ITEM 2:   Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In most cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “forecast,” “potential,” “likely” or “possible”, as well as the negative of such expressions, and similar expressions intended to identify forward-looking statements. These forward-looking statements include, without limitation, statements relating to:

These forward looking statements are subject to key risks and uncertainties including, without limitation: we, the FDA or a similar foreign regulatory agency, a data safety monitoring board, or an institutional review board delaying, limiting, suspending or terminating the clinical development of vapendavir, BTA-C585, laninamivir octanoate or any of our clinical development programs at any time for a lack of safety, tolerability, biologic activity, commercial viability, regulatory or manufacturing issues, or any other reason whatsoever; our ability to successfully negotiate an acceptable final termination settlement with BARDA; ongoing in vivo IND-enabling studies of BTA-C585 being successfully completed and continuing to support the filing of an IND ; our ability to meet and reach agreement with the FDA on an appropriate primary endpoint for any prospective registration trials for laninamivir octanoate; our ability to identify and reach agreement with viable potential partners to advance laninamivir octanoate; our ability to comply with applicable government regulations in various countries and regions in which we are conducting, or expect to conduct, clinical trials; our ability to manufacture and maintain sufficient quantities of preclinical and clinical trial material on hand to support and complete our preclinical studies or clinical trials on a timely basis; our ability to retain and recruit sufficient staff, including key executive management and employees, to manage our business; our ability to secure, manage and retain qualified third-party clinical research, preclinical research, data management, contract manufacturing and other similar vendors who we outsource many of our activities to and rely on to assist us in the design, development and implementation of the development of our product candidates; our third-party contract research, data management and manufacturing organizations fulfilling their contractual obligations on a timely basis or otherwise performing satisfactorily in the future; G SK  and Daiichi Sankyo continuing to generate net sales from Relenza ^® and Inavi r ^® , respectively, and otherwise continuing to fulfill their obligations under our royalty-bearing license agreements with them in the future; our ability to maintain, protect or defend our proprietary intellectual property rights from unauthorized use by others, or not infringe on the intellectual property rights of others; our ability to successfully manage our expenses, operating results and financial position in line with our plans and expectations ; the condition of the equity and debt markets and our ability to raise sufficient funding in such markets; changes in general economic business or competitive conditions related to our industry or product candidates; and other statements contained elsewhere in this in this Quarterly Report on Form 10-Q and our 2014 Annual Report on Form 10-K .

There may be events in the future that we are unable to predict accurately, or over which we have no control. You should read this Form 10-Q and the documents that we reference herein and which been filed or incorporated by reference as exhibits completely and with the understanding that our actual future results may be materially different from what we expect. Our business, financial condition, results of operations, and prospects may change. We may not update these forward-looking statements, even though our situation may change in the future, unless we have an obligation under the federal securities laws to update and disclose material developments related to previously disclosed information. We qualify all of the information presented in this Form 10-Q, and particularly our forward-looking statements, by these cautionary statements.

Biota is a registered trademark of Biota Pharmaceuticals, Inc., Relenza ^® is a registered trademark of GlaxoSmithKline plc, and Inavir ^® is a registered trademark of Daiichi Sankyo Company, Ltd .

References to “we,” “us,” and “our” refer to Biota Pharmaceuticals, Inc. and its subsidiaries.

The following is a discussion and analysis of the major factors contributing to our results of operations for the three and six months ended December 31, 2014, and our financial condition at that date, and should be read in conjunction with the financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Company Overview

