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CEMP > SEC Filings for CEMP > Form 10-Q on 8-Aug-2012All Recent SEC Filings

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Form 10-Q for CEMPRA, INC.


8-Aug-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation

The interim financial statements and this Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2011, and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2011. In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to risks and uncertainties, including those set forth under "Part I. Item 1. Business-Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011, and elsewhere in this report, that could cause actual results to differ materially from historical results or anticipated results.

Overview

We are a clinical-stage pharmaceutical company focused on developing antibiotics to meet critical medical needs in the treatment of bacterial infectious diseases, particularly respiratory tract and bacterial urethritis infections and chronic staphylococcal infections. We are developing our lead program, solithromycin (CEM-101), in both oral and IV formulations for the treatment of community acquired bacterial pneumonia (CABP), one of the most serious infections of the respiratory tract. We have successfully completed an oral Phase 2 clinical trial for the treatment of CABP demonstrating comparable efficacy to the current standard of care, levofloxacin, with a favorable safety and tolerability profile. In the first half of 2012, we submitted the Phase 2 data and our protocol for the pivotal Phase 3 oral clinical trial to the FDA. The protocol accomodates the proposed draft guidance discussed by the U.S. Food and Drug Administration, or FDA, for the conduct and approval of CABP trials. This is to be a global study, involving over 100 clinical sites, and will test moxifloxacin, another fluoroquinolone, like levofloxacin that we used in the Phase 2 trial, as the comparator. Since this is a global study we chose moxifloxacin as the comparator because it is approved at the same dose throughout the world whereas levofloxacin is used at higher doses in the U.S. versus the rest of the world. Comments received from the FDA have been incorporated into the protocol, with no fundamental change to the proposed study design. We expect to finalize this protocol and initiate the pivotal Phase 3 trial for oral solithromycin in patients with CABP in the fourth quarter of 2012.

We are currently conducting the Phase 1 intravenous (IV) trial, in which we are testing escalating doses. We expect the therapeutic dose to be 400 mg or lower, administered over 2-5 days depending on the severity of the disease. We expect to complete the trial and optimization of the infusion solution in the second half of 2012 after which we plan to request an end-of-phase 2 meeting with the FDA where we will propose a single IV-to-oral Phase 3 trial as part of the regulatory path to a new drug application, or NDA, for both the IV and oral formulations. This Phase 3 trial is expected to begin in 2013 dependent on funding from a third-party collaborative partner or other financing source.

In addition to the clinical studies in CABP, we have demonstrated in-vitro activity of solithromycin against gonococci including most multi-drug resistant gonococci. Based on its activity against gonococcus and because it is well tolerated when administered orally at high doses, we initiated a Phase 2 trial in uncomplicated gonorrhea. Enrollment began in May 2012 and is expected to complete in the second half of 2012. This study is an open label study and is being run in a single center in the U.S. and will enroll approximately 30 patients, including males and females. In this study, patients are being treated with a single oral dose of 1200 mg of solithromycin after demonstration of gonococcal infection. Patients are considered cured if they are disease free on the seventh day after treatment, as measured both by symptoms and microbiologcal isolation. This study is expected to add to the safety database of solithromycin which we believe will be helpful to support our planned NDA for solithromycin for the treatment of CABP. If the results of this Phase 2 trial are positive, we will seek funding for a Phase 3 trial. A guidance document is available for studying antibtioics to treat bacterial urethritis and we plan to design the Phase 3 trial in discussion with the FDA.

Our second program is Taksta, which is a novel dosing regimen of fusidic acid we are developing for use in the U.S. We conducted a Phase 2 acute bacterial skin and skin structure infections (ABSSSI) clinical trial to demonstrate its activity against current strains of methicillin-resistant S. aureus (MRSA) in the U.S. as well as to show tolerability to our proposed dosing regimen. In this study, Taksta showed a favorable safety and tolerability profile and comparable efficacy to linezolid, the only FDA-approved oral antibiotic for treatment of MRSA. Based on these Phase 2 results, we are developing Taksta in the U.S. as an oral long-term treatment for bacterial infections caused by Staphylococcus aureus, including MRSA, in prosthetic joint infections (PJI), which is an unmet need. We expect to initiate in the fourth quarter of 2012 a Phase 2 clinical trial in patients with PJI to demonstrate Taksta's utility in chronic treatment of staphylococcal infections.

