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

Show all filings for ZOGENIX, INC.

Form 10-Q for ZOGENIX, INC.


8-Nov-2012

Quarterly Report


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

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. These forward looking statements include, but are not limited to, statements about:

• our ability to maintain and increase market demand for, and sales of, Sumavel DosePro;

• our ability to successfully execute our sales and marketing strategy for the commercialization of Sumavel DosePro and our dependence on our collaboration with Mallinckrodt LLC to promote Sumavel DosePro to a prescriber audience in the Unites States;

• the target action date for the FDA to complete its review of the Zohydro ER NDA and the potential for, and timing of, regulatory approval of Zohydro ER by the FDA;

• the potential for delays associated with any additional data required to be submitted by us in support of our NDA for Zohydro ER;

• the progress and timing of clinical trials for Relday;

• the timing of submissions to, and decisions made by, the FDA and other regulatory agencies, including foreign regulatory agencies, and demonstrating the safety and efficacy of Zohydro ER or any other product candidates to the satisfaction of the FDA and such other agencies;

• adverse side effects or inadequate therapeutic efficacy of Sumavel DosePro that could result in product recalls, market withdrawals or product liability claims;

• the safety and efficacy of Zohydro ER and our other product candidates;

• the market potential for migraine treatments, and our ability to compete within that market;

• the goals of our development activities and estimates of the potential markets for our product candidates, and our ability to compete within those markets;

• estimates of the capacity of manufacturing and other facilities to support our product and product candidates;

• our ability to ensure adequate and continued supply of Sumavel DosePro to successfully meet anticipated market demand;

• our expected remaining third party research and development costs for Zohydro ER;

• our and our licensors ability to obtain, maintain and successfully enforce adequate patent and other intellectual property protection of our products and product candidates and the ability to operate our business without infringing the intellectual property rights of others;

• our ability to obtain and maintain adequate levels of coverage and reimbursement from third-party payors for Sumavel DosePro or any of our other product candidates that may be approved for sale, the extent of such coverage and reimbursement and the willingness of third-party payors to pay for our products versus less expensive therapies;

• the impact of healthcare reform legislation; and

• projected cash needs and our expected future revenues, operations and expenditures.

The forward-looking statements are contained principally in the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." In some cases, you can identify forward-looking statements by the following words: "may," "will," "could," "would," "should," "expect," "intend," "plan," "anticipate," "believe," "estimate," "predict," "project," "potential," "continue," "ongoing" or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements relate to future events or our future financial performance or condition and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievement to differ materially from those expressed or implied by these forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q in greater detail under the heading "Item 1A - Risk Factors."

Given these risks, uncertainties and other factors, we urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. For all forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. We undertake no obligation to revise or update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.


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DosePro®, Intraject®, Relday™, Sumavel®, Zogenix™ and Zohydro™ ER are our trademarks. All other trademarks, trade names and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners. Use or display by us of other parties' trademarks, trade dress or products is not intended to and does not imply a relationship with, or endorsements or sponsorship of, us by the trademark or trade dress owner.

Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to "Zogenix," "we," "us" and "our" refer to Zogenix, Inc., including, as of June 7, 2010, its consolidated subsidiary.

The interim consolidated financial statements and this Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated 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.

Overview

Background

We are a pharmaceutical company commercializing and developing products for the treatment of central nervous system disorders and pain. Our first commercial product, Sumavel ® DosePro® (sumatriptan injection) Needle-free Delivery System, was launched in January 2010. Sumavel DosePro offers fast-acting, easy-to-use, needle-free subcutaneous administration of sumatriptan for the acute treatment of migraine and cluster headache in a pre-filled, single-use delivery system. Sumavel DosePro is the first drug product approved by the U.S. Food and Drug Administration, or FDA, that allows for the needle-free, subcutaneous delivery of medication. In June 2012, we entered into a co-promotion agreement with Mallinckrodt pursuant to which we granted to Mallinckrodt a co-exclusive right, with us, to promote Sumavel DosePro to a mutually agreed prescriber audience in the United States, beginning in August 2012. Our lead product candidate, Zohydro ER (hydrocodone bitartrate, formerly ZX002) is a 12-hour extended-release formulation of hydrocodone without acetaminophen for the treatment of moderate to severe chronic pain requiring around-the-clock opioid therapy. We completed Phase 3 development of Zohydro ER in 2011, and we submitted the New Drug Application, or NDA, for Zohydro ER to the FDA in May 2012. In July 2012, the FDA accepted our NDA as being sufficiently complete for a full review and assigned a Prescription Drug User Fee Act (PDUFA) target date of March 1, 2013. The agency will convene an advisory committee for Zohydro ER on December 7, 2012. The advisory committee provides the FDA with independent expert advice and recommendations; however the final decision regarding approval is made by the FDA.

