0001558370-19-004584.txt : 20190509 0001558370-19-004584.hdr.sgml : 20190509 20190509100952 ACCESSION NUMBER: 0001558370-19-004584 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 53 CONFORMED PERIOD OF REPORT: 20190331 FILED AS OF DATE: 20190509 DATE AS OF CHANGE: 20190509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALBIREO PHARMA, INC. CENTRAL INDEX KEY: 0001322505 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-33451 FILM NUMBER: 19809180 BUSINESS ADDRESS: STREET 1: 10 POST OFFICE SQUARE STREET 2: SUITE 502 SOUTH CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 857-415-4774 MAIL ADDRESS: STREET 1: 10 POST OFFICE SQUARE STREET 2: SUITE 502 SOUTH CITY: BOSTON STATE: MA ZIP: 02109 FORMER COMPANY: FORMER CONFORMED NAME: Biodel Inc DATE OF NAME CHANGE: 20050331 10-Q 1 albo-20190331x10q.htm 10-Q albo_Current_Folio_10Q

Stock

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10‑Q


(Mark One)

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

For the quarterly period ended March 31, 2019

OR

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

For the transition period from            to           .

Commission File Number 001‑33451


Albireo Pharma, Inc.

(Exact name of registrant as specified in its charter)


s

 

 

Delaware
(State or other jurisdiction of incorporation or organization)

    

90‑0136863
(IRS Employer Identification No.)

 

 

 

10 Post Office Square, Suite 502 South, Boston, MA

(Address of principal executive offices)

 

02109
(Zip code)

 

Registrant’s telephone number, including area code: (857) 254‑5555


Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

ALBO

The Nasdaq Capital Market

 

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      No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).   Yes      No  ☐

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

 

 

 

 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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

As of May 1, 2019, the registrant had 12,039,305 shares of common stock, $0.01 par value per share, outstanding.

 

 

 


 

Albireo Pharma, Inc.

 

 

 

 

     

Page

 

 

 

PART I — FINANCIAL INFORMATION 

 

 

 

 

 

Cautionary Note Regarding Forward-Looking Statements 

 

3

 

 

 

Item 1. Financial Statements 

 

6

 

 

 

Condensed Consolidated Balance Sheets (unaudited) at March 31, 2019 and December 31, 2018 

 

6

 

 

 

Condensed Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2019 and 2018 

 

7

 

 

 

Condensed Consolidated Statements of Comprehensive Loss (unaudited) for the Three Months Ended March 31, 2019 and 2018 

 

8

 

 

 

Condensed Consolidated Statements of Equity (unaudited) for the Three Months Ended March 31, 2019 and March 31, 2018 

 

9

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2019 and 2018 

 

10

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited) 

 

11

 

 

 

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

 

21

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

 

29

 

 

 

Item 4. Controls and Procedures 

 

29

 

 

 

PART II — OTHER INFORMATION 

 

 

 

 

 

Item 1. Legal Proceedings 

 

31

 

 

 

Item 1A. Risk Factors 

 

31

 

 

 

Item 6. Exhibits 

 

32

 

 

 

Signatures 

 

32

 

All brand names, trademarks or service marks appearing in this quarterly report are the property of their respective owners. Registrant’s use or display of another party’s trademark, service mark, trade dress or product in this quarterly report is not intended to, and does not, imply a relationship with, or endorsement or sponsorship of, the registrant by such other party.

 

 

 

2


 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, which we refer to as the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act, that relate to future events or to our future operations or financial performance. Any forward-looking statement involves known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statement. Forward-looking statements include statements, other than statements of historical fact, about, among other things:

·

the progress, number, scope, cost, duration or results of our development activities, nonclinical studies and clinical trials of odevixibat (formerly known as A4250), elobixibat, A3384 or any of our other product candidates or programs, such as the target indication(s) for development or approval, the size, design, population, conduct, cost, objective or endpoints of any clinical trial, or the timing for initiation or completion of or availability of results from any clinical trial (including PEDFIC 1, our Phase 3 clinical trial of odevixibat in patients with progressive familial intrahepatic cholestasis, or PFIC), for submission or approval of any regulatory filing, or for meeting with regulatory authorities;

·

the potential benefits that may be derived from any of our product candidates;

·

the timing of and our ability to obtain and maintain regulatory approval of our existing product candidates, any product candidates that we may develop, and any related restrictions, limitations, or warnings in the label of any approved product candidates;

·

any payment that HealthCare Royalty Partners III, L.P., or HCR, or EA Pharma Co., Ltd., or EA Pharma, may make to us or any other action or decision that EA Pharma may make concerning elobixibat or our business relationship;

·

our future operations, financial position, revenues, costs, expenses, uses of cash, capital requirements, our need for additional financing or the period for which our existing cash resources will be sufficient to meet our operating requirements; or

·

our strategies, prospects, plans, expectations, forecasts or objectives.

Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “forecast,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “targets,” “likely,” “will,” “would,” “could,” “should,” “continue,” “scheduled” and similar expressions or phrases, or the negative of those expressions or phrases, are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Although we believe that we have a reasonable basis for each forward-looking statement contained in this report, we caution you that these statements are based on our estimates or projections of the future that are subject to known and unknown risks and uncertainties and other important factors that may cause our actual results, level of activity, performance, experience or achievements to differ materially from those expressed or implied by any forward-looking statement. Actual results, level of activity, performance, experience or achievements may differ materially from those expressed or implied by any forward-looking statement as a result of various important factors, including our critical accounting policies and risks and uncertainties relating, among other things, to:

·

the design, size, duration and endpoints for, and results from, PEDFIC 1, our Phase 3 clinical trial of odevixibat in patients with PFIC or our related extension study, or any other trials that will be required to obtain marketing approval for odevixibat to treat patients with PFIC or any other pediatric cholestatic liver disease, for elobixibat to treat nonalcoholic steatohepatitis, or NASH, or for A3384 to treat bile acid malabsorption, or BAM;

3


 

·

whether favorable findings from clinical trials of odevixibat to date, including findings in indications other than PFIC, will be predictive of results from future clinical trials, including the trials comprising our Phase 3 PFIC program for odevixibat;

·

whether either or both of the U.S. Food and Drug Administration, or FDA, and European Medicines Agency, or EMA, will determine that the primary endpoint and treatment duration of the double blind Phase 3 trial in patients with PFIC are sufficient, even if such primary endpoint is met with statistical significance, to support approval of odevixibat in the United States or the European Union, to treat PFIC, a symptom of PFIC, a specific PFIC subtype(s) or otherwise;

·

the outcome and interpretation by regulatory authorities of an ongoing third-party study pooling and analyzing long-term PFIC patient data;

·

the timing for initiation or completion of, or for availability of data from, the trials comprising the Phase 3 PFIC program for odevixibat, and the outcomes of such trials;

·

delays or other challenges in the recruitment of patients for the double blind Phase 3 trial of odevixibat;

·

whether odevixibat will meet the criteria to receive a rare pediatric disease priority review voucher from the FDA when applicable, whether a rare pediatric disease priority review voucher that we may receive in the future for odevixibat, if any, will be valuable to us, and, if necessary, whether the rare pediatric disease priority review voucher program will be renewed beyond 2020;

·

the competitive environment and commercial opportunity for a potential treatment for PFIC and other orphan pediatric cholestatic liver diseases;

·

the conduct and results of clinical trials and nonclinical studies and assessments of odevixibat, elobixibat, A3384 or any of our other product candidates and programs, including the performance of third parties engaged to execute them and difficulties or delays in patient enrollment and data analysis;

·

the medical benefit that may be derived from odevixibat, elobixibat, A3384 or any of our other product candidates;

·

the extent to which our agreements with HCR and EA Pharma for elobixibat generate nondilutive income for us;

·

the timing and success of submission, acceptance and approval of regulatory filings and any related restrictions, limitations or warnings in the label of any approved product candidates;

·

the significant control or influence that EA Pharma has over the commercialization of elobixibat in Japan and the development and commercialization of elobixibat in EA Pharma’s other licensed territories;

·

whether we elect to seek and, if so, our ability to establish a license or other partnering transaction with a third party for elobixibat in the United States or Europe;

·

whether findings from nonclinical studies and clinical trials of IBAT inhibitors will be predictive of future clinical success for a product candidate of ours in the treatment of NASH;

·

the accuracy of our estimates regarding expenses, costs, future revenues, uses of cash and capital requirements;

·

our ability to obtain additional financing on reasonable terms, or at all;

4


 

·

our ability to establish additional licensing, collaboration or similar arrangements on favorable terms and our ability to attract collaborators with development, regulatory and commercialization expertise;

·

the success of competing third-party products or product candidates;

·

our ability to successfully commercialize any approved product candidates, including their rate and degree of market acceptance;

·

our ability to expand and protect our intellectual property estate;

·

regulatory developments in the United States and other countries;

·

our ability to fully remediate our identified internal control material weaknesses;

·

the performance of our third-party suppliers, manufacturers and contract research organizations and our ability to obtain alternative sources of raw materials;

·

our ability to attract and retain key personnel; and

·

our ability to comply with regulatory requirements relating to our business, and the costs of compliance with those requirements, including those on data privacy and security.

