vsar-10q_20180630.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended June 30, 2018

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: 001-36361

 

Versartis, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

2834

 

26-4106690

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

1020 Marsh Rd

Menlo Park, California 94025

(650) 963-8580

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

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period than the registrant was required to submit and post 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 definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

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 July 31, 2018, there were 36,240,673 outstanding shares of common stock, par value $0.0001 per share, of Versartis, Inc.

 

 

 

 

 

 

 


 

VERSARTIS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED June 30, 2018

PART I. FINANCIAL INFORMATION

 

Item

  

 

  

Page

1.

  

Financial Statements (unaudited):

  

 

 

  

a. Condensed Consolidated Balance Sheets at June 30, 2018 and December 31, 2017

  

3

 

  

b. Condensed Consolidated Statements of Operations for the three months ended June 30, 2018
and 2017

  

4

 

  

c. Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2018
and 2017

  

5

 

  

d. Notes to Condensed Consolidated Financial Statements

  

6

2.

  

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

  

16

3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

20

4.

  

Controls and Procedures

  

20

 

PART II. OTHER INFORMATION

1.

  

Legal Proceedings

  

21

1A.

  

Risk Factors

  

21

2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

49

6.

  

Exhibits

  

50

Signatures

  

51

 

 

 

 

2

 


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

VERSARTIS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except share and per share data)

 

 

June 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

67,776

 

 

$

81,146

 

Prepaid expenses and other current assets

 

686

 

 

 

562

 

Total current assets

 

68,462

 

 

 

81,708

 

Restricted cash

 

2,388

 

 

 

2,383

 

Property and equipment, net

 

680

 

 

 

798

 

Build-to-suit lease asset

 

8,770

 

 

 

8,888

 

Total assets

 

80,300

 

 

 

93,777

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

$

804

 

 

$

1,500

 

Accrued liabilities

 

3,234

 

 

 

4,093

 

Total current liabilities

 

4,038

 

 

 

5,593

 

Build-to-suit lease obligation

 

7,324

 

 

 

5,428

 

Total liabilities

 

11,362

 

 

 

11,021

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

Common stock, $0.0001 par value, 100,000,000 shares authorized at

   June 30, 2018 and December 31, 2017; 36,240,673 and 35,938,126 shares

   issued and outstanding at June 30, 2018 and December 31, 2017, respectively

 

4

 

 

 

4

 

Additional paid-in capital

 

461,995

 

 

 

456,984

 

Accumulated deficit

 

(393,061

)

 

 

(374,232

)

Total stockholders' equity

 

68,938

 

 

 

82,756

 

Total liabilities and stockholders’ equity

$

80,300

 

 

$

93,777

 

 

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

 

 

 

 

3

 


 

VERSARTIS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

$

3,438

 

 

$

28,618

 

 

$

7,038

 

 

$

50,622

 

General and administrative

 

6,003

 

 

 

7,572

 

 

 

10,920

 

 

 

15,228

 

Total operating expenses

 

9,441

 

 

 

36,190

 

 

 

17,958

 

 

 

65,850

 

Loss from operations

 

(9,441

)

 

 

(36,190

)

 

 

(17,958

)

 

 

(65,850

)

Interest income

 

249

 

 

 

242

 

 

 

442

 

 

 

441

 

Other income (expense), net

 

(656

)

 

 

(521

)

 

 

(1,313

)

 

 

(782

)

Net loss before provision for income taxes

$

(9,848

)

 

$

(36,469

)

 

$

(18,829

)

 

$

(66,191

)

Provision for income taxes

 

 

 

 

128

 

 

 

 

 

 

128

 

Net loss

$

(9,848

)

 

$

(36,597

)

 

$

(18,829

)

 

$

(66,319

)

Net loss per share - basic and diluted

$

(0.27

)

 

$

(1.04

)

 

$

(0.52

)

 

$

(1.89

)

Weighted-average common shares used to compute

   basic and diluted net loss per share

 

36,134

 

 

 

35,316

 

 

 

36,010

 

 

 

35,001

 

 

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

 

 

 

4

 


 

VERSARTIS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

 

Six Months Ended

 

 

June 30,

 

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

$

(18,829

)

 

$

(66,319

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

236

 

 

 

104

 

Stock-based compensation expense

 

4,976

 

 

 

7,522

 

Changes in assets and liabilities

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

(124

)

 

 

(7,124

)

Accounts payable

 

(695

)

 

 

1,194

 

Accrued and other liabilities

 

(860

)

 

 

8,063

 

Income taxes payable

 

 

 

 

(247

)

Net cash used in operating activities

 

(15,296

)

 

 

(56,807

)

Cash flows from investing activities

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

 

 

(1,009

)

Inducement on build-to-suit lease obligation

 

1,896

 

 

 

 

Net cash used in investing activities

 

1,896

 

 

 

(1,009

)

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from issuance of common stock in connection with employee benefit plans

 

35

 

 

 

2,399

 

Net cash provided by financing activities

 

35

 

 

 

2,399

 

Net increase (decrease) in cash, cash equivalents, and restricted cash

 

(13,365

)

 

 

(55,417

)

Cash, cash equivalents, and restricted cash at beginning of period

 

83,529

 

 

 

201,153

 

Cash, cash equivalents, and restricted cash at end of period

$

70,164

 

 

$

145,736

 

Supplemental disclosure

 

 

 

 

 

 

 

Income taxes paid

$

 

 

$

375

 

Supplemental disclosure of noncash items

 

 

 

 

 

 

 

Build-to-suit leasehold improvements

$

5,428

 

 

$

1,219

 

Build-to-suit lease transaction

$

 

 

$

8,174

 

 

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

 

 

 

 

5

 


VERSARTIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)

 

VERSARTIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

1. Formation and Business of the Company

Versartis, Inc., or the Company, was incorporated on December 10, 2008 in the State of Delaware. The Company has been an endocrine-focused biopharmaceutical company that was developing a long-acting recombinant human growth hormone for the treatment of growth hormone deficiency.

The Company’s headquarters and operations are in Menlo Park, California. Since incorporation, the Company has been primarily performing research and development activities, including clinical trials, filing patent applications, obtaining regulatory approvals, hiring personnel, and raising capital to support and expand these activities.

In September 2017, the Company announced that the VELOCITY Phase 3 clinical trial of somavaratan in pediatric growth hormone deficiency, or GHD, failed to meet its primary endpoint of non-inferiority.  All ongoing clinical trials of somavaratan have concluded and currently the Company does not intend to further develop somavaratan.    

In June 2018, the Company entered into a merger agreement with Aravive Biologics, Inc. to form a clinical stage, Nasdaq-listed company, based in Houston, Texas, focused on the development of innovative oncology therapeutics. Aravive Biologics is a privately held clinical stage biopharmaceutical company developing novel, highly selective therapies designed to treat serious cancers and certain fibrotic diseases.  Under this merger agreement, Aravive will merge with a wholly owned subsidiary of Versartis in an all-stock transaction. Following the proposed merger, Versartis and Aravive equity holders are each expected to own approximately 50 percent of the combined company. This transaction is expected to close during the second half of 2018, subject to approval by the stockholders of both companies and the satisfaction or waiver of other customary closing conditions.

Unaudited Interim Financial Information

In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of June 30, 2018, its results of operations three- and six- month periods ended June 30, 2018, and 2017, cash flows three- and six- months ended June 30, 2018, and 2017.  The December 31, 2017 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States of America, or GAAP. The results for interim periods are not necessarily indicative of the results for the entire year or any other interim period. The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2017 included in the Company’s annual report on Form 10-K filed on March 6, 2018 with the U.S. Securities and Exchange Commission, or the SEC.

 

 

2. Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The preparation of the accompanying condensed consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

The accompanying condensed consolidated financial position as of June 30, 2018 and as of December 31, 2017, and the results of operations and cash flows for the three- and six- month periods ended June 30, 2018 and 2017 include the accounts of Versartis, Inc. and its wholly-owned subsidiaries, Versartis Cayman Holdings Company and Versartis GmbH. All intercompany accounts and transactions have been eliminated. The U.S. dollar is the functional currency for all the Company's consolidated operations.

As of June 30, 2018, the Company had a cash and cash equivalents balance of $67.8 million consisting of cash and cash equivalents in highly liquid U.S. money market funds.  The Company believes that its existing cash and cash equivalents will be sufficient to sustain operations for at least the next 12 months from the issuance of these financial statements, based on its current business plan. As a result of the failure of the VELOCITY trial to meet its primary endpoint, the Company has implemented a number of cost-cutting measures, including a reduction in workforce of approximately two-thirds from September 2017.  The Company’s expected cash needs for the foreseeable future have been significantly reduced with the current initiatives and termination of a number of supplier contracts, including

 

6

 


VERSARTIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)

 

commercial contracts with our contract manufacturers. Since inception, the Company has incurred net losses and negative cash flows from operations. At June 30, 2018, the Company had an accumulated deficit of $393.1 million and working capital of $64.4 million. The Company expects to continue to incur losses from costs related to the proposed merger transaction and related administrative activities for the foreseeable future. Although management has been successful in raising capital in the past, most recently $59.1 million in October and November 2016, given the failure of the VELOCITY trial to meet its primary endpoint, there can be no assurance that the Company will be successful or that any needed financing will be available in the future at terms acceptable to the Company.

 

Segments

The Company operates in one segment. Management uses one measurement of profitability and does not segregate its business for internal reporting. All long-lived assets are maintained in the United States of America.

 

Concentration of credit risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents. All of the Company’s cash and cash equivalents are held at several financial institutions that management believes are of high credit quality. Such deposits may exceed federally insured limits.

The Company entered into forward foreign currency contracts that exposed it to credit risk to the extent that the counterparties potentially were unable to meet the terms of the agreement. The Company did, however, seek to mitigate such risks by limiting its counterparties to major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored. Management did not expect material losses as a result of defaults by counterparties.

 

Risk and Uncertainties

The Company’s future results of operations involve a number of risks and uncertainties. Factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations include, but are not limited to, uncertainty of results of clinical trials and reaching milestones, uncertainty of regulatory approval of the Company’s potential drug candidates, uncertainty of market acceptance of the Company’s products, competition from substitute products and larger companies, securing and protecting proprietary technology, strategic relationships or a strategic transaction and dependence on key individuals and sole source suppliers.

Products developed by the Company require clearances from the U.S. Food and Drug Administration, or the FDA, the Pharmaceuticals Medicines and Devices Agency, or the PMDA, or other international regulatory agencies prior to commercial sales. There can be no assurance that the products will receive the necessary clearances. If the Company was denied clearance, clearance was delayed or the Company was unable to maintain clearance, it could have a materially adverse impact on the Company.

The Company expects to incur substantial operating losses for the next several years and will need to obtain additional financing in order to develop, launch and commercialize any product candidates for which it receives regulatory approval.

Cash and cash equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At June 30, 2018 and December 31, 2017, the Company’s cash and cash equivalents were held in multiple institutions in the United States and Europe and included deposits in money market funds which were unrestricted as to withdrawal or use.

Restricted Cash

Restricted cash includes cash and cash equivalents that is restricted through legal contracts, regulations or the Company’s intention to use the cash for a specific purpose. The Company’s restricted cash primarily relates to the letter of credit provided to its Landlord for the Company’s headquarters in Menlo Park (as described in Note 5) to secure its obligations under the lease.

Property and equipment, Net

Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, generally between three and five years. Leasehold improvements are amortized on a straight-line basis over the lesser of their useful life or the term of the lease. Maintenance and repairs are charged to expense as incurred, and improvements are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in operations in the period realized.

 

7

 


VERSARTIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)

 

Build-to-Suit Lease

In the Company’s recent lease arrangement (as described in Note 5), the Company was involved in the construction of the building. To the extent the Company is involved with the structural improvements of the construction project or takes construction risk prior to the commencement of a lease, accounting guidance requires the Company to be considered the owner for accounting purposes of these types of projects during the construction period. Therefore, the Company records an asset in property and equipment on the condensed consolidated balance sheet for the replacement cost of the Company’s leased portion of the pre-existing building.  The Company records a corresponding build-to-suit lease obligation on its condensed consolidated balance sheets representing the amounts paid by the lessor.

