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

Show all filings for PAIN THERAPEUTICS INC

Form 10-Q for PAIN THERAPEUTICS INC


9-Nov-2012

Quarterly Report


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

This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included elsewhere in this report. Operating results are not necessarily indicative of results that may occur in future periods.

This document contains forward-looking statements, that are based upon current expectations, within the meaning of the Private Securities Reform Act of 1995. We intend that such statements be protected by the safe harbor created thereby. Forward-looking statements involve risks and uncertainties and our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. Examples of such forward-looking statements include, but are not limited to, statements about:

• the New Drug Application, or NDA, for REMOXY® (oxycodone) Extended-Release Capsules CII resubmitted by King Pharmaceutical, Inc., or King, a subsidiary of Pfizer, Inc., or Pfizer, to the U.S. Food and Drug Administration, or FDA, and the Complete Response Letter Pfizer received by Pfizer from the FDA in response to King's resubmission of the NDA for REMOXY;

• royalty, milestone or collaboration revenue we may receive from Pfizer and other payments we may receive from our collaboration agreements;

• the potential for development of a noninvasive, blood-based biomarker and clinical diagnostic for Alzheimer's disease based on our published preclinical data;

• the duration of the development period for expected drug candidates;

• expansion of our potential product line, including the formulation of additional dosage forms of our drug candidates;

• operating losses and anticipated operating and capital expenditures;

• expected uses of capital resources;

• the potential benefits of our drug candidates;

• the utility of protection of our intellectual property;

• expected future sources of revenue and capital and increasing cash needs;

• potential competitors or competitive products;

• market acceptance of our drug candidates and potential drug candidates;

• expenses increasing, interest income decreasing or fluctuations in our operating results;

• expectations regarding trade secrets, technological innovations, licensing agreements and outsourcing of certain business functions;

• anticipated hiring and development of our internal systems and infrastructure;

• the sufficiency of our current resources to fund our operations over the next twelve months;

• assumptions and estimates used for our disclosures regarding stock-based compensation; and

• estimates concerning the realization of deferred tax assets.

Such forward-looking statements involve risks and uncertainties, including, but not limited to, those risks and uncertainties relating to:

• difficulties or delays in the potential regulatory approval of the REMOXY NDA, including the potential for a request by the FDA of additional data which may require an extended period of time to obtain and submit, that could significantly delay or prevent such approval;


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• the successful development and commercialization of REMOXY and other drug candidates pursuant to our collaboration and license agreements with Pfizer, or the Pfizer Agreements, and development of other drug candidates pursuant to our other collaboration agreements, and the continuation of such agreements;

• difficulties or delays in research, development, testing and pursuit of regulatory approval of a biomarker and diagnostic for Alzheimer's disease;

• difficulties or delays in development, testing, clinical trials (including patient enrollment), regulatory approval, production and commercialization of our drug candidates;

• unexpected adverse side effects or inadequate therapeutic efficacy of our drug candidates that could slow or prevent product approval (including the risk that current and past results of clinical trials are not indicative of future results of clinical trials) or potential post-approval market acceptance;

• the uncertainty of protection of our intellectual property rights or trade secrets;

• potential infringement of the intellectual property rights of third parties;

• pursuing in-license and acquisition opportunities;

• maintenance or third party funding of our collaboration and license agreements;

• hiring and retaining personnel; and

• our financial position and our ability to obtain additional financing if necessary.

In addition, such statements are subject to the risks and uncertainties discussed in the "Risk Factors" section and elsewhere in this document.

This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included elsewhere in this report. Operating results are not necessarily indicative of results that may occur in future periods.

Overview

We are a biopharmaceutical company that develops novel drugs. Our lead drug candidate is called REMOXY® (oxycodone) Extended-Release Capsules CII. REMOXY is a strong painkiller with a unique formulation designed to reduce potential risks of unintended use. REMOXY and three other abuse-resistant painkillers are being developed pursuant to the Pfizer Agreements.