We are currently focused on developing oral, small molecule compounds to treat a number of respiratory-related viral infections. We have recently initiated a Phase 2b clinical trial (named SPIRITUS), a randomized, double-blind, placebo-controlled dose-ranging for BTA-798, also known as vapendavir, in moderate –to-severe asthmatic patients at risk of loss of asthma control and exacerbations due to presumptive HRV infection. We have successfully completed two other Phase 2 trials of vapendavir to date and recently completed additional Phase 1 bioavailability and drug-drug interaction study of vapendavir in healthy volunteers. In addition we are developing laninamivir octanoate, a long-acting neuraminidase inhibitor (“NI”), for the treatment of influenza A and B. On August 1, 2014, we reported top-line safety and efficacy results from a randomized, double-blind, placebo-controlled, parallel-arm Phase 2 clinical trial (named IGLOO) comparing the safety and efficacy of a 40 mg and an 80 mg dose of laninamivir octanoate to placebo. As compared to placebo, neither the 40 mg nor the 80 mg cohort achieved a statistically significant reduction in the median time to alleviation of all influenza associated symptoms, the primary endpoint, as measured by the Flu-iiQ patient-recorded outcome questionnaire. Certain important secondary endpoints, including quantitative viral shedding, and secondary bacterial infections, as well as the time to alleviation of systemic symptoms, did achieve statistically significant results for laninamivir octanoate treated cohorts compared to placebo.

In addition to these Phase 2 clinical-stage development programs, we are also developing orally bioavailable F and non-F protein compounds for the treatment of RSV infections in children, the elderly and immune-compromised patients. We are currently conducting IND-enabling studies with BTA-C585 , the lead compound from our F-protein inhibitor program.

We previously developed zanamivir, a neuraminidase inhibitor that is marketed worldwide by GSK as Relenza ^® for the prevention and treatment of influenza A and B. GSK markets Relenza ^® pursuant to a royalty-bearing research and license agreement we entered into with GSK in 1990. In 2003, we entered into a collaboration and license agreement with Daiichi Sankyo, under which each party cross-licensed its intellectual property related to second-generation, long-acting neuraminidase inhibitors, including laninamivir octanoate. In 2009, we entered into a commercialization agreement with Daiichi Sankyo that provided Daiichi Sankyo with an exclusive license to commercialize laninamivir octanoate in Japan and entitled us to receive a royalty on net sales of laninamivir octanoate in Japan. Laninamivir octanoate, which is marketed in Japan by Daiichi Sankyo as Inavir ^® , was approved for sale by the Japanese Ministry of Health and Welfare for the treatment of influenza A and B in adults and children in September 2010 and for the prevention of influenza A and B in December 2013. In 2009, we filed an IND with the FDA to develop laninamivir octanoate in the U.S.

In March 2011, we were awarded a contract from BARDA designed to provide up to $231 million in support of the development of and submission for a New Drug Application (“NDA”) of laninamivir octanoate for the treatment of influenza A and B infections in the U.S. On May 7, 2014, U.S. Department of Health and Human Services (“HHS”) office of the Assistant Secretary for Preparedness and Response (“ASPR”) and BARDA notified us of its decision to terminate the contract for the convenience of the U.S. Government. We continue to work with BARDA to close out this contract, which involves finalizing invoices and billings, determining the nature and extent of any equitable adjustments, and negotiating a final termination settlement.

Although several of our influenza product candidates have been successfully developed and commercialized to date by other larger pharmaceutical companies under license, collaboration or commercialization agreements with us, we have not independently developed or received regulatory approval for any product candidate, and we do not currently have any sales, marketing or commercial capabilities. Therefore, it is possible that we may not successfully derive any significant product revenues from any product candidates that we are developing now, or may develop in the future. We expect to incur losses for the foreseeable future as we intend to support the clinical and preclinical development of our product candidates. Also, due to the recent termination of our contract with BARDA, we anticipate that our revenue from service and cost of revenue will decline substantially in fiscal 2015 as compared to recent historical levels and will not recur in fiscal 2016.

