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EX-31.1 - EX-31.1 - Paratek Pharmaceuticals, Inc.prtk-ex311_6.htm
EX-32.2 - EX-32.2 - Paratek Pharmaceuticals, Inc.prtk-ex322_8.htm
EX-32.1 - EX-32.1 - Paratek Pharmaceuticals, Inc.prtk-ex321_9.htm
EX-31.2 - EX-31.2 - Paratek Pharmaceuticals, Inc.prtk-ex312_7.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: June 30, 2016 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

x

 

 

 

 

Non-accelerated filer

o  (Do not check if a smaller reporting company)

Smaller reporting company

¨

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 July 29, 2016 there were 22,627,711 shares of the registrant's common stock, par value $0.001 per share, outstanding.

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

Page

PART I FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

2

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015

 

2

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2016 and 2015

 

3

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015

 

4

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

5

 

 

 

 

Item 2.

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

 

19

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

29

 

 

 

 

Item 4.

Controls and Procedures

 

29

 

 

 

 

PART II OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

30

 

 

 

 

Item 1A.

Risk Factors

 

31

 

 

 

 

Item 6.

Exhibits

 

31

 

 

 

 

 

SIGNATURES

 

32

 

 

 

 

 

 

 

 

1


 

PART I – FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

Paratek Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except for share and par value amounts)

(unaudited)

 

 

 

June 30,

2016

 

 

December 31,

2015

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

87,427

 

 

$

131,302

 

Available-for-sale securities

 

 

62,975

 

 

 

 

Restricted cash

 

 

2,787

 

 

 

2,443

 

Accounts receivable

 

 

85

 

 

 

745

 

Prepaid and other current assets

 

 

1,862

 

 

 

7,927

 

Total current assets

 

 

155,136

 

 

 

142,417

 

Restricted cash

 

 

1,011

 

 

 

250

 

Fixed assets, net

 

 

1,034

 

 

 

779

 

Intangible assets, net

 

 

1,153

 

 

 

1,349

 

Goodwill

 

 

829

 

 

 

829

 

Other long-term assets

 

 

260

 

 

 

294

 

Total assets

 

$

159,423

 

 

$

145,918

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable and other accrued expenses

 

 

13,849

 

 

$

6,443

 

Accrued contract research

 

 

12,324

 

 

 

11,583

 

Current portion of Intermezzo reserve

 

 

2,321

 

 

 

2,476

 

Total current liabilities

 

 

28,494

 

 

 

20,502

 

Long-term debt

 

 

19,625

 

 

 

19,565

 

Contingent obligations

 

 

1,120

 

 

 

1,000

 

Other liabilities

 

 

3,728

 

 

 

3,611

 

Total liabilities

 

 

52,967

 

 

 

44,678

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Preferred stock:

 

 

 

 

 

 

 

 

Undesignated preferred stock: $0.001 par value; 5,000,000 authorized; no shares

   issued and outstanding

 

 

 

 

 

 

 

Common stock, $0.001 par value, 100,000,000 shares authorized, 22,627,711 and

17,608,615 issued and outstanding at June 30, 2016 and December 31, 2015, respectively

 

 

22

 

 

 

17

 

Additional paid-in capital

 

 

436,681

 

 

 

369,949

 

Accumulated other comprehensive income

 

 

34

 

 

 

 

Accumulated deficit

 

 

(330,281

)

 

 

(268,726

)

Total stockholders’ equity

 

 

106,456

 

 

 

101,240

 

Total liabilities and stockholders’ equity

 

$

159,423

 

 

$

145,918

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

2


 

Paratek Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

 

 

Three months ended

June 30,

 

 

Six months ended

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

22,135

 

 

 

10,998

 

 

 

46,423

 

 

 

17,739

 

General and administrative

 

 

7,602

 

 

 

4,281

 

 

 

13,941

 

 

 

8,552

 

Impairment of intangible asset

 

 

 

 

 

 

 

 

 

 

 

2,761

 

Changes in fair value of contingent consideration

 

 

15

 

 

 

400

 

 

 

120

 

 

 

(2,740)

 

Total operating expenses

 

 

29,752

 

 

 

15,679

 

 

 

60,484

 

 

 

26,312

 

Loss from operations

 

 

(29,752)

 

 

 

(15,679)

 

 

 

(60,484)

 

 

 

(26,312)

 

Other income and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(818)

 

 

 

(25)

 

 

 

(1,548)

 

 

 

(25)

 

Interest income

 

 

288

 

 

 

 

 

 

479

 

 

 

 

Other income (loss), net

 

 

(1)

 

 

 

5

 

 

 

(1)

 

 

 

5

 

Net loss

 

 

(30,283)

 

 

 

(15,699)

 

 

 

(61,554)

 

 

 

(26,332)

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Unrealized gain on available-for-sale securities, net of tax

 

 

33

 

 

 

 

 

 

34

 

 

 

 

Comprehensive loss

 

$

(30,250)

 

 

$

(15,699)

 

 

$

(61,520)

 

 

$

(26,332)

 

Net loss per share - basic and diluted

 

$

(1.69)

 

 

$

(0.96)

 

 

$

(3.47)

 

 

$

(1.71)

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

17,895,301

 

 

 

16,372,694

 

 

 

17,755,528

 

 

 

15,400,819

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

3


 

Paratek Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Six months ended

June 30,

 

 

 

2016

 

 

2015

 

Net loss

 

$

(61,554)

 

 

$

(26,332)

 

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

 

 

-

 

 

 

 

 

      Depreciation and amortization

 

 

583

 

 

 

394

 

      Stock-based compensation expense

 

 

5,443

 

 

 

1,427

 

      Noncash interest expense

 

 

563

 

 

 

 

      Noncash interest income

 

 

(479)

 

 

 

 

      Impairment of intangible asset

 

 

 

 

 

2,761

 

      Change in fair value of contingent consideration

 

 

120

 

 

 

(2,740)

