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OREX > SEC Filings for OREX > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for OREXIGEN THERAPEUTICS, INC.

Form 10-Q for OREXIGEN THERAPEUTICS, INC.


9-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under Part II, Item 1A, "Risk Factors." 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. Except as required by law, we assume no obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

Background

We are a biopharmaceutical company focused on the development of pharmaceutical product candidates for the treatment of obesity. Our lead combination product candidates targeted for obesity are Contrave ฎ, which has completed Phase III clinical trials for which a New Drug Application, or NDA, has been submitted and reviewed by the U.S. Food and Drug Administration, or FDA, and Empatic™, which has completed Phase II clinical trials. Each of these product candidates is a combination of generic drugs, which we have systematically screened for synergistic central nervous system, or CNS, activity. Each of the components of our product candidates has already received regulatory approval for other indications and has been commercialized previously. We are developing these combinations in an effort to demonstrate adequate efficacy and safety for potential regulatory approval. We have not yet received regulatory approval for either product candidate.

In January 2011, we received a complete response letter, or CRL, from the FDA concerning our previously-submitted NDA for Contrave. A CRL is issued by the FDA when the review of an NDA is completed and questions remain that precludes the approval of the NDA in its current form. The CRL for Contrave indicated that the FDA could not approve the NDA in its present form primarily due to concerns regarding the theoretical cardiovascular risk of Contrave treatment when used long term in a population of overweight and obese subjects. The CRL stated that before our NDA could be approved, we must conduct a randomized, double-blind, placebo-controlled trial of sufficient size and duration to demonstrate that the risk of major adverse cardiovascular events, or MACE, in overweight and obese subjects treated with Contrave does not adversely affect the drug's benefit-risk profile.

In September 2011, following a meeting with senior officials in the FDA's Office of New Drugs, or OND, we received written correspondence from the director of the OND detailing the OND's design requirements for a randomized, double-blind, placebo controlled cardiovascular outcomes trial, or CVOT, for Contrave that would address the CRL. The CVOT is a randomized, double-blind, placebo-controlled cardiovascular outcomes trial evaluating the occurrence of MACE in patients participating in the study. An interim analysis is planned to be conducted by the CVOT's independent Data Monitoring Committee once approximately 87 MACE have occurred. Importantly, if the interim analysis excludes a doubling of risk of MACE in patients receiving Contrave compared to placebo, we plan to resubmit the Contrave NDA to the FDA for approval. The exclusion of a doubling of risk of MACE was established as the threshold for approvability of Contrave during discussions with the FDA prior to the start of the CVOT. In early February 2012 we reached agreement with the FDA on a Special Protocol Assessment, or SPA, for the CVOT. An SPA is a written agreement with the FDA on the details of the design and planned analysis for a clinical trial. An SPA is generally binding upon the FDA unless a substantial scientific issue essential to determining safety or efficacy is identified after the trial begins.

In June 2012, we initiated the CVOT, which we now refer to as the Light Study. We are targeting to enroll a patient population with a 1.5% annualized background rate of MACE. The demographics (age, gender, smoking status, prevalence of cardiovascular disease, diabetes and other co-morbidities) of the patients enrolled into the study to date are in line with the targeted population and the projected MACE rate. We have surpassed our goal to enroll 7,000 patients in the Light Study and plan to enroll approximately 9,000 patients through the end of 2012. With the resulting increase in observation time in the study, the time to accrual of the 87th MACE needed to conduct the interim analysis should occur up to two months sooner than previously projected, potentially as soon as the second quarter of 2013. However, we can provide no assurance that these recent enrollment rates will continue or that the patients we are enrolling will result in the appropriate event rate. If enrollment does not proceed as anticipated or the actual background MACE rate does not meet or exceed the expected 1.5% per year, or we otherwise cannot enroll the targeted population on our anticipated timeframe, the 87th MACE may not occur until much later than anticipated.


