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EX-31.2 - EX-31.2 - Paratek Pharmaceuticals, Inc.prtk-ex312_10.htm
EX-31.1 - EX-31.1 - Paratek Pharmaceuticals, Inc.prtk-ex311_8.htm
EX-32.2 - EX-32.2 - Paratek Pharmaceuticals, Inc.prtk-ex322_9.htm
EX-32.1 - EX-32.1 - Paratek Pharmaceuticals, Inc.prtk-ex321_11.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

x

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: September 30, 2015 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: 001-36066

 

PARATEK PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

33-0960223

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

75 Park Plaza

Boston, MA 02116

(617) 807-6600

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

 

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.

 

Large accelerated filer

o

Accelerated filer

o

 

 

 

 

Non-accelerated filer

o  (Do not check if a smaller reporting company)

Smaller reporting company

x

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

As of November 6, 2015 there were 17,608,615 shares of the registrant's common stock outstanding.

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

Page

PART I FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

2

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014

 

2

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014

 

3

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014

 

4

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

5

 

 

 

 

Item 2.

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

 

21

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

29

 

 

 

 

Item 4.

Controls and Procedures

 

29

 

 

 

 

PART II OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

29

 

 

 

 

Item 1A.

Risk Factors

 

30

 

 

 

 

 

 

 

 

Item 6.

Exhibits

 

56

 

 

 

 

 

SIGNATURES

 

57

 

 

 

 

CERTIFICATIONS

 

1


 

PART I – FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

Paratek Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except for share and par value)

 

 

 

September 30,

2015

 

 

December 31,

2014

 

 

 

(unaudited)

 

 

(See Note 2)

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

146,428

 

 

$

95,856

 

Accounts receivable

 

 

270

 

 

 

4,434

 

Other current assets

 

 

8,289

 

 

 

1,039

 

Total current assets

 

 

154,987

 

 

 

101,329

 

Restricted cash

 

 

2,735

 

 

 

2,946

 

Fixed assets, net

 

 

672

 

 

 

49

 

Intangible assets, net

 

 

1,562

 

 

 

4,814

 

Goodwill

 

 

829

 

 

 

829

 

Other long-term assets

 

 

28

 

 

 

 

Total assets

 

$

160,813

 

 

$

109,967

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable and other accrued expenses

 

$

6,737

 

 

$

2,915

 

Accrued contract research

 

 

6,709

 

 

 

826

 

Current portion of Intermezzo reserve

 

 

160

 

 

 

 

Total current liabilities

 

 

13,606

 

 

 

3,741

 

Long-term debt

 

 

19,536

 

 

 

 

Intermezzo reserve, net of current portion

 

 

2,310

 

 

 

2,850

 

Contingent obligations

 

 

1,580

 

 

 

4,560

 

Other liabilities

 

 

3,557

 

 

 

3,592

 

Total liabilities

 

 

40,589

 

 

 

14,743

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Preferred stock:

 

 

 

 

 

 

 

 

Undesignated preferred stock: $0.001 par value; 5,000,000 shares authorized, no shares issued and outstanding at September 30, 2015; and 4,000,000 shares authorized, no shares issued and outstanding at December 31, 2014

 

 

 

 

 

 

Series A Junior participating preferred stock: $0.001 par value; no shares issued and outstanding at September 30, 2015; and 1,000,000 shares authorized, no shares issued and outstanding at December 31, 2014

 

 

 

 

 

 

Common stock, $0.001 par value, 100,000,000 shares authorized, 17,608,615 and 14,417,936 issued and outstanding at September 30, 2015 and December 31, 2014, respectively

 

 

18

 

 

 

14

 

Additional paid-in capital

 

 

367,826

 

 

 

293,076

 

Accumulated deficit

 

 

(247,620

)

 

 

(197,866

)

Total stockholders’ equity

 

 

120,224

 

 

 

95,224

 

Total liabilities and stockholders’ equity

 

$

160,813

 

 

$

109,967

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

2


 

Paratek Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except share and per share amounts)

 

 

 

 

 

Three months ended

September 30,

 

 

Nine months ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development collaborations

 

$

-

 

 

$

-

 

 

$

-

 

 

$

342

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

17,817

 

 

 

1,001

 

 

 

35,556

 

 

 

2,364

 

General and administrative

 

 

5,795

 

 

 

2,074

 

 

 

14,347

 

 

 

3,865

 

Impairment of intangible asset

 

 

-

 

 

 

-

 

 

 

2,761

 

 

 

-

 

Changes in fair value of contingent consideration

 

 

(240

)

 

 

-

 

 

 

(2,980

)

 

 

-

 

Total operating expenses

 

 

23,372

 

 

 

3,075

 

 

 

49,684

 

 

 

6,229

 

Loss from operations

 

 

(23,372

)

 

 

(3,075

)

 

 

(49,684

)

 

 

(5,887

)

Other income and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(47

)

 

 

(158

)

 

 

(73

)

 

 

(714

)

Loss on mark-to-market of notes and warrants

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(119

)

Other income (expense), net

 

 

(2

)

 

 

-

 

 

 

3

 

 

 

6

 

Net loss

 

 

(23,421

)

 

 

(3,233

)

 

 

(49,754

)

 

 

(6,714

)

Unaccreted dividends on convertible preferred stock

 

 

-

 

 

 

(745

)

 

 

-

 

 

 

(1,684

)

Net loss attributable to common stockholders

 

$

(23,421

)

 

$

(3,978

)

 

$

(49,754

)

 

$

(8,398

)

Basic and diluted net loss per common share

 

$

(1.33

)

 

$

(29.48

)

 

$

(3.08

)

 

$

(91.81

)

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

17,561,708

 

 

 

135,000

 

 

 

16,129,031

 

 

 

91,484

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

3


 

Paratek Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

 

 

Nine months ended

September 30,

 

 

 

2015

 

 

2014

 

Net loss

 

$

(49,754

)

 

$

(6,714

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

544

 

 

 

-

 

Stock-based compensation expense

 

 

2,940

 

 

 

507

 

Noncash interest expense

 

 

-

 

 

 

577

 

Impairment of intangible asset

 

 

2,761

 

 

 

-

 

Change in fair value of contingent consideration

 

 

(2,980

)

 

 

-

 

Loss on mark-to-market on convertible notes and preferred stock warrants

 

 

-

 

 

 

119

 

Other gains, net

 

 

10

 

 

 

37

 

Changes in operating assets and liabilities, net of effects of merger

 

 

 

 

 

 

 

 

Accounts receivable and other current assets

 

 

(1,466

)

 

 

6

 

Accounts payable and accrued expenses

 

 

9,524

 

 

 

(2,324

)

Other liabilities and other assets

 

 

(569

)

 

 

(342

)

Net cash used in operating activities

 

 

(38,990

)

 

 

(8,134

)

Investing activities

 

 

 

 

 

 

 

 

(Purchase) sale of fixed assets

 

 

(686

)

 

 

15

 

Other investing activities

 

 

-

 

 

 

(9

)

Decrease in restricted cash

 

 

211

 

 

 

-

 

Net cash provided by (used in) investing activities

 

 

(475

)

 

 

6

 

Financing activities

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

245

 

 

 

-

 

Proceeds from issuance of long-term debt, net of costs and debt discount

 

 

19,357

 

 

 

-

 

Proceeds from issuance of common stock

 

 

70,435

 

 

 

-

 

Proceeds from non-convertible note financing

 

 

-

 

 

 

5,480

 

Proceeds from bridge loan-related party

 

 

-

 

 

 

4,300

 

Deferred financing costs

 

 

-

 

 

 

(499

)

Refund of financing

 

 

-

 

 

 

(831

)

Net cash provided by financing activities

 

 

90,037

 

 

 

8,450

 

Net increase in cash and cash equivalents

 

 

50,572

 

 

 

322

 

Cash and cash equivalents at beginning of period

 

 

95,856

 

 

 

1,212

 

Cash and cash equivalents at end of period

 

$

146,428

 

 

$

1,534

 

Supplemental disclosure of noncash financing activities

 

 

 

 

 

 

 

 

Fair value of warrants issued

 

$

289

 

 

$

-

 

Receivable from sale of stock

 

$

1,000

 

 

$

-

 

Issuance of new Series A convertible preferred stock in exchange for previously issued preferred stock and convertible notes

 

$

-

 

 

$

520

 

Conversion of prefunding to non-convertible note

 

$

-

 

 

$

21,140

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

4


 

Paratek Pharmaceuticals, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(unaudited)

 

1.   Description of the business

Paratek Pharmaceuticals, Inc. (the “Company” or “Paratek”) is a Delaware corporation with its corporate office in Boston, Massachusetts and an office in King of Prussia, Pennsylvania. The Company is a clinical stage biopharmaceutical company focused on the development and commercialization of innovative therapeutics based upon tetracycline chemistry. The Company has used its expertise in biology and tetracycline chemistry to create chemically diverse and biologically distinct small molecules derived from the minocycline core structure. The Company’s two lead product candidates are the antibacterials omadacycline and sarecycline. Omadacycline entered into Phase 3 clinical development in June 2015. Sarecycline entered Phase 3 clinical development in December 2014.