These and other risks and uncertainties are described in greater detail under the caption “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10‑K for the fiscal year ended December 31, 2018, in Item 1A of Part II of this quarterly report, and in other filings that we make with the Securities and Exchange Commission, or SEC. As a result of the risks and uncertainties, the results or events indicated by the forward-looking statements may not occur. We caution you not to place undue reliance on any forward-looking statement.

In addition, any forward-looking statement in this quarterly report represents our views only as of the filing date of this quarterly report and should not be relied upon as representing our views as of any subsequent date. We anticipate that subsequent events and developments may cause our views to change. Although we may elect to update these forward-looking statements publicly at some point in the future, we specifically disclaim any obligation to do so, except as required by applicable law. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

 

5


 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Albireo Pharma, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(unaudited)

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

2019

 

2018

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

150,339

 

$

163,885

Prepaid expenses and other assets

 

 

1,194

 

 

850

Other receivables

 

 

2,803

 

 

2,915

Total current assets

 

 

154,336

 

 

167,650

Property and equipment, net

 

 

173

 

 

187

Goodwill

 

 

17,260

 

 

17,260

Other noncurrent assets

 

 

1,209

 

 

369

Total assets

 

$

172,978

 

$

185,466

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Trade payables

 

$

2,987

 

$

4,352

Accrued expenses

 

 

6,385

 

 

8,165

Other liabilities

 

 

569

 

 

308

Total current liabilities

 

 

9,941

 

 

12,825

Liability related to sale of future royalties

 

 

51,433

 

 

49,969

Long-term liabilities

 

 

213

 

 

35

Total liabilities

 

 

61,587

 

 

62,829

Stockholders’ Equity:

 

 

 

 

 

 

Common stock, $0.01 par value per share — 30,000,000 authorized at March 31, 2019 and December 31, 2018; 12,038,836 and 11,969,928 issued and outstanding at March 31, 2019 and December 31, 2018

 

 

120

 

 

120

Additional paid in capital

 

 

217,807

 

 

214,694

Accumulated other comprehensive income

 

 

6,591

 

 

4,293

Accumulated deficit

 

 

(113,127)

 

 

(96,470)

Total stockholders’ equity

 

 

111,391

 

 

122,637

Total liabilities and stockholders’ equity

 

$

172,978

 

$

185,466

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

6


 

 

Albireo Pharma, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended March 31, 

    

    

 

    

2019

    

2018

    

    

Revenue

 

$

570

 

$

11,202

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

8,329

 

 

6,151

 

 

General and administrative

 

 

5,293

 

 

4,128

 

 

Other operating (income) expense, net

 

 

2,296

 

 

1,504

 

 

Total operating expenses

 

 

15,918

 

 

11,783

 

 

Operating loss

 

 

(15,348)

 

 

(581)

 

 

Interest income (expense), net

 

 

(1,309)

 

 

(1,016)

 

 

Non-operating income (expense), net

 

 

 —

 

 

(22)

 

 

Net loss before income taxes

 

 

(16,657)

 

 

(1,619)

 

 

Income tax

 

 

 —

 

 

 —

 

 

Net loss

 

$

(16,657)

 

$

(1,619)

 

 

Net loss per share attributable to holders of common stock:

 

 

 

 

 

 

 

 

Net loss per share - basic and diluted

 

$

(1.39)

 

$

(0.15)

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic and diluted

 

 

12,001,125

 

 

10,896,575

 

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

7


 

Albireo Pharma, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

    

Three Months Ended March 31, 

    

 

    

2019

    

2018

    

Net loss

 

$

(16,657)

 

$

(1,619)

 

Other comprehensive loss:

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

2,298

 

 

1,194

 

Total other comprehensive income (loss)

 

 

2,298

 

 

1,194

 

Total comprehensive income (loss)

 

$

(14,359)

 

$

(425)

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

8


 

Albireo Pharma, Inc.

Condensed Consolidated Statements of Equity

(in thousands, except share and per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

    

 

 

  

Additional

    

Other

    

 

 

    

Total

 

Common Stock

 

Paid-In

 

Comprehensive

 

Accumulated

 

Stockholders’

 

Shares

    

Amount

    

Capital

    

Income

    

Deficit

    

Equity

Balance--December 31, 2017

8,902,784

 

$

89

 

$

114,522

 

$

1,001

 

$

(50,359)

 

$

65,253

Share based compensation expense

 —

 

 

 —

 

 

1,188

 

 

 —

 

 

 

 

 

1,188

Exercise of options

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Issuance of common stock, net of costs

2,994,362

 

 

30

 

 

94,120

 

 

 —

 

 

 —

 

 

94,150

Other comprehensive loss

 —

 

 

 —

 

 

 —

 

 

1,194

 

 

 —

 

 

1,194

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

(1,619)

 

 

(1,619)

Balance--March 31, 2018

11,897,146

 

$

119

 

$

209,830

 

$

2,195

 

$

(51,978)

 

$

160,166

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance--December 31, 2018

11,969,928

 

$

120

 

$

214,694

 

$

4,293

 

$

(96,470)

 

$

122,637

Share based compensation expense

 —

 

 

 —

 

 

1,823

 

 

 —

 

 

 —

 

 

1,823

Exercise of options

68,908

 

 

 —

 

 

1,290

 

 

 —

 

 

 —

 

 

1,290

Exercise of warrants

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Issuance of common stock, net of costs

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Other comprehensive loss

 —

 

 

 —

 

 

 —

 

 

2,298

 

 

 —

 

 

2,298

Net loss

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(16,657)

 

 

(16,657)

Balance--March 31, 2019

12,038,836

 

$

120

 

$

217,807

 

$

6,591

 

$

(113,127)

 

$

111,391

 

 

 

9


 

Albireo Pharma, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2019

    

2018

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(16,657)

 

$

(1,619)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

  

 

 

Non cash interest expense on liability related to royalty monetization

 

 

2,005

  

 

1,007

Depreciation and amortization

 

 

11

  

 

53

Stock-based compensation expense

 

 

1,823

  

 

1,188

Unrealized foreign exchange (gain) loss

 

 

3,441

 

 

1,200

Changes in operating assets and liabilities:

 

 

 

  

 

 

Prepaid expenses and other current assets

 

 

(354)

  

 

401

Other receivables

 

 

28

  

 

(738)

Other non-current assets

 

 

(440)

  

 

332

Trade payables

 

 

(1,262)

  

 

924

Accrued expenses

 

 

(1,619)

  

 

(1,581)

Other liabilities and long-term liabilities

 

 

(499)

  

 

(69)

Net cash (used in) provided by operating activities

 

 

(13,523)

  

 

1,098

Cash flows from investing activities:

 

 

 

  

 

 

Purchase of property, plant and equipment

 

 

 —

  

 

(47)

Net cash used in investing activities

 

 

 —

  

 

(47)

Cash flows from financing activities:

 

 

 

  

 

 

Proceeds from issuance of common stock, net of issuance costs

 

 

 —

  

 

94,150

Royalty monetization agreement

 

 

 —

  

 

44,525

Exercise of options

 

 

1,290

 

 

 —

Net cash provided by financing activities

 

 

1,290

  

 

138,675

Effect of exchange rate changes on cash and cash equivalents

 

 

(1,313)

  

 

(41)

Net (decrease) increase in cash and cash equivalents

 

 

(13,546)

  

 

139,685

Cash and cash equivalents—beginning of period

 

 

163,885

  

 

53,231

Cash and cash equivalents—end of period

 

$

150,339

 

$

192,916

Supplemental disclosures of cash flow information:

 

 

  

  

 

  

Right of use asset

 

$

1,205

 

$

 —

Lease liability

 

 

1,190

  

 

 —

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

10


 

Albireo Pharma, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Summary of significant accounting policies and basis of presentation

Organization

Albireo Pharma, Inc. (Parent), together with its direct and indirect subsidiaries (the Company), is a clinical-stage biopharmaceutical company focused on the development and commercialization of novel bile acid modulators to treat orphan pediatric liver diseases and other liver and gastrointestinal diseases and disorders. The Company’s clinical pipeline includes a Phase 3 lead product, a Phase 2 product candidate, and elobixibat, which is approved in Japan for the treatment of chronic constipation. Odevixibat, the Company’s Phase 3 lead product, is in development initially for the treatment of patients with progressive familial intrahepatic cholestasis (PFIC), a rare, life-threatening genetic disorder affecting young children.

Basis of presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information, and the instructions to Form 10‑Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10‑K for the fiscal year ended December 31, 2018. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for fair presentation have been included in the Condensed Consolidated Financial Statements. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the full fiscal year, any other interim period or any future fiscal year. The condensed consolidated financial statements are prepared on a basis consistent with prior periods except for the adoption of the new leasing standard discussed below.

Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (ASC) and Accounting Standards Update (ASU) of the Financial Accounting Standards Board (FASB).

Principles of consolidation

The accompanying Consolidated Financial Statements include the accounts of Parent and its direct or indirect wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Foreign currency translation

Functional and presentation currency

Items included in the financial statements of each entity comprising the Company are measured using the currency of the primary economic environment in which the entity operates (the functional currency).

Transactions and balances

Foreign currency transactions in each entity comprising the Company are remeasured into the functional currency of the entity using the exchange rates prevailing at the respective transaction dates. Foreign exchange gains and losses resulting from the settlement of such transactions and from the remeasurement at year-end exchange rates of monetary

11


 

assets and liabilities denominated in foreign currencies are recognized within Other operating (income) expense, net in the Condensed Consolidated Statements of Operations.

The results and financial position of the Company that have a functional currency different from the USD are translated into the presentation currency as follows:

a.

assets and liabilities presented are translated at the closing exchange rate as of March 31, 2019 and December 31, 2018;

b.

income and expenses for each statement of comprehensive income (loss) are translated at the average exchange rate for the applicable period; and

c.

significant transactions use the closing exchange rate on the date of the transaction;

All resulting exchange differences arising from such translations are recognized directly in other comprehensive income (loss) and presented as a separate component of equity.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in the financial statements and accompanying notes. Management must apply significant judgment in this process. On an ongoing basis, the Company evaluates its estimates and assumptions, including but not limited to accruals, deferred tax assets and the accretion of interest on the monetization liability. Actual results could materially differ from these estimates.

Research and development expenses

Research and development costs are expensed as incurred and include primarily salaries, benefits and other staff-related costs; clinical trial and related clinical manufacturing costs; contract services and other outside costs.

The Company’s nonclinical studies and clinical trials are performed by third-party contract research organizations (CROs). Some of these expenses are billed monthly for services performed, while others are billed based upon milestones achieved. For nonclinical studies, the significant factors used in estimating accruals include the percentage of work completed to date and contract milestones achieved. For clinical trial expenses, the significant factors used in estimating accruals include the number of patients enrolled and percentage of work completed to date or contract milestones achieved. The Company’s estimates are highly dependent upon the timeliness and accuracy of the data provided by the respective CROs regarding the status of the contracted activity, with adjustments made when deemed necessary.

Revenue recognition

The Company enters into licensing agreements which are within the scope of ASC Topic 606, Revenue from Contracts with Customers (ASC 606), under which it may exclusively license rights to research, develop, manufacture and commercialize its product candidates to third parties. The terms of these arrangements may include payment to the Company of one or more of the following: non-refundable, upfront license fees; reimbursement of certain costs; development, regulatory and commercial milestone payments; and royalties on net sales of licensed products.

In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under each of its agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. As part of the accounting for these arrangements, the Company must use significant judgment to determine: (a) the number of performance

12


 

obligations based on the determination under step (ii) above and (b) the transaction price under step (iii) above. The Company uses judgment to determine whether milestones or other variable consideration, except for royalties, should be included in the transaction price as described further below. The transaction price is allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied.

Amounts received prior to revenue recognition are recorded as deferred revenue. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current portion of deferred revenue in the accompanying consolidated balance sheets. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion.

Exclusive Licenses

If the license to the Company’s intellectual property is determined to be distinct from the other promises or performance obligations identified in the arrangement, the Company recognizes revenue from non-refundable, upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. In assessing whether a promise or performance obligation is distinct from the other promises, the Company considers factors such as the research, development, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. In addition, the Company considers whether the collaboration partner can benefit from a promise for its intended purpose without the receipt of the remaining promise, whether the value of the promise is dependent on the unsatisfied promise, whether there are other vendors that could provide the remaining promise, and whether it is separately identifiable from the remaining promise. For licenses that are combined with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. The measure of progress, and thereby periods over which revenue should be recognized, are subject to estimates by management and may change over the course of the research and development and licensing agreement. Such a change could have a material impact on the amount of revenue the Company records in future periods.

Milestone Payments

At the inception of each arrangement that includes development milestone payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The Company evaluates factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the particular milestone in making this assessment. There is considerable judgment involved in determining whether it is probable that a significant revenue reversal would not occur. At the end of each subsequent reporting period, the Company reevaluates the probability of achievement of all milestones subject to constraint and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.

Royalties

For arrangements that include sales-based royalties, including milestone payments based on a level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).

In 2012, the Company entered into a license agreement (the Agreement) with EA Pharma Co., Ltd. (EA Pharma, formerly Ajinomoto Pharmaceuticals Co., Ltd.) to develop a select product candidate (elobixibat) for registration and

13


 

subsequent commercialization in select markets. In conjunction with the Agreement, the Company granted EA Pharma an exclusive license to its intellectual property for development and commercialization activities in the designated field and territories. The Company is entitled to payments resulting from pharmaceutical ingredient or related procurement services if provided as part of a development plan. Revenue related to these payments is recorded on a net basis; in this instance, the Company acts as an agent, as it does not have discretion to change suppliers and does not perform any part of the services or manufacture of the subject pharmaceutical ingredients. The costs associated with these activities are netted against the related revenue in the condensed consolidated statements of operations.

As of March 31, 2019, the Company is eligible to receive a regulatory-based milestone payment under the Agreement of €4.3 million ($4.8 million based on the Euro to USD exchange rate as of March 31, 2019) if a specified regulatory event is achieved for elobixibat. The cash payments and any other payments for milestones and royalties from EA Pharma are non-refundable, non-creditable and not subject to set-off

The Agreement will continue until the last royalty period for any product in the territory, which is defined as the period when there are no remaining patent rights or regulatory exclusivity in place for any products subject to royalties. EA Pharma may terminate the Agreement at will upon 180 days’ prior written notice to the Company. Either party may terminate the Agreement for the other party’s uncured material breach or insolvency and in certain other circumstances agreed to by the parties.

The Company assessed this arrangement in accordance with Accounting Standards Codification and concluded that the contract counterparty, EA Pharma, is a customer. The Company identified the following material promises under the arrangement: (1) a sub-licensable and exclusive license to use the Company’s intellectual property and collaboration compounds to conduct development and commercialization activities in the designated fields and territories and (2) the technology transfer of the Albireo intellectual property and compound. Participation on the joint development committee (“JDC”) and joint commercialization committee (“JCC”) was determined to be quantitatively and qualitatively immaterial and therefore is excluded from the performance obligations. The license was determined to not be distinct from the technology transfer; as such, the Company determined that these promises should be combined into a single performance obligation. 

Under the Agreement, in order to evaluate the appropriate transaction price, the Company determined that the upfront amount constituted the entirety of the consideration to be included in the transaction price as of the outset of the arrangement, which was allocated to the single performance obligation. At the outset of the arrangement, the transaction price included only the €10.0 million upfront consideration received and was increased to include the $8.0 million received in conjunction with the 2016 amendment to the agreement. The potential milestone payments were excluded from the transaction price, as all milestone amounts were either fully constrained or related to future sales-based royalties. In April 2013, December 2015, and October 2016, various development milestone events were achieved, and the Company recognized revenue related to these events; because the Company previously satisfied its performance obligation to deliver the license, the Company recorded these milestone payments as received. The Company will reevaluate the transaction price at the end of each reporting period and as other uncertain events are resolved or other changes in circumstances occur, and, if necessary, adjust its estimate of the transaction price.

In January 2018, the Japanese Ministry of Health Labour and Welfare (MHLW) approved a new drug application filed by EA Pharma for elobixibat for the treatment of chronic constipation, for which the Company received a milestone payment of $11.2 million. Based on the regulatory approval, the Company determined that the milestone was no longer at risk of significant reversal. As such, because the single performance obligation had previously been satisfied, the Company recognized this amount in full in the first quarter of 2018 and there was no deferred revenue or contract asset as of December 31, 2018. The Company recognizes the royalty revenue based on the estimated qualifying sales by EA Pharma each period.

Monetization of Future Royalties

In December 2017, the Company entered into a royalty interest acquisition agreement (RIAA) with HealthCare Royalty Partners III, L.P. (HCR) pursuant to which it sold to HCR the right to receive all royalties from sales in Japan and sales milestones achieved from any covered territory potentially payable to the Company under the Agreement, up

14


 

to a specified maximum “cap” amount of $78.8 million, based on the funds the Company received from HCR to date. The Company received $44.5 million from HCR, net of certain transaction expenses, under the RIAA and the Company is eligible to receive an additional $15.0 million under the RIAA if a specified sales milestone is achieved for elobixibat in Japan. If the cap amount is reached, the Company will again become eligible to receive royalties from Japanese sales and sales milestones from covered territories for elobixibat from EA Pharma under the Agreement. The Company is obligated to make royalty interest payments to HCR under the RIAA only to the extent it receives future Japanese royalties, sales milestones or other specified payments from EA Pharma. Although the Company sold its rights to receive royalties from the sales of elobixibat in Japan, as a result of its ongoing involvement in the cash flows related to these royalties, the Company will continue to account for these royalties as revenue. The Company recorded the $44.5 million as a liability related to sale of future royalties (royalty obligation). The royalty obligation will be amortized using the effective interest rate method, based on the Company’s best estimate of the time it will take to reach the capped amount.

