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CHTP > SEC Filings for CHTP > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for CHELSEA THERAPEUTICS INTERNATIONAL, LTD.

Form 10-Q for CHELSEA THERAPEUTICS INTERNATIONAL, LTD.


7-Nov-2012

Quarterly Report


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

The statements contained in this Quarterly Report on Form 10-Q that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the expectations, beliefs, intentions or strategies regarding the future. We intend that all forward-looking statements be subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In particular, this "Management's Discussion and Analysis of Financial Condition and Results of Operations" includes forward-looking statements that reflect our current views with respect to future events and financial performance. We use words such as we "expect," "anticipate," "believe," and "intend" and similar expressions to identify forward-looking statements. A number of important factors could, individually or in the aggregate, cause actual results to differ materially from those expressed or implied in any forward-looking statement, including those set forth under "Part 1. Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011 and in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2012 and June 30, 2012 under "Part II. Item 1A. Risk Factors".

Overview

We are a development stage pharmaceutical company that seeks to acquire, develop and commercialize innovative products for the treatment of a variety of human diseases. Our strategy is to develop technologies that address important unmet medical needs or offer improved alternatives to current methods of treatment. Specifically, we are developing Northera™ (droxidopa), a novel therapeutic agent, for the treatment of symptomatic neurogenic orthostatic hypotension, or Neurogenic OH, in patients with primary autonomic failure (Parkinson's disease, or PD, multiple systems atrophy, or MSA, and pure autonomic failure, or PAF), dopamine-?-hydroxylase, or DBH, deficiency and non-diabetic autonomic neuropathy. We are also evaluating the potential therapeutic applications of droxidopa in reducing the frequency of falls in patients with Neurogenic OH associated with PD as well as other potentially norepinephrine-related conditions and diseases including intradialytic hypotension, fibromyalgia and adult attention deficit hyperactivity disorder. In addition, we have a portfolio of metabolically inert antifolates that we have studied as a potential treatment of rheumatoid arthritis and that might also be suitable for the treatment of multiple other autoimmune disorders including psoriasis, Crohn's disease, uveitis, ankylosing spondylitis, inflammatory bowel disease, cancer and other immunological disorders.

Northera, our most advanced investigational product candidate, is an orally-active synthetic precursor of norepinephrine being developed for the treatment of symptomatic Neurogenic OH. In Japan, Northera has been approved since 1989 and is marketed by Dainippon Sumitomo Pharma Co., Ltd., or DSP, for the treatment of frozen gait and dizziness on standing in PD, orthostatic hypotension, syncope and dizziness on standing in MSA (Shy-Drager Syndrome) and familial amyloid polyneuropathy and symptoms of orthostatic hypotension in hemodialytic patients. During 2007, the U. S. Food and Drug Administration, or FDA, granted orphan drug status to Northera for the treatment of symptomatic Neurogenic OH and the European Medicines Agency, or EMA, granted orphan medicinal product designation for the treatment of patients with PAF and patients with MSA.

During late 2011 and early 2012, we were focused on preparations for the potential commercial launch of Northera™ (droxidopa) in the United States in anticipation of FDA approval. In November 2011, the FDA accepted for filing our New Drug Application, or NDA, seeking approval to market Northera for the treatment of Neurogenic OH in patients with primary autonomic failure (including PD, MSA and PAF), DBH deficiency and non-diabetic autonomic neuropathy that we had submitted in September 2011. The clinical portion of the NDA included combined safety and efficacy data from our two completed Phase III studies in Neurogenic OH, Study 301 and Study 302, two long-term open-label extension studies, Study 303 and Study 304, a dedicated thorough QTc study and a 24-hour ambulatory blood pressure monitoring study, Study 305.

In February 2012, a meeting of the Cardiovascular and Renal Drugs Advisory Committee, or CRDAC, was held, at the request of the FDA, to review and discuss the Northera NDA. The CRDAC recommended, in a 7 to 4 vote, that the FDA approve our NDA to market Northera in the United States.

