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KYTH > SEC Filings for KYTH > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for KYTHERA BIOPHARMACEUTICALS INC

Form 10-Q for KYTHERA BIOPHARMACEUTICALS INC


13-Nov-2012

Quarterly Report


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

You should read the following discussion of our financial condition and results of operations in conjunction with the condensed financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our Prospectus filed pursuant to Rule 424(b) under the Securities Act with the Securities and Exchange Commission on October 10, 2012.

In addition, the following discussion contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "should," "estimate," or "continue," and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled "Risk Factors," set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

Overview

We are a clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of novel prescription products for the aesthetic medicine market. Our objective is to develop first-in-class, prescription products using an approach that relies on the scientific rigor of biotechnology to address unmet needs in the rapidly-growing market for aesthetic medicine. Our initial focus is on the facial aesthetics market, which comprises the majority of the aesthetic medicine market. Our product candidate, ATX-101, is a potential first-in-class, injectable drug currently in Phase III clinical development for the reduction of submental fat, which commonly presents as an undesirable "double chin." Based on clinical trials conducted to date, ATX-101 has exhibited significant, meaningful and durable results in the reduction of submental fat. These results correspond with patient satisfaction measures demonstrating meaningful improvement in perceived chin appearance. If approved by applicable regulatory authorities, we believe ATX-101 will be an attractive solution for the reduction of submental fat, representing a new product category within the rapidly growing facial aesthetics market. ATX-101 is our only product candidate in clinical development and we are substantially dependent on its regulatory approval and successful commercialization.

Since commencing operations in August 2005, we have devoted substantially all our efforts to identify and develop products for the aesthetics market, recruiting personnel and raising capital. We have devoted predominantly all of our resources to the preclinical and clinical development of ATX-101. In August 2010, we entered into a license agreement and related collaboration agreement with Bayer to develop and commercialize ATX-101 for all indications. We have retained all rights to develop and commercialize ATX-101 in the United States and Canada and Bayer exclusively licensed the rights to ATX-101 in the rest of the world. We have not filed for approval with the FDA and Bayer has not filed for approval with any foreign regulatory agencies for the commercialization of ATX-101 and we have not generated any revenue from product sales. Through September 30, 2012, we have funded substantially all of our operations through the sale and issuance of our preferred stock and convertible debt and amounts received from U.S. Government grants and pursuant to our collaboration arrangement with Bayer.

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We have never been profitable and, as of September 30, 2012, we had an accumulated deficit of $102.3 million. We incurred net losses of approximately $2.3 million, $16.4 million, $5.5 million and $18.8 million for the three months ended September 30, 2011 and 2012 and nine months ended September 30, 2011 and 2012, respectively. We expect to continue to incur net operating losses for at least the next several years as we advance ATX-101 through clinical development, seek regulatory approval, prepare for and, if approved, proceed to commercialization. We have no manufacturing facilities and all of our manufacturing activities are contracted out to third parties. Additionally, we currently utilize third-party clinical research organizations, or CROs, to carry out our clinical development and we do not yet have a sales organization. We will need substantial additional funding to support our operating activities, especially as we approach anticipated regulatory approval in the United States and Canada and begin to establish our sales capabilities. Adequate funding may not be available to us on acceptable terms, or at all. Our failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on our business, results of operations, and financial condition.

On October 16, 2012, we completed our IPO of 5,060,000 shares of common stock at an offering price of $16.00 per share, which included the exercise in full by the underwriters of their option to purchase up to 660,000 additional shares of common stock. We received net proceeds of approximately $72.6 million, after deducting underwriting discounts, commissions and offering related transaction costs.

Financial Overview

Revenue

To date, all of our revenue has been derived from license fees we have received pursuant to our collaboration arrangement with Bayer. We have not generated any revenue from product sales.