Upon completion of construction, the Company considered the requirements for sale-leaseback accounting treatment, including evaluating whether all risks of ownership have been transferred back to the landlord, as evidenced by a lack of continuing involvement in the leased property where construction has been completed. The Company’s assessment of the arrangement determined that they did not qualify for sale-leaseback accounting treatment; therefore the building asset remains on the Company’s condensed consolidated balance sheets at its historical cost, and such asset is depreciated over its estimated useful life. The initial recording of these assets and liabilities is classified as non-cash investing and financing items, respectively, for purposes of the consolidated statements of cash flows.

Impairment of Long-Lived Assets

The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by the comparison of the carrying amount to the future net cash flows which the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value (i.e. determined through estimating projected discounted future net cash flows or other acceptable methods of determining fair value) arising from the asset. There have been no such impairments of long-lived assets as of June 30, 2018 or December 31, 2017.

Fair Value of Financial Instruments

The carrying value of the Company’s cash and cash equivalents, prepaid expenses, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these items.

Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:

 

Level I

 

Unadjusted quoted prices in active markets for identical assets or liabilities;

 

Level II

 

 

Inputs other than quoted prices included within Level I that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

 

Level III

 

 

Unobservable inputs that are supported by little or no market activity for the related assets or liabilities.

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The Company’s financial instruments consist of Level I assets as of June 30, 2018. Level I securities are comprised of highly liquid money market funds.

The Company’s foreign currency derivative contracts have maturities over a 12-month time horizon and is with a counterparty that has a minimum credit rating of A- or equivalent by Standard & Poor's, Moody's Investors Service, Inc. or Fitch, Inc. These contracts are reported as Level II assets, however there were none outstanding as of June 30, 2018.

 

8

 


VERSARTIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)

 

Preclinical and Clinical Trial Accruals

The Company’s clinical trial accruals are based on estimates of patient enrollment and related costs at clinical investigator sites as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions and clinical research organizations, or CROs, that conduct and manage clinical trials on the Company’s behalf.

The Company estimates preclinical and clinical trial expenses based on the services performed, pursuant to contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on its behalf. In accruing service fees, the Company estimates the time period over which services will be performed and the level of patient enrollment and activity expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. Payments made to third parties under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered. In September 2017, the Company announced that the VELOCITY Phase 3 clinical trial of somavaratan in pediatric growth hormone deficiency (GHD) failed to meet its primary endpoint of non-inferiority.  All ongoing clinical trials of somavaratan have concluded and as such, there were no material preclinical and clinical trial accruals as of June 30, 2018.  

Research and development

Research and development costs are charged to operations as incurred. Research and development costs include, but are not limited to, payroll and personnel expenses, laboratory supplies, consulting costs, external research and development expenses and allocated overhead, including rent, equipment depreciation, and utilities. Costs to acquire technologies to be used in research and development that have not reached technological feasibility and have no alternative future use are expensed to research and development costs when incurred.

Income taxes

The Company accounts for income taxes under the asset and liability approach. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

The Company assesses all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and the Company will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.     

Stock-Based compensation

For stock options granted to employees, the Company recognizes compensation expense for all stock-based awards based on the grant-date estimated fair value. The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service period. The fair value of stock options is determined using the Black-Scholes option pricing model. The determination of fair value for stock-based awards on the date of grant using an option pricing model requires management to make certain assumptions regarding a number of complex and subjective variables.

Stock-based compensation expense related to stock options granted to nonemployees is recognized based on the fair value of the stock options, determined using the Black-Scholes option pricing model, as they are earned. The awards generally vest over the time period the Company expects to receive services from the nonemployee.

 

9

 


VERSARTIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)

 

Stock-based compensation expense, net of estimated forfeitures, is reflected in the condensed consolidated statements of operations and comprehensive loss as follows (in thousands):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

$

877

 

 

$

1,501

 

 

$

1,759

 

 

$

2,982

 

General and administrative

 

1,278

 

 

 

2,157

 

 

 

3,217

 

 

 

4,540

 

Total

$

2,155

 

 

$

3,658

 

 

$

4,976

 

 

$

7,522

 

 

Comprehensive Loss

Comprehensive loss is defined as a change in equity of a business enterprise during a period, resulting from transactions from non-owner sources.  Specifically, the Company includes cumulative foreign currency translation adjustments and net unrealized gains and losses on effective cash flow hedges. There was no difference between net loss and comprehensive loss for all periods presented.

Net Loss per Share of Common Stock

Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares and potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, stock options, restricted stock units and shares issued under our Employee Stock Purchase Plan are considered to be potentially dilutive securities. Because the Company has reported a net loss for all of the periods presented, diluted net loss per common share is the same as basic net loss per common share for those periods.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies and adopted by us as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective is not expected to have a material impact on the Company’s financial position or results of operations upon adoption.

In May 2017, the FASB issued, ASU-2017-09, Compensation—Stock Compensation (Topic 718).  This guidance clarifies when changes to the terms and conditions of share-based awards must be accounted for as modifications. The guidance does not change the accounting treatment for modifications. The guidance, which became effective on January 1, 2018, has not had a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued, ASU-2017-01, Business Combinations (Topic 805)- Definition of a Business. This guidance clarifies changes to the definition of a business for accounting purposes. Under the new guidance, an entity first determines whether substantially all of the fair value of a set of assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, also known as the screen test. If this threshold is met under the screen test, the set of assets is not deemed to be a business. If the threshold is not met, the entity then evaluates whether the set of assets meets the requirement to be deemed a business, which at a minimum, requires there to be an input and a substantive process that together significantly contribute to the ability to create outputs. In June 2018, the company entered into a proposed merger agreement with Aravive Biologics, Inc., where Aravive will merge with a wholly owned subsidiary of Versartis in an all-stock transaction. Under the agreement, Versartis will acquire Aravive’s net assets under an asset acquisition.  Substantially all of the fair value of the net acquired assets is concentrated in a single identifiable asset or a group of similar identifiable assets, and as such the set of net assets acquired is not deemed to be a business.  The guidance, which has become effective for the Company on January 1, 2018, is expected to have a material impact on the Company’s consolidated financial statements upon close of the proposed merger transaction between Versartis and Aravive as application of the screen test under the new guidance results in the transaction to be accounted for as an asset acquisition.

In November 2016, the FASB issued, ASU-2016-18, Statement of Cash Flows (Topic 230)- Restricted Cash.  This guidance requires that a statement of cash flows present the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash amounts shown on the statement of cash flows.  The guidance has become effective on a retrospective basis for the

 

10

 


VERSARTIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)

 

Company on January 1, 2018. The Company retrospectively adjusted the prior periods presented in our consolidated statement of cash flows, which resulted in a reclassification of restricted cash of $2.4 million to the beginning and ending period balances of cash and cash equivalents at June 30, 2018. The following is a reconciliation of the captions in the consolidated balance sheet to the consolidated statements of cash flows (in thousands):

 

As of

 

 

June 30, 2018

 

 

December 31, 2017

 

 

June 30, 2017

 

 

December 31, 2016

 

Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Cash and cash equivalents

$

67,776

 

 

$

81,146

 

 

$

143,358

 

 

$

201,153

 

      Restricted cash (included in other current assets)

 

2,388

 

 

 

2,383

 

 

 

2,378

 

 

 

 

Cash, cash equivalents and restricted cash in Consolidated Statements of Cash Flows

$

70,164

 

 

$

83,529

 

 

$

145,736

 

 

$

201,153

 

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU is a comprehensive new leases standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. The new standard requires that all lessees recognize the assets and liabilities that arise from leases on the balance sheet and disclose qualitative and quantitative information about its leasing arrangements.

The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous lease guidance. The ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years, and earlier adoption is permitted. In the financial statements in which the ASU is first applied, leases shall be measured and recognized at the beginning of the earliest comparative period presented with an adjustment to equity.  The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial condition, results of operations and cash flows.

In May 2014, the FASB issued a new accounting standard that amends the guidance for the recognition of revenue from contracts with customers to transfer goods and services. The FASB has subsequently issued additional, clarifying standards to address issues arising from implementation of the new revenue recognition standard. The new revenue recognition standard and clarifying standards are effective for interim and annual periods beginning on January 1, 2018, and may be adopted earlier, but not before January 1, 2017. The revenue standards are required to be adopted by taking either a full retrospective approach or a modified retrospective approach. The Company has adopted the new revenue standard as of January 1, 2018 using a modified retrospective application to each prior reporting period presented. Through June 30, 2018 the Company had no open contracts and previously recorded a cumulative inception to date total of $40.0 million of contract revenues at December 31, 2017 received from Teijin Limited under an exclusive license and supply agreement which was considered substantially complete as of December 31, 2017.  The adoption did not have an effect on the Company’s consolidated financial statements on the adoption date and no adjustment to retained earnings as of January 1, 2018 was required.

 

 

3. Balance Sheet Components

Prepaid expenses and other current assets (in thousands)

 

 

June 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Preclinical and clinical (1)

$

57

 

 

$

261

 

Other

 

629

 

 

 

301

 

Total

$

686

 

 

$

562

 

 

 

(1)

These prepayments consist primarily of advances to the Company’s contract manufacturers and contract research organizations

 

11

 


VERSARTIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)

 

Accrued Liabilities (in thousands)

 

 

June 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Payroll and related

$

2,695

 

 

$

2,058

 

Preclinical and clinical

 

82

 

 

 

1,694

 

Professional services

 

303

 

 

 

204

 

Other

 

154

 

 

 

137

 

Total

$

3,234

 

 

$

4,093

 

 

 

4. Fair Value Measurements

The Company’s financial instruments consist principally of cash and cash equivalents, prepaid expenses, accounts payable and accrued liabilities. The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):

 

 

Fair Value Measurements at June 30, 2018

 

 

(unaudited)

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

55,862

 

 

$

55,862

 

 

$

 

 

$

 

 

$

55,862

 

 

$

55,862

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2017

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

62,428

 

 

$

62,428

 

 

$

 

 

$

 

 

$

62,428

 

 

$

62,428

 

 

$

 

 

$

 

 

 

5. Commitments and Contingencies

Facility Leases

In March 2017, the Company entered into an operating facility lease agreement for approximately 34,500 rentable square feet located at 1020 Marsh Road, Menlo Park, California (1020 Space) and for approximately 17,400 rentable square feet located on the second floor of the building located at 1060 Marsh Road.  In September 2017, the Company terminated its lease specific to 1060 Marsh Road.  The 1020 space serves as the Company’s corporate headquarters.

The delivery of the 1020 Space to the Company occurred in April 2017. The 1020 Space lease commenced on August 8, 2017 for a period of 86 months, with one renewal option for a five-year term. The total obligation under this lease for the Company is approximately $18.4 million as of June 30, 2018.

As an inducement to enter the lease, the Landlord provided the Company with an approximately $1.9 million tenant improvement allowance for the 1020 Space. In January 2018, the Company received approximately $1.5 million, or 80% of the tenant improvement allowance. The remaining 20% of $0.4 million was received in May 2018. The Company has provided the Landlord with a letter of credit to secure its obligations under the lease in the initial amount of approximately $2.4 million, reported as restricted cash on the balance sheet, which is subject to reductions in future years if certain financial hurdles are met.

