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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2014

OR

o         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: 001-35663

KYTHERA Biopharmaceuticals, Inc.

(Exact Name of Registrant as Specified in its Charter)

(818) 587-4500

(Registrant’s Telephone Number, Including Area Code)

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

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 that the registrant was required to submit and post such files).  Yes x  No o

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

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

As of October 17, 2014, the number of outstanding shares of the registrant’s common stock, par value $0.00001 per share, was 22,675,319.

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KYTHERA BIOPHARMACEUTICALS, INC.

Index

Item 3 through 5 of Part II have been omitted because they are not applicable with respect to the current reporting period.

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

KYTHERA BIOPHARMACEUTICALS, INC.

Condensed Consolidated Balance Sheets

See accompanying notes.

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KYTHERA BIOPHARMACEUTICALS, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

See accompanying notes

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KYTHERA BIOPHARMACEUTICALS, INC.

Condensed Consolidated Statements of Cash Flows

(unaudited)

See accompanying notes.

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KYTHERA BIOPHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2014

(unaudited)

1. Organization

KYTHERA Biopharmaceuticals, Inc. (“KYTHERA” or the “Company”) is a clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of novel prescription products for the aesthetic medicine market. The Company’s objective is to develop first-in-class, prescription aesthetic products using an approach that relies on the scientific rigor of biotechnology to address unmet needs in the rapidly-growing market for aesthetic medicine. The Company’s initial focus is on the facial aesthetics market, which comprises the majority of the aesthetics medicine market. The Company’s product candidate, ATX-101, is a potential first-in-class, injectable drug in late stage clinical development for the reduction of submental fat, which commonly presents as an undesirable “double chin.”

KYTHERA was originally incorporated in Delaware in June 2004 under the name Dermion, Inc. It commenced operations in August 2005 and its name was changed to AESTHERx, Inc. In July 2006, the Company changed its name to KYTHERA Biopharmaceuticals, Inc.

Since commencement of operations in August 2005, the Company has devoted substantially all its efforts to the development of ATX-101, recruiting personnel and raising capital. In 2010, the Company entered into a License Agreement with Bayer Consumer Care AG and a Services, Research, Development and Collaboration Agreement with Bayer’s Affiliate, Intendis GmbH, collectively referred to as the collaboration arrangement with Bayer. Bayer Consumer Care AG and Intendis GmbH are referred to jointly as Bayer. On March 7, 2014, the Company entered into an agreement whereby it acquired the rights to develop and commercialize ATX-101 outside of the United States and Canada from Bayer. In connection with this acquisition, the Company recorded a $52,757,000 charge for acquired in-process research and development during the quarter ended March 31, 2014. See Note 6, “Collaborations and Contingencies” for a more detailed discussion of this acquisition.

The information included in this quarterly report on Form 10-Q should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities Exchange Commission (“SEC”).

2. Summary of Significant Accounting Policies and Basis of Presentation

There have been no material changes to the Company’s significant accounting policies during the nine months ended September 30, 2014 as compared to the significant accounting policies described in the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2013.

The accompanying financial information for the three and nine months ended September 30, 2014 and 2013 are unaudited. The consolidated financial statements include the consolidated accounts of the Company and its wholly-owned subsidiary, KYTHERA Holdings Ltd. (“KHL”), a Bermuda corporation.  Intercompany accounts and transactions have been eliminated in consolidation.  These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, and applicable rules and regulations of the SEC regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In management’s opinion, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, and include all adjustments, which include only normal recurring adjustments necessary for the fair presentation of our condensed consolidated statement of financial position as of September 30, 2014, our condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2014 and 2013 and our condensed consolidated statements of cash flows for the nine months ended September 30, 2014 and 2013. The results for interim periods are not necessarily indicative of the results expected for the full fiscal year or any other period(s).

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Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could materially differ from those estimates. Management considers many factors in selecting appropriate financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these condensed consolidated financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates, including: expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes and management must select an amount that falls within that range of reasonable estimates. This process may result in actual results differing materially from those estimated amounts used in the preparation of the financial statements.

Cash and Cash Equivalents and Marketable Securities

All highly liquid securities with maturities of 90 days or less from the date of purchase are considered to be cash equivalents. As of September 30, 2014 and December 31, 2013, cash and cash equivalents were comprised of funds invested in cash and money market accounts. The Company maintains cash balances in excess of amounts insured by the FDIC. The accounts are monitored by management to mitigate the risk.

Investments with maturities of more than 90 days from the date of purchase are classified as marketable securities. Marketable securities are stated at fair value. The Company has classified its entire marketable securities portfolio as available-for-sale securities. Accordingly, any unrealized gain or loss on the investments is reported as a component of accumulated other comprehensive income (loss). The amortized cost of these securities is adjusted for amortization of premiums and accretion of discounts to maturity, as applicable. Such amortizations and accretions are included as a component of interest income. The entire marketable securities portfolio is considered available for use in current operations and, accordingly, all such investments are considered current assets although the stated maturity of individual investments may be more than one year beyond the balance sheet date.

Realized gains and losses, determined on a specific identification basis, and declines in value, if any, judged to be other-than-temporary on available-for-sale securities are reported as a component of interest income. When securities are sold, any associated unrealized gain or loss previously reported in accumulated other comprehensive income (loss) is reclassified out of stockholders’ equity and recorded in the statement of operations and comprehensive loss for the period. Accrued interest and dividends are included in interest income.

On a quarterly basis, the Company reviews the available-for-sale securities for other-than-temporary declines in fair value below the amortized cost basis.  This evaluation is based on a number of factors including the length of time and extent to which the fair value has been below the cost basis and any adverse conditions related specifically to the security, including any changes to the credit rating of the security. If the Company concludes that an other-than-temporary impairment exists, it recognizes an impairment charge to reduce the investment to fair value and records the related charge as a reduction of interest income. No impairment charges were recognized for the three and nine months ended September 30, 2014 and 2013.

Property and Equipment

Property and equipment are recorded at historical cost and consist of the following:

Except for leasehold improvements discussed below, depreciation is recorded using the straight-line method over the estimated useful lives of the assets (one to five years). The Company reviews its property and equipment assets for impairment in value whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During the nine months ended September 30, 2014, the Company disposed of certain assets totaling $254,000. The disposals consisted primarily of leasehold improvements and furniture and fixtures from the Company’s previously leased facility. These assets were fully depreciated at the date of disposal. The Company had no impairments or disposals during the nine months ended September 30, 2013.

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Cameras used in the Company’s clinical trials are fully depreciated as of September 30, 2014 and are being held for disposal.

The $1,146,000 in leasehold improvements as of September 30, 2014 relates to the leasehold improvements constructed at the Company’s newly leased facility. These leasehold improvements were placed into service in August 2014 when the Company began to occupy the newly leased facility and will be depreciated over the three year lease term, which is the shorter of the improvements expected useful lives and the lease term.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist primarily of cash and cash equivalents and marketable securities. The primary objectives for the Company’s investment portfolio are the preservation of capital and the maintenance of liquidity. The Company does not enter into any investment transaction for trading or speculative purposes.

The Company’s investment policy limits investments to certain types of instruments such as certificates of deposit, money market instruments, obligations issued by U.S. government and U.S. government agencies and corporate debt securities and places restrictions on maturities and concentration by type and issuer. The Company maintains cash balances in excess of amounts insured by the FDIC. The accounts are monitored by management to mitigate the risk.

Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of net loss and other comprehensive income (loss). For the three and nine months ended September 30, 2014 and 2013, the only component of other comprehensive income (loss) are net unrealized gains and losses on marketable securities. There were no material reclassifications out of accumulated other comprehensive income (loss) during the three and nine months ended September 30, 2014 and 2013.

Fair Value of Financial Instruments

The carrying amounts reported in the accompanying condensed consolidated financial statements for accounts payable and accrued liabilities approximate their fair value because of the short-term nature of these accounts. The fair value of cash equivalents, marketable securities and the notes payable are discussed in Note 7, “Fair Value Measurements.”

Recent Accounting Pronouncements

In May 2014, a new standard was issued related to revenue recognition, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new standard will replace most of the existing revenue recognition standards in U.S. GAAP when it becomes effective on January 1, 2017. Early adoption is not permitted. The new standard allows for either “full retrospective” adoption, whereby the new standard is applied to each prior reporting period presented or “modified retrospective” adoption, whereby the new standard is only applied to the most current period presented with the cumulative effect of the change recognized at the date of the initial application. The Company is assessing the potential impact of the new standard on its consolidated statements of financial position and results of operations and comprehensive income (loss) and has not yet selected a transition method.

In August 2014, a new standard was issued which will require management to evaluate if there is substantial doubt about the entity’s ability to continue as a going concern and, if so, disclose it in both annual and interim reporting periods. The new standard will become effective for the Company’s annual filing for the period ending December 31, 2016 and interim periods thereafter, with early adoption permitted. The Company does not believe the adoption of this accounting standard will have a material impact on the Company’s financial statements and related disclosures.

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3. Marketable Securities

The Company’s marketable securities held as of September 30, 2014 and December 31, 2013 are summarized below:

There were no material realized gains or losses from the sale of marketable securities during the three and nine months ended September 30, 2014 and 2013. All of our available-for-sale investments that were in an unrealized loss position as of September 30, 2014 have been in a continuous unrealized loss position for less than 12 months and had an aggregate fair value of $45,279,000. The unrealized losses related to corporate debt securities, which the Company plans to hold until maturity, and it is more likely than not that the Company will not be required to sell prior to maturity. Due to the limited duration and severity of the loss, as well as the nature of corporate debt securities, the Company does not consider the investments to be other-than-temporarily impaired at September 30, 2014.