In the future, if ATX-101 is approved for commercial sale in the United States and Canada, we may generate revenue from product sales. Pursuant to our license agreement with Bayer, we may generate additional revenue from a combination of payments of up to approximately $297.0 million contingent upon Bayer's achievement of specified regulatory and commercialization milestones and tiered escalating royalties in the mid- to high-teens on Bayer's sales of ATX-101. In May 2012, we received a $15.8 million payment from Bayer triggered by Bayer's decision to pursue continued development and regulatory approval for ATX-101 after receipt of positive results from the European Phase III clinical trials for ATX-101. In addition, we also received $17.4 million from Bayer to fund certain further global development activities of ATX-101 under the terms of the collaboration arrangement. We expect that any revenue we generate from our license agreement will fluctuate from quarter to quarter as a result of the uncertain timing and amount of license fees, milestone payments, royalties and other payments.

Even if ATX-101 is approved for commercial sale, we do not expect to generate revenue from product sales until at least 2015, if at all. If we fail to complete the development of ATX-101, or other product candidates, in a timely manner or to obtain regulatory approval, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected.

Research and Development Expenses

Major components of our research and development costs are personnel costs, including cash compensation and stock-based compensation expense, pre-clinical studies, clinical trials and related clinical manufacturing, materials and supplies, and fees paid to consultants and other entities that conduct certain research and development activities on our behalf. We expense all research and development costs in the periods in which they are incurred. To date, our research and development expenses have related predominately to the development of ATX-101. In the three months ended September 30, 2011 and 2012 and the nine months ended September 30, 2011 and 2012, we spent $3.2 million, $13.9 million, $9.6 million and $28.8 million, respectively, on research and development expenses. Since inception through September 30, 2012, we have spent approximately $63.9 million on research and development expenses related to the development of ATX-101, excluding cash and stock-based compensation expenses. We do not allocate cash and stock-based compensation expense to individual product candidates, as we are organized and record expense by functional department and our employees may allocate time to more than one development project. We do not utilize a formal time allocation system to capture expenses on a project-by-project basis.

Conducting significant research and development is central to our business and strategy. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and greater duration of late stage clinical trials as compared to earlier clinical and preclinical development. We expect our research and development expenses will increase for the foreseeable future as we seek to complete our Phase III clinical development of ATX-101 in the United States and Canada, and to advance our early-stage research projects.

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General and Administrative Expenses

Our general and administrative costs primarily consist of personnel costs, including cash compensation and stock-based compensation expense, associated with our executive, accounting and finance, legal, marketing and human resources departments. Other general and administrative expenses include costs in connection with patent filing, prosecution and defense, facility costs and professional fees for legal, consulting, marketing, audit and tax services. For the three months ended September 30, 2011 and 2012 and for the nine months ended September 30, 2011 and 2012 our general and administrative expenses totaled approximately $1.7 million, $2.4 million, $4.9 million and $7.1 million, respectively. We expect our general and administrative costs will increase as we increase our headcount and expand our facility and information technology to support our operations as a public company and as we look to prepare for a potential commercial launch of ATX-101, if approved for sale. Additionally, we anticipate increased expenses related to audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and Securities and Exchange Commission requirements, director and officer insurance premiums and investor relations costs associated with being a public company.

Collaboration Arrangement with Bayer

In August 2010, we entered into a license agreement with Bayer Consumer Care AG and a related collaboration agreement with Bayer's affiliate, Intendis GmbH. We refer to these agreements jointly as our collaboration arrangement with Bayer, and we refer to Bayer Consumer Care AG and Intendis GmbH jointly as Bayer. Pursuant to our collaboration arrangement, we licensed to Bayer all of the development and commercial rights to ATX-101 outside the United States and Canada. In connection with establishing the collaboration arrangement, we received upfront payments of $43.6 million in 2010 comprised of license fees and amounts to fund certain further global development activities of ATX-101. We remain eligible to receive up to an aggregate of approximately $297.0 million in additional payments contingent upon Bayer's achievement of specified regulatory and commercialization milestones, as well as escalating royalties from the mid- to high-teens on Bayer's net product sales of ATX-101. In May 2012, we received a $15.8 million payment from Bayer triggered by Bayer's decision to pursue continued development and regulatory approval for ATX-101 after receipt of positive results from the European Phase III clinical trials for ATX-101. In addition, we also received $17.4 million from Bayer to fund certain further Bayer global development activities of ATX-101 under the terms of the collaboration arrangement.