We plan to continue to finance our operations with (i) our existing cash, cash equivalents and investments, (ii) proceeds from existing or potential future royalty-bearing licenses, government contracts, or collaborative research and development arrangements, (iii) future equity and/or debt financings, or (iv) other financing arrangements. Our ability to continue to support our operations is dependent, in the near-term, upon us managing our cash resources, receipt of royalty revenue under our exiting licensees, our receipt of final reimbursements and settlement proceeds from BARDA, entering into future collaboration, license or commercialization agreements , successfully developing our product candidates , executing future financings and ultimately, upon obtaining of our products for sale and achieving positive cash flows from operations on a consistent basis. There can be no assurance that additional capital or funds will be available on terms acceptable to us, if at all, or we will be able to enter into collaboration, license or commercialization agreements in the future, or that we will ever generate significant product revenue and become operationally profitable on a consistent basis.

Recent Corporate Developments

Vapendavir – On February 5, 2015, we announced that we have commenced patient screening for our Phase 2b SPIRITUS trial of vapendavir in patients with moderate-to-severe asthma. The goal of the study is to enroll approximately 150 laboratory-confirmed HRV infected patients over the next 12 months and to report top-line data in mid-2016. The primary endpoint of this multi-center, randomized, double-blind, placebo-controlled dose-ranging study is the change from baseline to study day 14 in asthma control questionnaire (“ACQ”)-6 total score. The secondary endpoints are focused on safety and tolerability, lung function assessments such as forced expiratory volume in one second (“FEV1 “), incidence of asthma exacerbations, assessments of the severity and duration of cold symptoms measured by the Wisconsin Upper Respiratory Symptom Survey-21 (“WURSS-21”), and virology assessments such as changes in viral load.

BTA-C585 and RSV Program – On February 5, 2015, we announced we have successfully completed the requisite in vitro studies to support an IND application for our RSV fusion inhibitor, BTA-C585, and pending successful completion of ongoing in vivo studies, we intend to file the IND by mid-year 2015. In addition, we have identified a series of potent RSV non-fusion inhibitors that we intends to further develop and believe could be useful either as a stand-alone treatment and potentially in combination therapy with our fusion inhibitor (BTA-C585) for the treatment of patients infected with RSV.

BARDA Contract Termination – On February 5, 2015, we reported that during our second fiscal quarter, we had successfully resolved the majority of our outstanding claims with the BARDA associated with the termination of our contract with BARDA in May 2014. As of December 31, 2014, we had $7.4 million in accounts receivable due from BARDA, of which $5.4 million was collected in early January 2015. We believe that, pursuant to applicable government regulations, we are entitled to be reimbursed for the remaining $2.0 million of accounts receivable we have recorded under the terminated BARDA contract. At this time, we cannot determine when and to what extent a final termination settlement will be reached with BARDA.

Laninamivir Octanoate ( “ LANI ” ) – On February 5, 2015, we announced that we plan to meet with the FDA next quarter to discuss the results of the LANI Phase 1 asthma and Thorough QT/QTc (“TQT”) studies, the Phase 1/2 pediatric study, and the Phase 2 IGLOO study to determine the appropriate primary endpoint for, and which patient reported outcome tools would be acceptable for use in prospective registration trials of LANI to treat uncomplicated influenza. Further, we are pursuing partnering opportunities with LANI for Phase 3 development and commercialization outside of Japan.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of Results of Operations discusses our financial results, which (except to the extent described in the Notes thereto) have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

We base our estimates and judgments on historical experience, current economic and industry conditions, and various other factors that we believe to be reasonable under the circumstances. This forms 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 or conditions. We believe the following critical accounting policies require significant judgment and estimates:

In August 2014, the Financial Accounting Standards Board issued authoritative accounting guidance related to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. In doing so, the amendments should reduce diversity in the timing and content of footnote disclosures. This guidance is effective for public and non-public entities for annual periods ending after December 15, 2016, and interim periods thereafter. Early adoption is permitted. We are currently assessing the expected impact, if any, that this Accounting Standards Update will have on the consolidated financial statements.

In May 2014, the Financial Accounting Standards Board issued authoritative accounting guidance related to revenue from contracts with customers. This guidance is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This guidance is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. We will adopt this guidance on July 1, 2017. Companies may use either a full retrospective or a modified retrospective approach to adopt this guidance. We are evaluating which transition approach to use and its impact, if any, on its consolidated financial statements.