However, on March 28, 2012, we announced that the FDA had issued a Complete Response Letter, or a CRL, regarding our Northera NDA that included a request by the FDA that we submit data from an additional positive study to support efficacy. It was recommended that such a study be designed to demonstrate durability of effect over a 2- to 3-month period. Notably, the CRL did not identify any outstanding safety concerns. In addition, the FDA provided comments on the draft labeling submitted for Northera, including a preliminary recommendation to include a black box warning due to the lack of available data on patients in a fully supine position. However, the letter indicated that such a boxed warning could be reconsidered if suitable data demonstrating a lack of severe hypertension in a fully supine position were provided.

In May 2012, we completed an End-of-Review Meeting, or EOR, with the FDA to review the CRL and more fully understand the FDA's concerns regarding the Northera NDA. In preparation for this meeting, we prepared an information package, including a proposal for utilizing data from our then ongoing Study 306B to support the Northera NDA that called for a change in the primary endpoint of Study 306B to the orthostatic hypotension symptom assessment, or OHSA, item #1 score (dizziness, lightheadedness, feeling faint or "feeling like you might black out") at visit 4 (one-week post titration) and a recommendation to increase the number of patients targeted for enrollment in the study to approximately 200. Based on feedback received during the EOR, we submitted a revised protocol for Study 306B, proposing a change in the primary endpoint of Study 306B to OHSA, item #1 at visit 5 (two-weeks post titration) and supporting blinding documentation regarding the study for FDA review.

Also, given the concerns raised by the FDA at the EOR regarding results from the highest enrolling site in Study 301, we have submitted all information pertaining to two independent site visits, neither of which found any significant errors in the conduct of the trial, which was consistent with the positive findings from the FDA pre-approval inspection conducted during the review of the Northera NDA. Further, we have agreed to submit and are currently in the process of reviewing all source documentation from all patients at the site. We have also initiated reviews and inquiries into the data and conduct of this center from independent, third-party quality experts to confirm the validity of data from the site. Should the FDA decide to disregard the results of this site, the results of Study 301 would not be statistically significant and the study may not be deemed positive.

In June 2012, we received the written response, or General Advice Letter, from the FDA to our proposal to modify and utilize data from our then ongoing Study 306B. In its response, the FDA advised that, based on the theoretical potential for un-blinding, Study 306B is unlikely to provide sufficient confirmatory evidence to support a Northera NDA. The FDA was not confident that this information did not influence the conduct of the study or the statistical analysis plan. The FDA further recommended that we "design and conduct an additional trial to demonstrate that droxidopa has a significant and persistent effect" on symptoms of Neurogenic OH.

Soon after receipt of the written response from the FDA, we stopped enrolling patients in our Study 306B. Total enrollment was completed with 174 patients randomized, representing the single largest placebo-controlled study ever conducted in Neurogenic OH. In addition, we modified the primary endpoint of Study 306B to the mean change in OHSA item #1 score (dizziness, lightheadedness, feeling faint or "feeling like you might black out") at visit 4 (one-week post titration). The rate of patient reported falls is a secondary efficacy endpoint of the study. We anticipate that results of Study 306B will provide valuable efficacy and safety data. Results from this study are expected by the end of 2012. At that time we plan to finalize and reach agreement with the FDA on an additional study design to fulfill the requirements for our planned resubmission of the Northera NDA.

In addition to droxidopa, we have devoted resources to the development of a portfolio of molecules for the treatment of various autoimmune/inflammatory diseases. The most advanced platform is a portfolio of metabolically-inert antifolate molecules engineered to have potent anti-inflammatory and anti-tumor activity to treat a range of immunological disorders, including two clinical stage product candidates designated as CH-1504 and CH-4051.

In May 2012, we announced the top-line results of our completed multinational, 12-week, double-blind Phase II trial of CH-4051 in patients with rheumatoid arthritis, designed to compare the efficacy and tolerability of CH-4051 against methotrexate, currently the leading antifolate treatment and standard of care for a broad range of abnormal cell proliferation diseases. This Phase II trial was conducted in 244 patients with rheumatoid arthritis who experience an inadequate response to methotrexate treatment. Results of this trial indicated that CH-4051 did not demonstrate superior efficacy to methotrexate in the dose range evaluated. CH-4051 was found to be safe and well-tolerated in the study, with no dose-limiting toxicities or clear differences in the overall adverse event rate between methotrexate and the CH-4051 treatment groups. While management believes that higher doses of CH-4051 might provide enhanced therapeutic benefit in rheumatoid arthritis and that CH-4051 could be developed for other anti-inflammatory and autoimmune indications, we determined that current resources would be better allocated toward the planned completion of the Northera development program in Neurogenic OH. As such, there are no immediate plans to continue the development of CH-4051 although we do continue to discuss potential out-licensing opportunities for this portfolio of molecules.

