ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than statements of historical factors are “forward-looking statements” for purposes of these provisions. In some cases you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and similar expressions intended to identify forward-looking statements. 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” in this report. 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

 

Anthera Pharmaceuticals, Inc. is a biopharmaceutical company focused on advancing the development and commercialization of innovative medicines that benefit patients with unmet medical needs. We currently have two compounds in development, liprotamase and blisibimod. We licensed liprotamase from Eli Lilly & Co (“Eli Lilly”) in July 2014. Liprotamase is a novel non-porcine investigational Pancreatic Enzyme Replacement Therapy (“PERT”) intended for the treatment of patients with Exocrine Pancreatic Insufficiency (“EPI”), often seen in patients with cystic fibrosis and other conditions. We licensed blisibimod from Amgen, Inc. (“Amgen”) in December 2007. Blisibimod targets B-cell activating factor or (“BAFF”) which has been shown to be elevated in a variety of B-cell mediated autoimmune diseases, including systemic lupus erythematosus (“SLE”), or lupus, Immunoglobulin A nephropathy, or IgA nephropathy, lupus nephritis, and others.

Since inception, we have funded our operations through equity offerings, private placements of convertible debt and debt financings. We will need substantial additional financing to continue to develop our product candidates, obtain regulatory approvals and to fund operating expenses, which we will seek to raise through public or private equity or debt financings, collaborative or other arrangements with third parties or through other sources of financing. We cannot assure you that such funds will be available on terms favorable to us, if at all. We may never successfully complete development of any of our product candidates, obtain adequate patent protection for our technology, obtain necessary government regulatory approval for our product candidates or achieve commercial viability for any approved product candidates. In addition, we may not be profitable even if we succeed in commercializing our product candidates.

In December 2014, we entered in an exclusive license agreement with Zenyaku Kogyo Co., Ltd (“Zenyaku”) for the development and commercialization of blisibimod in Japan and potentially other countries throughout Asia.  We retain full development and commercialization rights of blisibimod for all other global territories including North America and the European Union and we are actively pursuing partnerships with pharmaceutical and biotech companies to develop and commercialize blisibimod in these territories.

In March 2015, we received a research award of up to $3 million from Cystic Fibrosis Foundation Therapeutics Incorporated ("CFFT") for our development of liprotamase.  We retain the right to develop and commercialize liprotamase and will owe royalties to CFFT on net sales of any drug candidate approved and commercialized under the collaboration. The funding is to be disbursed by CFFT to us upon our achievement of milestones specified in the agreement.  At our discretion, we may choose to fund a particular stage of the liprotamase development plan without CFFT funds.  Any CFFT funds not expended on the development program of liprotamase must be returned to CFFT and, upon such return, the amounts of such returned funds will not be included as part of the research award for the purpose of calculating royalties or other amounts owed by us to CFFT.  To the extent CFFT provides or makes available any information, expertise, know-how or other intellectual   property related to cystic fibrosis or the treatment, prevention or cure there-of (“CFFT Know-How”) to us, CFFT grants to us a non-exclusive, transferrable, sublicensable, worldwide rights and license under all of CFFT’s rights in such CFFT Know-How to assist us to research, develop, commercialize, make or have made, use, sell, have sold, offer for sale, import, export and otherwise exploit the product.

 

Liprotamase: a Novel Pancreatic Enzyme Replacement Therapy (PERT)

 

Pancreatic enzyme replacement therapy is currently the mainstay of treatment for nutrient malabsorption in patients with digestive enzyme deficiencies known as EPI. EPI occurs when diseases such as cystic fibrosis (“CF”) and chronic pancreatitis impede or destroy the exocrine function of the pancreas. Orally delivered porcine PERTs have been available for many years for the treatment of EPI. Unmet medical needs for the treatment of EPI remain. For example, as the porcine-derived proteins contained in the PERTs pass through the low pH environment of the stomach, enzyme activity rapidly diminishes and, as a consequence, large doses of porcine enzymes are often required. Since protease and lipase can become irreversibly inactivated in an acid environment, most products are provided as enteric-coated microbeads. Patient-to-patient variability in acidification of the intestine makes dissolution variable. Poor stability and variability in terms of potency and pharmaceutical properties have also been identified as important factors contributing to a poor response of some patients to PERTs.

 

 

Liprotamase is a novel PERT intended for the treatment of EPI. The exocrine pancreas is responsible for synthesis and secretion of digestive enzymes, including lipase, protease, and amylase. EPI occurs when diseases such as CF and chronic pancreatitis impede or destroy the exocrine function of the pancreas. A reduction in, or absence of the normally secreted pancreatic digestive enzymes, causes lipids, proteins, and carbohydrates to enter the distal gastrointestinal (“GI”) tract in unabsorbable forms, leading to GI pain and distention, maldigestion, and steatorrhea. Without appropriate therapy, patients with EPI may experience malnutrition, poor growth or weight loss, reduced quality of life, and, in severe cases, increased morbidity and early death.

