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

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

Form 10-Q for SYNERGY PHARMACEUTICALS, INC.


13-Nov-2012

Quarterly Report


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

The following discussion should be read in conjunction with our condensed consolidated financial statements and other financial information appearing elsewhere in this quarterly report. In addition to historical information, the following discussion and other parts of this quarterly report contain forward-looking statements. You can identify these statements by forward-looking words such as "plan," "may," "will," "expect," "intend," "anticipate," believe," "estimate" and "continue" or similar words. Forward-looking statements include information concerning possible or assumed future business success or financial results. You should read statements that contain these words carefully because they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. We believe that it is important to communicate future expectations to investors. However, there may be events in the future that we are not able to accurately predict or control. Accordingly, we do not undertake any obligation to update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties set forth under "Risk Factors" in our Annual Report on Form 10-K as of and for the year ended December 31, 2011 and other periodic reports filed with the United States Securities and Exchange Commission ("SEC"). Accordingly, to the extent that this Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of Synergy, please be advised that Synergy's actual financial condition, operating results and business performance may differ materially from that projected or estimated by Synergy in forward-looking statements.

Overview

We are a biopharmaceutical company focused primarily on the development of drugs to treat gastrointestinal, or GI, disorders and diseases. Our lead product candidate is plecanatide (formerly called SP-304), a guanylyl cyclase C, or GC-C, receptor agonist, to treat GI disorders, primarily chronic idiopathic constipation, or CC, and constipation-predominant irritable bowel syndrome, or IBS-C. CC and IBS-C are functional gastrointestinal disorders that afflict millions of sufferers worldwide. CC is primarily characterized by constipation symptoms but a majority of these patients report experiencing bloating and abdominal discomfort as among their most bothersome symptoms. IBS-C is characterized by frequent and recurring abdominal pain and/or discomfort associated with chronic constipation. We are also developing SP-333, our second generation GC-C receptor agonist for the treatment of gastrointestinal inflammatory diseases, such as ulcerative colitis, or UC.

Plecanatide

We are currently developing plecanatide, a synthetic hexadecapeptide designed to mimic the actions of the GI hormone, uroguanylin, for the treatment of CC and IBS-C. Plecanatide is an agonist of GC-C receptor.

Plecanatide is covered by a U.S. patent issued on May 9, 2006 with respect to composition of matter that expires on March 25, 2023, subject to possible patent term extension, and a U.S. patent issued on September 21, 2010 with respect to composition of matter that expires on June 9, 2022, subject to possible patent term extension. We have filed patent applications to broaden our patent estate covering GC-C receptor agonists.

On October 24, 2011, we initiated dosing of patients in a Phase II/III clinical trial of plecanatide to treat chronic constipation. This study is being conducted at 113 clinical sites in the United States and was originally designed to enroll 880 patients with CC to be treated with one of three doses of plecanatide (0.3, 1.0 or 3.0 mg) or placebo taken once daily over a period of 12 weeks. The study's primary objective is the measure of complete spontaneous bowel movements, or CSBMs, using a responder analysis. The trial also is designed to evaluate spontaneous bowel movements, or SBMs, and daily constipation symptoms, as well as the impact of plecanatide on disease-specific quality of life measures. On April 9, 2012, we announced that we had reached the halfway mark for total enrollment in the clinical trial, with over 800 screened patients, resulting in a total of 440 randomized enrolled patients at that time. On August 14, 2012, we announced that we achieved our enrollment target of 880 patients and would close enrollment at all sites on August 31, 2012. We completed enrollment with a total of 951 patients enrolled at the 113 clinical sites participating in this study. We anticipate reporting top line data during the first week of January 2013.

On September 14, 2012, we entered into a binding letter of intent (the "LOI") with Ironwood Pharmaceuticals, Inc. ("Ironwood") pursuant to which we and Ironwood agreed to enter into a definitive license agreement giving us an exclusive worldwide license to Ironwood's method of use patents on plecanatide for the treatment of CC and IBS-C. The LOI contemplates a low single digit royalty on net sales and both parties agreed not to challenge each other's patents covering certain GC-C agonists, with the exception that Synergy retains the right to challenge Ironwood's method of use patent on plecanatide.

We are also preparing to initiate a Phase IIb clinical trial of plecanatide for the treatment of IBS-C in patients during the fourth quarter of 2012.