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

      Accounts receivable and other current assets

 

 

7,102

 

 

 

189

 

      Purchase of prepaid interest - marketable securities

 

 

(144)

 

 

 

 

      Accounts payable and accrued expenses

 

 

7,671

 

 

 

7,650

 

      Other liabilities and other assets

 

 

(120)

 

 

 

(569)

 

Net cash used in operating activities

 

 

(40,815)

 

 

 

(17,220)

 

Investing activities

 

 

 

 

 

 

 

 

Purchase of fixed assets

 

 

(374)

 

 

 

(431)

 

Purchase of marketable securities

 

 

(68,209)

 

 

 

 

Proceeds from maturities of marketable securities

 

 

5,000

 

 

 

 

(Increase) decrease in restricted cash

 

 

(1,105)

 

 

 

(132)

 

Net cash used in investing activities

 

 

(64,688)

 

 

 

(563)

 

Financing activities

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

11

 

 

 

234

 

Proceeds from sale of common stock

 

 

61,617

 

 

 

70,435

 

Net cash provided by financing activities

 

 

61,628

 

 

 

70,669

 

Net decrease in cash and cash equivalents

 

 

(43,875)

 

 

 

52,886

 

Cash and cash equivalents at beginning of period

 

 

131,302

 

 

 

95,856

 

Cash and cash equivalents at end of period

 

$

87,427

 

 

$

148,742

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

Public offering costs incurred but unpaid at period end

 

$

334

 

 

$

 

 

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 Phase 3 clinical development for the treatment of acute bacterial skin and skin structure infections, or ABSSSI, in June 2015. The Company announced positive top-line efficacy and safety data for this study in June 2016. On November 9, 2015, the Company announced that the first patient was dosed in a Phase 3 clinical study of omadacycline for the treatment of community-acquired bacterial pneumonia, or CABP. The Company continues to progress this Phase 3 study consistent with its plan and anticipates top-line results for CABP as early as the third quarter of 2017.  The Company initiated its first oral-only study for omadacycline, notably with a Phase 1b clinical study in urinary tract infection, or UTI, in May 2016. Results of the UTI study are anticipated in the fourth quarter of 2016. The Company also expects to initiate an oral-only Phase 3 study of omadacycline for the treatment of ABSSSI in August 2016. The Company anticipates top-line results for this study as early as the second quarter of 2017. The Company has an agreement with the U.S. Food and Drug Administration, or the FDA, on the design of this study that is consistent with the current ABSSSI guidance. A Phase 1b sinusitis study has been deprioritized to focus internal efforts on the oral-only ABSSSI Phase 3 study and strategic planning efforts for UTI.

In addition to ongoing Phase 3 studies, the Company is conducting several clinical Phase 1 studies that are needed for inclusion in the planned New Drug Application, or NDA, regulatory filing (i.e., special populations, pharmacokinetics and lung penetration studies in healthy volunteers) with the FDA. The Company plans to submit an NDA for the treatment of ABSSSI and CABP in the first half of 2018.

The Company’s second product, sarecycline, entered Phase 3 clinical development in December 2014. The Company’s U.S. partner, Allergan plc, has provided guidance that top-line data from the Phase 3 trial of sarecycline will be available in the first half of 2017.

Prior to October 30, 2014, the name of the Company was Transcept Pharmaceuticals, Inc., or Transcept. On October 30, 2014, Transcept completed a business combination with privately held Paratek Pharmaceuticals, Inc., or 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., or Merger Sub, Tigris Acquisition Sub, LLC, or Merger LLC, and Old Paratek, or the Merger Agreement, pursuant to which Merger Sub merged with and into Old Paratek, with Old Paratek surviving as a wholly-owned subsidiary of Transcept, followed by the merger of Old Paratek with and into Merger LLC, with Merger LLC surviving as a wholly-owned subsidiary of Transcept (the Company refers to these mergers together as the Merger). 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, or 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.

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, or 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 nonconvertible senior secured promissory notes issued in March 2014, the 2014 Notes, 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, or 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.

 

5


 

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, or 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.

Since its inception, the Company has generated an accumulated deficit of $330.3 million through June 30, 2016 and will require substantial additional funding in connection with the Company’s continuing operations to support commercial activities associated with its lead product candidate, omadacycline. The Company is subject to risks common to companies in the biopharmaceutical industry, including, but not limited to, risks of failure of preclinical studies and clinical trials, the need to obtain additional financing to fund the future development of the Company’s product candidates, the need to obtain marketing approval for the Company’s product candidates, the need to successfully commercialize and gain market acceptance of product candidates, dependence on key personnel, and compliance with government regulations.

 

 

2.   Summary of Significant Accounting Policies and Basis of Presentation

Summary of Significant Accounting Policies

The significant accounting policies and estimates used in preparation of the condensed consolidated financial statements are described in the Company’s audited consolidated financial statements as of and for the year ended December 31, 2015, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission, or the SEC, on March 9, 2016. During the first quarter of 2016, the Company began investing in short-term marketable securities. Refer to Note 3, Cash and Cash Equivalents and Marketable Securities, and Note 10, Fair Value Measurements, for additional information. There have been no other material changes in the Company’s significant accounting policies during the six months ended June 30, 2016.

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, or ASC, and Accounting Standards Update, or ASU, of the Financial Accounting Standards Board, or FASB, and pursuant to the rules and regulations of the SEC.

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, 2015, and, in the opinion of management, reflect all 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 June 30, 2016 and 2015.

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, 2016. These 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, 2015, and notes thereto, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC on March 9, 2016.

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., Paratek UK, Ltd and Paratek Bermuda, 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 the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in the Company’s financial statements. On an ongoing basis, the Company evaluates its estimates and judgments, including those related to, 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.

 

6


 

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. Cash and Cash Equivalents and Marketable Securities 

 

The Company considers all highly liquid investments purchased with original maturities of 90 days or less at acquisition to be cash equivalents. Cash and cash equivalents include cash held in banks and amounts held primarily in interest-bearing money market accounts. Cash equivalents are carried at cost, which approximates their fair market value.