The maturities of the Company’s marketable securities are as follows:

4. Notes Payable

Notes payable consisted of the following:

Note Payable to Bayer

In March 2014, as part of the agreement to acquire the rights to develop and commercialize ATX-101 outside of the United States and Canada, the Company issued a $51,000,000 unsecured promissory note to Bayer.  The promissory note is subordinated to amounts owed under the Company’s existing credit facility.  Interest is accrued at 5% per annum and is payable on the anniversary date of the note.  The Company has the option of deferring 80% of the accrued interest, adding any unpaid interest to the principal amount. The note is due on the ten year anniversary from issuance, with the option to prepay at any point in time without penalty.

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As the note payable to Bayer bears interest at 5%, which was below the borrowing rate available to the Company at issuance, it was recorded at its fair value of $21,600,000, which is the present value of the future cash flows assuming a borrowing rate of 15%. The difference between face value and fair value of the note was recorded as a discount and is being amortized over the life of the note utilizing the effective interest method. The balance of the note payable at September 30, 2014 is as follows:

Included in interest expense for the three and nine months ended September 30, 2014 was amortization of the debt discount of $174,000 and $392,000, respectively, and interest expense of $643,000 and $1,446,000,respectively, related to the note payable to Bayer.  The balance of accrued interest expense at September 30, 2014 was $1,446,000 and the balance of the remaining unamortized discount was $29,008,000 at September 30, 2014.

Notes Payable Related to Credit Facility

On March 21, 2011, the Company executed a debt financing agreement whereby the Company had access to borrow up to $15,000,000 of senior loan financing through January 1, 2012. Subsequently, the credit facility was amended to provide for an extension of the drawdown period. For each draw, the Company was required to make six months of interest only payments at a fixed rate of 11.5% followed by 30 months of interest and principal payments at a fixed rate of 8.5% and a final payment of 6% of the amount drawn due with the last principal payment. Interest expense related to the notes payable is being recorded over the term of the notes utilizing the effective interest method.  The debt is secured by all the Company’s assets, except for the Company’s intellectual property, which is subject to a negative pledge agreement.

On October 1, 2012, the Company drew $5,000,000 and in November 2012, obtained an extension allowing for the draw of the remaining $10,000,000 in $5,000,000 increments by January 31, 2013 and February 28, 2013. On January 31, 2013 the Company drew down an additional $5,000,000 of available funds under its credit facility and on February 28, 2013, the Company drew the remaining $5,000,000.  As of September 30, 2014 and December 31, 2013, $15,000,000 had been drawn.  There was no further borrowing capacity under this facility as of September 30, 2014.

Upon entry into the debt financing agreement, the Company issued warrants to purchase 34,000 shares of Series C redeemable convertible preferred stock (“Series C Preferred”) at an exercise price of $13.3530. The estimated fair value of the warrants at issuance of approximately $345,000 was recorded as a deferred financing cost offsetting the notes payable liability and is being amortized to interest expense over the expected term of the loan.  Upon extension of the credit facility in December 2011, the Company issued a warrant to purchase up to an additional 86,000 shares of its Series D redeemable convertible preferred stock (“Series D Preferred”) at an exercise price of $13.9040. The estimated fair value of the warrant at issuance of approximately $1,074,000 was recorded as a deferred financing cost offsetting the notes payable liability and is being amortized to interest expense over the expected term of the loan.  Effective immediately prior to the closing of the Company’s initial public offering (“IPO”), the warrants for convertible preferred stock became warrants for common. All warrants were exercised on a cashless basis in December of 2012 resulting in the net issuance of 49,000 shares of common stock.

Included in interest expense for the three and nine months ended September 30, 2014 and 2013 was amortization of debt issuance costs of $85,000 and $255,000, and $85,000 and $255,000, respectively, and interest expense of $270,000 and $940,000, and $452,000 and $1,231,000, respectively, related to the notes payable. The balance of accrued interest expense at September 30, 2014 and December 31, 2013 was $692,000 and $375,000, respectively. The remaining unamortized debt issuance cost at September 30, 2014 and December 31, 2013 was $481,000 and $736,000, respectively.

5. Stockholders’ Equity

Shares Reserved for Future Issuance

Shares of the Company’s common stock reserved for future issuance are as follows:

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Stock Awards

In September 2012, the Company’s board of directors approved the 2012 Equity Incentive Award Plan (“the 2012 Plan”), which became effective upon completion of the Company’s IPO. The 2012 Plan provides for the granting of incentive and nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, deferred stock, dividend equivalents, performance awards, stock payments and other stock-based and cash-based awards to its employees, directors, and consultants at the discretion of the compensation committee of the board of directors. The 2012 Plan is the successor to the Amended and Restated 2004 Stock Plan. Any remaining shares available for future issuance under the 2004 Stock Plan are available for issuance under the 2012 Plan. In addition, the plan reserve will automatically increase annually from January 1, 2013 through January 1, 2022 by an amount equal to the smaller of: (a) 1,512,687 shares, (b) four percent of the number of shares of common stock issued and outstanding on the immediately preceding December 31, or (c) an amount determined by the Company’s board of directors. As of September 30, 2014 and December 31, 2013, a total of 4,094,000 and 3,224,000 shares, respectively, were authorized for grant under the Plan.

In September 2014, the Company’s board of directors approved the 2014 Employment Commencement Incentive Plan (“the 2014 Plan”), under which up to 900,000 shares are available for grant. The 2014 Plan provides for the granting of nonstatutory stock options, restricted stock, restricted stock units, performance awards, dividend equivalents, stock payments, stock appreciation rights or other incentive awards or performance share awards to new employees as inducement to enter employment.

Stock options may be granted with exercise prices not less than the fair market value of the Company’s common stock. Under the 2012 Plan, incentive stock options granted to individuals owning more than 10% of the total combined voting power of all classes of stock (“a 10% stockholder”) are exercisable up to five years from the date of grant. The 2012 Plan provides that the exercise price of any incentive stock option granted to a 10% stockholder cannot be less than 110% of the estimated fair value of the common stock on the date of grant. Except as set forth above, options granted under the Company’s plans expire no later than ten years from the date of grant. Options granted to employees under the Company’s plans vest over periods determined by the board of directors, which generally vest over four years. Additionally, the Company has granted certain performance-based stock option awards and restricted stock units that vest based on the achievement of certain predetermined milestones. Prior to the Company’s IPO, the board of directors determined the estimated fair value of its common stock based on assistance from an independent third-party valuation expert. Since the Company’s IPO, the fair market value of its common stock is the closing share price as reported on the NASDAQ Global Select Market on the date of grant.

The Company estimates the fair value of its stock-based awards to employees and directors using the Black-Scholes option pricing model. The Black-Scholes model requires the input of complex and subjective assumptions, including (a) the expected stock price volatility, (b) the expected term of the award, (c) the risk-free interest rate and (d) expected dividends. Due to the Company’s limited operating history and a lack of company specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. When selecting these public companies on which it has based its expected stock price volatility, the Company selected companies with comparable characteristics to it, including enterprise value, risk profiles, position within the industry, and with historical public share price information sufficient to meet the expected life of the stock-based awards. The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price in public markets becomes available. The Company has estimated the expected life of its employee stock options using the “simplified” method, whereby, the expected life equals the arithmetic average of the vesting term and the original contractual term of the option due to its lack of sufficient historical data. The risk-free interest rates for periods within the expected life of the option are based on the U.S. Treasury yield curve in effect during the period the options were granted. The Company has never paid, and does not expect to pay dividends in the foreseeable future. The Company also grants restricted stock units and the grant date fair value per share of those awards is equal to the closing stock price on the date of grant.

The Company is also required to estimate forfeitures at the time of grant, and revise those estimates in subsequent periods if actual forfeitures differ from its estimates. The Company uses historical data to estimate pre-vesting forfeitures and record stock-based compensation expense only for those awards that are expected to vest. To the extent that actual forfeitures differ from the Company’s estimates, the difference is recorded as a cumulative adjustment in the period the estimates were revised. For the three and nine months ended September 30, 2014 and 2013, the Company applied forfeiture rates based on the Company’s historical forfeitures.

A summary of stock option activity for the nine months ended September 30, 2014 is as follows:

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The Company accounts for stock options issued to nonemployees using a fair value approach. The compensation costs of these arrangements are subject to re-measurement over the vesting terms as earned.

A summary of restricted stock unit activity for the nine months ended September 30, 2014 is as follows:

Total equity-based compensation cost recorded in the condensed consolidated statements of operations and comprehensive loss, which includes employee stock-based compensation expense, and the value of options issued to nonemployees and directors for services is allocated as follows:

As of September 30, 2014, there was $25,181,000 of unrecognized compensation expense related to unvested employee stock option agreements, which is expected to be recognized over a weighted-average period of approximately 2.96 years and $3,054,000 related to restricted stock unit agreements which is expected to be recognized over a weighted-average period of approximately 1.07 years. For stock option and restricted stock unit awards subject to graded vesting, the Company recognizes compensation cost on a straight-line basis over the service period for the entire award.

6. Collaborations and Contingencies

Collaboration Arrangements

From time to time, the Company enters into collaborative arrangements for its research and development and manufacturing activities. Each collaboration is unique in nature and the Company’s significant agreements are discussed below.

