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VIRACTA THERAPEUTICS, INC.

(VIRX)
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VIRACTA THERAPEUTICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/10/2021 | 04:36pm EST

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the consolidated financial statements and accompanying notes thereto for the fiscal year ended December 31, 2020 contained in our Form 8-K/A filed with the Securities and Exchange Commission (the "SEC") on March 23, 2021. Past operating results are not necessarily indicative of results that may occur in future periods.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange" Act). All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy, prospective product candidates, product approvals, future regulatory developments, research and development costs, the timing and likelihood of success, plans and objectives of management for future operations, future results of current and anticipated products and the expected impact of the novel coronavirus ("COVID-19") on us, U.S. Food and Drug Administration (the "FDA"), or on third parties on whom we rely, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statement. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expect," "plan," "anticipate," "could," "intend," "target," "project," "contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other similar expressions. Although we believe the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risk and we can give no assurances that our expectations will prove to be correct. Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely. As a result of many factors, including without limitation those set forth under "Risk Factors" under Item 1A of Part II below, and elsewhere in this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements. Except as required by applicable law, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes. For all forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to "Viracta," "we," "us" and "our" refer to Viracta Therapeutics, Inc.

Overview

Viracta is a clinical-stage, precision oncology company focused on advancing new medicines for the treatment of virus-associated malignancies. The association of viruses and cancer has been well characterized, and Viracta's lead program is focused on cancers associated with the Epstein-Barr virus ("EBV"). Viracta's lead product candidate is an all-oral combination of nanatinostat, Viracta's proprietary investigational drug, and valganciclovir (collectively referred to as "Nana-val"). This product candidate is currently being investigated in patients with multiple subtypes of relapsed/refractory EBV-positive ("EBV+") lymphoma in a Phase 1b/2 trial and a Phase 2 trial, and in patients with EBV+ recurrent or metastatic nasopharyngeal carcinoma ("RM-NPC") and other EBV+ solid tumors in a Phase 1b/2 trial. Viracta's development pipeline also includes vecabrutinib, a clinical-stage non-covalent ITK/BTK inhibitor and VRx-510 (formerly SNS-510), a preclinical-stage PDK-1 inhibitor. Viracta is evaluating future development and collaboration opportunities for vecabrutinib in combination with chimeric antigen receptor ("CAR") T-cell therapies and VRx-510 in multiple oncology indications.

EBV+ Lymphoma

In June 2021, Viracta announced the initiation of NAVAL-1 (Nanatinostat in Combination with Valganciclovir), a global, multicenter, open-label Phase 2 basket trial for the treatment of relapsed/refractory ("R/R") EBV+ lymphoma. NAVAL-1 will evaluate Nana-val in patients with EBV+ R/R lymphoma and is anticipated to enroll approximately 140 patients at centers in North America, Europe, and Asia-Pacific. The primary endpoint of the trial is objective response rate, with key secondary endpoints including duration of response, survival outcomes, and the safety profile of the combined treatment. Patients with relapsed or refractory disease following two or more prior therapies (one or more for extranodal NK/T cell lymphoma) without curative treatment options will be eligible for enrollment. If successful, Viracta believes this trial could potentially support multiple new drug application filings across various EBV+ lymphoma subtypes. The trial employs a Simon two-stage design where a limited number of patients are initially enrolled into cohorts in Stage 1 and, if a pre-specified activity threshold is reached, additional patients will be enrolled in Stage 2. During Stage 2,


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Viracta anticipates discussing the preliminary results with the U.S. Food and Drug Administration and may amend the protocol to include additional patients as necessary to enable registration. Viracta anticipates providing an update on the first cohort(s) that have expanded into Stage 2 in the second half of 2022.

Viracta is also conducting a Phase 1b/2 trial in EBV+ R/R lymphoma and final results from this trial will be presented in an oral presentation at the 2021 American Society of Hematology ("ASH") Annual Meeting in December 2021.

Viracta has received Fast Track Designation by the U.S. Food and Drug Administration for the treatment of relapsed or refractory EBV+ lymphoid malignancies, in addition to orphan drug designations for the treatment of post-transplant lymphoproliferative disorders, plasmablastic lymphoma, and T-cell lymphoma.

EBV+ Solid Tumors

In October 2021, Viracta announced the initiation of a multinational Phase 1b/2 trial in patients with EBV+ RM-NPC and other EBV+ solid tumors. The trial is designed to evaluate the safety and preliminary efficacy of Nana-val alone and in combination with the PD-1 checkpoint inhibitor pembrolizumab. The Phase 1b dose escalation portion is designed to evaluate safety and to determine the recommended Phase 2 dose ("RP2D") of Nana-val in patients with EBV+RM-NPC. In Phase 2, up to sixty patients with EBV+ RM-NPC will be randomized to receive Nana-val at the RP2D with or without pembrolizumab, to evaluate safety, overall response rate, and potential pharmacodynamic markers. Additionally, patients with other EBV+ solid tumors will be enrolled to receive Nana-val at the RP2D in a Phase 1b dose expansion cohort. Viracta anticipates providing preliminary clinical data from the trial in 2022.