We and King jointly managed a Phase III clinical program and NDA submission for REMOXY. In mid-2008, the FDA accepted our NDA for REMOXY with Priority Review. In December 2008, we received from the FDA a Complete Response Letter for the NDA for REMOXY. In this Complete Response Letter, the FDA indicated additional non-clinical data was required to support the approval of REMOXY. Also, the FDA did not request or recommend additional clinical efficacy studies prior to approval. In 2009, King assumed sole responsibility for the regulatory approval of REMOXY. This shift of responsibility did not change any economic term of our agreements with Pfizer. In December 2010, King resubmitted the REMOXY NDA. In January 2011, we announced that the FDA had accepted the resubmission of the REMOXY NDA. In June 2011, we and Pfizer announced that King received a Complete Response Letter from the FDA in response to King's resubmission of the REMOXY NDA. The FDA's Complete Response Letter raised concerns related to, among other matters, the Chemistry, Manufacturing, and Controls section of the NDA for REMOXY. Sufficient information does not yet exist to accurately assess the time required to resolve the concerns raised in the FDA's Complete Response Letter.

On November 1, 2012, Pfizer announced it plans to meet with the FDA in March 2013 to discuss REMOXY. Pfizer also announced the initiation of a new pharmacokinetic study with REMOXY.


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All of our program fee, collaboration and milestone revenue is recognized pursuant to the Pfizer Agreements, including:

                                                                                 Amount
                                                                 Year           Received
Description                                                    Received           (mm)
Upfront program fee payment                                         2005        $     150
Program fee payment related to an amendment to the
strategic alliance                                                  2010        $       5
Milestone payments related to:
acceptance by the FDA of the NDA for REMOXY                         2008        $      15
acceptance by the FDA of the IND for abuse-resistant
oxymorphone                                                         2011        $       5
acceptance by the FDA of the IND for abuse-resistant
hydrocodone                                                         2008        $       5
acceptance by the FDA of the IND for abuse-resistant
hydromorphone                                                       2006        $       5

In 2011, Pfizer acquired King. We expect REMOXY will be commercialized within Pfizer's primary care unit. We believe Pfizer's acquisition of King may facilitate REMOXY's commercial success if REMOXY is approved.

We will receive a $15.0 million cash milestone payment from Pfizer upon regulatory approval of REMOXY in the United States. We could also receive up to $105.0 million from Pfizer in additional milestone payments in the course of clinical development of the other abuse-resistant opioid painkillers. Subject to certain limitations, Pfizer is also obligated to fund development expenses incurred by us pursuant to the Pfizer Agreements, which result in collaboration revenue. Pfizer is obligated to fund the commercialization expenses of, and has the exclusive right to market and sell, drugs developed in connection with the Pfizer Agreements. The royalty rate for net sales of REMOXY and the other three abuse-resistant product candidates covered by the Pfizer Agreements in the United States is 20%, except as to the first $1.0 billion in cumulative net sales in the United States, for which the royalty is set at 15%. The royalty rate for net sales of products covered by the Pfizer Agreements outside the United States is 10% on all of net sales.

On May 3, 2012, we announced that four U.S. patents were issued for REMOXY:
Patents 8,133,507; 8,168,217; 8,153,152 and 8,147,870. These patents extend to 2025 and beyond. In Europe, REMOXY is covered by two granted patents that expire in 2016 and 2026, respectively, plus any eligible patent term extensions.

On July 18, 2012, we announced the publication of preclinical data with respect to a new approach to treat Alzheimer's disease. The publication also suggests the usefulness of our approach to develop a noninvasive, blood-based biomarker and clinical diagnostic for Alzheimer's disease.