Prior to October 30, 2014, the name of the Company was Transcept Pharmaceuticals, Inc. (“Transcept”). On October 30, 2014, Transcept completed its business combination with Paratek Pharmaceuticals, Inc. (“Old Paratek”) in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of June 30, 2014, by and among Transcept, Tigris Merger Sub, Inc. (“Merger Sub”), Tigris Acquisition Sub, LLC (“Merger LLC”) and Paratek (the “Merger Agreement”), pursuant to which Merger Sub merged with and into Paratek, with Paratek surviving as a wholly-owned subsidiary of Transcept (the “Merger”), followed by the merger of Paratek with and into Merger LLC, with Merger LLC surviving as a wholly-owned subsidiary of Transcept. Also on October 30, 2014, in connection with, and prior to the completion of, the Merger, Transcept effected a 1-for-12 reverse stock split of its common stock (the “Reverse Stock Split”), and immediately following the Merger, Transcept changed its name to “Paratek Pharmaceuticals, Inc.”, and Merger LLC changed its name to “Paratek Pharma, LLC.” Following the completion of the Merger, the business conducted by Paratek Pharmaceuticals Inc. became primarily the business conducted by Paratek. These condensed consolidated financial statements reflect the historical results of Paratek prior to the Merger, and do not include the historical results of Transcept prior to the completion of the Merger. All 2014 share and per share disclosures have been adjusted to reflect the exchange of shares in the Merger, and the 1-for-12 reverse stock split of the common stock on October 30, 2014.

Immediately prior to the Merger, Old Paratek sold 8,068,766 shares of its common stock for an aggregate purchase price of $93.0 million to certain existing Paratek stockholders and certain new investors in Paratek (the “Financing”). Immediately prior to the closing of the Financing, the $6.0 million in aggregate principal amount outstanding under, and all accrued interest on, the 2014 Notes (as defined in Note 11 below) converted into 1,335,632 shares of Old Paratek’s common stock based on a conversion price of $0.778 per share. Further, and also immediately prior to the closing of the Financing, each share of Old Paratek’s preferred stock outstanding at that time was converted into shares of Old Paratek’s common stock at a ratio determined in accordance with Paratek’s certificate of incorporation then in effect. The parties to the Financing and to the conversion of the 2014 Notes include officers, employees and directors of Paratek, making these transactions related party in nature.

Under the terms of the Merger Agreement, Transcept issued shares of its common stock to Old Paratek’s stockholders, at an exchange rate of 0.0675 shares of common stock, after taking into account the Reverse Stock Split, in exchange for each share of Old Paratek common stock outstanding immediately prior to the Merger. Transcept also assumed all of the stock options outstanding under the Old Paratek 2014 Equity Incentive Plan, as amended (the “Paratek Plan”), and stock warrants of Old Paratek outstanding immediately prior to the Merger, with such stock options and warrants henceforth representing the right to purchase a number of shares of Transcept common stock equal to 0.0675 multiplied by the number of shares of Old Paratek common stock previously represented by such options and warrants. Transcept also assumed the Paratek Plan.

After consummation of the Merger, the Old Paratek stockholders, warrant holders and option holders owned approximately 89.6% of the fully-diluted common stock of Paratek, with Transcept’s stockholders and optionholders immediately prior to the Merger, whose shares of Paratek common stock (including shares received upon the cancellation of existing options) remain outstanding after the Merger, owning approximately 10.4% of the fully-diluted common stock of Paratek. Under generally accepted accounting principles in the United States of America (“U.S. GAAP”), the Merger was treated as a “reverse merger” under the purchase method of accounting. For accounting purposes, Old Paratek is considered to have acquired Transcept.

 

 

2.   Summary of Significant Accounting Policies and Basis of Presentation

Summary of Significant Accounting Policies

The significant accounting policies described in the Company’s audited consolidated financial statements as of and for the year ended December 31, 2014, and the notes thereto, which are included in the Annual Report on Form 10-K/A, have had no material changes during the nine months ended September 30, 2015.

 

5


 

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. GAAP as found in the Accounting Standards Codification (“ASC”), and Accounting Standards Update (“ASU”), of the Financial Accounting Standards Board (“FASB”), and pursuant to the rules and regulations of the Securities and Exchange Commission.

The accompanying condensed consolidated financial statements are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended December 31, 2014, and, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods ended September 30, 2015 and 2014.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2015. The accompanying consolidated balance sheet as of December 31, 2014, was derived from the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K/A. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2014, and notes thereto, which are included in the Company’s Annual Report on Form 10-K/A.

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the results of operations of Paratek Pharmaceuticals, Inc. and its wholly-owned subsidiaries, Paratek Pharma, LLC, Paratek Securities Corporation, Transcept Pharma, Inc., and Paratek UK, Ltd. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the accompanying unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management of the Company to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reported period. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, intangible assets, goodwill, contingent liabilities, stock-based compensation arrangements, useful lives for depreciation and amortization of long-lived assets and valuation allowances on deferred tax assets. Actual results could differ from those estimates.

Segment and Geographic Information

Operating segments are defined as components of an enterprise engaging in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one operating segment.

 

 

3.   Merger Agreement

As described in Note 1, the Company completed the Merger with Transcept on October 30, 2014 for the principal purposes of utilizing the cash resources held by Transcept to continue the development of the late-stage product candidate held by Paratek and for the access to capital markets afforded by Transcept’s public listing.

 

6


 

Pro forma information

The following unaudited pro forma information presents a summary of the Company’s condensed consolidated results of operations as if the Merger had taken place as of January 1, 2014 (in thousands):

 

 

 

Three Months

Ended

September 30,

2014

 

 

Nine Months

Ended

September 30,

2014

 

Pro forma combined revenues

 

$

182

 

 

$

1,304

 

Pro forma combined net loss attributable to common stockholders

 

$

(12,180

)

 

$

(22,730

)

Pro forma basic and diluted net loss per share

 

$

(79.01

)

 

$

(205.74

)

 

 

4.   Intangible Assets, Net

Intangible assets consist of the following (in thousands):

 

 

 

September 30,

2015

 

 

December 31,

2014

 

Intermezzo product rights

 

$

1,410

 

 

$

4,550

 

TO-2070 product rights

 

 

440

 

 

 

440

 

Gross intangible assets

 

 

1,850

 

 

 

4,990

 

Less: Accumulated amortization

 

 

(288

)

 

 

(176

)

Net intangible assets

 

$

1,562

 

 

$

4,814

 

 

Intermezzo and TO-2070 product rights were acquired through the Merger with Transcept on October 30, 2014. Refer to Note 6, License and Collaboration Agreements, for further detail concerning the Intermezzo and TO-2070 products.  Intangible assets are reviewed for impairment at least annually and when events or circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. On March 27, 2015, a decision was made by the United States District Court for the District of New Jersey, or the District Court, concerning Intermezzo patent infringement claims the Company made in response to the filing of an Abbreviated New Drug Application with the Federal Drug Administration. The decision made by the District Court invalidated several Intermezzo patents as obvious and triggered an evaluation of the carrying value of the Intermezzo product rights and related contingent obligations in light of an expected decline in Intermezzo sales. Refer to Note 13 Commitments and Contingencies for further information concerning the litigation.

As a result of the District Court’s ruling, the Company performed an interim impairment test of the Intermezzo product rights in connection with the preparation of its unaudited condensed consolidated financial statements for the first quarter of 2015. This impairment test utilized probability-weighted cash flow estimation and sale proceeds income approaches with consideration to the timing of payments of associated contingent obligations to former Transcept stockholders. Based on the intangible asset impairment test performed, the Company recorded a non-cash impairment charge of $2.8 million.