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On October 22, 2012, we announced that we received a response to a formal dispute resolution request from the FDA's Center for Drug Evaluation and Research, or CDER. We requested that Contrave be considered for approval on the basis of existing data together with a postmarketing requirement to supply the interim analysis of the Light Study shortly after approval. CDER denied this request, reaffirming that the cardiovascular outcomes data from the interim analysis of the Light Study is required prior to approval; however, CDER indicated that it was highly supportive of the exploration of a faster path to resubmission of the Contrave NDA. We plan to explore with the FDA the possibility of resubmitting the Contrave NDA in advance of the interim data from the Light Study. Under this scenario, data from the planned interim analysis would be provided during the anticipated review period for the NDA. Although procedural details need to be addressed, these discussions could result in a faster path to resubmission of the Contrave NDA. We can provide no assurance, however, that we will reach agreement on such a path with CDER or otherwise, and in such event, we will only be able to resubmit the NDA when we have the data.

In July 2012, we reinitiated development of Empatic. Our objective is to have communications with the FDA to discuss the continued development of Empatic by the end of 2012.

In October 2012, we completed a public offering of 11,000,000 shares of its common stock at a public offering price of $5.50 per share. Net cash proceeds from the public offering were approximately $56.5 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We granted the underwriters a 30-day option to purchase an additional 1,650,000 shares of common stock.

Our primary activities since incorporation have been organizational activities, including recruiting personnel, conducting research and development, including clinical trials, and raising capital. We have incurred significant net losses since our inception. As of September 30, 2012, we had an accumulated deficit of $404.3 million. These losses have resulted principally from costs incurred in connection with research and development activities, primarily costs of clinical trial activities associated with our current product candidates, and general and administrative expenses. We expect to continue to incur losses for the next several years. Successful transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support our cost structure, and until that time, we may need to continue to raise additional equity or debt financing.

Revenues

We generated approximately $2.6 million in revenue for the nine months ending September 30, 2012, resulting from the sublicensing of technology and amounts earned under our collaboration agreement with Takeda Pharmaceutical Company Limited, or Takeda. In September 2010, we entered into a collaboration agreement with Takeda to develop and commercialize Contrave in the United States, Canada and Mexico. Under the collaboration agreement, we received an upfront, nonrefundable cash payment of $50.0 million from Takeda and this amount is being recognized ratably over the estimated life of the agreement.

During 2005, we sublicensed technology to Cypress Bioscience, Inc., or Cypress, for an upfront payment of $1.5 million, and this amount was being recognized ratably over the estimated life of the sublicensed patent. In January 2011, Cypress exercised its right to terminate the agreement. The remaining deferred revenue of $971,000 was recognized in January 2011.

Other than the amortization of the upfront payment of $50.0 million from Takeda, we do not expect to generate any significant revenues from licensing, achievement of milestones or product sales unless and until we are able to obtain regulatory approval of, and commercialize, our product candidates.

Research and Development Expenses

The majority of our operating expenses to date have been incurred in research and development activities. Our research and development expenses consisted primarily of costs associated with clinical trials managed by our contract research organizations, or CROs, product development efforts and manufacturing costs. License fees, salaries and related employee benefits for certain personnel, and costs associated with certain non-clinical activities such as regulatory expenses, are also included in this amount. Our most significant costs to date are expenses incurred in connection with the clinical trials for Contrave and Empatic. The clinical trial expenses included payments to vendors such as CROs, investigators, suppliers of clinical drug materials and related consultants. We charge all research and development expenses to operations as incurred because the underlying technology associated with these expenditures relates to our research and development efforts and has no alternative future uses.


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Our internal research and development resources are not directly tied to any individual research project and are primarily deployed across our Contrave and Empatic programs, both of which target the obesity market. We are developing our two obesity product candidates in parallel and, due to the fact that we use shared resources across projects, we do not maintain information regarding our internal costs incurred for our research and development programs on a program-specific basis. We use external service providers to manage our clinical trials, to manufacture the product supplies used in these trials and for formulations development, consulting and other activities.