Although we were profitable in 2006, 2007 and 2008 based on payments received under the Pfizer Agreements and interest income, we have yet to generate any revenues from product sales. We have an accumulated deficit of $133.9 million at September 30, 2012. These losses have resulted principally from costs incurred in connection with research and development activities,


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salaries and other personnel-related costs and general corporate expenses. Research and development activities include costs associated with our drug candidates. Salaries and other personnel-related costs include non-cash stock-based compensation associated with options and other equity awards granted to employees and non-employees. Our operating results may fluctuate substantially from period to period as a result of the timing and enrollment rates of clinical trials for our drug candidates and our need for clinical supplies.

We expect to continue to use significant cash resources in our operations for the next several years. Our cash requirements for operating activities and capital expenditures may increase substantially in the future as we:

• conduct preclinical and clinical trials for our drug candidates;

• seek regulatory approvals for our drug candidates;

• develop, formulate, manufacture and commercialize our drug candidates;

• implement additional internal systems and develop new infrastructure;

• acquire or in-license additional products or technologies, or expand the use of our technology;

• maintain, defend and expand the scope of our intellectual property; and

• hire additional personnel.

Product revenue will depend on receiving regulatory approvals for, and successfully marketing, our drug candidates. If development efforts result in regulatory approval and successful commercialization of our drug candidates, we will generate revenue from direct sales of our drugs and/or, if we license our drugs to future collaborators, from the receipt of license fees and royalties from sales of licensed products. We conduct our research and development programs through a combination of internal and collaborative programs. We rely on arrangements with universities, our collaborators, contract research organizations and clinical research sites for a significant portion of our product development efforts.

We focus substantially all our research and development efforts on research and development in the areas of neurology, oncology and hematology. The following table summarizes expenses by category for research and development efforts (in thousands):

                                    Three months ended          Nine months ended
                                       September 30,              September 30,
                                     2012          2011          2012         2011
         Compensation             $    1,885      $ 1,426     $    4,129     $ 4,692
         Contractor fees (1)             275          242            794         828
         Other common costs (2)          219          351            582       1,069

                                  $    2,379      $ 2,019     $    5,505     $ 6,589

(1) Contractor fees generally includes expenses for preclinical studies, clinical trials and formulation and manufacturing activities.

(2) Other common costs generally includes the allocation of common costs such as facilities.

Our technology has been applied across certain of our portfolio of drug candidates. Data, know-how, personnel, clinical results, research results and other matters related to the research and development of any one of our drug candidates also relate to, and further the development of,


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our other drug candidates. For example, we expect that results of non-clinical studies, such as pharmacokinetics, toxicology and other studies, regarding certain components of our drug candidate REMOXY to be applicable to the other potential abuse-resistant drug candidates since all such potential drug candidates are expected to utilize such components. As a result, costs allocated to a specific drug candidate may not necessarily reflect the actual costs surrounding research and development of that drug candidate due to cross application of the foregoing.

Estimating the dates of completion of clinical development, and the costs to complete development, of our drug candidates would be highly speculative, subjective and potentially misleading. Pharmaceutical products take a significant amount of time to research, develop and commercialize. The clinical trial portion of the development of a new drug alone usually spans several years. We expect to reassess our future research and development plans based on our review of data we receive from our current research and development activities. The cost and pace of our future research and development activities are linked and subject to change.

On December 2, 2011, a purported class action was filed against us and our executive officers in the U.S. District Court for the Western District of Texas. This complaint alleges, among other things, violations of Section 10(b), Rule 10b-5, and Section 20(a) of the Exchange Act arising out of allegedly untrue or misleading statements of material facts made by us regarding REMOXY's development and regulatory status during the purported class period, February 3, 2011 through June 23, 2011. The complaint states that monetary damages are being sought, but no amounts are specified.

On December 22, 2011, Anders Goldfarb filed a derivative action on behalf of Pain Therapeutics, Inc. against us and our directors listed above in the U.S. District Court for the Western District of Texas. As reported in our Report on Form 10Q for the quarterly period ended June 30, 2012, on April 26, 2012, the U.S. District Court for the Western District of Texas dismissed this action.