 

We believe liprotamase is potentially the first soluble, stable and non-porcine derived enzyme product to offer a novel solution to patients who are unable to maintain appropriate nutritional health with existing enzyme therapies. Liprotamase’s chemical characteristics, unlike currently available PERTs, make it ideal for powder formulation as either a capsule or sachet product for oral solution, which can be conveniently co-administered with a small volume of water.

 

Our Phase 3 Development of Liprotamase in EPI

 

Upon completion of the manufacture of liprotamase in capsules, we plan to initiate the SOLUTION study in the second half of 2015. SOLUTION is a Phase 3, randomized, open-label, assessor-blind, non-inferiority, active-comparator study evaluating the efficacy and safety of liprotamase in patients with cystic fibrosis-related exocrine pancreatic insufficiency. This pivotal study is intended to evaluate the non-inferiority of liprotamase compared with other commercially available PERT in a population enriched for PERT responders. A second, smaller SIMPLICITY study in younger pediatric subjects, is planned to support broader marketing approval across pediatric age groups. We believe the SOLUTION and SIMPLICITY studies may offer a number of potential opportunities for differentiation versus the currently marketed PERTs, including:

 

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Use of biotechnology-derived high-purity enzymes that are produced by fermentation processes rather than from mammalian organs which carry a label warning for viral transmission.

 

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Use of a novel chemically modified lipase drug substance that provides resistance to proteolytic degradation.

 

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A product containing an appropriate ratio of the three digestive enzymes (lipase, protease and amylase) to maximize relative efficacy while minimizing the potential for adverse events, such as fibrosing colonopathy.

 

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Capsule and sachet dose forms free of enteric coating and the associated impact on timing of product release in the upper GI tract, and capsule size/burden.

 

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A capsule formulation using known, safe, excipients that provides lower pill burden and good delivery performance. The pure, high-activity enzyme constituents, and absence of bulky enteric coating give rise to smaller, easy-to-swallow capsules with good disintegration once swallowed, and adequate storage stability compared with porcine PERTs of an equivalent lipase unit dose strength.

 

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A sachet formulation containing liprotamase power for oral solution which can be easily be dissolved into water, and finally provides patients, especially young pediatric patients, with an easy-to-swallow dosing option.

 

Blisibimod: a Potent Inhibitor of B-Cell Activating Factor

 

Blisibimod is a peptibody antagonist of the BAFF cytokine which we are developing as a subcutaneous administered treatment for systemic lupus erythematosus, or lupus, and IgA nephropathy (“IgAN”). BAFF, also known as BLyS, is a tumor necrosis family member and is critical to the development, maintenance and survival of B-cells. Although the cause of lupus is still not completely understood, B-cell activation and autoantibody production are known to be central to the process. Evidence has emerged that overexpression of BAFF plays an important role in this disease process. In preclinical studies, transgenic mice created to over-express BAFF begin to exhibit symptoms similar to lupus. In mice that spontaneously develop lupus-like disease, BAFF is known to be elevated, and treatment with blisibimod improves outcomes and survival. Similarly, there is increasing evidence of an association between BAFF and IgAN. In preclinical studies, mice that overexpress BAFF develop an IgA-associated nephropathy with renal manifestations similar to that of human IgAN. Patients with lupus or IgA nephropathy have elevated serum levels of BAFF.  Significant improvements in lupus disease activity and disease markers have been reported in randomized, placebo-controlled clinical trials with blisibimod (Furie et al, 2014) and other BAFF inhibitors including belimumab (Navarra et al., Lancet, 377(9767):721, 2011, Furie et al., Arthritis Rheum., 63(12),:3918, 2011), and tabalumab (Isenberg et al., Annual Meeting of the American College of Rheumatology, November 2014).

 

 

Our Phase 3 Development of Blisibimod in Lupus

 

In the third quarter of 2012 at an End of Phase 2 meeting with the U.S. Food and Drug Administration (“FDA”), we presented the results of the PEARL-SC clinical study and our plans for Phase 3 registration studies of blisibimod in patients with active lupus. As a result of this meeting, we initiated patient enrollment in the initial Phase 3 CHABLIS-SC1 study in March 2013.

