10-Q/A 1 hptx-10q_20130630.htm FORM 10-Q

      

      

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

      

FORM 10-Q

      

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2013

or

 

¨

TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from                      to                     

Commission File Number: 001-35614

      

HYPERION THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

      

   

 

Delaware

   

61-1512713

(State or other jurisdiction of

incorporation or organization)

   

(IRS Employer

Identification No.)

601 Gateway Boulevard, Suite 200

South San Francisco, California 94080

(650) 745-7802

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

      

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

   

 

Large accelerated filer

   

¨

      

Accelerated filer

   

¨

   

   

   

   

Non-accelerated filer

   

x (Do not check if a smaller reporting company)

      

Smaller reporting company

   

¨

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2)    Yes  ¨    No  x

As of August 5, 2013, the number of outstanding shares of the registrant’s common stock was 20,087,200.

      

   

   

   

   

   

   


   

TABLE OF CONTENTS

   

 

   

   

   

Page

   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS  

   

i

      

   

   

   

   

   

   

PART I. FINANCIAL INFORMATION  

   

1

      

   

   

   

   

   

   

Item 1.

   

Condensed Consolidated Financial Statements (Unaudited)  

   

1

      

   

   

   

   

   

   

   

   

Condensed Consolidated Balance Sheets  

   

1

      

   

   

   

   

   

   

   

   

Condensed Consolidated Statements of Operations  

   

2

      

   

   

   

   

   

   

   

   

Condensed Consolidated Statements of Cash Flows  

   

3

      

   

   

   

   

   

   

   

   

Notes to Condensed Consolidated Financial Statements  

   

4-16

      

   

   

   

   

   

   

Item 2.

   

Management’s Discussion and Analysis of Financial Condition and Results of Operations  

   

17

      

   

   

   

   

   

   

Item 3.

   

Quantitative and Qualitative Disclosures About Market Risk  

   

27

      

   

   

   

   

   

   

Item 4.

   

Controls and Procedures  

   

27

      

   

   

   

   

   

   

PART II. OTHER INFORMATION  

   

28

      

   

   

   

   

   

   

Item 1.

   

Legal Proceedings  

   

28

      

   

   

   

   

   

   

Item 1A.

   

Risk Factors  

   

28

      

   

   

   

   

   

   

Item 2.

   

Unregistered Sales of Equity Securities and Use of Proceeds  

   

48

      

   

   

   

   

   

   

Item 3.

   

Defaults Upon Senior Securities  

   

48

      

   

   

   

   

   

   

Item 4.

   

Mine Safety Disclosures  

   

48

      

   

   

   

   

   

   

Item 5.

   

Other Information  

   

49

      

   

   

   

   

   

   

Item 6.

   

Exhibits  

   

49

      

In this report, unless otherwise stated or the context otherwise indicates, references to “Hyperion,” “we,” “us,” “our” and similar references refer to Hyperion Therapeutics, Inc. and our wholly owned subsidiary. The names Hyperion Therapeutics, Inc.TM , RAVICTI and BUPHENYL are our trademarks. All other trademarks, trade names and service marks appearing in this report are the property of their respective owners.

   

   

       

 

   


   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. In some cases you can identify these statements by forward-looking words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect,” or similar expressions, or the negative or plural of these words or expressions. These forward-looking statements include, but are not limited to, statements concerning the following:

 

·   the commercial launch and future sales of or any other future products or product candidates;

 

·   our expectations regarding the commercial supply of our UCD products;

 

·   third-party payor reimbursement for RAVICTI and BUPHENYL;

 

·   our estimates regarding anticipated capital requirements and our needs for additional financing;

 

·   the UCD or HE patient market size and market adoption of RAVICTI by physicians and patients;

 

·   the timing or cost of a Phase III trial in HE;

 

·   the development and approval of the use of RAVICTI for additional indications or in combination therapy;

 

·   our expectations regarding licensing, acquisitions and strategic operations;

 

·   impact of accounting standards; and

 

·   repayment of notes payable.

These statements are only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements. We discuss many of these risks in this report in greater detail under the heading “Risk Factors” and elsewhere in this report. You should not rely upon forward-looking statements as predictions of future events.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by law, we are under no duty to update or revise any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this report.

   

   

       

 

i

   


   

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Hyperion Therapeutics, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

   

(Unaudited)

   

 

   

June 30, 2013

   

   

December 31,
2012

   

Assets

   

   

   

   

   

   

   

Current assets

   

   

   

   

   

   

   

Cash and cash equivalents

$

109,727

      

   

$

49,853

      

Accounts receivable, net

   

1,723

      

   

   

—  

   

Inventories

   

4,992

      

   

   

—  

   

Prepaid expenses and other current assets

   

599

      

   

   

1,155

      

Total current assets

   

117,041

      

   

   

51,008

      

Property and equipment, net

   

431

      

   

   

49

      

Intangible asset, net

   

16,171

   

   

   

—  

   

Other non-current assets

   

57

      

   

   

147

      

Total assets

$

133,700

      

   

$

51,204

      

Liabilities and Stockholders’ Equity

   

   

   

   

   

   

   

Current liabilities

   

   

   

   

   

   

   

Accounts payable

$

2,057

      

   

$

2,177

      

Accrued liabilities

   

4,612

      

   

   

2,540

      

Deferred revenue

   

110

   

   

   

—  

   

Notes payable, current portion

   

5,406

      

   

   

4,348

      

Total current liabilities

   

12,185

      

   

   

9,065

      

Notes payable, net of current portion

   

5,248

      

   

   

7,750

      

Total liabilities

   

17,433

      

   

   

16,815

      

Commitments and contingencies (Note 11)

   

   

   

   

   

   

   

Stockholders’ equity

   

   

   

   

   

   

   

Preferred stock, par value $0.0001 — 10,000,000 shares authorized; none issued and outstanding

   

—  

   

   

   

—  

   

Common stock, par value $0.0001 — 100,000,000 shares authorized at June 30, 2013 and December 31, 2012; 20,087,200 and 16,646,269 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively

   

2

      

   

   

2

      

Additional paid-in capital

   

239,215

      

   

   

173,384

      

Accumulated deficit

   

(122,950

   

   

(138,997

Total stockholders’ equity

   

116,267

      

   

   

34,389

      

Total liabilities and stockholders’ equity

$

133,700

      

   

$

51,204

      

   

   

   

   

   

   

   

   

   

   

   

   

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

   

   

       

 

 1 

   


   

Hyperion Therapeutics, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(Unaudited)

   

 

   

Three Months Ended
June 30,

   

   

Six Months Ended
June 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Revenues:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Product revenue, net

$

7,305

   

   

$

—  

   

   

$

8,088

   

   

$

—  

   

Total revenues

   

7,305

   

   

   

—  

   

   

   

8,088

   

   

   

—  

   

Costs and expenses:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Cost of sales

   

875

   

   

   

—  

   

   

   

943

   

   

   

—  

   

Research and development

   

2,562

      

   

   

2,732

      

   

   

4,401

      

   

   

11,640

      

Selling, general and administrative

   

9,220

      

   

   

2,023

      

   

   

17,164

      

   

   

4,340

      

Amortization of intangible asset

   

329

   

   

   

—  

   

   

   

329

   

   

   

—  

   

Total costs and expenses

   

12,986

      

   

   

4,755

      

   

   

22,837

      

   

   

15,980

      

Loss from operations

   

(5,681

   

   

(4,755

   

   

(14,749

   

   

(15,980

Interest income

   

11

      

   

   

3

      

   

   

12

      

   

   

7

      

Interest expense

   

(387

   

   

(1,282

   

   

(795

   

   

(2,322

Gain from settlement of retention option (Note 4)

   

31,079

   

   

   

—  

   

   

   

31,079

   

   

   

—  

   

Other income (expense)  - net

   

—  

   

   

   

(1,128

   

   

500

   

   

   

(753

Net income (loss)

$

25,022

   

   

$

(7,162

   

$

16,047

   

   

$

(19,048

Net income (loss) per share attributable to common stockholders:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Basic

$

1.25

   

   

$

(15.26

   

$

0.86

   

   

$

(40.59

Diluted

$

1.17

   

   

$

(15.26

)

   

$

0.80

   

   

$

(40.59

)

Weighted average number of shares used to compute net income (loss) per share of common stock:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Basic

   

20,050,987

      

   

   

469,319

      

   

   

18,716,332

      

   

   

469,319

      

Diluted

   

21,358,275

   

   

   

469,319

   

   

   

19,978,089

   

   

   

469,319

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

   

   

   

 

 2 

   


   

Hyperion Therapeutics, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

   

 

   

Six Months Ended
June 30,

   

   

2013

   

   

2012

   

Cash flows from operating activities

   

   

   

   

   

   

   

Net income (loss)

$

16,047

   

   

$

(19,048

Adjustments to reconcile net income (loss) to net cash used in operating activities

   

   

   

   

   

   

   

Depreciation and amortization

   

51

      

   

   

7

      

Amortization of debt discount

   

261

      

   

   

822

      

Re-measurement of warrants liability

   

—  

   

   

   

1,445

      

Re-measurement of call option liability and preferred stock liability

   

—  

   

   

   

(737

Stock-based compensation expense

   

1,756

      

   

   

320

      

Amortization of debt issuance costs

   

17

      

   

   

48

      

Amortization of intangible asset

   

329

   

   

   

—  

   

Gain from settlement of retention option (Note 4)

   

(31,079

   

   

—  

   

Changes in assets and liabilities

   

   

   

   

   

   

   

Accounts receivable

   

(1,723

   

   

—  

   

Inventories, net of acquisition

   

(1,065

   

   

—  

   

Prepaid expenses and other current assets

   

272

      

   

   

266

      

Other non-current assets

   

73

   

   

   

(137

Accounts payable

   

(120

   

   

(267

Deferred revenue

   

110

   

   

   

—  

   

Accrued liabilities and other non-current liabilities

   

2,072

   

   

   

786

      

Net cash used in operating activities

   

(12,999

   

   

(16,495

Cash flows from investing activities

   

   

   

   

   

   

   

Acquisition of property and equipment

   

(433

   

   

(13

Option to purchase rights to BUPHENYL and AMMONUL (Notes 3 and 4)

   

—  

   

   

   

(283

Acquisition of rights to BUPHENYL, net of AMMONUL option (Note 4)

   

10,962

   

   

   

—  

   

Change in restricted cash

   

—  

   

   

   

329

      

Net cash provided by investing activities

   

10,529

   

   

   

33

      

Cash flows from financing activities

   

   

   

   

   

   

   

Proceeds from issuance of common stock in follow-on offering, net of underwriting discounts

   

64,488

      

   

   

—  

   

Proceeds from issuance of common stock

   

337

      

   

   

48

      

Proceeds from issuance of convertible notes payable

   

—  

   

   

   

7,504

      

Proceeds from issuance of notes payable

   

—  

   

   

   

10,000

   

Payments of offering costs

   

(776

   

   

(809

Principal payments under notes payable

   

(1,705

   

   

—  

   

Net cash provided by financing activities

   

62,344

      

   

   

16,743

      

Net increase in cash and cash equivalents

   

59,874

      

   

   

281

      

Cash and cash equivalents, beginning of period

   

49,853

      

   

   

7,018

      

Cash and cash equivalents, end of period

$

109,727

      

   

$

7,299

      

Supplemental cash flow information

   

   

   

   

   

   

   

Cash paid for interest

$

532

      

   

$

105

   

Supplemental disclosure of noncash investing and financing activities

   

   

   

   

   

   

   

Stock-based compensation capitalized into inventories

   

26

      

   

   

—  

   

Option to purchase rights to BUPHENYL and AMMONUL (Note 4)

   

283

   

   

   

—  

   

Warrants issued in connection with notes payable

   

—  

   

   

   

1,228

      

Deferred offering costs in accounts payable and accrued liabilities

   

—  

   

   

   

566

   

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

   

   

   

 

 3 

   


   

Hyperion Therapeutics, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Formation and Business of the Company

Hyperion Therapeutics, Inc. (the “Company”) was incorporated in the state of Delaware on November 1, 2006. The Company was in the development stage from inception through March 31, 2013. During this period, the Company’s activities consisted primarily of raising capital, negotiating a promotion and drug development collaboration agreement, establishing a management team and performing drug development activities. The Company launched RAVICTI® (glycerol phenylbutyrate) Oral Liquid during the quarter ended March 31, 2013 and acquired BUPHENYL® (sodium phenylbutyrate) Tablets and Powder in May 2013. During the quarter ended June 30, 2013, the Company had significant revenues from principal operations and therefore, ceased being a development stage company.