Critical Accounting Policies

The preparation of our financial statements in accordance with United States generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and interest income in our financial statements and accompanying notes. We evaluate our estimates on an ongoing basis, including those estimates related to agreements, research collaborations and investments. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The following items in our financial statements require significant estimates and judgments:

• Stock-based compensation. We recognize expense in the statement of operations for the fair value of all share-based payments to employees and directors, including grants of employee stock options and other share based awards. For stock options, we use the Black-Scholes option valuation model and the single-option award approach and straight-


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line attribution method. Using this approach, the compensation cost is amortized on a straight-line basis over the vesting period of each respective stock option, generally four years. We estimate forfeitures and adjust this estimate periodically based on the extent to which future actual forfeitures differ, or are expected to differ, from such estimates.

We have granted share-based awards that vest upon achievement of certain performance criteria, or Performance Awards. The value of these awards is the product of the number of shares of our common stock to be issued under the award multiplied by the fair market value of a share of our common stock on the date of grant. These awards include future performance conditions. We estimate an implicit service period for achieving these performance conditions. Performance Awards vest and common stock is issued on achieving performance conditions. We recognize stock-based compensation expense for Performance Awards when we conclude that achieving a performance condition is probable. We periodically review and update as appropriate our estimates of the implicit service periods and the likelihood of achieving the performance conditions.

• Revenue recognition and deferred program fee revenue. We recognize program fee revenue, collaboration revenue and milestone revenue in connection with the Pfizer Agreements. Program fee revenue is derived from program fee payments we received under the Pfizer Agreements. These payments are recognized from receipt ratably over our estimate of the development period for the fourth of four drug candidates expected to be developed. We currently estimate the development period for all four expected drug candidates to end in the quarter ended September 30, 2016. We review the estimated development period on a quarterly basis and change it if appropriate based upon our latest expectations. Collaboration revenue from reimbursement of development expenses pursuant to the Pfizer Agreements are generally recognized when King has completed its review of the expenses invoiced to them. King is obligated to pay us milestone payments contingent upon the achievement of certain substantive events in the development of REMOXY and the other opioid painkillers under the Pfizer Agreements. We recognize milestone payments as revenue when we achieve the underlying developmental milestone as the milestone payments are not dependent upon any other future activities or achievement of any other future milestones and the achievement of each of the developmental milestones were substantively at risk and contingent at the effective date of the collaboration. Substantial effort is involved in achieving each of the developmental milestones. These milestones represent the culmination of discrete earnings processes and the amount of each milestone payment is reasonable in relation with the level of effort associated with the achievement of the milestone. Each milestone payment is non-refundable and non-creditable when made. The ongoing research and development services we provide are priced at fair value based upon the reimbursement of expenses we incur.

• Taxes. We make estimates and judgments in determining the need for a provision for income taxes, including the estimation of our taxable income or loss for each full fiscal year. We have accumulated significant deferred tax assets. Deferred income taxes reflect the tax effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of certain deferred tax assets is dependent upon future earnings, if any. We are uncertain as to the timing and amount of


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any future earnings. Accordingly, we offset these net deferred tax assets with a valuation allowance. We may in the future determine that more of our deferred tax assets will likely be realized, in which case we will reduce our valuation allowance in the quarter in which such determination is made. If the valuation allowance is reduced, we may recognize a benefit from income taxes in our statement of operations in that period. We classify interest recognized in connection with our tax positions as interest expense, when appropriate.

Results of Operations

Three and nine months ended September 30, 2012 and 2011

Revenue - Program fee revenue

Program fee revenue recognized from the program fees we received under the Pfizer Agreements were $2.7 million for both the third quarter of 2012 and 2011 and $8.2 million for both the nine months ended September 30, 2012 and 2011.

Revenue - Collaboration revenue

Collaboration revenue from reimbursement of our development expenses incurred under the Pfizer Agreements was $0.2 million for the first nine months of 2012 and $0.6 million for the first nine months of 2011.