Bayer

In August 2010, the Company entered into a license agreement with Bayer Consumer Care AG that provided Bayer with an exclusive license to develop, manufacture and commercialize ATX-101 outside of the United States and Canada. In connection with the License Agreement the Company also entered into a related Services, Research, Development and Collaboration Agreement with Bayer’s affiliate, Intendis GmbH. These agreements were referred to jointly as the collaboration arrangement with Bayer, and Bayer Consumer Care AG and Intendis GmbH are referred to jointly as Bayer. In connection with the entry into the collaboration arrangement, Bayer paid the Company an upfront license fee of approximately $21,319,000 and approximately $22,247,000 for research and development to fund a portion of Bayer’s European Phase III clinical trials. The Company received a contingent event-based payment of $15,800,000 on May 31, 2012, triggered by the completion of Bayer’s European Phase III clinical trials for ATX-101, the receipt of two consecutive validated manufacturing lots and Bayer’s subsequent decision to pursue continued development and seek regulatory approval of ATX-101. This amount was recorded as revenue upon receipt as all revenue recognition criteria had been met. At this time, Bayer also elected to pursue additional research and development activities related to ATX-101, which were distinct from the original development activities, and subsequently funded $17,400,000 for these additional Bayer development activities. In March 2014, the Company acquired rights to ATX-101 outside of the United States and Canada from Bayer and no longer expects to recognize revenue from Bayer.

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Amounts to fund collaboration efforts of $22,247,000 and $17,400,000 were recorded as restricted cash and deferred development funds and were recognized as an offset to research and development expenses as the restricted cash was utilized to fund development activities. Amounts recognized as offsets to research and development expenses were $3,570,000 for the nine months ended September 30, 2014 and $3,006,000 and $8,206,000 for the three and nine months ended September 30, 2013, respectively. No amounts were recognized as offsets to research and development expenses for the three months ended September 30, 2014 due to the Company’s purchase of the rights from Bayer. Deferred development funds remaining at the time that the Company purchased the rights to ATX-101 outside of the United States and Canada in March 2014 of $967,000 were no longer considered restricted cash and were deducted from the one-time charge to in-process research and development, reducing the in-process research and development expense recorded in March 2014.

In March 2014, the Company entered into an agreement whereby it acquired the rights to develop and commercialize ATX-101 outside of the United States and Canada from Bayer.  Under the new agreement, KYTHERA Holdings Ltd., a wholly-owned Bermuda subsidiary of the Company, purchased these rights. As a result of this agreement, Bayer was issued 698,103 shares of the Company’s common stock valued at $33,000,000 based on an average closing stock price of $47.27 over a period set forth in the agreement.  Additionally, the Company issued an unsecured promissory note for $51,000,000, which is subordinated to amounts owed under the Company’s existing credit facility, bears interest at 5% per annum and is payable no later than 2024. Additionally, Bayer is eligible to receive up to $123,800,000 upon the achievement of certain long-term sales milestone payments on annual sales of ATX-101 outside of the United States and Canada.  As of September 30, 2014, the achievement of the related sales levels is not considered to be probable.

The acquisition date costs allocated to the acquired rights consists of the following:

The fair value of the common stock issued is based on the closing price of our common stock on the acquisition date of $45.02 per share. As the note payable to Bayer includes an interest rate which was below the borrowing rate available to the Company at issuance, it was recorded at its fair value of $21,600,000, which is the present value of the future cash flows assuming a borrowing rate of 15%, which approximates market. Other represents the net impact of the reduction in costs resulting from the residual restricted cash of $967,000 that reverted to the Company, partially offset by $695,000 of transaction costs related to the acquisition.

This transaction was accounted for as an acquisition of a group of assets.  As the acquired rights to ATX-101, represent acquired-in-process research and development, with no alternative future uses, the costs allocated to such rights, $52,757,000, were immediately expensed upon acquisition and reflected as in-process research and development in the condensed consolidated statement of operations and comprehensive loss.  This charge is considered to be a component of research and development expense.

See Note 4, “Notes Payable” for a more detailed discussion of the promissory note.

Los Angeles Biomedical Research Institute

In August 2005, the Company entered into an exclusive license agreement with Los Angeles Biomedical Research Institute at Harbor/UCLA Medical Center, or LA Biomed, pursuant to which it obtained a worldwide exclusive license to practice, enforce and otherwise exploit certain patent rights related to the use of the active ingredient in ATX-101. The exclusive license requires the Company to pay LA Biomed a milestone payment of $500,000 upon receipt of marketing approval of ATX-101, as well as non-royalty sublicense fees equal to 10% of any sublicense income, up to a total of $5,000,000, 50% of which the Company may elect to satisfy through the issuance of capital stock. Additionally, upon commercialization of a licensed product or service, the Company is obligated to pay low- to mid- single digit royalties on net product sales of ATX-101. In August 2010, due to the receipt of the upfront license fee from Bayer, the Company incurred non-royalty sublicense fees of $1,950,000, which was deferred and was recognized as sublicense fee expense on a straight-line basis over the same period as the license income. During 2010, the Company made payments of cash and stock to LA Biomed totaling $390,000 related to the non-royalty sublicense fee incurred. The remainder of $1,560,000 was paid upon the Company’s IPO in 50% cash and 50% stock.

Additionally, due to the receipt of the contingent event-based payment of $15,800,000 payable from Bayer on May 31, 2012, the Company incurred an additional non-royalty sublicense fee of $1,580,000 payable to LA Biomed, which was paid in 50% cash and 50% stock.

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Contingencies

From time to time, the Company may be subject to various litigation and related matters arising in the ordinary course of business. The Company is not currently subject to any such matters where there is at least a reasonable possibility that a material loss may have been incurred.

7. Fair Value Measurements

The Company applies various valuation approaches in determining the fair value of its financial assets and liabilities within a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. The fair value hierarchy is broken down into three levels based on the source of inputs as follows:

Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2—Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable, either directly or indirectly.

Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The availability of observable inputs can vary among the various types of financial assets and liabilities. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for financial statement disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is categorized is based on the lowest level input that is significant to the overall fair value measurement.

At September 30, 2014 and December 31, 2013, the Company had cash equivalents comprised of money market accounts whose value is based using quoted market prices with no adjustments applied. Accordingly, these securities are classified as Level 1. U.S. Government agency securities and corporate debt securities are measured at fair value using Level 2 inputs. These securities are investment grade with maturity dates of two years or less from the balance sheet date.  The Company reviews trading activity and pricing for these investments as of the measurement date. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from various third party data providers. These inputs represent quoted prices for similar assets in active markets or these inputs have been derived from observable market data. This approach results in the classification of these securities as Level 2 of the fair value hierarchy.  There were no transfers of assets or liabilities between the fair value measurement levels during the nine months ended September 30, 2014 and 2013.

The following fair value hierarchy table presents information about each major category of the Company’s financial assets measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013.

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The Company has notes payable, which are liabilities for which fair value is disclosed as of September 30, 2014 and December 31, 2013. Based on the borrowing rates currently available to the Company for debt with similar terms and consideration of default and credit risk, the Company believes that the carrying value of the notes payable related to the credit facility (Level 2) approximates its fair value at September 30, 2014 and December 31, 2013. At September 30, 2014, the Company had a note payable with Bayer at a below market interest rate of 5%.  The carrying value of the note was calculated assuming a discount rate of 15% based on an analysis to determine the market rate available to the Company for similar debt at issuance.  Based on an analysis of various factors at September 30, 2014, including the Company’s cost of equity, the effective interest rate on the credit facility notes payable, the rate of public company structured debt arrangements for development companies at a similar stage, its subordinated nature, other debt issuance by investment firms to similar companies and management’s judgment, the Company believes that the carrying value of this note payable approximates its fair value.  Since several of the factors analyzed are considered to be unobservable inputs, this is considered to be a Level 3 valuation.

The fair values of cash equivalents, accounts payable and accrued liabilities approximate their carrying values due to the short-term nature of these accounts.

8. Income Taxes

There is no provision for income taxes because the Company has incurred operating losses since inception. At September 30, 2014 the Company has concluded that it is more likely than not that the Company may not realize the benefit of its deferred tax assets due to its history of losses. Accordingly, the net deferred tax assets have been fully reserved.

As of September 30, 2014, the Company does not have any accrued interest or penalties related to uncertain tax positions. The Company’s policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. The Company does not have any interest or penalties related to uncertain tax positions in income tax expense for the three and nine months ended September 30, 2014 and 2013. The tax years subsequent to and including 2005 remain open to examination by the major taxing jurisdictions to which the Company is subject.

9. Basic and Diluted Net Loss Per Common Share

Basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period, excluding the effects of options and restricted stock units outstanding. Diluted net loss per common share is computed by dividing the net loss by the sum of the weighted average number of common shares outstanding during the period plus the potential dilutive effects of options and restricted stock units outstanding during the period calculated in accordance with the treasury stock method. Because the impact of these items is anti-dilutive during periods of net loss, there was no difference between weighted average number of shares used to calculate basic and diluted net loss per common share for the three and nine months ended September 30, 2014 and 2013.

The calculation of weighted average diluted shares outstanding excludes the dilutive effect of options and restricted stock units outstanding, as the impact of such items are anti-dilutive during periods of net loss.  Shares excluded from the calculation, prior to the use of the treasury stock method, unweighted, were 2,980,000 and 2,312,000 at September 30, 2014 and 2013, respectively.

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

You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2013.