 

The Company determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation at each balance sheet date. The Company has classified all of its marketable securities at June 30, 2016 as “available-for-sale” pursuant to ASC 320, Investments – Debt and Equity Securities. Investments not classified as cash equivalents are presented as either short-term or long-term investments based on both their maturities as well as the time period the Company intends to hold such securities. Available-for-sale securities are maintained by an investment manager and consist of U.S. treasury and government agency securities. Available-for-sale securities are carried at fair value with the unrealized gains and losses included in other comprehensive income (loss) as a component of stockholders’ equity until realized. Any premium or discount arising at purchase is amortized or accreted to interest expense or income over the life of the instrument. Realized gains and losses are determined using the specific identification method and are included in other income or expense. There were no realized gains or losses on marketable securities recognized for the three and six months ended June 30, 2016.

 

The Company reviews marketable securities for other-than-temporary impairment whenever the fair value of a marketable security is less than the amortized cost and evidence indicates that a marketable security’s carrying amount is not recoverable within a reasonable period of time. Other-than-temporary impairments of investments are recognized in the consolidated statements of operations and comprehensive loss if the Company has experienced a credit loss, has the intent to sell the marketable security, or if it is more likely than not that the Company will be required to sell the marketable security before recovery of the amortized cost basis. Evidence considered in this assessment includes reasons for the impairment, compliance with the Company’s investment policy, the severity and duration of the impairment and changes in value subsequent to the end of the period. There were no other-than-temporary impairments of investments recognized for the three and six months ended June 30, 2016.

 

The following is a summary of available-for-sale securities as of June 30, 2016 (in thousands):

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

$

35,139

 

 

$

28

 

 

$

-

 

 

$

35,167

 

Government agencies

 

 

27,802

 

 

 

7

 

 

 

(1)

 

 

 

27,808

 

           Total

 

$

62,941

 

 

$

35

 

 

$

(1)

 

 

$

62,975

 

 

No available-for-sale securities held as of June 30, 2016 have remaining maturities greater than one year.

 

4.   Restricted Cash

 

Intermezzo Reserve

 

In accordance with the Merger Agreement, an initial amount of $3.0 million, or the Intermezzo Reserve, has been kept in a separate segregated bank account established at the closing date of the Merger. This account is utilized solely at the direction and in the discretion of the special committee of the Board of Directors of the Company, or the Special Committee, or its authorized delegates in connection with the Special Committee’s management of the Intermezzo assets and the potential Intermezzo asset disposition. The balance was $2.3 million and $2.4 million as of June 30, 2016 and December 31, 2015, respectively.

 

As of June 30, 2016, also included in restricted cash is $0.5 million of royalty income received but not yet paid to former Transcept stockholders. The royalty payments are made to former Transcept stockholders annually on the anniversary of the Merger.

 

 

Letters of Credit

 

During the first quarter of 2016, the Company obtained a letter of credit in the amount of $0.8 million, which is collateralized

 

7


 

with a bank account at a financial institution, to secure value-added tax registration in certain foreign countries. Subsequent to June 30, 2016, the letter of credit was cancelled by the Company. The Company plans to obtain a new letter of credit during the third quarter of 2016 for the same value, dependent upon currency rates as of the date the letter of credit is obtained.

The Company leases its Boston, Massachusetts office space under a non-cancelable operating lease. Refer to Note 14, Commitments and Contingencies, for further details. In accordance with the lease, the Company has a cash-collateralized irrevocable standby letter of credit in the amount of $0.3 million as of June 30, 2016 and December 31, 2015, naming the landlord as beneficiary.

 

5.   Intangible Assets, Net

Intangible assets consist of the following (in thousands):

 

 

 

June 30,

2016

 

 

December 31,

2015

 

Intermezzo product rights

 

$

1,410

 

 

$

1,410

 

TO-2070 asset

 

 

170

 

 

 

170

 

Gross intangible assets

 

 

1,580

 

 

 

1,580

 

Less: Accumulated amortization

 

 

(427)

 

 

 

(231)

 

Net intangible assets

 

$

1,153

 

 

$

1,349

 

 

Intermezzo product rights and the TO-2070 asset were acquired through the Merger. Refer to Note 7, License and Collaboration Agreements, for further detail concerning Intermezzo and TO-2070.  Intangible assets are reviewed when events or circumstances indicate that the assets might be impaired. An impairment loss would be recognized when the estimated undiscounted cash flows to be generated by those assets are less than the carrying amounts of those assets.  If it is determined that the intangible asset is not recoverable, an impairment loss would be calculated based on the excess of the carrying value of the intangible asset over its fair value.

On March 27, 2015, a decision was made by the United States District Court for the District of New Jersey, or the New Jersey District Court, concerning Intermezzo patent infringement claims the Company made in response to the filing of an Abbreviated New Drug Application, or ANDA, with the FDA. The decision made by the New Jersey District Court invalidated several Intermezzo patent claims as obvious.  As a result of the New Jersey 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. Based on the intangible asset impairment test performed, the Company recorded a non-cash impairment charge of $2.8 million for the first quarter of 2015. The Company appealed the New Jersey District Court’s ruling during the second quarter of 2015. On January 8, 2016 the United States Court of Appeals for the Federal Circuit, or the U.S. Court of Appeals, affirmed the decision of the New Jersey District Court, and no opinion accompanied the judgment. Refer to Note 14, Commitments and Contingencies, for further information concerning the litigation.

 

The January 8, 2016 decision by the U.S. Court of Appeals 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 during the second half of 2016. On April 5, 2016, the first generic launch of Intermezzo occurred. The Company performed a recoverability test of the Intermezzo product rights as of June 30, 2016. It was determined that the summation of the undiscounted future cash flow of the Intermezzo product rights was greater than the carrying value. As such, the Company did not record an impairment charge during the three and six months ended June 30, 2016.