 

CHABLIS-SC1 is a multicenter, randomized, double-blind, placebo-controlled study designed to evaluate the efficacy, safety, tolerability and immunogenicity of blisibimod in patients with seropositive, clinically-active lupus (SELENA-SLEDAI ≥ 10) who require corticosteroid therapy in addition to standard-of-care for treatment of their disease. The study was designed to randomize 400 patients to receive either 200mg of blisibimod or placebo in addition to their standard-of-care medication for 52 weeks. We reached the enrollment target in June 2015. We expect topline data after the last enrolled patient completes 52 weeks of treatment in mid-2016. The primary endpoint of the CHABLIS-SC1 will be clinical improvement in the SLE Responder Index-6 (SRI-6) at 52 weeks. Key secondary outcomes from the study, including SRI-8, reduction in the number of lupus flares and steroid use, are intended to further differentiate blisibimod from currently available therapies. To date, enrolled patient demographics and disease characteristics for the CHABLIS-SC1 study are consistent with our goal to enroll patients with higher levels of lupus activity and positive biomarkers despite the stable use of corticosteroids. These characteristics were associated with improved outcomes in both our previous Phase 2 clinical study as well as in large Phase 3 studies conducted with other BAFF-inhibitors, belimumab and tabalumab.

 

We believe the CHABLIS development program for blisibimod may offer a number of potential opportunities for differentiation versus the currently marketed BAFF antagonist and other novel B-cell directed therapies, including:

 

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Clinical  differentiation:

 

 

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Patient convenience: A convenient, at-home, patient-administered subcutaneous product;

 

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Mechanism of action: Blisibimod is able to inhibit the activity of both membrane-bound and soluble BAFF;

 

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Potential labeling differentiation: A second study (CHABLIS-7.5) will also aim to enroll patients with stable renal disease (lupus nephritis);

 

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Manufacturing and peptibody design: Blisibimod represents a novel molecular structure, which confers manufacturing benefits and lower cost of goods based on a bacterial fermentation manufacturing process and utilizes multiple binding sites to achieve highest reported affinity for inhibition of BAFF;

 

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4 BAFF binding domains, compared to the typical 2 domains in a monoclonal antibody; and

 

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1 picomolar affinity for BAFF, compared to the 120-350 picomolar reported for anti-BAFF monoclonal antibodies.

An independent Data Safety Monitoring Board (“DSMB”) meets regularly over the course of the study to assess patient safety. During these regular meetings, the DSMB reviews un-blinded safety data which includes adverse events, suspected unexpected series adverse reactions, or SUSARs, deaths, laboratory data, and withdrawals data and compares trends between treatments. After the most recent scheduled meeting in March 2015, the DSMB recommended continuing the CHABLIS-SC1 and BRIGHT-SC clinical studies.

 

 

In February 2015, an interim analysis of CHABLIS-SC1 was conducted by an independent un-blinded statistician, who evaluated at a pre-specified point of time, the proportion of the responders to the systemic lupus erythematous SRI-6 responder index, and recommended the study to continue to completion as planned. This futility analysis was not intended to provide any rules for stopping for overwhelming efficacy, for a change in study sample size, or for an alteration of the study design. Rather, the analysis suggests that the observed data conforms with the assumptions upon which the trial was designed. The systemic lupus erythematosus response index (SRI) is an endpoint accepted by the FDA for a previous approval of a lupus therapy. Prior to the interim analysis and in response to input from our Scientific Advisory Board who evaluated the published clinical data from other recent lupus studies with BAFF inhibitors, we modified the primary endpoint of CHABLIS-SC1 from a comparison of the proportion of responders to the SRI-8 responder index to a comparison of the proportion of responders to the SRI-6 responder index (previously a secondary endpoint of the study) as data, including emerging observations with tabalumab (Isenberg et al ., Annual Meeting of the American College of Rheumatology, November 2014), suggest that SRI-6 responder rates are consistent and stable across multiple trials. Response rates to the SRI-8 responder index will remain a key secondary endpoint of the study. In addition to serving as a registration study for a potential lupus indication, observations in this study are intended to be included in marketing applications for blisibimod in IgA nephropathy and other indications.

 

With the additional funding from our July public offering, as described in Note 9 to our financials, we began planning for our second lupus study, CHABLIS 7.5 (formerly named CHABLIS-SC2), whose name emphasizes the intent to reduce background corticosteroid medication to ≤7.5mg prednisone.  The CHABLIS 7.5 trial will evaluate the effect of blisibimod on top of standard-of-care medication in patients with severe, seropositive SLE that is inadequately controlled with corticosteroids.  Patient eligibility for this study is informed by responder traits identified in the Phase 2 trial with blisibimod as well as the large Phase 3 programs with other BAFF inhibitors, belimumab and tabalumab.

