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

Show all filings for VENTRUS BIOSCIENCES INC

Form 10-Q for VENTRUS BIOSCIENCES INC


13-Nov-2012

Quarterly Report


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

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 and Form 10-K/A for the year ended December 31, 2011 filed on March 14 and June 13, 2012, respectively. In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to risks and uncertainties, including those set forth under "Part I. Item 1. Business - Risk Factors" in our Annual Report on Form 10-K/A for the year ended December 31, 2011, "Part II. Item 1A. Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, and elsewhere in this report, that could cause actual results to differ materially from historical results or anticipated results.

Overview

We are a specialty pharmaceutical company currently focused on the development and commercialization of late-stage prescription drugs addressing gastrointestinal problems, specifically anal disorders.

On May 14, 2012, we reported that a Phase III, randomized, double-blind, placebo-controlled clinical trial of VEN 307 for the treatment of anal fissures met its endpoints. We had a pre-NDA meeting with the U.S. Food and Drug Administration, or FDA, on August 30, 2012 at which time it was determined that we would need to conduct a second Phase III Clinical Trial comparing VEN 307 against placebo to support our planned new drug application, or NDA. We initiated this Phase III Trial in the fourth quarter of 2012, which we expect to complete in the fourth quarter of 2013. This trial will randomize in a 1:1 ratio, 400 subjects to either 2% diltiazem cream applied peri-anally 3 times daily or a placebo cream, at approximately 120 sites primarily in the US with supplemental sites in Canada and Israel. The treatment's duration will be approximately 4 weeks. The primary endpoint is similar to that in the prior Phase II Trial conducted by SLA: pain on defecation at 4 weeks. The key secondary endpoints are average daily Pain and Patients' Global Impression, also at 4 weeks. Assuming positive results, we expect to be able to file the NDA in the fourth quarter of 2013. Additional studies to be included in the NDA are 2 cutaneous safety trials; a cumulative irritation study in 30 patients and a sensitization study in 200 patients, following standardized protocols commonly used for the safety evaluation of dermatology products in the US for FDA review.

On June 25, 2012, we reported that a Phase III, randomized, double-blind, placebo-controlled clinical trial of VEN 309 for the treatment of symptomatic hemorrhoids did not meet its endpoints.

Based on the results of both completed Phase III trials, we have determined that our current resources would be better allocated toward the planned completion of VEN 307 development program in anal fissures. Consequently, we have no immediate plans to continue development of VEN 309 and have ceased all activity related to VEN 309 other than the winding down of the program.

VEN 307, which we have in-licensed from S.L.A. Pharma, is a pre-mixed and pre-packaged proprietary topical formulation of the drug diltiazem that we are developing for the treatment of anal fissures. We estimate that over four million people in the U.S. currently suffer from anal fissures and that there are approximately 1.1 million office visits per year and yet, to our knowledge, there is only one drug that has been approved by the FDA for this condition.

In addition to our lead product VEN 307, we also have in-licensed VEN 308 (phenylephrine) from S.L.A. Pharma. VEN 308 is intended to treat fecal incontinence associated with ileal pouch anal anastomosis, or IPAA. To our knowledge, there are no FDA-approved drugs for the treatment of fecal incontinence. We intend to explore further development of VEN 308 subject to available resources.

Since our inception, we have had no revenue from product sales, and have funded our operations principally through debt financings, our initial public offering in 2010, a public offering of our common stock in July 2011 and an at-the-market equity offering sales program conducted in May and June 2012. Our operations to date have been primarily limited to organizing and staffing our company, licensing our product candidates, developing clinical trials for our product candidates, establishing manufacturing for our product candidates, maintaining and improving our patent portfolio and raising capital. We have generated significant losses to date, and we expect to continue to generate losses as we progress towards the commercialization of VEN 307. As of September 30, 2012, we had a deficit accumulated during the development stage of $88,528,405. Because we do not generate revenue from any of our product candidates, our losses will continue as we advance our product candidates towards regulatory approval and eventual commercialization. As a result, our operating losses are likely to be substantial over the next several years. We are unable to predict the extent of any future losses or when we will become profitable, if at all.

We believe that our existing cash will be sufficient to fund our projected operating requirements through the second quarter of 2014. Until we can generate a sufficient amount of product revenue, if ever, we expect to finance future cash needs through public or private equity offerings, debt financings or corporate collaborations and licensing arrangements.

