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PBTH > SEC Filings for PBTH > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for PROLOR BIOTECH, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for PROLOR BIOTECH, INC.


8-Nov-2012

Quarterly Report


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

Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "PSLRA"), Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), about our expectations, beliefs or intentions regarding our product development efforts, business, financial condition, results of operations, strategies or prospects. You can identify such forward-looking statements by the words "expects," "intends," "plans," "projects," "believes," "estimates," "likely," "goal," "assumes," "targets" and similar expressions and/or the use of future tense or conditional constructions (such as "will," "may," "could," "should" and the like) and by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual operations or results to differ materially from the operations and results anticipated in forward-looking statements. These factors include, but are not limited to, the factors contained in "Item 1A - Risk Factors" of our most recently filed Annual Report on Form 10-K, as amended, as updated by our subsequently filed Forms 10-Q or other documents we file with the SEC. We do not undertake any obligation to update forward-looking statements, except as required by applicable law. We intend that all forward-looking statements be subject to the safe harbor provisions of the PSLRA. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance.

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

The following discussion should be read in conjunction with the consolidated financial statements and the related notes thereto that appear in Item 1 of this Quarterly Report on Form 10-Q.

The discussion and analysis of the Company's financial condition and results of operations are based on the Company's financial statements, which the Company has prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, the Company evaluates such estimates and judgments, including those described in greater detail below. The Company bases its estimates on historical experience and on various other factors that the Company 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 may differ from these estimates under different assumptions or conditions.

Overview

We are a development stage biopharmaceutical company utilizing patented technology to develop longer-acting, proprietary versions of already-approved therapeutic proteins that currently generate billions of dollars in annual global sales. We have obtained certain exclusive worldwide rights from Washington University in St. Louis, Missouri to use a short, naturally-occurring amino acid sequence (peptide) that has the effect of slowing the removal from the body of the therapeutic protein to which it is attached. This Carboxyl Terminal Peptide (CTP) can be readily attached to a wide array of existing therapeutic proteins, stabilizing the therapeutic protein in the bloodstream and extending its life span without additional toxicity or loss of desired biological activity. We are using the CTP technology to develop new, proprietary versions of certain existing therapeutic proteins that have longer life spans than therapeutic proteins without CTP. We believe that our products will have greatly improved therapeutic profiles and distinct market advantages.

We also obtained certain exclusive worldwide rights from Yeda Research and Development Company Ltd. ("Yeda") for a technology that allows elongation of circulation time in the body of therapeutic drugs. This technology is named "Reversible PEGylation". We plan on using the Reversible PEGylation technology to develop new, proprietary versions of certain existing therapeutic drugs that have longer life spans than therapeutic proteins without Reversible PEGylation. The license to the Reversible PEGylation technology is exclusive, worldwide, and excludes development or commercialization of drug compounds in the following fields: (a) haemophilia A or B; (b) inhibitor haemophilia; (c) haemorrhage; and/or (d) von Willebrand Disease. The license also excludes drugs containing any of the coagulation proteins known as Factors V, VII, VIIa, VIII or IX, including, in each case, any respective functional human protein molecule of any of the foregoing, including any fragment, subunit, derivative or modified form of any of the foregoing (whether recombinant or human plasma derived). Under the Reversible PEGylation license agreement, we are subject to development and commercialization milestones and timelines, and we are obligated to pay Yeda certain annual fees, as well as up to 3.5% on net sales of products developed using the Reversible PEGylation technology.

We believe our products in development will provide several key advantages over our competitor's existing products:

ˇ significant reduction in the number of injections required to achieve the same or superior therapeutic effect from the same dosage;

ˇ faster commercialization with greater chance of success and lower costs than those typically associated with a new therapeutic protein; and

ˇ manufacturing using industry-standard biotechnology-based protein production processes.

Merck & Co. has developed the first novel protein containing CTP, named ELONVAŽ, a long-acting CTP-modified version of the fertility drug follicle stimulating hormone (FSH). On January 28, 2010, Merck received marketing authorization from the European Commission for ELONVAŽ with unified labeling valid in all European Union Member States. Our license for CTP technology extends to all human therapeutic applications other than Follicle Stimulating Hormone (FSH), human Chorionic Gonadotropin (hCG), Luteinizing Hormone (LH) and Thyroid-Stimulating Hormone (TSH).

Our internal product development program is currently focused on extending the life span of the following biopharmaceuticals, in an effort to provide patients with improved therapies that may enhance their quality of life:

ˇ Human Growth Hormone (hGH)

ˇ Factor IX

ˇ Diabetes Type II & Obesity Peptide Oxyntomodulin

ˇ Factor VIIa

ˇ Interferon ? and Erythropoietin (EPO)

ˇ Atherosclerosis and rheumatoid arthritis long-acting therapies

We believe that the CTP technology will be broadly applicable to these, as well as other, best-selling therapeutic proteins in the market.