In addition, the following discussion contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other 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 discussed in the section titled “Risk Factors,” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

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Overview

We are a clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of novel prescription products for the aesthetic medicine market. Our objective is to develop first-in-class, prescription products using an approach that relies on the scientific rigor of biotechnology to address unmet needs in the rapidly-growing market for aesthetic medicine. Our initial focus is on the facial aesthetics market, which comprises the majority of the aesthetic medicine market. Our product candidate, ATX-101, is a potential first-in-class, injectable drug for the reduction of submental fat, which commonly presents as an undesirable “double chin.” Based on clinical trials conducted to date, ATX-101 has exhibited significant, meaningful and long-lasting results in the reduction of submental fat. These results correspond with patient satisfaction measures demonstrating meaningful improvement in perceived chin appearance. If approved by applicable regulatory authorities, we believe ATX-101 will be an attractive solution for the reduction of submental fat, representing a new product category within the rapidly growing facial aesthetics market.  ATX-101 is our only product candidate and we are substantially dependent on its regulatory approval and successful commercialization.

Since commencing operations in August 2005, we have devoted substantially all our efforts to identify and develop products for the aesthetics market, recruiting personnel and raising capital. We have devoted predominantly all of our resources to the preclinical and clinical development of ATX-101 and we have not generated any revenue from product sales. On May 12, 2014, we submitted our New Drug Application (“NDA”) with the U.S. Food and Drug Administration (“FDA”), which was accepted for filing by the FDA on July 10, 2014. The NDA will be subject to a standard review with a Prescription Drug User Fee Act (PDUFA) action date of May 13, 2015. The PDUFA date is the goal date for the FDA to complete its review of the NDA. The FDA informed us that the FDA’s division of Dermatology and Dental Products is currently planning to hold an Advisory Committee meeting on the ATX-101 application during the review. We submitted an NDS with Health Canada in August 2014 and a Marketing Authorization Application (“MAA”) to Swiss Medic in October 2014, seeking approval for ATX -101 as an injectable treatment for the reduction of submental fat.  Historically we have funded substantially all of our operations through the sale and issuance of our common and preferred stock, convertible debt, amounts received from U.S. Government grants and pursuant to our collaboration arrangement with Bayer and borrowings under our existing credit facility.

In March 2014, we entered into an agreement whereby we acquired the rights to develop and commercialize ATX-101 outside of the United States and Canada from Bayer in exchange for 698,103 shares of KYTHERA common stock and a $51.0 million unsecured promissory note with a fair value of $21.6 million. The promissory note, which is subordinated to amounts owed under our existing credit facility, bears interest at 5% per annum and is payable no later than 2024. Additionally, Bayer is eligible to receive up to $123.8 million upon the achievement of certain long-term sales milestone payments on annual sales of ATX-101 outside of the United States and Canada. The transaction was accounted for as an asset acquisition and, as a result, a one-time charge to in-process research and development of $52.8 million was recognized during the first quarter, including transaction costs, offset by the deferred development funds retained by the Company as a result of terminating the Services, Research, Development and Collaboration agreement.

We believe the acquisition of these rights is a transformative opportunity for KYTHERA and that we have the right leadership and operational team to shape the future path of ATX-101. We continue to evaluate on a territory-by-territory basis where and how to best maximize the value of ATX-101. As a result of acquiring the rights to develop and commercialize ATX-101 outside of the United States and Canada, we experienced modest increases in our operating expense and cash usage for regulatory costs outside the United States since the acquisition, and these will continue for the remainder of the year.

We have never been profitable and, as of September 30, 2014, we had an accumulated deficit of $283.6 million. We incurred net losses of $22.5 million and $111.4 million, and $11.5 million and $37.9 million for the three and nine months ended September 30, 2014 and 2013, respectively. We expect to continue to incur net operating losses for at least the next few years as we advance ATX-101 through clinical development, seek regulatory approval, prepare for and, if approved, proceed to commercialization. We have no manufacturing facilities and all of our manufacturing activities are contracted out to third parties. Additionally, we currently utilize third-party clinical research organizations, or CROs, to carry out our clinical development and we do not yet have a sales organization. We expect to seek additional funding to support our operating activities, especially as we approach anticipated regulatory approval in the United States and Canada and possibly internationally, and begin to establish our sales capabilities. Adequate funding may not be available to us on acceptable terms, or at all. Our failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on our business, results of operations, and financial condition.

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Financial Overview

Revenue

To date, all of our revenue has been derived from license fees we have received pursuant to our former collaboration arrangement with Bayer. In March 2014, we acquired the rights to ATX-101 outside of the United States and Canada from Bayer and no longer will recognize revenue from Bayer.

We have not generated any revenue from product sales. Even if ATX-101 is approved for commercial sale, we do not expect to generate revenue from product sales until at least 2015, if at all. If we fail to complete the development of ATX-101, or other product candidates, in a timely manner or to obtain regulatory approval, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected.

In-Process Research and Development

In March 2014, we incurred a one-time charge to in-process research and development of $52.8 million related to obtaining the rights to ATX-101 outside of the United States and Canada from Bayer. See Note 6 to the Condensed Consolidated Financial Statements, “Collaborations and Contingencies” for a more detailed discussion of this acquisition.

Research and Development Expenses

Major components of our research and development costs are personnel costs, including cash and stock-based compensation expense, preclinical studies, clinical trials and related manufacturing, materials and supplies, regulatory affairs activities, building of our medical affairs function and fees paid to consultants and other entities that conduct certain research, development and regulatory activities on our behalf. We expense all research and development costs in the periods in which they are incurred. To date, our research and development expenses have related predominately to the development of ATX-101. In the three and nine months ended September 30, 2014 and 2013 we spent $13.4 million and $34.3 million, and $7.0 million and $24.8 million, respectively, on research and development expenses, excluding in-process research and development. Since inception through September 30, 2014, we have spent approximately $167.5 million on research and development expenses related to the development of ATX-101, excluding cash and stock-based compensation expenses, including in-process research and development. We do not allocate cash and stock-based compensation expense to individual product candidates, as we are organized and record expense by functional department and our employees may allocate time to more than one development project. We do not utilize a formal time allocation system to capture expenses on a project-by-project basis.

Conducting significant research and development is central to our business and strategy. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and greater duration of late stage clinical trials as compared to earlier clinical and preclinical development. We expect our research and development expenses will be higher as compared to 2013 as we prepare for potential approval in the United States and in connection with increased personnel to establish medical affairs capability, establish commercial manufacturing and supply chain, NDA preparation and submission, preparation for expected FDA Advisory Committee meeting, and regulatory submissions in other territories throughout the world.

General and Administrative Expenses

Our general and administrative costs primarily consist of personnel costs, including cash and stock-based compensation expense, associated with our executive, accounting and finance, legal, marketing and human resources departments. Other general and administrative expenses include costs in connection with patent filing, prosecution and defense, facility costs and professional fees for legal, consulting, marketing, audit and tax services. For the three and nine months ended September 30, 2014 and 2013 our general and administrative expenses totaled approximately $7.9 million and $21.4 million, and $4.0 million and $11.7 million, respectively. We expect our general and administrative costs will be higher as compared to 2013 as we increase our headcount, occupy larger facility space, establish commercial and company infrastructure and other activities to support our company growth as we prepare for a potential commercial launch of ATX-101, in the United States and possibly internationally.

Interest Expense

Interest expense relates to the interest on the outstanding balances of the notes payable.  Interest expense increased significantly as compared to 2013 due to the additional interest expense on the note payable to Bayer issued in March 2014.

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Former Collaboration Arrangement with Bayer

In August 2010, we entered into a license agreement with Bayer Consumer Care AG and a related collaboration agreement with Bayer’s affiliate, Intendis GmbH. We refer to these agreements jointly as our collaboration arrangement with Bayer, and we refer to Bayer Consumer Care AG and Intendis GmbH jointly as Bayer. Pursuant to our collaboration arrangement, we licensed to Bayer all of the development and commercial rights to ATX-101 outside the United States and Canada. In connection with establishing the collaboration arrangement, we received upfront payments of $43.6 million in 2010 comprised of license fees and amounts to fund certain further global development activities of ATX-101. In May 2012, we received a $15.8 million payment from Bayer triggered by Bayer’s decision to pursue continued development and regulatory approval for ATX-101 after receipt of positive results from the European Phase III clinical trials for ATX-101. In addition, in May 2012, we also received $17.4 million from Bayer to fund certain further Bayer global development activities of ATX-101 under the terms of the collaboration arrangement.

In March 2014, we acquired the rights to develop and commercialize ATX-101 outside of the United States and Canada from Bayer. As a result of this agreement, Bayer was issued 698,103 shares of our common stock and we issued a note payable for $51.0 million. The promissory note, which is subordinated to amounts owed under our existing credit facility, bears interest at 5% per annum and is payable no later than 2024. Additionally, Bayer is eligible to receive up to $123.8 million upon the achievement of certain long-term sales milestone payments on annual sales of ATX-101 outside of the United States and Canada. We accounted for this transaction as an asset acquisition. Since the acquired rights represent acquired in-process research and development with no alternative future uses, we recorded a one-time charge to in-process research and development of $52.8 million as a result of expensing the resulting value assigned to such rights.