License Fees

License fees we received in 2010 of approximately $21.3 million have been deferred and were recognized on a straight-line basis over the expected period of substantial involvement in the collaboration activities that were required to be conducted relative to the upfront license fee and development funds received from Bayer and completion of which was a condition to Bayer's decision to pursue continued development and regulatory approval for ATX-101. These activities were completed as of May 31, 2012.

Collaboration Development Funds

Additionally, we have received approximately $39.6 million to fund certain further global development activities of ATX-101, which were recorded as restricted cash and deferred development funds and are an offset to research and development expenses as the restricted cash is utilized to fund development activities. Amounts recognized as offsets to research and development expenses were $3.7 million, $1.8 million, $11.4 million and $8.3 million for the three months ended September 30, 2011 and 2012 and the nine months ended September 30, 2011 and 2012, respectively.

Los Angeles Biomedical Research Institute

We entered into a license agreement with the Los Angeles Biomedical Research Institute, or LA Biomed, in August 2005, which granted us exclusive worldwide rights to key intellectual property for the active ingredient in ATX-101. As part of this license agreement, we incur sublicense fees equal to 10% of any non-royalty sublicense income, up to a total of an aggregate of $5.0 million. We are obligated to pay LA Biomed low- to mid-single digit royalties on net product sales of ATX-101 by us and Bayer. Additionally, we will incur a milestone payment of $0.5 million upon receipt of marketing approval.

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In August 2010, due to the receipt of the license fee income from Bayer, we incurred non-royalty sublicense fees of $2.0 million, which was deferred and is being recorded as sublicense expense on a straight-line basis over the same period as the license income recorded. During 2010, we made payments to LA Biomed in cash and stock totaling $0.4 million related to the non-royalty sublicense fee incurred and the remaining $1.6 million is due upon consummation of our IPO. Due to the receipt of the $15.8 million contingent event-based payment from Bayer in May 2012, we incurred an additional non-royalty sublicense fee of $1.6 million due to LA Biomed, of which we have paid $0.3 million, and the remaining amount is due upon consummation of our IPO. We will pay 50% of the $2.8 million of outstanding license fees as of September 30, 2012 through the issuance of our common stock and we paid the remaining 50% in cash.

Critical Accounting Policies and Significant Judgments and Estimates

The preparation of our financial statements requires us 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 our financial statements as well as the reported revenues and expenses during the reported periods. We base our estimates on historical experience and on various other factors that we believe 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 apparent from other sources. Actual results may differ materially from these estimates.

There have been no significant changes in critical accounting policies during the nine months ended September 30, 2012, as compared to the critical accounting policies described in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Basis of Presentation" in our final Prospectus dated October 10, 2012 as filed by the Company pursuant to Rule 424(b) under the Securities Act of 1933 relating to the Company's Registration Statement No. 333-175514 on Form S-1.

Results of Operations



Comparison of Three Months Ended September 30, 2011 and 2012 (unaudited)



                                          Three Months
                                       Ended September 30,                Change
                                       2011            2012           $             %
                                           (unaudited)
                                             (in thousands, except percentages)
License income                     $       3,366    $        -    $   (3,366 )       (100 )%
Sublicense expense                           308             -          (308 )       (100 )
Gross margin                               3,058             -        (3,058 )       (100 )
Operating expenses:
Research and development                   3,240        13,923        10,683          330 %
General and administrative                 1,732         2,439           707           41
Total operating expenses                   4,972        16,362        11,390          229
Loss from operations                      (1,914 )     (16,362 )      14,448          755
Warrant and other interest
income (expense), net                       (405 )         (24 )        (381 )        (94 )
Net loss                           $      (2,319 )  $  (16,386 )  $   14,067          607 %

License income. License income in the quarter ended September 30, 2011 represents the amortization of upfront license fees received in 2010 from our license agreement with Bayer, which was entered into in August 2010, and was fully amortized by May 31, 2012.