Critical Accounting Policies

The historical financial statements of the Company included with this Quarterly Report have been prepared in accordance with GAAP. The significant accounting policies followed in the preparation of the financial statements, on a consistent basis, are described below.

Use of Estimates:The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Financial Statements in U.S. Dollars: The functional and reporting currency of the Company is the U.S. dollar, as the U.S. dollar is the primary currency of the economic environment in which the Company has operated and expects to operate in the foreseeable future. The Company's R&D subsidiary, PROLOR Biotech Ltd., which we refer to as PROLOR LTD (formerly known as ModigeneTech Ltd.), conducts the majority of its operations in Israel. Most of the Israeli expenses are currently determined and paid in U.S. dollars. Financing and investing activities including loans and equity transactions are made in U.S. dollars.

Monetary accounts maintained in currencies other than the U.S. dollar are remeasured into U.S. dollars. All transaction gains and losses from the remeasurement of monetary balance sheet items are reflected in the statements of operations as financial income or expenses, as appropriate.

Principles of Consolidation:The consolidated financial statements include the accounts of the Company's wholly owned subsidiary, Modigene Delaware, and its wholly owned subsidiary, PROLOR LTD. Intercompany transactions and balances have been eliminated upon consolidation.

Research and Development Costs and Participation: Research and development ("R&D") costs are expensed as they are incurred and consist of salaries, benefits and other personnel-related costs, fees paid to consultants, clinical trials and related clinical manufacturing costs, license and milestone fees, and facilities and overhead costs. R&D expenses consist of independent R&D costs and costs associated with collaborative R&D and in-licensing arrangements. Participation from government for development of approved projects are recognized as a reduction of expenses as the related costs are incurred.

Concentrations of Credit Risk: Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents.

Cash and cash equivalents are invested in major banks in Israel and the United States. Such deposits in the United States are not fully insured. Management believes that the financial institutions that hold the Company's investments are financially sound, and, accordingly, minimal credit risk exists with respect to these investments.

The Company has no off-balance sheet concentration of credit risk, such as foreign exchange contracts or other foreign hedging arrangements.

Royalty-bearing Grants: Royalty-bearing grants from the Government of Israel for participation in the development of approved projects are recognized as a reduction of expenses as the related costs are incurred. Funding is recognized at the time PROLOR LTD is entitled to such grants, on the basis of the costs incurred.

Research and development grants received by PROLOR LTD for the three and nine month periods ended September 30, 2012 and 2011 and for the period from May 31, 2005 (inception date) through September 30, 2012 were $102,076, $591,155, $894,624, $1,477,269 and $5,859,318, respectively. The decrease in grants received for the 2012 periods as compared to the 2011 periods was primarily due to the timing of milestone payments under a particular grant. The Company expects that a payment originally scheduled for 2012 will be received in 2013 upon anticipated achievement of milestones related to development of the Company's product candidates.

Loss per Share: Basic and diluted losses per share are presented in accordance with ASC 260-10 "Earnings per share". Outstanding share options, warrants and restricted shares have been excluded from the calculation of diluted loss per share because the effect of all such securities is antidilutive. The total weighted average number of shares of Common Stock related to outstanding options and warrants excluded from the calculations of diluted loss per share for the three and nine month periods ended September 30, 2012 and 2011 and the period from May 31, 2005 (date of inception) to September 30, 2012 was 5,831,894, 7,469,565, 6,444,741, 10,582,544 and 7,748,195, respectively.

Results of Operation

Three and Nine Months Ended September 30, 2012 Compared to the Three and Nine Months ended September 30, 2011

Revenue

The Company has not generated any revenues from operations since its inception. To date, the Company has funded its operations primarily through the sale of equity securities and grants from the Israeli Office of the Chief Scientist (the "OCS"). If the Company's development efforts result in clinical success, regulatory approval and successful commercialization of the Company's products, then the Company could generate revenues from sales of its products.

Research and Development Expenses

The Company expects its research and development expenses to increase as it continues to develop its product candidates. Research and development expenses consist of:

ˇ internal costs associated with research and development activities;

ˇ payments made to third party contract research organizations, contract manufacturers, investigative sites and consultants;

ˇ manufacturing development costs;

ˇ personnel-related expenses, including salaries, benefits, travel and related costs for the personnel involved in research and development;

ˇ activities relating to the advancement of product candidates through preclinical studies and clinical trials; and

ˇ facilities and other expenses, which include expenses for rent and maintenance of facilities, as well as laboratory and other supplies.