Critical Accounting Policies

Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. Our significant accounting policies are more fully described in Note 2 to the December 31, 2011 audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011. The following accounting policies are critical to fully understanding and evaluating our financial results.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements as well as the reported revenue, if any, and expenses during the reporting periods. On an ongoing basis, management evaluates their estimates and judgments. Management bases estimates on historical experience and on various other factors that they 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 readily apparent from other sources. Actual results might differ from these estimates under different assumptions or conditions.

Stock-Based Compensation

We account for stock options granted to employees and directors, measured at grant date, based on the estimated fair value of the award, which is recognized as expense over the employee's or director's requisite service period on a straight-line basis. We account for stock options and warrants granted to non-employees on a fair value basis. The initial non-cash charge to operations for nonemployee options and warrants with vesting are revalued at the end of each reporting period based upon the change in the fair value of the options and recognized as consulting expense over the related service period. For the purpose of valuing options and warrants granted to employees and directors and to non-employees, we use the Black-Scholes option pricing model. To determine the risk-free interest rate, we utilize the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected term of the awards. We estimate the expected life of the options granted based on anticipated exercises in the future periods assuming the success of our business model as currently forecasted. For warrants and non-employee options, we use the contractual term of the warrant, the length of the note or option as the expected term. The expected dividend yield reflects our current and expected future policy for dividends on our common stock. The expected stock price volatility for our stock options will be calculated by examining historical volatilities for publicly traded industry peers as we do not now and for the near future will not have any significant trading history for our common stock. Forfeiture rates will be calculated based on the expected service period for our employees.

Research and Development Expense

Research and development expenses consist primarily of costs associated with:
(i) internal costs associated with our development activities; (ii) payments we make to third party contract research organizations, contract manufacturers, and consultants; (iii) technology and intellectual property license costs; and (iv) patent reimbursements. All research and development is expensed as incurred. License fees and pre-approved milestone payments due under each research and development arrangement that are paid prior to regulatory approval are expensed when the license is entered into or the milestone is achieved.

Conducting a significant amount of research and development is central to our business model. Since our inception on October 7, 2005 to September 30, 2012, we incurred $56,302,020 in research and development expenses. Product candidates in later-stage clinical development generally have higher development costs than those in earlier stages of development, primarily due to the significantly increased size and duration of the clinical trials. Included in research and development expense is the purchase price we paid in 2011 for VEN 309, discussed below.

In June 2011, we entered into an asset purchase agreement with Sam Amer & Company (the "Purchase Agreement") to acquire all rights, title and interest to VEN 309 (including patents, know how, other research materials and other indications), iferanserin inventory for use in clinical trials and a non-compete agreement. We paid $500,000 on execution of the Purchase Agreement and $12 million at closing, which took place on November 14, 2011. Additionally, we paid Amer $50,000 on execution and $5,000 per month through the closing for the consulting service. Upon the closing of the acquisition, the Exclusive License Agreement that we had previously entered into with Amer terminated.

Under the Purchase Agreement, we were obligated to make regulatory and commercialization milestone payments and pay royalties to Amer upon commercialization of VEN 309. The Purchase Agreement also contained a non-compete for Amer, Dr. Amer and his wife, but we determined that the non-compete had minimal value due to the age of Dr. and Mrs. Amer. Accordingly, we allocated the entire purchase price to in-process research and development and concluded that there is no alternative future use for these assets. Therefore, the entire $12.5 million has been recorded as a research and development expense in the statement of operations. In June 2012, after receipt of data from our Phase III clinical trial for VEN 309, we announced that we have no immediate plans to continue development of VEN 309, which has resulted and will continue to result in a reduction in expenses.

We plan to increase our research and development expenses for the foreseeable future in order to complete development of our active product candidate, VEN
307. The following table summarizes the research and development expenses related to our product candidates and other projects. The table reflects expenses directly attributable to each development candidate, which are tracked on a project basis.

                                                                                    Period from
             3 Months        3 Months         9 Months        9 Months          October 7, 2005
                ended           ended            ended           ended           (inception) to
            9/30/2012       9/30/2011        9/30/2012       9/30/2011       September 30, 2012
VEN 307   $ 1,948,690         633,535     $  2,933,993     $ 1,003,057     $          8,657,917
VEN 309   $ 2,094,085     $ 2,763,084     $ 13,134,687     $ 5,914,512     $         43,805,526
Other     $   145,352     $   270,560     $    704,097     $   819,954     $          3,838,577