Collaboration Development Funds

Additionally, we have received approximately $39.6 million to fund certain further global development activities of ATX-101, which were recorded as restricted cash and deferred development funds and were an offset to research and development expenses as the restricted cash was utilized to fund development activities. Amounts recognized as offsets to research and development expenses were $3.6 million for the nine months ended September 30, 2014, $3.0 million and $8.2 million for the three and nine months ended September 30, 2013, respectively. Deferred development funds remaining at the time that we purchased the rights to ATX-101 outside of the United States and Canada in March 2014 of $1.0 million were no longer considered restricted cash and were deducted from the one-time charge to in-process research and development. As the collaboration arrangement with Bayer was discontinued in March 2014, no amounts were recognized as offsets to research and development expenses during the three months ended September 30, 2014 and we no longer have restricted cash balances related to Bayer.

Los Angeles Biomedical Research Institute

We entered into a license agreement with the Los Angeles Biomedical Research Institute, or LA Biomed, in August 2005, which granted us exclusive worldwide rights to key intellectual property for the active ingredient in ATX-101. As part of this license agreement, we incur sublicense fees equal to 10% of any non-royalty sublicense income, up to a total of an aggregate of $5.0 million. We are obligated to pay LA Biomed low- to mid-single digit royalties on global net product sales of ATX-101. Additionally, we will incur a milestone payment of $0.5 million upon receipt of marketing approval.

In August 2010, due to the receipt of the license fee income from Bayer, we incurred non-royalty sublicense fees of $2.0 million, which was deferred and recorded as sublicense expense on a straight-line basis over the same period as the license income was recorded. During 2010, we made payments to LA Biomed in cash and stock totaling $0.4 million related to the non-royalty sublicense fee incurred and the remaining $1.6 million was paid upon our IPO in 50% cash and 50% stock. Due to the receipt of the $15.8 million contingent event-based payment from Bayer in May 2012, we incurred an additional non-royalty sublicense fee of $1.6 million due to LA Biomed, which was paid in 50% cash and 50% stock.

Critical Accounting Policies and Significant Judgments and Estimates

The preparation of our consolidated 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 our consolidated financial statements as well as the reported revenues and expenses during the reported periods. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ materially from these estimates.

There have been no significant changes in critical accounting policies during the three and nine months ended September 30, 2014, as compared to the critical accounting policies described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Basis of Presentation” in our audited financial statements included in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2013.

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Results of Operations

Comparison of Three Months Ended September 30, 2014 and 2013

Research and development expenses.  Research and development expenses increased $6.4 million, or 92.3%, from $7.0 million for the three months ended September 30, 2013 to $13.4 million for the three months ended September 30, 2014. There was an increase in headcount and related personnel costs of $1.1 million, including increased stock compensation expense of $0.2 million resulting from an increase in stock option grants as well as an increase in share price and the issuance of restricted stock units, an increase in cost due to lower utilization of deferred development funds of $1.7 million which served to offset research and development expenses under the Bayer collaboration, an increase in manufacturing costs of $2.6 million, and an increase of $0.9 million in external costs in connection with the development and execution of our medical affairs program. The increase in manufacturing costs is related to establishing commercial manufacturing and supply chain capabilities as we prepare for the potential approval of ATX-101, as well as manufacturing drug product to support international regulatory filings. Clinical trial costs are consistent between the quarters as the cost of our previously announced additional trials initiated in 2014 offset the costs for the U.S. and Canadian Phase III pivotal trials in the prior year.

General and administrative expenses.  General and administrative expenses increased by $3.9 million, or 96.1%, from $4.0 million for the three months ended September 30, 2013 to $7.9 million for the three months ended September 30, 2014. The increase is partially due to increased personnel costs associated with an increase in headcount in support of the growing organization of approximately $1.8 million, including increased stock compensation expense of $0.9 million resulting from an increase in stock option grants, an increase in share price, and the issuance of restricted stock units. The increase is also due to increased external costs of $1.6 million associated with the expansion of company infrastructure and marketing activities in preparation for commercial launch as we prepare for the potential approval of ATX-101.

Interest income.  Interest income for the three months ended September 30, 2014 and 2013 represents interest earned on marketable securities purchased during the year partially offset by the amortization of premiums paid on the purchased securities.

Interest expense.  Interest expense for the three months ended September 30, 2014 and 2013 relates to the outstanding balance of the notes payable. The increase is primarily due to interest expense on the note payable to Bayer issued in March 2014.

Comparison of Nine Months Ended September 30, 2014 and 2013

* Percentage not meaningful.

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In-process research and development.  In-process research and development of $52.8 million for the nine months ended September 30, 2014 represents the one-time charge for acquiring the rights to ATX-101 outside of the United States and Canada from Bayer in March 2014.

Research and development expenses.  Research and development expenses increased $9.6 million, or 38.6%, from $24.8 million for the nine months ended September 30, 2013 to $34.3 million for the nine months ended September 30, 2014. The increase is primarily attributable to higher costs from an increase in headcount and related personnel costs of $4.1 million, including increased stock compensation expense of $1.7 million, an increase in manufacturing costs of $3.1 million due to establishing commercial manufacturing and supply chain capabilities in preparation for commercial launch as we prepare for the potential approval of ATX-101 as well as drug product manufacturing in support of international regulatory filings, an increase in external costs associated with our regulatory filings and preparation for our expected FDA Advisory Committee meeting of $1.7 million, and an increase in external costs of $2.3 million for the development and execution medical affairs program. The increase was partially offset by a decrease in clinical trial costs of approximately $1.3 million due to a decrease in the costs associated with the U.S. and Canadian Phase III pivotal trials offset by the costs of previously announced additional trials initiated during the year.

General and administrative expenses.  General and administrative expenses increased by $9.7 million, or 82.4%, from $11.7 million for the nine months ended September 30, 2013 to $21.4 million for the nine months ended September 30, 2014. The increase is primarily due to increased personnel costs associated with an increase in headcount in support of the growing organization of approximately $4.4 million, including increased stock compensation expense of $2.7 million, increased external costs of $2.0 million associated with marketing activities in preparation of commercial launch as we prepare for the potential approval of ATX-101, increased external costs of $1.3 million for the expansion of our information technology infrastructure to support our potential commercial launch of ATX-101, and increased corporate development, accounting, legal, director fees and insurance costs of $1.7 million as a result of the maintaining a growing public company.

Interest income.  Interest income for the nine months ended September 30, 2014 represents interest earned on marketable securities held during the first three quarters of 2014 offset by the amortization of premiums paid on the purchased securities.

Interest expense.  Interest expense increased by $1.5 million, or 104.1%, from $1.5 million for the nine months ended September 30, 2013 to $3.0 million for the nine months ended September 30, 2014. The increase is primarily due to the interest expense incurred on the note payable to Bayer issued in March 2014.

Liquidity and Capital Resources

Since our inception, we have incurred net losses and negative cash flows from our operations. We incurred net losses of $111.4 million and $37.9 million, and used $43.7 million and $34.2 million of cash for our operating activities for the nine months ended September 30, 2014 and 2013, respectively. At September 30, 2014 we had an accumulated deficit of $283.6 million.

As of September 30, 2014, we had working capital of $101.7 million. Historically, we have principally financed our operations through our public offerings, private placements of redeemable convertible preferred stock and convertible debt, amounts received pursuant to our collaboration arrangement with Bayer for the development of our product candidate ATX-101 and borrowings under our notes payable. In the fourth quarter 2013, we completed a public offering of shares of common stock at an offering price of $45.75 per share and we received aggregate net proceeds of approximately $125.0 million, after deducting the underwriting discount and offering related transaction costs.

At September 30, 2014, we had capital resources consisting of cash and cash equivalents and marketable securities of $117.4 million. Our funds are currently invested in money market funds, U.S. government agency securities, corporate debt securities and demand deposit accounts.

Additionally, we have drawn $15.0 million under our credit facility and have no further borrowing capacity under our existing credit facility. In connection with our acquisition of the rights to develop and commercialize ATX-101 outside of the United States and Canada from Bayer in March 2014, we issued a $51.0 million unsecured promissory note. The promissory note, which is subordinated to amounts owed under our existing credit facility, bears interest at 5% and is payable no later than 2024. Bayer is also eligible to receive certain long-term sales milestone payments on annual sales outside of the United States and Canada. We have the right to repay the outstanding obligation including accrued interest before its due date in 2024. The terms provide for us to defer up to 80% of the 5% accrued interest on the principal annually, and add it to the outstanding balance.

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We believe that our existing capital resources will be sufficient to fund our operations for at least the next 12 months. We believe that we will continue to expend substantial resources for the foreseeable future on the completion of clinical and regulatory development of ATX-101, preparing and filing foreign regulatory applications, preparations for potential commercial launch of ATX-101, and development of any other product candidates we may choose to pursue. These expenditures will include costs associated with research and development, conducting preclinical studies and clinical trials, obtaining regulatory approvals, and manufacturing and supply as well as marketing and selling any products approved for sale. In addition, other unanticipated costs may arise. We expect to seek additional financing in the future to fund our operations, to expand our commercial organization in anticipation of potential commercial launch of ATX-101, or develop additional product candidates, by selling additional equity, issuing debt or convertible debt securities that may result in dilution to our stockholders. If we raise additional funds through the issuance of convertible debt securities, these securities could have rights senior to those of our common stock and could contain covenants that restrict our operations. There can be no assurance that we will be able to obtain additional equity or debt financing on terms acceptable to us, if at all. Our failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on our business, results of operations, and financial condition.