The Company is a commercial stage biopharmaceutical company focused on the development and commercialization of novel therapeutics to treat disorders in the areas of orphan diseases and hepatology. The Company has developed RAVICTI to treat the most prevalent urea cycle disorders (“UCD”) and is developing glycerol phenylbutyrate (“GPB”) for the potential treatment of hepatic encephalopathy (“HE”). UCD and HE are generally characterized by elevated levels of ammonia in the bloodstream. Elevated levels of ammonia are potentially toxic and can lead to severe medical complications which may include death. The Company’s product, RAVICTI, is designed to lower ammonia in the blood. UCD are inherited rare genetic diseases caused by a deficiency of one or more enzymes or transporters that constitute the urea cycle, which in a healthy individual removes ammonia through conversion of ammonia to urea. HE is a serious but potentially reversible neurological disorder that can occur in patients with liver scarring, known as cirrhosis, or acute liver failure. On February 1, 2013, the U.S. Food and Drug Administration (“FDA”), granted approval of RAVICTI for the use as a nitrogen-binding agent for chronic management of adult and pediatric UCD patients greater than two years of age who cannot be managed by dietary protein restriction and/or amino acid supplementation alone. On May 31, 2013, the Company acquired BUPHENYL, an FDA-approved therapy for treatment of the most prevalent UCD, from Ucyclyd Pharma Inc. (“Ucyclyd”), a subsidiary of Valeant Pharmaceuticals International, Inc. (“Valeant”). Subsequent to the acquisition on May 31, 2013, the Company started selling BUPHENYL Tablets and Powder within and outside the United States.

Hyperion Therapeutics Limited was formed in January 2008 as a private limited company under the Companies Act 1985 for England and Wales and is wholly owned by the Company. Since formation, there has been no activity in Hyperion Therapeutics Limited.

On July 31, 2012, the Company completed its initial public offering (“IPO”) and the shares began trading on the NASDAQ Global Market on July 26, 2012. The Company received net proceeds from the IPO of $51.3 million, after deducting underwriting discounts and commissions of $4.0 million and expenses of $2.2 million.

On March 13, 2013, the Company completed its follow-on offering and issued 2,875,000 shares of its common stock at an offering price of $20.75 per share. In addition, the Company sold an additional 431,250 shares of common stock directly to its underwriters when they exercised their over-allotment option in full at the offering price of $20.75 per share. The Company received net proceeds from the offering of $63.7 million, after deducting underwriting discounts and commissions of $4.1 million and expenses of $0.8 million.

Since inception, the Company has incurred recurring net operating losses and negative cash flows from operations. During the six months ended June 30, 2013, the Company incurred a loss from operations of $14.7 million and used $13.0 million of cash in operations. At June 30, 2013, the Company had an accumulated deficit of $123.0 million. The Company expects to incur increased research and development expenses when the Company initiates a Phase III trial of GPB for the treatment of patients with episodic HE. In addition, the Company expects to incur increased sales and marketing expenses for RAVICTI and BUPHENYL in UCD. Management’s plans with respect to these matters include utilizing a substantial portion of the Company’s capital resources and efforts in completing the development and obtaining regulatory approval of GPB in HE, expanding the Company’s organization, and commercialization of RAVICTI and marketing of BUPHENYL.

   

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and on a basis consistent with the annual consolidated financial statements, and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair presentation of the periods presented. These interim financial results are not necessarily indicative of the results to be expected for the year ending December 31, 2013, or for any other future annual or interim

 

 

 4 

   


   

period. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2012.

Use of Estimates

The preparation of the interim condensed consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to fair value of assets, intangible asset valuation, preclinical and clinical trial accruals, research and development expenses, stock-based compensation expense, income taxes, revenue recognition and product sales allowances. Management bases its estimates on historical experience or on various other assumptions, including information received from its service providers, which it believes to be reasonable under the circumstances. Actual results could differ from those estimates.

Reclassifications

Certain prior year amounts in the interim condensed consolidated financial statements have been reclassified to conform to the current year’s presentation. In particular, certain sales and marketing expenses have been combined with general and administrative expenses in the condensed consolidated statement of operations. The result of this reclassification had no impact on the previously reported net loss or condensed consolidated balance sheet.

Segment Reporting

The Company operates as one operating segment and uses one measurement of profitability to manage its business. All long-lived assets are maintained in the United States.

Fair Value of Financial Instruments

The Company measures certain financial assets and liabilities at fair value based on the exchange price that would be received for an asset or paid for to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The carrying amounts of the Company’s financial instruments, including cash equivalents, accounts payable, and accrued liabilities, approximate fair value due to their short maturities. See Note 5, Fair Value Measurements, regarding the fair value of the Company’s notes payable.

Business Combinations

The Company allocates the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Direct transaction costs associated with the business combination are expensed as incurred.

Accounts Receivable

Trade accounts receivable are recorded net of product sales allowances for prompt-payment discounts, chargebacks, and doubtful accounts. Estimates for chargebacks and prompt-payment discounts are based on contractual terms, historical trends and our expectations regarding the utilization rates for these programs.

Inventories

Inventories are stated at the lower of cost or market value with cost determined under the first-in-first-out (FIFO) cost method and consists of raw materials and supplies, work in process and finished goods. Costs to be capitalized as inventories include third party manufacturing costs, associated compensation related costs of personnel indirectly involved in the manufacturing process and other overhead costs such as ancillary supplies.

Subsequent to FDA approval of RAVICTI on February 1, 2013, the Company began capitalizing RAVICTI inventories as the related costs were expected to be recoverable through the commercialization of the product. Costs incurred prior to the FDA approval of RAVICTI have been recorded as research and development expense in the condensed consolidated statements of operations. If

 

 

 5 

   


   

information becomes available that suggest that inventories may not be realizable, the Company may be required to expense a portion or all of the previously capitalized inventories.

Products that have been approved by the FDA or other regulatory authorities, such as RAVICTI are also used in clinical programs, to assess the safety and efficacy of the products for usage in diseases that have not been approved by the FDA or other regulatory authorities. The form of RAVICTI utilized for both commercial and clinical programs is identical and, as a result, the inventory has an “alternative future use” as defined in authoritative guidance. Raw materials and purchased drug product associated with clinical development programs are included in inventory and charged to research and development expense when the product enters the research and development process and no longer can be used for commercial purposes and, therefore, does not have an “alternative future use”.

On May 31, 2013, the Company acquired BUPHEYNY including inventory from Ucyclyd (see Note 4). The Company recorded these inventories at fair value in the amount of $3.9 million on the acquisition date. The Company will expense the difference between the fair value and book value of inventory as that inventory is sold. The Company evaluates for potential excess inventory by analyzing current and future product demand relative to the remaining product shelf life. The Company builds demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance and patient usage.

Intangible Assets

Intangible assets are recorded at acquisition cost less accumulated amortization and impairment.  Intangible assets with finite lives are amortized over their estimated useful lives. The Company’s intangible asset pertains to BUPHENYL product rights (see Note 7). Intangible assets are amortized over the estimated useful life using the economic use method, which reflects the pattern that the economic benefits of the intangible assets are consumed as revenue is generated. The pattern of consumption of the economic benefits is estimated using the future projected cash flows of  the intangible asset.

Impairment of Long-lived Assets

The Company reviews its property and equipment, intangible assets subject to amortization and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset class may not be recoverable. Recoverability is measured by comparing the carrying amount to the future net undiscounted cash flows that the assets are expected to generate. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value determined using projected discounted future net cash flows arising from the assets.

Revenue Recognition

The Company recognizes revenue in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605, Revenue Recognition, when the following criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred and risk of loss has passed; the seller’s price to the buyer is fixed or determinable and collectability is reasonably assured. The Company determines that persuasive evidence of an arrangement exists based on written contracts that defined the terms of the arrangements. In addition, the Company determines that services have been delivered in accordance with the arrangement. The Company assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. The Company assesses collectability based primarily on the customer’s payment history and on the creditworthiness of the customer.

Product Revenue, net: The Company’s product revenue represents sales of RAVICTI and BUPHENYL which are recognized once all four revenue recognition criteria described above are met. The Company recognizes revenue net of product sales allowances. Product shipping and handling costs are included in cost of sales.

   

 

   

• During 2013, the Company began distributing RAVICTI to two specialty pharmacies through a specialty distributor. The specialty pharmacies then in turn dispensed RAVICTI to patients in fulfillment of prescriptions. As RAVICTI is a new product, and the Company’s first commercial product, the Company could not reasonably assess potential product sales allowances at the time of sale to the specialty distributor. As a result, the price of RAVICTI was not deemed fixed or determinable. The Company does not record revenue on shipments of RAVICTI to the specialty distributor, until the product was shipped to patients by the specialty pharmacies at which time the related product sales allowances could be reasonably estimated.

   

   

   

 

 

 6 

   


   

   

 

   

• As discussed in Note 1, on May 31, 2013, the Company acquired BUPHENYL from Ucyclyd. The Company sells BUPHENYL in the United States to a specialty distributor who in turn sells this product to retail pharmacies, hospitals and other dispensing organizations. The Company records revenue on product shipments to the specialty distributor upon receipt by the specialty distributor. For product sales of BUPHENYL outside the United States, revenue is recognized once the product is accepted by the customer or their acceptance period has expired whichever comes first.

Product Sales Allowances: The Company establishes reserves for prompt-payment discounts, government and commercial rebates, product returns and chargebacks. Allowances relate to prompt-payment discounts and are recorded at the time of revenue recognition, resulting in a reduction in product sales revenue and a decrease in trade accounts receivables. Accruals related to government rebates, product returns and other applicable allowances such as distributor fees are recognized at the time of revenue recognition, resulting in a reduction in product sales and an increase in accrued expenses or a reduction in the related accounts receivable.

   

 

   

• Prompt-payment discounts: The specialty distributor and specialty pharmacies are offered prompt payment discounts. The Company expects the specialty distributor and specialty pharmacies will earn prompt payment discounts and, therefore deduct the full amount of these discounts from total product sales when revenues are recognized. The Company records prompt-payment discounts as allowances against accounts receivable on the condensed consolidated balance sheet.

   

   

   

• Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program. Rebate amounts are based upon contractual agreements or legal requirements with public sector (e.g. Medicaid) benefit providers. Rebates are amounts owed after the final dispensing of the product to a benefit plan participant and are based upon contractual agreements or legal requirements with public sector benefit providers. The allowance for rebates is based on statutory discount rates and expected utilization. The Company estimates for expected utilization of rebates based on historical data and data received from the specialty pharmacies. Rebates are generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarter’s unpaid rebates. If actual future rebates vary from estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment. Allowance for rebates are recorded in accrued liabilities on the condensed consolidated balance sheet.

   

   

   

• Chargebacks: Chargebacks are discounts that occur when contracted customers purchase directly from a specialty distributor. Contracted customers, which primarily consist of Public Health Service institutions, non-profit clinics, and Federal government entities purchasing via the Federal Supply Schedule, generally purchase the product at a discounted price. The specialty distributor, in turn, charges back to the Company the difference between the price initially paid by the specialty distributor and the discounted price paid to the specialty distributor by the customer. For BUPHENYL, the allowance for chargebacks is based on historical sales data and known sales to contracted customers. For RAVICTI, the allowance for chargebacks is based on known sales to contracted customers. For qualified programs that can purchase the Company’s products through distributors at a lower contractual government price, the distributors charge back to the Company the difference between their acquisition cost and the lower contractual government price.

   

   

   

• Medicare Part D Coverage Gap: Medicare Part D prescription drug benefit mandates manufacturers to fund 50% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. The Company estimates for the expected Medicare Part D coverage gap are based on historical invoices received and in part from data received from the specialty pharmacies. Funding of the coverage gap is generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarters. If actual future funding varies from estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment. Estimates of the Medicare Part D coverage Gap are recorded in accrued liabilities on the condensed consolidated balance sheet.

   

   

   

• Distribution Service Fees: The Company has a written contract with the specialty distributor that includes terms for distribution-related fees. Distributor fees are calculated at percentage of gross sales based upon agreed contracted rate. The Company accrues distributor fees at the time of the revenue recognition, resulting in reduction of product sales revenue and the recording of accrued liabilities on the condensed consolidated balance sheets. The Company records distribution and other fees paid to its customers as a reduction of revenue, unless it receives an identifiable and separate benefit for the consideration and it can reasonably estimate the fair value of the benefit received. If both conditions are met, the Company records the consideration paid to the customer as an operating expense. These costs are typically known at the time of sale, resulting in minimal adjustments subsequent to the period of sale.

   

   

   

• Product Returns: Consistent with industry practice, the Company generally offers customers a limited right to return. The Company accepts returns of products from patients resulting from breakage as defined within the Company’s returns policy. Additionally, the Company considers several other factors in the estimation process including the expiration dates of product shipped, third party data in monitoring channel inventory levels, shelf life of the product, prescription trends and other relevant factors. Provisions for estimated product returns are recorded as accrued liabilities on the condensed consolidated balance sheet.

   

   

Co-payment assistance: The Company provides a cash donation to a non-profit third party organization which supports patients, who have commercial insurance and meet certain financial eligibility requirements, with co-payment assistance and travel costs. The amount of co-payment assistance is accounted for by the Company as a reduction of revenues.