The Company appealed the District Court’s ruling during the second quarter of 2015 and the appeal is still pending as of September 30, 2015.  The Company performed another interim impairment test of the Intermezzo product rights in connection with the preparation of its unaudited condensed consolidated financial statements for the third quarter of 2015.  Given the significant uncertainty concerning the ultimate disposition of the Intermezzo product, the fair value of the Intermezzo product rights was evaluated using probability-weighted cash flow estimation and sale proceeds income approaches with consideration to the timing of payments of associated contingent obligations to former Transcept stockholders.  Based on the intangible asset impairment test performed, it was determined that the projected undiscounted future cash flows exceeded the book value of the intangible asset and no additional impairment charge was recorded.

 

The adjusted carrying value of the Intermezzo product rights are being amortized over a remaining useful life of four years. After the impairment charge, accumulated amortization of the Intermezzo product rights at September 30, 2015 was $154,000, and amortization expense for the three and nine months ended September 30, 2015 was $77,000 and $154,000, respectively.

 

The TO-2070 product rights are being amortized over an estimated three-year useful life. Accumulated amortization of the TO-2070 product rights at September 30, 2015 was $134,000, and amortization expense for the three and nine months ended September 30, 2015 was $36,667 and $110,000, respectively.

 

 

7


 

 

5.   Net Loss Per Share Available to Common Stockholders

Basic net loss per share available to common stockholders is calculated by dividing the net loss available to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share available to common stockholders is computed by dividing the net loss available to common stockholders by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method or the as if-converted method, as applicable. For purposes of this calculation, convertible preferred stock, stock options, convertible preferred stock warrants and common stock warrants are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share available to common stockholders when their effect is dilutive.

The following table presents the computation of basic and diluted net loss per share reflecting the effect of the Reverse Stock Split in connection with the Merger (in thousands, except share and per share data):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(23,421

)

 

$

(3,233

)

 

$

(49,754

)

 

$

(6,714

)

Less: Unaccreted dividends on convertible preferred stock

 

 

 

 

 

(745

)

 

 

 

 

 

(1,684

)

Net loss attributable to common stockholders

 

$

(23,421

)

 

$

(3,978

)

 

$

(49,754

)

 

$

(8,398

)

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

17,561,708

 

 

 

135,000

 

 

 

16,129,031

 

 

 

91,484

 

Net loss per share—basic and diluted

 

$

(1.33

)

 

$

(29.48

)

 

$

(3.08

)

 

$

(91.81

)

 

The following outstanding shares subject to options and warrants to purchase common stock were antidilutive due to a net loss in the periods presented and, therefore, were excluded from the dilutive securities computation as of the dates indicated below:

 

 

 

As of

September 30,

 

 

 

2015

 

 

2014

 

Excluded potentially dilutive securities(1):

 

 

 

 

 

 

 

 

Shares subject to options to purchase common stock

 

 

2,103,390

 

 

 

812,903

 

Unvested restricted stock

 

 

262,000

 

 

 

 

Shares subject to warrants to purchase common stock

 

 

47,423

 

 

 

 

Convertible preferred stock

 

 

 

 

 

236,250

 

Shares subject to warrants to purchase preferred stock

 

 

 

 

 

11,858

 

Totals

 

 

2,412,813

 

 

 

1,061,011

 

 

(1)

The number of shares is based on the maximum number of shares issuable on exercise or conversion of the related securities as of September 30, 2015 and 2014. Such amounts have not been adjusted for the treasury stock method or weighted average outstanding calculations as required if the securities were dilutive.

 

 

6.   License and Collaboration Agreements

Allergan plc

In July 2007, the Company and Allergan plc, or Allergan, entered into a collaborative research and license agreement, or the Allergan Collaboration Agreement, under which the Company granted Allergan an exclusive license to research, develop and commercialize tetracycline products for use in the United States for the treatment of acne and rosacea. Since Allergan did not exercise its development option with respect to the treatment of rosacea prior to initiation of a Phase 3 trial for the product, the license grant to Allergan converted to a non-exclusive license for the treatment of rosacea as of December 2014. Under the terms of the Allergan Collaboration Agreement, the Company and Allergan are responsible for, and are obligated to use, commercially reasonable efforts to conduct specified development activities for the treatment of acne and, if requested by Allergan, the Company may conduct certain additional development activities to the extent the Company determines in good faith that the Company has the necessary resources available for such activities. Allergan has agreed to reimburse the Company for our costs and expenses, including third-party costs, incurred in conducting any such development activities.

 

8


 

Under the terms of the Allergan Collaboration Agreement, Allergan is responsible for and is obligated to use commercially reasonable efforts to develop and commercialize tetracycline compounds that are specified in the agreement for the treatment of acne. Allergan failed to elect to advance the development of sarecycline for the treatment of rosacea in accordance with the terms of the agreement so the license granted to Allergan was converted to a non-exclusive license for the treatment of rosacea. The Company has agreed during the term of the Allergan Collaboration Agreement not to directly or indirectly develop or commercialize any tetracycline compounds in the United States for the treatment of acne and rosacea, and Allergan has agreed during the term of the Allergan Collaboration Agreement not to directly or indirectly develop or commercialize any tetracycline compound included as part of the agreement for any use other than as provided in the agreement.

The Company earned an upfront fee in the amount of $4.0 million upon the execution of the Allergan Collaboration Agreement, $1.0 million upon filing of an Investigational New Drug Application in 2010, and $2.5 million upon initiation of Phase 2 trials in 2012. In December 2014, the Company also earned $4.0 million upon initiation of Phase 3 trials associated with the Allergan Collaboration Agreement. In addition, Allergan may be required to pay the Company an aggregate of approximately $17.0 million upon the achievement of specified future regulatory milestones, the next being $5.0 million upon acceptance by the U.S. Food and Drug Administration, or FDA, of a New Drug Application, or NDA, submission. Allergan is also obligated to pay the Company tiered royalties, ranging from the mid-single digits to the low double digits, based on net sales of tetracycline compounds developed under the Allergan Collaboration Agreement, with a standard royalty reduction post patent expiration for such product for the remainder of the royalty term. Allergan’s obligation to pay the Company royalties for each tetracycline compound it commercializes under the Allergan Collaboration Agreement expires on the later of the expiration of the last to expire patent that covers the tetracycline compound in the United States and the date on which generic drugs that compete with the tetracycline compound reach a certain threshold market share in the United States.

Either the Company or Allergan may terminate the Allergan Collaboration Agreement for certain specified reasons at any time after Allergan has commenced development of any tetracycline compound, including if Allergan determines that it would not be commercially viable to continue to develop or commercialize the tetracycline compound and/or that it is unlikely to obtain regulatory approval of the tetracycline compound, and, in any case, no backup tetracycline compound is in development or ready to be developed and the parties are unable to agree on an extension of the development program or an alternative course of action. Either the Company or Allergan may terminate the Allergan Collaboration Agreement for the other party’s uncured breach of a material term of the agreement on 60 days’ notice (unless the breach relates to a payment term, which requires a 30-day notice) or upon the bankruptcy of the other party that is not discharged within 60 days. Upon the termination of the Allergan Collaboration Agreement by Allergan for the Company’s breach, Allergan’s license will continue following the effective date of termination, subject to the payment by Allergan of the applicable milestone and royalty payments specified in the agreement unless our breach was with respect to certain specified obligations, in which event the obligation of Allergan to pay us any further royalty or milestone payments will terminate. Upon the termination of the Allergan Collaboration Agreement by us for Allergan’s breach or the voluntary termination of the agreement by Allergan, Allergan’s license under the agreement will terminate.

The Company determined whether the performance obligations under this collaboration could be accounted for separately or as a single unit of accounting. The Company determined that the license, participation on steering committees and research and development services performance obligations during the research period of the CRL Agreement represented a single unit of accounting. As the Company could not reasonably estimate its level of effort, the Company recognized revenue from the upfront payment, milestone payment and research and development services payments using the contingency-adjusted performance model over the expected development period. The development period was completed in June 2010. Under this model, when a milestone was earned or research and development services were rendered, revenue was immediately recognized on a pro-rata basis in the period the milestone was achieved or services were delivered based on the time elapsed from the effective date of the agreement. Thereafter, the remaining portion was recognized on a straight-line basis over the remaining development period. The Company has determined that each potential future clinical, regulatory and commercialization milestone is substantive. In making this determination, pursuant to the accounting guidance on revenue recognition for milestone payments, the Company considered and concluded that each individual milestone: (i) relates solely to the past performance of the intellectual property to achieve the milestone; (ii) is reasonable relative to all of the deliverables and payment terms in the arrangement; and (iii) is commensurate with the enhanced value of the intellectual property as a result of the milestone achievement. As the Company’s obligations under this arrangement have been completed, all future milestones, which are all considered substantive, will be recognized as revenue when achieved.