These costs and expenses are partially funded by grants received by the Company from the OCS. There can be no assurance that the Company will continue to receive grants from the OCS in amounts sufficient for its operations, if at all.

The Company expects its research and development expenditures to increase significantly in the near future in connection with the ongoing production of its protein drug candidates. The Company intends to continue to hire new employees, in research and development, in order to meet its operation plans.

The Company has multiple research and development projects ongoing at any one time. The Company utilizes its internal resources, employees and infrastructure across multiple projects and tracks time spent by employees on specific projects. The Company believes that significant investment in product development is a competitive necessity and plans to continue these investments in order to realize the potential of its product candidates.

For the three and nine month periods ended September 30, 2012 and 2011 and for the period from May 31, 2005 (inception date) through September 30, 2012, the Company incurred research and development expenses, net of government grants and participation, of $4,729,457, $2,126,307, $11,159,866, $7,538,773 and $40,902,334, respectively. The increase for the three and nine month periods ended September 30, 2012 as compared to the 2011 periods resulted primarily from an increase in clinical trials expenses and increases in the manufacturing costs associated with production of high quantities of GMP of hGH-CTP.

The successful development of the Company's product candidates is subject to numerous risks, uncertainties and other factors. Beyond the next twelve months, and even during the next twelve months, the Company cannot reasonably estimate the timing or costs of the efforts necessary to complete the remainder of the development of the Company's product candidates. Additionally, the Company cannot reasonably estimate when it can expect material cash inflows from the Company's product candidates or any of the Company's other development efforts, if at all. The foregoing is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of differences arising during clinical development, including:

ˇ completion of such preclinical and clinical trials;

ˇ receipt of necessary regulatory approvals;

ˇ the number of clinical sites included in the trials;

ˇ the length of time required to enroll suitable patients;

ˇ the number of patients that ultimately participate in the trials;

ˇ adverse medical events or side effects in treated patients;

ˇ lack of comparability with complementary technologies;

ˇ obtaining capital necessary to fund operations, including research and development efforts; and

ˇ the results of clinical trials.

The Company's expenditures are subject to additional uncertainties, including the terms and timing of regulatory approvals, and the expenses of filing, prosecuting, defending and enforcing any patent claims or other intellectual property rights. The Company may obtain unexpected results from its clinical trials. The Company may elect to discontinue, delay or modify clinical trials of some product candidates or focus on others. A change in the outcome of any of the foregoing 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 United States Food and Drug Administration ("FDA") or other regulatory authorities were to require the Company to conduct clinical trials beyond those which it currently anticipates will be required for the completion of the clinical development of a product candidate, or if the Company experiences significant delays in enrollment in any of its clinical trials, the Company could be required to expend significant additional financial resources and time on the completion of clinical development. Drug development may take several years and millions of dollars in development costs. If the Company does not obtain or maintain regulatory approval for its products, its financial condition and results of operations will be substantially harmed.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation expense for persons serving in the Company's executive and administration functions. Other general and administrative expenses include facility-related costs not otherwise included in research and development expense and professional fees for legal and accounting services. For the three and nine month periods ended September 30, 2012 and 2011 and for the period from May 31, 2005 (inception date) through September 30, 2012, the Company incurred general and administrative expenses of $866,623, $808,270, $2,515,119, $ 2,395,122 and $19,617,088, respectively. The increase for the three and nine month periods ended September 30, 2012 as compared to the 2011 periods was primarily due to an increase in professional services fees and an increase in office expenses as the Company expanded its staff.

Financial Expenses and Income

Financial expenses and income consists of the following:

ˇ interest earned on the Company's cash and cash equivalents; and

ˇ expenses or income resulting from fluctuations of the New Israeli Shekel and the Euro, in which a portion of the Company's assets and liabilities are denominated, against the U.S. dollar.

For the three and nine month periods ended September 30, 2012 and 2011 and for the period from May 31, 2005 (inception date) through September 30, 2012, the Company incurred net financial income (expense) of $95,401, $(549,896), $105,442, $(107,486) and $525,699, respectively. Financial income for the three and nine month periods ended September 30, 2012 increased as compared to the 2011 periods primarily due to currency fluctuations on deposits in Israeli Shekels and Euros.

Stock-based Compensation

The Company records stock-based compensation expenses according to ASC 718-10, "Compensation - Stock Compensation", which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors, including employee stock options under the Company's stock plans, based on estimated fair values.

ASC 718-10 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company's consolidated statement of operations. The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option-pricing model.