Complementing our autoimmune/inflammatory program is a second platform consisting of a portfolio of therapeutics targeting immune-mediated inflammatory disorders and transplantation, known as our I-3D portfolio. We currently have no work underway related to this portfolio.

In July 2012, the Board of Directors announced the implementation of a corporate restructuring pursuant to which certain Board of Directors, management and workforce changes were effected. We significantly reduced headcount and retained only those employees necessary to support efforts to obtain approval to market Northera in the U.S. for the treatment of symptomatic Neurogenic OH. Concurrent with the restructuring, the Board authorized a plan to explore and evaluate strategic options for the Company, with the goal of optimizing long-term stockholder value.

Since inception we have focused primarily on organizing and staffing our company, negotiating in-licensing agreements with our partners, acquiring, developing and securing our proprietary technology, participating in regulatory discussions with the FDA, the EMA and other regulatory agencies and undertaking preclinical and clinical trials of our product candidates. We are a development stage company and have generated no revenue since inception. We do not anticipate generating any product revenue until and unless we successfully obtain approval from the FDA or equivalent foreign regulatory bodies to begin selling our pharmaceutical candidates although we could potentially generate revenue by entering into strategic agreements including out-licensing, co-development or co-promotion of our drug candidates. Developing pharmaceutical products is a lengthy and expensive process and the process for obtaining approval to market a product in the United States or elsewhere is complex and subject to numerous regulatory hurdles. As we recently experienced, we might encounter unforeseen efficacy or safety issues with our clinical trials, experience delays in our estimated timeframes for obtaining marketing approval of our currently licensed product candidates or experience other delays. Based upon the receipt of the CRL in March 2012 and subsequent correspondence from the FDA, we would not currently anticipate being able to submit a revised NDA for Northera until, at the earliest, 2013 but it is more likely that a revised NDA would be submitted subsequent to that, depending on the design and duration of additional clinical trials. Currently, development expenses are being funded with proceeds from prior equity financings and, to a much lesser extent, through the prior issuance of our common stock pursuant to option or warrant exercises. We completed equity financings in December 2004, February 2006, March 2007, November 2007, July 2009, March 2010, October 2010, February 2011 and January 2012. In addition, we received additional proceeds under a controlled equity offering for sales made during September 2010. To the extent we move Northera into additional clinical trials, our need to finance operating costs will continue. Accordingly, our success will depend not only on the safety and efficacy of our product candidates, but also on our ability to finance the development of our products (see "Liquidity and Capital Resources").

Critical Accounting Policies

Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Our significant accounting policies are more fully described in Note 1 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011 that was filed on March 7, 2012. The following accounting policies are critical in fully understanding and evaluating our reported financial results.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements as well as the reported revenue and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and judgments. Management bases estimates on historical experience and on various other factors that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results might differ from these estimates under different assumptions or conditions.

Research and Development Expense. Research and development costs are expensed as incurred. We often contract with third parties to facilitate, coordinate and perform agreed upon research and development activities. To ensure that research and development costs are expensed as incurred, we measure expense based on work performed for the underlying contract, typically utilizing a percentage-of-completion approach, and record prepaid assets or accrue expenses on a monthly basis for such activities based on the measurement of liability from expense recognition and the receipt of invoices.

These contracts typically call for the payment of fees for services at the initiation of the contract and/or upon the achievement of certain milestones. In the event that we prepay fees for future milestones, we record the prepayment as a prepaid asset and amortize the asset into research and development expense over the period of time the contracted research and development services are performed. Most fees are incurred throughout the contract period and are expensed based on their percentage of completion at a particular date.