Also, the Company, at its discretion, may provide manufacturing process development services to Allergan in exchange for full-time equivalent based cost reimbursements. The Company determined that the manufacturing process development services are considered a separate unit of accounting as (i) they are set at the Company’s discretion, (ii) they have stand-alone value, as these services could be performed by third parties, and (iii) the full-time equivalent rate paid for such services rendered is considered fair value. Therefore, the Company recognizes cost reimbursements for manufacturing process development services as revenue as the services are performed.

 

9


 

Tufts University

In February 1997, the Company and Tufts University, or Tufts, entered into a license agreement under which the Company acquired an exclusive license to certain patent applications and other intellectual property of Tufts related to the drug resistance field to develop and commercialize products for the treatment or prevention of bacterial or microbial diseases or medical conditions in humans or animals or for agriculture. The Company subsequently entered into nine amendments to that agreement, collectively the Tufts License Agreement, to include patent applications filed after the effective date of the original license agreement, to exclusively license additional technology from Tufts, to expand the field of the agreement to include disinfectant applications, and to change the royalty rate and percentage of sublicense income paid by the Company to Tufts under sublicense agreements with specified sublicensees. The Company is obligated under the Tufts License Agreement to provide Tufts with annual diligence reports and a business plan and to meet certain other diligence milestones. The Company has the right to grant sublicenses of the licensed rights to third parties, which will be subject to the prior approval of Tufts unless the proposed sublicensee meets a certain net worth or market capitalization threshold. The Company is primarily responsible for the preparation, filing, prosecution and maintenance of all patent applications and patents covering the intellectual property licensed under the Tufts License Agreement at its sole expense. The Company has the first right, but not the obligation, to enforce the licensed intellectual property against infringement by third parties.

The Company issued Tufts 1,024 shares of the Company’s common stock on the date of execution of the original license agreement, and the Company may be required to make certain payments of up to $0.3 million to Tufts upon the achievement by products developed under the agreement of specified development and regulatory approval milestones. The Company has already made a payment of $50,000 to Tufts for achieving the first milestone following commencement of the Phase 3 non-registration clinical trial for omadacycline. The Company is also obligated to pay Tufts a minimum royalty payment in the amount of $25,000 per year, if the Company does not sponsor at least $100,000 of research at Tufts in such year. In the past, the Company has opted to satisfy its minimum royalty obligations to Tufts by providing an equivalent amount of sponsored research or receiving a waiver from Tufts with respect to such obligations. The Company expects that it will satisfy its future minimum royalty obligations to Tufts by making an annual royalty payment of $25,000 to Tufts. In addition, the Company is obligated to pay Tufts royalties based on gross sales of products, as defined in the agreement, ranging in the low single digits depending on the applicable field of use for such product sale. If the Company enters into a sublicense under the Tufts License Agreement, the Company will be obligated to pay Tufts a percentage, ranging from the low-to-mid teens based on the applicable field of use for such product, of the license maintenance fees or sublicense issue fees paid to the Company by the sublicensee and the lesser of a percentage, ranging from the low tens to the high twenties based on the applicable field of use for such product, of the royalty payments made to the Company by the sublicensee or the amount of royalty payments that would have been paid by the Company to Tufts if the Company had sold the products.

Unless terminated earlier, the Tufts License Agreement will expire at the same time as the last-to-expire patent in the patent rights licensed to the Company under the agreement and after any such expiration the Company will continue to have an exclusive, fully-paid-up license to such intellectual property licensed from Tufts. Tufts has the right to terminate the agreement upon 30 days’ notice should the Company fail to make a material payment under the Tufts License Agreement or commit a material breach of the agreement and not cure such failure or breach within such 30 day period, or if, after the Company has started to commercialize a product under the Tufts License Agreement, the Company ceases to carry on its business for a period of 90 consecutive days. The Company has the right to terminate the Tufts License Agreement at any time upon 180 days’ notice. Tufts has the right to convert the Company’s exclusive license to a non-exclusive license if the Company does not commercialize a product licensed under the agreement within a specified time period.

The Company also agreed to pay Tufts royalties based on gross sales of products, as defined in the Tufts License Agreement, ranging in the low single digits depending on the applicable field of use for such product sale. If the Company enters into a sublicense under the Tufts License Agreement, it will be obligated to pay Tufts a percentage, ranging from the low-to-mid teens based on the applicable field of use for such product, of the license maintenance fees or sublicense issue fees paid to the Company by the sublicensee and the lesser of a percentage, ranging from the low teens to the high twenties based on the applicable field of use for such product, of the royalty payments made to the Company by the sublicensee or the amount of royalty payments that would have been paid by us to Tufts if the Company had sold the products.

Purdue Pharma L.P.

In July 2009, the Company and Purdue Pharma L.P., or Purdue Pharma, entered into a collaboration agreement, or the Purdue Collaboration Agreement, that grants an exclusive license to Purdue Pharma to commercialize Intermezzo in the United States and pursuant to which:

 

·

Purdue Pharma paid the Company a $25.0 million non-refundable license fee in August 2009;

 


 

10


 

 

·

Purdue Pharma paid the Company a $10.0 million non-refundable intellectual property milestone in December 2011 when the first of two issued formulation patents was listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, or Orange Book; 

 

·

Purdue Pharma paid the Company a $10.0 million non-refundable intellectual property milestone in August 2012 when the first of two issued methods of use patents was listed in the FDA’s Orange Book;

 

·

The Company transferred the Intermezzo NDA to Purdue Pharma, and Purdue Pharma is obligated to assume the expense associated with maintaining the NDA and further development of Intermezzo in the United States, including any expense associated with post-approval studies;

 

·

Purdue Pharma is obligated to commercialize Intermezzo in the United States at its expense using commercially reasonable efforts;

 

·

Purdue Pharma is obligated to pay the Company tiered base royalties on net sales of Intermezzo in the United States ranging from the mid-teens up to the mid-20% level, with each such royalty tiers subject to an increase by a percentage in the low single digits upon a specified anniversary of regulatory approval of Intermezzo. The base royalty is tiered depending upon the achievement of certain fixed net sales thresholds by Purdue Pharma, which net sales levels reset each year for the purpose of calculating the royalty. The royalty tiers are subject to reductions upon generic entry and patent expiration. Purdue Pharma is obligated to pay royalties until the later of 15 years from the date of first commercial sale in the United States or the expiration of patent claims related to Intermezzo; and

 

·

Purdue Pharma is obligated to pay the Company up to an additional $70.0 million upon the achievement of certain net sales targets for Intermezzo in the United States.

The Company had an option to co-promote Intermezzo to psychiatrists in the United States and such option was terminated as a result of the Merger.

The Purdue Collaboration Agreement expires on the expiration of Purdue Pharma’s royalty obligations. Purdue Pharma has the right to terminate the Purdue Collaboration Agreement at any time upon advance notice of 180 days. The Purdue Collaboration Agreement is also subject to termination by Purdue Pharma in the event of FDA or governmental action that materially impairs Purdue Pharma’s ability to commercialize Intermezzo or the occurrence of a serious event with respect to the safety of Intermezzo. The Purdue Collaboration Agreement may also be terminated by the Company upon Purdue Pharma commencing an action that challenges the validity of Intermezzo related patents. The Company also has the right to terminate the Purdue Collaboration Agreement immediately if Purdue Pharma is excluded from participation in federal healthcare programs. The Purdue Collaboration Agreement may also be terminated by either party in the event of a material breach by or insolvency of the other party.

The Company also granted Purdue Pharma and an associated company the right to negotiate for the commercialization of Intermezzo in Mexico in 2013 but retained the rights to commercialize Intermezzo in the rest of the world.

In December 2013, Purdue Pharma notified the Company that it intended to discontinue use of the Purdue Pharma sales force to actively market Intermezzo to healthcare professionals during the first quarter of 2014.

In October 2014, the Company announced that its board of directors had approved a special dividend of, among other things, the right to receive, on a pro rata basis, 100% of any royalty income received by the Company pursuant to the Purdue License Agreement and 90% of any cash proceeds from a sale or disposition of Intermezzo, less fees and expenses incurred in connection with such activity, to the extent that either occurs prior to the second anniversary of the closing date of the Merger.