Impact of COVID-19

In December 2019, a novel strain of coronavirus, otherwise known as COVID-19, was reported in Wuhan, China. On March 11, 2020, the World Health Organization (the "WHO") declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to the coronavirus outbreak. This outbreak has severely impacted global economic activity, and many countries and many states in the United States have reacted to the outbreak by instituting quarantines, mandating business and school closures and restricting travel. The effects of the COVID-19 pandemic continue to rapidly evolve and the full impact of the COVID-19 pandemic remains highly uncertain and subject to change. For example, we have experienced an impact on the timing of clinical site initiations as a result of the COVID-19 pandemic. We have taken certain measures and continue to evaluate other potential measures to mitigate the impact of the COVID-19 pandemic on our trials. We do not yet know the full extent of potential delays or impacts on our business, our clinical trials, healthcare systems or the global economy as a whole. These effects could have a material impact on our operations. The continued COVID-19 pandemic may negatively impact our workforce and our research and development activities. See Item 1A - "Risk Factors" for additional information regarding the potential impact of the COVID-19 pandemic on our business, results of operations and financial condition.

Financial Operations Overview

Research and Development Expenses

We expense all research and development expenses as they are incurred. Research and development expenses primarily include:


?
clinical and regulatory-related costs;
?
expenses incurred under agreements with contract research organizations
("CROs");
?
manufacturing and stability testing costs and related supplies and materials;
and
?
employee-related expenses, including salaries, benefits, travel and share-based
compensation expense.

All of our research and development expenses to date have been incurred in connection with the development of Nana-val. The process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming. The successful development and commercialization of Nana-val is still highly uncertain. We are unable to estimate with any certainty the costs we will incur in the continued development and regulatory review of Nana-val, though such costs may be significant. Clinical development timelines, the probability of success and development costs can differ materially from expectations. We may never succeed in achieving marketing approval for our product candidate.

The costs of clinical trials may vary significantly over the life of a project owing to, but not limited to, the following:


?
per patient trial costs;
?
the number of sites included in the trials;

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?
the countries in which the trials are conducted;
?
the length of time required to enroll eligible subjects;
?
the number of subjects that participate in the trials;
?
the number of doses that subjects receive;
?
the cost of comparative agents used in trials;
?
the drop-out or discontinuation rates of subjects;
?
potential additional safety monitoring or other studies requested by regulatory
agencies;
?
the duration of patient follow-up; and
?
the efficacy and safety profile of the product candidate.

We do not yet know when Nana-val may be commercially available, if at all.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related benefits, including share-based compensation. Other general and administrative expenses include professional fees for accounting, tax, patent costs, legal services, insurance, facility costs and costs associated with being a publicly-traded company, including fees associated with investor relations and directors and officers liability insurance premiums. We expect that general and administrative expenses will increase in the future as we expand our operating activities, prepare for the growth needs associated with potential commercialization of Nana-val and continue to incur additional costs associated with being a publicly-traded company and maintaining compliance with exchange listing and SEC requirements. These increases will likely include higher consulting costs, legal fees, accounting fees, directors' and officers' liability insurance premiums and fees associated with investor relations.

Other income (expense)

Other income (expense) consists of interest income and expense as well as various income or expense items of a non-recurring nature. We earn interest income from interest-bearing accounts and money market accounts for cash and cash equivalents. Interest expense is primarily attributable to interest charges associated with borrowings under our loan and security agreements.

Critical Accounting Policies and Significant Judgments and Estimates

Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with generally accepted accounting principles in the United States ("GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses during the reporting periods. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from these estimates under different assumptions or conditions.

The critical accounting policies and estimates underlying the accompanying unaudited financial statements are those set forth in our financial statements and accompanying notes for the year ended December 31, 2020, which are contained in our Current Report on Form 8-K/A filed with the SEC on March 23, 2021.

Other Information

None.

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Results of Operations

Comparison of Three Months Ended September 30, 2021 and 2020

The following table summarizes the results of our operations for the three months ended September 30, 2021 and 2020 (in thousands):




                                                    Three Months Ended September 30,
                                                   2021              2020         Change
Research and development expenses               $     7,088$     3,105$ 3,983
Purchased in-process research and development         4,000                 -       4,000
General and administrative expenses                   3,711               887       2,824




Research and development expenses. Research and development expenses for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 increased by approximately $4.0 million. The increase in research and development expenses for the three months ended September 30, 2021 was primarily due to increases in costs incurred to support the initiation of the NAVAL-1 and solid tumor trials as well as an increase in headcount and non-cash share-based compensation.