We have devoted substantially all of our resources to our drug development efforts, including conducting clinical trials of our product candidates, protecting our intellectual property and providing general and administrative support for these operations. We do not have any products approved for sale and have not generated any revenue from any source. From inception in November 2005 through June 30, 2012, we raised a total of $151.3 million from the issuance of debt, sale of convertible notes, convertible preferred shares and common shares, including $58.0 million from the sale of common stock in our initial public offering, or IPO, in February 2012.

We have incurred losses in each year since our inception in November 2005. Our net losses were approximately $5.2 million and $9.5 million for the three months ended June 30, 2011 and June 30, 2012, respectively, and $10.4 million and $12.7 million for the six months ended June 30, 2011 and June 30, 2012, respectively. As of June 30, 2012, we had an accumulated deficit of approximately $109.7 million. Substantially all of our operating losses resulted from costs incurred in connection with our development programs and from general and administrative costs associated with our operations.

We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We anticipate that our expenses will increase substantially as we:

initiate or continue our clinical trials of solithromycin and Taksta and our other product candidates;

operate as a public company;

seek regulatory approvals for our product candidates that successfully complete clinical trials;

build appropriate manufacturing facilities for the manufacture of, or outsource the manufacture of, any products for which we may obtain regulatory approval;

establish our own sales force, or contract with third parties, for the sales, marketing and distribution of any products for which we obtain regulatory approval;

maintain, expand and protect our intellectual property portfolio;

continue our other research and development efforts;

hire additional clinical, quality control, scientific and management personnel; and

add operational, financial and management information systems and personnel, including personnel to support our product development and commercialization efforts.

We do not expect to generate product revenue unless and until we successfully complete development and obtain marketing approval for one or more of our product candidates, which we expect will take a number of years and is subject to significant uncertainty. Accordingly, we will need to raise additional capital prior to the commercialization of solithromycin and Taksta or any of our other product candidates. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our operating activities through a combination of equity offerings, debt financings, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. However, we may be unable to raise additional funds when needed on favorable terms or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to develop our product candidates.

Our Board of Directors approved a 1-for-9.5 reverse stock split of our common and preferred shares on January 12, 2012, which became effective on January 29, 2012. All references to common stock, common shares outstanding, average number of common shares outstanding and per share amounts in our consolidated financial statements and notes to consolidated financial statements have been restated to reflect the 1-for-9.5 reverse stock split on a retroactive basis.


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Financial Overview

Revenue

To date, we have not generated revenue from the sale of any products or from any other source. In the future, we anticipate generating revenue from a combination of sales of our products, if approved, whether through our own or a third-party sales force, and license fees, milestone payments and royalties in connection with strategic collaborations regarding any of our product candidates. We expect that any revenue we generate will fluctuate from quarter to quarter. If we or our strategic partners fail to complete the development of solithromycin or Taksta in a timely manner or obtain regulatory approval for them, or if we fail to develop our own sales force or find one or more strategic partners for the commercialization of approved products, our ability to generate future revenue, and our financial condition and results of operations would be materially adversely affected.

Research and Development Expenses

Since our inception, we have focused our resources on our research and development activities, including conducting pre-clinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings for our product candidates. We recognize our research and development expenses as they are incurred. Our research and development expenses consist primarily of:

employee-related expenses, which include salaries, benefits and share compensation expense, for personnel in research and development functions;

fees paid to consultants and clinical research organizations, or CROs, in connection with our clinical trials, and other related clinical trial costs, such as for investigator grants, patient screening, laboratory work and statistical compilation and analysis;

costs related to acquiring and manufacturing clinical trial materials;

costs related to compliance with regulatory requirements;

consulting fees paid to third parties related to non-clinical research and development;

research supplies; and

license fees and milestone payments related to in-licensed technologies.

From inception through June 30, 2012, we have incurred $76.2 million in research and development expenses. We plan to increase our research and development expenses for the foreseeable future as we seek to complete development of solithromycin for CABP and urethritis and Taksta for PJI and to further advance our other product candidates.


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Our direct research and development expenses consist principally of external costs, such as fees paid to investigators, consultants, central laboratories and CROs in connection with our clinical trials, and related clinical trial fees. Our internal resources, employees and infrastructure are not directly tied to any individual research project and are typically deployed across multiple projects. Through our clinical development programs, we are advancing, in parallel, solithromycin for CABP and urethritis and Taksta for PJI, respectively, as well as for other indications. Through our pre-clinical development programs, we are seeking to develop macrolide product candidates for non-antibacterial indications.