   

 

 

 7 

   


   

Cost of sales

Cost of sales includes third-party manufacturing cost of products sold, royalty fees, and other indirect costs related to personnel compensation, shipping and supplies.

Costs incurred prior to FDA approval of RAVICTI have been recorded as research and development expense in the Company’s condensed consolidated statement of operations. The Company expects that cost of RAVICTI sales as a percentage of revenue will increase in future periods as product manufactured prior to FDA approval, and therefore fully expensed, is utilized.

Cost of BUPHENYL sales as a percentage of revenue was higher and not indicative cost of sales in future periods due to the recording of the step-up value on BUPHENYL inventories acquired from Ucyclyd which will be expensed to cost of sales as that inventory is sold. (See Notes 4 and 6).

   

Comprehensive Loss

For all periods presented, the comprehensive income (loss) was equal to the net income (loss); therefore, a separate statement of comprehensive income (loss) is not included in the accompanying interim condensed consolidated financial statements.

Net Income (Loss) per Share of Common Stock

Basic earnings per share is computed by dividing the net income (loss) by the weighted average number of shares of common stock outstanding during the periods presented. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased for the assumed exercise of dilutive options and other potentially dilutive securities using the treasury stock method unless the effect is antidilutive.

Recent Accounting Pronouncements

In February 2013, FASB issued Accounting Standard Update (“ASU”) No. 2013-02, Comprehensive Income: Reporting of amounts reclassified out of other comprehensive income. Under the amendments of this update an entity is required to present either parenthetically on the face of the financial statements or in the notes, significant amounts reclassified from each component of accumulated other comprehensive income and the income statement line items affected by the reclassification. However, an entity would not need to show the income statement line item affected for certain components that are not required to be reclassified in their entirety to net income, such as amounts amortized into net periodic pension cost. The standard was effective prospectively for public entities for fiscal years, and interim periods with those years, beginning after December 15, 2012. Early adoption was permitted. The Company adopted this guidance on January 1, 2013. The implementation did not have an impact on the Company’s financial statements.

In July 2013, FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. Under the amendments of this update an entity is required to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. For example, an entity should not evaluate whether the deferred tax asset expires before the statute of limitations on the tax position or whether the deferred tax asset may be used prior to the unrecognized tax benefits being settled. The provisions of this update will be effective prospectively for the Company in fiscal years beginning after December 15, 2013, and for the interim periods within fiscal years with early adoption and retrospective application permitted. The Company believes the adoption of this new guidance will not have a material impact on its consolidated results of operations or financial position.

   

3. Collaboration Agreement with Ucyclyd Pharma, Inc.

In March 2012, the Company entered into the purchase agreement with Ucyclyd under which the Company purchased the worldwide rights to RAVICTI and the amended and restated collaboration agreement (the “restated collaboration agreement”) under which Ucyclyd granted the Company an option to purchase all of Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL at a fixed price at a future defined date, plus subsequent milestone and royalty payments, subject to Ucyclyd’s right to retain AMMONUL for a predefined price. The restated collaboration agreement superseded the collaboration agreement with Ucyclyd, dated August 23,

 

 

 8 

   


   

2007, as amended. The entry into the purchase agreement and the restated collaboration agreement resolved a dispute that the two parties had with respect to their rights under the prior collaboration agreement.

Under the purchase agreement, the Company made a payment of $6.0 million of which (i) $5.7 million was allocated to the worldwide rights to RAVICTI and (ii) $0.3 million was allocated to the option to purchase rights to BUPHENYL and AMMONUL, based on their relative fair values. The allocated amount to the rights to RAVICTI of $5.7 million was recorded to research and development expense in the consolidated statements of operations for the period ended March 31, 2012 due to the uncertainty of an alternative future use. The allocated amount for the option to purchase rights to BUPHENYL and AMMONUL in the amount of $0.3 million was included within other current assets and was subsequently offset against the gain recognized from the settlement of retention option (see Note 4).

The Company will also pay tiered mid to high single digit royalties on global net sales of RAVICTI and may owe regulatory milestones of up to $15.8 million related to approval of GPB in HE, regulatory milestones of up to $7.3 million per indication for approval of GPB in indications other than UCD or HE, and net sales milestones of up to $38.8 million if GPB is approved for use in indications other than UCD (such as HE) and all annual sales targets are reached.

In addition, the intellectual property license agreements executed between Ucyclyd and Dr. Marshall L. Summar, (“Summar”) and Ucyclyd and Brusilow Enterprises, LLC, (“Brusilow”) were assigned to the Company, and the Company has assumed the royalty and milestone obligations under the Brusilow agreement for sales of RAVICTI in any indication and the royalty obligations under the Summar agreement on sales of GPB to treat HE. The Brusilow and Summar agreements provide that royalty obligations will continue, without adjustment, even if generic versions of the licensed products are introduced and sold in the relevant country.

Under the terms of the restated collaboration agreement, the Company had an option to purchase all of Ucyclyd’s worldwide rights in BUPHENYL and AMMONUL, subject to Ucyclyd’s option to retain rights to AMMONUL. The Company was permitted to exercise this option for 90 days beginning on the earlier of the date of the approval of RAVICTI for the treatment of UCD and June 30, 2013, but in no event earlier than January 1, 2013. The upfront purchase price for AMMONUL and BUPHENYL will be $22.0 million. If the RAVICTI New Drug Application (“NDA”) for UCD was not approved by January 1, 2013, then Ucyclyd will be obligated to make monthly payments of $0.5 million to the Company until the earliest of (1) FDA approval of the RAVICTI NDA for UCD, (2) June 30, 2013 and (3) the Company’s written notification of the decision not to purchase Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL.

On February 1, 2013, the FDA approved RAVICTI for the treatment of UCD in adult and pediatric patients two years of age and older. In accordance with the restated collaboration agreement, Ucyclyd made a payment of $0.5 million during the quarter ended March 31, 2013.

On April 29, 2013, the Company exercised its option to purchase BUPHENYL and AMMONUL. Ucyclyd subsequently exercised its time-limited right to elect to retain all rights to AMMONUL for a contractual purchase price of $32.0 million (“retention amount”). Upon closing of the transaction, Ucyclyd paid the Company a net payment of $13.0 million, which reflects the Company’s contractual purchase price for Ucyclyd’s worldwide rights to BUPHENYL in the amount of $19.0 million being off set against Ucyclyd’s retention amount for AMMONUL. The Company has retained a right of first negotiation should Ucyclyd later decide to sell, exclusively license, or otherwise transfer the AMMONUL assets to a third party.

   

4.  Acquisition of BUPHENYL from Ucyclyd Pharma, Inc.  

Description of the Transaction

As discussed in Note 3, under the terms of the restated collaboration agreement, on April 29, 2013, the Company exercised its option to purchase all of Ucyclyd’s worldwide rights in BUPHENYL and AMMONUL. On May 17, 2013 Ucyclyd exercised it’s time-limited right to elect to retain all rights to AMMONUL. On May 31, 2013 (the “Acquisition Date”), the Company completed the acquisition of BUPHENYL. Accordingly, BUPHENYL results are included in Hyperion’s consolidated financial statements from the date of the acquisition. For the period from June 1, 2013 to June 30, 2013, BUPHENYL net revenue was $1.1 million and net income was not material.

The Company acquired BUPHENYL to enhance its commercial product portfolio and to allow the Company an opportunity to serve the entire UCD patient population, including those less than two years of age or for those patients who may prefer BUPHENYL.

 

 

 9 

   


   

Purchase Consideration and Assets Acquired

The Company accounted for the acquisition of BUPHENYL as a business combination under the acquisition method of accounting. On the Acquisition Date, the Company received a net payment of $11.0 million, which reflected the $32.0 million retention amount for AMMONUL due to the Company less the $19.0 million contractual purchase price for BUPHENYL due to Ucyclyd and a $2.0 million payment due to Ucyclyd for inventory that the Company purchased from Ucyclyd.

The fair value of purchase consideration was estimated based upon the fair value of assets acquired. The estimated fair value attributed to the BUPHENYL product rights was determined on a discounted forecast of the estimated net future cash flows to be generated from the product rights (see Note 7) and has an expected useful life of 10 years. The following table summarizes the provisional allocation of purchase price to the fair values of the assets acquired as of the acquisition date:

   

   

 

   

(in thousands) 

   

Inventories

$

3,900

   

Intangible Asset – BUPHENYL Product rights

   

16,500

   

Total

$

20,400

   

The amounts above are considered preliminary and are subject to change once Hyperion finalizes its determination of the fair value of assets acquired under the acquisition method. Thus, these amounts are subject to refinement and final determination of the values of assets acquired and may result in adjustments to the values presented above.

Gain from settlement of retention option

In connection with the allocation between the BUPHENYL acquistion described above and Ucyclyd’s exercise of its retention option, the Company recorded a gain of approximately $31.1 million. The amount of gain is comprised of (i) fair value of BUPHENYL of $20.4 million and (ii) net cash received from Ucyclyd of $10.9 million off-set by (iii) the $0.3 million carrying value of the option to purchase the rights to BUPHENYL and AMMONUL. The following table summarizes the results of the Company’s allocation:

   

 

   

(in thousands) 

   

Ucyclyd’s retention option amount

$

32,000

   

Amount due to Ucyclyd for BUPHENYL product rights

   

(19,000

)

Amount due to Ucyclyd for inventory

   

(2,038

)

Net payment received from Ucyclyd

   

10,962

   

Option to purchase the rights to BUPHENYL and AMMONUL

   

(283

)

Fair value of BUPHENYL

   

20,400

   

Gain from settlement of retention option

$

31,079

   

Pro forma Impact of Business Combination

The following consolidated pro forma information is based on the assumption that the acquisition occurred on January 1, 2012.  The unaudited pro forma information is presented for comparative purposes only and is not necessarily indicative of the financial position or results of operations which would have been reported had the Company completed the acquisition during these periods or which might be reported in the future. The unaudited pro forma information reflects primarily the application of the following adjustments:

 

·   elimination of the historical intangible asset amortization expense of this acquisition;

 

·   amortization expense related to the fair value of intangible asset acquired;

 

·   the exclusion of acquisition-related costs, incurred for this acquisition; and

 

·   the exclusion of the step-up value related to inventory sold that was acquired as part of the acquisition. Such amounts was included in the applicable comparative period for purposes of pro forma financial information.

 

 

 10 

   


   

The unaudited pro forma information is not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the acquisition been completed on January 1, 2012. In addition, the unaudited pro forma information does not purport to project the future results of operations of the Company.

   

 

   

Three Months Ended
June 30,

   

   

Six Months Ended
June 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

   

(in thousands)

Net revenues

$

9,152

   

   

$

7,439

   

   

$

18,784

   

   

$

13,622

   

Net income (loss)

   

25,627

   

   

   

(2,804

)

   

   

20,806

   

   

   

(13,513

)

Acquisition-related Costs

Acquisition related expenses consist of transaction costs which represent external costs directly related to the acquisition of BUPHENYL and primarily include expenditures for professional fees such as legal, accounting and other directly related incremental costs incurred to close the acquisition. Acquisition related expenses for the three and six months ended June 30, 2013 were $0.3 million and $0.4 million, respectively.

   

5. Fair Value Measurements

The Company follows ASC 820-10, “Fair Value Measurements and Disclosures,” which among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:

 

·   Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

 

·   Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

 

·   Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

The following table presents the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012 (in thousands):

   

 

   

June 30, 2013

   

   

Quoted prices in
Active Markets
for Identical
Items (Level 1)

   

      

Significant
Other
Observable
Inputs
(Level 2)

   

      

Significant
Unobservable
Inputs
(Level 3)

   

Assets:

   

   

   

      

   

   

   

      

   

   

   

Money market funds

$

38,005

      

      

$

—  

   

      

$

—  

   

   

$

38,005

      

      

$

—  

      

      

$

—  

      

   

   

 

 

 11 

   


   

   

 

 

December 31, 2012

   

   

Quoted prices in
Active Markets
for Identical
Items (Level 1)

   

      

Significant
Other
Observable
Inputs
(Level 2)

   

      

Significant
Unobservable
Inputs
(Level 3)

   

Assets:

   

   

   

      

   

   

   

      

   

   

   

Money market funds

$

45,003

      

      

$

—  

      

      

$

—  

      

   

$

45,003

      

      

$

—  

      

      

$

—  

      

The following table presents the carrying value and estimated fair value of the Company’s notes payable as of June 30, 2013 (in thousands):

   

 

   

June 30, 2013

   

   

Carrying
Value

   

      

Estimated
Fair Value

   

April and September 2012 Notes

$

10,654

      

      

$

11,362

      

The fair value of the April and September 2012 Notes is based on the present value of expected future cash flows and assumptions about current interest rates and the credit worthiness of the Company. The notes payable are classified within Level 3 of the hierarchy of fair value measurements.

