Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion and analysis of our
financial condition and results of operations should be read together with our audited financial statements for the years ended September
30, 2024 and 2023 and related notes included elsewhere in this annual report. The following discussion contains “forward-looking
statements” that reflect our future plans, estimates, beliefs and expected performance. Our actual results may differ materially
from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors. We caution that
assumptions, expectations, projections, intentions, or beliefs about future events may, and often do, vary from actual results and the
differences can be material. Please see “Cautionary Note Regarding Forward-Looking Statements” as well as “Risk Factors-
Risks Related to the Company’s Business and Our Industry.”
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Business
Citius Oncology is a specialty biopharmaceutical
company focused on developing and commercializing innovative targeted oncology therapies. We are commercializing LYMPHIR (denileukin diftitox),
an oncology immunotherapy for the treatment of CTCL, a rare form of non-Hodgkin lymphoma. LYMPHIR was approved by the FDA in August 2024.
We were incorporated in the Cayman Islands on
March 1, 2021, for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar
business combination with one or more businesses. In August 2024, we reincorporated in Delaware and completed the Merger whereby we acquired
SpinCo as a wholly owned subsidiary and changed our name to Citius Oncology, Inc. SpinCo began operations in April 2022.
Since inception, the Company has devoted substantially
all of our efforts to business planning, research and development, and recruiting management and technical staff. The Company is subject
to a number of risks common to companies in the pharmaceutical industry including, but not limited to, risks related to the development
by the Company or our competitors of research and development stage products, market acceptance of our approved products, competition
from larger companies, dependence on key personnel, dependence on key suppliers and strategic partners, the Company’s ability to
obtain additional financing and the Company’s compliance with governmental and other regulations.
License Agreement with Eisai
In September 2021, Citius Pharma entered into
an asset purchase agreement with Dr. Reddy’s and a license agreement with Eisai to acquire an exclusive license for E7777 (denileukin
diftitox), a late-stage oncology immunotherapy for the treatment of CTCL, a rare form of non-Hodgkin lymphoma. Citius Pharma assigned
these agreements to us effective April 1, 2022. Citius Pharma renamed E7777 as I/ONTAK and also obtained the trade name LYMPHIR TM
for the product. Denileukin diftitox is referred to in this annual report as E7777, I/ONTAK or LYMPHIR, depending on the period of time
and context that is being discussed.
Under the terms of the
agreements, Citius Pharma acquired Dr. Reddy’s exclusive license for E7777 from Eisai and other related assets owned by Dr. Reddy’s.
The exclusive license includes rights to develop and commercialize E7777 in all markets except for Japan and certain parts of Asia. Additionally,
we retain an option on the right to develop and market the product in India. Eisai retains exclusive development and marketing rights
for the agent in Japan, China, Korea, Taiwan, Hong Kong, Macau, Indonesia, Thailand, Malaysia, Brunei, Singapore, India (subject to the
India option), Pakistan, Sri Lanka, Philippines, Vietnam, Myanmar, Cambodia, Laos, Afghanistan, Bangladesh, Bhutan, Nepal, Mongolia, and
Papua New Guinea. Citius Pharma paid $40 million upfront payment which represents the acquisition date fair value of the in-process research
and development acquired from Dr. Reddy’s. Dr. Reddy’s is entitled to up to $40 million in development milestone payments
related to CTCL approvals in the U.S. and other markets, up to $70 million in development milestones for additional indications, as well
as commercial milestone payments and low double-digit tiered royalties on net product sales (within a range of 10% to 15%), and up to
$300 million for commercial sales milestones. We also must pay on a fiscal quarter basis tiered royalties equal to low double-digit percentages
of net product sales (within a range of 10% to 15%). The royalties will end on the earlier of (i) the 15-year anniversary of the first
commercial sale of the latest indication that received regulatory approval in the applicable country and (ii) the date on which a biosimilar
product results in the reduction of net sales in the applicable product by 50% in two consecutive quarters, as compared to the four quarters
prior to the first commercial sale of the biosimilar product. We will also pay to Dr. Reddy’s an amount equal to a low-thirties
percentage of any sublicense upfront consideration or milestone payments (or the like) received by us and the greater of (i) a low-thirties
percentage of any sublicensee sales-based royalties or (ii) a mid-single digit percentage of such licensee’s net sales.