We are also developing Relday™, a proprietary, long-acting injectable formulation of risperidone using Durect Corporation's SABER™ controlled-release formulation technology in combination with our DosePro needle-free, subcutaneous drug delivery system through a July 2011 development and license agreement with Durect. Risperidone is used to treat the symptoms of schizophrenia and bipolar disorder in adults and teenagers 13 years of age and older. If successfully developed and approved, we believe Relday may be the first once-monthly, subcutaneous antipsychotic product available in a needle-free delivery system. In May 2012 we filed an investigational new drug, or IND, application with the FDA. In July 2012, we initiated our first IND clinical trial for Relday. This Phase 1 clinical trial is a single-center, open-label, safety and pharmacokinetic trial that will enroll 30 patients with chronic, stable schizophrenia or schizoaffective disorder. We expect this study to complete by the end of 2012.

In addition to Relday, we are also evaluating the market potential, formulation requirements and clinical development pathway of an additional central nervous system compound that could be paired with DosePro to enhance its commercial attractiveness. We are also seeking to capitalize on our DosePro drug delivery technology by out-licensing it to potential partners enabling them to enhance, differentiate or extend the life cycle of their proprietary injectable products. In March 2012, we entered into a Co-Marketing and Option Agreement with Battelle Memorial Institute, or Battelle, pursuant to which we granted to Battelle the exclusive right to co-market our DosePro drug delivery technology to a specified list of Battelle's pharmaceutical clients.

We have experienced net losses and negative cash flow from operating activities since inception, and as of September 30, 2012, had an accumulated deficit of $328.7 million. We expect to continue to incur net losses and negative cash flow from operating activities for at least the next several years primarily as a result of the expenses incurred in connection with our efforts in seeking marketing approval for Zohydro ER, the initiation of clinical development for Relay, any additional required testing for Zohydro ER, and the cost of the sales and marketing expense associated with Sumavel DosePro, and, if approved, Zohydro ER. As of September 30, 2012, we had cash and cash equivalents of $49.6 million.


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On July 27, 2012, we completed a public offering of common stock and warrants for net proceeds of approximately $65.4 million (including over-allotment purchase), after deducting underwriting discounts and commissions of $4.2 million and offering expenses of $0.5 million. We sold a total of 32,500,000 shares of our common stock and warrants to purchase 14,625,000 shares of common stock (excluding over-allotment purchase) in the offering, at a purchase price to the public of $1.99 per share of common stock and $0.01 per share underlying each warrant. The underwriters were granted a 30-day option to cover over-allotments, to purchase up to an additional 4,875,000 shares of common stock and warrants to purchase 2,193,750 shares of common stock, of which the underwriters exercised their option with respect to 2,558,300 shares of common stock and warrants for 1,151,235 shares of common stock. The warrants will be exercisable beginning on July 27, 2013 at an exercise price of $2.50 per share and will expire on July 27, 2017, which is five years from the date of issuance.

Although it is difficult to predict future liquidity requirements, we believe that with our cash and cash equivalents as of September 30, 2012, together with future proceeds from the sale of Sumavel DosePro, we will have sufficient resources to fund our operations for the next 12 months.

We may need to obtain additional capital to finance our operations beyond that point through debt or equity financings or through collaborations or partnerships with other companies. There can be no assurance that we will be able to obtain any source of financing on acceptable terms, or at all, if required. If we are not able to raise additional capital on terms acceptable to us, or at all, as and when needed, we may be required to reduce or curtail our operations and costs, and we may be unable to continue as a going concern. In its report on our consolidated financial statements for the year ended December 31, 2011, our independent registered public accounting firm included an explanatory paragraph expressing substantial doubt regarding our ability to continue as a going concern.