6. Inventories

The following table represents the components of inventories (in thousands):

 

   

June 30,
2013

   

December 31,
2012

   

Raw Materials

$

1,080

   

$

—  

   

Work in process

   

72

   

   

—  

   

Finished goods

   

3,840

   

   

—  

   

Total

$

4,992

   

$

—  

   

As discussed in Note 4, on May 31, 2013, the Company acquired BUPHENYL from Ucyclyd. As part of the acquisition, the Company purchased inventories from Ucyclyd and the Company recorded these inventories at fair value in the amount of $3.9 million on the Acquisition Date (see Note 4).

   

7. Intangible Asset

As discussed in Notes 3 and 4, the Company acquired BUPHENYL and as part of this transaction, the Company recognized $16.5 million of an intangible asset relating to BUPHENYL product rights. The estimated fair value attributed to the BUPHENYL product rights was determined on a discounted forecast of the estimated net future cash flows to be generated from the product rights. Intangible assets are amortized over the estimated useful life using the economic use method, which reflects the pattern that the economic benefits of the intangible assets are consumed as revenue is generated. The pattern of consumption of the economic benefits is estimated using the future projected cash flows of the intangible asset. The Company estimated the useful life of the BUPHENYL product rights to be 10 years.

Intangible asset amortization expense was $0.3 million for the three and six months ended June 30, 2013.

Estimated aggregate amortization expense for each of the five succeeding years ending December 31 is as follows (in thousands):

   

 

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

2013

   

   

2014

   

   

2015

   

   

2016

   

   

2017

   

Amortization expense

$

2,312

   

   

$

4,548

   

   

$

2,412

   

   

$

1,372

   

   

$

1,243

   

   

   

 

 

 12 

   


   

8. Accrued Liabilities

The following table represents the components of accrued liabilities (in thousands):

   

 

   

June 30,
2013

   

      

December 31,
2012

   

Pre-clinical and clinical trial expenses

$

514

      

      

$

583

      

Payroll and related expenses

   

1,918

      

      

   

1,457

      

Sales related accruals

   

1,499

   

   

   

—  

   

Interest payable

   

80

      

      

   

93

      

Other

   

601

      

      

   

407

      

   

$

4,612

      

      

$

2,540

      

   

9. Notes Payable

In April 2012, the Company borrowed $10.0 million (the “April 2012 Notes”) pursuant to a loan and security agreement (the “Loan Agreement”) with Silicon Valley Bank and Leader Lending, LLC—Series B (the “Lenders”). The loan carries an interest rate of 8.88%, with interest only payments for the period of 9 months from May 1, 2012. The loan is then payable in equal monthly principal payments plus interest over a period of 27 months from February 1, 2013. In connection with the Loan Agreement, the Company granted a security interest in all of its assets, except intellectual property. The Company’s obligations to the Lenders include restrictions on borrowing, asset transfers, placing liens or security interest on its assets including the Company’s intellectual property, mergers and acquisitions and distributions to stockholders. The Loan Agreement also requires the Company to provide the Lenders monthly financials and compliance certificate within 30 days of each month end, annual audited financials within 180 days of each fiscal year-end and annual approved financial projections. The Company issued warrants to the Lenders to purchase a total of 75,974 shares of common stock with an exercise price of $4.08 per share. The Loan Agreement requires immediate repayment of amounts outstanding upon an event of default, as defined in the Loan Agreement, which includes events such as a payment default, a covenant default or the occurrence of a material adverse change, as defined in the Loan Agreement. In addition, a final payment equal to 6.5% of the principal loan amount is due on the earlier of (i) maturity date, (ii) prepayment of the loan or (iii) an event of default.

Pursuant to the terms of the Loan Agreement, once the Company raises at least $30.0 million from the sale of equity securities or subordinated debt, the Lenders also agreed to lend the Company a one-time single loan in the amount of $2.5 million (the “Bank Term Loan”). In September 2012, the Company borrowed an additional $2.5 million (the “September 2012 Note”) from Silicon Valley Bank pursuant to the terms of the Bank Term Loan. In addition, the Company issued warrants to Silicon Valley Bank to purchase a total of 8,408 shares of common stock with an exercise price of $5.05 per share. A final payment equal to 6.5% of the principal loan amount is due on the earlier of (i) maturity date, (ii) prepayment of the loan or (iii) an event of default. The principal amount outstanding under the Bank Term Loan accrues interest at a per annum rate equal to the greater of (i) 8.88% and (ii) the Treasury Rate, as defined in the Loan Agreement, on the date the loan is funded plus 8.50%, with interest only payments for the period of 9 months from the date the loan is funded. The loan is then payable in equal monthly principal payments plus interest over a period of 27 months from the date the loan is funded.

For the three and six months ended June 30, 2013, the Company recorded amortization of debt discount of $0.1 million and $0.3 million, respectively, related to the April 2012 Notes and September 2012 Note.

   

10. Warrants

October 2007 Common Stock Warrants

In connection with a Loan and Security Agreement entered into in October 2007, the Company issued warrants to purchase 274 shares of Series B convertible preferred stock. In June 2009, as part of the recapitalization, these warrants were converted into warrants to purchase shares of common stock. The warrants are exercisable at $1,913.05 per share and will expire in October 2017 (the “October 2007 common stock warrants”).

April 2012 Common Stock Warrants

In connection with the Loan Agreement entered into in April 2012 (Note 9), the Company issued warrants to the Lenders to purchase a total of 75,974 shares of common stock. The warrants are exercisable at $4.08 per share and expire in April 2022 (the “April 2012 common stock warrants”). As of June 30, 2013, the April 2012 common stock warrants had been fully exercised.  

 

 

 13 

   


   

September 2012 Common Stock Warrants

In connection with the September 2012 Note, the Company issued warrants to the Lender to purchase a total of 8,408 shares of common stock. The warrants are exercisable at $5.05 per share and expire in September 2022 (the “September 2012 common stock warrants”). As of June 30, 2013, the September 2012 common stock warrants had been fully exercised.

The following table summarizes the outstanding warrants and the corresponding exercise price as of June 30, 2013 and December 31, 2012:

   

 

   

Number of Shares Outstanding

   

   

   

   

   

June 30,
2013

   

      

December 31,
2012

   

      

Per Share
Exercise Price

   

October 2007 common stock warrants

   

274

      

      

   

274

      

      

$

1,913.05

      

April 2012 common stock warrants

   

—  

      

      

   

75,974

      

      

   

4.08

      

September 2012 common stock warrants

   

—  

   

      

   

8,408

      

      

   

5.05

      

Total

   

274

      

      

   

84,656

      

      

      

      

      

   

11. Commitments and Contingencies

Contingencies

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future, but have not yet been made. Further, the Company may be subject to certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.

In accordance with the Company’s amended and restated certificate of incorporation and amended and restated bylaws, the Company has indemnification obligations to its officers and directors for certain events or occurrences, subject to certain limits, while they are serving at the Company’s request in such capacity. There have been no claims to date and the Company has a director and officer insurance policy that may enable it to recover a portion of any amounts paid for future claims.

The Company is contingently committed for development milestone payments as well as sales-related milestone payments and royalties relating to potential future product sales under the restated collaboration agreement and purchase agreement with Ucyclyd (Note 3). The amount, timing and likelihood of these payments are unknown as they are dependent on the occurrence of future events that may or may not occur, including approval by the FDA of GPB for HE.

   

12. Stockholders’ Equity

On March 13, 2013, the Company completed its follow-on offering and issued 2,875,000 shares of its common stock at an offering price of $20.75 per share. In addition, the Company sold an additional 431,250 shares of common stock directly to its underwriters when they exercised their over-allotment option in full at an offering price of $20.75 per share. The Company received net proceeds from the offering of $63.7 million, after deducting underwriting discounts and commissions of $4.1 million and expenses of $0.8 million. As a result of these transactions, the Company issued a total of 3,306,250 shares of its common stock during the three months ended March 31, 2013.

   

13. Stock Option Plan

In April 2012, the board of directors of the Company adopted the 2012 Omnibus Incentive Plan (the “2012 Plan”). The Company’s stockholders approved the 2012 Plan in July 2012. The 2012 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, unrestricted stock, stock units, dividend equivalent rights, other equity-based awards and cash bonus awards. The 2012 Plan became effective on July 25, 2012

As of June 30, 2013, the Company had 749,611 shares of common stock available for issuance and 1,079,747 options and 21,000 restricted stock units (“RSU’s”) outstanding under the 2012 Plan. During the six months ended June 30, 2013, the board of directors approved the grants of 839,515 stock options at exercise prices in the range of $18.24—$25.82 and 21,000 RSU’s under the 2012 Plan. In addition, pursuant to the provisions of the 2012 Plan providing for an annual automatic increase in the number of shares of common stock reserved for issuance under the plan on January 1, 2013, the shares available for issuance under the 2012 Plan increased by 665,850 shares.

 

 

 14 

   


   

On July 25, 2012, the effective date of the 2012 Plan, the 2006 Plan was frozen and no additional awards will be made under the 2006 Plan. Any shares remaining available for future grant were allocated to the 2012 Plan and any shares underlying outstanding options that terminate by expiration, forfeiture, cancellation, or otherwise without issuance of such shares, will be allocated to the 2012 Plan. As of June 30, 2013, there were 1,584,977 options outstanding under the 2006 Plan.

During the quarter ended June 30, 2013, the Company modified certain stock options and recorded an expense of $0.2 million related to this modification in its condensed consolidated statements of operations.

Stock-Based Compensation

The Company estimates the fair value of stock options using the Black-Scholes option valuation model. The fair value of employee stock options and RSU’s is being amortized on a straight-line basis over the requisite service period of the awards.

Total stock-based compensation expense related to options granted was allocated as follows (in thousands):

   

 

   

Three Months Ended
June 30,

   

      

Six Months Ended
June 30,

   

   

2013

   

      

2012

   

      

2013

   

      

2012

   

Cost of sales

$

2

      

      

$

—  

   

      

$

3

   

      

$

—  

   

Research and development

   

143

      

      

   

102

      

      

   

235

   

      

   

139

      

Selling general and administrative

   

1,108

      

      

   

140

      

      

   

1,521

   

      

   

181

      

Total

$

1,253

      

      

$

242

      

      

$

1,759

   

      

$

320

      

Stock-based compensation of $17,000 and $26,000 was capitalized into inventories for the three and six months ended June 30, 2013. Capitalized stock-based compensation is recognized as cost of sales when the related product is sold. Allocations to research and development, selling, general and administrative expenses are based upon the department to which the associated employee reported. No related tax benefits of the stock-based compensation expense have been recognized.

   

14. Income Taxes

The Company was granted orphan drug designation in 2009 by the FDA for its products currently under development. The orphan drug designation allows the Company to claim increased federal tax credits for its research and development activities. The Company had $16.4 million of federal credit carryforwards of which $15.9 million relates to Orphan Drug Credit claims for 2009 through 2012. These federal credit carryforwards were fully provided with 100% valuation allowance.

The Company did not record any income tax expense for the three and six month periods ended June 30, 2013. Expected taxable income in 2013 will be offset by federal and state net operating losses and credits.

There was no interest or penalties accrued through June 30, 2013. The Company’s policy is to recognize any related interest or penalties in income tax expense. The material jurisdiction in which the Company is subject to potential examination by tax authorities for tax years ended 2006 through the current period include the United States and California. The Company is not currently under income tax examinations by any tax authorities.

   

 

 

 15 

   


   

   

15. Net Income (Loss) per Share of Common Stock

The following table sets forth the computation of basic and diluted net income (loss) per share of common stock for the periods indicated (in thousands, except share and per share amounts):

   

 

   

Three Months Ended
June 30,

   

   

Six Months Ended
June 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Historical net income (loss) per share

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Numerator:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Net income (loss) attributable to common stockholders

$

25,022

   

   

$

(7,162

   

$

16,047

   

   

$

(19,048

Denominator:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Weighted-average number of common shares outstanding — basic

   

20,050,987

      

   

   

469,319

      

   

   

18,716,332

      

   

   

469,319

      

Dilutive effect of stock-options and awards

   

1,307,288

   

   

   

—  

   

   

   

1,261,757

   

   

   

—  

   

Weighted average common shares outstanding — dilutive

   

21,358,275

   

   

   

469,319

   

   

   

19,978,089

   

   

   

469,319

   

Net income (loss) per share:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Basic

$

1.25

   

   

$

(15.26

)

   

$

0.86

   

   

$

(40.59

)

Diluted

$

1.17

   

   

$

(15.26

)

   

$

0.80

   

   

$

(40.59

)

The following outstanding potentially dilutive securities were excluded from the computation of diluted net income (loss) per share, as the effect of including them would have been antidilutive:

   

 

   

Three Months Ended
June 30,

   

      

Six Months Ended
June 30,

   

   

2013

   

      

2012

   

      

2013

   

      

2012

   

Convertible preferred stock

   

—  

      

      

   

6,575,637

      

      

   

—  

      

      

   

6,575,637

      

Stock options

   

675,969

      

      

   

1,717,337

      

      

   

380,745

      

      

   

1,717,337

      

October 2007, April 2008 and 2012 common stock warrants

   

274

      

      

   

76,270

      

      

   

274

      

      

   

76,270

      

Total

   

676,243

      

      

   

8,369,244

      

      

   

381,019

      

      

   

8,369,244

      

   

   

16. Related Party Transaction

As  part of the Company’s acquisition of BEPHENYL (see Note 4), the Company assumed the existing BUPHENYL distributors agreements, including the distribution agreement with Swedish Orphan Biovitrum AB (“SOBI”). SOBI’s chairman, Bo Jesper Hansen, is member of the Company’s Board of Directors. During the first half of 2013 there have been no revenues recognized or expenses incurred related to this agreement.