Purchased in-process research and development. The increase was due to the payment of $4.0 million in order to terminate the exclusive collaboration and license agreement with Shenzhen Salubris Pharmaceutical Co. Ltd. The Company had granted Salubris an exclusive license, with the right to grant sublicenses, to the Company's patent and know-how rights to develop and commercialize nanatinostat in combination with an antiviral drug, such as valganciclovir, for treatment, prevention, or diagnosis of virus-associated malignancies in humans and non-humans in the Republic of China, excluding Hong Kong, Macau, and Taiwan, which was re-acquired upon termination.

General and administrative expenses. General and administrative expenses for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 increased by approximately $2.8 million. The increase was largely due to incremental costs associated with being a publicly traded company, including legal fees, audit fees, consulting expenses, filing fees and increased directors and officer's insurance costs, in addition to an increase in non-cash share-based compensation.

Comparison of Nine Months Ended September 30, 2021 and 2020

The following table summarizes the results of our operations for the nine months ended September 30, 2021 and 2020 (in thousands):




                                                  Nine Months Ended September 30,
                                              2021               2020           Change

Research and development expenses $ 16,558$ 9,912$ 6,646 Purchased and acquired in-process research and development

                        88,478                  -          88,478
General and administrative expenses             11,422              2,777           8,645
Gain on Royalty Purchase Agreement              13,500                  -          13,500




Research and development expenses. Research and development expenses for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 increased by approximately $6.6 million. The increase in research and development expenses was primarily due to increases in costs incurred to support the initiation of the NAVAL-1 and solid tumor trials as well as an increase in headcount and non-cash share-based compensation.

Purchased and acquired in-process research and development. Purchased in-process research and development was related to the payment of $4.0 million to terminate the exclusive collaboration and license agreement with Shenzhen Salubris Pharmaceutical Co. Ltd. The Company had granted Salubris an exclusive license, with the right to grant sublicenses, to the Company's patent and know-how rights to develop and commercialize nanatinostat in combination with an antiviral drug, such as valganciclovir, for treatment, prevention, or diagnosis of virus-associated malignancies in humans and non-humans in the Republic of China, excluding Hong Kong, Macau, and Taiwan, which was re-acquired upon termination. The acquired in-process research and development included non-cash and non-recurring cost of $84.5 million associated with the estimated fair value of the in-process research and development projects acquired in the asset acquisition with no alternative future use, which was charged to expense on the Sunesis merger date.

General and administrative expenses. General and administrative expenses for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 increased by approximately $8.6 million. The increase was largely due to significant and non-recurring costs associated with the Merger, in addition to incremental costs associated with being a publicly traded company, including legal fees, audit fees, consulting expenses, filing fees and increased directors and officer's insurance costs, in addition to an increase in non-cash share-based compensation.


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Gain on royalty purchase agreement. The gain was associated with upfront proceeds of $13.5 million recorded in connection with the multi-license milestone and royalty monetization transaction with XOMA (US) LLC.

Liquidity and Capital Resources

As of September 30, 2021, we have devoted substantially all of our efforts to product development and have not realized product sales revenues from our planned principal operations. We have a limited operating history, and the sales and income potential of our business and market are unproven. We have experienced net losses since our inception and, as of September 30, 2021, had an accumulated deficit of approximately $154.2 million. We expect to continue to incur net losses for at least the next several years. A successful transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support our cost structure. If we are unable to generate revenues adequate to support our cost structure, we will need to raise additional equity through the issuance of our common stock, through other equity or debt financings or through collaborations or partnerships with other companies. As of September 30, 2021, we had cash and cash equivalents of approximately $111.0 million and working capital of approximately $105.9 million. In February 2021, as noted below, we completed the sale of common stock in a private placement resulting in gross proceeds of approximately $65.0 million. Additionally, we received approximately $17.1 million in cash and cash equivalents in the Merger previously discussed. We also received $13.5 million in upfront proceeds related to the Royalty Purchase Agreement with XOMA (US) LLC, as discussed in the financial statement footnotes. In May 2021, we entered into an Open Market Sale AgreementSM (the "Sale Agreement") with Jefferies LLC (the "Sales Agent"), under which we may offer and sell up to $50.0 million of shares of our common stock from time to time through the Sales Agent. As of the date of the filing this Form 10-Q, no shares have been issued pursuant to the Sales Agreement. Based on our current financial position and business plan, management believes that our existing cash and cash equivalents will be sufficient to fund our planned operations for at least twelve months from the issuance date of these financial statements.