Mallinckrodt Co-Promotion Agreement

In June 2012, we and Mallinckrodt entered into a co-promotion agreement. Under the terms of the co-promotion agreement Mallinckrodt has committed to a minimum number of sales representatives for the initial term of the agreement, which runs through June 30, 2014, and can be extended by mutual agreement of the parties in additional six month increments. We remain responsible for the manufacture, supply and distribution of commercial product for sale in the United States. In addition, we will supply product samples to Mallinckrodt at an agreed upon transfer price and Mallinckrodt will reimburse us for all other promotional materials used.

In partial consideration of Mallinckrodt's sales efforts, we will pay Mallinckrodt a service fee on a quarterly basis that represents a specified fixed percentage of net sales of prescriptions generated from Mallinckrodt's prescriber audience over a baseline amount of net sales to the same prescriber audience, or baseline net sales. In addition, upon completion of the co-promotion term in June 30, 2014 (unless otherwise extended), and only if the co-promotion agreement is not terminated as a result of certain circumstances, we will be required to pay Mallinckrodt an additional tail payment calculated as a fixed percentage of the Mallinckrodt net sales over the baseline net sales during the first full twelve months following the last day of the term.

For the three and nine months ended September 30, 2012 and 2011, we incurred service fee expenses of $0.1 million under the co-promotion agreement.

Astellas Co-Promotion Agreement

We launched the commercial sale of Sumavel DosePro in the United States in January 2010 with our co-promotion partner, Astellas Pharma US, Inc., or Astellas. Under our co-promotion agreement with Astellas that we entered into in July 2009, or the Astellas co-promotion agreement, Astellas primarily promoted Sumavel DosePro to primary care physicians (including internal medicine, family practice and general practice), OB/GYNs, emergency medicine physicians and urologists, or collectively, the Astellas Segment, in the United States. Our sales force historically promoted Sumavel DosePro primarily to neurologists and other key prescribers of migraine medications, including headache clinics and headache specialists in the United States. We jointly shared in the cost of advertising, marketing and other promotional activities related to the Sumavel DosePro brand and were required to provide minimum levels of sales effort to promote Sumavel DosePro. In December 2011, we entered into an amendment to the Astellas co-promotion agreement, or the amended Astellas co-promotion agreement, whereby the agreement terminated on March 31, 2012.

At the inception of the Astellas co-promotion agreement and in exchange for the right to promote Sumavel DosePro, Astellas made a non-refundable up-front payment of $2.0 million to us and made aggregate additional payments of $18.0 million to us upon the achievement of a series of milestones. These proceeds are reflected as $8.5 million of deferred revenues on our consolidated balance sheet at December 31, 2011. Beginning with the launch of Sumavel DosePro in January 2010, we began recognizing these proceeds as contract revenues on a ratable basis over 42 months (the original term of the agreement). Upon amendment of the Astellas co-promotion agreement on December 20, 2011, the remaining deferred


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proceeds were recognized as contract revenues on a ratable basis over 3.4 months (the remaining term of the amended agreement). This acceleration in the recognition of the contract proceeds resulted in the recognition of $8.5 million of contract revenue during the three months ended March 31, 2012.

Under the terms of the amended Astellas co-promotion agreement, we are required to make two annual tail payments to Astellas, estimated as a total of $5.3 million, calculated as decreasing fixed percentages (ranging from a mid-twenties down to a mid-teen percentage) of net sales in the Astellas Segment in the last 12 months of its active promotion. The present value of such tail payments was recorded as a long-term liability on the amendment date and is payable in July 2013 and July 2014. The fair value of the tail payments will be accreted through interest expense on a monthly basis through the date of payment. As of September 30, 2012, the long-term tail payment liability was $2.7 million (including the service fee reduction discussed below), and there was $0.1 million and $0.4 million of related interest expense recognized during the three and nine months ended September 30, 2012, respectively. Additionally, beginning in the second quarter of 2012, pursuant to a promotion transition plan, our field sales force of approximately 95 representatives assumed full responsibility from approximately 400 Astellas sales representatives for the continued marketing of Sumavel DosePro. This promotion transition expanded our focus to include a portion of the high-prescribing primary care physicians previously covered by Astellas under the Astellas co-promotion agreement.