The following table shows the activity within the liability account for the period ended March 31, 2019:

 

 

 

 

 

    

March 31, 2019

 

    

(in thousands) 

Liability related to sale of future royalties—beginning balance

 

$

50,546

Foreign currency translation (gain)/loss in other comprehensive income/(loss)

 

 

16

Accretion of interest expense on liability related to royalty monetization

 

 

2,005

Repayment of the liability

 

 

(564)

Liability related to sale of future royalties—ending balance

 

$

52,003

Less current portion classified within other current liabilities

 

 

(570)

Net ending liability related to sale of future royalties

 

$

51,433

 

The Company records estimated royalties due for the current period in accrued other until the payment is received from EA Pharma at which time the Company then remits payment to HCR. As royalties are remitted to HCR, the balance of the royalty obligation will be effectively repaid over the life of the RIAA. In order to determine the amortization of the royalty obligation, the Company is required to estimate the total amount of future royalty payments to be received and submitted to HCR, as noted above, based on the Company’s best estimate of the time it will take to reach the cap amount and when milestones will be received. The sum of these amounts less the $44.5 million proceeds the Company received will be recorded as interest expense over the life of the royalty obligation. Since inception, the Company’s estimate of its total interest expense resulted in a quarterly effective interest rate of approximately 4.02% The Company periodically assesses the estimated royalty payments to HCR and to the extent such payments are greater or less than its initial estimates or the timing of such payments is materially different than its original estimates, the Company will prospectively adjust the accretion of interest on the royalty obligation. There are a number of factors that could materially affect the amount and the timing of royalty payments, most of which are not within the Company’s control. Such factors include, but are not limited to, the rate of elobixibat prescriptions, the number of doses administered, the introduction of competing products, manufacturing or other delays, patent protection, adverse events that result in governmental health authority imposed restrictions on the use of the drug products, significant changes in foreign exchange rates as the royalties remitted to HCR are in U.S. dollars while sales of elobixibat are in Japanese yen, and sales never achieving forecasted numbers, which would result in reduced royalty payments and reduced non-cash interest expense over the life of the royalty obligation. To the extent future royalties result in an amount less than the liability, the Company is not obligated to fund any such shortfall.

Loss contingencies

Loss contingencies are recorded as liabilities when it is probable that a liability has occurred and the amount of loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that an ultimate loss will be material. Contingent liabilities are often resolved over long periods of time. Estimating probable losses requires analysis that often depends on judgments about potential actions by third parties, such as regulators.

Recently adopted accounting pronouncements

As of January 1, 2019, the Company adopted ASU 2016‑02, “Leases (Topic 842).” The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases

15


 

with terms longer than 12 months. The Company has applied the transition provisions at the beginning of the period of adoption, which results in recording the cumulative adjustment to the opening balance sheet as of January 1, 2019.  Under this transition provision, the Company will continue to apply the legacy guidance under ASC 840, Leases, including its disclosure requirements, in the comparative periods presented in fiscal 2019. On the date of the adoption, the Company recorded an ROU of $1.2 million and lease liabilities of $1.2 million. Additionally, the Company elected the following practical expedients: the Company has elected to not separate lease components from non-lease components in its lease contract; the Company will not apply the recognition requirements of ASC 842 to its leases with lease terms of 12 months or less but rather recognize the lease expense on a straight-line basis over the lease term; Relief package – the Company has not reassessed whether expired or existing contracts may contain a lease, the lease classification of expired or existing leases and whether previously capitalized indirect costs would qualify for capitalization under ASC 842. Use of hindsight – the Company has elected to use hindsight in assessing the likelihood of renewals, terminations and purchase options and in assessing impairment of ROU assets. Portfolio approach  – the Company has elected to not apply the portfolio approach for groups of leases with similar characteristics.

 

 

2. Fair Value of financial instruments

When measuring the fair value of financial instruments, the Company evaluates valuation techniques such as the market approach, the income approach and the cost approach. A three-level valuation hierarchy, which prioritizes the inputs to valuation techniques that are used to measure fair value, is based upon whether such inputs are observable or unobservable.

Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity. The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows:

Level 1—Observable inputs such as quoted prices (unadjusted) for identical instruments in active markets;

Level 2—Observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-derived valuations whose significant inputs are observable for substantially the full term of the assets or liabilities; and

Level 3—Unobservable inputs that reflect the reporting entity’s estimate of assumptions that market participants would use in pricing the asset or liability.

 

3.Commitments and contingencies

Commercial real estate leases

The Company’s portfolio of commercial real estate leases consists of office space for its corporate headquarters in Boston, Massachusetts and for administrative and research lab space in Goteborg, Sweden, both of which are accounted for as operating leases. These leases include renewal rights as for the corporate headquarters lease, escalating payments. On March 28, 2019, the Company entered into an amendment to the Boston, Massachusetts lease to (i) replace the Company’s existing office space with a new office space that will be leased from the same landlord and (ii) extend the term of the lease through the date ending eighty-eight months after the date upon which the landlord will have substantially completed the work necessary to deliver the new leased space.  The Company is expected to take control of the new leased space in the third quarter of 2019.  The new leased space will contain monthly lease payments subject to annual escalations of $1.00 per square foot for the remaining term of the new lease with the Company obligated to make approximately $7.3 million of aggregate lease payments over the term of the new lease, or approximately $900,000 annually. The new leased space was excluded from the Right of Use Asset and Lease Liability because the Company does not yet have possession of the space.

 

16


 

The Company’s lease in Goteborg, Sweden includes the rental of office and lab space plus a defined number of parking spaces and contained an original expiration date in November 2019. This lease includes annual rent escalations based on the changes in the Swedish Consumer Price Index.  This lease renews automatically for consecutive three year terms unless notice of non-renewal is given by either party at least nine months prior to the end of the current term and subject to the Company’s right to terminate the lease at any time upon six months’ notice. Subsequent to the year ended December 31, 2018, this lease was renewed for an additional three year period through November 2022, with quarterly payments of $35,419.

 

As of March 31, 2019, the net balance of ROU assets totaled $400,000 and were classified within other non current assets.  The current and long term balances of lease liabilities at March 31, 2019 were $174,000 and $213,000, respectively, and were classified within other liabilities, and long-term liabilities, respectively.  Operating lease expense under ASC 842 was $103,000 for the three months ended March 31, 2019.  There were no short-term lease or variable lease costs incurred for the three months ended March 31, 2019.  As of March 31, 2019, the weighted average remaining lease term for the Company’s operating leases was 2.6 years.  Rent expense recognized under legacy GAAP for the Company’s operating leases was $102,000 for the three months ended March 31, 2018.

Agreements with CROs

As of March 31, 2019, the Company had various agreements with CROs for the conduct of specified research and development activities. Based on the terms of the respective agreements, the Company may be required to make future payments of up to $23.1 million to CROs upon the completion of contracted work.

Legal Contingency

On February 19, 2019, the Company filed a complaint for breach of contract and breach of implied covenant of good faith and fair dealing against Ferring International Center S.A. (the “Respondent”) in the United States District Court for the Southern District of New York. Based on procedural considerations, we decided to refile the complaint in the Supreme Court of the State of New York, County of New York on April 26, 2019. We previously entered into the License Agreement, dated July 2, 2012, as amended as of October 2013 (the “License Agreement”), by and between Respondent and us, pursuant to which Respondent, among other things, conducted two Phase 3 clinical trials to evaluate the efficacy and safety of elobixibat as a treatment for chronic idiopathic constipation, known as Echo 1 and Echo 2, which ended in 2014. As previously disclosed, Respondent stopped Echo 1 and Echo 2 early citing an issue related to the distribution of study drug to study sites that was unrelated to the performance of elobixibat and terminated the License Agreement. The complaint alleges that Respondent breached its obligations under the License Agreement to (1) make earned milestone payments, (2) use good clinical practices, good laboratory practices and good manufacturing practices, and (3) use commercially reasonable efforts. The complaint also alleges that Respondent violated the covenant of good faith and fair dealing implied in the License Agreement. In the complaint, the Company is seeking, among other things, compensatory damages of at least € 37 million.

The Company has retained outside counsel under a contingency fee arrangement, and as a result, the Company will not incur attorneys’ fees for litigating the matter, but counsel will receive a contingent fee of 33 1/3% of the net recovery (after deduction of expenses) in the event a recovery is received.

Due to their nature, it is difficult to predict the outcome, or the costs involved in any litigation. Furthermore, Respondent may have significant resources and interest to litigate and therefore, although we have a contingency fee arrangement, this litigation could be protracted and may ultimately involve significant legal expenses.