Sublicense expense. Sublicense expense in the quarter ended September 30, 2011 represents the recognition of the amortization of our $2.0 million non-royalty sublicense fee payable to LA Biomed as a result of our receipt of license fee income pursuant to our license agreement with Bayer, which is being recognized on a straight-line basis over the same period that the license income is recorded. No expense was recorded for the quarter ended September 30, 2012 as it was fully amortized by May 31, 2012.

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Research and development expenses. Research and development expenses increased $10.7 million, or 330%, from $3.2 million for the three months ended September 30, 2011 to $13.9 million for the three months ended September 30, 2012. The increase is primarily due to an increase in clinical trial costs of approximately $8.1 million due to the initiation of our U.S. Phase III clinical trials and open label study, with the remainder primarily attributable to an increase in personnel and consultant expense due to an increase in research and development activities in connection with our U.S. Phase III clinical trials, the FDA approval process and preparations for commercialization.

General and administrative expenses. General and administrative expenses increased by $0.7 million, or 41%, from $1.7 million for the three months ended September 30, 2011 to $2.4 million for the three months ended September 30, 2012. The increase is primarily due to increased consulting costs and personnel costs associated with an increase in headcount.

Warrant and other interest income (expense), net. Warrant and other interest income (expense), net, decreased by $0.4 million from expense of $0.4 million for the three months ended September 30, 2011 to expense of $24,000 for the three months ended September 30, 2012. The decrease in warrant and other interest income (expense), net is primarily due to the fair value revaluation of the redeemable convertible preferred stock warrants.

Comparison of Nine Months Ended September 30, 2011 and 2012 (unaudited)



                                            Nine Months
                                        Ended September 30,                Change
                                        2011            2012           $             %
                                            (unaudited)
                                              (in thousands, except percentages)
License income                      $      10,099    $   19,687    $    9,588           95 %
Sublicense expense                            924         1,936         1,012          110
Gross margin                                9,175        17,751         8,576           93
Operating expenses:
Research and development                    9,593        28,808        19,215          200
General and administrative                  4,934         7,102         2,168           44
Total operating expenses                   14,527        35,910        21,383          147
Loss from operations                       (5,352 )     (18,159 )      12,807          239
Warrant and other interest
income (expense), net                        (172 )        (604 )         432          251
Net loss                            $      (5,524 )  $  (18,763 )  $   13,239          240 %

License income. License income represents the recognition of the $15.8 million contingent event-based payment from Bayer in May 2012, as well as the amortization of upfront license fees received in 2010 from our license agreement with Bayer, which was entered into in August 2010, and was amortized on a straight-line basis through May 31, 2012. The increase of $9.6 million from $10.1 million for the nine months ended September 30, 2011 to $19.7 million for the nine months ended September 30, 2012 is primarily due to the recognition of the $15.8 million contingent event based payment from Bayer in May 2012, offset by a decrease in amortization of the upfront license fees of $6.2 million as it was fully amortized by May 31, 2012.