In consideration for Astellas' performance of its commercial efforts, we were required to pay Astellas a service fee on a quarterly basis that represents a fixed percentage of between 45% and 55% of Sumavel DosePro net sales to the Astellas Segment through the date of termination. Astellas paid us a fixed fee for all sample units they ordered for distribution to their sales force. Amounts received from Astellas for shared marketing costs and sample product are reflected as a reduction of selling, general and administrative expenses, and amounts payable to Astellas for shared marketing expenses and service fees are reflected as selling, general and administrative expenses.

In August 2012, we and Astellas completed a final reconciliation under the terms of the agreement and agreed to adjust the service fees paid to Astellas over the term of the co-promotion agreement, resulting in a service fee receivable of $1.5 million, which will offset the two annual tail payments, and a reduction to the annual tail payment liability of $0.7 million. The present value of the service fee receivable and tail payment reduction of $1.9 million was recorded as a reduction in selling, general and administrative expenses during the three and nine months ended September 30, 2012, and an offset to the tail payment liability. The fair value of the service fee receivable and tail payment reduction will be accreted through interest income through the dates of the two tail payments in July 2013 and July 2014.

For the three months ended September 30, 2012 and 2011, we recognized shared marketing expense of $0 and $0.4 million, respectively, and for the nine months ended September 30, 2012 and 2011, we recognized shared marketing expense of $0.3 million and $1.5 million, respectively. For the three months ended September 30, 2012 and 2011, and prior to the final reconciliation of service fees, the Company incurred $0 and $1.7 million in service fee expenses, respectively. For the nine months ended September 30, 2012 and 2011, and prior to the final reconciliation of service fees, the Company incurred $1.8 and $4.9 million in service fee expenses, respectively.

Revenues

For the three months ended September 30, 2012 and 2011, we recognized $8.5 million and $8.8 million, respectively, in net product revenues, and for the nine months ended September 30, 2012 and 2011 we recognized $26.4 million and $25.0 million, respectively, in net product revenues. For the three months ended September 30, 2012 and 2011 we recognized $0 and $1.6 million, respectively, in contract revenues, and for the nine months ended September 30, 2012 and 2011 we recognized $8.5 million and $4.7 million, respectively, in contract revenues in each case associated with license and milestone payments made to us by Astellas under the Astellas co-promotion agreement.

We sell Sumavel DosePro product in the United States to wholesale pharmaceutical distributors and retail pharmacies, or collectively, our customers, subject to rights of return. Prior to the third quarter of 2011, Sumavel DosePro had a limited sales history, and we could not reliably estimate expected returns of the product at the time of shipment. Accordingly, we deferred recognition of revenue on product shipments of Sumavel DosePro until the right of return no longer existed, which occurred at the earlier of the time Sumavel DosePro units were dispensed through patient prescriptions or expiration of the right of return. Units dispensed are generally not subject to return, except in the rare cases where the product malfunctions or the product is damaged in transit. We estimate patient prescriptions dispensed using an analysis of third-party information, including third-party market research data.

Beginning in the third quarter of 2011, we began recognizing Sumavel DosePro product sales at the time title transfers to our customer, and providing for an estimate of future product returns at that time. We believe that our estimated product return allowances for Sumavel DosePro require a high degree of judgment and are subject to change based on our experience and certain quantitative and qualitative factors. Sumavel DosePro's shelf life is determined by the shorter expiry date of its


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two subassemblies, which is currently approximately 30 months from the date of manufacture. We accept unused product from our customers that are within six months before and up to one year after its expiration date for a credit at the then-current whole acquisition cost, or WAC, reduced by a nominal fee for processing the return. Our initial product inventories reached expiration in 2011.