Shin Nippon Biomedical Laboratories Ltd.

In September 2013, the Company and Shin Nippon Biomedical Laboratories Ltd., or SNBL, entered into a License Agreement, or SNBL License Agreement, pursuant to which SNBL granted the Company an exclusive worldwide license to commercialize SNBL’s proprietary nasal drug delivery technology to develop TO-2070. The Company was developing TO-2070 as a treatment for acute migraine using SNBL’s proprietary nasal powder drug delivery system. Under the SNBL License Agreement, the Company was required to fund all development and regulatory approval with respect to TO-2070. Pursuant to the SNBL License Agreement, the Company paid an upfront nonrefundable technology license fee of $1.0 million, and the Company was also obligated to pay up to an aggregate of $41.5 million upon the achievement of certain development, regulatory and sales milestones, and tiered, low double-digit royalties on annual net sales of TO-2070.

 

 

11


 

In September 2014, the Company and SNBL entered into a Termination Agreement and Release, or the SNBL Termination Agreement, pursuant to which, among other things, the SNBL License Agreement was terminated and the Company assigned all of its rights, interest and title to the TO-2070 assets to SNBL in exchange for a portion of certain future net revenue received by SNBL as set forth in the SNBL Termination Agreement, up to an aggregate of $2.0 million.

 

 

7.   Capital Stock

 

Common Stock

On January 12, 2015, the Company filed a registration statement on Form S-3 with the Securities and Exchange Commission to sell shares of Company common stock, par value $0.001 per share, in an aggregate amount of up to $200.0 million to the public in a registered offering or offerings. Under this shelf registration, the Company completed an underwritten offering on May 5, 2015 of 3,089,000 shares of common stock at a public offering price of $24.50 per share, which includes 229,000 shares of common stock issued upon the exercise, in part, by the underwriters of an option to purchase additional shares from the Company. The aggregate proceeds received by the Company, after underwriting discounts and commissions and other offering expenses, were $70.4 million.

 

As described in Note 11, the Company entered into a Loan and Security Agreement with Hercules Technology Growth Capital (“Hercules”), under which the Company may borrow up to $40.0 million in multiple tranches.  The Company borrowed the first tranche of $20.0 million upon closing of the transaction on September 30, 2015.  Subject to certain terms, Hercules was also granted the right to participate, in an amount of up to $2.0 million, in subsequent sales and issuances of the Company's equity securities to one or more investors for cash for financing purposes in an offering that is broadly marketed to multiple investors and at the same terms as the other investors.   On September 30, 2015, Hercules entered into a Stock Purchase Agreement with the Company to purchase 44,782 shares of common stock resulting in proceeds to the Company of $1.0 million.  The excess of proceeds received by the Company over the fair value of the common stock issued was allocated as a reduction of the fees paid to Hercules in conjunction with obtaining the initial $20.0 million draw of Term Loan.

 

Warrants

As described in Note 11, as consideration for the Loan Agreement, the Company issued Hercules a warrant to purchase 32,692 shares of its common stock at an exercise price of $24.47 per share (the "Warrant") on September 30, 2015, which expires five years from issuance or at the consummation of a Public Acquisition, as defined in the Warrant agreement. The Warrant's relative fair value of $290,000 was determined using a Black-Scholes option-pricing model with the following assumptions:

 

 

September 30,

2015

 

Volatility

 

 

62.4

%

Weighted average risk-free interest rate

 

 

1.4

%

Expected dividend yield

 

 

0.0

%

Expected term

 

5 years

 

 

 

 

 

 

 

12


 

8.   Accounts Payable and Accrued Expenses

Accrued expenses consist of the following (in thousands):

 

 

 

September 30,

2015

 

 

December 31,

2014

 

Accounts payable

 

$

4

 

 

$

489

 

Accrued legal costs

 

 

1,231

 

 

 

876

 

Intermezzo payable

 

 

1,175

 

 

 

399

 

Accrued compensation

 

 

1,108

 

 

 

544

 

Accrued contract manufacturing

 

 

2,263

 

 

 

70

 

Accrued professional fees

 

 

795

 

 

 

322

 

Accrued other

 

 

161

 

 

 

215

 

Total

 

$

6,737

 

 

$

2,915

 

 

 

9.   Fair Value Measurements

Financial instruments, including cash, restricted cash, accounts receivable, accounts payable, accrued expenses and the Intermezzo reserve are carried on the condensed consolidated financial statements at amounts that approximate fair value. The fair value of the Company’s long-term debt is determined using current applicable rates for similar instruments as of the balance sheet date.  The carrying value of the long-term debt approximates its fair value as the interest rate is near current market rates.  The fair value of the Company’s long-term debt was determined using Level 3 inputs.  Fair values are based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of perceived risk.

The following tables present information about the Company’s financial liabilities that have been measured at fair value as of September 30, 2015 and December 31, 2014, and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities or other inputs that are observable market data. Fair values determined by Level 3 inputs utilize unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability (in thousands):

 

Description

 

Quoted

Prices in

Active

Markets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total Fair Value

at September 30,

2015

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent obligations

 

$

 

 

$

 

 

$

1,580

 

 

$

1,580

 

 

 

$

 

 

$

 

 

$

1,580

 

 

$

1,580

 

 

Description

 

Quoted

Prices in

Active

Markets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total Fair Value

at December 31,

2014

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent obligations

 

$

 

 

$

 

 

$

4,560

 

 

$

4,560

 

 

 

$

 

 

$

 

 

$

4,560

 

 

$

4,560

 

 

Contingent obligations represent the right for former Transcept shareholders to receive certain contingent amounts, in the future, consisting of:

 

(i)

one hundred percent of any royalty income received by the Company prior to October 30, 2016, pursuant to the United States License and Collaboration Agreement, dated July 31, 2009, as amended November 1, 2011, by and between Transcept and Purdue Pharmaceutical Products L.P.;

 

(ii)

one hundred percent of any payments received by the Company pursuant to the termination of a License Agreement with Shin Nippon Biomedical Laboratories Ltd., SNBL, which granted the Company an exclusive worldwide license to

 

13


 

 

commercialize SNBL’s proprietary nasal drug delivery technology for development of TO-2070, a proprietary nasal powder drug delivery system;  

 

(iii)

ninety percent of any cash proceeds from a sale or disposition of Intermezzo (less all fees and expenses incurred by the Company in connection with such sale or disposition following the closing date); provided such sale or disposition occurs prior to October 30, 2016, and

 

(iv)

the amount, if any, of the $3.0 million Intermezzo reserve deposited at closing which is remaining at October 30, 2016.

 

As of September 30, 2015, the fair value of the contingent obligations to former Transcept stockholders was determined using probability-weighted scenario methodologies, employing cash-flow and sale proceeds income approaches with consideration to the potential timing of possible payments to former Transcept stockholders. During the quarter ended March 31, 2015, the outcome of an Intermezzo patent infringement trial triggered an evaluation of the carrying value of the Intermezzo product rights and related contingent liability in light of an expected decline in Intermezzo sales. As a result of the evaluation, the Company recorded a reduction in contingent obligations to former Transcept shareholders of $3.1 million during the quarter ended March 31, 2015.  The Company appealed the outcome of the trial during the second quarter of 2015 and the appeal is still pending as of September 30, 2015.  Based on estimated probability of success of the appeal combined with fair value remeasurements, we recorded a net increase in contingent obligations to former Transcept shareholders of $0.2 million during the second and third quarters of 2015.  Material assumptions used to value contingent obligations to former Transcept stockholders with respect to Intermezzo product rights include:

 

Probabilities associated with the various outcomes of the ongoing ANDA litigation and the potential sale of Intermezzo product rights;

 

The forecasted Intermezzo product revenues and associated royalties due the Company, as well as the appropriate discount rate given consideration to the market and forecast risk involved; and

 

The potential proceeds associated with, and timing of, the sale of the Company’s Intermezzo product rights.

Material assumptions used to value contingent obligations to former Transcept stockholders with respect to the TO-2070 product rights include:

 

Probabilities associated with SNBL licensing the TO-2070 asset under the SNBL Termination Agreement; and

 

Potential proceeds associated with, and timing of, the potential payments in accordance with the SNBL Termination Agreement.

