Quarterly report pursuant to Section 13 or 15(d)

Collaboration Agreement

Collaboration Agreement
6 Months Ended
Jun. 30, 2011
Collaboration Agreement [Abstract]  
On December 20, 2009, the Company, through its wholly-owned subsidiary, OncoGenex Technologies, entered into a Collaboration Agreement with Teva Pharmaceutical Industries Ltd., or Teva, for the development and global commercialization of custirsen (and related compounds), a pharmaceutical compound designed to inhibit the production of clusterin, a protein we believe is associated with cancer treatment resistance, or the Licensed Product. Under the Collaboration Agreement, Teva paid the Company upfront payments in the aggregate amount of $50 million and has agreed to pay up to $370 million upon the achievement of developmental and commercial milestones and royalties at percentage rates ranging from the mid-teens to mid-twenties on net sales, depending on aggregate annual net sales of the Licensed Product.
On the same date, the Company and Teva also entered into a stock purchase agreement, or Stock Purchase Agreement, pursuant to which Teva made an additional $10 million equity investment in the Company at a 20% premium to a thirty-day average closing price, resulting in the issuance of 267,531 of our common shares purchased at a price of $37.38 per share. The 20% share premium was included as consideration for the custirsen license and has been included in collaboration revenue.
In connection with the Collaboration Agreement and pursuant to the terms of agreements between the Company and Isis relating to custirsen, the Company paid Isis Pharmaceuticals, Inc., or Isis, $10 million which was recorded as research and development expense in 2009. The Company also paid approximately $333,333 to the University of British Columbia, or UBC, pursuant to the terms of their license agreement relating to custirsen, which has been recorded as research and development expense in 2009. Pursuant to the terms of the third-party agreements, the Company anticipates that it would be required to pay third parties 31% of any milestone payments that are not based on a percentage of net sales of the Licensed Product. Pursuant to the terms of third-party agreements, the Company anticipates it will pay royalties to third-parties of 4.88% to 8.00% of net sales, unless the Company’s royalties are adjusted for competition from generic compounds, in which case royalties to third parties will also be subject to adjustment on a country-by-country basis. Certain third-party royalties are tiered based on the royalty rate received by the Company. Minimum royalty rates payable by the Company assume certain third-party royalties are not paid at the time that the Licensed Product is marketed due to the expiration of patents held by such third parties. Maximum royalty rates assume all third-party royalty rates currently in effect continue in effect at the time the Licensed Product is marketed.
Teva has the exclusive worldwide right and license to develop and commercialize products containing custirsen and related compounds. The Company has an option to co-promote any Licensed Product in the United States and Canada.
Teva is responsible for all costs relating to product commercialization including costs incurred in relation to the Company’s co-promotion option, except for start-up costs in advance of commercialization.
Teva and the Company have developed a Clinical Development Plan under which three phase 3 clinical trials will be initiated:
    The ongoing phase 3 clinical trial, referred to as the Synergy trial, or SYNERGY, to evaluate a survival benefit for custirsen in combination with first-line docetaxel treatment in patients with castrate resistant prostate cancer, or CRPC. Expected timing of results from the survival primary endpoint for the custirsen SYNERGY Phase 3 clinical trial remains unchanged at Q4 2013. During discussions regarding the Prostate Cancer SATURN trial, or SATURN, Special Protocol Assessment, or SPA, amendment, U.S. Food and Drug Administration, or FDA, stated that an application supported primarily by the results of SYNERGY alone would be acceptable for submission. We expect to increase patient enrollment in SYNERGY from 800 to approximately 1000 patients, and expand the number of clinical trial sites.
    An ongoing phase 3 clinical trial, referred to as SATURN, to evaluate a durable pain palliation benefit for custirsen in combination with docetaxel as second-line chemotherapy in approximately 300 patients with CRPC. We have revised the custirsen SATURN Phase 3 trial protocol to expand the eligible patient population, and to align with the recently approved chemotherapy, cabazitaxel. We are awaiting final, written FDA agreement on the SPA amendment that will allow patients to receive either docetaxel re-treatment or cabazitaxel as second-line chemotherapy. Recruitment efforts are ongoing to enroll more patients in the SATURN study, which has had few patients accrued due to restrictive enrollment criteria regarding docetaxel retreatment and stable pain criteria. Expected timing of results for the pain palliation primary endpoint is now projected to be Q4 2013 rather than Q2 2013.