 

6.   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, stock options, restricted stock units, and warrants to purchase common stock 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.

 

 

8


 

The following outstanding shares subject to stock options, restricted stock units, 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 three and six months ended June 30, 2016 and 2015 as indicated below:

 

 

 

June 30,

 

 

 

2016

 

 

2015

 

Excluded potentially dilutive securities(1):

 

 

 

 

 

 

 

 

Shares subject to outstanding options to purchase common stock

 

 

2,863,382

 

 

 

1,825,896

 

Unvested restricted stock units

 

 

475,500

 

 

 

217,000

 

Shares subject to warrants to purchase common stock

 

 

42,306

 

 

 

14,734

 

Totals

 

 

3,381,188

 

 

 

2,057,630

 

 

(1)

The number of shares is based on the maximum number of shares issuable on exercise or conversion of the related securities as of June 30, 2016 and 2015. Such amounts have not been adjusted for the treasury stock method or weighted average outstanding calculations as required if the securities were dilutive.

 

 

7.   License and Collaboration Agreements

Allergan plc

In July 2007, the Company and Warner Chilcott Company, Inc. (now part of 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 its costs and expenses, including third-party costs, incurred in conducting any such development activities.

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 FDA, of an 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.

The Company has not received any amounts or recognized any revenue under this arrangement since 2014.

 

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. 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;

 

·

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;

 

10


 

 

·

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 Collaboration 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 the 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.

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 asset 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.

 

11


 

8.   Capital Stock

 

On October 15, 2015, Paratek Pharmaceuticals, Inc. entered into a Controlled Equity OfferingSM Sales Agreement, or the Sales Agreement, with Cantor Fitzgerald & Co., or Cantor, under which the Company could, at its discretion, from time to time sell shares of its common stock, with a sales value of up to $50 million. The Company provided Cantor with customary indemnification rights, and Cantor was entitled to a commission at a fixed rate of 3% of the gross proceeds per share sold.  Sales of the shares under the Sales Agreement were to be made in transactions deemed to be “at the market offerings”, as defined in Rule 415 under the Securities Act of 1933, as amended. The Company initiated sales of shares under the Sales Agreement in March 2016, and sold an aggregate of 129,088 shares of common stock during the six months ended June 30, 2016, resulting in net proceeds of $2.0 million after deducting commissions of $62,000. 

 

In June 2016, the Company completed a public offering of 4,887,500 shares of common stock at an offering price of $13.00 per share, which included 637,500 shares of common stock issued upon the exercise by the underwriters of an option to purchase additional shares from the Company. The offering was completed under the shelf registration statement that was filed on Form S-3 and declared effective by the SEC on April 27, 2015. The net proceeds received by the Company, after underwriting discounts and commissions and other estimated offering expenses, were $59.3 million. 

Warrants to Purchase Common Stock

9,614 warrants to purchase common stock have an exercise price of $0.15 per share and will, if not exercised, expire in 2021. A further 5,120 warrants to purchase common stock with an exercise price of $73.66 expired in April 2016.

As described in Note 12, Long-term Debt, in connection with a Loan and Security Agreement, or the Loan Agreement, into which the Company entered with Hercules Technology II, L.P. and Hercules Technology III, L.P., together, Hercules, and certain other lenders and Hercules Technology Growth Capital, Inc. (as agent), the Company issued to each of Hercules Technology II, L.P. and Hercules Technology III, L.P. a warrant to purchase 16,346 shares of its common stock (32,692 shares of common stock in total) at an exercise price of $24.47 per share, or the Hercules Warrants, on September 30, 2015, which expire five years from issuance or at the consummation of a Public Acquisition, as defined in each of the Hercules Warrant agreements.

 

9.   Accounts Payable and Other Accrued Expenses

Accounts payable and other accrued expenses consist of the following (in thousands):

 

 

 

June 30,

2016

 

 

December 31,

2015

 

Accounts payable

 

$

7,911

 

 

$

766

 

Accrued legal costs

 

 

582

 

 

 

615

 

Accrued compensation

 

 

1,384

 

 

 

1,323

 

Intermezzo payable

 

 

597

 

 

 

288

 

Accrued professional fees

 

 

1,117

 

 

 

874

 

Accrued contract manufacturing

 

 

1,988

 

 

 

2,443

 

Accrued other

 

 

270

 

 

 

134

 

Total

 

$

13,849

 

 

$

6,443

 

 

 

10.   Fair Value Measurements

Financial instruments, including cash, cash equivalents, restricted cash, money market funds, U.S. treasury and government agency securities, 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 table presents information about the Company’s financial assets and liabilities that have been measured at fair value as of June 30, 2016 and December 31, 2015, 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

 

12


 

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

 

Total

 

 

Quoted

Prices in

Active

Markets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

$

35,167

 

 

$

35,167

 

 

$

 

 

$

 

Government agencies

 

 

27,808

 

 

 

 

 

 

27,808

 

 

 

 

        Total Assets

 

$

62,975

 

 

$

35,167

 

 

$

27,808

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent obligations

 

$

1,120

 

 

$

 

 

$

 

 

$

1,120

 

Total Liabilities

 

$

1,120

 

 

$

 

 

$

 

 

$

1,120

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent obligations

 

$

1,000

 

 

$

 

 

$

 

 

$

1,000

 

Total Liabilities

 

$

1,000

 

 

$

 

 

$

 

 

$

1,000

 

 

Marketable Securities

U.S. treasury securities fair values can be obtained through quoted market prices in active exchange markets and are therefore classified as Level 1. The pricing on government agencies was primarily sourced from independent third party pricing services, overseen by management, and is based on valuation models that consider standard input factor such as deal quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment spreads, credit information and the bond’s terms and conditions, among other things, and are therefore classified as Level 2.

Contingent Consideration

Contingent obligations represent the right for former Transcept stockholders 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 SNBL, which granted the Company an exclusive worldwide license to 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.