The following table provides a roll forward of the fair value of contingent obligations categorized as Level 3 instruments, for the nine months ended September 30, 2015 (in thousands):

 

 

 

Contingent

liability—

former

Transcept

stockholders

 

Balances at December 31, 2014

 

$

4,560

 

Change in fair value

 

 

(2,980

)

Balances at September 30, 2015

 

$

1,580

 

 

 

10.   Stock-Based Compensation

The Company recognizes compensation expense of stock-based awards over the vesting periods of the awards, net of estimated forfeitures. The following table presents stock-based compensation expense included in the Company’s condensed consolidated statements of operations (in thousands):

 

 

 

Three months ended

September 30,

 

 

Nine months ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Research and development expense

 

$

413

 

 

$

205

 

 

$

704

 

 

$

221

 

General and administrative expense

 

 

1,100

 

 

 

274

 

 

 

2,236

 

 

 

286

 

Total stock-based compensation expense

 

$

1,513

 

 

$

479

 

 

$

2,940

 

 

$

507

 

 

 

14


 

 

Stock-based compensation expense is estimated as of the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which generally represents the vesting period. The Company estimates the fair value of its stock options using the Black-Scholes option-pricing model. The weighted-average assumptions used to determine the value of the stock option grants is as follows:

 

 

 

Nine months ended

September 30, 2015

 

 

 

2015

 

 

2014

 

Volatility

 

55.9-62.4%

 

 

 

72.0

%

Weighted average risk-free interest rate

 

1.3-1.9%

 

 

 

1.9

%

Expected dividend yield

 

 

 

 

 

 

Expected life of options (in years)

 

5.3-6.3

 

 

 

5.8

 

 

Stock Option Plan Activity

 

An evergreen provision in the Company’s 2006 Stock Option Plan resulted in an additional 125,000 shares of the Company’s common stock becoming available for issuance on January 1, 2015.

 

During the nine months ended September 30, 2015, the Company’s Board of Directors granted 102,000 restricted stock units to executives and employees of the Company and 425,769 stock options to directors, officers, employees and consultants to the Company under the Transcept Pharmaceuticals, Inc. 2006 Incentive Award Plan, or 2006 Plan, and the Paratek Pharmaceuticals. Inc. 2014 Equity Incentive Plan, or 2014 Plan, with time vesting provisions ranging from one to four years. The Company’s Board of Directors adopted a 2015 Inducement Plan in accordance with NASDAQ Rule 5635(c)(4), reserving 360,000 shares of common stock solely for the grant of inducement stock options to new employees, and granting 260,000 options under the plan to two executives of the Company with four-year time vesting provisions.

 

The Company’s Board of Directors also adopted a 2015 Equity Incentive Plan, or 2015 Plan, that was ratified by Company stockholders at the Annual Meeting held on June 9, 2015. The 2015 Plan is intended to be the successor to and continuation of the 2006 Plan and the 2014 Plan, and collectively, the Prior Plans.  When the 2015 Plan became effective, no additional stock awards were granted under the Prior Plans, although all outstanding stock awards granted under the Prior Plans will continue to be subject to the terms and conditions as set forth in the agreements evidencing such stock awards and the terms of the Prior Plans.  During the nine months ended September 30, 2015, the Company’s Board of Directors granted 160,000 restricted stock units to executives and employees of the Company and 697,000 stock options to directors, officers, employees and consultants to the Company under the 2015 Plan with time vesting provisions ranging from one to four years.

Further, in February 2015 the Company’s Board of Directors modified the vesting terms attendant to eight grants to four executives of the Company aggregating 483,114 options previously granted under its 2014 Equity Incentive Plan from strictly time- based vesting to include certain performance-based vesting terms associated with completion of data lock in the Company’s Phase 3 clinical trials of omadacycline for the treatment of acute bacterial skin and skin structure infections, or ABSSSI, and community- acquired bacterial pneumonia, or CABP. The Company recognizes compensation cost for awards with performance conditions if and when the Company concludes that it is probable that the performance condition will be achieved over the requisite service period. Since the Company believes it is more likely than not that data lock will be reached on the Phase 3 ABSSSI and CABP clinical trials, the sum of the incremental compensation cost and any remaining unrecognized compensation cost for the original award on the modification date will be recognized, on a prospective basis, through the projected date of data lock on the Phase 3 ABSSSI and CABP clinical trials.

Total shares available for future issuance under the 2015 Inducement Plan and the 2015 Equity Incentive Plan are 443,000 shares as of September 30, 2015.


 

15


 

Stock options

 

A summary of stock option activity for the nine months ended September 30, 2015 is as follows:

 

 

 

Number

of Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Term

(in Years)

 

 

Aggregate

Intrinsic

Value

 

Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2014

 

 

781,568

 

 

$

4.30

 

 

 

 

 

 

 

 

 

Granted

 

 

1,382,769

 

 

 

20.92

 

 

 

 

 

 

 

 

 

Exercised

 

 

(56,897

)

 

 

4.30

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(4,050

)

 

 

24.07

 

 

 

 

 

 

 

 

 

Balances at September 30, 2015

 

 

2,103,390

 

 

$

15.82

 

 

 

9.36

 

 

$

15,631

 

Exercisable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

 

97,479

 

 

$

16.42

 

 

 

9.17

 

 

$

592

 

Vested and expected to vest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

 

2,026,145

 

 

$

15.93

 

 

 

9.35

 

 

$

13,231

 

 

Total unrecognized compensation expense for all stock-based awards was $19.4 million as of September 30, 2015. This amount will be recognized over a weighted average period of 3.1 years.

Restricted Stock

A summary of restricted stock activity for the nine months ended September 30, 2015 is as follows:

 

 

 

Number

of Shares

 

 

Weighted

Average

Grant Date Fair Value

 

 

 

 

 

 

 

 

 

 

Unvested balance at December 31, 2014

 

 

-

 

 

$

-

 

Granted

 

 

262,000

 

 

 

24.63

 

Unvested balance at September 30, 2015

 

 

262,000

 

 

$

24.63

 

 

 

 

 

 

 

 

 

 

 

 

11.   Long-term Debt

 

Nonconvertible Senior Secured Promissory Notes

In March 2014, the Company issued nonconvertible senior secured promissory notes (the “2014 Notes”) to certain individuals and entities in the original aggregate principal amount of $6.0 million in connection with a concurrent recapitalization of the Company’s capital stock. The 2014 Notes were collateralized by substantially all of the assets of the Company and accrued interest at a rate of 10% per annum. The holders of the 2014 Notes included officers, employees and directors of the Company, making the 2014 Notes related party in nature. Pursuant to the terms of the 2014 Notes, the aggregate amount of principal outstanding was to have become due and payable upon the first to occur of June 30, 2014 or a number of other defined events that had not transpired and, as a result, an event of default existed that the lenders agreed to forbear subject to a Debt Conversion Agreement (the “Debt Conversion Agreement”) entered into in June 2014.

The lead lenders committed to a minimum investment of $3.3 million in the March 2014 secured debt financing. The terms of the March 2014 secured debt financing included a provision that required the other existing holders of the Company’s outstanding convertible notes to participate in the offering of the 2014 Notes based on their pro rata share of the remaining $2.8 million offering amount. The convertible note holders who contributed their pro rata share to the March 2014 secured debt financing converted their existing principal amount of convertible notes outstanding into 2.25 shares of newly designated Series A Convertible Preferred Stock (“New Series A Convertible Preferred Stock”) for every $1.00 of principal outstanding. The convertible note holders who did not contribute their pro rata share to the March 2014 secured debt financing converted their existing principal amount of convertible notes

 

16


 

outstanding into 1.00 share of New Series A Convertible Preferred Stock for every $1.00 of principal outstanding. Moreover, all accrued interest as of February 28, 2014 was converted into New Series A Convertible Preferred Stock on a dollar-for-dollar basis. Upon the closing of the March 2014 transactions, $15.6 million of principal and $2.2 million of accrued interest related to the existing convertible notes converted into 2,256,674 shares of New Series A Convertible Preferred Stock.

Pursuant to the terms of the March 2014 secured debt financing, in April 2014, the lead lenders invested the difference between $2.8 million and the amount invested by other holders of the existing convertible notes to bring the total financing proceeds to $6.0 million. The amount of this additional investment by the lead lenders was $0.7 million. In connection with this additional investment, the lead lenders received warrants exercisable for 9,614 shares of New Series A Convertible Preferred Stock with an exercise price of $0.15 per share (the “New Series A Warrants”). The New Series A Warrants have a term of seven years. The New Series A Warrants were recorded at an initial fair value of approximately $40,000 and became warrants to purchase common stock at the closing of the Merger on October 30, 2014.