Our future capital requirements depend on many factors, including:

·                  the timing of, and the costs involved in, obtaining regulatory approvals for ATX-101 in the U.S., including the cost of any studies or additional activities that the FDA may require us to complete;

·                  any unexpected results from further analysis of clinical data of our completed clinical trials;

·                  the timing and scope of the investment we make in building our commercial infrastructure and sales force in anticipation of the potential commercial launch of ATX-101 in the U.S.;

·                  the timing of, and the costs involved in, obtaining regulatory approvals for ATX-101 outside of the United States and Canada including other costs associated with operating outside of the United States;

·                  the number and characteristics of any other product candidates we develop or acquire;

·                  the scope, progress, results and costs of researching and developing ATX-101 or any future product candidates, and conducting preclinical and clinical trials;

·                  the cost of commercialization activities if ATX-101 or any future product candidates are approved for sale, including marketing, sales and distribution cost and preparedness of our corporate infrastructure;

·                  the cost of manufacturing ATX-101 and any future product candidates and any products we successfully commercialize;

·                  the timing of the payment of our debt obligations, including whether or not we determine to prepay the $51.0 million note held by Bayer;

·                  our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such agreements;

·                  any product liability or other lawsuits related to our products or commenced against us;

·                  the expenses needed to attract and retain skilled personnel;

·                  the costs associated with being a public company;

·                  the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation; and

·                  the timing, receipt and amount of sales of, or royalties on, future approved products, if any.

Please see “Risk Factors” for additional risks associated with our substantial capital requirements.

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Note Payable to Bayer

In March 2014, as part of the agreement to acquire the rights to develop and commercialize ATX-101 outside of the United States and Canada, we entered into a $51.0 million unsecured promissory note with Bayer. The promissory note is subordinated to amounts owed under our existing credit facility.  Interest is accrued at 5% per annum and is payable on the anniversary date of the note. We have the option of deferring 80% of the accrued interest, adding any unpaid interest to the principal amount. The note is due on the ten year anniversary from issuance, with the option to prepay at any point in time without penalty. As the note payable to Bayer includes a favorable interest rate, which was below the borrowing rate available to us at issuance, it was recorded at its fair value of $21.6 million, which is the present value of the future cash flows assuming a borrowing rate of 15%, which approximates market. The discount on the note is being amortized to interest expense utilizing the effective interest method.

Notes Payable Related to our Credit Facility

On March 21, 2011, we entered into a credit facility with Lighthouse Capital Partners VI, L.P. (“Lighthouse”), which we refer to as our credit facility, which provided access to borrow up to $15.0 million of senior loan financing through January 1, 2012. In December 2011, July 2012 and November 2012, we amended the credit facility to provide for an extension of our drawdown period. As of September 30, 2014 and December 31, 2013, we had drawn $15.0 million, respectively, and no longer have any further borrowing capacity under the credit facility. The credit facility includes various covenants, and we were in compliance with all covenants at September 30, 2014.

For each drawdown, we will make six months of interest only payments at a fixed rate of 11.5% followed by 30 months of interest and principal payments at a fixed rate of 8.5%, and a final payment of 6% of the amount drawn. The debt is secured by all of our assets, except for intellectual property, which is subject to a negative pledge agreement. In accordance with the terms of the credit facility, we issued to Lighthouse warrants to purchase 33,700 shares of our Series C redeemable convertible preferred stock at a price per share of $13.3530 and 86,306 shares of our Series D redeemable convertible preferred stock at a price per share of $13.9040.

All of the warrants issued to Lighthouse converted to warrants to purchase 120,006 shares of common stock in connection with our initial public offering and were subsequently net exercised on a cashless basis for 49,435 shares of common stock in December of 2012.

Summary Statements of Cash Flows

The following table shows a summary of our cash flows for the nine months ended September 30, 2014 and 2013.

Net cash used in operating activities.  Net cash used in operating activities was $43.7 million for the nine months ended September 30, 2014 and consisted primarily of a net loss of $111.4 million offset by the non-cash in-process research and development charge of $53.0 million and stock-based compensation of $9.2 million. The significant items in the change in operating assets and liabilities include a decrease in deferred development funds of $2.1 million offset by a decrease in restricted cash of $5.1 million and an increase in accounts payable and other accrued liabilities of $1.5 million. The increase in accounts payable and other accrued liabilities is primarily due to the timing of activities related to preparing for potential commercial launch. The decrease in the deferred development funds and restricted cash is due to the completion of obligations under our collaboration agreement with Bayer.

Net cash used in operating activities was $34.2 million for the nine months ended September 30, 2013 and consisted primarily of a net loss of $37.9 million offset by stock based compensation of $4.8 million. The significant items in the change in operating assets and liabilities include a decrease in deferred development funds of $9.0 million offset by a decrease in restricted cash of $6.3 million. The decrease in the deferred development funds and restricted cash was due to the continuing performance of obligations under the collaboration agreement with Bayer during 2013.

Net cash provided by (used in) investing activities.  Net cash used in investing activities for the nine months ended September 30, 2014 was $25.0 million compared to net cash used for investing activities of $29.4 million for the nine months ended September 30, 2013.  Our cash flows related to investing activities are primarily due to purchases and sales of marketable securities. There were $55.9 million of marketable securities purchased and purchases of property and equipment of $1.9 million for the nine months ended September 30, 2014, offset by the proceeds from sales of marketable securities of $32.9 million. There were no material gains or losses on the sale of marketable securities. For the nine months ended September 30, 2013, purchases of marketable securities were $32.4 million, offset by proceeds from sales of marketable securities of $3.0 million.

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Net cash (used in) provided by financing activities.  Net cash used in financing activities for the nine months ended September 30, 2014 was $3.1 million and was due to repayment of borrowings under the credit facility of $4.4 million offset by proceeds from common stock option exercises of $1.3 million. Net cash provided by financing activities was $9.5 million for the nine months ended September 30, 2013, and was primarily due to the draw of $10.0 million from the credit facility.

Indemnification

In the normal course of business, we enter into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. Our exposure under these agreements is unknown because it involves claims that may be made against us in the future, but have not yet been made. To date, we have not paid any claims or been required to defend any action related to our indemnification obligations. However, we may record charges in the future as a result of these indemnification obligations.

In accordance with our certificate of incorporation and bylaws, we have indemnification obligations to our officers and directors for specified events or occurrences, subject to some limits, while they are serving at our request in such capacities. There have been no claims to date, and we have director and officer insurance that may enable us to recover a portion of any amounts paid for future potential claims.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements (as defined by applicable SEC regulations) that are reasonably likely to have a current or future material effect on our financial condition, revenues and expenses, results of operations, liquidity, capital expenditures or capital resources, except stock awards.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks in the ordinary course of our business. These market risks are principally limited to interest rate fluctuations and foreign currency exchange rate fluctuations. Due to the fixed interest rate of our notes payable, we do not currently have any exposure to changes in our interest expense as a result of changes in interest rates.

Cash and Cash Equivalents and Marketable Securities

As of September 30, 2014, we had cash and cash equivalents and marketable securities of $117.4 million. The primary objective of our investment activities is to preserve principal and liquidity while maximizing income without significantly increasing risk. We do not enter into investments for trading or speculative purposes. At September 30, 2014, our cash and cash equivalents and marketable securities were comprised of funds in cash, money market accounts, U.S. government agency securities and investment grade, highly liquid corporate debt securities. Due to the short-term nature of our investment portfolio, we do not believe an immediate 10% increase in interest rates would have a material effect on the fair market value of our portfolio. Additionally, we do not expect our operating results or cash flows would be materially affected by a 10% decrease in market interest rates.

Notes Payable

Our notes payable related to the credit facility are at an effective interest rate which approximates the borrowing rates currently available to the Company for debt with similar terms and consideration of default and credit risk. Our note payable to Bayer is at a rate that is less than market, but the note was recorded at fair value based on an interest rate which approximates the borrowing rates currently available to the Company for debt with similar terms and consideration of default and credit risk. As the interest rates on our notes payable are fixed for specified periods, changes in interest rates do not affect our operating results or cash flows.

Foreign Currency Exchange Rate Fluctuations

With the recent acquisition of rights to ATX-101 outside of the United States and Canada from Bayer, in the future, we may be subject to fluctuations in foreign currency exchange rate risk. We are not currently exposed to any material foreign currency exchange rate risk and, as a result, we do not currently hedge any foreign currency exposure.

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ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive and financial officers, evaluated the effectiveness of our disclosures controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of September 30, 2014. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that 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. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2014, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during the quarter ended September 30, 2014 identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. Other Information

ITEM 1. Legal Proceedings

We may from time to time be involved in various legal proceedings of a character normally incident to the ordinary course of our business. We are not currently a party to any material litigation or other material legal proceedings.

ITEM 1A. Risk Factors

Our operations and financial results are subject to various risks and uncertainties, including those described below, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. You should carefully consider the risks described below and the other information in this Quarterly Report on Form 10-Q.

Risks Related to Our Limited Operating History, Business and Capital Requirements

We have a limited operating history and have incurred significant losses since our inception and we anticipate that we will continue to incur 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 assess our future viability.

We are a clinical-stage biopharmaceutical company with a limited operating history. Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. To date, we have focused principally on developing our only product candidate, ATX-101, for which we completed our U.S. and Canadian Phase III clinical trials and submitted an NDA with the FDA in May 2014. We are not profitable and have incurred losses in each year since our inception in June 2004. We have only a limited operating history upon which one can evaluate our business and prospects. In addition, we have limited experience and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biopharmaceutical industry. We have not generated any revenue from product sales to date. We continue to incur significant research and development and other expenses related to our ongoing operations. Our net loss for the nine months ended September 30, 2014 and 2013 was approximately $111.4 million and $37.9 million, respectively. As of September 30, 2014 we had an accumulated deficit of $283.6 million. We expect to continue to incur losses for the foreseeable future, as we continue our development of, and seek regulatory approvals for, ATX-101, and begin to commercialize ATX-101. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital.