We expect the amount and timing of collaboration revenue to fluctuate in relation to the amount and timing of the underlying research and development expenses.

Research and Development Expense

Research and development expense consists primarily of costs of drug development work associated with our drug candidates, including:

• preclinical testing,

• clinical trials,

• clinical supplies and related formulation and design costs, and

• salaries and other personnel-related expenses.

Research and development expense increased to $2.4 million in the third quarter of 2012 from $2.0 million in the third quarter of 2011. This increase was primarily related to higher non-cash stock related costs related to Performance Awards in the third quarter of 2012 as compared to the third quarter of 2011, offset in part by lower headcount-related costs. Research and development expense decreased to $5.5 million in the first nine months of 2012 from $6.6 million in the first nine months of 2011. This decrease was primarily due to lower headcount-related costs in 2012 compared to 2011. Research and development expenses included non-cash stock related compensation costs of $2.0 million in the first nine months of 2012 and $2.1 million in the first nine months of 2011.


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We expect research and development expenses to fluctuate over the next several years as we continue our development efforts. We expect our development efforts to result in our drug candidates progressing through various stages of clinical trials. Our research and development expenses may fluctuate from period to period due to the timing and scope of our development activities and the results of clinical trials and preclinical studies.

General and Administrative Expense

General and administrative expense consists primarily of compensation and other general corporate expenses. General and administrative expense increased to $2.0 million in the third quarter of 2012 from $1.8 million in the third quarter of 2011. This increase was primarily related to higher non-cash stock related costs related to Performance Awards in the third quarter of 2012 as compared to the third quarter of 2011. General and administrative expense decreased to $5.0 million in the first nine months of 2012 from $5.1 million in the first nine months of 2011. This decrease was primarily due to lower headcount-related costs in 2012 compared to 2011. General and administrative expense included non-cash stock related compensation costs of $2.0 million in the first nine months of 2012 and $2.1 million in the first nine months of 2011.

We expect general and administrative expense to increase over the next several years in connection with support of pre-commercialization and commercialization activities for our drug candidates. The increase may fluctuate from period to period due to the timing and scope of these activities and the results of clinical trials and preclinical studies.

Interest Income

Interest income decreased to $0.1 million in the third quarter of 2012 from $0.2 million in the third quarter of 2011 and to $0.4 million in the first nine months of 2012 from $0.7 million in the first nine months of 2011. We expect our interest income to decrease in the future as we use cash to fund our operations.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily through public and private stock offerings, payments received under the Pfizer Agreements and interest earned on our investments. We intend to continue to use our capital resources to fund research and development activities, capital expenditures, working capital requirements and other general corporate purposes. As of September 30, 2012, cash, cash equivalents and marketable securities were $92.5 million.

Net cash used in operating activities was $5.3 million for the first nine months of 2012 compared to net cash provided by operating activities of $0.5 million for the first nine months of 2011.

Net cash provided by investing activities was $20.2 million for the first nine months of 2012 and $57.4 million for the first nine months of 2011. Investing activities for the first nine months of 2012 consisted of purchases and maturities of marketable securities. Investing activities for the first nine months of 2011 consisted of maturities of marketable securities. There were no significant purchases of property and equipment in 2012 and 2011.


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Cash from financing activities was $0.2 million in the first nine months of 2012 and $9.0 million in the first nine months of 2011. Financing activities consisted primarily of proceeds from stock option exercises.

Realization of our other deferred tax assets is dependent on future earnings, if any. We are uncertain about the timing and amount of any future earnings. Accordingly, we offset these net deferred tax assets with a valuation allowance. There is a high degree of uncertainty regarding the timing of future cash outflows associated with our liabilities related to uncertain tax positions. Our liability at September 30, 2012 related to our uncertain tax positions is immaterial.

We currently lease approximately 6,000 square feet of office space pursuant to a non-cancelable operating lease in Austin, TX that expires in 2014. We had a . . .

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