Hercules Term Loan

 

On September 30, 2015, the Company entered into a Loan and Security Agreement (“Loan Agreement”) with Hercules. Under the Loan Agreement, Hercules will provide the Company with access to term loans with an aggregate principal amount of up to $40.0 million (collectively, the "Term Loan"). The Company initially drew a principal amount of $20.0 million, which was funded on September 30, 2015. The remaining $20.0 million available under the Loan Agreement can be drawn at the Company’s option in minimum increments of $10.0 million through December 31, 2016 (the “Draw Period”). The Term Loan is repayable in monthly installments commencing on April 1, 2018 through maturity on September 1, 2020. The interest rate is equal to the greater of (i) 8.5%, or (ii) the sum of 8.5%, plus the Prime Rate minus 5.75% per annum. An end of term charge equal to 4.5% of the issued principal balance of the Term Loan is payable at maturity, including in the event of any prepayment, and is being accrued as interest expense over the term of the loan using the effective interest method. Borrowings under the Loan Agreement are collateralized by substantially all of the assets of the Company.

 

If the Company repays all or a portion of the term loans prior to maturity, in addition to the end of term charge, the Company will pay Hercules a prepayment fee as follows: (i) 2.0% of the then outstanding principal amount if the prepayment occurs prior to April 1, 2018 or (ii) no fee if the prepayment occurs on or after April 1, 2018.

 

Upon an Event of Default, an additional 5.0% interest will be applied and Hercules may, at its option, accelerate and demand payment of all or any part of the loan together with the prepayment and end of term charges. An Event of Default is defined in the Loan Agreement as (i) failure to make required payments; (ii) failure to adhere to financial, operating and reporting loan covenants; (iii) an event or development occurs that has a material adverse effect; (iv) false representations in the Loan Agreement; (v) insolvency, as described in the Loan Agreement; (vi) levy or attachments on any of the Company's assets; and (vii) default of any other agreement or subordinated debt greater than $1.0 million. In the event of insolvency, this acceleration and declaration would be automatic. In addition, in connection with the Loan Agreement, the Company agreed to provide Hercules with a contingent security interest in the Company's bank accounts. The Company's control of its bank accounts is not adversely affected unless Hercules elects to obtain unilateral control of the Company's bank accounts by declaring that an Event of Default has occurred. The principal of the Term Loan, which is not due within 12 months of September 30, 2015, has been classified as long-term as the Company determined that a material adverse effect resulting in Hercules exercising its rights under the subjective acceleration clause is remote.

 

Subject to certain terms, Hercules was also granted the right to participate in an amount of up to $2.0 million in subsequent sales and issuances of the Company's equity securities to one or more investors for cash for financing purposes in an offering that is broadly marketed to multiple investors and at the same terms as the other investors.    On the September 30, 2015, Hercules entered into a Stock Purchase Agreement with the Company to purchase 44,782 shares of common stock resulting in proceeds to the Company of $1.0 million.  The excess of proceeds received by the Company over the fair value of the common stock issued was allocated as a reduction of the fees paid to Hercules in conjunction with obtaining the initial $20.0 million draw of the Term Loan.

 

17


 

 

Debt issuance costs of $511,000 have been ratably allocated to the initial $20.0 million draw and the remaining unfunded $20.0 million. Debt issuance costs related to the initial $20.0 million draw are presented on the condensed consolidated balance sheet as a direct deduction from the related debt liability rather than capitalized as an asset in accordance with the Company’s early adoption of ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). Issuance costs related to the unfunded amount have been capitalized as prepaid asset and will be amortized ratably through the end of the Draw Period.  In the event the Company exercises its option to borrow additional funds, the remaining unamortized prepaid asset balance would be reclassified and recorded as a deduction from the face amount of the funds borrowed based upon a ratable allocation of the amount drawn compared to the remaining unfunded amount available to the Company and will be amortized over the remaining life of the term loan using the effective interest method.

 

In connection with the Loan Agreement, the Company issued to Hercules a Warrant to purchase 32,692 shares of the Company’s common stock at an exercise price of $24.47 per share. The Warrant's relative fair value of $290,000 at September 30, 2015 was determined using a Black-Scholes option-pricing model. The relative fair value of the Warrant was included as a discount to the Term Loan and also as a component of additional paid-in capital.  See Note 7, “Capital Stock,” for further description of the Warrant.

 

In addition to the Warrant, the Company paid fees to Hercules in conjunction with obtaining the Term Loan. The Warrant fair value and fees paid to Hercules, an aggregate of $572,000, were ratably allocated to the initial $20.0 million draw and the remaining unfunded $20.0 million. The $208,000 of costs allocated to the initial $20.0 million draw were recorded as a debt discount and are being amortized as additional interest expense over the term of the loan using the effective interest method. The $364,000 of costs allocated to the unfunded $20.0 million was recorded as prepaid expenses and are being amortized ratably through the end of the Draw Period. In the event the Company exercises its option to borrow additional funds, the remaining unamortized prepaid asset balance related would be reclassified and recorded as debt discount based upon a ratable allocation of the amount drawn compared to the remaining unfunded amount available to the Company and will be amortized over the remaining life of the term loan using the effective interest method.

 

As of September 30, 2015, on the Company's balance sheet, the Company has recorded a long-term debt obligation of $19.5 million, net of debt discount of $463,000, and prepaid expenses of $619,000.

 

Future principal payments, which exclude the 4.5% end of term charge, in connection with the Loan Agreement, as of September 30, 2015 are as follows (in thousands):

 

 

 

 

 

2015

 

$

-

 

2016

 

 

-

 

2017

 

 

-

 

2018

 

 

5,540

 

2019 and thereafter

 

 

14,460

 

Total

 

$

20,000

 

 

 


 

18


 

12.   Income Taxes

There is no provision for federal and state income taxes since the Company has historically incurred operating losses. Deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting and tax bases of assets and liabilities using statutory rates. Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of net operating loss carryforwards and research and development credits. Under the applicable accounting standards, management has considered the Company’s history of losses and concluded that it is more likely than not that the Company will not recognize the benefits of federal and state deferred tax assets. Accordingly, a full valuation allowance has been established against the Company’s otherwise recognizable net deferred tax assets.

 

 

13.   Commitments and Contingencies

 

Leases

 

The Company leases its Boston, Massachusetts and King of Prussia, Pennsylvania office spaces under non-cancelable operating leases expiring in 2019 and 2021, respectively. The Company entered into the King of Prussia and Boston leases in January 2015 and April 2015, respectively, and the lease terms are for six and four years, respectively, each with one renewal option for an extended term. The King of Prussia and Boston lease terms began in June 2015 and July 2015, respectively.  The Company is required to make additional payments under the facility operating leases for taxes, insurance, and other operating expenses incurred during the operating lease period.  The leases contain rent escalation and rent holiday, which are being accounted for as rent expense under the straight-line method.  Deferred rent is included in accounts payable and other accrued expenses and other liabilities in the condensed consolidated balance sheet as of September 30, 2015.  The Company will record monthly rent expense of approximately $35,000 and $12,000 for the Boston and King of Prussia offices, respectively, on a straight-line basis over the effective lease terms.

 

Rent expense for the two new leases, exclusive of related taxes, insurance, and maintenance costs, for continuing operations totaled approximately $139,000 and $151,000 for three and nine months ended September 30, 2015, respectively, and is reflected in operating expenses.

 

As of September 30, 2015, future minimum lease payments under operating leases are as follows:

 

 

 

 

 

Fiscal Year

 

 

 

 

Remainder of 2015

 

$

140,000

 

2016

 

 

565,000

 

2017

 

 

576,000

 

2018

 

 

587,000

 

2019

 

 

446,000

 

2020

 

 

152,000

 

2021 and thereafter

 

 

128,000

 

Total

 

$

2,594,000

 

 

Intermezzo Patent Litigation

In July 2012, the Company received notifications from three companies, Allergan Elizabeth LLC, or Allergan Elizabeth, Watson Laboratories, Inc.—Florida, or Watson, and Novel Laboratories, Inc. (Novel), in September 2012, from each of Par Pharmaceutical, Inc. and Par Formulations Private Ltd., together, the Par Entities, in February 2013 from Dr. Reddy’s Laboratories, Inc. and Dr. Reddy’s Laboratories, Ltd., together, Dr. Reddy’s, and in July 2013 from TWi Pharmaceuticals, Inc., or Twi, stating that each has filed with the FDA an Abbreviated New Drug Application, or ANDA, that references Intermezzo. Refer to Item 3 Legal Proceedings as filed in the Company’s Annual Report on Form 10-K/A dated December 31, 2014 for a full description of the history of this litigation.