  Results of Operations

Three Months Ended December 31, 201 4 and December 31, 201 3

Summary. For the three months ended December 31, 2014, we reported a net income of $6.5 million, as compared to a net loss of $0.1 million in the same period of 2013. The $6.6 million increase in net income in 2014 was primarily due to a $9.8 million decrease in the cost of revenue, a $1.4 million increase in foreign exchange gain, a $0.5 million decrease in general and administrative expense and a $0.1 million increase in interest income, offset in part by $4.6 million decrease in revenue and a $0.6 million increase in research and development expense. Basic and diluted net income per share were $0.19 for the three month period ended December 31, 2014, as compared to a basic and diluted net loss per share of zero in the same period of 2013.

Revenue. Revenue decreased to $13.9 million for the three months ended December 31, 2014 from $18.5 million for the same period in 2013. The following table summarizes the key components of our revenue for the three months ended December 31, 2014 and 2013:  

Royalty revenues increase primarily due to an increase in seasonal sales of Inavir ^® in Japan which is marketed by Daiichi Sankyo, offset in part by lower sales of Relenza ^® , which is marketed worldwide by GlaxoSmithKline. Revenue from services decreased due to a reduction in contract service revenue related to the cancellation of the Company’s contract with BARDA in May 2014 for the convenience of the U.S. Government, offset in part by a partial settlement of $4.7 million for all final costs associated with the Phase 2 IGLOO clinical trial for laninamivir octanoate. Revenue from grants and other decreased due to a decrease in grant-related research activities.

Cost of Revenue. Cost of revenue decreased to $1.6 million for the three months ended December 31, 2014 from $11.4 million for the same period in 2013. The following table summarizes the components of our cost of revenue for the three months ended December 31, 2014 and 2013.

Direct preclinical, clinical and product development expense decreased due to the lower direct third-party clinical costs incurred associated with Phase 1 and 2 clinical trials and manufacturing activities for the laninamivir octanoate program under the terminated BARDA contract. Salaries, benefits and share-based compensation expense decreased primarily as a result of personnel no longer being allocated to work under the BARDA contract. Other expenses decreased due to reduction in miscellaneous costs as a result of the termination of the BARDA contract.  

Research and Development Expense. Research and development expense increased to $4.8 million for the three months ended December 31, 2014 from $4.2 million for the same period in 2013. The following table summarizes the components of our research and development expense for the three months ended December 31, 2014 and 2013.

Direct preclinical, clinical and product development expense increased largely due to the initiation of the Phase 2 SPIRITUS clinical trial of vapendavir and preclinical expenses related to the ongoing IND-enabling studies associated with BTA-C585, our RSV fusion inhibitor. Salaries, benefits and share-based compensation decreased primarily due to reductions in personnel working on research activities. Other expenses decreased due to lower research and intellectual patent filing expenses on product candidates.

General and Administrative Expense. General and administrative expense decreased to $2.6 million for the three months ended December 31, 2014 from $3.1 million for the same period in 2013. The following table summarizes the components of our general and administrative expense for the three months ended December 31, 2014 and 2013.

Salaries, benefits and share-based compensation expenses decreased as a result of reductions in personnel. Professional and legal fees expense decreased primarily due to lower professional and legal expenses related to previous integration activities. Other expenses decreased primarily due to lower insurance premiums as compared to the previous period.

Foreign Exchange Gain, (Loss) net. Foreign exchange gain increased due to the increase in the value of the U.S. dollar as compared to the Australian dollar during the three month period ended December 31, 2014 and the related translation of foreign currency balances and transactions in our subsidiaries that have a different functional currency than the reporting currency on our statement of operations. We translate all of the assets and liabilities of our non-U.S. subsidiaries at the period-end exchange rate and the net effect of these translation adjustments is shown on our condensed consolidated balance sheet as a component of stockholders’ equity.