The following table summarizes our research and development expenses for the three and nine months ended September 30, 2012 and 2011. Costs that are not attributable to a specific research program are included in the "Other" category (in thousands):

                                             Three Months Ended          Nine Months Ended
                                                September 30,              September 30,
 Costs of external service providers:         2012          2011         2012          2011
 Obesity                                   $    23,674     $   261     $  39,770     $  3,219
 Other                                              57          34           154          119

 Subtotal                                       23,731         295        39,924        3,338
 Internal costs                                  1,603         924         4,202        6,605
 Stock-based compensation                          472         320         1,302        1,294

 Total research and development expenses   $    25,806     $ 1,539     $  45,428     $ 11,237

At this time, due to the risks inherent in the drug development process, we are unable to estimate with any certainty the costs we will incur in the continued development, if any, of our product candidates for potential commercialization. Specifically, we cannot quantify the development expenses associated with completion of the Light Study for Contrave or the development of Empatic. Prior to its commencement, we anticipated that the costs to conduct the Light Study to the interim analysis would be approximately $100.0 million. We believe the costs we have incurred to date and expect to incur in the future in connection with the conduct of the Light Study are consistent with our original projection. Until we communicate with the FDA, we are not able to estimate the expenses required to further develop Empatic. Future development expenses will depend on the scope and timing of the Light Study and any other additional clinical trials for Contrave, if any, our financial resources, as well as decisions made with respect to the development of Empatic and ongoing assessments as to each product candidate's commercial potential. Clinical development timelines, the probability of success and development costs can differ materially from expectations. The lengthy process of completing our clinical trials, including the Light Study, and seeking regulatory approval for our product candidates requires the expenditure of substantial resources. In addition, we cannot forecast with any degree of certainty which product candidates will be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements. Any failure by us or delay in completing our clinical trials, including the Light Study, or in obtaining regulatory approvals, could cause a delay in the commencement of product revenues and cause our research and development expenses to increase and, in turn, have a material adverse effect on our results of operations. We do not expect Contrave to be commercially available in any major market until the end of 2013 at the earliest, if at all, and Empatic to be commercially available in any major market for at least several years, if at all.

General and Administrative

Our general and administrative expenses consist primarily of salaries and related costs for personnel in executive, finance, accounting and internal support functions. In addition, general and administrative expenses include professional fees for legal, consulting and accounting services. We anticipate general and administrative expenses to remain generally unchanged as we continue to pursue the development of Contrave and Empatic.

Other Income (Expense)

Other income consists of interest earned on our cash, cash equivalents and investment securities. Interest expense consists of interest incurred in connection with the $25.0 million credit and security agreement, as amended, with GE Healthcare Financial Services which was paid in full and terminated in July 2011.

Critical Accounting Policies and Estimates

Management's discussion and analysis of our financial condition and results of operations are based upon our financial statements, which are prepared in accordance with accounting principles that are 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 and liabilities, related disclosure of contingent assets and liabilities at the date of the financial statements, and the reported


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amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to accounting for research and development expenses and stock-based compensation costs. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.

There were no significant changes during the nine months ended September 30, 2012 to the items that we disclosed as our critical accounting policies and estimates in Note 2 to our audited financial statements in our Annual Report on Form 10-K for the year ended December 31, 2011.

Results of Operations

Comparison of three months ended September 30, 2012 to three months ended September 30, 2011

Revenues. Revenues for each of the three months ended September 30, 2012 and 2011 were $857,000 and represents revenue recognized under our collaboration agreement with Takeda.

Research and Development Expenses. Research and development expenses increased to $25.8 million for the three months ended September 30, 2012 from $1.5 million for the comparable period during 2011. This increase of approximately $24.3 million was due primarily to an increase in expenses in connection with our Contrave CVOT, related proprietary product formulation work and consulting activities of $23.3 million and an increase in salaries and personnel related costs of $580,000.