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SP-333

We are also developing a second generation GC-C receptor analog, SP-333, for the treatment of gastrointestinal inflammatory diseases. SP-333 is a synthetic analog of uroguanylin, a natriuretic hormone which is normally produced in the body's intestinal tract. Deficiency of this hormone is thought to be one of the primary reasons for the formation of polyps that can lead to colon cancer, as well as debilitating and difficult-to-treat GI inflammatory disorders such as UC and Crohn's disease. SP-333 has exhibited potent anti-inflammatory activity in animal studies of colitis, displaying a novel mechanism-of-action that the company believes can provide a new way to treat UC patients with mild to moderate disease.

On September 7, 2012, Synergy submitted an Investigational New Drug (IND) application for clinical evaluation of SP-333 to treat inflammatory bowel disease (IBD). On October 19, 2012, we began oral dosing of healthy adult volunteers in a Phase I clinical trial of SP-333 that is designed as a placebo-controlled, dose-escalating, single-dose study, planned to enroll up to 70 volunteers. A multi-dose, dose-escalation trial is planned for early 2013.

FV-100

On August 17, 2012, Synergy signed an Asset Purchase Agreement with Bristol-Myers Squibb Company ("BMS") and acquired certain assets related to FV-100, an orally available nucleoside analog, currently being developed for the treatment of shingles, a severe, painful skin rash caused by reactivation of the varicella zoster virus - the virus that causes chickenpox. The terms of the Agreement provide for an initial base payment of $1 million, subsequent milestone payments covering (i) marketing (FDA) approval and (ii) on achieving the milestone of aggregate net sales equal to or greater than $125 million, as well as a single digit royalty based on net sales.

Recent Developments

Synergy Callisto Merger

On July 20, 2012, Synergy entered into an Agreement and Plan of Merger (the "Merger Agreement") with Callisto. Pursuant to the Merger Agreement, following the satisfaction or waiver of each of the applicable conditions set forth in the Merger Agreement, Callisto and Synergy will merge (the "Merger"), whereupon Callisto's separate corporate existence will cease and Synergy will continue as the surviving corporation of the Merger. Callisto is Synergy's largest shareholder and is a development stage biopharmaceutical company.

On October 15, 2012, Synergy entered into Amendment No. 1 to the above Agreement and Plan of Merger, dated July 20, 2012 with Callisto Pharmaceuticals, Inc., a Delaware corporation. Pursuant to the Amendment, the parties have agreed to, among other things, (i) increase the exchange ratio from .17 to .1799 and
(ii) change the lock-up provision such that each share of Company common stock received in connection with the merger shall be subject to a lock-up beginning on the effective date of the merger and ending on the earlier of (i) twenty-four
(24) months after such date, (ii) a Change in Control (as defined in the Merger Agreement), or (iii) written consent of the Company, at the Company's sole discretion, provided the Company's consent shall apply to all shares of the Company's common stock issued pursuant to the merger.

The consummation of the Merger is subject to various customary closing conditions, including but not limited to, (i) approval by Callisto's and our stockholders, (ii) the Registration Statement on Form S-4 shall have been declared effective by the SEC and (iii) the shares of our common stock to be issued in the Merger shall have been approved for listing on The NASDAQ Capital Market. Upon consummation of the Merger the related party balances due from Callisto, $2,655,594 as of September 30, 2012, will be eliminated.


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Ironwood

On September 14, 2012, we entered into a binding letter of intent (the "LOI") with Ironwood Pharmaceuticals, Inc. ("Ironwood") pursuant to which we and Ironwood agreed to enter into a definitive license agreement giving us an exclusive worldwide license to Ironwood's method of use patents on plecanatide for the treatment of chronic constipation. The LOI contemplates a low single digit royalty on net sales and both parties agreed not to challenge each other's patents covering certain GC-C agonists, with the exception that Synergy retains the right to challenge Ironwood's method of use patent on plecanatide.

FINANCIAL OPERATIONS OVERVIEW

From inception through September 30, 2012, we have sustained cumulative net losses of $97,075,397. From inception through September 30, 2012, we have not generated any revenue from operations and expect to incur additional losses to perform further research and development activities and do not currently have any commercial biopharmaceutical products. We do not expect to have such for several years, if at all.

Our product development efforts are thus in their early stages and we cannot make estimates of the costs or the time they will take to complete. The risk of completion of any program is high because of the many uncertainties involved in bringing new drugs to market including the long duration of clinical testing, the specific performance of proposed products under stringent clinical trial protocols, the extended regulatory approval and review cycles, our ability to raise additional capital, the nature and timing of research and development expenses and competing technologies being developed by organizations with significantly greater resources.