The Company applies ASC 505 "Equity" with respect to options issued to non-employees.

For the three and nine month periods ended September 30, 2012 and 2011 and for the period from May 31, 2005 (inception date) through September 30, 2012, the Company incurred stock-based compensation expenses of $450,286, $474,135, $1,190,687, $1,374,560, and $11,190,823, respectively. Stock-based compensation expenses for the three and nine month periods ended September 30, 2012 decreased as compared to the 2011 periods primarily due to a significantly greater number of stock options granted in prior periods that were unvested as of September 30, 2011 as compared to the number of unvested options as of September 30, 2012.

Cash Flows

For the nine months ended September 30, 2012 and 2011 and for the period from May 31, 2005 (inception date) through September 30, 2012, net cash used in operating activities was $11,348,204, $8,180,359 and $45,268,932, respectively. The increase in cash used in operating activities for the nine months ended September 30, 2012 as compared to 2011 period was primarily due to increased R&D spending related to the manufacturing of the hGH-CTP product candidate.

For the nine months ended September 30, 2012 and 2011 and for the period from May 31, 2005 (inception date) through September 30, 2012, net cash used in investing activities was $10,772,910, $908,331 and $13,127,145, respectively. The increase in net cash used in investing activities for the nine months ended September 30, 2012 as compared to 2011 resulted primarily from our deposit of a portion of the cash proceeds from our underwritten public offering of common stock into short-term interest-bearing bank deposits.

For the nine months ended September 30, 2012 and 2011 and for the period from May 31, 2005 (inception date) through September 30, 2012, net cash provided by financing activities was $37,430,128, $581,047 and $86,966,778, respectively. The increase for the nine months ended September 30, 2012 as compared to 2011 resulted primarily from our receipt of proceeds from our underwritten public offering of common stock, as well as an increase in cash proceeds from the exercise of warrants.

Liquidity and Capital Resources

The Company expects to incur losses from operations for the foreseeable future. The Company has incurred, and expects to continue to incur, increasing research and development expenses, including expenses related to the hiring of personnel and additional clinical trials. General and administrative expenses have increased, and the Company expects that they will continue to increase, as the Company continues to expand its finance and administrative staff, add infrastructure and incur additional costs related to being a public company in the United States, including the costs of directors' and officers' insurance, investor relations programs and increased professional fees. Our future capital requirements will depend on a number of factors, including the continued progress of our research and development of product candidates, the timing and outcome of clinical trials and regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims and other intellectual property rights, the status of competitive products, the availability of financing and our success in developing markets for our product candidates.

At September 30, 2012, we had approximately $28.5 million of cash and cash equivalents, together with approximately $10.7 million of cash in short-term deposit accounts, and we believe that our existing cash and cash equivalents and short-term investments will be sufficient to enable us to fund our operating expenses and capital expenditure requirements at least until December 31, 2013. We have based this estimate on assumptions that may prove to be wrong and are subject to change, and we may be required to use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials. Our future capital requirements will depend on many factors, including the progress and results of our clinical trials, the duration and cost of discovery and preclinical development, and laboratory testing and clinical trials for our product candidates, the timing and outcome of regulatory review of our product candidates, the number and development requirements of other product candidates that we pursue, and the costs of commercialization activities, including product marketing, sales, and distribution. We do not anticipate that we will generate product revenues for at least the next several years, and we expect continuing operating losses to result in increases in our cash used in operations over the next several years. To the extent that our capital resources are insufficient to meet our future capital requirements, we will need to finance our future cash needs through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. We cannot assure you that we will be able to consummate any such offerings or financings or enter into any such arrangements on terms favorable to us or at all.

Effects of Inflation and Currency Fluctuation

Inflation generally affects the Company by increasing costs of labor and clinical trials. The Company does not believe that inflation has had a material effect on its results of operations for the three and nine month periods ended September 30, 2012 or 2011.

The Company has operations in Israel and has contracts with European companies as well as Euro and Shekel bank deposits. Our foreign contracts with service providers use applicable local currencies, Euros or Shekels. As a result, we are subject to adverse movements in foreign currency exchange rates in countries in which we conduct business. Our results of operations are predominantly affected by fluctuations in the value of the U.S. dollar as compared to the New Israeli Shekel and the Euro.

We do not engage in trading of market risk sensitive instruments or purchase hedging or "other than trading" instruments that are likely to expose us to market risk, whether interest rate, commodity price or equity price risk. We have not purchased options or entered into swaps or forward or futures contracts, nor do we use derivative financial instruments for speculative trading or any other purpose.

Off-Balance Sheet Arrangements

The Company had no off-balance sheet arrangements as of September 30, 2012.

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