Interim Report for Kancera AB (publ) Q3 2013

The period January to September and the third quarter 2013 in brief

• R&D expenses for the quarter totaled SEK 5.4m (SEK 14.4m) of which the third quarter constitute SEK 1.8m (SEK 2.4m).
• Operating income for the period totaled SEK -8.3m (SEK -19.5m) of which the third quarter constitute SEK -2.7m (SEK -3.8m).
• Income after financial items for the period totaled SEK -5.3m (SEK -19.5m) of which the third quarter constitute SEK -2.7m (SEK -3.8m).
• Earnings per share for the period were SEK -0.16 (SEK -1.28) of which the third quarter constitute SEK -0.08 (SEK -0.25).
• The income after financial items and earnings per share was affected by a profit of SEK 3m that occurred when realizing a claim acquired to a value less than the nominal amount. The claim has been recognized as income during the first quarter.
• Cash flow from operating activities for the period totaled SEK -9.0m (SEK -20.4m) of which the third quarter constitute SEK -1.9m (SEK -5.2m).
• Equity as of September 30, 2013 totaled SEK 9.4m (SEK 9.2m) or SEK 0.29 (SEK 0.61) per share. The equity/assets ratio as of September 30, 2013 was 72 percent (85 percent).
• Cash and cash equivalents as of September 30, 2013 totaled SEK 2.1m (SEK 2.2m). Vinnova, Sweden´s Innovation Agency awarded Kancera´s ROR project a non-refundable grant of SEK 0.5m. The assessment of the Board is that additional financing is necessary in order to perform planned projects during 2013 and 2014. See also under “Comments on the financial development”.

Significant events during the period

• Kancera reported through an update of the project portfolio that

           – Publications during the conference “American Society for Hematology” (ASH) in Atlanta, USA, from Kancera, its co-founder Professor Håkan Mellstedt at the Karolinska Institutet, and researchers at University of California, San Diego, showed the importance of ROR in the development of new pharmaceuticals against the most common forms of chronic and acute leukemia (CLL and AML, respectively).

           – Further patent protection investments in the ROR project were made by the registration of an international patent application (PCT/EP2013/051772) during January 2013. During the third quarter this application was revoked and replaced with a new patent application EP13180941.0. Further, Kancera acquired exclusive rights to a patent application on human monoclonal antibodies (WO 2012/076727). The acquisition of the patent rights is based on an agreement with Bioinvent that does not involve any financial burden for Kancera (except future patent expenses) before revenues are generated.

           – Complementing analyses of Kancera´s earlier results showed that the level of inhibition of the PFKFB3 protein within the cancer cell correlates well with the growth inhibition observed in both cancer cells as in a whole tumor. This further strengthens PFKFB3 as a target for cancer treatment.

• Kancera reported that agreements have been reached with the purpose to enable Kancera´s new smaller organization access to a state-of-the-art laboratory. The agreements include an agreement with

           – Humlegården Fastigheter AB on the lease of smaller and more cost effective laboratories that are better adapted to the size and budget of the ROR project.

           – Sobi AB to take over Sobi AB:s SEK 5m claim on iNovacia. This claim is secured by for instance iNovacia´s laboratory equipment and instruments via a floating charge on assets. The claim and the floating charge on assets was taken over against a payment to Sobi AB amounting to SEK 2m.