The process of conducting pre-clinical studies and clinical trials necessary to obtain FDA approval is costly and time consuming. The probability of success for each product candidate and clinical trial may be affected by a variety of factors, including, among others, the quality of the product candidate's early clinical data, investment in the program, competition, manufacturing capabilities and commercial viability. As a result of the uncertainties discussed above, the uncertainty associated with clinical trial enrollments and the risks inherent in the development process, we are unable to determine with certainty the duration and completion costs of current or future clinical stages of our product candidate or when, or to what extent, we will generate revenues from the commercialization and sale of our product candidate. Development timelines, probability of success and development costs vary widely. Based on its current status, we anticipate that to complete the clinical trial process and commercialize our lead product candidate VEN 307 will cost approximately $20 million. This estimate could change significantly depending on the progress, timing and results of non-clinical and clinical trials associated with VEN 307. We believe our cash resources at September 30, 2012 will allow us to take VEN 307 through a second Phase III trial and through the second quarter 2014.

Off-Balance Sheet Arrangements

Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.

Results of Operations

Comparison of the Three Months Ended September 30, 2012 and September 30, 2011

Research and Development Expense

Research and development expense was $4,188,127 for the three months ended September 30, 2012, an increase of $520,948 or 14.205%, from $3,667,179 for same period in 2011. The primary reason for the increase was the costs associated with the new Phase III clinical trial for VEN 307, which commenced in the third quarter of 2012 and the closing out of the VEN 309 Phase III trial. Additionally, we incurred higher development costs due to initiation of nonclinical and pharmacology trials for VEN 309 which subsequently ended, and manufacturing costs to support future clinical studies for VEN 307. We expect that our research and development expenses will decrease due to the termination of the development of VEN 309.

General and Administrative Expense

General and administrative expense consists primarily of salaries, consulting fees and other related costs, professional fees for legal services and accounting services, insurance and travel expenses, as well as the option expense associated with the grants of options to our employees, consultants and directors. The termination of the development of VEN 309 did not have a significant effect on our general and administrative expenses.

General and administrative, or G&A, expense was $1,182,176 for the three months ended September 30, 2012, a decrease of $696,542 or 37.075% from $1,878,718 for the three months ended September 30, 2011. The decrease was primarily due to a decrease in stock option and warrant expense, investor relations expense and a reclassification of a few salaries from G&A to R&D.

Interest Income and Expense

We had no interest expense for the three months ended September 30, 2012, which was a decrease of $30,605 from the three months ended September 30, 2011. We did not have any outstanding loans during the three months ended September30, 2012, and therefore did not incur interest expense. Interest income was $14,906 for the three months ended September 30, 2012 compared to $28,423 for the same period in 2011.

Comparison of the Nine Months Ended September 30, 2012 and September 30, 2011

Research and Development Expense

Research and development expense was $16,772,777 for the nine months ended September 30, 2012, an increase of $9,035,254 or 116.772% from $7,737,523 for same period in 2011. The primary reason for the increase was the costs associated with the Phase III clinical trials for VEN 309, which commenced in the third quarter of 2011 and was terminated in June 2012. Additionally, we have incurred higher development costs due to initiation of nonclinical and pharmacology trials for VEN 309 and manufacturing costs to support future clinical studies for VEN 307 and VEN 309. Our research and development expenses incurred on the development of VEN 309, decreased due to the termination of this development in June 2012. We expect the R&D expenses for VEN 307 to increase in the future.

General and Administrative Expense

General and administrative expense consists primarily of salaries, consulting fees and other related costs, professional fees for legal services and accounting services, insurance and travel expenses, as well as the option expense associated with the grants of options to our employees and directors. The termination of the development of VEN 309 did not have a significant effect on our general and administrative expenses.

G&A expense was $4,265,889 for the nine months ended September 30, 2012, a decrease of $3,110,849 or 43.91%, from $7,376,738 for the nine months ended September 30, 2011. The decrease was primarily due to a decrease in stock option and warrant expense, investor relations expense and a reclassification of a few salaries from G&A to R&D.

Interest Income and Expense

We had no interest expense for the nine months ended September 30, 2012, which is a decrease of $116,664 from the nine months ended September 30, 2011. We did not have any outstanding loans during the first three quarters of 2012 and therefore did not incur interest expense. Interest income decreased slightly, from $47,880 to $39,345.

Liquidity and Capital Resources

Sources of Liquidity

As a result of our significant research and development expenditures and the lack of any FDA-approved products to generate product sales revenue, we have not been profitable and have generated operating losses since we were incorporated in October 2005. We have funded our operations through September 30, 2012 principally with debt (which in connection with our initial public offering, all of the convertible notes, and accrued interest thereon, were converted into common stock or repaid) and equity financing, including raising approximately $15.2 million in net proceeds in our initial public offering, which closed on December 22, 2010, and approximately $2.4 million in net proceeds upon the exercise on January 7, 2011 of the over-allotment option granted to the underwriter of our initial public offering. In July 2011, we raised $47.6 million in net proceeds in a registered public offering of our common stock. In May and June 2012, we raised approximately $4,166,000 in net proceeds under an at-the-market program.