CRITICAL ACCOUNTING POLICIES

Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Our accounting policies are described in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA of our Annual Report on Form 10-K as of and for year ended December 31, 2011, filed with the SEC on March 15, 2012. There have been no changes to our critical accounting policies since December 31, 2011.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

For a discussion of our contractual obligations see (i) our Financial Statements and Notes To Consolidated Financial Statements-Note 7. Commitments and Contingencies , and (ii) Item 7 Management Discussion and Analysis of Financial Condition and Results of Operations- Contractual Obligations and Commitments , included in our Annual Report on Form 10-K as of December 31, 2011 and changes in contractual obligations and commitments as reported in our Form 10-Q for the three months ended and as of March 31, 2012. There have been no major changes in our contractual obligations and commitments during the three months ended September 30, 2012.

OFF-BALANCE SHEET ARRANGEMENTS

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


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RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

We had no revenues during the three months ended September 30, 2012 and 2011 because we do not have any commercial biopharmaceutical products and we do not expect to have such products for several years, if at all.

Research and development expenses for the three months ended September 30, 2012 ("Current Quarter") increased $4,362,817 or 112 %, to $8,245,620 from $3,882,803 for the three months ended September 30, 2011("Prior Year Quarter"). This increase in research and development expenses was largely attributable to continuing the development of our plecanatide and SP-333 product candidates. The following table sets forth our research and development expenses directly related to our product candidates for the three months ended September 30, 2012 and 2011. These expenses were primarily external costs associated with chemistry, manufacturing and controls including costs of drug substance and product (CMC), as well as preclinical studies and clinical trial costs, as follows:

                                    Three Months Ended
                                       September 30,
Drug candidates                     2012          2011
Plecanatide (Phase IIb/III)      $ 5,486,386   $ 3,089,294
SP-333(Phase I)                      969,104             -
FV-100 (Pre-clinical)              1,000,000             -
Total direct cost                $ 7,455,490   $ 3,089,294
Total indirect cost                  790,130       793,509
Total Research and Development   $ 8,245,620   $ 3,882,803

Indirect research and development costs related to in-house staff compensation, facilities, depreciation, share-based compensation and research and development support services are not directly allocated to specific drug candidates. Indirect cost was $ 790,130 in the Current Quarter, as compared to $793,509 during the Prior Year Quarter due to lower share based compensation.

General and administrative expenses increased $740,306 or 67%, to $1,843,150 for the Current Quarter from $1,102,844 for the three months ended September 30, 2011. These increased expenses were primarily the result of (i) higher compensation and related employee benefits of approximately $686,000 in the Current Quarter as compared to $ 327,000 during the Prior Year Quarter, primary due to higher stock based compensation expenses for employee related stock options granted this quarter, (ii) higher facilities cost of approximately $248,000 in the Current Quarter as compared to $218,000 during the Prior Year Quarter and (iii) higher corporate legal services of approximately $283,000 for the Current Quarter, as compared to $170,000 for the Prior Year Quarter,
(iv) higher consultants and financial advisors fees of approximately $483,000 in the Current Quarter, as compared to $145,000 during the Prior Year Quarter related to the merger, partially offset by (v) lower accounting, tax and travel expenses of approximately $143,000 the Current Quarter, as compared to $237,000 during the Prior Year Quarter.

Net loss for the Current Quarter was $9,885,287as compared to a net loss of $582,851 incurred for the Prior Year Quarter. This increase in our net loss of $9,302,436, or 1596% was a result of the increases in operating expenses discussed above, and the gain resulting from the change in fair value of derivative instruments-warrants of $140,322 during the Current Quarter, as compared to a gain of $4,382,796 during the Prior Year Quarter.

NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

We had no revenues during the nine months ended September 30, 2012 and 2011 because we do not have any commercial biopharmaceutical products and we do not expect to have such products for several years, if at all.

Research and development expenses for the nine months ended September 30, 2012 ("Current Period") increased $13,494,649 or 175%, to $21,210,028 from $7,715,379 for the nine months ended September 30, 2011("Prior Year Period"). This increase in research and development expenses was largely attributable to continuing the development of our plecanatide and SP-333 product candidates. The following table sets forth our research and development expenses directly related to our product candidates for the nine months ended September 30, 2012 and 2011. These direct expenses were primarily external costs associated with chemistry, manufacturing, controls including drug substance and product (CMC), as well as preclinical studies and clinical trial costs, as follows:


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                                          Nine Months Ended
                                            September 30,
Drug candidates                           2012          2011
Plecanatide (Phase IIb/III)           $ 16,163,387   $ 6,756,884
SP-333 (Phase I)                         1,923,104             -
FV-100 (Pre-clinical)                    1,000,000             -
Total direct cost                     $ 19,086,491   $ 6,756,884
Total indirect cost                      2,123,537       958,495
Total research and development cost     21,210,028     7,715,379

In addition, indirect research and development costs related to in-house staff compensation, facilities, depreciation, share-based compensation and research and development support services are not directly allocated to specific drug candidates were $1,165,042 higher due to (i) higher compensation, employee benefits and stock based compensation expenses of $1,640,000 in the Current Period, as compared to $820,000 during the Prior Year Period, as a result of increased staffing levels required to support the our Phase II/III trial which was initiated in October 2011 and (ii) higher scientific and regulatory advisory fees and expenses of $583,000 in the Current Period, as compared to $179,000 during the Prior Year Period, related to an Investigational New Drug (IND) application for clinical evaluation of SP-333 to treat inflammatory bowel disease (IBD) filed on September 7, 2012, and work on an IND filing for a new clinical study of plecanatide in IBS-C patients.

General and administrative expenses increased $967,891 or 21%, to $5,492,766 for the Current Period from $4,524,875 for the Prior Year Period. These increased expenses were primarily the result of higher legal cost of approximately $973,000 in the Current Period as compared to $464,000 during the Prior Year Period, related to (i) our Form S-3 Shelf Registration filing in June of 2012,
(ii) our Merger related Form S-4 Proxy and Registration Statement filed October 25, 2012 and (iii) costs associated with defending against Merger related class action suits filed in New York and Delaware during the Current Period. See Part II, Item 1 Legal Proceedings of this report for details of these cases.

Net loss for the Current Period was $ 27,466,379 as compared to a net loss of $8,841,640 incurred for the Prior Year Period. This increase in our net loss of $18,624,739, or 211% was a result of the increases in operating expenses discussed above, and loss resulting from the change in fair value of derivative instruments-warrants of $1,169,079 during the Current Period, as compared to a gain of $3,346,421 during the Prior Year Period, due principally to an increase in the stock price of Synergy common from $3.51 as of December 31, 2011 to $4.78 per share on September 30, 2012.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2012 we had $17,244,049 of cash and cash equivalents on hand as compared to $13,244,883 of cash and cash equivalents on hand as of December 31, 2011. In addition, on September 30, 2012 we held $20,123,315 in available-for-sale securities, U.S. Treasury Bills and Notes, whereas we had no such investments as of December 31, 2011. As of September 30, 2012 we had working capital of $33,677,415 as compared to working capital of $11,561,286 as of December 31, 2011.

On May 9, 2012, we closed an underwritten public offering of 10,000,000 shares of common stock at an offering price of $4.50 per share. The gross proceeds from this offering were $45 million, before deducting underwriting discounts and commissions and other estimated offering expenses of $2,952,930. We also granted the underwriters a 45-day option to purchase up to an additional 1,500,000 shares of common stock at an offering price of $4.50 per share to cover over-allotments, if any. On June 6, 2012 the underwriters exercised all of the over-allotment option resulting in additional gross proceeds of $6,750,000, before deducting underwriting discounts, commissions and other offering expenses of $405,000, bringing total gross proceeds from the offering to $51,750,000.

On June 21, 2012, Synergy entered into a controlled equity sales agreement with a placement agent ("Agent") and agreed that Synergy may issue and sell through the Agent, up to $30,000,000 of common stock of the Company. From October 8, 2012 through October 26, 2012, Synergy sold 299,911 shares of common stock with gross proceeds of $1,423,491at an average selling price of $4.74 per share. No sales were initiated prior to this period.

We will be required to raise additional capital to complete the development and commercialization of current product candidates and to continue to fund operations at the current cash expenditure levels. Recent worldwide economic conditions, as well as domestic and international equity and credit markets, have significantly deteriorated and may remain depressed for the foreseeable future. These developments will make it more difficult to obtain additional equity or credit financing, when needed. We cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact our ability to conduct business.

If we are unable to raise additional capital when required or on acceptable terms, we may have to (i) significantly delay, scale back or discontinue the development and/or commercialization of one or more product candidates;
(ii) seek collaborators for product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; or (iii) relinquish or otherwise dispose of rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves on unfavorable terms.


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Our condensed consolidated financial statements as of September 30, 2012 and December 31, 2011 have been prepared under the assumption that we will continue as a going concern for the next twelve months. Our ability to continue as a going concern is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to generate revenue. The financial statements do not include any adjustments that might result from the negative outcome of this uncertainty.

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