• Kancera reported that a decision was taken to terminate the reconstruction of iNovacia due to uncertainty regarding the possibilities to create external revenues that would allow the continued operation of iNovacia. Against this background, the company applied for bankruptcy and was declared bankrupt on February 21. Kancera has not provided financial guarantees relating to iNovacia.
• Kancera reported that the company has finalized a new and more effective organization. A complete arsenal of instruments and an internationally competitive library of drug prototypes have been acquired from the iNovacia bankrupt´s estate. In parallel key persons have been recruited for the further development of a ROR-targeted drug against cancer. This combined resource is now operational in specially equipped laboratories at Karolinska Institutet Science Park.
• Kancera announced that a collaboration has been initiated with Professor Thomas Kipps and his research team at the University of California, San Diego. During the collaboration Kancera will provide its diagnostic antibodies that constitute a tool for Professor Kipps´group in order to demonstrate how activation of ROR1 correlates with the properties of aggressive cancer forms.
• New knowledge on how Kancera´s ROR inhibitors are metabolized in the liver provides important information on how to develop the synthesis of effective ROR inhibitors in order to deliver a drug candidate in 2013 according to plan.
• Kancera together with an international research team reported progress in the development of a drug against a serious parasitic disease. Kancera owns together with its partners in the project, the rights to jointly developed drugs against schistosomiasis.
• Kancera announced the initiation of a collaboration with Professor Thomas Helleday and his research group at Karolinska Institutet and the Science for Life Laboratory (SciLifeLab) in order to advance unique research on energy metabolism in cancer and Kancera´s PFKFB3 project. Within the collaboration Kancera retains exclusive ownership of its PFKFB inhibitors. An agreement has been reached between Kancera and the researchers providing Kancera exclusive rights to acquire inventions that may arise within the framework of the collaboration. Professor Thomas Helleday is a highly regarded expert in the area of intractable cancer. He leads an interdisciplinary research team that conducts translational research aimed at understanding the fundamental questions about the occurrence of cancer and the development of new drugs for cancer treatment.
• On May 28, 2012 the Annual General Meeting approved the Board’s proposal to authorize the Board, on one or several occasions until the next Annual General Meeting, to issue new shares against payment in cash and or in kind or by set-off. The total number of shares which may be issued under this authority shall not exceed 25 percent of the total number of shares. The authorization has not yet been used.
• Kancera announced that the company has been awarded a grant of SEK 500,000 and with the possibility of an additional SEK 1,000,000 for further development of the ROR project. The grant was awarded by the Swedish Innovation Agency VINNOVA which had identified Kancera as a young, innovative company with growth potential. Kancera´s ROR project attacks cancer via a novel mechanism and is considered highly innovative.
• Kancera reported progress in the development of a ROR-inhibiting cancer drug.

           – The compound KAN0439365 has been shown to be effective against cancer cells from patients that are treatment-resistant today and has shown good metabolic stability in human liver cells and blood. KAN0439365 is the first in a new generation of ROR inhibitors to meet the requirements that the company places on a candidate drug in these respects

           – Kancera continues development of a compound to be used in efficacy and safety studies in animals.

           – Kancera has registered a new patent application EP13180941.0 for small molecule ROR inhibitors and registered national applications for human monoclonal antibodies against ROR in the U.S., Europe, India and China.

• Kancera announced that the European Union Seventh Framework Programme has awarded Kancera € 950,000 for the development of drugs to treat severe parasitic diseases. From February 2014, Kancera together with international research groups in the project A-PARADDISE, will develop drugs against malaria, schistosomiasis, leishmaniasis and Chagas disease. The total budget for the three-year project is 6 M€ of which Kancera´s part of ca € 950,000, is the largest.
• Kancera announced the initiation of a collaboration with Professor Rolf Lewensohn and his research group at Cancer Centre Karolinska (CCK) in order to develop therapies that will increase the sensitivity of tumors for chemo- and radiotherapy for several solid tumors. During the collaboration Kancera´s researchers will, on behalf of the research team at CCK, assist with analysis and evaluation of drug properties of active substances which affect the ability of tumors to resist chemo- and radiotherapy induced DNA damage.