 

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. The Company recorded a total net increase in contingent obligations to former Transcept stockholders $0.1 million during the six months ended June 30, 2016.

 

  Material assumptions used to value contingent obligations to former Transcept stockholders with respect to Intermezzo asset include:

 

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

 

13


 

 

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 six months ended June 30, 2016 (in thousands):

 

 

 

Contingent

liability—

former

Transcept

stockholders

 

Balances at December 31, 2015

 

$

1,000

 

Change in fair value

 

 

120

 

Balances at June 30, 2016

 

$

1,120

 

 

 

11.   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

June 30,

 

 

Six months ended

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Research and development expense

 

$

961

 

 

$

275

 

 

$

1,659

 

 

$

291

 

General and administrative expense

 

 

2,062

 

 

 

910

 

 

$

3,784

 

 

 

1,136

 

Total stock-based compensation expense

 

$

3,023

 

 

$

1,185

 

 

$

5,443

 

 

$

1,427

 

 

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 Company estimates expected forfeitures based on historical experience and recognizes compensation costs only for those equity awards expected to vest. The weighted-average assumptions used to determine the value of the stock option grants is as follows:

 

 

 

Six months ended

June 30,

 

 

 

2016

 

 

2015

 

Volatility

 

 

73.5%

 

 

 

58.4%

 

Weighted average risk-free interest rate

 

 

1.4%

 

 

 

1.9%

 

Expected dividend yield

 

 

0.0%

 

 

 

0.0%

 

Expected life of options (in years)

 

 

5.8

 

 

 

6.1

 

 

Stock Option Plan Activity

The number of shares of the Company’s common stock  available for issuance under the Paratek Pharmaceuticals, Inc. 2015 Equity Incentive Plan, or the 2015 Plan, was initially 1,200,000 shares, plus the number of shares that again become available for grant as a result of forfeited or terminated awards or shares withheld in satisfaction of the exercise price of withholding obligations associated with awards under the Paratek Pharmaceuticals, Inc. 2006 Incentive Award Plan, as amended, and the Paratek Pharmaceuticals, Inc. 2014 Equity Incentive Plan, not to exceed 2,000,000 shares. 880,430 shares of common stock were automatically added to the shares authorized for issuance under the 2015 Plan on January 1, 2016 pursuant to a “Share Reserve”

 

14


 

provision contained in the 2015 Plan. The Share Reserve will automatically increase on January 1 of each year, for the period commencing on (and including) January 1, 2016 and ending on (and including) January 1, 2025, in an amount equal to 5% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year. Notwithstanding the foregoing, the Board of Directors of the Company may act prior to January 1 of a given year to provide that there will be no January 1 increase in the Share Reserve for such year or that the increase in the Share Reserve for such year will be a lesser number of shares of common stock than would otherwise occur.

 

During the six months ended June 30, 2016, the Company’s Board of Directors granted 200,000 restricted stock units to executives and employees of the Company and 627,000 stock options to directors, officers and employees of the Company under the 2015 Plan, with time vesting provisions ranging from one to four years.

 

The Company has not made any additional grants under the Paratek Pharmaceuticals, Inc. 2015 Inducement Plan, or the 2015 Inducement Plan, since December 31, 2015. Although the Company does not currently anticipate the issuance of additional stock options under the 2015 Inducement Plan, 6,500 shares remain available for grant under that plan, as well as any shares underlying outstanding options that may become available for grant pursuant to the plan’s terms.  It is therefore possible that the Company may, based on the business and recruiting needs of the Company, issue additional stock options under the 2015 Inducement Plan.  

 

As of December 31, 2015, no additional shares remained available for issuance under either the Paratek Pharmaceuticals, Inc. 2006 Equity Incentive Plan, as amended, or the Paratek Pharmaceuticals, Inc. 2014 Equity Incentive Plan.

 

Total shares available for future issuance under the 2015 Plan are 340,930 shares as of June 30, 2016.

Stock options

 

A summary of stock option activity for the six months ended June 30, 2016 is as follows:

 

 

 

Number

of Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Term

(in years)

 

 

Aggregate

Intrinsic

Value

(in thousands)

 

Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2015

 

 

2,242,890

 

 

$

17.91

 

 

 

9.10

 

 

$

10,692

 

Granted

 

 

627,000

 

 

 

14.28

 

 

 

 

 

 

 

 

 

Exercised

 

 

(2,508)

 

 

 

4.30

 

 

 

 

 

 

 

 

 

Expired or Forfeited

 

 

(4,000)

 

 

 

24.07

 

 

 

 

 

 

 

 

 

Balances at June 30, 2016

 

 

2,863,382

 

 

$

17.12

 

 

 

8.85

 

 

$

6,940

 

Exercisable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

 

778,413

 

 

$

15.55

 

 

 

8.54

 

 

$

3,119

 

Vested and expected to vest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

 

2,624,662

 

 

$

17.04

 

 

 

8.83

 

 

$

6,546

 

 

Total unrecognized compensation expense for all stock-based awards was $23.1 million for the six months ended June 30, 2016. This amount will be recognized over a weighted average period of 2.54 years.

Restricted Stock Units

A summary of restricted stock unit activity for the six months ended June 30, 2016 is as follows: 

 

 

Number

of Shares

 

 

Weighted

Average

Grant Date Fair Value

 

 

 

 

 

 

 

 

 

 

Unvested balance at December 31, 2015

 

 

275,500

 

 

$

24.43

 

Granted

 

 

200,000

 

 

 

14.05

 

Unvested balance at June 30, 2016

 

 

475,500

 

 

$

20.07

 

 

 

 

 

 

 

 

 

 

 

15


 

 

12.   Long-term Debt

 

On September 30, 2015, the Company entered into the Loan Agreement with Hercules and certain other lenders, and Hercules Technology Growth Capital, Inc.  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, or 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, or 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” as reported in The Wall Street Journal 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 Loan 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 would be reasonably expected to have 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 March 31, 2016, 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, pursuant to the Loan Agreement, 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 Technology Growth Capital, Inc. entered into a Stock Purchase Agreement with the Company to purchase 44,782 shares of common stock resulting in proceeds to the Company of approximately $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.