   

   

   

   

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following management’s discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes thereto for the year ended December 31, 2012, included in our Annual Report on Form 10-K/A, filed with the U.S. Securities and Exchange Commission (“SEC”).

Overview

We are a biopharmaceutical company focused on the development and commercialization of novel therapeutics to treat disorders in the areas of orphan diseases and hepatology. We have developed our product, RAVICTI® (glycerol phenylbutyrate) Oral Liquid, to treat the most prevalent urea cycle disorders (“UCD”) and are developing glycerol phenylbutyrate (“GPB”) to treat hepatic encephalopathy (“HE”), two different diseases in which blood ammonia is elevated. UCD are inherited rare genetic diseases caused by a deficiency of one or more enzymes or protein transporters that constitute the urea cycle, which in a healthy individual removes ammonia through the conversion of ammonia to urea. HE may develop in some patients with liver scarring, known as cirrhosis, or acute liver failure and is a chronic disease which fluctuates in severity and may lead to serious neurological damage. On February 1, 2013, the U.S. Food and Drug Administration (“FDA”), granted approval of RAVICTI for use as a nitrogen-binding agent for chronic management of UCD in adult and pediatric patients greater than two years of age who cannot be managed by dietary protein restriction and/or amino acid supplementation alone. Limitations of use for RAVICTI include treatment of patients with acute hyperammonemia (“HA”) crises for whom urgent intervention is typically necessary, patients with N-acetylglutamate synthetase deficiency for whom the safety and efficacy of RAVICTI has not been established, and UCD patients under two months of age for whom RAVICTI is contraindicated due to uncertainty as to whether newborns, who may have immature pancreatic function, can effectively digest RAVICTI. We commercially launched RAVICTI during the first quarter of 2013. On May 1, 2013, we received notification from the FDA that RAVICTI qualified for orphan drug exclusivity.

We originally obtained rights to develop RAVICTI in 2007 pursuant to a collaboration agreement with Ucyclyd Pharma, Inc. (“Ucyclyd”), a subsidiary of Valeant Pharmaceuticals International, Inc. (“Valeant”). In March 2012, we purchased the worldwide rights to RAVICTI for an upfront payment of $6.0 million, future payments based upon the achievement of regulatory milestones in indications other than UCD, sales milestones, and mid to high single digit royalties on global net sales of RAVICTI. Pursuant to an amended and restated collaboration agreement (the “restated collaboration agreement”), with Ucyclyd entered into in March 2012, we had an option to purchase all of Ucyclyd’s worldwide rights to BUPHENYL® (sodium phenylbutyrate) Tablets and Powder, an FDA approved therapy for treatment of the most prevalent UCDs and AMMONUL® (sodium phenylacetate and sodium benzoate) injection 10%/10%, the only adjunctive therapy currently FDA-approved for the treatment of HA crises in UCD patients, for an upfront payment of $22.0 million, plus subsequent milestone and royalty payments. On April 29, 2013, we exercised our option to acquire BUPHENYL and AMMONUL from Ucyclyd and subsequently, Ucyclyd exercised its option to retain AMMONUL. On May 31, 2013, we completed the acquisition of BUPHENYL and we received a net payment of $11.0 million which reflected the $32.0 million contractual purchase price for AMMONUL due to us less the $19.0 million contractual purchase price for BUPHENYL due to Ucyclyd and $2.0 million payment due to Ucyclyd for inventory we purchased from Ucyclyd.

As of June 30, 2013, we had an accumulated deficit of $123.0 million. We recorded losses from operations of $14.7 million and $16.0 million for the six months ended June 30, 2013 and 2012, respectively. During the second quarter of 2013, we had significant revenues from our principal operations and therefore, ceased being a development s stage company. We anticipate that a substantial portion of our capital resources and efforts in the foreseeable future will be focused on completing the development and obtaining regulatory approval of GPB in HE, expanding our organization, commercialization of RAVICTI and marketing of BUPHENYL.

On March 13, 2013, we completed a follow-on offering and issued 2,875,000 shares of our common stock at an offering price of $20.75 per share. In addition, we sold an additional 431,250 shares of common stock directly to our underwriters when they exercised their over-allotment option in full at an offering price of $20.75 per share. We received net proceeds from the offering of $63.7 million, after deducting underwriting discounts and commissions of $4.1 million and expenses of $0.8 million.

On July 31, 2012, we completed our initial public offering (“IPO”) and issued 5,000,000 shares of our common stock at an initial offering price of $10.00 per share. We sold an additional 750,000 shares of common stock directly to our underwriters when they exercised their over-allotment option in full at the initial offering price of $10.00 per share. Our shares began trading on the NASDAQ Global Market on July 26, 2012. We received net proceeds from the IPO of $51.3 million, after deducting underwriting discounts and commissions of $4.0 million and expenses of $2.2 million.

 

 

 17 

   


   

In April 2012, our Phase II HE trial data was unblinded and the trial met its primary endpoint, which was to demonstrate that the proportion of patients experiencing an HE event was significantly lower on GPB versus placebo, both administered in addition to a standard of care, including lactulose and/or rifaximin. We expect our research and development expenses to increase when we initiate a Phase III trial of GPB in HE. We will likely continue to incur significant commercial, sales, marketing and outsourced manufacturing expenses in connection with the commercialization of RAVICTI and BUPHENYL in UCD. These increased expenses, as compared to prior years, include payroll related expenses due to the addition of employees in the commercial, manufacturing and regulatory departments, costs related to the initiation and operation of our distribution network, and marketing costs and general infrastructure expenses as we expand our organization.

Financial Overview

Revenues

Our product revenues consist of the following:

 

·   revenues from the sale of our first commercial product, RAVICTI which was approved by the FDA on February 1, 2013 and was commercially launched in the U.S. during the period ended March 31, 2013 and

 

·   revenues from the sale of BUPHENYL which we acquired from Ucyclyd on May 31, 2013, pursuant to the restated collaboration agreement, and we currently distribute BUPHENYL in the U.S. and certain countries outside the U.S.

See “Results of Operations” below for more detailed discussion on revenues.

Cost of sales

Our cost of sales includes third-party manufacturing costs, royalty fees payable under our restated collaboration agreement with Ucyclyd, and other indirect costs including compensation cost of personnel, shipping and supplies.

The manufacturing costs we incurred prior to FDA approval of RAVICTI have been recorded as research and development expenses in our condensed consolidated statement of operations. For RAVICTI, we expect that cost of sales as a percentage of sales will increase in future periods as product manufactured prior to FDA approval is utilized as these products have been fully expensed as research and development expenses in prior periods.

As a result of the business combination related to the purchase of BUPHENYL, cost of sales was higher and not indicative of cost of sales in future periods due to the recording of the step-up value on BUPHENYL inventories acquired from Ucyclyd which will be expensed to cost of sales as that inventory is sold. Since the inventories we purchased were part of the business combination, the inventories were recorded at fair value on the acquisition date. For additional information see Note 4 to our unaudited condensed consolidated financial statements appearing elsewhere in this report.

Research and Development Expenses

We recognize research and development expenses as they are incurred. Our research and development expenses consist primarily of:

 

·   salaries and related expenses for personnel, including expenses related to stock options or other stock-based compensation granted to personnel in development functions;

 

·   fees paid to clinical consultants, clinical trial sites and vendors, including clinical research organizations (“CROs”), in conjunction with implementing and monitoring our clinical trials and acquiring and evaluating clinical trial data, including all related fees, such as for investigator grants, patient screening fees, laboratory work and statistical compilation and analysis;

 

·   other consulting fees paid to third parties;

 

·   expenses related to production of clinical supplies, including fees paid to contract manufacturers;

 

·   expenses related to license fees and milestone payments under in-licensing agreements;

 

·   expenses related to compliance with drug development regulatory requirements in the United States, the European Union and other foreign jurisdictions;

 

·   depreciation and other allocated expenses; and

 

·   expenses incurred to manufacture RAVICTI prior to FDA approval.

 

 

 18 

   


   

We expense both internal and external research and development expenses as they are incurred. We did not begin tracking our research and development expenses on a program-by-program basis until January 1, 2010. We develop RAVICTI in UCD and GPB for HE in parallel, and we typically use our employees, consultants and infrastructure resources across our two programs. Thus, some of our research and development expenses are not attributable to an individual program, but rather are allocated across our two clinical stage programs and these costs are included in unallocated costs as detailed below. In 2012, unallocated costs included $5.7 million incurred in connection with the purchase of RAVICTI from Ucyclyd. Allocated expenses include salaries, stock-based compensation and related benefit expenses for our employees, consulting fees and fees paid to clinical suppliers. The following table shows our research and development expenses for the three and six months ended June 30, 2013 and 2012 (in thousands):

   

 

   

Three Months Ended
June 30,

   

      

Six Months Ended
June 30,

   

   

2013

   

      

2012

   

      

2013

   

      

2012

   

   

(unaudited)

   

      

(unaudited)

   

UCD Program

$

1,618

      

      

$

948

      

      

$

2,545

      

      

$

2,052

      

HE Program

   

235

      

      

   

745

      

      

   

549

      

      

   

1,620

      

Unallocated

   

709

      

      

   

1,039

      

      

   

1,307

      

      

   

7,968

      

Total

$

2,562

      

      

$

2,732

      

      

$

4,401

      

      

$

11,640

      

We expect our research and development expenses to increase when we initiate our Phase III trial of GPB for the treatment of patients with episodic HE. Due to the inherently unpredictable nature of product development, we are currently unable to estimate the expenses we will incur.

Our research and development expenditures are subject to numerous uncertainties in timing and cost to completion. Development timelines, the probability of success and development expenses can differ materially from expectations. Clinical trials in orphan diseases, such as UCD and HE, may be difficult to enroll given the small number of patients with these diseases. Completion of clinical trials may take several years or more, but the length of time generally varies according to the type, complexity, novelty and intended use of a product candidate. The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others:

 

·   the number of trials required for approval;

 

·   the number of sites included in the trials;

 

·   the length of time required to enroll suitable patients;

 

·   the number of patients that participate in the trials;

 

·   the drop-out or discontinuation rates of patients;

 

·   the duration of patient follow-up;

 

·   the number and complexity of analyses and tests performed during the trial;

 

·   the phase of development of the product candidate; and

 

·   the efficacy and safety profile of the product candidate.

Our expenses related to clinical trials are based on estimates of patient enrollment and related expenses at clinical investigator sites as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions and contract research organizations that conduct and manage clinical trials on our behalf. We generally accrue expenses related to clinical trials based on contracted amounts applied to the level of patient enrollment and activity according to the protocol. If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we modify our estimates of accrued expenses accordingly on a prospective basis.

As a result of the uncertainties discussed above, we are unable to determine with certainty the duration and completion costs of our RAVICTI and GPB development programs.

Selling, General and Administrative Expenses

Selling general and administrative expenses consist primarily of salaries, benefits and stock-based compensation for employees in administration, finance and business development, legal, investor relations, marketing, commercial and sales functions, including fees to third party vendors providing customer support services. Other significant expenses include consulting fees, allocated facilities expenses and professional fees for accounting and legal services, including legal services associated with obtaining and maintaining patents. We expect that our selling, general and administrative expenses will increase with the continued commercialization of

 

 

 19 

   


   

RAVICTI and marketing of BUPHENYL. We expect these increases will likely include increased expenses for insurance, expenses related to the hiring of additional personnel and payments to outside consultants, lawyers and accountants.

Amortization of intangible asset

In 2013, the amortization of intangible asset pertains to the amortization expense of BUPHENYL product rights acquired on May 31, 2013. For additional information, see Notes 4 and 7 to our unaudited condensed consolidated financial statements appearing elsewhere in this report.  

Interest Income

Interest income consists of interest earned on our cash and cash equivalents.

Interest Expense

Interest expense consists primarily of non-cash and cash interest costs related to our borrowings.