 

4. Net loss per share

Basic net loss per share, or Basic EPS, is calculated by dividing the net loss by the weighted average number of shares of common stock outstanding. Diluted net loss per share, or Diluted EPS, is calculated by dividing the net loss by the weighted-average number of shares of common stock plus dilutive common stock equivalents outstanding.

17


 

The following table sets forth the computation of Basic EPS and Diluted EPS (in thousands, except for share and per share data):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2019

    

2018

    

Basic and Diluted EPS:

 

 

 

 

 

 

 

Numerator

 

 

 

 

 

 

 

Net loss

 

$

(16,657)

  

$

(1,619)

 

Denominator

 

 

 

 

 

 

 

Weighted average number of shares outstanding

 

 

12,001,125

 

 

10,896,575

 

Basic and Diluted EPS

 

$

(1.39)

  

$

(0.15)

 

 

The following outstanding common stock equivalents were excluded from the computation of Diluted EPS for the three months ended March 31, 2019 and 2018 because including them would have been anti-dilutive:

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 

 

 

    

2019

    

2018

    

Options to purchase common stock and RSUs

 

1,757,728

 

703,016

 

 

 

5. Income taxes

The Company did not record a tax provision or benefit for the three months ended March 31, 2019 or 2018. The Company has continued to maintain a full valuation allowance against its net deferred tax assets. The Company has had an overall net operating loss position since its inception.

 

6. Financings

At-the-Market Offering Program

In October 2017, the Company entered into an at-the-market offering program, which we refer to as the 2017 Sales Agreement relating to the sale of shares of the Company’s common stock having an aggregate offering price of up to $50.0 million. In February 2018, the Company sold an aggregate of 728,862 shares of common stock pursuant to the 2017 Sales Agreement and received proceeds, net of offering expenses, of approximately $24.2 million. On March 6, 2019, we terminated the 2017 Sales Agreement and we entered into a new sales agreement, which we refer to as the 2019 Sales Agreement, with respect to an at-the-market offering program relating to the sale of shares of the Company’s common stock having an aggregate offering price of up to $50.0 million.

 January 2018 Underwritten Public Offering

On January 9, 2018, the Company completed an underwritten public offering of 2,265,500 shares of its common stock, at a price to public of $33.00 per share. The Company received net proceeds from this offering of $69.9 million, after deducting underwriting discounts, commission and offering expenses.

 

7. Stock-based Compensation

The Company recognized stock-based compensation expense for employees of $1.8 million and $1.2 million for the three months ended March 31, 2019 and 2018, respectively.

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A summary of the outstanding stock options as of March 31, 2019 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock Options Outstanding

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted-

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

 

Exercise

 

Contractual

 

Intrinsic

 

 

Number of

 

Price Per

 

Term

 

Value (in

 

    

Shares

    

Share

    

(Years)

    

thousands)

Outstanding—December 31, 2018

 

1,369,504

 

$

22.34

 

8.06

 

$

8,421

Granted

 

413,461

 

$

24.46

 

 

 

 

 

Expirations/forfeitures

 

(13,329)

 

$

55.64

 

 

 

 

 

Exercises

 

(68,908)

 

$

18.73

 

 

 

 

 

Outstanding—March 31, 2019

 

1,700,728

 

$

22.74

 

8.32

  

$

17,066

Exercisable—March 31, 2019

 

536,836

 

$

14.87

 

6.49

  

$

10,225

 

Aggregate intrinsic value represents the difference between the estimated fair value of the underlying common stock and the exercise price of outstanding, in-the-money options.

Options to purchase 19,422 shares of common stock are performance based and vest upon the date the Company files a drug approval application for its product candidate odevixibat for any orphan indication, if such filing occurs prior to a specified date. This unvested performance-based option is excluded from the vested or expected to vest balance as of March 31, 2019.

As of March 31, 2019, the total unrecognized compensation expense related to unvested options was $19.7 million, which the Company expects to recognize over a weighted average vesting period of 2.8 years.

In determining the estimated fair value of the stock-based awards, the Company uses the Black-Scholes option pricing model and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment to determine.

The fair value of stock option awards granted during the three months ended March 31, 2019 was estimated with the following assumptions:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

    

March 31, 2019

Price per share of common stock

 

$

22.22

-

28.76

Expected term (in years)

 

 

5.6

-

5.6

Risk-free interest rate

 

 

2.2

-

2.6

Expected volatility

 

 

87.6

-

88.1

Dividend rate

 

 

 

0%

 

 

 

Restricted Stock Units

The Company grants restricted stock units (“RSUs”) to executive officers and employees from time to time.

Each RSU award represents one share of common stock and each award vests 25% on the first anniversary and in equal quarterly installments thereafter.  The costs of the awards, determined as the fair market value of the shares on the grant date, are expensed on a straight-lined basis over the length of the award. 

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A summary of outstanding RSU as of March 31, 2019 is as follows:

 

 

 

 

 

 

 

 

    

Shares

    

 

Weighted
Average
Grant-Date
Fair Value

Non-vested and outstanding balance at December 31, 2018

 

5,000

 

$

27.98

Changes during the period:

 

 

 

 

 

RSUs granted

 

52,000

 

 

26.31

 

 

 

 

 

 

Non-vested and outstanding RSU balance at March 31, 2019

 

57,000

 

$

26.46

 

Employee Stock Purchase Plan

In June of 2018, the Company’s Board of Directors adopted the 2018 Employee Stock Purchase Plan (the Plan) that allows eligible employees to purchase shares of its common stock at a discount through payroll deductions.  The Plan was subsequently approved by shareholders, with 300,000 shares being available to be issued under the Plan.

The Plan terms state implementation will be by a series of six-month offering periods, with a new offering period commencing on June 1 and December 1 of each year or the first business day thereafter. The initial Offering Period under the Plan began on December 1, 2018 and will close on May 31, 2019.  The Plan is intended to qualify under the Internal Revenue Code of 1986, Section 423

 

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

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes included elsewhere in this quarterly report and our audited financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10‑K for the year ended December 31, 2018, filed with the SEC. In addition to historical information, the following discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results, performance or experience could differ materially from what is indicated by any forward-looking statement due to various important factors, risks and uncertainties, including, but not limited to, those set forth under “Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this quarterly report or under “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10‑K for the year ended December 31, 2018, in Item 1A of Part II of this Quarterly Report on Form 10-Q, or in other filings that we make with the SEC.

Overview

We are a biopharmaceutical company focused on the development and commercialization of novel bile acid modulators to treat orphan pediatric liver diseases and other liver or gastrointestinal diseases and disorders. The initial target indication for our lead product candidate, odevixibat, is progressive familial intrahepatic cholestasis, or PFIC, a rare, life-threatening genetic disorder affecting young children for which there is currently no approved drug treatment. We completed a Phase 2 clinical trial of odevixibat in children with chronic cholestasis and pruritus, and in May of 2018 we enrolled the first patient in our Phase 3 clinical trial for odevixibat in patients with PFIC, which we refer to as PEDFIC 1.  In the first quarter 2019, we revised our statistical analysis methodology for PEDFIC 1,  in line with guidance from the FDA. One result of the revision is an improvement in the power of the study. We also submitted a protocol amendment for PEDFIC 2, our long term, open label extension study, which includes an additional cohort of PFIC patients who are not eligible for PEDFIC 1. We expect to initiate the expanded PEDFIC 2 cohort in the second half of 2019. In June of 2018, the FDA granted a rare pediatric disease designation to odevixibat for the treatment of PFIC, which affirms our eligibility to apply for a rare pediatric disease priority review voucher upon submission of a new drug application for odevixibat.  In September of 2018, the FDA granted fast track designation for odevixibat for the treatment of pruritus associated with PFIC.  In October of 2018, the FDA granted orphan drug designation to odevixibat for the treatment of Alagille syndrome, or ALGS, a rare, life threatening disease that affects the liver and for which there is no approved pharmacologic treatment option.  In December of 2018, the European Commission granted orphan designation to odevixibat for the treatment of biliary atresia, another rare, life threatening disease that affects the liver and for which there is no approved pharmacologic treatment option.  In January of 2019, the FDA granted orphan drug designation to odevixibat for the treatment of biliary atresia.  In addition to PFIC, we plan to initiate a pivotal clinical trial for odevixibat in biliary atresia, which we believe to be one of the most common rare pediatric liver diseases, in the second half of 2019, and we plan to conduct clinical development of odevixibat in 2020 as a treatment for one or more other pediatric cholestatic liver diseases and disorders.  Our most advanced product candidates in addition to odevixibat include elobixibat, which is approved in Japan for the treatment of chronic constipation and for which we have an effective Investigational New Drug application (IND) for a Phase 2 clinical trial as a treatment for nonalcoholic fatty liver disease, or NAFLD, and NASH, which we expect to initiate in the second quarter of 2019, and A3384, which is a product candidate to treat bile acid malabsorption, or BAM. In June 2018, we were granted a patent for a method of using elobixibat to treat NASH in both the U.S. and Europe.  We also have a preclinical program in NASH.