The following table sets forth costs incurred on a program-specific basis for solithromycin and Taksta, excluding personnel-related costs. Macrolide research includes costs for discovery programs. All employee-related expenses for those employees working in research and development functions are included in "Research and development personnel cost" in the table, including salary, bonus, employee benefits and share-based compensation. We do not allocate insurance or other indirect costs related to our research and development function to specific product candidates. Those expenses are included in "Indirect research and development expense" in the table.

                                         Three Months Ended June 30,            Six Months Ended June 30,
                                          2011                 2012             2011                 2012
                                          (Unaudited, in thousands)             (Unaudited, in thousands)
Direct research and development
expense by program:
Solithromycin                         $      3,507         $      6,392     $      7,122         $      7,606
Taksta                                          38                  263              127                  294
Macrolide research                              22                   18               93                   21
Research and development personnel
cost                                           469                  698              992                1,302

Total direct research and
development expense                          4,036                7,371            8,334                9,223
Indirect research and development
expense                                        325                   53              419                   77

Total research and development
expense                               $      4,361         $      7,424     $      8,753         $      9,300

The successful development of our clinical and pre-clinical product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the remainder of the development of any of our clinical or pre-clinical product candidates or the period, if any, in which material net cash inflows from these product candidates may commence. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

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

future clinical trial results; and

the timing of regulatory approvals.

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

We expect to begin the Phase 3 trial with oral solithromycin in the second half of 2012. Following completion of our ongoing Phase 1 trial with IV solithromycin, we plan to request an end-of-Phase 2 meeting with the FDA where we will propose a single IV-to-oral Phase 3 trial as part of the regulatory path to the NDA for both the IV and oral formulations. This Phase 3 trial is planned as an IV-to-oral trial and is expected to begin in 2013 dependent on funding from a third-party collaborative partner or other financing source. The IV-to-oral Phase 3 trial will be a randomized, double-blinded study conducted against a comparator drug agreed upon with the FDA, for which we will have to show non-inferiority from an efficacy perspective and acceptable safety and tolerability.

We have successfully completed a Phase 2 clinical trial with Taksta in ABSSSI patients. In this trial, the Taksta loading dose regimen demonstrated a favorable safety and tolerability profile and efficacy that was comparable to


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linezolid. We have completed a successful end of Phase 2 meeting with the FDA in which we presented our plan to conduct two Phase 3 clinical trials for Taksta as a treatment for ABSSSI. We plan to initiate a Phase 2 trial with Taksta in patients with PJI in the fourth quarter of 2012.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs, including share-based compensation, for employees in executive, operational, finance and human resources functions. Other significant general and administrative expenses include professional fees for accounting, legal, and information technology services, facilities costs, and expenses associated with obtaining and maintaining patents.

Other Income (Expense), Net

Interest income consists of interest earned on our cash and equivalents as well as changes in fair value of warrants issued in connection with the December 2011 Note. We expect our interest income to increase during 2012 as we invested the net proceeds from the IPO pending their use in our operations.

Interest expense consists of interest incurred on the August 2011 Notes and December 2011 Note as well as changes in fair value of warrants issued in connection with the notes. We expect interest expense to increase during 2012 from the outstanding December 2011 Note.

Accretion of Redeemable Preferred Shares

Our redeemable convertible preferred shares were initially recorded on our balance sheet at their cost, less associated issuance costs. The amount reflected on the balance sheet for our convertible preferred shares is increased by periodic accretion so that the amount reflected on the balance sheet will equal the aggregate redemption price at the redemption date. Upon completion of our IPO, all of our outstanding preferred shares, including $13.7 million of accrued yield converted into a total of 9,958,502 shares of common stock.

Yield was cumulative and payable to the holders of preferred shares in advance of any distributions on common shares but only when, if and as declared by our board of directors. The holders of Class C preferred shares earned an annual yield at a rate of 8.0% of the original purchase price from May 13, 2009 through February 8, 2012. Through May 13, 2009, the holders of Class A preferred shares and Class B preferred shares earned an annual yield at a rate of 8.0% of the original purchase price. Yield was recorded through periodic accretions which increase the carrying value of the preferred shares and is charged against additional paid-in capital to the extent available or shareholders' equity (deficit).

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities in our financial statements. We evaluate our estimates and judgments, including those related to accrued expenses and share-based compensation, on an ongoing basis. We base our estimates on historical experience, known trends and events and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

For a description of our critical accounting policies and estimates, please refer to the "Critical Accounting Policies and Estimates" section of the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on March 30, 2012. There have been no material changes in any of our accounting policies since December 31, 2011.


