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EX-32.1 - EX-32.1 - PROTEOSTASIS THERAPEUTICS, INC.pti-ex321_8.htm
EX-31.2 - EX-31.2 - PROTEOSTASIS THERAPEUTICS, INC.pti-ex312_6.htm
EX-31.1 - EX-31.1 - PROTEOSTASIS THERAPEUTICS, INC.pti-ex311_7.htm
EX-10.2 - EX-10.2 - PROTEOSTASIS THERAPEUTICS, INC.pti-ex102_127.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

For the quarterly period ended September 30, 2017

OR

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: 001-37695

 

Proteostasis Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

20-8436652

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

200 Technology Square, 4th Floor

Cambridge, Massachusetts 02139

(Address of principal executive office) (Zip Code)

Registrant’s telephone number, including area code: (617) 225-0096

 

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      No  

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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

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,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

 

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

As of November 9, 2017, there were 25,216,088 shares of the registrant’s Common Stock, $0.001 par value per share, outstanding.

 

 

 

 

 


 

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains 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. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim”, “may”, “will”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

 

our estimates regarding our clinical trials, including, without limitation, the timing of the initiation of, completion of, enrollment in, and data from our trials;

 

our estimates regarding anticipated filing of INDs for nominated drug candidates;

 

our estimates regarding expenses, future revenues and capital requirements;

 

our ability to obtain and maintain regulatory approval of PTI-428, PTI-801 and PTI-808, and our combination solutions for any indication, and the labeling under any approval we may obtain;

 

our ability to obtain and maintain sanctioning or favorable scoring of our clinical trials or protocols from other third parties, such as the Therapeutics Development Network of the Cystic Fibrosis Foundation or the Clinical Trial Network of the European Cystic Fibrosis Society;

 

intense competition in the CF market and the ability of our competitors, many of whom have greater resources than we do, to offer different, better or lower cost therapeutic alternatives than our product candidates;

 

anticipated regulatory developments in the United States and foreign countries;

 

anticipated developments with respect to, and the commercial availability of, CFTR modulators with which PTI-428 or other of our product candidates is intended to be administered, including Vertex’s Kalydeco® and Orkambi®;

 

our plans to develop and commercialize PTI-428, PTI-801, PTI-808 and our combination solutions including expected preclinical and clinical results and timing;

 

our ability to obtain and maintain intellectual property protection for our proprietary assets;

 

the size and growth of the potential markets for PTI-428, PTI-801, PTI-808 and our combination solutions, and our ability to serve those markets;

 

the rate and degree of market acceptance of PTI-428, PTI-801, PTI-808 and our combination solutions for any indication;

 

our ability to obtain additional financing;

 

the loss of key scientific or management personnel; and

 

other forward-looking statements discussed elsewhere in this report.

Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events and with respect to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those described under Part II, Item 1A. Risk Factors and elsewhere in this Quarterly Report on Form 10-Q. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

This Quarterly Report on Form 10-Q also contains estimates, projections and other information concerning our industry, the general business environment, and the markets for certain diseases, including estimates regarding the potential size of those markets and the estimated incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events, circumstances or numbers including actual disease prevalence rates and market size, may differ materially from the information reflected in this report. Unless otherwise expressly stated, we obtained this industry, business information, market data, prevalence information and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources, in some cases applying our own assumptions and analysis that may, in the future, not prove to have been accurate.

Kalydeco® and Orkambi® are trademarks of Vertex Pharmaceuticals Incorporated.

 

 

2


 

Proteostasis Therapeutics, Inc.

INDEX

 

 

 

 

 

Page

PART I – FINANCIAL INFORMATION

Item 1.

 

Condensed Financial Statements (unaudited)

 

 

 

 

Condensed Balance Sheets as of September 30, 2017 and December 31, 2016

 

4

 

 

Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016

 

5

 

 

Condensed Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2017 and 2016

 

6

 

 

Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016

 

7

 

 

Notes to Condensed Financial Statements

 

8

 

 

 

 

 

Item 2.

 

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

 

17

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

27

 

 

 

 

 

Item 4.

 

Management’s Evaluation of our Disclosure Controls and Procedures

 

28

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

29

Item 1A.

 

Risk Factors

 

29

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

65

Item 6.

 

Exhibits

 

66

 

 

 

 

 

Signatures

 

67

 

3


 

PART I — FINANCIAL INFORMATION

PROTEOSTASIS THERAPEUTICS, INC.

CONDENSED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

18,192

 

 

$

18,613

 

Short-term investments

 

 

25,034

 

 

 

66,897

 

Restricted cash

 

 

294

 

 

 

 

Accounts receivable

 

 

1,079

 

 

 

668

 

Prepaids and other current assets

 

 

1,838

 

 

 

4,059

 

Total current assets

 

 

46,437

 

 

 

90,237

 

Property and equipment, net

 

 

12,582

 

 

 

541

 

Other assets

 

 

41

 

 

 

68

 

Restricted cash, net of current portion

 

 

1,656

 

 

 

294

 

Total assets

 

$

60,716

 

 

$

91,140

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,535

 

 

$

2,021

 

Accrued expenses

 

 

5,855

 

 

 

4,328

 

Deferred revenue

 

 

1,754

 

 

 

2,204

 

Deferred rent

 

 

139

 

 

 

201

 

Other liabilities

 

 

756

 

 

 

 

Total current liabilities

 

 

11,039

 

 

 

8,754

 

Deferred revenue, net of current portion

 

 

 

 

 

752

 

Deferred rent, net of current portion

 

 

 

 

 

87

 

Derivative liability

 

 

3

 

 

 

91

 

Other liabilities, net of current portion

 

 

11,355

 

 

 

 

Total liabilities

 

 

22,397

 

 

 

9,684

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 5,000,000 shares authorized

   as of September 30, 2017 and December 31, 2016, respectively; no shares issued

   and outstanding as of September 30, 2017 and December 31, 2016

 

 

 

 

 

 

Common stock, $0.001 par value; 125,000,000 shares authorized

   as of September 30, 2017 and December 31, 2016, respectively; 25,112,724 and

   25,000,734 shares issued and outstanding as of September 30, 2017 and

   December 31, 2016, respectively

 

 

26

 

 

 

26

 

Additional paid-in capital

 

 

241,758

 

 

 

238,902

 

Accumulated other comprehensive loss

 

 

(7

)

 

 

(22

)

Accumulated deficit

 

 

(203,458

)

 

 

(157,450

)

Total stockholders’ equity

 

 

38,319

 

 

 

81,456

 

Total liabilities and stockholders’ equity

 

$

60,716

 

 

$

91,140

 

 

The accompanying unaudited notes are an integral part of these condensed financial statements.

 

 

4


 

PROTEOSTASIS THERAPEUTICS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue

 

$

1,551

 

 

$

1,715

 

 

$

3,719

 

 

$

4,324

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

12,894

 

 

 

9,218

 

 

 

41,372

 

 

 

23,498

 

General and administrative

 

 

2,741

 

 

 

3,266

 

 

 

8,813

 

 

 

8,682

 

Total operating expenses

 

 

15,635

 

 

 

12,484

 

 

 

50,185

 

 

 

32,180

 

Loss from operations

 

 

(14,084

)

 

 

(10,769

)

 

 

(46,466

)

 

 

(27,856

)

Interest income

 

 

155

 

 

 

36

 

 

 

515

 

 

 

56

 

Other expense, net

 

 

(25

)

 

 

(38

)

 

 

(57

)

 

 

(15

)

Net loss

 

 

(13,954

)

 

 

(10,771

)

 

 

(46,008

)

 

 

(27,815

)

Accruing dividends on preferred stock

 

 

 

 

 

 

 

 

 

 

 

(1,378

)

Net loss attributable to common stockholders

 

$

(13,954

)

 

$

(10,771

)

 

$

(46,008

)

 

$

(29,193

)

Net loss per share attributable to common

   stockholders—basic and diluted

 

$

(0.56

)

 

$

(0.54

)

 

$

(1.84

)

 

$

(1.75

)

Weighted average common shares outstanding—basic and

   diluted

 

 

25,093,344

 

 

 

20,073,685

 

 

 

25,051,536

 

 

 

16,672,368

 

 

The accompanying unaudited notes are an integral part of these condensed financial statements.

 

 

5


 

PROTEOSTASIS THERAPEUTICS, INC.

CONDENSED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net loss

 

$

(13,954

)

 

$

(10,771

)

 

$

(46,008

)

 

$

(27,815

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on investments

 

 

20

 

 

 

(9

)

 

 

15

 

 

 

(9

)

Comprehensive loss

 

$

(13,934

)

 

$

(10,780

)

 

$

(45,993

)

 

$

(27,824

)

The accompanying unaudited notes are an integral part of these condensed financial statements.

 

 

 

 

6


 

PROTEOSTASIS THERAPEUTICS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(46,008

)

 

$

(27,815

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

187

 

 

 

248

 

Premium on short-term investments

 

 

(140

)

 

 

(124

)

Amortization of premium on short-term investments

 

 

182

 

 

 

2

 

Non-cash rent expense

 

 

(149

)

 

 

(134

)

Stock-based compensation expense

 

 

2,228

 

 

 

1,245

 

Stock issued for consulting services

 

 

555

 

 

 

130

 

Change in fair value of derivative liability

 

 

(88

)

 

 

140

 

Change in fair value of preferred stock warrant liability

 

 

 

 

 

(82

)

Gain on disposal of property and equipment

 

 

 

 

 

(13

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(411

)

 

 

473

 

Prepaids and other current assets

 

 

2,221

 

 

 

(2,200

)

Other assets

 

 

27

 

 

 

63

 

Accounts payable

 

 

514

 

 

 

390

 

Accrued expenses

 

 

1,527

 

 

 

1,849

 

Deferred revenue

 

 

(1,202

)

 

 

(1,992

)

Net cash used in operating activities

 

 

(40,557

)

 

 

(27,820

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Change in restricted cash

 

 

(1,656

)

 

 

 

Purchases of short-term investments

 

 

(23,727

)

 

 

(56,299

)

Proceeds received from maturities of short-term investments

 

 

65,563

 

 

 

 

Purchases of property and equipment

 

 

(117

)

 

 

(32

)

Proceeds received from disposal of property and equipment

 

 

 

 

 

13

 

Net cash provided by (used in) investing activities

 

 

40,063

 

 

 

(56,318

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock upon completion of initial public

   offering, net of commissions and underwriting discounts

 

 

 

 

 

46,500

 

Proceeds from issuance of common stock upon completion of follow-on public

   offering, net of commissions and underwriting discounts

 

 

 

 

 

70,265

 

Proceeds from exercise of stock options

 

 

30

 

 

 

144

 

Proceeds from issuance of common stock pursuant to employee stock purchase plan

 

 

43

 

 

 

 

Payments of initial public offering costs

 

 

 

 

 

(2,515

)

Payments of follow-on public offering costs

 

 

 

 

 

(272

)

Net cash provided by financing activities

 

 

73

 

 

 

114,122

 

Net increase (decrease) in cash and cash equivalents

 

 

(421

)

 

 

29,984

 

Cash and cash equivalents at beginning of period

 

 

18,613

 

 

 

13,844

 

Cash and cash equivalents at end of period

 

$

18,192

 

 

$

43,828

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Conversion of convertible preferred stock into common stock

 

$

 

 

$

112,292

 

Issuance of common stock to settle accrued Series A preferred stock dividends

 

$

 

 

$

3

 

Issuance of common stock for partial payment of accrued bonus

 

$

 

 

$

62

 

Conversion of preferred stock warrants into common stock warrants

 

$

 

 

$

28

 

Deferred offering costs included in accounts payable and accrued expenses

 

$

 

 

$

524

 

Amounts capitalized under build-to-suit lease transaction

 

$

12,111

 

 

$

 

The accompanying unaudited notes are an integral part of these condensed financial statements.

 

7


 

PROTEOSTASIS THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

 

1.

Nature of the Business

Proteostasis Therapeutics, Inc. (the “Company”) was incorporated in Delaware on December 13, 2006. The Company is a clinical stage biopharmaceutical company developing small molecule therapeutics to treat cystic fibrosis (“CF”) and other diseases caused by dysfunctional protein processing.  The Company focuses on identifying therapies that restore protein function.  CF is a disease caused by defects in the cystic fibrosis transmembrane conductance regulator (“CFTR”) protein and insufficient CFTR protein function. The Company’s lead product candidates, PTI-428, PTI-801 and PTI-808  are in early clinical development, with plans for double and triple combinations, and the Company’s other drug candidates are in the preclinical development and discovery phases.

As of December 31, 2016, the Company adopted the provisions of Financial Statement Account Standards Board (FASB) Accounting Standard Codification (ASC) Topic 205-40, Presentation of Financial Statements – Going Concern (ASC 205-40), which requires management to assess the Company’s ability to continue as a going concern for twelve months after the date of the financial statements are issued. This standard requires management to 1) identify and disclose if there are initial conditions indicating substantial doubt about the Company’s ability to continue as a going concern within twelve months of the issuance date of the financial statements, 2) disclose the principal conditions that gave rise to substantial doubt, 3) disclose management’s evaluation of the significance of those conditions in relation to the Company’s ability to meet its obligations and 4) disclose management’s plans that are intended to mitigate the adverse conditions.  In accordance with the accounting standard, when considering management’s plans to mitigate the conditions giving rise to substantial doubt, management can only consider those plans which are probable to be successfully implemented.

The Company has incurred losses from operations since its inception. As of September 30, 2017, the Company had an accumulated deficit of $203.5 million. During the three and nine months ended September 30, 2017, the Company incurred losses of $14.0 million and $46.0 million and during the nine months ended September 30, 2017 the Company used $40.6 million of cash in operations. The Company expects to continue to generate operating losses in the foreseeable future. The Company currently expects that its cash, cash equivalents and short-term investments of $43.2 million will be sufficient to fund its operating expenses and capital requirements, based upon its current operating plan, through the second quarter of 2018. As of September 30, 2017, management has further assessed this risk and, in accordance with the requirements of ASC 205-40, determined that there are initial conditions indicating that there is substantial doubt about the Company’s ability to continue as a going concern within twelve months of the issuance date of these condensed financial statements.  These indicators are the Company’s accumulated deficit and the forecasted cash expenditures. Although the Company has been successful in raising capital in the past, there is no assurance that it will be successful in obtaining such additional financing on terms acceptable to the Company, if at all, nor is it considered probable under the accounting standards. As such, under the requirements of ASC 205-40, management may not consider the potential for future capital raises in its assessment of the Company’s ability to meet its obligations for the next twelve months. If the Company is unable to obtain funding, the Company would be forced to delay, reduce or eliminate its research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect its business prospects, or the Company may be unable to continue operations.

The ability to reduce spending at a level that mitigates the factors described above, is not considered probable, as defined in the accounting standards; as such, under the requirements of ASC 205-40, the full extent to which management may extend the Company’s funds through these actions may not be considered in management’s assessment of the Company’s ability to continue as a going concern for the next twelve months.  

Thus, in accordance with the requirements of ASC 205-40, management has concluded that substantial doubt exists about the Company’s ability to continue as a going concern for twelve months from the date these condensed financial statements are issued.

The condensed financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.

 

 

8


 

2.

Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The condensed balance sheet at December 31, 2016 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The accompanying condensed financial statements as of September 30, 2017 and for the three and nine months ended September 30, 2017 are unaudited. The accompanying unaudited interim financial statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2017. In the opinion of management, all adjustments, consisting only of normal recurring adjustments as necessary, for the fair statement of the Company’s condensed financial position as of September 30, 2017 and condensed results of its operations and cash flows for the three and nine months ended September 30, 2017 have been made. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2017.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, revenue recognition, the accrual for research and development expenses and the valuation of common stock and the derivative liability. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

Restricted Cash

As of September 30, 2017 and December 31, 2016, restricted cash consisted of a certificate of deposit in the amount of $0.3 million collateralizing a letter of credit issued as a security deposit in connection with the Company’s lease of its corporate facilities at 200 Technology Square, Cambridge, MA.

On September 19, 2017, the Company entered into a lease agreement for a new corporate headquarters at 80 Guest Street, Brighton, MA (see Note 11). As of September 30, 2017, restricted cash, net of current portion, consisted of a money market account in the amount of $1.7 million collateralizing a letter of credit issued as a security deposit for this lease agreement.

Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. As of September 30, 2017 and December 31, 2016, the Company’s cash equivalents consisted of money market funds.

Short-term Investments

Short-term investments represent holdings of available-for-sale marketable securities in accordance with the Company’s investment policy and cash management strategy. Short-term investments mature within one-year from the balance sheet date. Investments in marketable securities are recorded at fair value, with any unrealized gains and losses, net of taxes, reported as a component of stockholders’ equity until realized or until a determination is made that an other-than-temporary decline in market value has occurred. The cost of marketable securities sold is determined based on the specific identification method and any realized gains or losses on the sale of investments are reflected as a component of other expense, net.

9


 

Fair Value Measurements

Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

 

Level 1—Quoted prices in active markets for identical assets or liabilities.

 

Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

 

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

The Company’s derivative liability, short-term investments and cash equivalents are carried at fair value determined according to the fair value hierarchy described above (see Note 4). The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair value due to the short-term nature of these assets and liabilities.

Net Loss per Share

In February 2016, upon the closing of the IPO, all of the outstanding shares of the Company’s redeemable convertible preferred stock automatically converted into 9,699,600 shares of the Company’s common stock. Prior to this conversion, the Company followed the two-class method when computing net loss per share as the Company had issued shares that met the definition of participating securities. The two-class method determines net loss per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. The Company’s redeemable convertible preferred stock contractually entitled the holders of such shares to participate in dividends, but did not contractually require the holders of such shares to participate in losses of the Company. Accordingly, the two-class method did not apply for periods in which the Company reported a net loss or a net loss attributable to common stockholders resulting from dividends or accretion related to its redeemable convertible preferred stock.

Basic net income (loss) per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net loss per share attributable to common stockholders is computed by dividing the diluted net loss attributable to common stockholders by the weighted average number of common shares, including potential dilutive common shares assuming the dilutive effect of outstanding stock options and unvested restricted common shares, as determined using the treasury stock method. For periods in which the Company has reported net losses, diluted net loss per common share attributable to common stockholders is the same as basic net loss per common share attributable to common stockholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. For any period in which the Company has reported net income, basic net income per common share attributable to common stockholders is adjusted for certain amounts to calculate diluted net loss per common share attributable to common stockholders, since dilutive common shares are assumed to have been issued if their effect is dilutive and not to have been issued if their effect is anti-dilutive.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes existing revenue recognition guidance under GAAP. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard defines a five-step process to achieve this principle, and will require companies to use more judgment and make more estimates than under the current guidance. The Company expects that these judgments and estimates will include identifying performance obligations in the customer contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 such that the standard is effective for public entities for annual periods beginning after December 15, 2017 and for interim periods within those fiscal years. Early adoption of the standard

10


 

is permitted for annual periods beginning after December 15, 2016. In April 2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing. The new standard clarifies two aspects of ASU 2014-09, Revenue from Contracts with Customers (Topic 606): identifying performance obligations and the licensing implementation guidance. These new standards will become effective for the Company on January 1, 2018. The Company only has one contract (see Note 8) within the scope of Topic 606 and intends to use the modified retrospective method for adoption. Since the inception of the contract the Company has recognized $8.1 million in revenue. The Company is still assessing the impact that the adoption of these new standards will have on its financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). This guidance will require that lease arrangements longer than 12 months result in an entity recognizing an asset and liability equal to the present value of the lease payments in the statement of financial position. This guidance is effective for annual periods beginning after December 15, 2018, and interim periods therein. This standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The new standard involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The new standard was adopted by the Company on January 1, 2017 on a modified retrospective basis. As a result, the Company has made an accounting policy election to account for forfeitures as they occur. The adoption of ASU 2016‑09 also requires excess tax benefits and tax deficiencies be recorded in the income statement as opposed to additional paid‑in capital when the awards vest or are settled. This had no material impact on the condensed financial statements as of and for the three and nine months ended September 30, 2017.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new standard clarifies certain aspects of the statement of cash flows, including the classification of debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees and beneficial interests in securitization transactions. The new standard also clarifies that an entity should determine each separately identifiable source or use within the cash receipts and cash payments on the basis of the nature of the underlying cash flows. In situations in which cash receipts and payments have aspects of more than one class of cash flows and cannot be separated by source or use, the appropriate classification should depend on the activity that is likely to be the predominant source or use of cash flows for the item. The new standard will be effective for the Company on January 1, 2018. The Company is currently evaluating the impact that the adoption of this standard will have on its statements of cash flows.

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 719): Scope of Modification Accounting. The new standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The new standard will be effective for the Company on January 1, 2018; however, early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s financial position or results of operations.

 

 

11


 

3.

Short Term Investments

The following table summarizes the Company’s short term investments as of September 30, 2017 and December 31, 2016 (in thousands):

 

 

 

September 30, 2017

 

 

 

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Fair Value

 

U.S government-sponsored enterprise securities

 

$

12,519

 

 

$

 

 

$

(3

)

 

$

12,516

 

U.S. treasury securities

 

 

12,522

 

 

 

 

 

 

(4

)

 

 

12,518

 

 

 

$

25,041

 

 

$

 

 

$

(7

)

 

$

25,034

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Fair Value

 

U.S government-sponsored enterprise securities

 

$

53,384

 

 

$

 

 

$

(20

)

 

$

53,364

 

U.S. treasury securities

 

 

13,535

 

 

 

 

 

 

(2

)

 

 

13,533

 

 

 

$

66,919

 

 

$

 

 

$

(22

)

 

$

66,897

 

 

The Company did not have any realized gains or losses on its short-term investments for the three and nine months ended September 30, 2017 and 2016. There were no other-than-temporary impairments recognized for the three and nine months ended September 30, 2017 and 2016.

 

 

4.

Fair Value of Financial Assets and Liabilities

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands):

 

 

 

Fair Value Measurements as of September 30, 2017 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

14,370

 

 

$

 

 

$

 

 

$

14,370

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored enterprise securities

 

 

 

 

 

12,516

 

 

 

 

 

 

12,516

 

U.S. treasury securities

 

 

 

 

 

12,518

 

 

 

 

 

 

12,518

 

 

 

$

14,370

 

 

$

25,034

 

 

$

 

 

$

39,404

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability

 

$

 

 

$

 

 

$

3

 

 

$

3

 

 

 

$

 

 

$

 

 

$

3

 

 

$

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of December 31, 2016 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

15,440

 

 

$

 

 

$

 

 

$

15,440

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored enterprise securities

 

 

 

 

 

53,365

 

 

 

 

 

 

53,365

 

U.S. treasury securities

 

 

 

 

 

13,532

 

 

 

 

 

 

13,532

 

 

 

$

15,440

 

 

$

66,897

 

 

$

 

 

$

82,337

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability

 

$

 

 

$

 

 

$

91

 

 

$

91

 

 

 

$

 

 

$

 

 

$

91

 

 

$

91

 

  

12


 

During the periods ended September 30, 2017 and December 31, 2016, there were no transfers between Level 1, Level 2 and Level 3.

Derivative Liability

The derivative liability relates to a cash settlement option associated with the change of control provision in our Cystic Fibrosis Foundation Therapeutics, Inc. (“CFFT”) agreement, which meets the definition of a derivative. The fair value of the derivative liability is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The fair value of the derivative instrument was determined using the Monte-Carlo simulation analysis. In determining the fair value of the derivative liability, the inputs impacting fair value include the fair value of the Company’s common stock, expected term of the derivative instrument, expected volatility of the common stock price, risk-free interest rate, expected sales-based milestone payments, discount rate, probability of a change of control event, and the probability that the counterparty would elect to accept the alternative cash payment in lieu of its right to the future sales-based milestone payments.

 

As of September 30, 2017 and December 31, 2016, the Company determined the per share common stock price available based on the closing price of its common stock on the NASDAQ Global Market as of September 29, 2017 and December 30, 2016, respectively. The Company determined the expected term of the instrument to be 2.25 years and 2.50 years as of September 30, 2017 and December 31, 2016, respectively. The Company estimated its expected stock volatility to be 80.0% and 81.1% as of September 30, 2017 and December 31, 2016, respectively, based on the historical volatility of publicly traded peer companies for terms matching the expected term of the instrument for each respective period. The risk-free interest rate was determined to be 1.51% and 1.33% as of September 30, 2017 and December 31, 2016, respectively, by reference to the U.S. Treasury yield curve for terms matching the expected term of the instrument for each respective period.

Changes in the values of the derivative liability are summarized below (in thousands):

 

 

 

Derivative

 

 

 

Liability

 

Fair value at December 31, 2016

 

$

91

 

Change in fair value

 

 

(88

)

Fair value at September 30, 2017

 

$

3

 

 

 

5.

Prepaids and Other Current Assets

Prepaids and other current assets consisted of the following (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Prepaid clinical, manufacturing and scientific expenses

 

$

1,197

 

 

$

1,390

 

Prepaid insurance expenses

 

 

218

 

 

 

104

 

Other prepaid expenses and other current assets

 

 

423

 

 

 

2,565

 

 

 

$

1,838

 

 

$

4,059

 

 

 

6.

Accrued Expenses

Accrued expenses consisted of the following (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Accrued payroll and related expenses

 

$

1,293

 

 

$

1,813

 

Accrued research and development expenses

 

 

4,086

 

 

 

1,612

 

Accrued professional fees

 

 

399

 

 

 

383

 

Accrued other

 

 

77

 

 

 

520

 

 

 

$

5,855

 

 

$

4,328

 

 

 

13


 

7.

Stock-Based Compensation

2016 Stock Option and Incentive Plan

On February 3, 2016, the Company’s stockholders approved the 2016 Stock Option and Incentive Plan (the “2016 Plan”), which became effective on February 9, 2016. The 2016 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock units, restricted stock awards and other stock-based awards. The number of shares initially reserved for issuance under the 2016 Plan is 1,581,839 shares. The number of shares of common stock that may be issued under the 2016 Plan will automatically increase on each January 1, beginning on January 1, 2017, by the lesser of 3% of the shares of the Company’s common stock outstanding on the immediately preceding December 31 or an amount determined by the Company’s board of directors or the compensation committee of the board of directors. The shares of common stock underlying any awards that are forfeited, canceled, repurchased or are otherwise terminated by the Company under the 2016 Plan and the 2008 Plan will be added back to the shares of common stock available for issuance under the 2016 Plan.

As of September 30, 2017, the total number of shares reserved under the 2016 Plan and 2008 Plan was 3,577,930 and the Company had 631,077 shares available for future issuance under the 2016 Plan.

2016 Employee Stock Purchase Plan

On February 3, 2016, the Company’s stockholders approved the 2016 Employee Stock Purchase Plan (the “2016 ESPP”), which became effective in connection with the completion of the Company’s initial public offering. A total of 138,757 shares of common stock were reserved for issuance under this plan. In addition, the number of shares of common stock that may be issued under the 2016 ESPP will automatically increase on each January 1, beginning on January 1, 2017 and ending on January 1, 2026, by the least of (i) 138,757 shares of common stock, (ii) 1% of the Company’s shares of common stock outstanding on the immediately preceding December 31 and (iii) an amount determined by the Company’s board of directors or the compensation committee of the board of directors.

During the nine months ended September 30, 2017, 10,829 shares of common stock were issued pursuant to the 2016 ESPP. As of September 30, 2017, the total number of shares reserved under the 2016 ESPP was 266,685 shares. The Company recognized less than $0.1 million of stock-based compensation during each of the three and nine month periods ended September 30, 2017.

Stock Option Grants and Shares to Non-employees

Prior to 2013, the Company issued options to purchase 203,964 shares of common stock to non-employees, primarily members of the Company’s scientific advisory board, that vest upon the achievement of specified development and clinical milestones. As of September 30, 2017, options for the purchase of 83,250 shares held by non-employees remained unvested, pending achievement of the specified milestones, and had an aggregate fair value of $0.1 million.

Stock-Based Compensation

Stock-based compensation expense, including shares issued to a non-employee for consulting services, was classified in the statements of operations as follows (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Research and development

 

$

412

 

 

$

119

 

 

$

1,070

 

 

$

351

 

General and administrative

 

 

636

 

 

 

451

 

 

 

1,713

 

 

 

1,024

 

 

 

$

1,048

 

 

$

570

 

 

$

2,783

 

 

$

1,375

 

 

 

14


 

8.

Collaboration Agreement

Astellas

Under the Collaborative Research, Development, Commercialization and License Agreement (as further amended, the “Astellas Agreement”) with Astellas Pharma Inc. (“Astellas”), entered into in November 2014, the Company recognized revenue of $1.6 million and $1.0 million for the three months ended September 30, 2017 and 2016, respectively, and $3.7 million and $2.2 million for the nine months ended September 30, 2017 and 2016, respectively. The Company recognizes revenue from all upfront payments, research funding payments, non-substantive milestone payments and reimbursements of third-party costs under this arrangement, together as a single unit, over the three and a half year research term of the agreement, which commenced in January 2015, with a cumulative catch-up for the elapsed portion of the services being recognized at the time any non-substantive milestone payment or other consideration is earned. Amounts recorded as deferred revenue under the Astellas Agreement totaled $1.8 million and $3.0 million as of September 30, 2017 and December 31, 2016, respectively.

Biogen

Under the now-terminated collaboration agreement between the Company and Biogen New Ventures, formerly Biogen Idec New Ventures Inc. (“Biogen”), the Company recognized revenue of $0.7 million and $2.1 million for the three and nine months ended September 30, 2016. The Company did not have any deferred revenue under the Biogen agreement as of September 30, 2017 and December 31, 2016 and will not recognize any additional revenue under this terminated agreement in the future.

 

 

9.

Income Taxes

The Company did not record a federal or state income tax benefit for its losses for the three and nine months ended September 30, 2017 and 2016 due to the conclusion that a full valuation allowance is required against the Company’s deferred tax assets.  

 

 

10.

Net Loss per Share

Basic and diluted net loss per share attributable to common stockholders was calculated as follows (in thousands, except share and per share amounts):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(13,954

)

 

$

(10,771

)

 

$

(46,008

)

 

$

(27,815

)

Accruing dividends on preferred stock

 

 

 

 

 

 

 

 

 

 

 

(1,378

)

Net loss attributable to common

   stockholders-basic and diluted

 

$

(13,954

)

 

$

(10,771

)

 

$

(46,008

)

 

$

(29,193

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares

   outstanding—basic

 

 

25,093,344

 

 

 

20,073,685

 

 

 

25,051,536

 

 

 

16,672,368

 

Net loss per share attributable to common

   stockholders—basic and diluted

 

$

(0.56

)

 

$

(0.54

)

 

$

(1.84

)

 

$

(1.75

)

 

The Company’s potential dilutive securities, which include stock options and a warrant to purchase common stock, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same.

15


 

The Company has reported a net loss for all periods presented. Therefore, diluted net loss per common share is the same as basic net loss per common share. The following potentially dilutive securities outstanding, prior to the use of the treasury stock method or if-converted method, have been excluded from the computation of diluted weighted-average shares outstanding, because such securities had an antidilutive impact due to the losses reported:

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

Options to purchase common stock

 

 

2,946,853

 

 

 

1,731,823

 

Warrant for the purchase of convertible preferred stock

   (as converted to common stock)

 

 

 

 

 

14,800

 

 

 

 

2,946,853

 

 

 

1,746,623

 

 

The warrant for the purchase of common stock was exercised in February 2016. The Company issued 4,349 shares in a net issuance transaction.

 

11.

Build-to-Suit Lease

On September 19, 2017, the Company entered into a lease agreement for its new headquarters, consisting of approximately 30,000 square feet of laboratory and office space located in Brighton, Massachusetts. The lease commencement date will be on the earlier of (i) the first date on which tenant commenced occupancy for the conduct of business in the premises, or (ii) April 15, 2018, subject to extension for certain delays. The lease will extend for a lease term from the commencement date and then for ten years starting with the first day of the month following the month in which the commencement date falls, unless terminated earlier. The Company is entitled to one seven-year option to extend. Annual rent under the lease, exclusive of operating expenses and real estate taxes, will be approximately $1.7 million in the first year, with annual increases of 2.75% each year thereafter. Total expected rental payments through the initial lease term are approximately $18.8 million. The Company will be entitled to an improvement allowance of approximately $4.8 million for certain permitted costs related to the design and construction of Company improvements to the premises. The lease contains customary provisions allowing the landlord to terminate the lease if the Company fails to remedy a breach of any of its obligations within specified time periods, or upon bankruptcy or insolvency of the Company.

The Company is not the legal owner of the leased space. However, in accordance with ASC 840, Leases, because of the Company’s expected level of direct financial and operational involvement in the substantial tenant improvements required, the Company is deemed to be the owner of the leased space, including the building shell, during the construction period. As a result, the Company capitalized approximately $12.1 million as a build-to-suit asset within property, plant and equipment, net and recognized a corresponding build-to-suit facility lease obligation within other liabilities and other non-current liabilities on its balance sheets equal to the estimated replacement cost of its leased portion of the building at the inception of the lease.

Additionally, construction costs incurred as part of the build-out and tenant improvements will also be capitalized within property, plant and equipment, net. Rental payments made under the lease will be allocated to interest expense and the build-to-suit facility lease obligation, based on the implicit rate of the build-to-suit facility lease obligation. The build-to-suit facility lease obligation was approximately $12.1 million as of September 30, 2017.

 

 

16


 

Item 2.

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

The following discussion and analysis of our financial condition and the results of operations should be read in conjunction with our financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q (“Quarterly Report”) and our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 (the “Annual Report”) filed with the Securities and Exchange Commission on March 30, 2017. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section in our Annual Report and in this Quarterly Report, our actual results could differ materially from the results described, in or implied by, the forward-looking statements contained in the following discussion and analysis.

Overview

We are a clinical stage biopharmaceutical company developing small molecule therapeutics to treat cystic fibrosis, or CF, and other diseases caused by dysfunctional protein processing.  The Company focuses on identifying therapies that restore protein function.  CF is a disease caused by defects in the cystic fibrosis transmembrane conductance regulator, or CFTR, protein and insufficient CFTR protein function. Our CF focused pipeline consists of novel CFTR modulators including correctors, potentiators and amplifiers. We have exploited the novel mechanism of action of the amplifiers as a drug screening tool and have identified correctors and potentiators to be developed as part of a combination therapy. We are in clinical development for PTI-428, an amplifier, PTI-801, a corrector, and PTI-808, a potentiator. We are developing and, if approved, intend to commercialize our own therapies, including a double combination of our corrector and potentiator and a triple combination consisting of our corrector, potentiator and amplifier to be indicated for CF patients who have at least one F508del mutation, representing the majority of the patient population.

The approval of CFTR modulator based therapy, consisting of a potentiator and a combination of a potentiator and a corrector, has validated the clinical benefit of a small molecule pharmacological approach to improve CFTR function and has become a standard of care for eligible CF patients. These developments have spurred drug discovery and development initiatives that include a combinational approach of multiple modulators. Several companies are currently developing combined uses of three CFTR modulators whose goal is the restoration of CFTR protein activity in CF patients by using one potentiator and two corrector molecules. Correctors, such as lumacaftor or tezacaftor, are believed to improve protein folding and trafficking to enable abnormally folded CFTR protein to achieve some level of activity without repairing the actual protein mutation. Potentiators, such as ivacaftor, are believed to increase the opening time of the CFTR protein channel resulting in higher ion flow across the cell membrane.

CFTR modulators are compounds that affect the folding, trafficking, function and clearance of CFTR protein and can be classified according to the ways in which they affect CFTR protein. Amplifiers, which include PTI-428, are CFTR modulators designed to selectively increase the amount of the unfolded form of CFTR protein, thereby providing additional substrate for other CFTR modulators, such as correctors and potentiators, to act upon. Using industry-standard in vitro studies, we have demonstrated that co-administration of PTI-428 with these other CFTR modulators significantly improves the in vitro CFTR protein activity achieved by these CFTR modulators alone.

A triple combination regimen that includes PTI-428 with PTI-801, a corrector, and PTI-808, a potentiator, has been shown to restore in vitro CFTR protein activity to approximately 100% of normal, in patient-derived human bronchial epithelial, or HBE, cells homozygous for F508del.

With the recent advent of CFTR modulators, the CF treatment paradigm is shifting from palliative care, which addresses only the symptoms of CF, to disease-modifying agents that target the genetic mutations and protein dysfunction that cause the disease. We are developing and, if approved, intend to commercialize PTI-428 for CF patients with an F508del mutation of the CFTR gene, the most common CFTR gene mutation. In the United States, approximately 86% of all CF patients have an F508del mutation of the CFTR gene, of which approximately 53% are homozygous (having two copies of the F508del mutation), and approximately 47% are heterozygous (having an F508del mutation and one other mutation).

We have analyzed published data by Vertex Pharmaceuticals Incorporated, or Vertex, of its CFTR modulators (the potentiator ivacaftor and the correctors lumacaftor and tezacaftor) and combinations thereof, which showed a strong correlation between the in vitro CFTR protein activity and lung function improvement. We have shown in vitro that PTI-428 increases the amount of available CFTR protein and, when combined with ivacaftor and either lumacaftor or tezacaftor, nearly doubles the CFTR protein activity in the cell compared to a combination of only ivacaftor and either lumacaftor or tezacaftor. In the fourth quarter of 2015, the investigational new drug application, or IND, that we submitted to the U.S. Food and Drug Administration, or FDA, for a Phase 1 clinical trial to evaluate our PTI-428 product candidate became effective. In January 2016, we received Fast Track designation from the FDA for the investigation of PTI-428 for the treatment of CF. We initiated our first Phase 1 clinical trial in CF subjects and healthy volunteers in

17


 

the first half of 2016. The Phase 1 trial in CF subjects includes single ascending dose, or SAD, and multiple ascending dose, or MAD, cohorts. The Phase 1 trial in healthy volunteers includes SAD and MAD cohorts to assess the safety, pharmacokinetic and exploratory biomarker results.

We reported preliminary safety and pharmacokinetic (PK) data from MAD cohorts in the PTI-428 Phase 1 clinical trial in CF subjects receiving PTI-428 or placebo for 7 days in addition to Orkambi® as their background, standard of care therapy, as well as a cohort with CF subjects receiving PTI-428 or placebo for 7 days who are not taking CFTR modulator based therapies.

We have initiated a 28-day Phase 2 clinical trial for PTI-428, which commenced dosing of CF patients to receive PTI-428 or placebo for 28 days in addition to Orkambi® as their background therapy, we have completed enrollment and we expect preliminary data from this cohort in the fourth quarter of 2017. We have also initiated and commenced dosing for a study of patients on Kalydeco® who will be dosed with PTI-428 or placebo for 14 days and currently intend to report preliminary data in the first quarter of 2018.

Our IND for the Phase 1 study of PTI-801, a corrector molecule, was submitted to the FDA in the first quarter of 2017 and is now active. In March 2017, we received Fast Track designation from the FDA for the investigation of PTI-801 for the treatment of CF. We have completed dosing of subjects in the key SAD and MAD cohorts of the healthy volunteer portion of this study, to assess the safety and PK of PTI-801, reported initial data on this portion of the study, and are now enrolling and dosing CF subjects on background Orkambi®. We expect initial data from CF subjects on background Orkambi® who have been dosed with PTI-801 or placebo for 14 days in the fourth quarter of 2017.

Our IND for the Phase 1 study of PTI-808, a potentiator molecule, was submitted to the FDA in the second quarter of 2017 and is now active. The study protocol includes healthy volunteer cohorts to assess safety and PK, which are underway, and multiple dosing cohorts in CF patients. Under the same study protocol we plan to explore dosing of PTI-808 with our other investigational agents, PTI-428 and PTI-801. We expect initial data from the SAD and MAD cohorts of a 7-day study in healthy volunteers taking PTI-808 in the fourth quarter of 2017.

Our combination development program is intended to evaluate the clinical profile of the potential combinations of our drug candidates: PTI-801, PTI-808 and PTI-428. The initiation of the first combination study in CF patients is contingent on the outcome of the ongoing clinical studies with PTI-428 and PTI-801, each as an add-on to Orkambi®. We have completed preclinical combination safety and toxicology studies and have initiated a combination safety, tolerability and PK study in healthy volunteers with all three compounds. We expect initial data from a 7-day study in healthy volunteers taking all three compounds in the fourth quarter of 2017. Our CFTR modulators have shown synergy in vitro with other known and investigational CFTR modulators, creating several possible development pathways, including potential add-on therapies to marketed CFTR modulators and proprietary double and triple combinations as shown in Figure 1. Notably, in vitro data in patient cells showed that the combination of PTI-801 and PTI-808 restored CFTR protein activity to levels beyond those observed in cells from healthy carriers. Given the potential therapeutic benefit of multiple combination options and our commitment to next generation modulators, our combination development plan includes a PTI-801 and PTI-808 doublet and a PTI-808, PTI-801, and PTI-428 triplet.  This effort enables us to both diversify our combination strategy and understand the value potential of each component within our portfolio.  Additionally, co-administration of PTI-801 and PTI-808 is intended to explore the clinical effect of the dual combination based on in vitro assay data we observed which showed superior in vitro CFTR protein activity compared with the agents in the currently approved product Orkambi® or combinations being reviewed for potential marketing authorization in the near future (ivacaftor and tezacaftor). We aim to initiate this dual combination study in CF patients in the fourth quarter of 2017 and initiate a triple combination study in the first half of 2018. These studies are expected to enroll CF patients homozygous for F508del who are not taking Orkambi®.

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Figure 1

We strive to collect endorsement and sanctioning for all our studies in CF patients from key regional advocacy organizations to expedite patient recruitment and trial execution. Our Phase 1/2 study protocol for PTI-428 received approval and favorable ranking from the Clinical Trial Network of the European Cystic Fibrosis Society, or the CTN, a patient advocacy group that reviews protocols for CF trials and provides recommendations to its member sites. The PTI-801 study protocol has been sanctioned and favorably ranked by both the CTN and the Therapeutic Development Network, or TDN, part of the Cystic Fibrosis Foundation Therapeutics. We have submitted the PTI-808 study protocol – which includes co-administration with PTI-801 and PTI-428 – to the CTN and TDN for review, and will seek endorsement from both groups upon additional review of clinical data.

In addition, we have partnered with a major pharmaceutical company, Astellas Pharma Inc., or Astellas, on our unfolded protein response, or UPR, program. The UPR program is intended to reduce the accumulation of unfolded proteins in the endoplasmic reticulum, or ER, which is observed in many diseases caused by an imbalance in the proteostasis network and characterized by defects in protein folding, trafficking and clearance, including genetic, neurodegenerative and retinal degenerative diseases. In August 2016, we announced the achievement of a preclinical milestone by demonstrating that selective modulation of the UPR pathway is an effective disease-modifying approach in the treatment of multiple diseases with few or no therapies currently available.

Since our inception in 2006, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, acquiring and developing product and technology rights, and conducting research and development activities for our product candidates. We do not have any products approved for sale and have not generated any revenue from product sales. We have funded our operations to date with proceeds from the sale of preferred stock, the issuance of convertible promissory notes, proceeds from our initial public offering in February 2016, our follow-on public offering in September 2016, and, to a lesser extent, payments received in connection with collaboration agreements and a research grant.

Since our inception, we have incurred significant operating losses. Our net losses were $14.0 million and $10.8 million for the three months ended September 30, 2017 and 2016, respectively, and $46.0 million and $27.8 million for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, we had an accumulated deficit of $203.5 million. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We expect our expenses and capital requirements will increase substantially in connection with our ongoing activities, as we:

 

expand clinical trials for PTI-428, PTI-801 and PTI-808;

 

explore combination therapies in doublet, triplet and/or quad formats;

 

seek regulatory approval for our product candidates;

 

seek support and approval from our collaboration partners, the TDN and other interested parties;

 

hire personnel to support our product development, manufacturing, commercialization and administrative efforts; and

 

advance the research and development efforts of our product candidates, including, without limitation, back-up compounds.

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We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates. If we obtain regulatory approval for any of our product candidates, we expect to incur significant expenses related to developing our internal commercialization capability to support product sales, marketing and distribution. In addition, we will continue to incur additional costs associated with operating as a public company.

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the sale of public or private equity, debt financings or other capital sources, including potential collaborations with other companies or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates.

On October 31, 2017, we determined to focus our resources on research and clinical development of our CF programs, as well as supporting our collaboration with Astellas. Accordingly, we reduced our headcount dedicated to research from 46% of the total workforce to 34% through the elimination of 13 positions. As a result of this action, which is anticipated to be completed during the fourth quarter, we estimate annualized savings of approximately $3.0 million, with estimated one-time severance and related costs of approximately $0.2 million in the fourth quarter of 2017.

We expect that our cash, cash equivalents and short-term investments as of September 30, 2017 will enable us to fund our operating expenses and capital requirements, based upon our current operating plan, through the second quarter of 2018. See “—Liquidity and Capital Resources”.

Components of our Results of Operations

Revenue

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the foreseeable future. All of our revenue during the three and nine months ended September 30, 2017 was derived from our collaboration agreement with Astellas, while all of our revenue during the three and nine months ended September 30, 2016 was derived from our collaboration agreement with Astellas and our now-terminated collaboration agreement with Biogen New Ventures, formerly Biogen Idec New Ventures Inc. (“Biogen”).

Under the Astellas collaboration agreement, entered into in November 2014, we recognized revenue of $1.6 million and $1.0 million for the three months ended September 30, 2017 and 2016, respectively, and $3.7 million and $2.2 million of for the nine months ended September 30, 2017 and 2016. We recognize revenue from all upfront payments, research funding payments, non-substantive milestone payments and reimbursements of third-party costs under this arrangement, together as a single unit, over the three and a half-year research term, which commenced in January 2015, with a cumulative catch-up for the elapsed portion of the research services being recognized at the time any non-substantive milestone payment or other consideration is earned. Amounts recorded as deferred revenue under the Astellas collaboration agreement totaled $1.8 million and $3.0 million as of September 30, 2017 and December 31, 2016, respectively.

Under the now-terminated collaboration agreement we had with Biogen, we recognized revenue of $0.7 million for the three months ended September 30, 2016 and $2.1 million for the nine months ended September 30, 2016. We recognized revenue from all upfront license payments, research funding payments, non-substantive milestone payments and reimbursements of third-party costs under this arrangement, together as a single unit, over the four-year research term, which commenced in December 2013, with a cumulative catch-up for the elapsed portion of the research services being recognized at the time any non-substantive milestone payment or other consideration is earned. We did not have any deferred revenue under the agreement as of September 30, 2017 and December 31, 2016 and we will not recognize any additional revenue under this terminated agreement in the future.

We expect that any future revenue recognized under the Astellas collaboration agreement will fluctuate from quarter to quarter as a result of the uncertain timing of future milestone payments and the uncertain quantity of our research services provided from quarter to quarter. Further, subject to the terms and conditions of our collaboration agreement, our collaborator has certain unilateral rights to discontinue their participation in the research activities and, as a result, future payments to us under the agreement.

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Operating Expenses

Research and Development Expenses

Research and development expenses, which include costs of research services incurred in connection with our collaboration agreements and research grant, consist primarily of costs incurred in connection with the discovery and development of our product candidates, which include:

 

employee-related expenses, including salaries, related benefits, travel and stock-based compensation expense for employees engaged in research and development functions;

 

expenses incurred in connection with the preclinical and clinical development of our product candidates and under agreements with contract research organizations, or CROs;

 

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

 

payments made under third-party licensing agreements.

We expense research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers.

Our direct research and development expenses are tracked on a program-by-program basis and consist primarily of external costs, such as fees paid to consultants, central laboratories, contractors and CROs in connection with our clinical trials and preclinical development activities. We do not allocate employee costs, costs associated with our platform technology and facility expenses, including depreciation or other indirect costs, to specific product development programs because these costs are deployed across multiple product development programs and, as such, are not separately classified. We use internal resources to manage our preclinical development activities and perform data analysis for such activities. These employees work across multiple development programs and, therefore, we do not track their costs by program.

The table below summarizes our research and development expenses incurred by development program:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(in thousands)

 

 

(in thousands)

 

CF

 

$

7,484

 

 

$

6,052

 

 

$

24,858

 

 

$

13,999

 

UPR

 

 

529