On November 4, 2021, we entered into a loan and security agreement with Silicon Valley Bank ("SVB") and Oxford Finance LLC ("Oxford") for up to $50.0 million. In connection with entering the new $50.0 million credit facility, we and SVB agreed to terminate our prior $15.0 million loan and security agreement with SVB. The existing $5.0 million debt balance outstanding from our previous credit facility with SVB was repaid and reborrowed under this new $50.0 million credit facility. Under the terms of the $50.0 million credit facility, the remaining $45.0 million is available in two additional tranches of $20.0 million and $25.0 million under certain circumstances, and we are under no obligation to draw funds in the future.

We expect to continue to incur expenses and increase operating losses for at least the next several years. In the near-term, we anticipate incurring costs as we:


?
conduct ongoing and planned development activities;
?
initiate pre-approval and pre-commercialization activities for our lead product
candidate;
?
continue the preparation of the commercial manufacturing process;
?
maintain, expand and protect our intellectual property portfolio; and
?
continue to fund the additional accounting, legal, insurance and other costs
associated with being a public company.

The following table summarizes our cash flows for the nine months ended September 30, 2021 and 2020 (in thousands):



                                                          Nine Months Ended
                                                            September 30,
                                                         2021          2020
Net cash used in operating activities                  $ (11,640 )$ (11,513 )
Net cash provided by (used in) investing activities       12,910           (55 )
Net cash provided by financing activities                 62,624         5,256

Net increase (decrease) in cash and cash equivalents $ 63,894$ (6,312 )

Operating Activities. Cash used in operating activities was $11.6 million for the nine months ended September 30, 2021, as compared to cash used in operating activities of $11.5 million for the nine months ended September 30, 2020. This change was materially consistent with prior year for usual operating activities.

Investing Activities. Net cash provided by investing activities was $12.9 million for the nine months ended September 30, 2021, compared to cash used in investing activities of $55,000 for the nine months ended September 30, 2020. This change was a result of the cash and cash equivalents acquired in the Merger offset by purchases of property and equipment and in-process research and development.


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Financing Activities. Net cash provided by financing activities was $62.6 million for the nine months ended September 30, 2021 compared to cash provided by financing activities of $5.3 million for the nine months ended September 30, 2020. This change was a result of the financing proceeds from the private placement of common stock concurrent with the Merger in February 2021, net of issuance costs.

The amount and timing of our future funding requirements will depend on many factors, including but not limited to:


?
we may not have sufficient financial and other resources to complete clinical
development and commercialization for Nana-val;
?
we may not be able to provide acceptable evidence of safety and efficacy for
Nana-val;
?
we may be required to undertake additional clinical trials and other studies of
Nana-val;
?
FDA may disagree with the design of our future clinical trials, if any are
necessary;
?
variability in subjects, adjustments to clinical trial procedures and inclusion
of additional clinical trial sites;
?
FDA may not agree with the analysis of our clinical trial results;
?
the results of our clinical trials may not meet the level of statistical or
clinical significance or other bioequivalence parameters required by FDA for
marketing approval;
?
subjects in our clinical trials may die or suffer other adverse effects for
reasons that may or may not be related to our products;
?
contract manufacturers, suppliers, and/or consultants may not meet appropriate
timelines;
?
we may not be able to obtain, maintain and enforce our patents and other
intellectual property rights;
?
we may not be able to establish commercial-scale manufacturing capabilities; and
?
we may not be able to establish commercialization capabilities.

If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Any future debt financing may impose upon us covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any equity or debt financing may contain terms that are not favorable to us or our stockholders. If we are unable to raise additional funds when needed, we may be required to delay, reduce or terminate some or all of our development programs and clinical trials. We may also be required to sell or license to other parties rights to develop or commercialize our drug candidates that we would prefer to retain.

Off-Balance Sheet Arrangements

Through September 30, 2021, we have not entered into and did not have any relationships with unconsolidated entities or financial collaborations, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purpose.

Contractual Obligations and Commitments

On March 22, 2021, we entered into the Royalty Purchase Agreement with XOMA (US) LLC, pursuant to which, XOMA (US) LLC paid us an upfront payment of $13.5 million for the right to receive future milestones and royalties that we are entitled to receive under the terms of a license agreement with DOT Therapeutics-1, Inc. dated December 16, 2019 and a license agreement with Denovo Biopharma LLC dated December 5, 2019, net of certain obligations we have to a third party. Pursuant to the Royalty Purchase Agreement, we (directly or through a wholly-owned subsidiary) are also eligible to receive an up to $20.0 million pre-commercialization, event based milestone.

© Edgar Online, source Glimpses

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