General and Administrative Expenses. General and administrative expenses increased to $5.6 million for the three months ended September 30, 2012 from $3.9 million for the comparable period during 2011. This increase of approximately $1.7 million was due primarily to an increase in market research costs of $683,000, an increase in salaries and personnel related costs of $652,000 and an increase in stock-based compensation expense of $350,000.

Interest and Other Income. Interest income increased to $36,000 for the three months ended September 30, 2012 from $9,000 for the comparable period during 2011. This increase of $27,000 was due to an increase in average cash and investment balances.

Comparison of nine months ended September 30, 2012 to nine months ended September 30, 2011

Revenues. Revenues for the nine months ended September 30, 2012 and 2011 were $2.6 million and $3.5 million, respectively. The decrease of approximately $900,000 was due to the recognition of the remaining deferred revenue of $971,000 due to the termination of the license agreement with Cypress in January 2011.

Research and Development Expenses. Research and development expenses increased to $45.4 million for the nine months ended September 30, 2012 from $11.2 million for the comparable period during 2011. This increase of approximately $34.2 million was due primarily to an increase in expenses in connection with our Contrave CVOT, related proprietary product formulation work and consulting activities of $36.4 million. The increase was partially offset by a decrease in salaries and personnel related costs of $2.8 million. Research and development expenses for the nine months ended September 30, 2011 included employee termination costs of $2.6 million as a result of our corporate realignment.

General and Administrative Expenses. General and administrative expenses decreased to $14.9 million for the nine months ended September 30, 2012 from $15.9 million for the comparable period during 2011. This decrease of approximately $1.0 million was due primarily to a decrease in salaries and personnel related costs of $1.8 million. The decrease was partially offset by an increase in market research costs of $592,000. General and administrative expenses for the nine months ended September 30, 2011 included employee termination costs of $1.4 million as a result of our corporate realignment.

Interest and Other Income. Interest income increased to $125,000 for the nine months ended September 30, 2012 from $35,000 for the comparable period during 2011. This increase of $90,000 was due to an increase in average cash and investment balances.

Interest Expense. Interest expense decreased to $2,000 for the nine months ended September 30, 2012 from $221,000 for the comparable period during 2011. This decrease of $219,000 was primarily due to our debt being paid in full in July 2011.


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Liquidity and Capital Resources

Since inception, our operations have been financed primarily through the sale of equity securities. Through September 30, 2012, we received net proceeds of approximately $407.1 million from the sale of shares of our preferred and common stock as follows:

• from September 12, 2002 to December 31, 2006, we issued and sold a total of 1,053,572 shares of common stock for aggregate net proceeds of $14,801;

• in March 2004, we issued and sold a total of 9,322,035 shares of Series A redeemable convertible preferred stock for aggregate net proceeds of $9.2 million and the conversion of promissory notes and interest thereon totaling $1.7 million;

• from April 2005 to May 2005, we issued and sold 14,830,509 shares of Series B redeemable convertible preferred stock for aggregate net proceeds of $34.9 million;

• in November 2006, we issued and sold a total of 8,771,930 shares of Series C convertible preferred stock for aggregate net proceeds of $29.9 million;

• in May 2007, we issued and sold a total of 8,050,000 shares of common stock for aggregate net proceeds of $87.9 million;

• in January and February 2008, we issued and sold a total of 7,326,435 shares of common stock for aggregate net proceeds of $74.9 million;

• in July 2009, we issued and sold a total of 11,500,000 shares of common stock for aggregate net proceeds of $81.6 million;

• in December 2011, we issued and sold a total of 5,646,173 shares of common stock and warrants to purchase 56,461,730 shares of common stock for aggregate net proceeds of $86.9 million.

In October 2012, we completed a public offering of 11,000,000 shares of its common stock at a public offering price of $5.50 per share. Net cash proceeds from the public offering were approximately $56.5 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We granted the underwriters a 30-day option to purchase an additional 1,650,000 shares of common stock.