 

Our Phase 2/3 Development of Blisibimod for in IgA Nephropathy

 

The BRIGHT-SC study is a Phase 2/3 multicenter, randomized, double-blind, placebo-controlled study to evaluate the efficacy, safety, tolerability and immunogenicity of blisibimod in IgAN. We intend to enroll up to 200 patients with biopsy-proven IgAN who have proteinuria greater than one gram per 24 hours (1g/24hr) and are receiving standard of care medication including angiotensin converting enzyme inhibitors and angiotensin receptor blockers. We initiated our BRIGHT-SC study in the second quarter of 2013. Patients enrolled in the BRIGHT-SC study receive 300mg weekly blisibimod or placebo subcutaneously during the first 8 weeks of therapy, the induction phase, followed by 24 weeks of 200mg weekly blisibimod or placebo, the maintenance phase. The BRIGHT-SC clinical study is currently recruiting patients in Southeast Asia, the European Union (“EU”) and Eastern Europe.

 

In September 2013, we met with the FDA who agreed to consider accepting proteinuria as an endpoint for Subpart E approval for blisibimod in IgAN. In April 2014, we met with the Japan Pharmaceuticals and Medical Devices Agency (“PMDA”) to discuss our registration program for blisibimod in IgAN. In this meeting we gained the PMDA’s agreement on the acceptability of proteinuria as the primary efficacy endpoint to support marketing approval in Japan and have amended the BRIGHT-SC study to include the specific data requirements of the PMDA. In December 2014, we met with the European Medicines Agency (“EMA”) as part of the scientific advice process for blisibimod. We reached an agreement with the EMA on the acceptability of proteinuria as the primary efficacy variable as well as the requirement for a single study to support a Conditional Marketing Authorization Application (“CMAA”) provided that confirmatory evidence from a second study would be available post approval. The EMA also recommended the protocol provide information on the required duration of treatment, duration of response and need for re-treatment.

 

In March 2015, an interim futility analysis of BRIGHT-SC study was conducted by an independent unblinded statistician, who evaluated several important biomarkers of renal disease in patients who had completed at least 8 weeks of treatment and recommended the study to continue to completion as planned.  

 

Revenue

 

We have not generated any revenue from the commercial sales of our product candidates since our inception and do not expect to generate any revenue from the commercial sales of our product candidates in the near term.  However, as a result of the collaborative arrangement that we entered into with Zenyaku in December 2014 for the development of blisibimod, we began recognizing license fee revenue and collaborative revenues in 2015.  The license fee from the collaborative arrangement with Zenyaku is amortized over the performance obligation period (product development period) while reimbursement for our FTEs is recorded as collaborative revenues as incurred.  We will periodically review and, if necessary, revise the estimated performance obligation period in our collaboration.

 

 

Research and Development Expenses

 

Since our inception, we have focused our activities on our product candidate development programs. We expense research and development costs as they are incurred. Research and development expenses consist of personnel costs, including salaries, benefits and stock-based compensation, clinical studies performed by contract research organizations, or CROs, materials and supplies, licenses and fees and overhead allocations consisting of various administrative and facilities-related costs. Research and development activities are also separated into three main categories: licensing, clinical development and pharmaceutical development. Licensing costs consist primarily of fees paid pursuant to license agreements. Historically, our clinical development costs have included costs for preclinical and clinical studies. We expect to incur substantial clinical development costs for the continued development of blisibimod.  Pharmaceutical development costs consist of expenses incurred relating to clinical studies and product formulation and manufacturing.

 

We expense both internal and external research and development costs as incurred. We are developing our product candidates in parallel, and we typically use our employee and infrastructure resources across several projects. Thus, some of our research and development costs are not attributable to an individually named project, but rather are allocated across our clinical stage programs. These unallocated costs include salaries, stock-based compensation charges and related “fringe benefit” costs for our employees (such as workers compensation and health insurance premiums), consulting fees and travel.

Beginning in 2015, research and development costs are offset by reimbursement from Zenyaku for i) 100% of blisibimod development cost in Japan for IgA nephropathy and ii) 25% of global blisibimod development cost outside of Japan for IgA nephropathy.

The following table shows our total research and development expenses for the three and six months ended June 30, 2015 and 2014 (in thousands):

 

 

(1)

Offset by $0.4 million and $0.9 million in reimbursable expense for IgA nephropathy from Zenyaku for the three and six months ended June 30, 2015 respectively.

(2)  Included a one-time refund of $0.4 million from a vendor for our VISTA-16 clinical study, which was terminated in March 2012.