We are substantially dependent on the success of our only product candidate, ATX-101.

To date, we have invested nearly all of our efforts and financial resources in the research and development of ATX-101, which is currently our only product candidate. In particular, we have completed seven Phase I, three Phase II clinical studies, two European Phase III clinical trials, and two U.S. and Canadian Phase III clinical trials and two Phase IIIb studies.

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Our near-term prospects, including our ability to finance our company and to enter into strategic collaborations and generate revenue, will depend heavily on the successful development, regulatory approval and commercialization of ATX-101 and any future product candidates. The clinical and commercial success of ATX-101 will depend on a number of factors, including the following:

·                  our ability to demonstrate the safety and efficacy of ATX-101 to the satisfaction of the FDA and similar foreign regulatory authorities;

·                  our ability to obtain, and the timing of, regulatory approval of ATX-101 from the FDA and similar foreign regulatory authorities and the timely receipt of such necessary marketing approvals, where applicable;

·                  any unexpected results from further analysis of clinical data of our completed clinical trials;

·                  timely completion of our ongoing or upcoming clinical trials, which may be slower than we currently anticipate and will depend substantially upon the satisfactory performance of third-party contractors;

·                  whether we are required by the FDA or other similar foreign regulatory agencies to conduct additional clinical trials;

·                  our ability to successfully commercialize ATX-101, if approved for marketing and sale by applicable regulatory agencies, whether alone or in collaboration with others;

·                  our success in educating physicians and patients about the benefits, administration and use of ATX-101;

·                  the incidence, duration and severity of adverse side effects;

·                  achieving and maintaining compliance with all regulatory requirements applicable to ATX-101;

·                  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;

·                  the ability of our third-party manufacturers to manufacture clinical trial and commercial supplies of ATX-101 or any future product candidates, to remain in good standing with regulatory agencies, and to develop, validate and maintain commercially viable manufacturing processes that are compliant with Current Good Manufacturing Practice, or CGMP regulations;

·                  our ability to successfully commercialize ATX-101 in the United States and Canada, and in other international territories, if approved for marketing and sale in such countries and territories, whether alone or in collaboration with others;

·                  our ability to enforce our intellectual property rights in and to ATX-101;

·                  our ability to avoid third-party patent interference or patent infringement claims;

·                  acceptance of ATX-101 as safe and effective by patients and the medical community; and

·                  a continued acceptable safety profile of ATX-101 following approval.

Many of these factors are beyond our control. Accordingly, we cannot assure you that we will ever be able to generate revenue through the sale of ATX-101. If we are not successful in obtaining approval of and commercializing ATX-101, or are significantly delayed in doing so, our business will be materially harmed.

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We may be unable to obtain regulatory approval for ATX-101 under applicable regulatory requirements. The denial or delay of any such approval would delay commercialization of ATX-101 and adversely impact our potential to generate revenue, our business and our results of operations.

To gain approval to market a drug product, we must provide the FDA and foreign regulatory authorities with clinical data that adequately demonstrates the safety, efficacy and compliant manufacturing of the product for the intended indication applied for in the NDA or other respective regulatory filing. Drug development is a long, expensive and uncertain process, and delay or failure can occur at any stage of any of our clinical trials. A number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant setbacks in clinical trials and manufacturing, even after promising results in earlier preclinical or clinical studies. These setbacks have been caused by, among other things, preclinical findings made while clinical studies were underway and safety or efficacy observations made in clinical studies, including previously unreported adverse events. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and the results of clinical trials by other parties, including Bayer, our former collaborator, may not be indicative of the results in trials we may conduct.

In May 2014, we filed an NDA with the FDA for ATX-101 on the basis of the results from our pivotal U.S. and Canadian Phase III clinical trials for ATX-101, and our business currently depends entirely on its successful development, regulatory approval and commercialization in the United States.  We submitted an NDS with Health Canada in August 2014 and a Marketing Authorization Application (“MAA”) to Swiss Medic in October 2014, seeking approval for ATX -101 as an injectable treatment for the reduction of submental fat. We currently have no drug products approved for sale, and we may never obtain regulatory approval to commercialize ATX-101. The research, testing, manufacturing, labeling, approval, sale, marketing and distribution of drug products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, and such regulations differ from country to country. We are not permitted to market ATX-101 in the United States unless and until we receive approval of an NDA from the FDA, and we are not permitted to market ATX-101 in any foreign countries unless and until we receive the requisite approval from the regulatory authorities of such countries.

The FDA or any foreign regulatory bodies can delay, limit or deny approval of ATX-101 for many reasons, including:

·                  inability to demonstrate to the satisfaction of the FDA or the applicable foreign regulatory body that ATX-101 is safe and effective for the requested indication;

·                  the FDA’s or the applicable foreign regulatory agency’s disagreement with the trial protocol or the interpretation of data from preclinical studies or clinical trials;

·                  inability to demonstrate that the clinical and other benefits of ATX-101 outweigh any safety or other perceived risks;

·                  the FDA’s or the applicable foreign regulatory agency’s requirement for additional preclinical or clinical studies;

·                  the FDA’s or the applicable foreign regulatory agency’s non-approval of ATX-101’s chemistry, manufacturing or controls or labeling;

·                  the FDA’s or the applicable foreign regulatory agency’s failure to approve the manufacturing processes or facilities of third-party manufacturers and testing labs with whom we contract; or

·                  the potential for approval policies or regulations of the FDA or the applicable foreign regulatory agencies to significantly change in a manner rendering our clinical data or regulatory filings insufficient for approval.

Of the large number of drugs in development, only a small percentage successfully complete the FDA or other regulatory approval processes and are commercialized. Further, we did not conduct our U.S. and Canadian Phase III clinical trials under a Special Protocol Assessment, or SPA. In the absence of an agreed SPA there can be no assurance that the FDA will agree with our Phase III clinical trial protocol. In addition, ATX-101 may not be approved by the FDA or applicable foreign regulatory agencies even though it has met its specified endpoints in our U.S. and Canadian Phase III clinical trials and, our former collaborator, Bayer’s pivotal European Phase III clinical trials. The FDA and/or applicable foreign regulatory agencies may disagree with the trial design and/or the interpretation of data from clinical trials, and may ask us to conduct additional costly and time consuming clinical trials in order to obtain marketing approval or approval to enter into an advanced phase of development, or may change the requirements for approval even after it has reviewed and commented on the design for the clinical trials.

Even if we eventually complete clinical testing and receive approval of the NDA or foreign regulatory filing for ATX-101, the FDA or the applicable foreign regulatory agency may grant approval contingent on the performance of costly additional clinical trials which may be required after approval. The FDA or the applicable foreign regulatory agency also may approve ATX-101 for a more limited indication or a narrower patient population than we originally requested, and the FDA, or applicable foreign regulatory agency, may not approve the labeling that we believe is necessary or desirable for the successful commercialization of ATX-101. Any delay in obtaining, or inability to obtain, applicable regulatory approval would delay or prevent commercialization of ATX-101 and would materially adversely impact our business and prospects.

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Even if ATX-101 or any future product candidates obtain regulatory approval, they may never achieve market acceptance or commercial success.

Even if we obtain FDA or other regulatory approvals, ATX-101 or any future product candidates may not achieve market acceptance among physicians and patients, and may not be commercially successful. Market acceptance of ATX-101 or any future product candidates for which we receive approval depends on a number of factors, including:

·                  the safety and efficacy of the product as demonstrated in clinical trials;

·                  the clinical indications for which the product is approved and whether our desired labeling is approved;

·                  acceptance by physicians, major operators of clinics and patients of the product as a safe and effective treatment;

·                  proper training and administration of our products by physicians;

·                  the potential and perceived advantages of our product candidates over alternative treatments;

·                  the cost of treatment in relation to alternative treatments and willingness to pay for our products, if approved, on the part of physicians and patients;

·                  the willingness of patients to pay for ATX-101 and other aesthetic treatments in general, relative to other discretionary items;

·                  relative convenience and ease of administration;

·                  the incidence, duration and severity of adverse side effects;

·                  the effectiveness of our sales and marketing efforts; and

·                  the degree to which the approved labeling supports promotional initiatives for commercial success.

Any failure by our product candidates that obtain regulatory approval to achieve market acceptance or commercial success would adversely affect our results of operations.

We will require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product development, other operations or commercialization efforts.

Since our inception, most of our resources have been dedicated to the preclinical and clinical development of our sole product candidate, ATX-101. As of September 30, 2014, we had working capital of $101.7 million and capital resources consisting of cash and cash equivalents and marketable securities of $117.4 million. We have drawn down the full $15.0 million available under our credit facility and no longer have any established future borrowing capacity under that credit facility. We believe that we will continue to expend substantial resources for the foreseeable future on the completion of clinical and regulatory development of ATX-101, preparing and filing foreign regulatory filings, preparations for a potential commercial launch of ATX-101, and development of any other product candidates we may choose to pursue. These expenditures will include costs associated with research and development, conducting preclinical studies and clinical trials, obtaining regulatory approvals, and manufacturing and supply as well as marketing and selling any products approved for sale. In addition, other unanticipated costs may arise. Because the outcome of any drug development process is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of ATX-101 or any future product candidates.

We believe our existing cash and cash equivalents will allow us to fund our operating plan through at least the next 12 months. However, our operating plan may change as a result of factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings or other sources, such as strategic collaborations. Such financing may result in dilution to stockholders, imposition of debt covenants and repayment obligations, or other restrictions that may adversely affect our business. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans.