As of September 30, 2012, we had $56.1 million in cash and cash equivalents and an additional $52.2 million in investment securities, available-for-sale. As of September 30, 2012, our holdings primarily consisted of treasury-backed money market funds, treasuries and other instruments that are insured, guaranteed or supported by the U.S. federal government and some high quality corporate debt obligations. We maintain established guidelines relating to diversification and maturities of our investments to preserve principal and maintain liquidity.

Net cash used in operating activities was $41.0 million and $26.1 million for the nine months ended September 30, 2012 and 2011, respectively. Net cash used in each of these periods was primarily a result of external research and development expenses, clinical trial costs, personnel-related costs, third-party supplier expenses and professional fees.

Net cash used in investing activities was $6.4 million for the nine months ended September 30, 2012 and net cash provided by investing activities was $37.1 million for the nine months ended September 30, 2011. These amounts are primarily the result of the net purchases and maturities of investment securities.

Net cash provided by financing activities was $1.7 million for the nine months ended September 30, 2012 and net cash used in financing activities was $2.0 million for the nine months ended September 30, 2011. The net cash used in financing activities in 2011 was a result of the payments of principal towards our credit and security agreement with GE Healthcare Financial Services, as amended, and was partially offset by proceeds from the issuance of common stock due to exercises of stock options.

We cannot be certain if, when or to what extent we will receive cash inflows from the commercialization of our product candidates. We will incur substantial additional development expenses to conduct the Light Study for Contrave and to develop Empatic. We initiated the Light Study in June of 2012. Prior to its commencement, we anticipated that the costs to conduct the Light Study to the interim analysis would be approximately $100.0 million. We believe the costs we have incurred to date and expect to incur in the future in connection with the conduct of the Light Study are consistent with our original projection. Until we communicate with the FDA, we are not able to estimate the expenses required to further develop Empatic.


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We have entered into license agreements to acquire the rights to develop and commercialize Contrave and Empatic. Pursuant to these agreements, we obtained exclusive and non-exclusive licenses to the patent rights and know-how for selected indications and territories. Under our license agreement with Duke University, we issued 442,624 shares of our common stock in March 2004 and may be required to make future milestone payments totaling up to $1.7 million upon the achievement of various milestones related to regulatory or commercial events. Under our license agreement with Lee Dante, M.D., we issued an option to purchase 73,448 shares of our common stock in April 2004. We also paid Dr. Dante an upfront fee of $100,000 and, in September 2010, we paid him an additional $1.0 million upon the execution of the collaboration agreement with Takeda. In the future, we may be obligated to pay royalties to Dr. Dante related to certain revenues we receive in connection with any sublicense agreements we enter into, including our collaboration agreement with Takeda. Under our license agreement with Oregon Health & Science University, we issued 76,315 shares of our common stock in December 2003 and paid an upfront fee of $65,000. Under these three agreements, we are also obligated to pay royalties on any net sales of the licensed products.

Our future capital uses and requirements depend on numerous factors. These factors include but are not limited to the following:

• the scope, cost and timing of the Light Study and any other additional clinical trials required for Contrave and Empatic, including expenses to support the trials and milestone payments that may become payable, and the decisions we make with respect to the continued development of such product candidates, which with respect to Empatic will depend on the outcome of any meeting we have with FDA on its continued development;

• the extent to which we in-license, acquire or invest in other indications, products, technologies and businesses;

• the terms and timing of any collaborative, licensing, co-promotion or other arrangements that we may establish with respect to Contrave or Empatic or any other product candidates that we may in-license or acquire;

• the costs of establishing sales, marketing and distribution capabilities in order to commercialize Contrave if and when it is approved for marketing or any other product candidates that we may in-license or acquire, should we elect to do so;

• the costs involved in enforcing or defending patent claims or other intellectual property rights;

• the costs and timing of regulatory approvals for Contrave and Empatic, if at all; and

• the successful commercialization of our products.

Although it is difficult to predict future liquidity requirements, we believe that our existing cash and cash equivalents will be sufficient to meet our projected operating requirements through the next 12 months.

Until we can generate significant cash from our operations, we expect to . . .

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