Gain from settlement of retention option

The amount of gain is comprised of (i) fair value of BUPHENYL of $20.4 million and (ii) net cash received from Ucyclyd of $10.9 million off-set by (iii) the $0.3 million carrying value of the option to purchase the rights to BUPHENYL and AMMONUL. Accordingly, we recorded the resulting net settlement of $31.1 million as gain from our settlement of the retention option on our condensed consolidated statements of operations. For additional information, see Note 4 to our unaudited condensed consolidated financial statements appearing elsewhere in this report.

Other Income (Expense), net

During the six months ended June 30, 2013 other income (expense), net consisted of a $0.5 million payment from Ucyclyd in accordance with the restated collaboration agreement. During the three and six months ended June 30, 2012, other income (expense), net consisted primarily of the changes in the fair value of the common and preferred stock warrants liability and call option liability associated with the issuance of approximately $32.5 million of convertible notes. Under ASC 815, Derivatives and Hedging and ASC 480, Distinguishing Liabilities from Equity, we account for the common stock warrants issued in 2011 and preferred stock warrants issued in 2012 and 2011, at fair value and recorded each as liabilities on the date of each issuance. The fair value was determined and subsequently re-measured using the Black-Scholes option-pricing model on each reporting date. On July 31, 2012, upon closing our IPO, we performed a final re-measurement of the common stock warrants issued in 2011 and preferred stock warrants issued in 2012 and 2011, and recorded the impact of the re-measurement to other income (expense), net. These warrants automatically net exercised into shares of common stock on July 31, 2012. As a result, these warrants will no longer be re-measured after July 31, 2012.

Income Taxes

We were granted orphan drug designation in 2009 by the FDA for our products currently under development. The orphan drug designation allowed us to claim increased federal tax credits for its research and development activities. We have $16.4 million of federal credit carryforwards of which $15.9 million relates to Orphan Drug Credit claims for 2009 through 2012. These federal credit carryforwards were fully provided with 100% valuation allowance.

We did not record income tax expense for the three and six month periods ended June 30, 2013. Our expected taxable income in 2013 will be offset by federal and state net operating losses and credits.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. GAAP. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Actual results could differ from those estimates.

 

 

 20 

   


   

Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. For additional information on our critical accounting policies, please refer to the information contained in Note 2 of the accompanying unaudited condensed consolidated financial statements and the Critical Accounting Policies and Estimates section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Annual Report on Form 10-K/A for the year ended December 31, 2012.

In relation to our commercial launch of RAVICTI during the period ended March 31, 2013 and our acquisition of BUPHENYL on May 31, 2013, we implemented the following critical accounting policies and estimates:

Business Combination

We allocate the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The purchase price allocation process requires us to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Direct transaction costs associated with the business combination are expensed as incurred.

Accounts Receivable

Our trade accounts receivable are recorded net of product sales allowances for prompt-payment discounts, chargebacks and doubtful accounts. We estimate chargebacks and prompt-payment discounts based on contractual terms, historical trends and our expectations regarding the utilization rates for these programs.

Inventories

Our inventories are stated at the lower of cost or market value with cost determined under the first-in-first-out (FIFO) cost method. Our inventories consist of raw materials, supplies, and work in process and finished goods. Subsequent to the FDA approval of RAVICTI on February 1, 2013, we began capitalizing inventories as the related costs were expected to be recoverable through the commercialization of the product. Prior to the FDA approval of RAVICTI, we recorded the costs incurred as research and development expenses in the condensed consolidated statements of operations. If information becomes available that suggest that our inventories may not be realizable, we may be required to expense a portion or all of the previously capitalized inventories.

The costs of our inventories consists mainly of third party manufacturing costs, associated compensation related costs of personnel indirectly involved in the manufacturing process and other overhead costs attributable to the manufacture of inventories.

Products that have been approved by the FDA or other regulatory authorities, such as RAVICTI are also used in clinical programs, to assess the safety and efficacy of the products for usage in diseases that have not been approved by the FDA or other regulatory authorities. The form of RAVICTI utilized for both commercial and clinical programs is identical and, as a result, the inventory has an “alternative future use”. Raw materials and purchased drug product associated with clinical development programs are included in inventory and charged to research and development expense when the product enters the research and development process and no longer can be used for commercial purposes and, therefore, does not have an “alternative future use”.

On May 31, 2013, we acquired BUPHENYL including inventory from Ucyclyd (see Note 4 to our unaudited condensed consolidated financial statements appearing elsewhere in this report). We recorded these inventories at fair value in the amount of $3.9 million on the acquisition date. We will expense the difference between the fair value and book value of inventory as that inventory is sold.

We evaluate for potential excess inventory by analyzing current and future product demand relative to the remaining product shelf life. We build demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance and patient usage. We classified inventory as current on the consolidated balance sheets when we expect inventory to be consumed for commercial use within the next 12 months.

Intangible Asset

We record intangible assets at acquisition cost less accumulated amortization and impairment. We amortize intangible assets with finite lives over their estimated useful lives. Our intangible asset pertains to BUPHENYL product rights acquired on May 31, 2013. We calculate the amortization of our intangible asset over its estimated useful life using the economic use method, which reflects the pattern that the economic benefits of the intangible asset is consumed as revenue is generated. The pattern of consumption of the economic benefits is estimated using the future projected cash flows of the intangible asset.

 

 

 21 

   


   

Impairment of Long-lived Assets

We review our property and equipment and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset class may not be recoverable. Recoverability is measured by comparing the carrying amount to the future net undiscounted cash flows that the assets are expected to generate. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value determined using projected discounted future net cash flows arising from the assets.

Revenue Recognition

We recognize revenue in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605, Revenue Recognition, when the following criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred and risk of loss has passed; and the seller’s price to the buyer is fixed or determinable and collectability is reasonably assured. We determine that persuasive evidence of an arrangement exists based on written contracts that define the terms of our arrangements. In addition, we determine that services have been delivered in accordance with the arrangement. We assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess collectability based primarily on the customer’s payment history and on the creditworthiness of the customer.

Product Revenue

During the three month and six month period ended June 30, 2013, our product revenues represent sales of RAVICTI and BUPHENYL in the U.S. and a limited amount of BUPHENYL sales outside the U.S. We recognized revenue once all four revenue recognition criteria described above are met.

During the first quarter of 2013, we began distributing RAVICTI to two specialty pharmacies through a specialty distributor. The specialty pharmacies, then in turn dispense RAVICTI to patients in fulfillment of prescriptions. As RAVICTI is a new product, and our first commercial product, we could not reasonably assess potential product sales allowances at the time of sale to the specialty distributor. As a result, the price of RAVICTI was not deemed fixed or determinable. We deferred the recognition of revenues on product shipments of RAVICTI to the specialty distributor until the product was shipped to patients by the specialty pharmacies at which time our related product sales allowances could be reasonably estimated. In future periods, once we have sufficient historical information to reasonably estimate our product sales allowances, we will re-evaluate our revenue recognition policy to determine whether the Company has sufficient information to recognize revenue upon receipt of RAVICTI by the specialty distributor.

On May 31, 2013, we acquired BUPHENYL from Ucyclyd. We sell BUPHENYL in the United States to a specialty distributor, who in turn sells this product to retail pharmacies, hospitals and other dispensing organizations. We recognized revenue from BUPHENYL sales upon receipt by the specialty distributor. For product sales of BUPHENYL outside the United States, revenue is recognized once the product is accepted by the customer or once their acceptance period has expired whichever comes first.

We recognize revenue net of product sales allowances, including estimated rebates, chargebacks, prompt-payment discounts, returns, distribution service fees and Medicare Part D coverage gap reimbursements. Product shipping and handling costs are included in cost of sales.

Product Sales Allowances

We establish reserves for prompt-payment discounts, government and commercial rebates, product returns and chargebacks. Allowances relating to prompt-payment discounts and chargebacks are recorded at the time of revenue recognition, resulting in a reduction in product sales revenue and a decrease in trade accounts receivables. Accruals related to government rebates, product returns and other applicable allowances such as distributor fees are recognized at the time of revenue recognition, resulting in a reduction in product sales and an increase in accrued expenses or a reduction in the related accounts receivable depending on the nature of the sales deduction.

Co-payment assistance

We provide cash donation to an independent non-profit third party organization (which supports patients who have commercial insurance and meet certain financial eligibility requirements) with co-payment assistance and travel costs. We account for the amount of co-payment assistance as a reduction of product revenues.

 

 

 22 

   


   

Cost of Sales

Our cost of sales during the quarter ended June 30, 2013 consist mainly of third party manufacturing cost of products sold, royalty fees and other indirect costs related to personnel compensation, shipping and supplies.

We recorded costs incurred prior to the FDA approval of RAVICTI as research and development expenses in our condensed consolidated statement of operations. We expect that cost of sales relating to RAVICTI as a percentage of revenue will increase in future periods as product manufactured prior to FDA approval, and therefore fully expensed, is utilized. The cost of BUPHENYL sales as a percentage of revenue was higher and not indicative of future cost of sales in future periods due to the recording of the step-value on BUPHENYL inventories acquired from Ucyclyd which will be expensed to cost of sales as the inventory is sold.

Results of Operations

Comparison of the Three and Six Months Ended June 30, 2013 and 2012

   

 

   

Three Months Ended
June  30,

   

   

Increase/
(Decrease)

   

   

%
Increase/
(Decrease)

   

   

Six Months Ended
June 30,

   

   

Increase/
(Decrease)

   

   

%
Increase/
(Decrease)

   

(in thousands, except for percentages)

2013

   

   

   

2012

2013

   

   

   

2012

   

   

   

(unaudited)

   

   

   

   

   

   

   

   

   

   

(unaudited)

   

   

   

   

   

   

   

   

   

Product revenue, net

$

7,305

   

   

$

—  

   

   

$

7,305

   

   

   

100

%

   

$

8,088

   

   

$

—  

   

   

$

8,088

   

   

   

100

%

Cost of sales

   

875

   

   

   

—  

   

   

   

875

   

   

   

100

   

   

   

943

   

   

   

—  

   

   

   

943

   

   

   

100

   

Research and development

   

2,562

   

   

   

2,732

   

   

   

(170

)

   

   

(6

)

   

   

4,401

   

   

   

11,640

   

   

   

(7,239

)

   

   

(62

)

Selling general and administrative

   

9,220

   

   

   

2,023

   

   

   

7,197

   

   

   

356

   

   

   

17,164

   

   

   

4,340

   

   

   

12,824

   

   

   

295

   

Amortization of intangible asset

   

329

   

   

   

—  

   

   

   

329

           

100

   

   

   

329

   

   

   

—  

   

   

   

329

   

   

   

100 

   

Interest income

   

11

   

   

   

3

   

   

   

8

   

   

   

267

   

   

   

12

   

   

   

7

   

   

   

5

   

   

   

71

   

Interest expense

   

(387

)

   

   

(1,282

)

   

   

(895

)

   

   

70

   

   

   

(795

)

   

   

(2,322

)

   

   

(1,527

)

   

   

(66

)

Gain from settlement of retention option

   

31,079

   

   

   

—  

   

   

   

31,079

   

   

   

100

   

   

   

31,079

   

   

   

—  

   

   

   

31,079

   

   

   

100

   

Other income (expense), net

   

—  

   

   

   

(1,128

)

   

   

(1,128

)

   

   

(100

)

   

   

500

   

   

   

(753

)

   

   

1,253

   

   

   

166

   

Revenues

During the three and six months ended June 30, 2013, we generated $7.3 million and $8.1 million of net product revenues. Product revenues from the sale of RAVICTI and BUPHENYL are recorded net of sales returns and estimated product sales allowances including government rebates , chargebacks, prompt -payment discounts and distributor fees.

For the three months period ended June 30, 2013, net product revenues consisted of the following:

 

·   net U.S. sales from RAVICTI in the amount of $6.2 million; and

 

·   net sales from BUPHENYL in the amount of $1.1 million (of which amount $0.1 million relates to sales outside the U.S. and $1.0 million sales in the U.S.).

For the six months period ended June 30, 2013, net product revenues consisted of the following:

 

·   net U.S. sales from RAVICTI in the amount of $7.0 million; and

 

·   net sales from BUPHENYL in the amount of $1.1 million (of which amount $0.1 million relates to sales outside the U.S. and $1.0 million sales in the U.S.).

Cost of Sales

Cost of sales of $0.9 million for the three and six months ended June 30, 2013 consisted of BUPHENYL product costs of $0.3 million and RAVICTI product costs of $0.6 million.

We began capitalizing inventory costs after FDA approval of RAVICTI as the related costs were expected to be recoverable through the commercialization of the product. We recorded costs incurred prior to FDA approval of RAVICTI as research and development expenses in our 2012 consolidated statement of operations. As a result, cost of sales for RAVICTI for the next several quarters will reflect a lower average per unit cost of materials.

 

 

 23 

   


   

For BUPHENYL, cost of sales was higher and not indicative of cost of sales in future periods due to the recording of the step-up value on BUPHENYL inventories acquired from Ucyclyd which will be expensed to cost of sales as the inventory is sold. Since the inventories were purchased as part of a business combination, they were recorded at fair value on the acquisition date. For additional information, see Note 4 to our unaudited condensed consolidated financial statements appearing elsewhere in this report.