We expect our research and development expenses to increase significantly as we continue to develop our product candidates. We intend to fund our clinical studies with existing cash and proceeds from potential future debt and equity offerings.

We expect that a large percentage of our research and development expenses in the future will be incurred in support of our current and future clinical development programs. These expenditures are subject to numerous uncertainties in timing and cost to completion. As we obtain results from clinical studies, we may elect to discontinue or delay clinical studies for certain clinical development programs in order to focus our resources on more promising clinical development programs. Completion of clinical studies may take several years or more, but the length of time generally varies according to the type, complexity, novelty and intended use of product candidates. The cost of clinical studies may vary significantly over the life of a program as a result of differences arising during clinical development, including:

 

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the number of sites included in the studies;

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the length of time required to enroll suitable patient subjects;

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the number of patients that participate in the studies;

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the number of doses that patients receive;

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the drop-out or discontinuation rates of patients; and

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the duration of patient follow-up.

 

 

Our expenses related to clinical studies are based on estimates of the services received and efforts expended pursuant to contracts with many research institutions, clinical research organizations and other service providers that conduct and manage clinical studies on our behalf. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Generally, these agreements set forth the scope of work to be performed at a fixed fee or unit price. Payments under the contracts are mainly driven by time and materials incurred by these service providers. Expenses related to clinical studies generally are accrued based on time and materials incurred by the service providers and in accordance with the contracts. If timelines or contracts are modified based upon changes to the clinical study design or scope of work to be performed, we modify our estimates of accrued expenses accordingly on a prospective basis.

 

None of our product candidates has received FDA or foreign regulatory marketing approval. In order to grant marketing approval, the FDA or foreign regulatory agencies must conclude that clinical data establishes the safety and efficacy of our product candidates and that the manufacturing facilities, processes and controls are adequate. Despite our efforts, our product candidates may not offer therapeutic or other improvement over existing, comparable drugs, be proven safe and effective in clinical studies, or meet applicable regulatory standards.

 

As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our development projects or when and to what extent we will receive cash inflows from the commercialization and sale of an approved product candidate, if ever.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of compensation for employees in executive and operational functions, including clinical, chemical manufacturing, regulatory, finance and business development. Other significant costs include professional fees for legal services, including legal services associated with obtaining and maintaining patents. We will continue to incur significant general and administrative expenses as a public company, including costs for insurance, costs related to the hiring of additional personnel, payment to outside consultants, lawyers and accountants and complying with the corporate governance, internal controls and similar requirements applicable to public companies.

 

Critical Accounting Policies and Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles, or GAAP. The preparation of these 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 these estimates and judgments, including those described below. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results and experiences may differ materially from these estimates.

 

While our significant accounting policies are more fully described in the accompanying notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2014, we believe that the following accounting policies is the most critical to aid you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we use in the preparation of our consolidated financial statements. 

Revenue Recognition

Our collaboration with Zenyaku provides for various types of payments to us, including development milestones, sales milestone, royalty and reimbursement for a portion of our internal and external cost.  All payments from Zenyaku are nonrefundable.   The collaborative arrangement is on a best-efforts basis, does not require scientific achievement as a performance obligation and provides for payment to be made when costs are incurred or the services are performed.

With respect to the collaborative arrangement with Zenyaku, we recognize revenue in accordance with FASB Accounting Standards Codification, or ASC 605 “ Revenue Recognition ”, subtopic ASC 605-25 “ Revenue with Multiple Element Arrangements ” and subtopic ASC 605-28 “ Revenue Recognition-Milestone Method ”, which provide accounting guidance for revenue recognition for arrangements with multiple deliverables and guidance on defining the milestone and determining when the use of the milestone method of revenue recognition for research and development transactions is appropriate, respectively.  For multiple-element arrangements, each deliverable within a multiple deliverable revenue arrangement is accounted for as a separate unit of accounting if both of the following criteria are met: (1) the delivered item or items have value to the customer on a standalone basis and (2) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control.  

The deliverables under the Zenyaku agreement have been determined to be a single unit of accounting and as such any license fees received will be recorded as deferred revenue and recognized ratably over the term of the estimated performance period under the agreement, which is the product development period.  We will periodically review the estimated performance period based on the progress of the related product development plan.  The effect of a change made to the estimated performance period would occur on a prospective basis in the period that the change was made.

 

 

For the collaborative research activities, we are entitled for reimbursement from Zenyaku for our internal personnel cost at a pre-determined full time equivalent (“FTE”) rate.  Revenue related to FTE services is recognized as research services are performed over the related performance periods. We are required to perform research and development activities as specified in the collaboration agreement. The payments received are not refundable and are based on a contractual reimbursement rate per FTE working on the project. Reimbursement for FTE cost is recorded as collaborative revenue as incurred.