Sublicense expense. Sublicense expense represents the recognition of the $1.6 million non-royalty sublicense fee payable to LA Biomed as a result of the receipt of the $15.8 million contingent event-based payment from Bayer in May 2012, as well as the remaining amortization of our $2.0 million non-royalty sublicense fee payable to LA Biomed as a result of our receipt of license fee income pursuant to our license agreement with Bayer, which is being recognized on a straight-line basis over the same period that the license income is recorded. The increase of $1.0 million from $0.9 million for the nine months ended September 30, 2011 to $1.9 million for the nine months ended September 30, 2012 is due to the recognition of the $1.6 million non-royalty sublicense fee in May 2012, offset by a decrease in the amortization of the sublicense fee associated with the upfront license fees recorded in 2011 but not in 2012 as it was fully amortized by May 31, 2012.

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Research and development expenses. Research and development expenses increased $19.2 million, or 200%, from $9.6 million for the nine months ended September 30, 2011 to $28.8 million for the nine months ended September 30, 2012. The increase is primarily due to an increase in clinical trial costs of approximately $14.9 million due to the initiation of our U.S. Phase III clinical trials and open label study, with the remainder primarily attributable to an increase in personnel and consultant expense due to an increase in research and development activities in connection with our U.S. Phase III clinical trials, the FDA approval process and preparations for commercialization.

General and administrative expenses. General and administrative expenses increased by $2.2 million, or 44%, from $4.9 million for the nine months ended September 30, 2011 to $7.1 million for the nine months ended September 30, 2012. The increase is primarily due to increased spending on patent filings and related intellectual property costs, increased consulting costs, and increased personnel costs associated with an increase in headcount.

Warrant and other interest income (expense), net. Warrant and other interest income (expense), net, increased by $0.4 million from expense of $0.2 million for the nine months ended September 30, 2011 to expense of $0.6 million for the nine months ended September 30, 2012. The increase in warrant and other interest income (expense), net is primarily due to the fair value revaluation of the redeemable convertible preferred stock warrants.

Liquidity and Capital Resources

Since our inception, we have incurred net losses and negative cash flows from our operations. We incurred net losses of $5.5 million and $18.8 million, and used $14.3 million and $17.1 million of cash flows for our operating activities for the nine months ended September 30, 2011 and 2012, respectively. At September 30, 2012, we had an accumulated deficit of $102.3 million.

As of September 30, 2012, we had working capital of $11.9 million. Historically, we have principally financed our operations through private placements of redeemable convertible preferred stock and convertible debt, which was subsequently converted in 2006, and amounts received pursuant to our collaboration arrangement with Bayer for the development of our product candidate, ATX-101. Through September 30, 2012, we have received net proceeds of $107.7 million from the issuance of redeemable convertible preferred stock and convertible debt. At September 30, 2012, we had capital resources consisting of cash and cash equivalents and restricted cash of $32.4 million, of which $17.3 million was restricted, and access to $15.0 million through our credit facility, of which $5.0 million was drawn on October 1, 2012. Our cash is invested primarily in money market funds and FDIC insured demand deposit accounts. Restricted cash was received in accordance with our collaboration arrangement with Bayer in order to fund continued development of ATX-101 under the terms of our collaboration agreement.

In accordance with the terms of the collaboration arrangement with Bayer, we received a contingent event-based payment on May 31, 2012 for $15.8 million triggered by Bayer's decision to pursue continued development and regulatory approval for ATX-101 after receipt of positive results from the European Phase III clinical trials for ATX-101. In addition, we also received $17.4 million from Bayer to fund certain further global development activities of ATX-101 under the terms of the collaboration arrangement. Due to the receipt of the contingent event-based payment, we incurred an additional non-royalty sublicense fee of $1.6 million due to LA Biomed, of which we have paid $0.3 million, and the remaining amount was due upon consummation of our IPO. We will pay 50% of the $2.8 million of outstanding license fees as of September 30, 2012 through the issuance of our common stock and we paid the remaining 50% in cash.

On October 16, 2012, we completed our IPO of 5,060,000 shares of common stock at an offering price of $16.00 per share, which included the exercise in full by the underwriters of their option to purchase up to 660,000 additional shares of common stock. We received net proceeds of approximately $72.6 million, after . . .

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