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Results of Operations

The following table summarizes the results of our operations for each of
three-month and six-month periods ended June 30, 2011 and 2012, together with
the changes in those items:



                                         Three Months Ended June 30,                       Six Months Ended June 30,
                                                                 Increase/                                       Increase/
                                    2011           2012          (Decrease)          2011          2012          (Decrease)
                                          (Unaudited, in thousands)                        (Unaudited, in thousands)
Revenue                           $      -        $    -        $         -        $      -       $    -        $         -
Research and development
expense(1)                            4,361         7,424              3,063           8,753        9,300                547
General and administrative
expense(1)                              806         1,778                972           1,686        2,750              1,064
Other income (expense), net              -           (327 )             (327 )             1         (628 )             (629 )

(1)  Includes the following stock-based compensation expenses:
Research and development
expense                           $      58       $   155       $         97       $      72      $   221       $        149
General and administrative
expense                                  41           351                310             125          450                325

Comparison of the Three Months Ended June 30, 2011 and June 30, 2012

Revenue

We did not recognize any revenue for the three months ended June 30, 2011 and 2012.

Research and Development Expense

Research and development expense increased by $3.1 million for the three months ended June 30, 2012 compared to the three months ended June 30, 2011 as a result of a $2.9 million increase in expenses incurred for solithromycin and a $0.2 million increase in expenses incurred for Taksta.

Expenses incurred for solithromycin increased primarily as a result of direct research expense increasing by $1.5 million as we began incurring start up costs related to our oral Phase 3 trial in the second quarter of 2012 as compared to the second quarter of 2011 when we were winding down the Phase 2 trial. Additionally, in the second quarter of 2012, solithromycin achieved the Phase 2 milestone with Optimer Pharmaceuticals resulting in a $1.0 million charge to expense and we entered into a licensing agreement with The Scripps Research Institute resulting in a $0.4 million charge to expense.

General and Administrative Expense

General and administrative expense increased $1.0 million for the three months ended June 30, 2012 compared to the three months ended June 30, 2011 as a result of increased employee expense of $0.4 million, director and officer insurance of $0.2 million and professional service fees of $0.4 million.

Other Income (Expense), Net

Other income (expense), net decreased by $0.3 million in the three months ended June 30, 2012 compared to the three months ended June 30, 2011 as a result of a $0.3 million increase in interest expense related to the December 2011 Note.

Comparison of the Six Months Ended June 30, 2011 and June 30, 2012

Revenue

We did not recognize any revenue for the six months ended June 30, 2011 and 2012.

Research and Development Expense

Research and development expense increased by $0.6 million for the six months ended June 30, 2012 compared to the six months ended June 30, 2011 as a result of a $0.5 million increase in expenses incurred for solithromycin and a $0.1 million increase in expenses incurred for Taksta.

The $0.5 million increase in expenses related to solithromycin for the first half of 2012 as compared to the first half of 2011 resulted primarily from a decrease of study related costs of $0.9 million in the first half of 2012 as compared to the first half of 2011 which were offset by increases in costs related to the achievement of the Phase 2 milestone with Optimer Pharmaceuticals resulting in


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a $1.0 million charge to expense and our entry into a licensing agreement with The Scripps Research Institute resulting in a $0.4 million charge to expense in the first half of 2012. The $0.9 million decrease in trial related costs resulted from $4.1 million decrease in costs related to the oral Phase 2 trial that completed enrollment in the first half of 2011 as partially offset by a $2.9 million increase in costs as we began incurring start up costs related to our oral Phase 3 trial and a $0.3 million increase in costs related to enrollment in our IV Phase 1 trial in the first half of 2012.

General and Administrative Expense

General and administrative expense increased $1.1 million for the six months ended June 30, 2012 compared to the six months ended June 30, 2011 as a result of increased employee expense of $.5 million, director and officer insurance of $0.2 million and professional service fees of $0.4 million.

Other Income (Expense), Net

Other income (expense), net decreased by $0.6 million in the six months ended June 30, 2012 compared to the six months ended June 30, 2011 as a result of a $0.1 million increase in fair value adjustments recorded as interest income and a $0.7 million increase in interest expense related to the August and December 2011 Notes.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception in November 2005 through June 30, 2012, we have funded our operations primarily with $151.3 million from debt, the sale of convertible notes, convertible preferred shares and common stock.

The gross proceeds we have received from the issuance and sale of our convertible notes, preferred shares and common stock are as follows:

                                                     Number of           Gross
  Issue                                   Year        Shares            Proceeds
                                                                     (in thousands)
  Class A                                  2006         789,191     $          7,497 (1)
. . .
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