 

12

 


VERSARTIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)

 

Future minimum lease payments under all of the Company’s noncancelable operating and facility leases, as of June 30, 2018, were as follows (in thousands):

 

Year Ended December 31,

 

 

 

2018

$

1,363

 

2019

 

2,780

 

2020

 

2,854

 

2021

 

2,930

 

2022

 

3,009

 

Thereafter

 

5,449

 

Total

$

18,385

 

 

Build-to-Suit

In March 2017, the Company entered into an operating facility lease agreement, as described above, to lease office space located in Menlo Park, California in a building to be constructed by the landlord. The company began occupying the 1020 Space in August 2017. The lease has a term of 86 months from the commencement date as defined in the lease agreement with the Company’s option to extend the term of the lease for an additional five years. The Company is obligated to make lease payments totaling approximately $20.0 million over the initial term of the lease.  The obligation under this lease is approximately $18.4 million as of June 30, 2018.  In connection with this lease, the landlord provided a tenant improvement allowance of approximately $1.9 million for the 1020 Space, for costs associated with the design, development and construction of the Company’s improvements. The Company funded all costs incurred in excess of the tenant improvement allowance. As of June 30, 2018, the Company received all of the tenant improvement allowance. The $1.9 million inducement payment received increased the build-to-suit lease obligation to $7.3 million as of June 30, 2018.

Under the terms of the lease agreement, the Company has indemnified the landlord during the construction period.  Accordingly, for accounting purposes, the Company has concluded that they were deemed the owner of the building during the construction period and the Company capitalized approximately $8.8 million within property and equipment and recognized a $7.3 million corresponding build-to-suit obligation in non-current liabilities in the condensed consolidated balance sheet as of June 30, 2018.  Of the $8.8 million, approximately $3.5 million has been recorded as a build-to-suit asset related to construction costs incurred as of June 30, 2018.  

Contingencies

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.

As of June 30, 2018 the Company is contingently committed to make development and sales-related milestone payments of up to $30.0 million under certain circumstances, and other payments of $10.0 million, as well as royalties relating to potential future product sales under the License Agreement with Amunix. The amount, timing and likelihood of these payments are unknown as they are dependent on the occurrence of future events that may or may not occur, including approval by the FDA of potential drug candidates.

 

 

6. Stockholders’ Equity

 

Equity Incentive Plans

The Company’s Board of Directors, or Board, and stockholders previously approved the 2014 Equity Incentive Plan, or the 2014 Plan, which became effective on March 21, 2014.  As of June 30, 2018, the total number of shares of common stock available for issuance under the 2014 Plan was approximately 2,355,000.  Unless the Board provides otherwise, beginning on January 1, 2015, and continuing until the expiration of the 2014 Plan, the total number of shares of common stock available for issuance under the 2014 Plan will automatically increase annually on January 1 by 4.5% of the total number of issued and outstanding shares of common stock as of December 31 of the immediately preceding year. As of June 30, 2018, approximately 4,391,000 shares of common stock were subject to outstanding awards under the 2014 Plan.

 

13

 


VERSARTIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)

 

In March 2014, the Board and stockholders approved the 2014 Employee Stock Purchase Plan, or the ESPP, which became effective as of March 5, 2014. The Company initially reserved a total of 150,000 shares of common stock for issuance under the ESPP. Unless the Board provides otherwise, beginning on January 1, 2015, and continuing until the expiration of the ESPP, the total number of shares of common stock available for issuance under the ESPP will automatically increase annually on January 1 by the lesser of (i) 1% of the total number of issued and outstanding shares of common stock as of December 31 of the immediately preceding year, or (ii) 300,000 shares of common stock. As of June 30, 2018, the Company has issued approximately 224,000 shares of common stock under the ESPP.

 

 

7. Net loss per share of Common Stock

The following table summarizes the computation of basic and diluted net loss per share of the Company (in thousands, except per share data):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

$

(9,848

)

 

$

(36,597

)

 

$

(18,829

)

 

$

(66,319

)

Weighted-average shares used to compute basic and diluted net loss per share

 

36,134

 

 

 

35,316

 

 

 

36,010

 

 

 

35,001

 

Basic and diluted net loss per common share

$

(0.27

)

 

$

(1.04

)

 

$

(0.52

)

 

$

(1.89

)

 

Basic net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing the net loss per common share by the weighted-average number of common shares and dilutive common stock equivalents outstanding for the period, determined using the treasury-stock method and the as-if converted method, for convertible securities, if inclusion of these is dilutive. Because the Company has reported a net loss for all periods presented, diluted net loss per share is the same as basic net loss per common share for those periods.

 

 

8. Restructuring Plan

   In October 2017, the Board of Directors of the Company approved a plan of termination to eliminate a number of positions effective October 20, 2017 (the “Restructuring Plan”), as part of its commitment to reduce costs following the failure of the Phase 3 VELOCITY trial of somavaratan to reach its primary endpoint. Simultaneously with the Restructuring Plan the Company established a Severance Benefit Plan (thePlan”) for affected employees as well as a retention plan for retained employees.  The Plan provides payment of severance benefits to affected employees of the Company.

As part of the Company’s commitment to reduce operating expenses and preserve cash, the Company eliminated additional positions effective May and June 2018. The reduction included a total of 14 employees, which represented approximately 59% of its workforce as of June 26, 2018, the date affected employees were notified. Pursuant to the Plan, affected employees received certain severance benefits. For the period ended June 30, 2018, the Company incurred a one-time severance-related charge totaling approximately $3.5 million, of which $1.2 million is included within general and administrative expenses and $2.3 million is included within research and development expenses.      

 

9. Merger & Acquisition

Pending Acquisition of Aravive Biologics, Inc.

On June 3, 2018, we entered into an Agreement and Plan of Merger and Reorganization, or the Agreement, by and among Versartis, Inc., a Delaware corporation (“Parent”), Velo Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”), and Aravive Biologics, Inc., a Delaware corporation (the “Company”). Under the Agreement, Aravive will merge with a wholly owned subsidiary of Versartis in an all-stock transaction. The transaction will result in a clinical stage, Nasdaq-listed company, based in Houston, Texas, focused on the development of innovative oncology therapeutics.

 

14

 


VERSARTIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)

 

The Agreement contains certain termination rights for us and Aravive, and further provides that, upon termination of the Agreement under certain specified circumstances, Versartis or Aravie would be obligated to pay Aravive or Versartis a termination fee of $2.5 million.

Following the proposed merger, Versartis and Aravive equity holders are each expected to own approximately 50 percent of the combined company. The transaction has been unanimously approved by the boards of directors of both companies. The transaction is expected to close during the second half of 2018, subject to approval by the stockholders of both companies and the satisfaction or waiver of other customary closing conditions.

 

 

15

 


 

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

You should read the following management’s discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and notes thereto for the year ended December 31, 2017, included in our annual report on Form 10-K filed on March 6, 2018 with the U.S. Securities and Exchange Commission (SEC).

Special note regarding forward-looking statements

This report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included under Part II, Item 1A below. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

Versartis, Inc. (the “Company” “We” or “Our”) has been an endocrine-focused biopharmaceutical company that was developing a novel long-acting form of recombinant human growth hormone, somavaratan (VRS-317), for growth hormone deficiency, or GHD, an orphan disease.

Somavaratan is a fusion protein consisting of rhGH and a proprietary half-life extension technology known as XTEN®. We in-licensed the rights to use the XTEN technology from Amunix Operating, Inc., or Amunix, which has granted us an exclusive license under its patents and know-how related to the XTEN technology to develop and commercialize up to four licensed products, including somavaratan. If we commercialize a licensed product, we will owe to Amunix a royalty on net sales of the licensed products until the later of the expiration of all licensed patents or ten years from the first commercial sale in the relevant country. The royalty payable is one percent of net sales for the first two marketed products, but higher single-digit royalties are payable if we market additional products, or if we substitute one marketed product for another. If we elect to substitute one marketed product for another, in addition to royalties, we would also be required to make milestone and other payments totaling up to $40.0 million per marketed product.  

Recent Developments

In September 2017, we announced that the VELOCITY Phase 3 clinical trial of somavaratan in pediatric GHD did not meet its primary endpoint of non-inferiority.  All ongoing clinical trials of somavaratan have been concluded as of the end of 2017 and the U.S. Investigational New Drug Application, or IND, and all equivalent filings in foreign countries have been withdrawn. Based on a full review of the data from the Phase 3 VELOCITY trial, feedback from the FDA during the development of somavaratan, and an objective assessment by external regulatory experts, the company believes it could not successfully file for approval based on the existing dataset. The investment and delay in time-to-market that further development would require, significantly impact the business case for somavaratan, given the potential that one or more long-acting growth hormone products may already be commercialized for pediatric growth hormone deficiency during that time.

In October 2017, following the announcement of our failed Phase 3 VELOCITY trial to meet its primary endpoint, the board of directors approved a plan to reduce the size of our workforce by approximately 62%. The workforce reduction, which was completed in the fourth quarter of 2017, was designed to reduce our operating expenses while we conducted a review of development options for somavaratan. We incurred a one-time severance-related charge totaling approximately $3.4 million, all of which was paid in 2017, and of which $2.7 million and $0.7 million were recorded in research and development expenses and general and administrative expenses, respectively.

In October 2017, in parallel with our announcement regarding our assessment of the viability of further development of somavaratan and our restructuring plan, we announced that we engaged Cowen to assist in evaluating possible strategic transactions that could maximize our expertise and resources.

In May and June 2018, as part of our commitment to reduce costs and preserve cash, we terminated an additional number of positions to further reduce our operating expenses as we evaluated possible strategic transactions.

 

16

 


 

 

In June 2018, the Company entered into a merger agreement with Aravive Biologics, Inc. to form a clinical stage, Nasdaq-listed company, based in Houston, Texas, focused on the development of innovative oncology therapeutics. Aravive Biologics is a privately held clinical stage biopharmaceutical company developing novel, highly selective therapies designed to treat serious cancers and certain fibrotic diseases.  Under this merger agreement, Aravive will merge with a wholly owned subsidiary of Versartis in an all-stock transaction. Following the proposed merger, Versartis and Aravive equity holders are each expected to own approximately 50 percent of the combined company. This transaction is expected to close during the second half of 2018, subject to approval by the stockholders of both companies and the satisfaction or waiver of other customary closing conditions.

 

Financial overview

Revenue

We have never generated net income from operations on an annual basis, and, as of June 30, 2018, we had an accumulated deficit of $393.1 million, primarily as a result of research and development and general and administrative expenses. We have never earned revenue from commercial sales of any of our product candidates. In August 2016, we entered into an exclusive license and supply agreement with Teijin, a pharmaceutical company based in Japan, pursuant to which we granted to Teijin an exclusive license to develop, use, sell, offer for sale, import, and otherwise commercialize, in Japan, any pharmaceutical product incorporating somavaratan.  In exchange for such rights, we received a nonrefundable upfront payment of $40.0 million in 2016.  We recognized the $40.0 million as contract revenue in Q4 2017 upon termination of the agreement in January 2018 as our obligations under the agreement were substantively complete at December 31, 2017.    

In the future, we may generate revenue from a variety of sources, including product sales if we develop products which are approved for sale, license fees, milestones, research and development and royalty payments in connection with strategic collaborations or government contracts, or licenses of our intellectual property. 

Research and development expenses

We recognize both internal and external research and development expenses as incurred. Our external research and development expenses consist primarily of:

 

the cost of acquiring and manufacturing clinical trial and other materials, including expenses incurred under agreements with contract manufacturing organizations;

 

expenses incurred under agreements with contract research organizations, investigative sites, and consultants that conduct our clinical trials and a substantial portion of our preclinical activities; and

 

other costs associated with development activities, including additional studies.

Internal research and development costs consist primarily of salaries and related fringe benefit costs for our employees (such as workers’ compensation and health insurance premiums), stock-based compensation charges, travel costs, and allocated overhead expenses.

Since the results of our Phase 3 VELOCITY trial in 2017, we have restructured our Company to reduce costs, which included a substantial reduction in our workforce.        

General and administrative expenses

General and administrative expenses consist principally of personnel-related costs, professional fees for legal, consulting, audit and tax services, rent and other general operating expenses not included in research and development. We anticipate general and administrative expenses will decrease in future periods, reflecting our reduced headcount and infrastructure.

Other income (expense), net

Other income (expense), net is primarily comprised of gains and losses on foreign currency transactions related to third-party contracts with foreign-based contract manufacturing organizations, gains and losses on foreign currency exchange contracts, as well as interest charges associated with our build-to-suit lease obligation.