 

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 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. 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 each of Hercules Technology II, L.P. and Hercules Technology III, L.P., a warrant to purchase 16,346 shares of the Company’s common stock (32,692 shares of common stock in total) at an exercise price of $24.47 per share. The Hercules Warrants’ total relative fair value of $288,000 at September 30, 2015 was determined using a Black-Scholes option-pricing model. The relative fair value of the Hercules Warrants was included as a discount to the Term Loan and also as a component of additional paid-in capital.  

 

In addition to the Hercules Warrants, the Company paid fees to Hercules in conjunction with obtaining the Term Loan. The Hercules Warrants 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

 

16


 

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 June 30, 2016, the Company has recorded a long-term debt obligation of $19.6 million, net of debt discount of $0.4 million and prepaid expenses of $0.3 million.

Future principal payments, which exclude the 4.5% end of term charge, in connection with the Loan Agreement, as of June 30, 2016 are as follows (in thousands):

Fiscal Year

 

 

 

 

2016

 

$

 

2017

 

 

 

2018

 

 

5,540

 

2019

 

 

7,973

 

2020 and thereafter

 

 

6,487

 

Total

 

$

20,000

 

 

 

13.   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.

 

 

14.   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 in the condensed consolidated balance sheet as of June 30, 2016.  The Company will record monthly rent expense of approximately $35,000 and $12,000 for the original Boston and King of Prussia offices, respectively, on a straight-line basis over the effective lease terms.

 

The Company executed an amended lease agreement on its Boston office space in July 2016. The amended lease agreement adds 4,153 rentable square feet of office space, for a commitment of $1.1 million and extends the original lease term by two years, for an additional commitment of $0.9 million. The total lease commitment of $2.0 million is over a five-year lease term.  In accordance with the amended lease agreement, the Company paid a security deposit of $0.1 million.  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.  

 

Rent expense, exclusive of related taxes, insurance, and maintenance costs, for continuing operations totaled approximately $0.1 million and $0.3 million for three and six months ended June 30, 2016, respectively, and is reflected in operating expenses.

 

 

17


 

As of June 30, 2016, future minimum lease payments under operating leases are as follows:

 

 

 

 

 

Fiscal Year

 

 

 

 

Remainder of 2016

 

$

297

 

2017

 

 

603

 

2018

 

 

610

 

2019

 

 

446

 

2020

 

 

152

 

2021

 

 

128

 

Total

 

$

2,236

 

Intermezzo Patent Litigation

 

In July 2012, the Company received notifications from three companies, Actavis Elizabeth LLC, or Actavis Elizabeth, Watson Laboratories, Inc.—Florida, or Watson, and Novel Laboratories, Inc., or 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 ANDA, that references Intermezzo. Refer to Item 3, Legal Proceedings, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC on March 9, 2016, for a full description of the history of this litigation.

 

The New Jersey District Court, held a consolidated trial between December 1, 2014 and December 15, 2014 involving Paratek, Purdue Pharma, and their patent infringement claims against Actavis Elizabeth, Novel, and Dr. Reddy’s. The New Jersey District Court then received post-trial briefing and held a February 13, 2015 post-trial hearing. On March 27, 2015, the New Jersey 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, are invalid as obvious; (b) Actavis 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 New Jersey District Court entered final judgment consistent with the March 27, 2015 opinion and order referenced above.  As a result of the New Jersey 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.

 

The Company and Purdue Pharma jointly appealed the New Jersey 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.  On January 8, 2016 the U.S. Court of Appeals affirmed the decision of the New Jersey District Court, and no opinion accompanied the judgment. In connection with the merger of Transcept and the Company in October 2014, the former stockholders of Transcept retained the right to receive (i) 100% of the royalty income received by the Company prior to October 30, 2016 and (ii) 90% 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 of the merger); provided that such sale or disposition occurs prior to October 30, 2016.

Patent Term Adjustment Suit

In January 2013, the Company filed suit in the Eastern District of Virginia against the United States Patent and Trademark Office, or the USPTO, seeking recalculation of the patent term adjustment of the ’131 Patent. Purdue Pharma has agreed to bear the costs and expenses associated with this litigation. In June 2013, the judge granted a joint motion to stay the proceedings pending a remand to the USPTO, in which the USPTO is expected to reconsider its patent term adjustment award in light of decisions in a number of appeals to the Federal Circuit, including Novartis AG v. Lee 740 F.3d 593 (Fed. Cir. 2014), or the Novartis decision. Since having issued final rules implementing the Novartis decision, the USPTO has been working through the civil action cases and issuing remand decisions. The Company’s case is on remand until the USPTO makes its decision on the recalculation of the patent term adjustment.

Other Legal Proceedings

In the ordinary course of business, the Company is from time to time involved in lawsuits, claims, investigations, proceedings, and threats of litigation relating to intellectual property, commercial arrangements, employment and other matters. While the outcome of these proceedings and claims cannot be predicted with certainty, as of June 30, 2016, the Company was not party to any other legal or arbitration proceedings that may have, or have had in the recent past, significant effects on the Company’s financial position. No governmental proceedings are pending or, to the Company’s knowledge, contemplated against the Company. The Company is not a

 

18


 

party to any material proceedings in which any director, member of executive management or affiliate of the Company is either a party adverse to the Company or the Company’s subsidiaries or has a material interest adverse to the Company or the Company’s subsidiaries.

15.   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. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of the new standard from January 1, 2017 to January 1, 2018. Early adoption is not permitted for public entities. In March 2016 and April 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) and ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, respectively. The Company is currently evaluating the impact the adoption of these ASUs will have on its consolidated financial statements.