Research and Development Expenses

Research and development expenses decreased by $0.2 million, or 6%, to $2.6 million for the three months ended June 30, 2013, from $2.7 million for the three months ended June 30, 2012. This decrease was primarily due to decreases in clinical development costs due to completion of our HE Phase II trial in 2012.

Research and development expenses decreased by $7.2 million, or 62%, to $4.4 million for the six months ended June 30, 2013, from $11.6 million for the six months ended June 30, 2012. This decrease was primarily due to decreases of $1.1 million in clinical development costs due to completion of our HE Phase II trial in 2012 and a $5.7 million expense recognized pertaining to purchase of RAVICTI which occurred in the first quarter of 2012.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $7.2 million, or 356%, to $9.2 million for the three months ended June 30, 2013, from $2.0 million for the three months ended June 30, 2012. This increase was primarily due to increases of $3.8 million in compensation expense as a result of hiring additional employees in the sales and marketing departments and $0.5 million in insurance and other office and administrative related expenses, $1.5 million in selling and marketing expenses pertaining to commercialization of RAVICTI and $1.4 million increase in consulting costs.

Selling, general and administrative expenses increased by $12.8 million, or 295%, to $17.2 million for the six months ended June 30, 2013, from $4.3 million for the six months ended June 30, 2012. This increase was primarily due to increases of $6.1 million in compensation expense as a result of hiring additional employees in the sales and marketing departments and $1.0 million in insurance and other office and administrative related expenses, $3.3 million in selling and marketing expenses pertaining to the product launch and commercialization of RAVICTI and $1.8 million increase in consulting costs.

Amortization of intangible asset

For the three and six months ended June 30,  2013, amortization of intangible asset in the amount of $0.3 million pertains to the amortization expense for BUPHENYL product rights acquired as part of the BUPHENYL acquisition on May 31, 2013.

Interest Income

The changes in interest income were not significant for the three and six months ended June 30, 2013 and 2012.

Interest Expense

Interest expense decreased by $0.9 million, or 70%, to $0.4 million for the three months ended June 30, 2013, from $1.3 million for the three months ended June 30, 2012. The interest expense decreased for the three months ended June 30, 2013, compared to the same period in 2012, primarily due to the conversion of our April 2011 Notes and October 2011 Notes to common stock upon the closing of our IPO in July 2012.

Interest expense decreased by $1.5 million, or 66%, to $0.8 million for the six months ended June 30, 2013, from $2.3 million for the six months ended June 30, 2012. The interest expense decreased for the six months ended June 30, 2013, compared to the same period in 2012, primarily due to the conversion of our April 2011 Notes and October 2011 Notes to common stock upon the closing of our IPO in July 2012.

Gain from settlement of retention option

The amount of gain is comprised of (i) fair value of BUPHENYL of $20.4 million and (ii) net cash received from Ucyclyd of $10.9 million off-set by (iii) the $0.3 million carrying value of the option to purchase the rights to BUPHENYL and AMMONUL. Accordingly, we recorded the resulting net settlement of $31.1 million as gain from our settlement of the retention option on our condensed consolidated statements of operations. For additional information, see Note 4 to our unaudited condensed consolidated financial statements appearing elsewhere in this report.  

 

 

 24 

   


   

Other Income (Expense), net

During the six months ended June 30, 2013, we recorded $0.5 million in income related to Ucyclyd’s payment to us in relation to our restated collaboration agreement.

During the three months ended June 30, 2012, we recorded a change in fair value of $1.3 million of expense and $0.2 million of income related to the common stock warrants and the preferred stock warrants, respectively. During the six months ended June 30, 2012, we recorded a change in fair value of $1.8 million of expense and $0.3 million of income related to the common stock warrants and the preferred stock warrants, respectively. Additionally, we recorded $0.7 million to other income relating to the change in the fair value of our call option liability upon the issuance of our convertible notes in February 2012.

Liquidity and Capital Resources

During the six months ended June 30, 2013, we raised net proceeds of $63.7 from our follow-on offering and generated net revenues of $8.1 million.

As of June 30, 2013 and December 31, 2012, our principal sources of liquidity were our cash and cash equivalents, which totaled $109.7 million and $49.9 million, respectively.

In July 2012, we raised $51.3 million in net proceeds in our IPO. On March 13, 2013, we completed our follow-on offering and issued 2,875,000 shares of our common stock at an offering price of $20.75 per share. In addition, we sold an additional 431,250 shares of common stock directly to our underwriters when they exercised their over-allotment option in full at an offering price of $20.75 per share. We received net proceeds from the offering of $63.7 million, after deducting underwriting discounts and commissions of $4.1 million and expenses of $0.8 million.

We began generating revenues due to the commercialization of RAVICTI during the period ended March 31, 2013 and the acquisition of BUPHENYL on May 31, 2013. We believe that our existing cash and cash equivalents as of June 30, 2013, and our future expected product revenues will be sufficient to fund our operations for at least the next 12 months.

Cash Flows

The following table sets forth the major sources and uses of cash for the periods set forth below (in thousands):

   

 

   

Six Months Ended
June 30,

   

(In thousands)

2013

   

   

2012

   

   

(unaudited)

   

Net cash (used in) provided by:

   

   

   

   

   

   

   

Operating activities

$

(12,999

   

$

(16,495

Investing activities

   

10,529

   

   

   

33

      

Financing activities

   

62,344

      

   

   

16,743

      

Net increase in cash and cash equivalents

$

59,874

      

   

$

281

      

Cash used in operating activities of $13.0 million for the six months ended June 30, 2013 included our net income of $16.0 million, adjusted for non-cash items such as $31.1 million of gain from the settlement of retention option, $0.3 million of amortization of debt discount, $0.3 million of amortization of intangible asset, $1.8 million of stock-based compensation expense, a net cash outflow of $2.4 million related to changes in operating assets partially offset by a net cash inflow of $2.1 million related to changes in operating liabilities. For the six months ended June 30, 2012, the primary use of cash was to fund our operations related to the development of RAVICTI for the treatment of UCD and GPB for the treatment of HE. Cash used in operating activities of $16.5 million for the six months ended June 30, 2012, included net loss of $19.0 million, adjusted for non-cash items such as $0.8 million of amortization of debt discount, $0.3 million of stock-based compensation expense, $1.4 million for re-measurement of warrants liability, $0.7 million for re-measurement of call option and preferred stock liability and $0.6 million of net cash inflow related to changes in operating assets and liabilities. In addition, for the six months ended June 30, 2012, cash used in operating activities included the $5.7 million of expense we incurred for the purchase of RAVICTI.

Net cash provided by investing activities was $10.5 million and $33,000 for the six months ended June 30, 2013 and 2012, respectively. Net cash provided by investing activities for the six months ended June 30, 2013 includes a net payment of $11.0 million received from Ucyclyd partially offset by additions made to property and equipment of $0.4 million. For the six months ended June 30, 2012, net cash provided by investing activities consisted of an increase in restricted cash of $0.3 million, option to purchase the rights to BUPHENYL and AMMONUL of $0.3 million and acquisitions of property and equipment of $13,000.

 

 

 25 

   


   

Net cash provided by financing activities was $62.3 million and $16.7 million for the six months ended June 30, 2013 and 2012, respectively. Net cash provided by financing activities for the six months ended June 30, 2013 related primarily to the proceeds from our follow-on offering of $64.5 million (net of underwriting discounts and commissions) and proceeds from issuance of common stock due to exercise of stock options of $0.3 million partially offset by our payments of notes payable of $1.7 million and payments of deferred offering costs of $0.8 million. For the six months ended June 30, 2012, net cash provided by financing activities related primarily to the issuance of the February 2012 notes in the amount of $7.5 million and the proceeds from the loan agreement with Silicon Valley Bank and Leader Lending, LLC – Series B in the amount of $10.0 million, partially offset by our payments of deferred offering costs in the amount of $0.8 million.

Future Funding Requirements

We will likely need to obtain additional financing to fund our future operations, supporting sales and marketing activities related to RAVICTI and BUPHENYL, a Phase III trial in HE, as well as the development of any additional product candidates we might acquire or develop on our own. Our future funding requirements will depend on many factors, including, but not limited to

 

·   our ability to successfully commercialize RAVICTI and market BUPHENYL;

 

·   the amount of sales and other revenues from products that we may commercialize, if any, including the selling prices for such products and the availability of adequate third-party reimbursement;

 

·   selling and marketing costs associated with our UCD products, including the cost and timing of expanding our marketing and sales capabilities and establishing a network of specialty pharmacies;

 

·   the progress, timing, scope and costs of our nonclinical studies and clinical trials, including the ability to timely enroll patients in our planned and potential future clinical trials;

 

·   the time and cost necessary to obtain regulatory approvals and the costs of post-marketing studies that may be required by regulatory authorities;

 

·   the costs of obtaining clinical and commercial supplies of RAVICTI and BUPHENYL;

 

·   payments of milestones and royalties to third parties, including Ucyclyd;

 

·   cash requirements of any future acquisitions of product candidates;

 

·   the time and cost necessary to respond to technological and market developments:

 

·   the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and

 

·   any new collaborative, licensing and other commercial relationships that we may establish.

We only started to generate product revenue during the quarter ended March 31, 2013 and otherwise had not generated revenue from the sale of products in the last three years. We expect our continuing operating losses to result in increases in cash used in operations over the next several years.

We believe that our current cash and cash equivalents, which include the net proceeds from our IPO and follow-on offering will be sufficient to fund our operations for at least the next 12 months.

We have based these estimates on a number of assumptions that may prove to be wrong, and changing circumstances beyond our control may cause us to consume capital more rapidly than we currently anticipate. For example, we may not achieve the revenues we anticipated and our HE Phase III clinical trial may cost more than we expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials.

Additional financing may not be available when we need it or may not be available on terms that are favorable to us. We may seek to raise additional capital through a combination of private and public equity offerings and debt financings. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring debt, making capital expenditures or declaring dividends.

If adequate funds are not available to us on a timely basis, or at all, we may be required to terminate or delay clinical trials or other development activities for RAVICTI and GPB, or delay our establishment of sales and marketing capabilities or other activities that may be necessary to successfully market BUPHENYL. We may elect to raise additional funds even before we need them if the conditions for raising capital are favorable.

 

 

 26 

   


   

Off-Balance Sheet Arrangements

We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, 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 purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts.

Jumpstart Our Business Startups Act of 2012

The Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks in the ordinary course of our business. These risks primarily include risk related to interest rate sensitivities. During the three months ended June 30, 2013, our market risks have not changed materially from those discussed in Item 7A of our Form 10-K/A for the year ended December 31, 2012.

   

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of the end of the period covered by this report. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure.

Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. On April 1, 2013, we completed the first of two phases of the implementation of our corporate-wide Enterprise Resource Planning (“ERP”) system. Our new ERP system is expected to standardize and automate business processes, to improve operational and financial performance, and to enhance internal controls.

   

   

 

 

 27 

   


   

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently a party to any material legal proceedings.

Item 1A. Risk Factors

This Quarterly Report on Form 10-Q contains forward-looking information based on our current expectations. Because our actual results may differ materially from any forward-looking statements made by or on behalf of us, this section includes a discussion of important factors that could affect our actual future results, including, but not limited to, our revenues, expenses, net loss and loss per share. You should carefully consider these risk factors, together with all of the other information included in this Quarterly Report on Form 10-Q as well as our other publicly available filings with the SEC.

Risks Related to our UCD products including Commercialization of RAVICTI and Our Development Programs

We depend substantially on the commercial success of our product, RAVICTI, and we may not be able to successfully commercialize it.

We have invested a significant portion of our efforts and financial resources in the development of RAVICTI. As a result, our business is substantially dependent on our ability to successfully commercialize RAVICTI. We launched RAVICTI in March 2013 and are in the early stages of marketing. As a result, we may be unable to commercialize RAVICTI successfully.

Our ability to commercialize RAVICTI successfully will depend on our ability to:

 

achieve market acceptance and generate product sales through executing and maintaining agreements with a third-party logistics company and specialty pharmacies on commercially reasonable terms;

 

obtain and maintain adequate levels of reimbursement for RAVICTI;

 

hire, train, deploy and maintain a qualified commercial organization and field force;

 

create market demand for RAVICTI through education, marketing and sales activities;

 

comply with requirements established by the FDA, including post-marketing requirements and label restrictions; and

 

comply with other healthcare regulatory requirements.

The commercial success of RAVICTI will depend upon the degree of market acceptance among physicians, patients, patient advocacy groups, third-party payors and the medical community.