We recognize revenue from milestone payments when: (i) the milestone event is substantive and (ii) it does not have ongoing performance obligations related to the achievement of the milestone earned.  Milestone payments are considered substantive if all of the following conditions are met: the milestone payment (a) is commensurate with either our performance subsequent to the inception of the arrangement to achieve the milestone or the enhancement of the value of the delivered item or items as a result of a specific outcome resulting from our performance subsequent to the inception of the arrangement to achieve the milestone, (b) relates solely to past performance, and (c) is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement.

            Determining whether and when some of these revenue recognition criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we will report.  Changes in assumptions or judgments or changes to the elements in an arrangement could cause a material increase or decrease in the amount of revenue that we report in a particular period.

 Stock-Based Compensation

We account for stock options and stock purchase rights related to our equity incentive plans under the provisions of ASC 718 which requires the recognition of the fair value of stock-based compensation.  The fair value of stock options is estimated using a Black-Scholes option valuation model.  This model requires the input of subjective assumptions including expected stock price volatility, expected life and estimated forfeitures of each award.  The fair value of equity-based awards is amortized ratably over the requisite service period of the award.  Due to the limited amount of historical data available to us, particularly with respect to stock-price volatility, employee exercise patterns and forfeitures, actual results could differ from our assumptions.

We account for equity instruments issued to non-employees in accordance with the provisions of ASC 718 and ASC 505, “Equity.”   As a result, the non-cash charge to operations for non-employee options with service or other performance criteria is affected each reporting period by changes in the estimated fair value of our common stock, as the underlying equity instruments vest.  The two factors which most affect these changes are the price of the common stock underlying stock options for which stock-based compensation is recorded and the volatility of the stock price.  If our estimates of the fair value of these equity instruments change, it may have the effect of significantly changing compensation expense.

 

Accrued Clinical Expense

We make estimates of our accrued clinical expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time. This process involves reviewing open contracts and purchase orders, communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us at least monthly in arrears for services performed. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued clinical expenses include:

 

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fees paid to CROs in connection with clinical studies;

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fees paid to investigative sites in connection with clinical studies;

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fees paid to contract manufacturers in connection with the production of clinical study materials; and

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fees paid to vendors in connection with preclinical development activities.

We base our accruals related to clinical studies on our estimates of the services received and efforts expended pursuant to contracts with many research institutions, clinical research organizations and other service providers that conduct and manage clinical studies on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Generally, these agreements set forth the scope of work to be performed at a fixed fee or unit price. Payments under the contracts are mainly driven by time and materials incurred by these service providers. In accruing for service fees, we estimate the time and materials incurred by these service providers in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual accordingly. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates.

 

 

We began to recognize revenue in 2015 as a result of collaborative arrangement that we entered into with Zenyaku in December 2014 for the development of blisibimod. During the three months ended June 30, 2015, we recorded $143,000 for the reimbursement of FTEs and $146,000 for the amortization of the license fee. License fee from the collaborative arrangement is amortized over the period of performance (product development period) while reimbursement for our FTEs is recorded as collaborative revenue.

 

Research and Development Expenses

The following table summarizes our research and development expenses for the three months ended June 30, 2015 and 2014 (in thousands, except percentages):

		Three Months Ended June 30,
		2015				2014				$ Change				% Change
Research and development expenses		$	8,539			$	5,279			$	3,260				62	%

Research and development expense increased by $3.3 million during the three months ended June 30, 2015 from the same period in 2014 primarily due to an increase in the number of study subjects in our blisibimod clinical trials and preparation for the launch of our Phase 3 SOLUTION trial with liprotamase.  The increase is partially offset by $0.4 million in expense reimbursements from our partner, Zenyaku, for certain development costs associated with blisibimod in the quarter ended June 30, 2015.

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the three months ended June 30, 2015 and 2014 (in thousands, except percentages):

		Three Months Ended June 30,
		2015				2014				$ Change			% Change
General and administrative expenses		$	1,696			$	1,586			$	110				7	%

The increase in general and administrative expenses during the three months ended June 30, 2015 was primarily driven by higher non-cash stock-based compensation expense in 2015 compared to the same period in 2014.

 

 

The change in other expense during the three months ended June 30, 2015 was insignificant as compared to the same period in 2014. The decrease in interest expense during the three months ended June 30, 2015 as compared to 2014 was primarily due to the termination of our long-term debt in the fourth quarter of 2014.