We have monitored actual return history on an individual product lot basis since product launch. Actual product return experience in 2011 and for the nine months ending September 30, 2012 included a disproportionately high amount of returns from a single retail chain. In addition, we have also experienced a high level of returned product from our initial launch stocking initiatives. We may experience higher levels of returns due to the termination of the Astellas co-promotion agreement on March 31, 2012 and the potential fall-off of prescription demand in territories that may no longer be supported with direct promotional efforts. We consider these factors as well as the dating of our product at the time of shipment into the distribution channel, prescription trends and changes in the estimated levels of inventory within the distribution channel to estimate our exposure for returned product. Because of the shelf life of Sumavel DosePro and our return policy of issuing credits on returned product that is within six months before and up to one year after its product expiration date, there may be a significant period of time between when the product is shipped and when we issue credits on returned product. Accordingly, we may have to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustments. A 1% increase or decrease in our returns reserve as a percentage of product shipped in the three and nine months ended September 30, 2012 would have a cumulative financial statement impact of approximately $0.1 million and $0.4 million, respectively, for the three and nine months ended September 30, 2012. As our returns reserve also includes product shipped prior to 2012 that is within the product return period, our financial statements may be further affected if we experience higher levels of returns than estimated.

We permit certain wholesale pharmaceutical distributors to purchase limited quantities of product after the announcement of an increase to the WAC of our product and prior to the effectiveness of the increase. In turn, WAC price increases can result in accelerated purchases by wholesalers relative to anticipated retail and prescription demand. The timing of purchases made by wholesale distributors and retail pharmacies are subject to fluctuations for these reasons among others. Absent accelerated purchasing by wholesalers or other periodic changes in buying patterns, the wholesale channel has historically contained two to three weeks of product on hand. As of September 30, 2012, wholesale distributors reported approximately three weeks of our product on hand.

Cost of Sales

Cost of sales consist primarily of materials, third-party manufacturing costs, freight and indirect personnel and other overhead costs associated with sales of Sumavel DosePro based on units sold to wholesale pharmaceutical distributors and retail pharmacies, as well as reserves for excess, dated or obsolete commercial inventories and production manufacturing variances. For the three months ended September 30, 2012 and 2011, our cost of sales was $4.2 million and $5.5 million, respectively, and for the nine months ended September 30, 2012 and 2011 our cost of sales was $13.5 million and $14.3 million, respectively. Our product gross margin for the three months ended September 30, 2012 and 2011 was 50% and 38%, respectively, and our product gross margin for the nine months ended September 30, 2012 and 2011 was 49% and 43%, respectively.

Royalty Expense

Royalty expense consists of the amortization of the $4.0 million milestone payment paid by us to Aradigm Corporation upon the first commercial sale of Sumavel DosePro in the United States (which occurred in January 2010) and royalties payable to Aradigm based on net sales of Sumavel DosePro by us or one of our licensees. We are not required to make any further milestone payments to Aradigm. Our ongoing royalty obligation payable to Aradigm is set forth in the asset purchase agreement we entered into with Aradigm in August 2006 pursuant to which we acquired the rights to the DosePro technology. During each of the three months ended September 30, 2012 and 2011, we incurred $0.3 million in royalty expense to Aradigm, and during each of the nine months ended September 30, 2012 and 2011, we incurred $1.0 million in royalty expense to Aradigm.

Research and Development Expenses

Our research and development expenses consist of expenses incurred in developing, testing and seeking marketing approval of our product candidates, including:

• payments made to Durect for the license to and further development of Relday;

• milestone payments made to Alkermes in connection with development and regulatory milestones of Zohdyro;

• payments made to third-party contract research organizations, or CROs, and investigational sites, which conduct our trials on our behalf, and consultants;


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• expenses associated with regulatory submissions, pre-clinical development and clinical trials;

• payments to third-party manufacturers, which produce our active pharmaceutical ingredient and finished product;

• payments made to third-party CROs, laboratories and consultants in connection with pre-clinical studies;

• personnel related expenses, such as salaries, benefits, travel and other related expenses, including stock-based compensation; and

• facility, maintenance, depreciation and other related expenses.

We expense all research and development costs as incurred.

In March 2010, we initiated our Phase 3 clinical development program for Zohydro ER. We utilize CROs, contract laboratories and independent contractors for the conduct of pre-clinical studies and clinical trials. We track third party costs . . .

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