Critical accounting policies, significant judgments and use of estimates

Our management’s discussion and analysis of financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, (“U.S. GAAP”).  The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate

 

17

 


 

our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. Our significant accounting policies are more fully described in Note 2 of the accompanying unaudited condensed consolidated financial statements and in Note 2 to our audited consolidated financial statements contained in the Annual Report on Form 10-K filed on March 6, 2018 with the Securities Exchange Commission, or the SEC. There have been no significant or material changes in our critical accounting policies during the six months ended June 30, 2018, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Use of Estimates” in the Annual Report on Form 10-K.

Results of operations

Comparison of the Three and Six Months Ended June 30, 2018 and 2017

The following table summarizes our net loss during the periods indicated (in thousands, except percentages):

 

 

Three Months Ended

 

 

Increase/

 

 

Six Months Ended

 

 

Increase/

 

 

 

June 30,

 

 

(Decrease)

 

 

June 30,

 

 

(Decrease)

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

$

3,438

 

 

$

28,618

 

 

 

(25,180

)

 

 

-88

%

 

$

7,038

 

 

$

50,622

 

 

$

(43,584

)

 

 

-86

%

 

General and administrative

 

6,003

 

 

 

7,572

 

 

 

(1,569

)

 

 

-21

%

 

 

10,920

 

 

 

15,228

 

 

 

(4,308

)

 

 

-28

%

 

Loss from operations

 

(9,441

)

 

 

(36,190

)

 

 

(26,749

)

 

 

-74

%

 

 

(17,958

)

 

 

(65,850

)

 

 

(47,892

)

 

 

-73

%

 

Interest income

 

249

 

 

 

242

 

 

 

7

 

 

 

3

%

 

 

442

 

 

 

441

 

 

 

1

 

 

 

-1

%

 

Other income (expense), net

 

(656

)

 

 

(521

)

 

 

135

 

 

 

26

%

 

 

(1,313

)

 

 

(782

)

 

 

531

 

 

 

68

%

 

Net loss before provision for income taxes

 

(9,848

)

 

 

(36,469

)

 

 

(26,621

)

 

 

-73

%

 

 

(18,829

)

 

 

(66,191

)

 

 

(47,362

)

 

 

-72

%

 

Provision for income taxes

 

 

 

 

128

 

 

 

(128

)

 

NM

 

 

 

 

 

 

128

 

 

 

(128

)

 

NM

 

 

Net loss

$

(9,848

)

 

$

(36,597

)

 

$

(26,749

)

 

 

-73

%

 

$

(18,829

)

 

$

(66,319

)

 

$

(47,490

)

 

 

-72

%

 

 

Research and development expense

Research and development expense decreased $25.2 million, or 88%, to $3.4 million for the three months ended June 30, 2018 from $28.6 million for the same period in 2017.  For the six months ended June 30, 2018 research and development expense decreased $43.6 million or 86 %, to $7.0 million from $50.6 million for the same period in 2017.  The decrease in research and development expense was primarily due to the termination of clinical and manufacturing related contracts that supported the company’s Phase 3 clinical trials for somavaratan following the Phase 3 VELOCITY trial failing to meet its primary endpoint, as well as a substantial reduction in our workforce.

General and administrative expense

General and administrative expense decreased $1.6 million, or 21%, to $6.0 million for the three months ended June 30, 2018 from $7.6 million for the same period in 2017.   For the six months ended June 30, 2018 general and administrative expense decreased $4.3 million or 28 %, to $10.9 million from $15.2 million for the same period in 2017.The decrease was attributable to the reduction in workforce and our continued efforts to reduce consulting and professional services expenses following the Phase 3 VELOCITY trial failing to meet its primary endpoint, partially offset by an increase in professional services attributable to our proposed merger transaction with Aravive Biologics.  

Other income (expense), net

Other income (expense), increased $0.1 million to $0.6 million of other expense for the three months ended June 30, 2018 from other expense of $0.5 million for the same period in 2017.  This increase was primarily due to interest charges related to our build-to-suite lease obligation.

Liquidity and capital resources

Since our inception and through June 30, 2018, we have financed our operations through private placements of our equity securities, debt financing and our initial public offering in 2014 and, more recently, additional common stock offerings in January 2015 and October and November of 2016, as well as a $40.0 million upfront payment received from our strategic license agreement with Teijin. At June 30, 2018, we had cash and cash equivalents of $67.8 million, a majority of which is invested in money market funds at several highly rated financial institutions.

 

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While we assess and identify future opportunities to diversify our pipeline, we will need to obtain additional financing to build out our pipeline and fund operations for the foreseeable future and we will continue to seek funds through equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing, such as a strategic transaction. Although management has been successful in raising capital in the past, most recently $59.1 million in October and November 2016, there can be no assurance that we will be successful or that any needed financing will be available in the future at terms acceptable to us.  Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategies. We anticipate that we will need to raise substantial additional capital, the requirements of which will depend on many factors, including:

 

the rate of progress and cost of any future potential clinical studies;

 

the timing of, and costs involved in, seeking and obtaining approvals from the FDA and other regulatory authorities;

 

the cost of preparing to manufacture on a larger scale;

 

the costs of commercialization activities if any future product candidate is approved, including product sales, marketing, manufacturing and distribution;

 

the degree and rate of market acceptance of any products launched by us or future partners;

 

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

 

our ability to enter into additional collaboration, licensing, commercialization or other arrangements and the terms and timing of such arrangements; and

 

the emergence of competing technologies or other adverse market developments.

If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of potential development programs and clinical trials. We may also be required to sell or license to others technologies or clinical product candidates or programs that we would prefer to develop and commercialize ourselves.

Cash flows

The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below:

 

 

Six Months

 

 

June 30,

 

 

2018

 

 

2017

 

 

(In thousands)

 

Net cash (used in) provided by:

 

 

 

 

 

 

 

Operating activities

$

(15,296

)

 

$

(56,805

)

Investing activities

 

1,896

 

 

 

(1,009

)

Financing activities

 

35

 

 

 

2,399

 

Net increase (decrease) in cash and cash equivalents

$

(13,365

)

 

$

(55,415

)

 

Cash used in operating activities

Net cash used in operating activities was $15.3 million and $56.8 million in the six months ended June 30, 2018 and 2017, respectively. Cash used in operating activities in 2017 is primarily attributable to the use of funds in our operations related to the development of our product candidates. Cash used in operating activities in 2018 decreased compared to 2017 due to the termination of a number of supplier contracts, including commercial contracts with contract manufacturers as a result of the failure of the Phase 3 VELOCITY trial to meet its primary endpoint.

Cash used in investing activities

Net cash provided by and used in investing activities was $1.9 million and $1.0 million in the six months ended June 30, 2018 and 2017, respectively. Cash provided by investing activities in 2018, primarily relates to inducement payments received from the Landlord of our leased facility in Menlo Park, California, located at 1020 Marsh Road. Cash used in investing activities in 2017 is primarily due to a letter of credit associated with our facility at 1020 Marsh Road, for which we commenced this lease in March 2017.

 

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Cash provided by financing activities

Net cash provided by financing activities was $.03 million and $2.4 million in the six months ended June 30, 2018 and 2017, respectively. Cash provided by financing activities consisted of proceeds from issuance of common stock in connection with employee benefit plans.

As of June 30, 2018, we had cash and cash equivalents of approximately $67.8 million.  We believe that our existing cash and cash equivalents will be sufficient to sustain operations for at least the next 12 months from the issuance of these financial statements, based on our current business plan.

Contractual obligations and commitments

During the six months ended June 30, 2018, there were no material changes to our contractual obligations and commitments described under Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report on Form 10-K for the year ended December 31, 2017.     

  

Off-balance sheet arrangements

Since our inception, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

 

Item 3. Quantitative and qualitative disclosures about market risk

Interest Rate and Market Risk

The primary objective of our investment activities is to preserve our capital to fund our operations. We also seek to maximize income from our cash and cash equivalents without assuming significant risk. To achieve our objectives, we invest our cash and cash equivalents in money market funds. As of June 30, 2018, we had cash and cash equivalents of $67.8 million consisting of cash and investments in highly liquid U.S. money market funds. A portion of our investments may be subject to interest rate risk and could fall in value if market interest rates increase. However, because our investments are substantially all short-term in duration, we believe that our exposure to interest rate risk is not significant and a 1% movement in market interest rates would not have a significant impact on the total value of our portfolio. We actively monitor changes in interest rates.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

An evaluation as of June 30, 2018  was carried out under the supervision and with the participation of our management, including our Chief Executive Officer, who serves as our principal executive and financial officer, of the effectiveness of our “disclosure controls and procedures.”  Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the “Exchange Act,” defines “disclosure controls and procedures” as controls and other procedures of a company that are designed to ensure that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the company’s management, including its Chief Executive Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, our Chief Executive Officer, who serves as our principal executive officer and our principal financial officer, has concluded that our disclosure controls and procedures were effective at June 30, 2018 .

 

Changes in Internal Control over Financial Reporting

Our management, including our Chief Executive Officer, who serves as our principal executive and financial officer, has evaluated any changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2018 , and has concluded that there was no change during such quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on the Effectiveness of Controls

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met.  As set forth above, our Chief Executive Officer, who serves as our principal executive and financial officer, has concluded, based on his evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were effective to provide reasonable assurance that the objectives of our disclosure control system were met.

 

 

 

 

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PART II: OTHER INFORMATION

 

Item 1. Legal proceedings

We are not currently subject to any material legal proceedings.

Item 1A. Risk Factors.

Investing in our common stock involves a high degree of risk. You should consider carefully the following risks, together with all the other information in this Form 10-Q, including our condensed consolidated financial statements and notes thereto. If any of the following risks actually materializes, our operating results, financial condition and liquidity could be materially adversely affected. As a result, the trading price of our common stock could decline and you could lose part or all of your investment.

 

Risks Related to the Merger between the Company and Aravie, Inc.

 

If the merger is not completed, we may be unsuccessful in completing an alternative transaction on

terms that are as favorable as the terms of the proposed transaction with Aravive, or at all, and we may

be unable to reestablish an operating business. Our board of directors may decide to pursue a

dissolution and liquidation of the company. In such an event, the amount of cash available for distribution to

our stockholders will depend heavily on the timing of such liquidation as well as the amount of cash

that will need to be reserved for commitments and contingent liabilities.

 

To date, our current assets consist primarily of cash, cash equivalents and marketable securities, our listing on the Nasdaq Global Select Market and the Merger Agreement with Aravive. While we have entered into the Merger Agreement with Aravive, the closing of the merger with Aravive may be delayed or may not occur at all and there can be no assurance that the merger will deliver the anticipated benefits we expect or enhance shareholder value. If we are unable to consummate the merger with Aravive, our board of directors may elect to pursue an alternative strategy, one of which may be a strategic transaction similar to the proposed merger with Aravive. Attempting to complete an alternative transaction will be costly and time consuming, and we can make no assurances that such an alternative transaction would occur at all. Alternatively, our board of directors may elect to continue operations or decide to pursue a dissolution and liquidation of the company. In such an event, the amount of cash available for distribution to our stockholders will depend heavily on the timing of such decision, as with the passage of time the amount of cash available for distribution will be reduced as we continue to fund our operations. In addition, if our board of directors were to approve and recommend, and our stockholders were to approve, a dissolution and liquidation of the company, we would be required under Delaware corporate law to pay our outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to our stockholders. Our commitments and contingent liabilities may include severance obligations and fees and expenses related to the merger. As a result of this requirement, a portion of our assets may need to be reserved pending the resolution of such obligations. In addition, we may be subject to litigation or other claims related to a dissolution and liquidation. If a dissolution and liquidation were pursued, our board of directors, in consultation with its advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, holders of our common stock could lose all or a significant portion of their investment in the event of a liquidation, dissolution or winding up of the company.

 

Risks related to the development and commercialization of our product candidate

 

We are in the process of evaluating strategic alternatives and assessing our clinical programs following the failure of the Phase 3 clinical trial for our only product candidate, somavaratan, to meet its primary endpoint.