Comparison of the six months ended June 30, 2015 and 2014

 

We began to recognize revenues in 2015 as a result of collaborative arrangement that we entered into with Zenyaku in December 2014 for the development of blisibimod. During the six months ended June 30, 2015, we recorded $339,000 for the reimbursement of FTEs and $195,000 for the amortization of the license fee. License fee from the collaborative arrangement is amortized over the period of performance (product development period) while reimbursement for our FTEs is recorded as collaborative revenue.

Research and Development Expenses

The following table summarizes our research and development expenses for the six months ended June 30, 2015 and 2014 (in thousands, except percentages):

		Six Months Ended June 30,
		2015				2014				$ Change				% Change
Research and development expenses		$	14,534			$	11,044			$	3,490				32	%

Research and development expenses increased during the six months ended June 30, 2015 from the same period in 2014 primarily due to higher clinical expense as a result of the achievement of the enrollment target for our Phase 3 CHABLIS-SC study in the second quarter and continued advancement of our BRIGHT study.  The increase is partially offset by $0.9 million in expense reimbursements from our partner, Zenyaku, for certain development costs associated with blisibimod in the six months ended June 30, 2015.

 

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the six months ended June 30, 2015 and 2014 (in thousands, except percentages):

		Six Months Ended June 30,
		2015				2014				$ Change					% Change
General and administrative expense		$	3,603			$	3,430			$	173				5	%

General and administrative expenses increased during the six months ended June 30, 2015 primarily driven higher professional fees in 2015 compared to the same period in 2014.

 

The change in other expense during the six months ended June 30, 2015 was insignificant as compared to the same period in 2014. The decrease in interest expense during the six months ended June 30, 2015 as compared to 2014 was primarily due to the termination of our long-term debt in the fourth quarter of 2014.  

 

 

Comparison of Research Award for the Three and Six Months ended June 30, 2015 and 2014

The following table summarizes payment we received pursuant to a research award for the three and six months ended June 30, 2015 and 2014 (in thousands, except percentages):

In March 2015, we received a research award of up to $3 million from CFFT for our development of liprotamase.  For the three and six months ended June 30, 2015, we received $1.1 million from CFFT in connection with achieving certain milestones specified in the award agreement.

Liquidity and Capital Resources

 

Our principal liquidity requirements are primarily to meet our working capital needs, support ongoing business activities, research and development, and our capital expenditure needs.  As of June 30, 2015, we had cash and cash equivalents of approximately $35.5 million.

 On March 12, 2015, we executed an equity purchase agreement (“Purchase Agreement”), with Lincoln Park Capital Fund, LLC (“LPC”) pursuant to which we have the right, but not obligation, to sell to LPC up to an aggregate of $10.0 million in shares of the common stock over a period of two years in amounts as set forth in the 2015 Purchase Agreement.  In July 2015, we amended the Purchase Agreement and reduced the amount LPC can purchase to an aggregate of $6.0 million shares of common stock.  No sales of common stock have been made under the Purchase Agreement as of June 30, 2015.

On November 15, 2013, we entered into a Sales Agreement (the “ATM Agreement”) with Cowen and Company, LLC (“Cowen”) to create an ATM under which we from time to time may offer and sell shares of its common stock, par value $0.001 per share, having an aggregate offering price of up to $25.0 million through Cowen, as agent.  As of June 30, 2015, we had sold $21.3 million in shares of common stock, leaving a balance of $3.7 million available for future sale pursuant to the ATM   Agreement.

In April 2013, we filed a universal shelf registration statement with the SEC on Form S-3 (File No. 333-187780) for the proposed offering from time to time of up to $100.0 million of securities, including common stock, preferred stock, debt securities and/or warrants. On November 15, 2013, we registered $25.0 million under the registration statement for the Cowen ATM. In January 2015, we registered $8.0 million under the registration statement for the issuance of common stock to Zenyaku and Amgen. In February 2015, we allocated $10.3 million under the registration statement for the Purchase Agreement with LPC which was reduced to $6.3 million in July 2015 pursuant to an amendment to the Purchase Agreement. In March and July 2015, we utilized $57.5 million of this shelf registration in connection with   an underwritten public offering, leaving a balance of $3.2 million available for future issuance under this shelf registration statement, which will expire in April 2016.

 

 

During the six months ended June 30, 2015 and 2014, our operating activities used cash of $12.8 million and $13.2 million, respectively, primarily resulting from our net losses and changes in our working capital accounts, adjusted for non-cash items including stock based compensation.

 

 

During the six months ended June 30, 2015, cash used in investing activities was insignificant. During the six months ended June 30, 2014, cash provided by investing activities was $8.1 million which represented a reduction in our restricted cash as result of principal repayments made to Square 1 Bank.