    A phase 3 clinical trial to evaluate a survival benefit for custirsen in combination with first-line chemotherapy in patients with non-small cell lung cancer, or NSCLC. The initiation of the Phase 3 clinical trial evaluating custirsen in patients with NSCLC has been delayed as we determine the optimal chemotherapeutic combination. We believe NSCLC is a promising indication and remain committed to the advancement of custirsen in NSCLC.
Teva will be responsible for conducting any other studies and development work necessary to obtain required regulatory approvals. The Company may assume some of these activities if assigned by the joint steering committee. Teva will be responsible for all such costs. The joint steering committee will oversee the development and regulatory approval of any Licensed Product. The Company may terminate its participation in the joint steering committee at any time.
Funding responsibilities for the Clinical Development Plan will be allocated as follows:
    The Company will be required to spend $30 million in direct and indirect development costs, and
    Teva will fund all other expenses under the Clinical Development Plan.
The Collaboration Agreement will remain in effect, on a country-by-country basis, until the expiration of the obligation of Teva to pay royalties on sales of the Licensed Product in such country (or earlier termination under its terms). After the completion of all three phase 3 clinical trials set forth in the Clinical Development Plan, or upon early termination due to a material adverse change in the Company’s patent rights related to custirsen or safety issues or “futility” as defined in the Collaboration Agreement, Teva may terminate the Collaboration Agreement at its sole discretion upon three months’ notice if notice is given prior to regulatory approval of a Licensed Product and upon six months’ notice if notice is given after such regulatory approval. If Teva terminates the Collaboration Agreement for any reasons other than an adverse change in custirsen patent rights, safety issues or “futility” determination as previously described, it will remain responsible for paying for any remaining costs of all three phase 3 clinical trials, except for specified development expenses that are the responsibility of the Company. Either party may terminate the Collaboration Agreement for an uncured material breach by the other party or upon the bankruptcy of either party. If the Collaboration Agreement is terminated by the Company for other than an uncured material breach by Teva, the Company will pay Teva a royalty on sales of Licensed Products. The percentage rates of such royalties (which are in the single digits) vary depending on whether termination occurs prior to the first regulatory approval in the United States or a primary European Market or after one of these approvals. These royalties would expire on a country-by-country basis on the earlier of ten years after the first commercial sale of a Licensed Product or certain thresholds related to generic competition.
In the event of a change of control of the Company, within 90 days of the change of control, Teva may terminate the joint steering committee at its sole discretion, terminate the co-promotion option at its sole discretion if not then exercised by the Company or if exercised but not yet executed by the Company, or terminate the co-promotion option if in its commercially reasonable opinion co-promotion with the Company’s successor would be materially detrimental to Teva’s interests.
Upon entering into the Collaboration Agreement, the Company assessed whether withholdings taxes were owed to the Israeli Tax Authority, or ITA, resulting from the Collaboration Agreement. It was the Company’s position that withholdings taxes were not owed, and a claim was issued to the ITA accordingly. For accounting purposes, management concluded that the withholdings tax claim was an uncertain tax position, and $3 million, which represented the potential withholdings tax obligation, once received from Teva was initially recorded as restricted cash pending the ITA review of our claim and a corresponding liability of $3 million was included in accounts payable and accrued liabilities. In June 2010, the Company received approval from the ITA for our request for a withholdings tax exemption on amounts received from Teva in relation to the Collaboration Agreement. Following receipt of this approval from the ITA the $3 million was released to the Company from escrow. Subsequently, the Company released the $3 million liability and recorded a $3 million income tax recovery in the second quarter of 2010.
Revenue for the three and six months ended June 30, 2011 was $1.9 million, and $3.1 million which consists of partial recognition of deferred collaboration revenue representing OncoGenex’s contribution to the custirsen phase 3 development plan under our Collaboration Agreement with Teva and custirsen manufacturing costs incurred by OncoGenex in the year ended December 31, 2010 that are reimbursable from Teva. At June 30, 2011, a remaining balance of $19.9 million of the up-front payment was recorded in deferred collaboration revenue. There was $1.7 million and $6.4 million in revenue recorded in the three and six months ended June 30, 2010 as a result of the Collaboration Agreement with Teva.