Significant events after the end of the reporting period

• Kancera AB has announced the decision, authorized by the Extraordinary General Meeting on October 30 to conduct a rights issue of approximately SEK 16.1m with preferential rights for existing shareholders. The issue is scheduled to include the subscription of units in Kancera AB with the condition that each old share gives the holder the right to subscribe for one (1) unit à 0.50 SEK/unit. Each unit is intended to contain one (1) new share and one (1) warrant where two warrants entitle the holder to subscribe for one (1) new share at 0.75 SEK/share. The term of the warrant is scheduled to extend until 31 May 2014. The warrant is intended to be listed in parallel with the stock.
• Kancera announces in this quarterly report that the required stability of ROR inhibitors in liver cells of mice has been reached allowing the start of animal studies to investigate how ROR inhibitors are distributed in the body and tolerated before the start of efficacy studies in animal models of various human cancers.
  

Statement from the CEO

Three years ago Kancera set the goal to deliver a drug candidate in the ROR project against cancer by the end of 2013. At that time, the focus was on chronic lymphocytic leukemia (CLL).

Today this goal is within reach, although a couple of technically challenging steps remain. To reach this point we have designed and synthesized more than 500 patent-pending ROR inhibitors that have been tested on tumor material from more than 100 patients. Due to new research, the ambitions for our ROR-inhibiting drug have grown to include several forms of intractable cancer such as pancreas, lung and breast cancer as well as the most common form of acute leukemia.

Kancera competes in an international market with many skilled academic researchers and companies that strive to improve the care for cancer patients. An example of a successful competitor is the biotech company Pharmacyclics which has developed the drug Ibrutinib for the treatment of a couple of forms of leukemia. In December 2011 Johnson & Johnson (J&J) acquired the rights to Ibrutinib for 150 million USD at signing plus milestone payments of 825 million USD. At that time the project was in early clinical trials in phase II. Since then, the development of Ibrutinib has proceeded quickly until the registration of the drug in the U.S. in August 2013.

Some have suggested that the market for CLL thus would be closed after the introduction of Ibrutunib which now is expected to be J&J’s next big anti-cancer drug. However, recent findings show that resistance is developed against Ibrutinib. This agrees well with Kancera´s results from in-house studies on how this drug acts against cancer cells from CLL patients in an advanced phase of the disease. Cancer cells from these severely ill patients are not sensitive to either J&J´s Ibrutinib or to today’s most widely used chemotherapy for CLL (FludarabineTM). As we had hoped, the studies show that Kancera´s ROR inhibitors are able to very efficiently reprogram the resistant cancer cells to self-destruct.

The results thus point to that Kancera´s ROR-inhibiting drug will have a clear and important place in the treatment of severely ill cancer patients.

The ROR inhibitor KAN0439365 meets the laboratory requirements studied to date that we have on a candidate drug for efficacy, drug interaction and cardiovascular safety with respect to humans (studies performed outside the body). Also, it is KAN0439365 that, compared to Ibrutinib and FludarabineTM, has shown a superior effect in cells from severely ill CLL patients.

In order to reach all the way to the selection of a candidate drug and a commercial agreement, we need a ROR inhibitor that works also in mice and rats since efficacy and safety studies are conducted in these species. Kancera is making clear progress towards these desired properties thus allowing the start of animal studies to investigate how ROR inhibitors are distributed in the body and tolerated before studies that will examine the effect on various animal models of human cancers.

During the past year we have carried through a “pre-marketing campaign” in order to pave the way for a commercial agreement concerning our ROR drug. The campaign has included presentations at 10 commercial and scientific congresses and meetings with some 40 pharmaceutical companies. The response from the market has confirmed a strong interest in the ROR project and has provided valuable information on what Kancera needs to deliver to reach an attractive agreement with an internationally established partner.

Beyond a successful commercialization of the ROR project, Kancera has several cancer projects in its portfolio with the capacity to deliver drug candidates for sale within the next few years. Surprisingly, one of these cancer projects comes from an incidental finding in an EU-funded pharmaceutical project mainly targeted against life-threatening parasitic diseases. Following a successful delivery of this EU project, Kancera has now been awarded an additional 950 000 EUR over three years starting in February 2014 showing that the Kancera team delivers quality that is internationally competitive.

The next step, however, is delivery in the ROR project, which could be our first drug against life-threatening cancer.

Thomas Olin
CEO of Kancera