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Our future capital requirements depend on many factors, including:

·                  the timing of, and costs involved in, obtaining regulatory approval for ATX-101 in the U.S. and other international territories including the cost of any studies or additional activities that the FDA or other regulatory agencies may require us to complete;

·                  any unexpected results from further analysis of clinical data from our completed clinical trials;

·                  the timing and scope of the investment we make in building our commercial infrastructure and sales force in anticipation of the potential commercial launch of ATX-101 in the U.S.;

·                  the timing of, and the costs involved in, obtaining regulatory approvals for any future product candidates;

·                  the number and characteristics of any additional product candidates we may develop or acquire;

·                  the scope, progress, results and costs of researching and developing ATX-101 or any future product candidates, and conducting preclinical and clinical trials;

·                  the cost of commercialization activities if ATX-101 or any future product candidates are approved for sale, including marketing, sales and distribution costs and preparedness of our corporate infrastructure;

·                  the cost of manufacturing ATX-101 or any future product candidates and any products we successfully commercialize;

·                  the timing of the payment of our debt obligations, including whether or not we determine to prepay the $51.0 million note held by Bayer;

·                  our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such agreements;

·                  any product liability or other lawsuits related to our products or commenced against us;

·                  the expenses needed to attract and retain skilled personnel;

·                  the costs associated with being a public company;

·                  the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent or other claims, including litigation costs and the outcome of such litigation; and

·                  the timing, receipt and amount of sales of, or royalties on, any future approved products, if any.

Additional funds may not be available when we need them, on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to:

·                  delay, limit, reduce or terminate preclinical studies, clinical trials or other development activities for ATX-101 or any future product candidates;

·                  delay, limit, reduce or terminate our research and development activities; or

·                  delay, limit, reduce or terminate our establishment of sales and marketing capabilities or other activities that may be necessary to commercialize ATX-101 or any future product candidates.

Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.

Clinical testing is expensive, and can take many years to complete, and its outcome is inherently uncertain. Furthermore, we rely on contract research organizations, or CROs, and clinical trial sites to ensure the proper and timely conduct of our clinical trials and while we have agreements governing their committed activities, we have limited influence over their actual performance. Failure can occur at any time during the clinical trial process. For example, we have in the past terminated early-stage development and clinical programs for other potential drug candidates due to a lack of sufficient efficacy or the potential for unacceptable adverse reactions to a particular drug candidate, as well as our desire to concentrate our efforts on the development of ATX-101. The results of preclinical and clinical studies of our product candidates may not be predictive of the results of later-stage clinical trials. For example, the positive results generated to date in clinical studies for ATX-101 do not ensure that later clinical trials will demonstrate similar results. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy despite having progressed through preclinical studies and initial clinical trials. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier studies, and we cannot be certain that we will not face similar setbacks. Even if our ongoing or future clinical trials are completed, the results may not be sufficient to obtain regulatory approval for our product candidates.

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We may experience delays in our ongoing clinical trials, and we do not know whether future clinical trials, if any, will begin on time, need to be redesigned, enroll an adequate number of patients on time or be completed on schedule, if at all. Clinical trials can be delayed or aborted for a variety of reasons, including delay or failure to:

·                  obtain regulatory approval to commence a trial;

·                  reach agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

·                  obtain institutional review board, or IRB, approval at each site;

·                  recruit suitable patients to participate in a trial;

·                  have patients complete a trial or return for post-treatment follow-up;

·                  have clinical sites observe trial protocol or continue to participate in a trial;

·                  address any patient safety concerns that arise during the course of a trial;

·                  address any conflicts with new or existing laws or regulations;

·                  add a sufficient number of clinical trial sites; or

·                  manufacture sufficient quantities of product candidate or placebo for use in clinical trials.

Patient enrollment is a significant factor in the timing of clinical trials and is affected by many factors, including the size and nature of the patient population, the proximity of eligible patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs or treatments that may be approved for the indications we are investigating.

We could also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such trials are being conducted, by the Data Safety Monitoring Board, or DSMB, for such trial or by the FDA or other regulatory authorities. Such authorities may suspend or terminate a clinical trial due to a number of factors, including failure to conduct the clinical trial in accordance with the requirements of the relevant regulatory filing (including clinical protocol and manufacturing), inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial.

If we experience delays in the completion of, or terminate, any clinical trial of our future product candidates, if any, the commercial prospects of these product candidates may be harmed, and our ability to generate product revenues from any of these product candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may significantly harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of a clinical trial may also ultimately lead to the denial of regulatory approval of a product candidate.

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ATX-101, if approved, will face significant competition and our failure to effectively compete may prevent us from achieving significant market penetration.

The aesthetic product market, and the facial aesthetics market in particular, is highly competitive and dynamic, and is characterized by rapid and substantial technological development and product innovations. We are seeking regulatory approval of ATX-101 for the reduction in submental fat. A substantial portion of our target physician market is comprised of plastic surgeons and some dermatologists who utilize liposuction and other procedures for fat reduction. Such physicians may find it more advantageous to utilize these surgical and non-surgical procedures to remove localized fat deposits rather than an injectable biopharmaceutical therapy such as ATX-101. We anticipate that ATX-101, if approved, may, for some patients, compete for a share of their discretionary budget with other facial aesthetic products, including injectable botulinum toxins and dermal fillers, as well as for share of mind within the physician’s office for improving facial aesthetics. In addition, we expect that ATX-101, if approved, will compete with new and existing therapies for the treatment of localized fat, including, liposuction and other procedures, as well as other technologies aimed at fat reduction, including laser energy-based and ultrasound energy-based products. We believe that some of these products have been or may be marketed and used for the reduction of submental fat even though they have not been approved for that purpose.

If approved, ATX-101 may also compete with unregulated, unapproved and off-label fat reduction treatments. For example, we are aware that there are entities such as compounding pharmacies and device manufacturers that have manufactured quantities of deoxycholic acid-based formulations, which have been sold as fat reduction treatments without drug approval from the FDA or other foreign governmental regulatory body equivalents. In order to compete successfully in the aesthetics market, we will have to demonstrate that the reduction of submental fat with ATX-101 is a worthwhile aesthetic treatment and is a superior alternative to existing therapies for the reduction of submental fat. There may be other drug or device products currently under development or being considered for development for the treatment of submental or other fat of which we are not currently aware, but which upon approval could compete directly with ATX-101. As an example, we are aware that Neothetics, Inc. (formerly known as Lithera, Inc.), has announced Phase 2b study results for LIPO-202, which is reported to be a physician administered injectable pharmaceutical product being developed for reduction of central abdominal bulging in non-obese patients through the non-ablative, non-surgical fat tissue reduction in specific locations.

ATX-101, if approved, will compete for patient and physician resources and mindshare with products and technologies that are not primarily related to fat reduction, such as injectable botulinum toxins, dermal fillers, and laser-, ultrasound- and radio frequency-based procedures and other aesthetic medicine technologies. The medical technology and aesthetic companies that offer these products also have a broad range of other product offerings, large direct sales forces, and long-term customer relationships with our target physicians, which could inhibit our market penetration efforts.

In addition, a substantial portion of our target physician market is comprised of plastic surgeons who utilize surgical methods for fat reduction. Such physicians may find it more advantageous to utilize surgical techniques to remove localized fat deposits rather than an injectable biopharmaceutical therapy such as ATX-101. Additionally, multiple non-invasive technologies for the reduction of fat or “body-contouring” have received marketing clearance from the FDA. For example, Zeltiq Aesthetics, Inc. has a body-contouring system, CoolSculpting, which utilizes controlled cooling to reduce the temperature of fat cells in the treated area for the selective reduction of fat around the flanks and abdomen.  Zeltiq has announced an intention to pursue FDA clearance in the submentum. Zerona, a laser energy-based product marketed by Erchonia Corporation, and Liposonix, an ultrasound energy-based product marketed by Solta Medical, Inc., have also received FDA marketing clearance. These products may be considered as alternative treatments or therapies.

Due to less stringent regulatory requirements for devices outside of the United States, there are many more aesthetic products and procedures available for use in international markets than are approved for use in the United States. There are also fewer limitations on the claims that competitors in international markets can make about the effectiveness of their products and the manner in which they can market them. For example, Aqualyx has been issued a CE mark in Italy as a medical device that appears to be comprised of an injectable pharmacologic agent combined with ultrasound activity for the non-surgical treatment of localized adiposity. As a result, ATX-101 will face more competition in these markets than in the United States.

Many of these potential competitors are large, experienced companies that have substantially greater resources and brand recognition than we do. Competing in the aesthetic market could result in price-cutting, reduced profit margins, and limited market share, any of which would harm our business, financial condition, and results of operations.

The commercial success of ATX-101, if approved, will depend significantly on broad physician adoption and use of ATX-101.

The commercial success of ATX-101, if approved, will depend significantly on the broad adoption and use of ATX-101 by physicians for the treatment of submental fat. Physician adoption of ATX-101 for the treatment of submental fat, if approved, will depend on a number of factors, including:

·                  the safety and effectiveness of ATX-101 for the removal of submental fat as compared to alternative treatments or procedures;

·                  physician willingness to adopt a new therapy to remove submental fat;

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·                  patient compliance with the treatment regimen;

·                  overcoming any biases plastic surgeons may have toward surgical procedures for submental fat reduction;

·                  patient satisfaction with the results and administration of ATX-101;