At the time of the FDA approval for LYMPHIR, a
$27.5 million milestone payment became payable under the terms of the asset purchase agreement for which a balance of $22.5 million remains
due as of September 30, 2024. Pending further discussions with Dr. Reddy’s, Dr. Reddy’s agreed to a partial deferral without
penalty of this milestone payment.
Under the license agreement, Eisai is to
receive a $5.9 million milestone payment, upon FDA approval which is included in license payable at September 30, 2024, and
additional commercial milestone payments related to the achievement of net product sales thresholds and an aggregate of up to $22
million related to the achievement of net product sales thresholds. Citius Pharma was also required to reimburse Eisai for up to
$2.65 million of its costs to complete the Phase 3 pivotal clinical trial for LYMPHIR for the CTCL indication and reimburse Eisai
for all reasonable costs associated with the preparation of a BLA for LYMPHIR. Eisai was responsible for completing the CTCL
clinical trial, and CMC activities through the filing of the BLA for LYMPHIR with the FDA. The Company will be responsible for
development costs associated with potential additional indications.
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The term of the license
agreement will continue until (i) if there has not been a commercial sale of a licensed product in the territory, the 10-year anniversary
of the original license effective date, March 30, 2016, or (ii) if there has been a first commercial sale of a licensed product in the
territory within the 10-year anniversary of the original license effective date, the 10-year anniversary of the first commercial sale
on a country-by-country basis. The term of the license may be extended for additional 10-year periods for all countries in the territory
by notifying Eisai and paying an extension fee equal to $10 million. Either party may terminate the license agreement upon written notice
if the other party is in material breach of the agreement, subject to cure within the designated time periods. Either party also may terminate
the license agreement immediately upon written notice if the other party files for bankruptcy or takes related actions or is unable to
pay its debts as they become due. Additionally, either party will have the right to terminate the agreement if the other party directly
or indirectly challenges the patentability, enforceability or validity of any licensed patent.
Also under the purchase
agreement with Dr. Reddy’s, we are required to (i) use commercially reasonable efforts to make commercially available products in
the CTCL indication, peripheral T-cell lymphoma indication and immuno-oncology indication, (ii) initiate two investigator initiated immuno-oncology
trials (both of which have been initiated), (iii) use commercially reasonable efforts to achieve each of the approval milestones, and
(iv) to complete each specified immuno-oncology investigator trial on or before the four-year anniversary of the effective date of the
definitive agreement. Additionally, we are required to commercially launch a product in a territory within six months of receiving regulatory
approval for such product in each such jurisdiction.
RESULTS OF OPERATIONS
Results of Operations for Year Ended September
30, 2024 compared to Year Ended September 30, 2023
Year Ended September 30,
2024
Year
Ended
September 30,
2023
Revenues
$ —
$ —
Operating expenses:
Research and development
4,925,001
4,240,451
General and administrative
8,148,929
5,915,290
Stock-based compensation – general and administrative
7,498,817
1,965,500
Total operating expenses
20,572,747
12,121,241
Loss before income taxes
(20,572,747 )
(12,121,241 )
Income tax expense
576,000
576,000
Net loss
$ (21,148,747 )
$ (12,697,241 )
Revenues
We did not generate any revenues for the years
ended September 30, 2024 and 2023.
Research and Development Expenses
For the year ended September 30, 2024, research
and development expenses were $4,925,001 as compared to $4,240,451 for the year ended September 30, 2023, an increase of $684,550 due
to development activities completed for the resubmission of the BLA of LYMPHIR in January 2024 which were associated with CRL remediation.
General and Administrative Expenses
For the year ended September 30, 2024, general
and administrative expenses were $8,148,929 as compared to $5,915,290 for the year ended September 30, 2023, an increase of $2,233,639.
The primary reason for the increase was the efforts associated with the pre-commercial and commercial launch activities of LYMPHIR associated
with market research, marketing, distribution and drug product reimbursement from health plans and payers.
Stock-based Compensation Expense
For the year ended September 30, 2024, stock-based
compensation expense was $7,498,817 as compared to $1,965,500 for the year ended September 30, 2023. The primary reason for the $5,533,317
increase in stock-based compensation expense was the amounts were realized over 12 months in the year ended September 30, 2024 as compared
to three months post-plan adoption in the year ended September 30, 2023.
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Income Taxes
The Company recorded deferred income tax expense
of $576,000 in each of the years ended September 30, 2024 and 2023 related to the amortization for taxable purposes of its in-process
research and development asset.