 

In June 2014, the FASB issued ASU 2014-12 Compensation—Stock Compensation. In March 2016, the FASB issued ASU 2016-09—Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several areas of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either liabilities or equity and classification of excess tax benefits on the statement of cash flows. This guidance also permits a new entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. This guidance will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods, and early adoption is permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the impact the adoption of the ASU will have on its consolidated financial statements.

 

In August 2014, the FASB issued ASU 2014-15 Presentation of Financial Statements-Going Concern. The amendments in this update apply to all reporting entities and require an entity’s management, in connection with preparing financial statements for each annual and interim reporting period, to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). This ASU is effective for annual periods ending after December 15, 2016. Early application is permitted. Although the Company has not yet adopted this ASU, the Company evaluated the impact of this new standard as if it was adopted in connection with the issuance of its financial statements as of and for the three and six months ended June 30, 2016 and determined no additional disclosures are required.

 

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 Company adopted this pronouncement on January 1, 2016, which did not have an impact on the Company’s financial position or results of operations.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), The ASU is effective for annual periods beginning after December 15, 2018. The amendment requires a lessee to recognize assets and liabilities for leases with a maximum possible term of more than 12 months. A lessee would recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the leased asset (the underlying asset) for the lease term. This ASU is effective for fiscal years beginning after December 15, 2018, including those interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the ASU will have on its consolidated financial statements.

 

 

 

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

 

19


 

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 that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. 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 the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC on March 9, 2016 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 clinical stage 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 lead product candidates are the antibacterials omadacycline and sarecycline. Omadacycline entered Phase 3 clinical development for the treatment of acute bacterial skin and skin structure infections, or ABSSSI, in June 2015. In June 2016, we announced positive top-line efficacy and safety data for this study. On November 9, 2015, we announced that the first patient was dosed in a Phase 3 clinical study of omadacycline for the treatment of community-acquired bacterial pneumonia, or CABP. We continue to progress our Phase 3 study consistent with our plan and anticipate top-line results for CABP as early as the third quarter of 2017. We have initiated our first oral-only study for omadacycline, notably with a Phase 1b clinical study in urinary tract infection, or UTI, in May 2016. We anticipate results for the UTI study in the fourth quarter of 2016.  We also plan to initiate an oral-only Phase 3 study of omadacycline for the treatment of ABSSSI in August 2016. We anticipate top-line results for this study as early as the second quarter of 2017.  Our Phase 1b sinusitis study has been deprioritized to focus internal efforts on the oral-only ABSSSI Phase 3 study and strategic planning efforts for UTI.

In addition to ongoing Phase 3 studies, we are conducting several clinical Phase 1 studies that are needed for inclusion in the planned New Drug Application, or NDA, regulatory filing (i.e., special populations, pharmacokinetics and lung penetration studies in healthy volunteers) with the U.S. Food and Drug Administration, or the FDA. We plan to submit an NDA for the treatment of ABSSSI and CABP in the first half of 2018.

 

Omadacycline is the first in a new class of aminomethycycline antibiotics. Omadacycline is a broad-spectrum, well-tolerated once-daily intravenous, or IV, and oral antibiotic. We believe that omadacycline has the potential to become the primary antibiotic choice of physicians for use as a broad-spectrum monotherapy antibiotic for ABSSSI, CABP, or UTI, and other serious community-acquired bacterial infections, where 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, oral and IV formulations with once-daily dosing, no known drug interactions, and a favorable safety and tolerability profile.

 

In the fall of 2013, the FDA agreed to 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 and for both oral and IV formulations in the United States.  In addition to Qualified Infectious Disease Product designation, on November 4, 2015, the FDA granted omadacycline Fast Track Designation for the development of omadacycline in ABSSSI, CABP, and complicated Urinary Tract Infections, or cUTI. Fast track designation facilitates the development, and expedites the review of drugs which treat serious or life-threatening conditions and fills an unmet medical need. In February 2016, we reached agreement with the FDA on the terms of the pediatric program associated with the Pediatric Research and Equity Act. The FDA has granted Paratek a waiver from conducting studies with omadacycline in children less than eight years old and a deferral in conducting studies in children eight years and older until safety and efficacy is established in adults.  In May 2016, the FDA agreed to the design of the Phase 3 oral-only ABSSSI study and that it is consistent with the current ABSSSI guidance.

 

Scientific advice received through the centralized procedure in Europe confirmed general agreement on the design and choice of

 

20


 

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 statistical standards than Market Authorization Applications (MAA) programs that conduct two pivotal phase 3 studies per indication. We believe that the inclusion of a second Phase 3 study in ABSSSI, if positive, strengthens the data package for a successful MAA filing and approval in EU. 

 

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 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. Our U.S. partner, Allergan plc, has provided guidance that top-line data from the Phase 3 trial of sarecycline will be available in the first half of 2017. We have also granted Allergan an exclusive license to develop and commercialize sarecycline for the treatment of rosacea in the United States, which converted to a non-exclusive license in December 2014 after Allergan did not exercise its development option with respect to rosacea. There are currently no clinical trials with sarecycline in rosacea underway.

 

To date, we have devoted a substantial amount of our resources to research and development efforts, including conducting clinical trials for omadacycline, protecting our intellectual property and providing general and administrative support for these operations. We have not yet submitted any product candidates for approval by regulatory authorities, and we do not currently have rights to any products that have been approved for marketing in any territory. We have not generated any revenue from product sales and to date have financed our operations primarily through sale of our common and convertible preferred stock, note financings, research and development collaborations, and, to a lesser extent, through government grants, foundation support, line of credit financings, and equipment lease financings.

 

We have incurred significant losses since our inception in 1996. Our accumulated deficit at June 30, 2016 was $330.3 million and our net loss for the six months ended June 30, 2016 was $61.5 million. A substantial amount of our net losses resulted from costs incurred in connection with our research and development programs, general and administrative costs associated with our operations and noncash items primarily associated with our note financings. The net losses and negative operating cash flows incurred to date, together with expected future losses, have had, and likely will continue to have, an adverse effect on our stockholders’ equity and working capital. The amount of future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate offsetting revenue, if any.