The precise prevalence of PFIC is unknown, and we are not aware of any patient registries or other method of establishing with precision the actual number of patients with PFIC in any geography. PFIC has been estimated to affect between one in every 50,000 to 100,000 children born worldwide. Benign recurrent familial intrahepatic cholestasis, or BRIC, is a disease that is caused by the same genetic defect as PFIC, and patients who manifest the same symptoms as PFIC but their symptomatology tends to be episodic in nature. We estimate that BRIC affects between one in every 50,000 to 100,000 children born worldwide. Based on the published incidence, published regional populations, and estimated median life expectancies, we estimate the prevalence of PFIC together with BRIC to be approximately 8,000 to 10,000 patients in the U.S. and E.U. but we are not able to estimate the prevalence of PFIC or BRIC with precision.

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We estimate that there are approximately 3,000 to 4,000 PFIC patients in the U.S. and E.U. We also estimate that there are approximately 5,000 to 6,000 BRIC patients in the U.S. and E.U. We currently have not modeled other regional opportunities in Asia, the Middle East and Latin America. We are aware there may be higher prevalence of disease in some countries such as Saudi Arabia and Turkey. There are currently no drugs approved for the treatment of PFIC. First-line treatment for PFIC is typically off-label ursodeoxycholic acid, or UDCA, which is approved in the United States and elsewhere for the treatment of primary biliary cholangitis, or PBC. However, many PFIC patients do not respond well to UDCA, undergo partial external bile diversion, or PEBD, surgery and often require liver transplantation. PEBD surgery is a life-altering and undesirable procedure in which bile is drained outside the body to a stoma bag that must be worn by the patient 24 hours a day.

Other Indications Under Development for Odevixibat. We plan to initiate a pivotal clinical trial with odevixibat in biliary atresia in the second half of 2019.  We plan to conduct clinical development of odevixibat in 2020 as a treatment for other pediatric cholestatic liver diseases and disorders as well, which may include ALGS and primary sclerosing cholangitis.

Biliary atresia is a partial or total blocking or absence of large bile ducts that causes cholestasis and resulting accumulation of bile that damages the liver. The estimated worldwide incidence of biliary atresia is between 4.5 and 8.5 for every 100,000 live births. There are currently no drugs approved for the treatment of biliary atresia. The current standard of care is a surgery known as the Kasai procedure, or hepatoportoenterostomy, in which the obstructed bile ducts are removed and a section of the small intestine is connected to the liver directly. However, only an estimated 25% of those initially undergoing the Kasai procedure will survive to their twenties without need for liver transplantation. The European Commission granted orphan designation to odevixibat for the treatment of biliary atresia in December of 2018. In January of 2019, the FDA granted orphan drug designation to odevixibat for the treatment of biliary atresia. We intend to initiate a pivotal clinical trial with odevixibat for the treatment of biliary atresia in the second half of 2019.

ALGS is a genetic condition associated with liver, heart, eye, kidney and skeletal abnormalities. In particular, ALGS patients have fewer than normal bile ducts inside the liver, which leads to cholestasis and the accumulation of bile and causes scarring in the liver. ALGS is estimated to affect between one in every 30,000 to 70,000 children born worldwide. There are currently no drugs approved for the treatment of ALGS. Current treatment for ALGS is generally in line with current treatments for PFIC as described above. In October of 2018, the FDA granted orphan drug designation to odevixibat for the treatment of ALGS.

Primary sclerosing cholangitis refers to swelling (inflammation), scarring, and destruction of bile ducts inside and outside of the liver. The first symptoms are typically fatigue, itching and jaundice, and many patients with sclerosing cholangitis also suffer from inflammatory bowel disease. The estimated incidence of primary sclerosing cholangitis is 6.3 cases per 100,000 people. There are currently no drugs approved for the treatment of sclerosing cholangitis. First-line treatment is typically off-label UDCA, although UDCA has not been established to be safe and effective in patients with sclerosing cholangitis in well controlled clinical trials. 

Elobixibat as a potential treatment for NASH.  NASH is a common, serious and sometimes fatal chronic liver disease that resembles alcoholic liver disease but occurs in people who drink little or no alcohol. Based on multiple epidemiological studies published by third parties in 2014 and 2015, we estimate that NASH affects 2 to 3.5% of adults, representing over 9 million people in the United States and 10 million people in the European Union. There are currently no drugs approved for the treatment of NASH. Lifestyle changes, including modification of diet and exercise to reduce body weight, as well as treatment of concomitant diabetes and dyslipidemia, are commonly accepted as the standard of care for NASH, but have not conclusively been shown to prevent disease progression. Based on findings on parameters relevant to NASH in clinical trials of elobixibat that we previously conducted in patients with chronic constipation and in patients with elevated cholesterol and findings on other parameters relevant to NASH from nonclinical studies that we previously conducted with elobixibat or a different IBAT inhibitor, we believe elobixibat has potential benefit in the treatment of NASH. Our IND for a Phase 2 clinical trial of elobixibat in NAFLD and NASH is in effect, and we expect to initiate the trial in the second quarter of 2019.

In March of 2019 we appointed Pamela Stephenson, as Chief Commercial Officer. 

22


 

Since inception, we have incurred significant operating losses. As of March 31, 2019, we had an accumulated deficit of $113.1 million. We expect to continue to incur significant expenses and increasing operating losses as we continue our development of, and seek marketing approvals for, our product candidates, prepare for and begin the commercialization of any approved products, and add infrastructure and personnel to support our product development efforts and operations as a public company in the United States.

As a clinical-stage company, our revenues, expenses and results of operations are likely to fluctuate significantly from quarter to quarter and year to year. We believe that period-to-period comparisons of our results of operations should not be relied upon as indicative of our future performance.

As of March 31, 2019, we had approximately $150.3 million in cash and cash equivalents.

Financial Operations Overview

The following discussion sets forth certain components of our consolidated statements of operations as well as factors that impact those items.

Revenue

We generate revenue primarily from the receipt of royalty revenue, upfront or license fees and milestone payments. License agreements with commercial partners generally include nonrefundable upfront fees and milestone payments, the receipt of which is dependent upon the achievement of specified development, regulatory or commercial milestone events, as well as royalties on product sales of licensed products, if and when such product sales occur, and payments for pharmaceutical ingredient or related procurement services. For these agreements, management applies judgment in the allocation of total agreement consideration to the performance obligations on a reliable basis that reasonably reflects the selling prices that might be expected to be achieved in stand-alone transactions. For additional information about our revenue recognition, refer to Note 1 to our condensed consolidated financial statements included in this quarterly report.

Operating Expenses

Research and Development Expenses

Research and development expenses consist primarily of personnel costs (including salaries, benefits and stock-based compensation) for employees in research and development functions, costs associated with nonclinical and clinical development services, including clinical trials and related manufacturing costs, third-party contract research organizations, or CROs, and related services and other outside costs, including fees for third-party professional services such as consultants. Our nonclinical studies and clinical studies are performed by CROs. We expect to continue to focus our research and development efforts on nonclinical studies and clinical trials of our product candidates. As a result, we expect our research and development expenses to continue to increase for the foreseeable future.

Our direct research and development expenses are tracked on a program-by-program basis and consist primarily of external costs such as fees paid to CROs and others in connection with our nonclinical and clinical development activities and related manufacturing. We do not allocate employee costs or facility expenses, including depreciation or other indirect costs, to specific product development programs because these costs are deployed across multiple product development programs and, as such, are not separately classified.

Successful development of our current and potential future product candidates is highly uncertain. Completion dates and costs for our programs can vary significantly by product candidate and are difficult to predict. As a result, we cannot estimate with any degree of certainty the costs we will incur in connection with development of any of our product candidates. We anticipate we will make determinations as to which programs and product candidates to pursue and how much funding to direct to each program and product candidate on an ongoing basis in response to the results of ongoing and future clinical trials, our ability to enter into licensing, collaboration and similar arrangements with respect to current or potential future product candidates, the success of research and development programs and our assessments of commercial potential.

23


 

General and Administrative Expenses

General and administrative expenses consist primarily of personnel costs (including salaries, benefits and stock-based compensation) for our executive, finance and other administrative employees. In addition, general and administrative expenses include fees for third-party professional services, including consulting, information technology, legal and accounting services and other corporate expenses and allocated overhead.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles for interim financial information. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates and assumptions on historical experience and on various assumptions that we believe are reasonable under the circumstances, and we evaluate them on an ongoing basis. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenues and expenses that are not readily apparent from other sources. Actual results and experiences may differ materially from these estimates and judgments. In addition, our reported financial condition and results of operations could vary if new accounting standards are enacted that are applicable to our business.