Interest Income. Interest income increased due to having a greater amount of investments in 2014 as compared to 2013 and the related yield earned on those investments.  

Six Months Ended December 31, 201 4 and December 31, 201 3

Summary. For the six months ended December 31, 2014, we reported a net loss of $0.4 million, as compared to a net loss of $4.0 million in the same period of 2013. The $3.6 million decrease in net loss in 2014 was primarily due to a $18.9 million decrease in the cost of revenue, a $3.0 million increase in foreign exchange gain, a $0.5 million decrease in general and administrative expense and a $0.1 million increase in interest income, offset in part by $16.2 million decrease in revenue and a $2.6 million increase in research and development expense and a $0.1 million decrease in income tax benefit. Basic and diluted net loss per share were $0.01 for the six month period ended December 31, 2014, as compared to a basic and diluted net loss per share of $0.14 in the same period of 2013.

Revenue. Revenue decreased to $14.6 million for the six months ended December 31, 2014 from $30.8 million for the same period in 2013. The following table summarizes the key components of our revenue for the six months ended December 31, 2014 and 2013:  

Royalty revenue increased primarily due to higher seasonal sales of Inavir ^® in Japan, which is marketed by Daiichi Sankyo, offset in part by lower sales of Relenza ^® , which is marketed worldwide by GlaxoSmithKline. Revenue from services decreased due to a decrease in contract service revenue related to the cancellation of our contract with BARDA in May 2014 for the convenience of the U.S. Government, offset in part by a partial settlement of $4.7 million for all final costs associated with the Phase 2 IGLOO clinical trial for laninamivir octanoate. Revenue from grants and other decreased due to a decrease in grant-related research activities.
 

Cost of Revenue. Cost of revenue decreased to $3.3 million for the six months ended December 31, 2014 from $22.2 million for the same period in 2013. The following table summarizes the components of our cost of revenue for the six months ended December 31, 2014 and 2013.

Direct preclinical, clinical and product development expense decreased due to the lower direct third-party clinical costs incurred associated with Phase 1 and 2 clinical trials and manufacturing activities for the laninamivir octanoate program under the terminated BARDA contract. Salaries, benefits and share-based compensation expense decreased primarily as a result of lower personnel being allocated to work under the BARDA contract. Other expenses decreased due to reduction in miscellaneous costs as a result of the termination of the BARDA contract.  

Research and Development Expense. Research and development expense increased to $9.7 million for the six months ended December 31, 2014 from $7.1 million for the same period in 2013. The following table summarizes the components of our research and development expense for the six months ended December 31, 2014 and 2013.

Direct preclinical, clinical and product development expense increased due largely to an increase in direct clinical expenses associated with the initiation of the Phase 2 SPIRITUS clinical trial of vapendavir and preclinical expenses related to the ongoing IND-enabling studies associated with BTA-C585, our RSV fusion inhibitor. Salaries, benefits and share-based compensation decreased primarily due to reductions in personnel. Other expenses decreased due to lower research and intellectual patent filing expenses on product candidates.

General and Administrative Expense. General and administrative expense decreased to $5.0 million for the six months ended December 31, 2014 from $5.5 million for the same period in 2013. The following table summarizes the components of our general and administrative expense for the six months ended December 31, 2014 and 2013.

Salaries, benefits and share-based compensation expenses decreased as a result of reductions in personnel. Professional and legal fees decreased primarily due to lower professional expenses related to human resources matters. Other expenses decreased primarily due to lower insurance premiums and expenses related to our public listing.

Foreign Exchange ( Gain ) , Loss . Foreign exchange (gain) loss increased to a gain of $2.8 million from a loss of $0.2 million due to the increase in the value of the U.S. dollar as compared to the Australian dollar during the six month period ended December 31, 2014 and the related translation of foreign currency balances and transactions in our subsidiaries that have a different functional currency than the reporting currency on our statement of operations. We translate all of the assets and liabilities of our non-U.S. subsidiaries at the period-end exchange rate and the net effect of these translation adjustments is shown on our condensed consolidated balance sheet as a component of stockholders’ equity.