We expect to continue to incur significant expenses and operating losses for the foreseeable future. We expect our clinical development expenses to increase in connection with our ongoing activities, particularly as we continue our clinical development of, and seek regulatory approvals for, our product candidates, prepare for and begin commercialization of any approved products, and add infrastructure and personnel to support our product development efforts.

We do not expect to generate revenue from product sales unless and until we or our partner Allergan successfully complete development and obtain marketing approval for one or more of our product candidates. Accordingly, we anticipate that we will need to raise additional capital in order to complete the development and commercialization of omadacycline and to advance the development of our other product candidates. Until we can generate a sufficient amount of product revenue to finance our cash requirements, we expect to finance our future cash needs primarily through a combination of equity offerings, debt financings, monetization of sarecycline U.S. royalties and strategic collaborations. We may be unable to raise capital when needed or on attractive terms, which would force us to delay, limit, reduce or terminate our development programs or commercialization efforts. We will need to generate significant revenue to achieve and sustain profitability, and we may never be able to do so.

Recent Financing Activities

 

We completed a public offering in June 2016 of 4,887,500 shares of common stock at an offering price of $13.00 per share, which included 637,500 shares of common stock issued upon the exercise by the underwriters of an option to purchase additional shares from us. The net proceeds received by us, after underwriting discounts and commissions and other estimated offering expenses, were $59.3 million. We intend to use the net proceeds from this offering, together with our existing capital resources, to fund our planned clinical studies of omadacycline, including an oral-only Phase 3 study of omadacycline for the treatment of ABSSSI, to fund activities required to support an NDA submission for omadacycline for the treatment of ABSSSI and CABP, including manufacture of registration and validation batches and establishment of secondary manufacturing suppliers for our active pharmaceutical ingredient, or API, and drug product, and for working capital and other general corporate purposes.

 

21


 

 

On October 15, 2015, we entered into a Controlled Equity OfferingSM, or Sales Agreement, with Cantor Fitzgerald & Co., or Cantor, under which we could, at our discretion, from time-to-time sell shares of our common stock, with a sales value of up to $50 million. We provided Cantor with customary indemnification rights, and Cantor was entitled to a commission at a fixed rate of 3% of the gross proceeds per share sold. Sales of the shares under the Sales Agreement were to be made in transactions deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act of 1933, as amended. We initiated sales of shares under the Sales Agreement in March 2016, and sold an aggregate of 129,088 shares of common stock during the six months ended June 30, 2016, resulting in net proceeds of $2.0 million after deducting commissions of $62,000. 

Financial Operations Overview

Revenue

We have not yet generated any revenue from product sales. All of our revenue to date has been derived from license fees, milestone payments, reimbursements for research, development and manufacturing activities under licenses and collaborations, and grant payments received from the National Institutes of Health, or NIH, and other non-profit organizations. We do not expect to generate revenue from product sales prior to 2018, at the earliest.

Research and Development Expense

Research and development expenses consisted primarily of costs directly incurred by us for the development of our product candidates, which include:

 

expenses incurred under agreements with clinical research organizations, or CROs, and investigative sites that will conduct our clinical trials;

 

the cost of acquiring and manufacturing preclinical and clinical study materials and developing manufacturing processes;

 

direct employee-related expenses, including salaries, benefits, travel and stock-based compensation expense of our research and development personnel;

 

allocated facilities, depreciation, and other expenses, which include rent and maintenance of facilities, insurance and other supplies; and

 

costs associated with preclinical activities and regulatory compliance.

Research and development costs are expensed as incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and our clinical sites.

We cannot determine with certainty the duration and completion costs of the current or future clinical trials of our product candidates or if, when, or to what extent we will generate revenues from the commercialization and sale of any of our product candidates for which we or any partner obtain regulatory approval. We may never succeed in achieving regulatory approval for any of our product candidates. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including:

 

the scope, rate of progress, and expense of our ongoing, as well as any additional, clinical trials and other research and development activities;

 

future clinical trial results;

 

potential changes in government regulation; and

 

the timing and receipt of any regulatory approvals.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that therapeutic candidate. For example, if the FDA, or another regulatory authority, were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of the clinical development of product candidates, or if we experience significant delays in the enrollment in any clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

 

22


 

With available cash resources subsequent to closing of the Merger in October 2014, follow-on offerings of shares of common stock in May 2015 and June 2016, borrowings under our Loan Agreement with Hercules, and sale of common stock through the Sales Agreement with Cantor, we are closing out our Phase 3 study of omadacycline for the treatment of ABSSSI, conducting an ongoing Phase 3 study of omadacycline for the treatment of CABP, and conducting additional supportive Phase 1 studies. We also initiated a Phase 1b oral-only study of omadacycline for the treatment of UTI in May 2016 and expect to initiate another oral-only Phase 3 clinical study in ABSSSI in August 2016.  Additionally, we have initiated our preparation for the filing of an NDA submission to the FDA, including conducting required manufacturing activities.

We manage certain activities, such as clinical trial operations, manufacture of therapeutic candidates, and preclinical animal toxicology studies, through third-party CROs. The only costs we track by each product candidate are external costs such as services provided to us by CROs, manufacturing of preclinical and clinical drug product, and other outsourced research and development expenses. We do not assign or allocate to individual development programs internal costs such as salaries and benefits, facilities costs, lab supplies and the costs of preclinical research and studies. Our external research and development expenses for omadacycline and other projects during the three and six months ended June 30, 2016 and 2015 are as follows (in thousands):  

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Omadacycline

 

$

19,181

 

 

$

7,047

 

 

$

40,667

 

 

$

12,495

 

Other external research

 

 

 

 

 

6

 

 

 

 

 

 

10

 

Total external costs

 

 

19,181

 

 

 

7,053

 

 

 

40,667