These contracts generally include pass-through fees. Pass-through fees include, but are not limited to, regulatory expenses, investigator fees, travel costs, and other miscellaneous costs including shipping and printing fees. Because these fees are incurred at various times during the contract term and they are used throughout the contract term, we record a monthly expense allocation to recognize the fees during the contract period. Fees incurred to set up the clinical trial are expensed during the setup period.

Costs related to the acquisition of technology rights and patents for which development work is still in process are expensed as incurred and considered a component of research and development costs. In addition, the purchase of active pharmaceutical ingredient and manufacturing supplies for potential commercial product is expensed as incurred and considered a component of research and development costs prior to obtaining approval from regulatory agencies to market the product.

Accounting for Stock-Based Compensation. We account for our stock options and warrants utilizing a fair value based method of accounting. In determining the fair value of the equity instrument, we consider, among other factors, (i) the risk-free interest rate, (ii) the expected life of the options granted, (iii) the anticipated dividend yield, (iv) the estimated future volatility of the underlying shares and (v) anticipated future forfeitures. To determine the risk-free interest rate, we utilize the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected life of our awards. We estimate the expected life of the options granted based on anticipated exercises in future periods assuming the success of our business model as currently forecasted. The expected dividends reflect our current and expected future policy for dividends on our common stock. To determine the expected stock price volatility for our stock options, we analyze the historical volatility of our stock price to determine an appropriate volatility factor. We plan to continue to analyze the expected stock price volatility, as well as other assumptions utilized in the calculations, at each grant date as more historical data becomes available. Our results of operations include non-cash compensation expense as a result of the issuance of stock option grants that are valued using this method. We expect to record additional non-cash compensation expense in the future, which might be significant. Due to the limited amount of historical data available to us, particularly with respect to employee exercise patterns and forfeitures, actual results could differ from our assumptions.

Results of Operations

Three Months Ended September 30, 2012 and 2011

The table below sets forth, for the periods indicated, certain items in our condensed consolidated statements of operations and other pertinent financial and operating data.

(in thousands, except percentages)

                                         For the three       For the three
                                         months ended        months ended            $
                                         September 30,       September 30,       Increase/            %
                                             2012                2011            (Decrease)        Change
Research and development expense        $     2,479,471     $     7,417,477     $ (4,938,006 )           -67 %
Sales and marketing expense                     221,399           2,203,898       (1,982,499 )           -90 %
General and administrative expense            1,169,157           1,278,085         (108,928 )            -9 %
Restructuring                                 2,218,347                   -        2,218,347             100 %
Interest income                                  12,076              45,222          (33,146 )           -73 %

Research and development expenses. During the third quarter of 2012, we continued to incur costs for Study 306B and our open-label extension study, Study 304. Specifically, expenses for the third quarter of 2012 included approximately $0.8 million of direct study costs for Study 306 and $0.4 million for extension studies. During 2011, primary expenditures were associated with the preparation and filing of our Northera NDA, our ongoing Phase II trial of CH-4051, Study 306 and our NOH extension studies. Additionally, we incurred costs during the third quarter of 2011 related to medical affairs activities, including hiring, on a contract basis, a team of medical science liaison employees, generating period costs of $1.1 million. This contract was terminated in conjunction with the restructuring in July 2012. Also contributing to our expenses in both periods were compensation and related costs. As a percentage of operating expenses, excluding the impact of the restructuring, research and development costs were 64% for the third quarter of 2012 and 68% for the same period of 2011.

From inception through September 30, 2012, cumulative research and development expenses related to our major research and development projects were approximately $161.6 million and are detailed as follows:

                                                                       Inception through
 (in thousands)                For the quarter ended                     September 30,
                   September 30, 2012         September 30, 2011             2012
 Antifolates      $                 50       $              1,300     $            43,500
 Droxidopa                       2,450                      6,100                 115,600
 I-3D                                -                          -                   2,500
                  $              2,500       $              7,400     $           161,600

Droxidopa. From inception through September 30, 2012, we had spent approximately $115.6 million in research and development expenses on droxidopa. Research and development costs for the Northera Neurogenic OH core program include our Phase III trial, Study 306B, our access and safety program, Study 304, continuing regulatory activity and drug manufacture. Droxidopa-related development costs in the fourth quarter of 2012 are expected to remain at similar levels, including approximately $1.2 million in direct program expenses for Study 306B plus our extension programs for Neurogenic OH patients. We expect to spend approximately $0.3 million to complete these programs in the first quarter of 2013. Currently, we can provide no guidance around the costs of required new trials, if any, which may be necessary for the advancement of our Northera NDA as the design of such a trial, or trials, has not been determined.