Interest Income. Interest income increased due to the Company having a greater amount of investments in 2014 as compared to 2013 and the related yield earned on those investments.  

LIQUIDITY AND CAPITAL RESOURCES

For the six months ended December 31, 2014, cash and cash equivalents decreased by $18.0 million, from $81.7 million to $63.7 million, including the effects of exchange rate movements on cash and cash equivalents. This decrease was primarily the result of cash being used to purchase additional liquid short-term and long-term investments and use of cash for operating activities during the period.

Net cash used in operating activities was $10.6 million for the six months ended December 31, 2014, which reflected our net loss for the period of $0.4 million and a net decrease in operating liabilities of $13.7 million, offset in part by a decrease in net operating assets of $1.7 million and non-cash charges for share-based compensation and depreciation of $1.8 million.

Our net loss resulted largely from our funding of research and development activities including basic research, conducting clinical and preclinical studies, manufacturing and formulation of our product candidates, and ongoing general and administrative expenses, partially offset by contract service revenue, royalty revenues and interest income. The net changes in operating assets and liabilities reflects a $12.6 million decrease in accounts payable and accrued expenses and a decrease of $1.1 million in accrued severance obligations and a $0.3 million increase in prepaid expenses, offset in part by a $4.3 million decrease in accounts receivable.

Net cash used in investing activities during the six months ended December 31, 2014 consisted of $9.9 million for purchases of short-term and long-term investments, offset in part by the call redemption of long-term investments of $6.9 million.

At December 31, 2014, our cash and cash equivalents totaled $63.7 million. Our cash and cash equivalents are currently held in the form of short-term deposits with large U.S. and Australian banks. Our short-term and long-term investments totaling $12.9 million consist primarily of U.S. treasury securities and U.S. government agency securities.

Our future funding requirements are difficult to determine and will depend on a number of factors, including:

Based on our current strategy and operating plan, and considering the potential costs associated with advancing the clinical development and preclinical development of our product candidates, we believe that our existing cash and cash equivalents of $63.7 million, plus our liquid investments of $12.9 million as of December 31, 2014, along with the anticipated proceeds from existing royalty-bearing licenses and final proceeds from the close-out of our contract with BARDA, will enable us to operate for a period of at least 12 months from December 31, 2014.

We currently do not have any commitments for future funding, nor do we anticipate that we will generate significant revenue, aside from existing revenue from royalty-bearing arrangements. Therefore, in order to meet our anticipated liquidity needs beyond 12 months to support the development of our product candidates and operations, or possibly sooner in the event we enter into other transactions or revise our strategy or development plans, we may need to raise or secure additional capital. We would expect to do so primarily through the sale of additional common stock or other equity securities, as well as through proceeds from future licensing agreements, strategic collaborations, forms of debt financing, or any other financing vehicle. Funds from these sources may not be available to us on acceptable terms, if at all, and our failure to raise such funds could have a material adverse impact on our future business strategy and plans, financial condition and results of operations. If adequate funds are not available to us on acceptable terms in the future, we may be required to delay, reduce the scope of, or eliminate one or more of our research and development programs, or delay or curtail our preclinical studies and clinical trials, or reduce our internal cost structure. If additional capital is not available to us on acceptable terms, we may need to obtain funds through license agreements, or collaborative or partner arrangements pursuant to which we will likely relinquish rights to certain product candidates that we might otherwise choose to develop or commercialize independently, or be forced to enter into such arrangements earlier than we would prefer, which would likely result in less favorable transaction terms. Additional equity financings may be dilutive to holders of our common stock, and debt financing, if available, may involve significant payment obligations and covenants that restrict how we operate our business.

Contractual and Commercial Commitments

There have been no material changes from the information included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2014.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as defined in Item 303(a)(4) (ii) of Regulation S-K under the Securities Exchange Act of 1934, as amended.