On January 31, 2012, we filed a shelf registration statement with the Securities and Exchange Commission, or SEC, under which we may offer shares of our common stock and preferred stock, various series of debt securities and/or warrants to purchase any of such securities, either individually or in units, in one or more offerings, up to a total dollar amount of $100,000,000. The registration statement became effective as of February 10, 2012. As part of the shelf registration statement, we included a prospectus for a possible at-the-market common equity sales program for the sale of up to $20,000,000 of our common stock. In May and June 2012, we raised $4,166,000 in net proceeds under the at-the-market program. At September 30, 2012, an aggregate of approximately $95,500,000 worth of securities is available under the shelf registration statement, out of which approximately $15,500,000 of common stock is available for the at-the-market common equity sales program.

Net Cash Used in Operating Activities

Net cash used in operating activities was $18,308,931 for the nine months ended September 30, 2012 to fund our research and development program build out and general and administrative expenses. The net loss of $20,999,321 for the nine months ended September 30, 2012 was greater than cash used in operating activities by $2,690,390. The primary reasons for the difference are attributed to a stock-based compensation charge of $2,567,972 and an increase of accounts payable of $168,122.

Net Cash Used in Investing Activities

Net cash used in investing activities was $3,240 for the nine months ended September 30, 2012.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $4,896,816 for the nine months ended September 30, 2012, and consisted of $427,817 from the exercise of options, $302,505 from exercise of warrants, and $4,166,494 (net of expenses of $250,988) from the sale of common stock.

Funding Requirements

We expect to incur losses for the foreseeable future. We expect to incur ongoing general and administrative expenses and research and development expenses as we pursue the development of VEN 307. Our future capital requirements will depend on a number of factors, including primarily the costs, timing and outcome of clinical trials and regulatory approvals, and, to a lesser extent, the costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing patent claims and other intellectual property rights, the acquisition of licenses to new products or compounds, the status of competitive products, the availability of financing, and our success in developing markets for our product candidates.

Based on our analysis of our future development costs, we estimate our expected future expenditures related to product development, through our recently begun second Phase III trial for VEN 307, as follows:

costs of the second Phase III clinical trial of VEN 307 in the treatment of anal fissures: $12,000;000;

payment of fees for applications or supplements subject to the Prescription Drug User Fee Act (PDUFA) and regulatory consultants: $2,100,000; and

payment to S.L.A. Pharma of our licensing obligations for VEN 307 of $41,500 per month until the filing of an NDA with the FDA, $400,000 in development costs upon receipt of a quality controlled final study report for the Phase III clinical trial, and up to $3,000,000 in approval milestones.

We believe that our existing cash and cash equivalents will be sufficient to enable us to fund our operating expenses and capital expenditure requirements through the second quarter of 2014. We have based these estimates on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect, which would cause us to require additional capital earlier. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials.

We do not anticipate that we will generate product revenue for at least the next several years. In the absence of additional funding, we expect our continuing operating losses to result in increases in our cash used in operations over the next several quarters and years.

To the extent our capital resources are insufficient to meet our future capital requirements, we will need to finance our future cash needs through public or private equity offerings, collaboration agreements, debt financings or licensing arrangements. However, the credit markets and the financial services industry have recently been experiencing a period of turmoil and uncertainty that have made equity and debt financing more difficult to obtain. Additional funding may not be available to us on acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our stockholders. For example, if we raise additional funds by issuing equity securities or by selling convertible debt securities, further dilution to our existing stockholders may result. If we raise funds through collaboration agreements or licensing arrangements, we may be required to relinquish rights to our technologies or drug candidates, or grant licenses on terms that are not favorable to us. If adequate funds are not available, we may be required to terminate, significantly modify or delay our research and development programs, reduce our planned commercialization efforts, or obtain funds through collaborators that may require us to relinquish rights to our technologies or drug candidates that we might otherwise seek to develop or commercialize independently. Conversely, we may elect to raise additional funds even before we need them if the conditions for raising capital are favorable, including through offerings of securities pursuant to our shelf registration statement on Form S-3, under which we currently have up to approximately $95 million in securities available for issuance, including up to approximately $15.5 million in shares of common stock that we may offer and sell under the at-the-market equity sales program.

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