During the six months ended June 30, 2015, cash provided by financing activities was $45.6 million, which was primarily driven by net proceeds of $11.5 million received from the sale of our common stock through an at-the-market (“ATM”) offering program, $26.9 million received from the sale of our common stock through a public offering and $7.0 million from the sale of our common stock to our collaborative partner, Zenyaku.  During the six months ended June 30, 2014, financing activities provided cash of $36,000 and was driven by net proceeds of $9.6 million received from the sale of our common stock through an ATM and equity purchase agreement with LPC, offset by $9.5 million of principal payment against our notes payable.

 

The above amounts exclude potential payments to be made under our license agreements to our licensors, totaling $76 million, that are based on the progress of our product candidates in development, as these payments are not determinable.

Under the Amgen Agreement, we are obligated to make additional milestone payments upon the achievement of certain development, regulatory and commercial objectives. We are also obligated to pay royalties on future net sales of products that are developed and approved as defined by this collaboration. Our royalty obligations as to a particular licensed product will be payable on a country-by-country basis and licensed on a product-by-licensed-product basis, for the longer of (a) the date of expiration of the last-to-expire valid claim within the licensed patents that covers the manufacture, use or sale, offer to sell or import of such licensed product by us or a sublicensee in such country, or (b) 10 years after the first commercial sale of the applicable licensed product in the applicable country.

Under the Lilly Agreement, we are obligated to make milestone payments upon the achievement of certain regulatory and commercial sales milestones.  In addition, after sales of the licensed products exceed an aggregate of $100.0 million in the United States, we are obligated to pay tiered royalties on future net sales, ranging from the single digits to the mid-teens, for products that are developed and approved as defined in the Lilly Agreement. Our royalty obligations as to a particular licensed product will be payable, on a licensed product-by-licensed product basis, for the longer of (a) the date of expiration of the last to expire valid claim within the licensed patents that covers the manufacture, use or sale, offer to sell, or import of such licensed product by us or a sublicense in such country, or (b) 12 years after the first commercial sale of the applicable licensed product in the applicable country.

Under the CFFT agreement, we are obligated to pay royalties to CFFT as follows: i) a one-time royalty in an amount equal to the five times the award, payable in three installments between the first and second anniversaries of the first commercial sale of a product; ii) a one-time royalty in an amount equal to the actual award after net product sales reaches $100 million; and iii) in the event of a license, sale or other transfer of the product or a change of control transaction prior to the commercial sale of the product, a milestone payment equal to three times the actual award.  Since there is significant development risk associated with the development of liprotamase, we have not accrued royalties for this agreement as of the period ending June 30, 2015.

 

Funding Requirements

 

To date, we have not generated any revenue from commercial sale of our product candidates. We expect to incur substantial expenses and generate significant operating losses over the next several years as we continue to advance our product candidates into clinical studies and as we:

 

•

continue clinical development of liprotamase and blisibimod;

 

 

•

hire additional clinical, scientific and management personnel; and

 

•

implement new operational, financial and management information systems.

 

Our future capital uses and requirements depend on numerous forward-looking factors. These factors include the following:

 

•

the progress of clinical studies of our product candidates;

•

the time and costs involved in obtaining regulatory approvals;

•

delays that may be caused by evolving requirements of regulatory agencies;

•

the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims;

•

our ability to establish, enforce and maintain selected strategic alliances; and

•

the acquisition of technologies, product candidates and other business opportunities that require financial commitments.

  

As of the filing of this report, we believe our existing cash, anticipated equity investment and loan proceeds from our partner, Zenyaku and partial reimbursement of global blisibimod development expense from Zenyaku, access to the capital market through an equity purchase agreement with LPC, and an ATM agreement with Cowen will enable us to meet our obligations and sustain our operations through at least the next 12 months.  However, we may require significant additional funds earlier than we currently expect to conduct additional or extended clinical studies and seek regulatory approval of our product candidates.  Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical studies.

Additional funding may not be available to us on acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our stockholders. For example, if we raise additional funds by issuing equity securities or by selling debt securities, if convertible, further dilution to our existing stockholders may result. To the extent our capital resources are insufficient to meet our future capital requirements, we will need to finance our future cash needs through public or private equity offerings, collaboration agreements, debt financings or licensing arrangements.

 

If adequate funds are not available, we may be required to terminate, significantly modify or delay our development programs, or obtain funds through collaborators that may require us to relinquish rights to our technologies or product candidates that we might otherwise seek to develop or commercialize independently. We may elect to raise additional funds even before we need them if the conditions for raising capital are favorable.

 

Off-Balance Sheet Arrangements

 

We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts.