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ALIM > SEC Filings for ALIM > Form 10-Q on 7-Nov-2011All Recent SEC Filings

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Form 10-Q for ALIMERA SCIENCES INC


7-Nov-2011

Quarterly Report


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

Various statements in this report are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this report regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. These statements are subject to risks and uncertainties and are based on information currently available to our management. Words such as, but not limited to, "anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "contemplates," "predict," "project," "targets," "likely," "potential," "continue," "will," "would," "should," "could," or the negative of these terms and similar expressions or words, identify forward-looking statements. The events and circumstances reflected in the Company's forward-looking statements may not occur and actual results could differ materially from those projected in the Company's forward-looking statements. Meaningful factors which could cause actual results to differ include, but are not limited to:
delay in or failure to obtain regulatory approval of the Company's product candidates;

uncertainty as to the Company's ability to commercialize, and market acceptance of, the Company's product candidates;

the extent of government regulations;

uncertainty as to the relationship between the benefits of the Company's product candidates and the risks of their side-effect profiles;

dependence on third-party manufacturers to manufacture the Company's product candidates in sufficient quantities and quality;

uncertainty of clinical trial results;

limited sales and marketing infrastructure;

inability of the Company's outside sales force to successfully sell and market ILUVIEN in the U.S. following regulatory approval; and

the Company's ability to operate its business in compliance with the covenants and restrictions that it is subject to under its credit facility.

All written and verbal forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We caution investors not to rely too heavily on the forward-looking statements we make or that are made on our behalf. We undertake no obligation, and specifically decline any obligation, to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. We encourage you to read the discussion and analysis of our financial condition and our financial statements contained in this report. We also encourage you to read Item 1A of Part II of this report entitled "Risk Factors" and Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, which contain a more complete discussion of the risks and uncertainties associated with our business. In addition to the risks described above and in Item 1A of Part II of this report and Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, other unknown or unpredictable factors also could affect our results. Therefore, the information in this report should be read together with other reports and documents that we file with the SEC from time to time, including Forms 10-Q, 8-K and 10-K, which may supplement, modify, supersede or update those risk factors. There can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us. Therefore, no assurance can be given that the outcomes stated in such forward-looking statements and estimates will be achieved.


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Overview
We are a biopharmaceutical company that specializes in the research, development and commercialization of prescription ophthalmic pharmaceuticals. We are presently focused on diseases affecting the back of the eye, or retina, because we believe these diseases are not well treated with current therapies and represent a significant market opportunity.
Our most advanced product candidate is ILUVIEN, which we are developing for the treatment of diabetic macular edema ("DME"). DME is a disease of the retina that affects individuals with diabetes and can lead to severe vision loss and blindness. In September 2010, we completed two Phase 3 pivotal clinical trials (collectively, our "FAME Study") for ILUVIEN involving 956 patients in sites across the U.S., Canada, Europe and India to assess the efficacy and safety of ILUVIEN in the treatment of DME.
In June 2010, we submitted a New Drug Application ("NDA") for ILUVIEN to the FDA that included data through month 24 of the FAME Study. In December 2010, the FDA issued a Complete Response Letter ("CRL") in response to our NDA. In the CRL, the FDA communicated its decision that the NDA could not be approved in its then present form. The FDA asked for analyses of the safety and efficacy data through month 36 of the FAME Study, including exploratory analyses in addition to those previously submitted in the NDA, to further assess the relative benefits and risks of ILUVIEN. The FDA also sought additional information regarding controls and specifications concerning the manufacturing, packaging and sterilization of ILUVIEN. In a February 2011 meeting with the FDA, the FDA requested additional data related to the use of the commercial version of the ILUVIEN inserter for which approval was sought in the NDA. In May 2011, we submitted to the FDA a complete response to the CRL. The FDA classified the response as a Class 2 resubmission with a Prescription Drug User Fee Act ("PDUFA") date of November 12, 2011. The PDUFA date is the date by which we can reasonably expect to have received the FDA's response. In July 2011, the FDA notified us that it will not call an advisory committee during its review of our complete response to the CRL. In September 2011, we enrolled our first patient in a physician utilization study aimed at providing the additional data requested by the FDA with respect to the commercial version of the ILUVIEN inserter. We have enrolled 54 patient eyes in this study evaluating the safety and utility of the commercial version of the inserter and are targeting to enroll 100 patient eyes before commercial launch.
In July 2010, using the Decentralized Procedure, we submitted a Marketing Authorization Application for ILUVIEN to the Medicines and Healthcare products Regulatory Agency ("MHRA") in the United Kingdom, which serves as the Reference Member State, and to regulatory authorities in Austria, France, Germany, Italy, Portugal and Spain. In November 2010, we received the Preliminary Assessment Report from the MHRA followed by additional comments from the other health authorities in December 2010. In July 2011, we submitted our draft responses to the clinical, non-clinical, and quality questions to the MHRA. The submission included the additional safety and efficacy data through the final readout at the end of the FAME Study. In September 2011, the MHRA provided comments to our clinical responses and indicated that there were no further comments to our non-clinical and quality responses. We are preparing, and plan to submit in November 2011, our final response to the Preliminary Assessment Report from the MHRA and to the additional comments from the other health authorities. If our NDA for ILUVIEN is approved by the FDA, we plan to commercialize ILUVIEN in the U.S. by marketing and selling it to retinal specialists as early as early 2012. In addition to treating DME, ILUVIEN is being studied in three Phase 2 clinical trials for the treatment of the dry form of age-related macular degeneration ("AMD"), the wet form of AMD and retinal vein occlusion ("RVO"). We intend to seek a collaboration partner for sales and marketing activities outside North America. We currently contract with development partners or outside firms for various operational aspects of our development activities, including the preparation of clinical supplies and have no plans to establish in-house manufacturing capabilities.
We commenced operations in June 2003. Since our inception we have incurred significant losses. As of September 30, 2011, we have accumulated a deficit of $205.3 million. We expect to incur substantial losses through the projected commercialization of ILUVIEN as we:
complete the clinical development and registration of ILUVIEN;

build our sales and marketing capabilities for the anticipated commercial launch of ILUVIEN in early 2012;

add the necessary infrastructure to support our growth;

evaluate the use of ILUVIEN for the treatment of other diseases; and

advance the clinical development of other new product candidates that we may license or acquire in the future.

Prior to our initial public offering ("IPO"), we funded our operations through the private placement of common stock, preferred stock, warrants and convertible debt, as well as by the sale of certain assets of the non-prescription business in which we were previously engaged. On April 21, 2010, our Registration Statement on Form S-1 (as amended) was declared effective by the Securities and Exchange Commission ("SEC") for our IPO, pursuant to which we sold 6,550,000 shares of our common stock at a public offering price of $11.00 per share. We received net proceeds of approximately $66.1 million from this transaction, after deducting underwriting discounts, commissions and other offering costs. As of September 30, 2011, we had approximately $38.6 million in cash, cash equivalents, and investments in marketable securities. In addition to our net IPO proceeds, our cash and cash equivalents include the January 2010 receipt of $10.0 million in proceeds from the exercise of outstanding Series C-1 warrants, and a $4.0 million option payment from Bausch & Lomb Incorporated ("Bausch & Lomb") upon the exercise by Bausch & Lomb of its option to extend by two years the period during which it may continue to develop an allergy product acquired from us in 2006.


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In October 2010, we obtained a $32.5 million senior secured credit facility ("Credit Facility") to help fund our working capital requirements. The Credit Facility consisted of a $20.0 million working capital revolver and a $12.5 million term loan. The lenders advanced $6.25 million under the term loan and the remaining $6.25 million was available for funding following FDA approval of ILUVIEN, but no later than July 31, 2011. In May 2011, the lenders and we amended the terms of the Credit Facility to, among other things, extend the FDA approval deadline for the second advance under the term loan to December 31, 2011, and to increase the amount available under the second advance of the term loan from $6.25 million to $11.0 million. In addition, the maturity date of the Credit Facility was extended from October 31, 2013 to April 30, 2014. We may draw on the working capital revolver against eligible, domestic accounts receivable. As of September 30, 2011, no amounts under the working capital revolver were outstanding or available.
We do not expect to generate revenues from our product, ILUVIEN, until early 2012, if at all, and therefore we do not expect to have positive cash flow from operations before that time. We believe our cash, cash equivalents, investments in marketable securities and Credit Facility are sufficient to fund our operations through the projected launch of ILUVIEN and the expected generation of revenue in early 2012. The commercialization of ILUVIEN is dependent upon approval by the FDA, however, and we cannot be sure that ILUVIEN will be approved by the FDA or that, if approved, future sales of ILUVIEN will generate enough revenue to fund our operations beyond its launch. Due to the uncertainty around FDA approval, our management cannot be certain that we will not need additional funds for the launch of ILUVIEN. If ILUVIEN is not approved, or if approved, does not generate sufficient revenue, we may adjust our commercial plans so that we can continue to operate with our existing cash resources or seek to raise additional financing.
During the third quarter of 2011, we terminated our two agreements with Emory University pursuant to which we had licensed certain nicotinamide adenine dinucleotide phosphate (NADPH) oxidase inhibitors, however we continue our evaluation of other NADPH oxidase inhibitors for use in the treatment of diseases of the eye, including dry AMD, wet AMD and diabetic retinopathy. Our Agreement with pSivida US, Inc.
In February 2005, we entered into an agreement with pSivida US, Inc. ("pSivida") for the use of fluocinolone acetonide ("FAc") in pSivida's proprietary delivery device. pSivida is a global drug delivery company committed to the biomedical sector and the development of drug delivery products. Our agreement with pSivida provides us with a worldwide exclusive license to develop and sell ILUVIEN, which consists of a tiny polyimide tube with membrane caps that is filled with FAc in a polyvinyl alcohol matrix for delivery to the back of the eye for the treatment and prevention of eye diseases in humans (other than uveitis). This agreement also provided us with a worldwide non-exclusive license to develop and sell pSivida's proprietary delivery device to deliver other corticosteroids to the back of the eye for the treatment and prevention of eye diseases in humans (other than uveitis) or to treat DME by delivering a compound to the back of the eye through a direct delivery method through an incision required for a 25-gauge or larger needle. We do not have the right to develop and sell pSivida's proprietary delivery device for indications for diseases outside of the eye or for the treatment of uveitis. Further, our agreement with pSivida permits pSivida to grant to any other party the right to use its intellectual property
(i) to treat DME through an incision smaller than that required for a 25-gauge needle, unless using a corticosteroid delivered to the back of the eye, (ii) to deliver any compound outside the back of the eye unless it is to treat DME through an incision required for a 25-gauge or larger needle, or (iii) to deliver non-corticosteroids to the back of the eye, unless it is to treat DME through an incision required for a 25-gauge or larger needle. Under the February 2005 agreement, we and pSivida agreed to collaborate on the development of ILUVIEN for DME, and share financial responsibility for the development expenses equally. The February 2005 agreement provided that after commercialization of ILUVIEN, profits, as defined in the agreement, would be shared equally. In March 2008, we and pSivida amended and restated the agreement to provide us with 80% of the net profits and pSivida with 20% of the net profits derived by us from the sale of ILUVIEN. Total consideration to pSivida in connection with the execution of the March 2008 agreement was $33.8 million, which consisted of a cash payment of $12.0 million, the issuance of a $15.0 million note payable, and the forgiveness of $6.8 million in outstanding receivables. The $15.0 million promissory note accrued interest at 8% per annum, payable quarterly and was payable in full to pSivida upon the earliest of a liquidity event as defined in the agreement, the occurrence of an event of default under our agreement with pSivida, or September 30, 2012. If the note was not paid in full by March 31, 2010, the interest rate was to increase to 20% effective as of April 1, 2010, and we were required to begin making principal payments of $500,000 per month. On April 27, 2010, we paid pSivida approximately $15.2 million in principal and interest to satisfy the note payable with the proceeds from our IPO. We will owe pSivida an additional milestone payment of $25.0 million upon FDA approval of ILUVIEN.


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Our Credit Facility
Term Loan
On October 14, 2010 ("Effective Date"), we entered into a Loan and Security Agreement ("Term Loan Agreement") with Silicon Valley Bank and MidCap Financial LLP ("Lenders"). Pursuant to the original terms of the Term Loan Agreement, we were entitled to borrow up to $12.5 million, of which $6.25 million ("Term Loan A") was advanced to us on the Effective Date. We were entitled to draw down the remaining $6.25 million under the Term Loan ("Term Loan B" and together with Term Loan A, the "Term Loan") if the FDA approved our NDA for ILUVIEN prior to or on July 31, 2011. On May 16, 2011, the Lenders and we amended the Term Loan Agreement ("Term Loan Modification") to, among other things, extend until December 31, 2011 the date by which the FDA must approve the NDA in order for us to draw down Term Loan B and increase the amount of Term Loan B by $4.75 million to $11.0 million. In addition, the maturity date of the Term Loan was extended from October 31, 2013 to April 30, 2014 (the "Term Loan Maturity Date"). We were required to pay interest on Term Loan A at a rate of 11.5% on a monthly basis through July 31, 2011, and then beginning August 2011, we are required to repay the principal in 33 equal monthly installments plus interest at a rate of 11.5%. We are required to pay interest at a rate of 12.5% on the amount borrowed, if any, under Term Loan B through April 30, 2012, and thereafter we will be required to repay the principal in equal monthly installments through the Term Loan Maturity Date, plus interest at a rate of 12.5%. If we repay Term Loan A prior to maturity, we must pay to the Lenders a prepayment fee equal to 5.0% of the total amount of principal then outstanding if the prepayment had occurred within one year after the funding date of Term Loan A ("Term Loan A Funding Date"), 3.0% of such amount if the prepayment occurs between one year and two years after the Term Loan A Funding Date and 1.0% of such amount if the prepayment occurs thereafter (subject to a 50% reduction in the event that the prepayment occurs in connection with an acquisition of us). If Term Loan B is advanced to us, then the amount of the prepayment fee on both Term Loan A and Term Loan B will be reset to 5.0% and the time-based reduction of the prepayment fee will be measured from the funding date of Term Loan B (subject to the same 50% reduction in the event of an acquisition of us), rather than from the Term Loan A Funding Date. To secure the repayment of any amounts borrowed under the Term Loan Agreement, we granted to the Lenders a first priority security interest in all of our assets, including our intellectual property, however, the lien on our intellectual property will be released if we meet certain financial conditions. The occurrence of an event of default could result in the acceleration of our obligations under the Term Loan Agreement and an increase to the applicable interest rate, and would permit the Lenders to exercise remedies with respect to the collateral under the Term Loan Agreement. We also agreed not to pledge or otherwise encumber our intellectual property assets. Additionally, we must seek the Lenders' approval prior to the payment of any cash dividends. On the Effective Date, we issued to the Lenders warrants to purchase an aggregate of up to 39,773 shares of our common stock. Each of the warrants is exercisable immediately, has a per-share exercise price of $11.00 and has a term of 10 years. We estimated the fair value of warrants granted using the Black-Scholes option pricing model. The aggregate fair value of the warrants was estimated to be $389,000. We allocated a portion of the proceeds from the Term Loan Agreement to the warrants in accordance with Accounting Standards Codification ("ASC") 470-20-25-2, Debt Instruments with Detachable Warrants. As a result, we recorded a discount of $366,000 which is being amortized to interest expense using the effective interest method. The Lenders also hold warrants to purchase an aggregate of up to 69,999 shares of our common stock, which are exercisable only if Term Loan B is advanced to us. Each of these warrants has a per share exercise price of $11.00 and a term of 10 years. We paid to the Lenders an upfront fee of $62,500 on the Effective Date and an additional fee of $50,000 in connection with the Term Loan Modification. In accordance with ASC 470-50-40-17, Debt - Modifications and Extinguishments, we are amortizing the unamortized discount on Term Loan A and the $50,000 modification fee over the remaining term of Term Loan A, as modified.


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We are required to maintain our primary operating and other deposit accounts and securities accounts with Silicon Valley Bank, which accounts must represent at least 50% of the dollar value of our accounts at all financial institutions. Working Capital Revolver
Also on the Effective Date, we entered into a Loan and Security Agreement with Silicon Valley Bank, pursuant to which we obtained a secured revolving line of credit ("Working Capital Revolver") from Silicon Valley Bank with borrowing availability up to $20,000,000 ("Revolving Loan Agreement"). On May 16, 2011, Silicon Valley Bank and we amended the Revolving Loan Agreement to extend the maturity date of the Working Capital Revolver from October 31, 2013 to April 30, 2014.
The Working Capital Revolver is a working capital-based revolving line of credit in an aggregate amount of up to the lesser of (i) $20,000,000, or (ii) 85% of eligible domestic accounts receivable. As of September 30, 2011, no amounts under the Working Capital Revolver were outstanding or available to us. Amounts advanced under the Working Capital Revolver will bear interest at an annual rate equal to Silicon Valley Bank's prime rate plus 2.50% (with a rate floor of 6.50%). Interest on the Working Capital Revolver will be due monthly, with the balance due at the maturity date. On the Effective Date, we paid to Silicon Valley Bank an upfront fee of $100,000. In addition, if we terminate the Working Capital Revolver prior to maturity, we would have paid to Silicon Valley Bank a fee of $400,000 if the termination occured within one year after the Effective Date and a fee of $200,000 if the termination occurs more than one year after the Effective Date (each a "Termination Fee"), provided in each case that such Termination Fee will be reduced by 50% in the event we are acquired. To secure the repayment of any amounts borrowed under the Revolving Loan Agreement, we granted to Silicon Valley Bank a first priority security interest in all of our assets, including our intellectual property, however, the lien on our intellectual property will be released if we meet certain financial conditions. The occurrence of an event of default could result in the acceleration of our obligations under the Revolving Loan Agreement and an increase to the applicable interest rate, and would permit Silicon Valley Bank to exercise remedies with respect to the collateral under the Revolving Loan Agreement. We also agreed not to pledge or otherwise encumber our intellectual property assets. Additionally, we must seek Silicon Valley Bank's approval prior to the payment of any cash dividends.
Our Discontinued Non-Prescription Business At the inception of our company, we were focused primarily on the development and commercialization of non-prescription over-the-counter ophthalmic products. In October 2006, due to the progress and resource requirements related to the development of ILUVIEN, we decided to discontinue our non-prescription business. As a result, we received proceeds of $10.0 million from the sale of our allergy products in December 2006 and $6.7 million from the sale of our dry eye product in July 2007, both to Bausch & Lomb. If one of the allergy products had received FDA approval, we were entitled to an additional $8.0 million payment from Bausch & Lomb under the sales agreement. In January 2010, we received a $4.0 million option payment from Bausch & Lomb upon the exercise by Bausch & Lomb of its option to extend the period during which it may continue to develop this allergy product by two years. However, in July 2011, Bausch & Lomb notified us that it will discontinue the development of this allergy product and not seek FDA approval. As a result of the discontinuation of our non-prescription business, all revenues and expenses associated with our over-the-counter portfolio are included in the loss from discontinued operations in the accompanying statements of operations.


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Financial Operations Overview
Revenue
To date we have only generated revenue from our dry eye non-prescription product. From the launch of that product in September 2004 to its sale in July 2007, we generated $4.4 million in net revenues. We do not expect to generate any significant additional revenue unless or until we obtain regulatory approval of, and commercialize, our product candidates or in-license additional products that generate revenue. In addition to generating revenue from product sales, we intend to seek to generate revenue from other sources such as upfront fees, milestone payments in connection with collaborative or strategic relationships, and royalties resulting from the licensing of our product candidates and other intellectual property. We expect any revenue we generate will fluctuate from quarter to quarter as a result of the nature, timing and amount of any milestone payments we may receive from potential collaborative and strategic relationships, as well as revenue we may receive upon the sale of our products to the extent any are successfully commercialized. Research and Development Expenses
Substantially all of our research and development expenses incurred to date related to our continuing operations have been related to the development of ILUVIEN. In the event the FDA approves our NDA for ILUVIEN, we will owe an additional milestone payment of $25.0 million to pSivida. We anticipate that we will incur additional research and development expenses in the future as we evaluate and possibly pursue the development of ILUVIEN for additional indications, or develop additional product candidates. We recognize research and development expenses as they are incurred. Our research and development expenses consist primarily of:
salaries and related expenses for personnel;

fees paid to consultants and contract research organizations ("CRO") in conjunction with independently monitoring clinical trials and acquiring and evaluating data in conjunction with clinical trials, including all related fees such as investigator grants, patient screening, lab work and data compilation and statistical analysis;

costs incurred with third parties related to the establishment of a commercially viable manufacturing process for our product candidates;

costs related to production of clinical materials, including fees paid to contract manufacturers;

costs related to upfront and milestone payments under in-licensing agreements;

costs related to compliance with FDA regulatory requirements;

consulting fees paid to third-parties involved in research and development activities; and

costs related to stock options or other stock-based compensation granted to personnel in development functions.

We expense both internal and external development costs as they are incurred. . . .

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