Our significant accounting policies are described in Note 1 to our audited consolidated financial statements included in our Annual Report on Form 10‑K for the fiscal year ended December 31, 2018 and to the extent policies have changed in Note 1 to our condensed consolidated financial statements included in this quarterly report. We believe that our accounting policies relating to revenue recognition, research and development expenses and accounting for the liability related to sale of future royalties are the most critical to understanding and evaluating our reported financial results. We have identified these policies as critical because they both are important to the presentation of our financial condition and results of operations and require us to make judgments and estimates on matters that are inherently uncertain and may change in future periods. These policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” in our Annual Report on Form 10‑K for the year ended December 31, 2018, except as it relates to the adoption of new standards in the current year.

Results of Operations

Three Months Ended March 31, 2019 and March 31, 2018

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

Change

 

 

    

2019

    

2018

    

$

    

 

 

(in thousands)

 

Revenue

 

$

570

 

$

11,202

 

$

(10,632)

 

 

There was $570,000 in revenue for the three months ended March 31, 2019 compared with $11.2 million for the three months ended March 31, 2018, a decrease of $10.6 million. The lower revenue is due to a milestone payment received from EA Pharma in the same period during 2018, for the approval by the Japanese MHLW of the new drug application for elobixibat for the treatment of chronic constipation.

Research and development expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

Change

 

 

    

2019

    

2018

    

$

    

 

 

(in thousands)

 

Research and development expenses

 

$

8,329

 

$

6,151

 

$

2,178

 

 

24


 

Research and development expenses were $8.3 million for the three months ended March 31, 2019 compared with $6.2 million for the three months ended March 31, 2018, an increase of $2.2 million. The higher research and development expenses for the 2019 period were principally due to $1.3 million in personnel and related expenses as we continue to increase our headcount and $665,000 in pre-clinical expenses.

The following table summarizes our principal product development programs and the out-of-pocket third-party expenses incurred with respect to each clinical-stage product candidate and our preclinical programs for the three months ended March 31, 2019 and 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

Change

 

 

    

2019

    

2018

    

$

    

 

 

(in thousands)

 

Direct third-party project costs:

 

 

 

 

 

 

 

 

 

 

Odevixibat

 

$

3,364

 

$

3,390

 

$

(26)

 

Elobixibat

 

 

223

 

 

23

 

 

200

 

A3384

 

 

74

 

 

128

 

 

(54)

 

Preclinical

 

 

1,003

 

 

338

 

 

665

 

Total

 

$

4,664

 

$

3,879

 

$

785

 

Other project costs(1):

 

 

 

 

 

 

 

 

 

 

Personnel costs

 

$

2,700

 

$

1,410

 

$

1,290

 

Other costs(2)

 

 

965

 

 

862

 

 

103

 

Total

 

$

3,665

 

$

2,272

 

$

1,393

 

Total research and development costs

 

$

8,329

 

$

6,151

 

$

2,178

 


(1)

Other project costs are leveraged across multiple programs.

(2)

Other costs include facility, supply, consultant and overhead costs that support multiple programs.

General and administrative expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

Change

 

 

    

2019

    

2018

    

$

    

 

 

(in thousands)

 

General and administrative expenses

 

$

5,293

 

$

4,128

 

$

1,165

 

 

General and administrative expenses were $5.3 million for the three months ended March 31, 2019 compared with $4.1 million for the three months ended March 31, 2018, an increase of $1.2 million. The increase is primarily attributable to $997,000 in personnel and related expenses  as we continue to increase our headcount.

Other operating (income) expense, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

Change

 

 

    

2019

 

2018

 

$

 

 

 

(in thousands)

 

Other operating (income) expense, net

 

$

2,296

 

$

1,504

 

$

792

 

 

Other operating (income) expense, net totaled $2.3 million for the three months ended March 31, 2019 compared with $1.5 million for the three months ended March 31, 2018. The difference resulted primarily from changes in currency exchange rates in the two periods.

25


 

Interest income (expense), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

Change

 

 

    

2019

    

2018

    

$

    

 

 

(in thousands)

 

Interest income (expense), net

 

$

(1,309)

 

$

(1,016)

 

$

(293)

 

 

Interest income (expense), net totaled $1.3 million of expense for the three months ended March 31, 2019 compared with $1.0 million of expense for the three months ended March 31, 2018. The difference was principally attributable to $2.0 million in non-cash interest expense recorded in connection with the sale of future royalties, related to sales of elobixibat in Japan, partially offset by interest income.

 

Liquidity and Capital Resources

Sources of Liquidity

We do not expect to generate significant revenue from product sales unless and until we or a potential future licensee or collaborator obtains marketing approval for, and commercializes, one or more of our current or potential future product candidates (other than elobixibat as a treatment for chronic constipation in Japan), which we do not expect to occur until at least 2021, if at all. We anticipate that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we continue the development of and seek regulatory approvals for our product candidates. We are subject to all of the risks applicable to the development of new pharmaceutical products and may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may harm our business. We expect that we will need substantial additional funding to complete development of and potentially commercialize our product candidates.

Our operations have historically been financed primarily through issuances of equity or convertible debt, upfront fees paid upon entering into license agreements, payments received upon the achievement of specified milestone events under license agreements, grants and venture debt borrowings. Our primary uses of capital are, and we expect will continue to be, personnel-related costs, third party expenses associated with our research and development programs, including the conduct of clinical trials, and manufacturing-related costs for our product candidates.

As of March 31, 2019, our cash and cash equivalents were approximately $150.3 million.

During the first quarter of 2018, following the Japanese MHLW’s approval of elobixibat for the treatment of chronic constipation in January 2018, we received a $44.5 million payment, net of certain transaction expenses, from HCR under our RIAA. Under the terms of the RIAA, we are eligible to receive an additional $15 million if a specified sales milestone is achieved for elobixibat in Japan. Additionally, this approval triggered a milestone payment to us from EA Pharma of $11.2 million. As of March 31, 2019, we have received approximately $45.4 million in upfront and milestone payments from EA Pharma under a license agreement for the development and commercialization of elobixibat in specified countries in Asia.  We are eligible to receive additional amounts of up to $4.9 million under the amended agreement, if a specified regulatory event is achieved for elobixibat. In addition, subject to the terms of the RIAA with HCR, we may in the future also become eligible under the license agreement to receive up to $31.9 million, if specified sales milestones are achieved for elobixibat and stepped royalties at rates beginning in the high single digits on any future elobixibat product sales.

In January 2018, we completed an underwritten public offering of 2,265,500 shares of our common stock for net proceeds of approximately $69.9 million. Subsequently, in February 2018, we sold 728,862 shares of our common stock for net proceeds of approximately $24.2 million pursuant to an at-the-market offering program Sales Agreement that we entered into with Cowen in October 2017, or the 2017 Sales Agreement. This agreement terminated on March 6, 2019. These sales were registered on our universal shelf registration statement on Form S-3, which was declared effective on December 5, 2017, or the 2017 Form S-3.

On March 6, 2019, we filed a new universal shelf registration on Form S-3 with the SEC, which was declared effective on April 30, 2019, pursuant to which we registered for sale up to $200 million of any combination of our

26


 

common stock, preferred stock, debt securities, warrants, rights and/or units from time to time and at prices and on terms that we may determine, which we refer to as the 2019 Form S-3.

On March 6, 2019, we entered into a new sales agreement, which we refer to as the 2019 Sales Agreement, with respect to an at-the-market offering program under which we may offer and sell, from time to time at our sole discretion, shares of our common stock having an aggregate offering price of up to $50.0 million.

Cash Flows

Three Months Ended March 31, 2019 and March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2019

    

2018

    

 

 

(in thousands)

 

Net cash provided by (used in):

 

 

 

 

 

 

 

Operating activities

 

$

(13,523)

 

 

1,098

 

Investing activities

 

 

 —

 

 

(47)

 

Financing activities

 

 

1,290

 

 

138,675

 

Total

 

$

(12,233)

 

$

139,726

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(1,313)

 

 

(41)

 

Net increase (decrease) in cash and cash equivalents

 

 

(13,546)

 

 

139,685

 

 

Operating activities

Net cash used in operating activities for the three months ended March 31, 2019 was $13.5 million compared to net cash provided by activities of $1.1 million for the corresponding 2018 period, a change of $14.6 million. The change is primarily due to the milestone payment from EA Pharma of $11.2 million during the 2018 period offset by increased R&D expenses.

Investing activities

Net cash used in investing activities was $0 for the three months ended March 31, 2019 compared to $47,000 for the corresponding 2018 period, a decrease of $47,000. The decrease was due to greater property and equipment purchases in 2018.

Financing activities

Net cash provided by financing activities for the three months ended March 31, 2019 was $1.3 million compared to net cash provided in financing activities of $138.7 million for the corresponding 2018 period, a difference of $137.4 million. The difference was principally due to our receipt of (i) $94.2 million in aggregate net proceeds from our public offering in January 2018 and our sales through our at-the-market offering program sales agreement in February 2018, and (ii) $44.5 million in net proceeds from HCR under our RIAA in February 2018.