The United States District Court for the District of New Jersey, or the District Court, held a consolidated trial between December 1, 2014 and December 15, 2014 involving Paratek, Purdue, and their patent infringement claims against Allergan Elizabeth, Novel, and Dr. Reddy’s. The District Court then received post-trial briefing and held a February 13, 2015 post-trial hearing. On March 27, 2015, the District Court issued an order and accompanying opinion finding that: (a) the asserted claims of U.S. Patent Nos. 7,682,628, 8,242,131, and 8,252,809, together, the “’628, ‘131, and ‘809 patents, are invalid as obvious; (b) Allergan Elizabeth, Novel, and Dr. Reddy’s infringe the ‘131 patent; (c) Novel infringes the ‘628 patent; and (d) Novel and Dr. Reddy’s infringe the ‘809 patent. On April 9, 2015, the District Court entered final judgment consistent with the March 27, 2015 opinion and order referenced

 

19


 

above.  As a result of the District Court’s findings, the intangible assets representing Intermezzo product rights have been impaired and the related contingent obligation has been reduced in light of an expected decline in Intermezzo sales. Refer to Note 4 Intangible Assets, Net and Note 9 Fair Value Measurements for discussion of impairment and reduction in contingent obligations, respectively.

The Company and Purdue jointly appealed the District Court’s final judgment as to the '131 patent to the United States Court of Appeals for the Federal Circuit on May 6, 2015.  The appeal is pending.  

Stockholder Suit

On October 2, 2014, Continuum Capital, on behalf of itself and a putative class of similarly situated stockholders of the Company, filed a lawsuit in the California Superior Court for Contra Costa County, or the Superior Court, against the Company and its then current board members (only one of whom remains as a director) as well as against the entity then known as Paratek Pharmaceuticals, Inc., or Old Paratek, which merged with a wholly-owned subsidiary of the Company on October 30, 2014. The complaint alleges that the Company’s board members breached fiduciary duties to stockholders in connection with the Company’s merger transaction with Old Paratek announced on June 30, 2014, and that the Company and its board of directors failed to make adequate disclosures in soliciting stockholder approval of the merger transaction, and that Old Paratek aided and abetted the alleged breaches. After expedited discovery, the parties agreed in principal to a settlement and release of all claims by a defined class of pre-merger stockholders of the Company. In furtherance of the settlement, the Company supplemented its disclosures regarding the merger transaction and paid negotiated plaintiffs’ attorneys’ fee of $0.6 million. The settlement was approved by the Superior Court on May 21, 2015.  The case has been dismissed, final judgement has been entered, and the time for appeal has expired.  Defendants deny any wrongdoing and agreed to settle the action to eliminate the burden and expense of further litigation.

From time to time the Company is involved in legal proceedings arising in the ordinary course of business. The Company believes there is no other litigation pending that could have, individually or in the aggregate, a material adverse effect on its results of operations or financial condition. The Company does not believe that any of the above matters will result in a liability that is probable or estimable at September 30, 2015.

 

    

14.   Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. The new standard will be effective for the Company on January 1, 2018. The Company is currently evaluating the method of adoption and the potential impact that Topic 606 may have on its financial position and results of operations.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40). The ASU requires all entities to evaluate for the existence of conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the issuance date of the financial statements. The accounting standard is effective for interim and annual periods ending after December 15, 2016, and will not have a material impact on the consolidated financial statements, but may impact the Company’s footnote disclosures.

 

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810)-Amendments to the Consolidation Analysis, which amends the criteria for determining which entities are considered variable interest entities, or VIEs, amends the criteria for determining if a service provider possesses a variable interest in a VIE and ends the deferral granted to investment companies for application of the VIE consolidation model. The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2015. The Company is currently evaluating the impact the adoption of the ASU will have on our financial statements.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. For public business entities, the ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company elected to adopt this guidance effective for the nine months ended September 30, 2015.


 

20


 

In April 2015, the FASB issued ASU No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which amends Accounting Standards Codification, or ASC, 350, Intangibles - Goodwill and Other. The amendments provide guidance as to whether a cloud computing arrangement (e.g., software as a service, platform as a service, infrastructure as a service, and other similar arrangements) includes a software license, and based on that determination, how to account for such arrangements. The ASU is effective for fiscal years, and interim periods therein, beginning after December 15, 2015 and may be applied on either a prospective or retrospective basis. Early adoption is permitted. The Company elected to adopt this guidance effective for the nine months ended September 30, 2015.

 

 

Item 2.

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

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this quarterly report. All references to “Paratek,” “we,” “us,” “our” or the “Company” in this Quarterly Report on Form 10-Q mean Paratek Pharmaceuticals, Inc. and our subsidiaries.

This discussion contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are identified by words such as “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” or the negative of these terms or similar expressions. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward- looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this report in Part II, Item 1A — “Risk Factors,” and elsewhere in this report. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

Company Overview

We are a biopharmaceutical company focused on the development and commercialization of innovative therapeutics based upon tetracycline chemistry. We have used our expertise in biology and tetracycline chemistry to create chemically diverse and biologically distinct small molecules derived from the minocycline core structure. Our two phase 3 product candidates are the antibacterials omadacycline and sarecycline.

Omadacycline is the first in a new class of aminomethycycline antibiotics.  Omadacycline is a broad-spectrum, well-tolerated once-daily IV and oral antibiotic being developed for potential use as a monotherapy for serious community-acquired bacterial infections where antibiotic resistance is of concern. We believe omadacycline, if approved, will be used in the emergency room, hospital and community care settings. We have designed omadacycline to provide potential advantages over existing antibiotics, including activity against resistant bacteria, broad spectrum antibacterial activity, IV and oral formulations with once-daily dosing, no known drug interactions, and a favorable safety and tolerability profile. We believe that omadacycline has the potential to become the primary antibiotic choice of physicians for use as a monotherapy antibiotic for acute bacterial skin and skin structure infections, or ABSSSI, community-acquired bacterial pneumonia, or CABP, urinary tract infections, UTI, and other serious community-acquired bacterial infections, where resistance is of concern.  Omadacycline entered Phase 3 clinical development for the treatment of ABSSSI in June 2015. On November 9, 2015, we announced that the first patient was dosed in a Phase 3 clinical study for the treatment of CABP.  We also plan to initiate Phase 1 clinical studies in UTI and sinusitis in the first half of 2016.

In the fall of 2013, the FDA accepted the design of our omadacycline Phase 3 studies for ABSSSI and CABP through the Special Protocol Assessment, or SPA, process.  In addition, the FDA confirmed that positive data from the individual studies for ABSSSI and CABP would be sufficient to support approval of omadacycline for each indication in the United States.  On November 4, 2015, the FDA granted omadacycline Fast Track Designation for the development of omadacycline in ABSSSI, CABP, and Complicated Urinary Tract Infections (cUTI). Fast track designation facilitates the development, and expedites the review of drugs which treat serious or life-threatening conditions and fill an unmet medical need.


 

21


 

Recent scientific advice received through the centralized procedure in Europe confirmed general agreement on the design and choice of comparators of the Phase 3 trials for ABSSSI and CABP and noted that approval based on a single study in each indication could be possible but would be subject to more stringent standards than programs that conduct two studies per indication. We are continuing to execute on our current strategy Phase 3 development strategy while evaluating this guidance and the potential for including additional data in support of an EU submission within the context of its broader clinical development strategy.

Our second phase 3 antibacterial product candidate, sarecycline, previously known as WC3035, is a new, once- daily, tetracycline-derived compound designed for use in the treatment of acne and rosacea. We believe that, based upon the data generated to-date, sarecycline possesses favorable anti-inflammatory activity, plus narrow-spectrum antibacterial activity relative to other tetracycline-derived molecules, oral bioavailability, does not cross the blood-brain barrier, and favorable pharmacokinetic, or PK, properties that we believe make it particularly well-suited for the treatment of inflammatory acne in the community setting. We have exclusively licensed U.S. development and commercialization rights to sarecycline for the treatment of acne to Allergan plc, or Allergan while retaining development and commercialization rights in the rest of the world. Allergan has informed us that sarecycline entered Phase 3 clinical trials in December 2014 for acne vulgaris. We have