Net Loss
For the year ended September 30, 2024, we incurred
a net loss of $21,148,747 compared to a net loss of $12,697,241 for the year ended September 30, 2023. The $8,451,506 increase in the
net loss was primarily due to the increase in our operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Working Capital
Citius Oncology has incurred operating losses
since inception and incurred net losses of $21,148,747 and $12,697,241 for the years ended September 30, 2024 and 2023, respectively.
At September 30, 2024, Citius Oncology had an accumulated deficit of $39,278,587. Citius Oncology’s net cash provided by operations
during the years ended September 30, 2024 and 2023 was $126,353 and $-0-, respectively.
Investing Activities
During 2024, the Company paid $5,000,000 in connection
with a partial milestone payments due under its asset purchase agreement with Dr. Reddy’s.
Financing Activities
In connection with closing of the Merger, Citius
Pharma, made a contribution to the Company’s capital in the amount of $33,180,961 representing the balance of the due to/due from
related party account on the date of the Merger. Citius Pharma also made cash contributions to the Company’s capital, pursuant to
the terms of the Merger Agreement, in the amount of $3,827,944.
Also, in connection with the Merger, Citius Pharma
advanced cash to the Company for an unsecured promissory note issued by the Company in the principal amount of $3,800,111.
Inflation
Our management believes that inflation
has not had a material effect on our results of operations.
Off Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition
and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. We review our estimates
on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe to be reasonable under
the circumstances. Actual results may differ from these estimates. We believe the judgments and estimates required by the following accounting
policies to be critical in the preparation of our financial statements.
49
In-process Research and Development
The Company capitalizes intangible assets purchased from others for
use in research and development activities as In Process Research & Development (IPR&D) when the assets acquired have an alternative
future use, the Company anticipates future economic benefit from that use and the assets acquired are not dependent on future development.
Milestone payments upon regulatory approval that meet the same criteria are capitalized when the payments are considered recoverable based
on expected future cash flows. Amortization of IPR&D over the exclusive regulatory period of the acquired asset commences upon revenue
generation.
In-process research and development of $73,400,000
represents the value of our September 2021 acquisition of an exclusive license for LYMPHIR (denileukin diftitox), a late-stage oncology
immunotherapy for the treatment of CTCL, a rare form of non-Hodgkin lymphoma and is expected to be amortized on a straight-line basis
over a period of 12 years commencing upon revenue generation. In-process research and development consists of $40,000,000 paid to Dr.
Reddy’s from the asset purchase agreement and approval milestone fees of $27,500,000 to Dr. Reddy’s and $5,900,000 to Eisai.
Incremental costs incurred on IPR&D after
the acquisition date are expensed as incurred, unless there is an alternative future use.
The Company reviews intangible assets annually
to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the
remaining useful life of any intangible asset. If the carrying value of an asset exceeds its undiscounted cash flows, the Company writes
down the carrying value of the intangible asset to its fair value for the period identified. No impairments have occurred since the acquisitions
of our intangible assets through September 30, 2024.
Stock-Based Compensation
The Company recognizes compensation costs resulting from the issuance
of stock-based awards to employees and directors as an expense in the consolidated statement of operations over the requisite service
period based on the fair value for each stock award on the grant date. The fair value of each option grant is estimated as of the date
of grant using the Black-Scholes option pricing model. The Company estimates volatility using the trading activity of its common stock.
Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes
in the input assumptions can materially affect the fair value estimate, the existing model may not necessarily provide a reliable single
measure of fair value of the Company’s stock options.
The Company recognizes compensation costs resulting from the issuance
of stock-based awards to non-employees as an expense in the consolidated statement of operations over the service period based on the
measurement of fair value for each stock award and records forfeitures as they occur.
Income Taxes
We follow accounting guidance regarding the recognition, measurement,
presentation, and disclosure of uncertain tax positions in the financial statements. Tax positions taken or expected to be taken in the
course of preparing our tax returns are required to be evaluated to determine whether the tax positions are “more-likely-than-not”
of being sustained by the applicable tax authorities. Tax positions not deemed to meet a more-likely-than-not threshold would be recorded
in the financial statements.
We recognize deferred tax assets and liabilities based on differences
between the financial reporting and tax basis of assets and liabilities using the enacted tax rates and laws that are expected to be in
effect when the differences are expected to reverse. We provide a valuation allowance for deferred tax assets for which we do not consider
realization of such assets to be more likely than not.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk
Not required.
Item 8. Financial Statements and Supplementary Data
See the financial statements included in this report beginning on page
F-1.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
None.
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