Funding Requirements

Cash used to fund operating expenses is affected by the timing of when we pay expenses, as reflected in the change in our outstanding accounts payable and accrued expenses. We believe that our existing cash and cash equivalents will be sufficient to meet our projected operating requirements at least into 2021, including for our Phase 3 clinical program for odevixibat in PFIC, but we will need additional financing to develop odevixibat for the treatment of one or more pediatric liver diseases in 2020. However, our operating plans may change as a result of many factors, including those described below, and we may need additional funds sooner than planned to meet operational needs and capital requirements. In addition, if the conditions for raising capital are favorable we may seek to raise additional funds at any time.

.

27


 

Our future funding requirements will depend on many factors, including the following:

·

the costs, design, duration and any potential delays of the Phase 3 clinical trial of odevixibat;

·

the scope, number, progress, duration, cost, results and timing of clinical trials and nonclinical studies of our current or future product candidates;

·

whether and to what extent milestone events are achieved under our license agreement with EA Pharma, our RIAA with HCR or any potential future licensee or collaborator;

·

the outcomes and timing of regulatory reviews, approvals or other actions;

·

our ability to obtain marketing approval for our product candidates;

·

our ability to establish and maintain additional licensing, collaboration or similar arrangements on favorable terms and whether and to what extent we retain development or commercialization responsibilities under any new licensing, collaboration or similar arrangement;

·

the success of any other business, product or technology that we acquire or in which we invest;

·

our ability to maintain, expand and defend the scope of our intellectual property portfolio;

·

our ability to manufacture any approved products on commercially reasonable terms;

·

our ability to establish a sales and marketing organization or suitable third-party alternatives for any approved product;

·

the number and characteristics of product candidates and programs that we pursue;

·

the costs of acquiring, licensing or investing in businesses, product candidates and technologies;

·

our need and ability to hire additional management and scientific and medical personnel;

·

the costs to operate as a public company in the United States, including the need to implement additional financial and reporting systems and other internal systems and infrastructure for our business;

·

market acceptance of our product candidates, to the extent any are approved for commercial sale; and

·

the effect of competing technological and market developments.

We cannot determine precisely the completion dates and related costs of our development programs due to inherent uncertainties in outcomes of clinical trials and the regulatory approval process. We cannot be certain that we will be able to successfully complete our research and development programs or establish licensing, collaboration or similar arrangements for our product candidates. Our failure or the failure of any current or potential future licensee to complete research and development programs for our product candidates could have a material adverse effect on our financial position or results of operations.

We expect to continue to incur losses. Our ability to achieve and maintain profitability is dependent upon the successful development, regulatory approval and commercialization of our product candidates and achieving a level of revenues adequate to support our cost structure. We may never achieve profitability.

If the conditions for raising capital are favorable, we may seek to finance future cash needs through public or private equity or debt offerings or other financings. Additionally, if we need to raise additional capital to fund our operations,

28


 

complete clinical trials, or potentially commercialize our product candidates, we may likewise seek to finance future cash needs through public or private equity or debt offerings or other financings. The necessary funding may not be available to us on acceptable terms or at all.

We filed a new universal shelf registration on Form S-3 with the SEC on March 6, 2019, which was declared effective on April 30, 2019, pursuant to which we registered for sale up to $200 million of any combination of our common stock, preferred stock, debt securities, warrants, rights and/or units from time to time and at prices and on terms that we may determine, which we refer to as the 2019 Form S-3. On March 6, 2019, we terminated the 2017 Sales Agreement and entered into a new sales agreement, which we refer to as the 2019 Sales Agreement, with respect to an at-the-market offering program under which we may offer and sell, from time to time at our sole discretion, shares of our common stock having an aggregate value up to $50.0 million. We make no assurances as to the continued effectiveness of the 2019 Form S-3. No additional securities registered under the 2017 Form S-3 will be offered or sold.

The sale of additional equity or convertible debt securities may result in significant dilution to our stockholders, and the terms may include liquidation or other preferences that adversely affect the rights of our stockholders. The incurrence of additional debt financing would result in debt service obligations and the instruments governing such debt may provide for operating and financing covenants that would restrict our operations. We may also seek to finance future cash needs through potential future licensing, collaboration or similar arrangements. These arrangements may not be available on acceptable terms or at all, and we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate our development programs or obtain funds through third-party arrangements that may require us to relinquish rights to certain product candidates that we might otherwise seek to develop or commercialize independently.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required for smaller reporting companies.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our principal executive officer and principal financial officer, after evaluating 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 Form 10‑Q, have concluded that, based on such evaluation and as a result of the material weaknesses discussed in our “Management’s Report on Internal Control over Financial Reporting” in our Form 10‑K for the year ended December 31, 2018 and below, our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Material Weaknesses and Remediation of Material Weaknesses

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a‑15(f) and 15d‑15(f) under the Exchange Act.

Our management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2019. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013 framework).

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Based on our assessment, our management concluded that the material weaknesses reported in our Annual Report on Form 10-K for the year ended December 31, 2018 remain un-remediated as of March 31, 2019. The material weaknesses will not be considered remediated until the enhanced controls operate for a sufficient period of time and management has concluded, through testing, that the controls are operating effectively.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As previously disclosed, the identified material weaknesses are pervasive in our internal control processes and involve the control environment, risk assessment, control activity and monitoring activities. Specifically, the material weaknesses relate to an insufficiently staffed finance organization with the requisite knowledge of U.S. GAAP and SEC reporting or skills in and ability to focus on internal control over financial reporting matters; not fully designing, implementing and monitoring policies or financial reporting controls that identify and sufficiently mitigate risks of material misstatement to the financial statements; and insufficient design, implementation and monitoring of general information technology controls to support the effective operation of financial controls. Because of the material weaknesses described above, our management believe that, as of March 31, 2019, our internal control over financial reporting was not effective.

Our management remains committed to the implementation of remediation efforts to address the material weaknesses and even though progress has been made to strengthen our controls, further remediation is needed. Management is in the process of executing a remediation plan with a new chief financial officer hired in October 2018 and a senior director of finance hired in September 2018 to provide enhanced oversight and governance of all financial reporting activities. Additionally, new accounting staff with the requisite knowledge of internal controls over financial reporting matters were hired in February 2019. We continue to upgrade our financial reporting system and we are continuing to strengthen our control processes and procedures with enhanced control documentation and additional management reviews to address these weaknesses and to ensure that we become compliant with the requirements of Section 404 of the Sarbanes-Oxley Act 2002. As we continue to evaluate and work to improve our internal control over financial reporting, our management may take additional measures.

Changes in Internal Control over Financial Reporting

Other than as described above, there were no changes in our internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during the three months ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

On February 19, 2019, the Company filed a complaint for breach of contract and breach of implied covenant of good faith and fair dealing against Ferring International Center S.A. (the “Respondent”) in the United States District Court for the Southern District of New York. Based on procedural considerations, we decided to refile the complaint in the Supreme Court of the State of New York, County of New York on April 26, 2019. We previously entered into the License Agreement, dated July 2, 2012, as amended as of October 2013 (the “License Agreement”), by and between Respondent and us, pursuant to which Respondent, among other things, conducted two Phase 3 clinical trials to evaluate the efficacy and safety of elobixibat as a treatment for chronic idiopathic constipation, known as Echo 1 and Echo 2, which ended in 2014. As previously disclosed, Respondent stopped Echo 1 and Echo 2 early citing an issue related to the distribution of study drug to study sites that was unrelated to the performance of elobixibat and terminated the License Agreement. The complaint alleges that Respondent breached its obligations under the License Agreement to (1) make earned milestone payments, (2) use good clinical practices, good laboratory practices and good manufacturing practices, and (3) use commercially reasonable efforts. The complaint also alleges that Respondent violated the covenant of good faith and fair dealing implied in the License Agreement. In the complaint, the Company is seeking, among other things, compensatory damages of at least € 37 million.

The Company has retained outside counsel under a contingency fee arrangement, and as a result, the Company will not incur attorneys’ fees for litigating the matter, but counsel will receive a contingent fee of 33 1/3% of the net recovery (after deduction of expenses) in the event a recovery is received.

Due to their nature, it is difficult to predict the outcome, or the costs involved in any litigation. Furthermore, Respondent may have significant resources and interest to litigate and therefore, although we have a contingency fee arrangement, this litigation could be protracted and may ultimately involve significant legal expenses.

Item 1A. Risk Factors

There have been no material changes to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on March 6, 2019.

 

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Item 6. Exhibits

 

 

 

 

 

 

 

 

 

 

 

Exhibit No.

    

Description

    

Filed
Herewith

    

Incorporated
by
Reference
Herein from
Form or
Schedule

    

Filing Date

    

SEC File/
Req. Number

 

 

 

 

 

 

 

 

 

 

 

10.1*

 

Employment Agreement dated as of March 25, 2019 by and between the Registrant and Pamela Stephenson.

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.2*

 

Non-Employee Director Compensation Policy.

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.3*

 

Amendment No. 1 to Office Lease Agreement dated as of March 28, 2019, by and between the Registrant and POSIG Investors, LLC.

 

 

 

8-K (Exhibit 10.1)

 

4/3/2019