 

We do not have any products that have gained regulatory approval. Our only clinical-stage product candidate is somavaratan, a novel, long-acting recombinant human growth hormone. In September 2017, we announced that the Phase 3 clinical trial of somavaratan failed to meet its primary endpoint. As a result, management is in the process of evaluating the Company’s future direction, including whether we will continue to seek the development, regulatory approval and commercialization of somavaratan in the future, or pursue an alternative course of action, including the possible consummation of a strategic transaction. There is no guarantee that we will be successful in any pursuit of strategic alternatives, or that any alternative course of action will lead to the success of our business. If we do continue our efforts to develop and commercialize somavaratan in the future, we may not be successful.

 

We cannot commercialize somavaratan or any future product candidates in the United States without first obtaining regulatory approval for the product from the U.S. Food and Drug Administration, or FDA, nor can we commercialize somavaratan or any future product candidates outside of the United States without obtaining regulatory approval from comparable foreign regulatory authorities. The FDA review process typically takes years to complete and approval is never guaranteed. Before obtaining regulatory

 

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approvals for the commercial sale of somavaratan for a target pediatric GHD indication or our future product candidates, we generally must demonstrate with substantial evidence gathered in preclinical and well-controlled clinical studies that the product candidate is safe and effective for use for that target indication and that the manufacturing facilities, processes and controls are adequate. Because our Phase 3 clinical trial failed to meet its primary endpoint, we concluded all active trials of somavaratan by the end of 2017.  We would need to conduct additional studies and trials in the future in order to continue to pursue regulatory approval of somavaratan in the United States. Moreover, obtaining regulatory approval for marketing of somavaratan in one country does not ensure we will be able to obtain regulatory approval in other countries, while a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in other countries.  

Even if somavaratan or any of our future product candidates were to successfully obtain approval from the FDA and comparable foreign regulatory authorities, any approval might contain significant limitations related to use restrictions for specified age groups, warnings, precautions or contraindications, or may be subject to burdensome post-approval study or risk management requirements. If we do not obtain regulatory approval for somavaratan in one or more jurisdictions, or any approval contains significant limitations, we may not be able to obtain sufficient funding or generate sufficient revenue to continue to fund our operations. Also, any regulatory approval of somavaratan or our future product candidates, once obtained, may be withdrawn. Furthermore, even if we obtain regulatory approval for somavaratan, the commercial success of somavaratan will depend on a number of factors, including the following:

 

development of our own commercial organization or establishment of a commercial collaboration with a commercial infrastructure;

 

establishment of commercially viable pricing and obtaining approval for adequate reimbursement from third-party and government payors;

 

the ability of our third-party manufacturers to manufacture quantities of somavaratan using commercially viable processes at a scale sufficient to meet anticipated demand and reduce our cost of manufacturing, and that are compliant with current Good Manufacturing Practices, or cGMP, regulations;

 

our success in educating physicians and patients about the benefits, administration and use of somavaratan;

 

the availability, perceived advantages, relative cost, relative safety and relative efficacy of alternative and competing treatments;

 

the effectiveness of our own or our potential strategic collaborators’ marketing, sales and distribution strategy and operations;

 

acceptance of somavaratan as safe and effective by patients, caregivers and the medical community;

 

a continued acceptable safety profile of somavaratan following approval; and

 

continued compliance with our obligations in our intellectual property licenses with third parties upon favorable terms.

Many of these factors are beyond our control. If we or our commercialization collaborators are unable to successfully commercialize somavaratan, we may not be able to earn sufficient revenues to continue our business.

Somavaratan is a new molecular entity, and although it contains the same rhGH composition used in currently approved rhGH products, it has been genetically modified to extend its half-life, creating uncertainty about its long-term safety profile.

Somavaratan utilizes the same rhGH amino acid sequence as in currently approved rhGH products, but combined with sequences of hydrophilic amino acids genetically fused to the rhGH protein to extend its half-life. This proprietary in-licensed half-life extension technology, XTEN, has been used in somavaratan to potentially enable less frequent administration of rhGH. We have limited clinical data on product candidates utilizing XTEN technology indicating whether they are safe or effective for long-term treatment in humans. The long term safety and efficacy of the XTEN technology and the extended half-life and exposure profile of somavaratan compared to currently approved rhGH products is unknown, and it is possible it may increase the risk of unforeseen reactions to somavaratan following extended treatment relative to other currently approved rhGH products. Continuously elevated levels of rhGH and insulin-like growth factor-I, or IGF-I, together can lead to acromegaly, a rare disease that occurs when the body produces excess growth hormone, leading to an increase in the size of bones and organs and which can result in disfigurement and other complications, with an associated increased cancer risk. It is unknown whether long-term repeated administration of somavaratan could result in an increased immune response to rhGH, leading to a loss of efficacy or potential safety issues. If clinical trials of somavaratan were conducted and extended treatment with somavaratan results in any concerns about its safety or efficacy, we may be unable to successfully develop or commercialize somavaratan.

We may not be able to continue the development of, obtain regulatory approval for, or successfully commercialize somavaratan.

We have expended considerable resources and efforts on the development of somavaratan. The failure of our Phase 3 clinical trial to meet its primary endpoint has caused a substantial delay in our ability to commercialize somavaratan. If we continue to develop

 

22

 


 

and commercialize somavaratan, we will need to commence and complete additional clinical trials that satisfy the specified primary endpoint criteria, manage clinical and manufacturing activities, obtain necessary regulatory approvals from the FDA and comparable regulatory authorities elsewhere, and successfully market and commercialize somavaratan. The increased time required to conduct additional clinical trials and obtain regulatory approval may make it more difficult to commercialize somavaratan successfully. If we continue with the development of somavaratan, there is no guarantee that we will be able to successfully complete these steps, and if we do not continue with the development of somavaratan, then we may not be able to continue our business in its current form and will be required to pursue alternative business strategies.

As an organization, we have never completed a successful Phase 3 clinical trial or submitted a BLA before, and may be unsuccessful in doing so for somavaratan.

The conduct of any future Phase 3 clinical trials and other supportive trials of somavaratan and the submission of a successful Biologics License Application, or BLA, is a complicated process. As an organization, we have never completed a successful Phase 3 clinical trial, have limited experience in preparing, submitting and prosecuting regulatory filings, and have not submitted a BLA before. Consequently, we may be unable to successfully and efficiently execute and complete necessary future clinical trials in a way that leads to BLA submission and approval of somavaratan. Failure to complete, or further delays in our clinical trials would prevent us from or delay us in commercializing somavaratan.

Somavaratan has never been manufactured for commercial use, and there are risks associated with scaling up manufacturing and validating the process for production of commercial material. In addition, to successfully commercialize somavaratan, we would also need to design, manufacture, and gain regulatory approval of a delivery device to safely, effectively, and conveniently administer somavaratan in relevant patient types.

Somavaratan has been successfully manufactured for use in clinical studies but there are risks associated with scaling up manufacturing to commercial scale and validating the commercial production process including, among others, cost overruns, potential problems with process scale-up, process reproducibility, stability issues, lot consistency and timely availability of raw materials. Even if we could otherwise obtain regulatory approval for somavaratan, there is no assurance that our manufacturer will be able to manufacture the approved product to specifications acceptable to the FDA or other regulatory authorities, to produce it in sufficient quantities to meet the requirements for the potential launch of the product or to meet potential future demand.

If our manufacturer is unable to produce sufficient quantities of the approved product for commercialization under our supply agreement, our commercialization efforts would be impaired, which would have an adverse effect on our business, financial condition, results of operations and growth prospects.

Somavaratan is a biological molecule, or biologic, rather than a small molecule chemical compound, and as a result we face special uncertainties and risks associated with scaling up manufacturing. The manufacture of biologics involves complex processes, including developing cells or cell systems to produce the biologic, growing large quantities of such cells and harvesting and purifying the biologic produced by them. As a result, the cost to manufacture biologics is generally far higher than traditional small molecule chemical compounds, and the manufacturing process is less reliable and is difficult to reproduce. Somavaratan was previously produced for us by a third-party contract manufacturer using a small-scale process that was too expensive and inefficient to support the dosages necessary for our clinical trials. In October 2012, we entered into an agreement with Boehringer Ingelheim to develop a more efficient, larger-scale manufacturing process. However, this agreement was terminated in December 2017, following the announcement that our Phase 3 clinical trial failed to meet its primary endpoint.  If we receive regulatory approval for somavaratan in the future, in order to successfully commercialize somavaratan, we will need to manufacture quantities of somavaratan using commercially viable processes at a scale sufficient to meet anticipated demand. Even if we are able to do so, if the therapeutically effective dosage of somavaratan is higher than we anticipate or the obtainable sales price is lower than we anticipate, we may not be able to successfully commercialize somavaratan.

To optimally commercialize somavaratan, we intended to design, manufacture, and gain regulatory approval of two distinct container closure systems, including the vial configuration used in the pivotal clinical trial and a delivery device to safely, effectively and conveniently administer the drug. In May 2016, we entered into a Manufacture and Supply Agreement with Owen Mumford Limited, under which they will manufacture a proprietary disposable autoinjector device for the administration of somavaratan and assemble the final combination product. Manufacturing of a precision medical device like the autoinjector is complex and introducing a novel device requires designing, production of prototypes, extensive testing and modification, and production of custom tools and molds.  We terminated our agreement with Owen Mumford following our September 2017 announcement that our Phase 3 clinical trial failed to meet its primary endpoint. If we are unable to develop and validate a suitable manufacturing process for the device, our commercialization efforts could be impaired, which could have an adverse effect on our business, financial condition, results of operations and growth prospects.

 

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Long-acting rhGH products and product candidates no longer in development or marketed have failed to generate commercial success or obtain regulatory approval, and we cannot predict whether somavaratan will achieve success where others have failed.

Many attempts have been made to develop sustained release formulations of rhGH. For example, Nutropin Depot, a long-acting form of rhGH developed by Genentech that uses Alkermes’ ProLease® injectable extended-release drug delivery system, was approved by the FDA in 1999 and withdrawn from the market in 2004 by Genentech and Alkermes due to the significant resources required to continue manufacturing and commercializing the product. Additional attempts at sustained release formulations have not yet led to globally marketed products, due to manufacturing, regulatory, efficacy and/or safety reasons. Our Phase 3 clinical trial for somavaratan failed to meet its primary endpoint, and we do not know whether we will continue to pursue the regulatory approval and commercialization of somavaratan. Even if we obtain all requisite regulatory approvals, no assurance can be given that somavaratan will achieve commercial success or market adoption.

Delays in the enrollment of patients if further clinical studies were conducted could increase our development costs and delay completion of the study.

We may not be able to initiate or resume clinical studies for somavaratan or any future product candidates if we are unable to locate and enroll a sufficient number of eligible patients to participate in these studies as required by the FDA or other regulatory authorities. The failure of our Phase 3 clinical trial to meet its primary endpoint may make it more difficult to enroll sufficient numbers of patients if further clinical trials were conducted. Even if we are able to enroll a sufficient number of patients in our clinical studies, if the pace of enrollment is slower than we expect, the development costs for our product candidates may increase and the completion of our studies may be delayed or our studies could become too expensive to complete.

If we continue to seek regulatory approval and commercialization of somavaratan, we will need to conduct additional trials and enroll patients at new clinical sites. Enrollment in our clinical trials is dependent on obtaining clearance from regulatory authorities in each country in which they will be conducted. To date, authorities in several countries have declined clinical trial applications or requested additional data or information prior to authorizing such applications in those countries. If we are unable to provide sufficient responses to the regulatory authorities during the conduct of the studies, they may be delayed.

There may be concurrent competing GHD clinical trials that will inhibit or slow our study enrollment if we conduct further trials. If we experience delays in enrollment, our ability to complete any clinical trial could be impaired and the costs of conducting the trial could increase, either of which could have a material adverse effect on our business.