RAVICTI may not gain market acceptance among physicians, patients, patient advocacy groups, third-party payors and the medical community. The degree of market acceptance of RAVICTI will depend on a number of factors, including:

 

the effectiveness, or perceived effectiveness, of RAVICTI as compared with any branded or generic forms of sodium phenylbutyrate;

 

the prevalence and severity of any side effects;

 

potential advantages over BUPHENYL or any generic versions of BUPHENYL;

 

the perception among physicians and patients as to the relative price differences between RAVICTI and BUPHENYL;

 

sufficient third-party coverage or reimbursement;

 

relative convenience and ease of administration;

 

willingness of patients to adopt RAVICTI as a replacement for sodium phenylbutyrate or any other UCD treatment options;

 

the strength of our sales and marketing organizations and our third-party distributors; and

 

the quality of our relationship with patient advocacy groups and the medical community.

If we fail to achieve market acceptance of RAVICTI, our revenue will be limited and it will be more difficult to achieve profitability, or profitability may not occur at all.

 

 

 28 

   


   

If we are unable to maintain agreements with, and effectively manage, third parties to distribute our UCD products to patients, our results of operations and business could be adversely affected.

We rely on third parties to distribute our UCD products to patients. We have contracted with a third-party logistics company to warehouse our UCD products. For RAVICTI, we contracted with two specialty pharmacies to sell and distribute to patients. A specialty pharmacy is a pharmacy that specializes in the dispensing of medications for complex or chronic conditions that require a high level of patient education and ongoing management. For BUPHENYL, which we acquired on May 31, 2013, we operate under a contract with a wholesaler who distributes and sells to retail pharmacies, hospitals and other dispensing organizations. We have also contracted with a third-party call center to coordinate prescription intake and distribution, reimbursement adjudication, patient financial support, and ongoing compliance support for our UCD products. This distribution network requires significant coordination with our sales and marketing and finance organizations. Failure to coordinate financial systems could negatively impact our ability to accurately report product revenue from sales of RAVICTI and BUPHENYL. If we are unable to effectively manage the distribution process, the sales of our UCD products, as well as any future products we may commercialize, will be delayed or severely compromised and our results of operations may be harmed.

In addition, since we use specialty pharmacies and heavily rely on our third-party call center to support RAVICTI, we are subject to certain risks, including, but not limited to, risks that these organizations may:

 

not provide us with accurate or timely information regarding their inventories, the number of patients who are using our UCD products, or complaints regarding those drugs;

 

not effectively sell or support our UCD products;

 

reduce or discontinue their efforts to sell or support our UCD products;

 

not devote the resources necessary to sell our UCD products in the volumes and within the time frames that we expect;

 

be unable to satisfy financial obligations to us or others; or

 

cease operations.

         Any such events may result in decreased product sales and lower product revenue, which would harm our results of operations and business.

If we are unable to successfully maintain internal commercialization capabilities, we will be unable to successfully commercialize our UCD products.

We need to commit significant time and financial and managerial resources to develop and maintain adequate marketing capabilities and a sales force with technical expertise in addition to supporting distribution capabilities. Factors that may inhibit our efforts to develop our commercialization capabilities include:

 

our inability to retain adequate numbers of effective commercial personnel;

 

our inability to train sales personnel, who may have limited experience with our company or UCD products, to deliver an effective message regarding our UCD products  that results in patients being treated with our UCD products by their treating physicians;

 

our inability to equip sales personnel with effective materials, including medical and sales literature to help them educate physicians and other healthcare providers regarding our UCD products and its proper administration; and

 

unforeseen costs and expenses associated with sustaining an independent sales and marketing organization.

If we are not successful in maintaining effective sales and marketing infrastructure, we will have difficulty commercializing our UCD products, which would adversely affect our business and financial condition.

If we are unable to maintain orphan drug exclusivity for RAVICTI in the United States, we may face increased competition.

Under the Orphan Drug Act of 1983, the FDA may designate a product as an orphan drug if it is a drug intended to treat a rare disease or condition affecting fewer than 200,000 people in the United States. A company that first obtains FDA approval for a designated orphan drug for the specified rare disease or condition receives orphan drug marketing exclusivity for that drug for a period of seven years from the date of its approval. This orphan drug exclusivity prevents the approval of another drug containing the same active ingredient and used for the same orphan indication except in very limited circumstances, based upon the FDA’s determination that a subsequent drug is safer, more effective or makes a major contribution to patient care, or if the orphan drug manufacturer is unable to assure that a sufficient quantity of the orphan drug is available to meet the needs of patients with the rare disease or condition. Orphan drug exclusivity may also be lost if the FDA later determines that the initial request for designation was materially defective. RAVICTI was granted orphan drug exclusivity by the FDA in May 2013, which we expect will provide the drug with orphan drug marketing exclusivity in the United States until February 2020, seven years from the date of its approval. However, such exclusivity may not effectively protect the product from competition if the FDA determines that a subsequent drug for the same

 

 

 29 

   


   

indication is safer, more effective or makes a major contribution to patient care, or if we are unable to assure the FDA that sufficient quantities of RAVICTI are available to meet patient demand. In addition, orphan drug exclusivity does not prevent the FDA from approving competing drugs for the same or similar indication containing a different active ingredient. If a subsequent drug is approved for marketing for the same or a similar indication we may face increased competition, and our revenues from the sale of RAVICTI will be adversely affected. RAVICTI does not have orphan drug exclusivity in the European Union or other regions of the world.

We have a history of net losses and may not achieve or maintain profitability.

We have a limited operating history and only recently received FDA approval for RAVICTI, which we initiated commercial sales of during the first quarter of 2013. On May 31, 2013, we completed the acquisition of BUPHENYL from Ucyclyd. We have funded our operations primarily from sales of our equity and debt securities. We have incurred losses from operations in each year since our inception, had an accumulated deficit totaling $123.0 million. Our losses, among other things, have had and will continue to have an adverse effect on our cash flow, stockholders’ equity and working capital. We may not generate sufficient sales of RAVICTI and BUPHENYL for us to achieve or maintain profitability on a timely basis, or at all.

We expect to incur increased selling, general and administrative expenses during the remainder of this year versus comparable periods last year due to higher sales and marketing expenses related to the commercialization of RAVICTI and the marketing of BUPHENYL, as well as additional full-year expenses related to operating as a public company. In addition, we expect increased research and development expenses related to our expected HE Phase III trial and for required post-marketing studies for UCD. We also expect to continue to incur significant losses for the foreseeable future. Additionally, our operating expenses may increase significantly if we in-license or acquire other products or product candidates. Further, because of the numerous risks and uncertainties associated with developing and commercializing therapeutic drugs, we may experience larger than expected future losses and may not become profitable.

If we fail to obtain and sustain an adequate level of reimbursement for our UCD products by third-party payors, sales would be adversely affected.

The course of treatment for UCD patients is and will continue to be expensive. We currently expect that the average price per patient year for RAVICTI will be between $250,000 and $290,000. We expect UCD patients to need treatment throughout their lifetimes. Most families of patients are not capable of paying for this treatment themselves. There will be no commercially viable market for RAVICTI and BUPHENYL without reimbursement from third-party payors. Even if there is a commercially viable market, if the level of reimbursement is below our expectations, our revenue and gross margins will be adversely affected. In addition, we expect to provide RAVICTI and BUPHENYL at no cost to qualified patients without insurance or without coverage for RAVICTI or BUPHENYL. If the numbers of patients that qualify for these programs is higher than our current estimates, our revenues and gross margins will be adversely affected.

Third-party payors, such as government or private health care insurers, carefully review and increasingly question the coverage of, and challenge the prices charged for, drugs. Reimbursement rates from private health insurance companies vary depending on the company, the insurance plan and other factors. A current trend in the United States health care industry is toward cost containment. Large public and private payors, managed care organizations, group purchasing organizations and similar organizations are exerting increasing influence on decisions regarding the use of, and reimbursement levels for, particular treatments. Such third-party payors, including Medicare, are questioning the coverage of, and challenging the prices charged for, medical products and services, and many third-party payors limit coverage of or reimbursement for newly approved health care products. In particular, third-party payors may limit the covered indications. Cost-control initiatives could decrease the price we might establish for products, which could result in product revenues being lower than anticipated. If the prices for our products decrease or if governmental and other third-party payors do not provide adequate coverage and reimbursement levels, our revenue and prospects for profitability will suffer. Additionally, there may be delays in obtaining appropriate documentation and securing reimbursement coverage from third-party payors, which may also have a significant impact on our revenue and profitability. Reimbursement systems in international markets, including the European Union, vary significantly by country and by region, and reimbursement approvals must be obtained on a country-by-country basis. In many countries the product cannot be commercially launched until reimbursement is approved. The negotiation process in some countries can exceed 12 months.

We are required to complete post-marketing studies mandated by the FDA for RAVICTI and such studies may be costly and time consuming. If the results of these studies reveal unacceptable safety risks, we may be required to withdraw RAVICTI from the market.

As part of the FDA approval of RAVICTI to treat UCD, we made a Phase IV commitment to conduct a long-term (approximately 10 years) outcomes study (or Registry), which is noted on the FDA-approved label. The FDA also imposed several post-marketing requirements which includes obligations to conduct:

 

two separate studies in UCD patients during the first two months of life and from 2 months to 2 years of age, including a study of the pharmacokinetics in both age groups;

 

 

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a study to determine whether metabolites are present in human breast milk;

 

a study to determine whether the metabolites of RAVICTI affect the metabolism of other drugs that these patients might be given concurrently; and

 

a randomized study to determine the safety and efficacy in UCD patients who are treatment naïve to phenylbutyrate treatment.

If we are unable to complete these studies or the results of the studies reveal unacceptable safety risks, we could be required to perform additional studies, which may be costly, and even lose marketing approval of RAVICTI. In addition to these studies, the FDA may also require us to commit to perform other lengthy post-marketing studies, for which we would have to expend significant additional resources, which could have an adverse effect on our operating results, financial condition and stock price.

The patient population suffering from UCD is small and has not been established with precision. If the actual number of patients is smaller than we estimate or if we are unable to convert patients from sodium phenylbutyrate to RAVICTI, our revenue and ability to achieve profitability may be adversely affected.

We estimate that the number of individuals in the United States with UCD is approximately 2,100, of which approximately 1,100 are currently diagnosed and approximately 600 patients are treated with FDA-approved pharmaceuticals, including sodium phenylbutyrate and RAVICTI. Of these, we estimate that approximately 60% are children and 40% are adults. Our estimate of the size of the patient population is based on published studies as well as internal analyses. If the results of these studies or our analysis of them do not accurately reflect the number of patients with UCD, our assessment of the market may be inaccurate, making it difficult or impossible for us to meet our revenue goals, or to obtain and maintain profitability. In addition, if existing patients do not use our therapies, it will be more difficult to achieve profitability, or profitability may not occur at all.

The number of patients in the United States who might be prescribed RAVICTI could be significantly less than the 600 currently estimated to be on either RAVICTI or sodium phenylbutyrate. Since RAVICTI and sodium phenylbutyrate target diseases with small patient populations, the per-patient drug pricing must be high in order to recover our development and manufacturing costs, fund adequate patient support programs and achieve profitability. We may be unable to maintain or obtain sufficient sales volume at a price high enough to justify our product development efforts and our sales and marketing and manufacturing expenses.

To obtain regulatory approval to market GPB in HE, costly and lengthy clinical trials may be required, and the results of the studies and trials are highly uncertain.

As part of the regulatory approval process, we must conduct, at our own expense, clinical trials on humans for each indication that we intend to pursue. We expect the number of nonclinical studies and clinical trials that the regulatory authorities will require will vary depending on the disease or condition the drug is being developed to address and regulations applicable to the particular drug. Generally, the number and size of clinical trials required for approval varies based on the nature of the disease and size of the expected patient population that may be treated with a drug, and we are still in discussions with the FDA as to the design of any HE clinical trials. We must demonstrate that our drug products are safe and efficacious for use in the targeted human patients in order to receive regulatory approval for commercial sale.

Serious adverse events or other safety risks could require us to abandon development and preclude or limit approval of GPB to treat HE.

We may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to participants or if preliminary data demonstrate that the product is unlikely to receive regulatory approval or unlikely to be successfully commercialized. In addition, regulatory agencies, institutional review boards and data safety monitoring boards may at any time order the temporary or permanent discontinuation of our clinical trials or request that we cease using investigators in the clinical trials if they believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements, or that they present an unacceptable safety risk to participants. If we elect or are forced to suspend or terminate a clinical trial of GPB to treat HE, the commercial prospects for GPB will be harmed and our ability to generate additional product revenues from RAVICTI may be delayed or eliminated.

We may never obtain approval for or commercialize RAVICTI outside of the United States, which would limit our ability to realize its full market potential.

We only have approval to market RAVICTI in the United States at this time. In order to market RAVICTI outside of the United States, we must comply with regulatory requirements of and obtain required regulatory approvals in, other countries. Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and obtaining regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. Approval processes vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approval could require additional nonclinical studies or clinical trials, which could be costly and time consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of RAVICTI in those countries. We

 

 

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