Antifolates. From inception through September 30, 2012, we had spent approximately $43.5 million in research and development expenses on our portfolio of antifolates. In May 2012, we announced the top-line results of our completed Phase II trial of CH-4051 in patients with rheumatoid arthritis. Results of this trial indicated that CH-4051 did not demonstrate superior efficacy to methotrexate in the dose range evaluated. While we believe that higher doses of CH-4051 might provide enhanced therapeutic benefit in rheumatoid arthritis and that CH-4051 could be developed for other anti-inflammatory and autoimmune indications, we determined that current resources would be better allocated toward the completion of our Northera development program in Neurogenic OH. Although we continue to evaluate potential partnering opportunities for these compounds we currently have no immediate plans to continue the development of CH-4051.

I-3D Portfolio. From inception through September 30, 2012, we had spent approximately $2.5 million in research and development expenses on the I-3D portfolio of compounds. We have conducted compound discovery work on the portfolio to try and identify one or more lead compounds. All of the work completed to date was performed before 2008 and we do not expect to incur significant additional expenses for these compounds until we select a partner or obtain additional financing.

Sales and marketing expenses. We had no formalized selling activities during the quarter ended September 30, 2012 and our sales and marketing expenses decreased significantly when compared to the quarter ended September 30, 2011. During the third quarter of 2011, we spent considerable resources on supporting the development and implementation of sales and marketing initiatives for Northera in anticipation of a planned 2012 commercial launch. During the third quarter of 2012, the majority of these activities had been brought to a close as related vendor contracts were cancelled and projects finalized during the second quarter of 2012. Such activities included market research, sales force strategy and planning, planning and development of advertising and promotional campaigns, website development, sales operations, sales support systems implementations, employee training programs, sales force recruiting and public relations. We did incur an increase in legal expenses related to our intellectual property during the third quarter of 2012.

General and administrative expenses. When compared to the third quarter of 2011, general and administrative expenses remained flat in the same period of 2012. Decreases in compensation and related costs were offset by increases in legal fees associated with shareholder suits, accounting fees for tax return preparation in multiple jurisdictions and investor relations costs to support communications on recent corporate activity.

Interest income and interest expense. At September 30, 2012, we had cash and cash equivalents of $33.0 million. The decrease in interest income is primarily related to our decreased cash position and continued softness in the interest rate market in the United States.

Nine Months Ended September 30, 2012 and 2011



The table below sets forth, for the periods indicated, certain items in our
condensed consolidated statements of operations and other pertinent financial
and operating data.



(in thousands, except percentages)    For the nine       For the nine
                                      months ended       months ended            $
                                     September 30,      September 30,        Increase/          %
                                          2012               2011           (Decrease)        Change
Research and development expense     $   15,874,135     $   29,557,451     $ (13,683,316 )        -46 %
Sales and marketing expense               6,943,327          4,639,245         2,304,082           50 %
General and administrative expense        4,530,435          3,928,255           602,180           15 %
Restructuring                             2,218,347                  -         2,218,347          100 %
Interest income                              58,444            131,120           (72,676 )        -55 %

Research and development expenses. During the first nine months of 2012, we continued to incur costs for Study 306B and our open-label extension study, Study 304 and had expenses for our now completed Phase II trial of CH-4051 in rheumatoid arthritis. We also incurred costs of approximately $0.2 million to support the preparation for the FDA requested meeting of the CRDAC held in February 2012 and our EOR meeting with the FDA, held in May 2012. Specifically, expenses for the nine months of 2012 included approximately $2.5 million of direct study costs related to our recently completed Phase II trial of CH-4051 and $3.5 million for Study 306B and our extension studies for Northera. Additionally, we incurred costs during the first six months of 2012 related to medical affairs activities, including a team of medical science liaison professionals, hired on a contract basis, generating period costs of $0.8 million. We also incurred approximately $1.8 million of expenses for the . . .

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