If future clinical studies of somavaratan and any future product candidates fail to demonstrate safety and efficacy to the satisfaction of the FDA or similar regulatory authorities outside the United States or do not otherwise produce results that are acceptable to such agencies, we may incur additional costs, experience delays in completing or ultimately fail in completing the development and commercialization of somavaratan or our future product candidates.

Before obtaining regulatory approval for the sale of any product candidate, we must conduct extensive clinical studies to demonstrate the safety and efficacy of our product candidates in humans. Clinical studies are expensive, difficult to design and implement, can take many years to complete and are uncertain as to outcome. A failure of one or more of our clinical studies could occur at any stage of testing. Our Phase 3 clinical trial of somavaratan failed to meet its primary endpoint, and we would need to conduct additional clinical trials in order to continue our efforts to obtain approval of somavaratan.

We may experience numerous unforeseen events during, or as a result of, clinical studies that could delay or prevent our ability to receive regulatory approval or commercialize somavaratan or any future product candidates, including the following:

 

clinical studies may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical studies or abandon product development programs;

 

the number of patients required for clinical studies may be larger than we anticipate, enrollment in these clinical studies may be insufficient or slower than we anticipate or patients may drop out of these clinical studies at a higher rate than we anticipate;

 

the cost of clinical studies or the manufacturing of our product candidates may be greater than we anticipate;

 

our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;

 

we might have to suspend or terminate clinical studies of our product candidates for various reasons, including a finding that our product candidates have unanticipated serious side effects or other unexpected characteristics or that the patients are being exposed to unacceptable health risks;

 

regulators may not approve our proposed clinical development plans;

 

24

 


 

 

regulators or institutional review boards may not authorize us or our investigators to commence a clinical study or conduct a clinical study at a prospective study site;

 

regulators or institutional review boards may require that we or our investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements; and

 

the supply or quality of our product candidates or other materials necessary to conduct clinical studies of our product candidates may be insufficient or inadequate.

If we are unable to successfully complete clinical studies or other testing, if the results of such studies or tests are not positive or are only modestly positive or if there are safety concerns, we may:

 

be delayed in obtaining marketing approval for our product candidates;

 

not obtain marketing approval at all;

 

obtain approval for indications that are not as broad as intended;

 

have the product removed from the market after obtaining marketing approval;

 

be subject to additional post-marketing testing requirements; or

 

be subject to restrictions on how the product is distributed or used.

Our product development costs will also increase if we decide to conduct additional clinical studies and experience delays in testing or approvals. We do not know whether any clinical studies will begin as planned, will need to be restructured or will be completed on schedule, or at all. For example, in February 2014, the FDA notified us that it would require additional information before allowing us to use a newly manufactured lot of somavaratan produced by our new manufacturer intended for our  VISTA study, and the FDA subsequently issued a partial clinical hold related to the use of any material produced by this new manufacturer.  The FDA ultimately lifted the partial clinical hold in June 2014.  And then in early 2015, following initiation of the VELOCITY trial, the FDA requested additional bioanalytical data and placed our Phase 3 clinical trial on partial clinical hold. We provided the requested information to the agency and this second partial clinical hold was lifted in June 2015.  There can be no assurance, however, that we will not be subject to similar FDA actions in any future clinical trials that we may conduct, or that such actions will not cause delays in our clinical studies.

Significant clinical study delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do, which would impair our ability to commercialize our product candidates and harm our business and results of operations.

Somavaratan or our future product candidates may cause serious adverse side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label or result in significant negative consequences following any marketing approval.

Our product candidate, somavaratan, has not completed clinical development, and failed to meet its primary endpoint in our Phase 3 trial. If we continue with clinical development of somavaratan, the risk of failure of clinical development is high. It is impossible to predict when or if somavaratan or any future product candidates will prove safe enough to receive regulatory approval. Undesirable side effects caused by somavaratan or any future product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or foreign regulatory authorities.

Safety data have been reported from seven clinical studies of somavaratan in GHD patients. In these studies, adverse events (AEs) associated with somavaratan administration have generally been mild or moderate and transient, have been observed most frequently at or shortly following administration of the first dose, and have been consistent with those typically reported and observed in children starting daily rhGH. Suspected serious adverse drug reactions have been rare. In the Phase 2 extension study in Japan, one potentially related serious AE (seizure) was reported in a child with both a medical history and clinical findings consistent with a preexisting condition. Reference safety information for somavaratan has been established based on frequency of reported events and clinical judgment. Events considered expected for the purposes of regulatory reporting include injection site pain and headache in adults and children with GHD. However, we cannot provide assurance that serious adverse events or clinically meaningful adverse events will not occur at a higher rate in current or future clinical trials or that side effects in general will not prompt the discontinued development of somavaratan or any future product candidates.

In addition, the administration of therapeutic proteins including recombinant hGH occasionally causes an immune response, resulting in the creation of antibodies against the protein. The antibodies may be transient or persistent and can have no effect or can neutralize the activity of the protein or accelerate its clearance. Antibodies, including the rare occurrence of neutralizing antibodies, have been observed in the somavaratan clinical trials and while they had no effect on occurrence of adverse events, their overall

 

25

 


 

clinical relevance must be assessed in our Phase 3 clinical trials. Due to potential safety, efficacy, immunogenicity, or toxicity issues that we may experience in our clinical trials in the future, we may not receive approval to market somavaratan or any future product candidates, which could prevent us from ever generating revenue or achieving profitability. Results of our trials could reveal an unacceptably high severity or prevalence of side effects or antibodies. In such an event, our trials could be suspended or terminated and the FDA or foreign regulatory authorities could order us to cease further development or deny approval of our product candidates for any or all targeted indications. Any drug-related side effects could affect patient recruitment or the ability of enrolled subjects to complete the trial or result in potential product liability claims. Any of these occurrences may have a material adverse effect on our business, results of operations, financial condition, cash flows and future prospects.

Additionally, if somavaratan or any of our future product candidates receives marketing approval, and we or others later identify undesirable side effects caused by such product, a number of potentially significant negative consequences could result, including:

 

we may be forced to suspend the marketing of such product;

 

regulatory authorities may withdraw their approvals of such product;

 

regulatory authorities may require additional warnings on the label that could diminish the usage or otherwise limit the commercial success of such products;

 

the FDA or other regulatory bodies may issue safety alerts, Dear Healthcare Provider letters, press releases or other communications containing warnings about such product;

 

the FDA may require the establishment or modification of Risk Evaluation Mitigation Strategies, or REMS, or a foreign regulatory authority may require the establishment or modification of a similar strategy that may, for instance, restrict distribution of our products and impose burdensome implementation requirements on us;

 

we may be required to change the way the product is administered or conduct additional clinical trials;

 

we could be sued and held liable for harm caused to subjects or patients;

 

we may be subject to litigation or product liability claims; and

 

our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved.

Even if further clinical trials were conducted that demonstrate acceptable safety and efficacy of somavaratan for growth in pediatric GHD patients based on a twice-monthly dosing regimen, the FDA or similar regulatory authorities outside the United States may not approve somavaratan for marketing or may approve it with restrictions on the label, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

In September 2017, we announced that our Phase 3 clinical trial failed to meet its primary endpoint, and we do not know whether we will conduct future clinical trials to continue our efforts to obtain approval for somavaratan. If we were to conduct future clinical trials, we would anticipate seeking regulatory approval for somavaratan in the United States, Europe, Japan and Canada for treatment of pediatric GHD patients. It is possible that the FDA, the EMA, the PMDA or Health Canada may not consider the results of our clinical trials to be sufficient for approval of somavaratan for this indication. In general, the FDA suggests that sponsors complete two adequate and well-controlled clinical studies to demonstrate effectiveness because a conclusion based on two persuasive studies will be more compelling than a conclusion based on a single study. Even if we achieve favorable results in a future Phase 3 clinical trial, and considering that somavaratan is a new molecular entity, the FDA may nonetheless require that we conduct additional clinical studies, possibly using a different clinical study design.

Moreover, even if the FDA or other regulatory authorities approve somavaratan for treatment of pediatric GHD, the approval may include additional restrictions on the label that could make somavaratan less attractive to physicians and patients compared to other products that may be approved for broader indications, which could limit potential sales of somavaratan.

If we fail to obtain FDA or other regulatory approval of somavaratan or if the approval is narrower than what we seek, it could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Even if somavaratan or any future product candidates receive regulatory approval, they may fail to achieve the degree of market acceptance by physicians, patients, caregivers, healthcare payors and others in the medical community necessary for commercial success.

If somavaratan or any future product candidates receive regulatory approval, they may nonetheless fail to gain sufficient market acceptance by physicians, hospital administrators, patients, healthcare payors and others in the medical community. The degree of

 

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market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, including the following:

 

the prevalence and severity of any side effects;

 

their efficacy and potential advantages compared to alternative treatments;

 

the price we charge for our product candidates;

 

the willingness of physicians to change their current treatment practices;

 

convenience and ease of administration compared to alternative treatments;

 

the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;

 

the strength of marketing and distribution support; and

 

the availability of third-party coverage or reimbursement.

For example, a number of companies offer therapies for treatment of pediatric GHD patients based on a daily regimen, and physicians, patients or their families may not be willing to change their current treatment practices in favor of somavaratan even if it is able to offer less frequent dosing. If somavaratan or any future product candidates, if approved, do not achieve an adequate level of acceptance, we may not generate significant product revenue and we may not become profitable on a sustained basis or at all.  

Our failure to successfully identify, acquire, develop and commercialize additional products or product candidates could impair our ability to grow.

In addition to any possible future efforts to commercialize somavaratan, a key element of our long-term growth strategy is to acquire, develop and/or market additional products and product candidates. We currently have one other potential product candidate that is in the preclinical study stage, but its development is at a preliminary stage and there can be no certainty that we will choose to advance it. Research programs to identify product candidates require substantial technical, financial and human resources, whether or not any product candidates are ultimately identified. Because our internal research capabilities are limited, we may be dependent upon pharmaceutical and biotechnology companies, academic scientists and other researchers to sell or license products or technology to us. The success of this strategy depends partly upon our ability to identify, select and acquire promising pharmaceutical product candidates and products. The process of proposing, negotiating and implementing a license or acquisition of a product candidate or approved product is lengthy and complex. Other companies, including some with substantially greater financial, marketing and sales resources, may compete with us for the license or acquisition of product candidates and approved products. We have limited resources to identify and execute the acquisition or in-licensing of third-party products, businesses and technologies and integrate them into our current infrastructure.

Moreover, we may devote resources to potential strategic transactions, acquisitions or in-licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts. Any product candidate that we acquire may require additional development efforts prior to commercial sale, including extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to risks of failure typical of pharmaceutical product development, including the possibility that a product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities. In addition, we cannot provide assurance that any products that we develop or approved products that we acquire will be manufactured profitably or achieve market acceptance.

We currently have no sales or distribution personnel and only limited marketing capabilities. If we are unable to develop a sales and marketing and distribution capability on our own or through collaborations or other marketing partners, we will not be successful in commercializing somavaratan or other future products.

We do not have a significant sales or marketing infrastructure and have no experience in the sale, marketing or distribution of therapeutic products. To achieve commercial success for any approved product, we must either develop a sales and marketing organization or outsource these functions to third parties.

There are risks involved with both establishing our own sales and marketing capabilities and entering into arrangements with third parties to perform these services. For example, recruiting and training a sales force is expensive and time-consuming and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.

We also may not be successful entering into arrangements with third parties to sell and market our product candidates or may be unable to do so on terms that are favorable to us. We likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively and could damage our reputation. If we do not

 

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establish sales and marketing capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our product candidates.

We face substantial competition, which may result in others discovering, developing or commercializing products before or more successfully than we do.

The development and commercialization of new therapeutic products is highly competitive. We face competition with respect to somavaratan, and will face competition with respect to any product candidates that we may seek to develop or commercialize in the future, from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. There are several large pharmaceutical and biotechnology companies that currently market and sell rhGH therapies to our target patient group. These companies typically have a greater ability to reduce prices for their competing drugs in an effort to gain or retain market share and undermine the value proposition that we might otherwise be able to offer to payors. Potential competitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization. Many of these competitors are attempting to develop therapeutics for our target indications.

If we continue with the development of somavaratan, we will focus on developing somavaratan for treatment of pediatric and adult GHD patients based on a twice-monthly dosing regimen. The current standard of care for growth therapies for patients in the United States and around the world is a daily subcutaneous injection of rhGH. There are a variety of currently marketed daily rhGH therapies administered by daily subcutaneous injection and used for the treatment of GHD, principally Norditropin® (Novo Nordisk), Humatrope® (Eli Lilly), Nutropin-AQ® (Roche/Genentech), Genotropin® (Pfizer), Saizen® (Merck Serono), ZomactonTM (Ferring Pharmaceuticals), Omnitrope® (Sandoz GmbH) and Valtropin® (LG Life Science). These rhGH drugs, with the exception of Valtropin®, are well-established therapies and are widely accepted by physicians, patients, caregivers, third-party payors and pharmacy benefit managers, or PBMs, as the standard of care for the treatment of GHD. Physicians, patients, third-party payors and PBMs may not accept the addition of somavaratan to their current treatment regimens for a variety of potential reasons, including concerns about incurring potential additional costs related to somavaratan, the perception that the use of somavaratan will be of limited additional benefit to patients, or limited long-term safety data compared to currently available rhGH treatments.

In addition to the currently approved and marketed daily rhGH therapies, there are a variety of experimental therapies that are in various stages of clinical development by companies both already participating in the rhGH market as well as potential new entrants, principally Aileron Therapeutics, Althea, Ambrx, Ascendis, Bioton S.A., Critical Pharmaceuticals, Dong-A, GeneScience, Genexine, Hanmi, LG Life Science, OPKO Health, Inc. (in collaboration with Pfizer, Inc.) and all of the existing global and regional rhGH franchises.

Many of our competitors, including a number of large pharmaceutical companies that compete directly with us, have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical, biotechnology and diagnostic industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical study sites and patient registration for clinical studies, as well as in acquiring technologies complementary to, or necessary for, our programs.

We may form strategic alliances in the future, and we may not realize the benefits of such alliances.

We have and may continue to form strategic alliances, create joint ventures or collaborations or enter into licensing arrangements with third parties that we believe will complement or augment our existing business. These relationships or those like them may require us to incur non-recurring and other charges, increase our near- and long-term expenditures, issue securities that dilute our existing stockholders or disrupt our management and business. In addition, we face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming and complex. Moreover, we may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for somavaratan or any future product candidates and programs because our research and development pipeline may be insufficient, our product candidates and programs may be deemed to be at too early of a stage of development for collaborative effort and third parties may not view our product candidates and programs as having the requisite potential to demonstrate safety and efficacy. If we license products or businesses, we may not be able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations and company culture. We cannot be certain that, following a strategic transaction or license, we will achieve the revenues or specific net income that justifies such transaction. Any delays in entering into new strategic partnership agreements related to our product candidates could also delay the development and commercialization of our product candidates and reduce their competitiveness even if they reach the market.

 

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If we are able to commercialize somavaratan or any future product candidates, the products may become subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives, thereby harming our business.

The regulations that govern marketing approvals, pricing and reimbursement for new therapeutic products vary widely from country to country. Some countries require approval of the sale price of a product before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain regulatory approval for a product in a particular country, but then be subject to price regulations that delay our commercial launch of the product and negatively impact the revenue we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability to recoup our investment in one or more product candidates, even if our product candidates obtain regulatory approval.

Our ability to commercialize somavaratan or any future products successfully also will depend in part on the extent to which reimbursement for these products and related treatments becomes available from government health administration authorities, private health insurers and other organizations. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and these third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are requiring that companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. We cannot be sure that reimbursement will be available for any product that we commercialize and, if reimbursement is available, what the level of reimbursement will be. Reimbursement may impact the demand for, or the price of, any product for which we obtain marketing approval. Obtaining reimbursement for our products may be particularly difficult because of the higher prices often associated with products administered under the supervision of a physician. If reimbursement is not available or is available only to limited levels, we may not be able to successfully commercialize any product candidate that we successfully develop.

There may be significant delays in obtaining reimbursement for approved products, and coverage may be more limited than the purposes for which the product is approved by the FDA or regulatory authorities in other countries. Moreover, eligibility for reimbursement does not imply that any product will be paid for in all cases or at a rate that covers our costs, including research, development, manufacturing, sales and distribution. Interim payments for new products, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Payment rates may vary according to the use of the product and the clinical setting in which it is used, may be based on payments allowed for lower cost products that are already reimbursed and may be incorporated into existing payments for other services. Net prices for products may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of products from countries where they may be sold at lower prices than in the United States. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. Our inability to promptly obtain coverage and profitable payment rates from both government funded and private payors for new products that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition. In some foreign countries, including major markets in the European Union and Japan, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take nine to twelve months or longer after the receipt of regulatory marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product to other available therapies. Our business could be materially harmed if reimbursement of our approved products, if any, is unavailable or limited in scope or amount or if pricing is set at unsatisfactory levels.

Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop.

We face an inherent risk of product liability exposure related to the testing of somavaratan and any future product candidates in human clinical studies and will face an even greater risk if we commercially sell any products that we may develop. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

decreased demand for any product candidates or products that we may develop;

 

injury to our reputation and significant negative media attention;

 

withdrawal of patients from clinical studies or cancellation of studies;

 

significant costs to defend the related litigation;

 

substantial monetary awards to patients;

 

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loss of revenue; and

 

the inability to commercialize any products that we may develop.

We currently hold $10.0 million in product liability insurance coverage, which may not be adequate to cover all liabilities that we may incur. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.

Risks related to our financial condition and need for additional capital

We have a limited operating history and have incurred significant losses since our inception, and we anticipate that we will continue to incur substantial and increasing losses for the foreseeable future. We have only one product candidate and no commercial sales, which, together with our limited operating history, makes it difficult to evaluate our business and assess our future viability.

We are a clinical-stage biopharmaceutical company with a limited operating history. We do not have any products approved for sale, and to date we have focused principally on developing our only product candidate, somavaratan. The Phase 3 clinical trial of somavaratan failed to meet its primary endpoint. Evaluating our performance, viability or future success will be more difficult than if we had a longer operating history or approved products on the market. Although we have taken steps to reduce and control our costs following the failure of our Phase 3 clinical trial to meet its primary endpoint, we continue to incur research and development and general and administrative expenses related to our operations.  In addition, we are exploring a range of alternatives to enhance stockholder value, including a potential strategic transaction, which could impact our cash needs that cannot be determined at this time. Investment in biopharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval or become commercially viable. We have incurred significant operating losses in each year since our inception and expect to incur substantial and increasing losses for the foreseeable future. As of June 30, 2018, we had an accumulated deficit of $393.1 million.

To date, we have financed our operations primarily through private placements of our convertible preferred stock, the initial public offering of our common stock in March 2014, and public offerings of our common stock in January 2015, October and November of 2016. We have devoted substantially all of our efforts to research and development, including clinical studies, but have not completed development of any product candidate, and our Phase 3 clinical trial recently failed to meet its primary endpoint. We anticipate that our expenses will increase to the extent we:

 

continue the research and development of our only product candidate, somavaratan, and any future product candidates;

 

conduct additional clinical studies of somavaratan in the future;

 

seek to discover or in-license additional product candidates;

 

seek regulatory approvals for somavaratan and any future product candidates that successfully complete clinical studies;

 

establish a sales, marketing and distribution infrastructure and scale-up manufacturing capabilities to commercialize somavaratan or other future product candidates if they obtain regulatory approval, including process improvements in order to manufacture somavaratan at commercial scale; and

 

enhance operational, financial and information management systems and hire more personnel, including personnel to support development of somavaratan and any future product candidates and, if a product candidate is approved, our commercialization efforts.

To be profitable in the future, we must succeed in developing and eventually commercializing somavaratan as well as other products with significant market potential. This will require us to be successful in a range of activities, including advancing somavaratan and any future product candidates, completing clinical studies of these product candidates, obtaining regulatory approval for these product candidates and manufacturing, marketing and selling those products for which we may obtain regulatory approval.  We may not succeed in these activities and may never generate revenue that is sufficient to be profitable in the future. Even if we are profitable, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to achieve sustained profitability would depress the value of our company and could impair our ability to raise capital, expand our business, diversify our product candidates, market our product candidates, if approved, or continue our operations.

We currently have no source of product revenue and may never become profitable.

To date, we have not generated any revenues from commercial product sales, or otherwise. Even if we are able to successfully achieve regulatory approval for somavaratan or any future product candidates, we do not know when any of these products will generate revenue from product sales for us. Our ability to generate revenue from product sales and achieve profitability will depend upon our ability, alone or with current and any future collaborators, to successfully commercialize products, including somavaratan or

 

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any product candidates that we may develop, in-license or acquire in the future. Our ability to generate revenue from product sales from somavaratan or any future product candidates also depends on a number of additional factors, including our or any future collaborators’ ability to:

 

complete development activities, including any further safety studies and Phase 3, Phase 2/3, and Phase 2 clinical trials that may be conducted with somavaratan, successfully and on a timely basis;

 

demonstrate the safety and efficacy of somavaratan to the satisfaction of the FDA and obtain regulatory approval for somavaratan and future product candidates, if any, for which there is a commercial market;

 

complete and submit applications to, and obtain regulatory approval from, foreign regulatory authorities;

 

set a commercially viable price for our products;

 

establish and maintain supply and manufacturing relationships with reliable third parties, and ensure adequate and legally compliant manufacturing of bulk drug substances and drug products to maintain that supply;

 

develop a commercial organization capable of sales, marketing and distribution of any products for which we obtain marketing approval in markets where we intend to commercialize independently;

 

find suitable distribution partners to help us market, sell and distribute our approved products in other markets;

 

obtain coverage and adequate reimbursement from third-party payors, including government and private payors;

 

achieve market acceptance of our products, if any;

 

establish, maintain and protect our intellectual property rights and avoid third-party patent interference or patent infringement claims; and

 

attract, hire and retain qualified personnel.

In addition, because of the numerous risks and uncertainties associated with pharmaceutical product development, including that somavaratan or any future product candidates may not advance through development or achieve the endpoints of applicable clinical trials, we are unable to predict the timing or amount of increased expenses, or when or if we will be able to achieve or maintain profitability. In addition, our expenses could increase beyond expectations if we decide to or are required by the FDA or foreign regulatory authorities to perform additional studies in the future . Even if we are able to complete the development and regulatory process for somavaratan or any future product candidates, we anticipate incurring significant costs associated with commercializing these products.

Even if we are able to generate revenues from the sale of somavaratan or any future product candidates that may be approved, we may not become profitable and may need to obtain additional funding to continue operations. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or shut down our operations.

Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or our guidance.

Our quarterly and annual operating results may fluctuate significantly in the future, which makes it difficult for us to predict our future operating results. From time to time, we may enter into collaboration agreements with other companies that include development funding and significant upfront and milestone payments and/or royalties, which may become an important source of our revenue. Accordingly, our revenue may depend on development funding and the achievement of development and clinical milestones under any current and potential future collaboration and license agreements and sales of our products, if approved. These upfront and milestone payments may vary significantly from period to period and any such variance could cause a significant fluctuation in our operating results from one period to the next. In addition, we measure compensation cost for stock-based awards made to employees at the grant date of the award, based on the fair value of the award as determined by our board of directors, and recognize the cost as an expense over the employee’s requisite service period. As the variables that we use as a basis for valuing these awards change over time, our underlying stock price and stock price volatility, the magnitude of the expense that we must recognize may vary significantly. Furthermore, our operating results may fluctuate due to a variety of other factors, many of which are outside of our control and may be difficult to predict, including the following:

 

the timing and cost of, and level of investment in, research and development activities relating to somavaratan and any future product candidates, which will change from time to time;

 

our ability to enroll patients in clinical trials and the timing of enrollment;

 

the cost of manufacturing somavaratan and any future product candidates, which may vary depending on FDA guidelines and requirements, the quantity of production and the terms of our agreements with manufacturers;

 

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expenditures that we will or may incur to acquire or develop additional product candidates and technologies;

 

the timing and outcomes of clinical studies for somavaratan and any future product candidates or competing product candidates;

 

changes in the competitive landscape of our industry, including consolidation among our competitors or partners;

 

any delays in regulatory review or approval of somavaratan or any of our future product candidates;

 

the level of demand for somavaratan and any future product candidates, should they receive approval, which may fluctuate significantly and be difficult to predict;

 

the risk/benefit profile, cost and reimbursement policies with respect to our products candidates, if approved, and existing and potential future drugs that compete with our product candidates;

 

competition from existing and potential future drugs that compete with somavaratan or any of our future product candidates;

 

our ability to commercialize somavaratan or any future product candidate inside and outside of the United States, either independently or working with third parties;

 

our ability to establish and maintain collaborations, licensing or other arrangements;

 

our ability to adequately support future growth;

 

potential unforeseen business disruptions that increase our costs or expenses;

 

future accounting pronouncements or changes in our accounting policies; and

 

the changing and volatile global economic environment.

The cumulative effects of these factors could result in large fluctuations and unpredictability in our quarterly and annual operating results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Investors should not rely on our past results as an indication of our future performance. This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our common stock could decline substantially. Such a stock price decline could occur even when we have met any previously publicly stated revenue and/or earnings guidance we may provide.

We will need additional funds to support our operations, and such funding may not be available to us on acceptable terms, or at all, which would force us to delay, reduce or suspend our research and development programs and other operations or commercialization efforts. Raising additional capital may subject us to unfavorable terms, cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our product candidates and technologies.

The completion of the development and the potential commercialization of somavaratan and any future product candidates, should they receive approval, will require substantial funds. As of June 30, 2018, we had approximately $67.8 million in cash and cash equivalents, which includes $59.1 million in net proceeds we received from our public offering in October and November 2016. We believe that our existing cash and cash equivalents, will be sufficient to sustain operations for at least the next 12 months based on our existing business plan. Our future financing requirements will depend on many factors, some of which are beyond our control, including the following:

 

the rate of progress and cost of our future clinical studies;

 

the timing of, and costs involved in, seeking and obtaining approvals from the FDA and other regulatory authorities;

 

the cost of preparing to manufacture somavaratan on a larger scale, should we elect to do so;

 

the costs of commercialization activities if somavaratan or any future product candidate is approved, including product sales, marketing, manufacturing and distribution;

 

the degree and rate of market acceptance of any products launched by us or future partners;

 

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

 

our ability to enter into additional collaboration, licensing, commercialization or other arrangements and the terms and timing of such arrangements;

 

the emergence of competing technologies or other adverse market developments; and

 

the costs of attracting, hiring and retaining qualified personnel.

 

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We do not have any material committed external source of funds or other support for our development efforts, and the failure of our Phase 3 clinical trial to meet its primary endpoint may make it more difficult to raise funds in the future. Until we can generate a sufficient amount of product revenue to finance our cash requirements, which we may never do, we expect to finance future cash needs through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing and distribution arrangements. Additional financing may not be available to us when we need it or it may not be available on favorable terms. If we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish certain valuable rights to somavaratan or potential future product candidates, technologies, future revenue streams or research programs, or grant licenses on terms that may not be favorable to us. If we raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of, or suspend one or more of our clinical studies or research and development programs or our commercialization efforts.

Risks related to our reliance on third parties

We rely on third parties to conduct our clinical studies, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such studies.

We do not independently conduct clinical studies of our lead product candidate, somavaratan. We historically have relied on third parties, such as contract research organizations, or CROs, clinical data management organizations, medical institutions and clinical investigators, to perform this function. For example, we relied on ResearchPoint Global to oversee and manage our VISTA study and global Phase 3 pediatric trial of somavaratan, and we may rely on these or similar organizations in the future. Our reliance on these third parties for clinical development activities reduces our control over these activities but does not relieve us of our responsibilities. We remain responsible for ensuring that each of our clinical studies is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred to as good clinical practices, for conducting, recording and reporting the results of clinical studies to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of patients in clinical studies are protected. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical studies in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, regulatory approvals for our product candidates and will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates.

We also may rely on other third parties to store and distribute supplies for our clinical studies. Any performance failure on the part of our existing or future distributors could delay clinical development or regulatory approval of our product candidates or commercialization of our products, producing additional losses and depriving us of potential product revenue.

We rely on third-party contract manufacturing organizations to manufacture and supply our product candidates. If our manufacturers and suppliers fail to perform adequately or fulfill our needs, we may be required to incur significant costs and devote significant efforts to find a new supplier or manufacturer. We may also face delays in the development and commercialization of our product candidates.

We have limited experience in, and we do not own facilities for, clinical-scale manufacturing of our product candidates and we historically have relied on third-party contract manufacturing organizations to manufacture and supply drug product for our clinical studies of somavaratan and our autoinjector device. The manufacture of pharmaceutical and medical device products in compliance with the cGMP and Quality System (QS) regulations and guidance from various regulatory authorities requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, including difficulties with production costs and yields, quality control, including stability of the product candidate and quality assurance testing, shortages of qualified personnel, as well as compliance with strictly enforced cGMP/QS requirements, other federal and state regulatory requirements and foreign regulations. If our manufacturers were to encounter any of these difficulties or otherwise fail to comply with their obligations to us or under applicable regulations, our ability to provide study drugs in our clinical studies would be jeopardized. Any delay or interruption in the supply of clinical study materials could delay the completion of our clinical studies, increase the costs associated with maintaining our clinical study programs and, depending upon the period of delay, require us to commence new studies at significant additional expense or terminate the studies completely.

All manufacturers of our product candidates must comply with cGMP and QS requirements enforced by the FDA, EMA, PMDA and similar authorities through their facilities inspection program. These requirements include, among other things, quality control, quality assurance and the maintenance of records and documentation. Manufacturers of our product candidates may be unable to comply with these requirements and with other regulatory authority requirements. Regulatory agencies may also implement new

 

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standards at any time, or change their interpretation and enforcement of existing standards for manufacture, packaging or testing of products. We have little control over our manufacturers’ compliance with these regulations and standards. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall or withdrawal of product approval. If the safety of any product supplied is compromised due to our manufacturers’ failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize our products and we may be held liable for any injuries sustained as a result. Any of these factors could cause a delay of clinical studies, regulatory submissions, approvals or commercialization of our product candidates, entail higher costs or impair our reputation.

The number of third-party manufacturers with the necessary manufacturing and regulatory expertise and facilities is limited, and it could be expensive and take a significant amount of time to restart and arrange for alternative suppliers, which could have a material adverse effect on our business. New manufacturers of any product candidate would be required to qualify under applicable regulatory requirements and would need to have sufficient rights under applicable intellectual property laws to the method of manufacturing the product candidate. Obtaining the necessary FDA approvals or other qualifications under applicable regulatory requirements and ensuring non-infringement of third-party intellectual property rights could result in a significant interruption of supply and could require the new manufacturer to bear significant additional costs that may be passed on to us.  

Our current and potential future license or collaboration agreements for somavaratan or any other product candidate may place some or all aspects of the development and commercialization of somavaratan or other product candidates outside our control, may require us to relinquish important rights or may otherwise be on terms unfavorable to us.

We have entered into and may in the future enter into additional license or collaboration agreements with third parties for the development or commercialization of somavaratan or future product candidates. For example, in August 2016, we entered into an Exclusive License and Supply Agreement, or the Teijin License, with Teijin Limited, or Teijin, pursuant to which we granted to Teijin an exclusive license to develop, use, sell, offer for sale, import or otherwise commercialize in Japan any pharmaceutical product incorporating somavaratan. Our likely collaborators for any distribution, marketing, licensing or other collaboration arrangements include pharmaceutical and biotechnology companies such as Teijin. Because such collaborators are independent third parties, they may be subject to different risks than we are and may have significant discretion in, and different criteria for, determining the efforts and resources they will apply related to their agreements with us. We may have limited control over the amount and timing of resources that our collaborators dedicate to the development or commercialization of our product candidates. Our ability to generate revenue from these arrangements will depend in part on our collaborators’ abilities to successfully perform the functions assigned to them in these arrangements.

Following the failure of our Phase 3 clinical trial to meet its primary endpoint, Teijin notified us, pursuant to the agreement’s terms, that it would be terminating the Exclusive License Supply Agreement between us and Teijin.  This decision was followed by discussions between us and Teijin regarding the failure of our Phase 3 VELOCITY trial to meet its primary endpoint during which it was determined that continuing with the License Agreement was no longer in the best interests of either party. The agreement was terminated in January 2018.

Collaborations involving our product candidates are subject to numerous risks, which may include the following:

 

Collaborators have significant discretion in determining the efforts and resources that they will apply to any such collaborations.

 

Collaborators may not pursue development and commercialization of our product candidates or may elect not to continue or renew development or commercialization programs based on clinical study results, changes in their strategic focus, availability of funding or other external factors, such as a business combination that diverts resources or creates competing priorities.

 

Collaborators may assume responsibility for conduct of clinical trials for product candidates in certain geographies and may fail to conduct such trials, may conduct them improperly, or may generate data inconsistent with the data from our clinical trials.  

 

Collaborators may assume responsibility for seeking or maintaining regulatory approvals, pricing, government reimbursement approval, and public and private formulary placements.  Failure to effectively obtain such approvals and clearances will substantially impact the commercial potential for the product candidate.  

 

Collaborators may delay clinical studies, provide insufficient funding for a clinical study program, stop a clinical study, abandon a product candidate, repeat or conduct new clinical studies or require a new formulation of a product candidate for clinical testing.

 

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Collaborators may be required to conduct duplicate analytical testing of a product candidate or approved product upon importation to a specific jurisdiction.  Collaborators could acquire or independently develop, or develop with third parties, products that compete directly or indirectly with our products or product candidates.

 

A collaborator with marketing and distribution rights to one or more products may not commit sufficient resources to their marketing and distribution.

 

The actions of a collaborator may create liability for us as the global manufacturer of a product candidate, either directly or through indemnification obligations defined in license, collaboration or other agreements.

 

Collaborators may not properly maintain or defend our intellectual property rights or may use our intellectual property or proprietary information in a way that gives rise to actual or threatened litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential liability.

 

Collaborators may publish or otherwise publicly present or disclose information regarding our product candidates, including laboratory data or the results of preclinical or clinical research.

 

Disputes may arise between us and a collaborator that causes the delay or termination of the research, development or commercialization of our product candidates or that results in costly litigation or arbitration that diverts management attention and resources;

 

Collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development or commercialization of the applicable product candidates.

 

Collaborators may own or co-own intellectual property covering our products that results from our collaborating with them, and in such cases, we would not have the exclusive right to commercialize such intellectual property.

Risks related to the operation of our business

Our future success depends on our ability to retain our chief executive officer and other key executives and to attract, retain and motivate qualified personnel.

We are highly dependent on our chief executive officer and the other principal members of our executive team, some of whom joined our company prior to May 2015, when our current chief executive officer began serving in that role. The loss of the services of any of these people or instability in our executive team, which may be more likely due to the failure of our  Phase 3 clinical trial to meet its primary endpoint, could impede the achievement of our research, development and commercialization objectives.

Recruiting and retaining qualified scientific, clinical, manufacturing and sales and marketing personnel will also be critical to our success. Following the failure of our Phase 3 clinical trial to meet its primary endpoint, key employees have left and may leave the Company, and we may not have the resources to hire, or we may choose not to replace additional personnel. We may not be able to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.

We have implemented a series of cost-savings measures, and we do not know what the impact of those measures.

Following the failure of our Phase 3 clinical trial to meet its primary endpoint, management implemented a number of cost-savings measures, including a significant reduction in force, in order to preserve cash as the Company assesses its alternatives.  We do not know what the impact of these measures will be, but the changes could divert management resources, which could adversely impact the Company’s business operations.