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RGLS > SEC Filings for RGLS > Form 10-Q on 19-Nov-2012All Recent SEC Filings

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Form 10-Q for REGULUS THERAPEUTICS INC.


19-Nov-2012

Quarterly Report


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

The interim unaudited condensed 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 final prospectus filed with the Securities and Exchange Commission on October 5, 2012 relating to our Registration Statement on Form S-1/A (File No. 333-183384) for our initial public offering.


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FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q may contain "forward-looking statements" within the meaning of the federal securities laws made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under Part II, Item 1A, "Risk Factors" in this quarterly report on Form 10-Q. Except as required by law, we assume no obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise. These statements, which represent our expectations or beliefs concerning various future events, may contain words such as "may," "will," "expect," "anticipate," "intend," "plan," "believe," "estimate" or other words indicating future results. Such statements may include, but are not limited to, statements concerning the following:

the initiation, cost, timing, progress and results of our research and development activities, preclinical studies and future clinical trials;

our ability to obtain and maintain regulatory approval of our future product candidates, and any related restrictions, limitations, and/or warnings in the label of an approved product candidate;

our ability to obtain funding for our operations;

our plans to research, develop and commercialize our future product candidates;

our strategic alliance partners' election to pursue development and commercialization;

our ability to attract collaborators with development, regulatory and commercialization expertise;

our ability to obtain and maintain intellectual property protection for our future product candidates;

the size and growth potential of the markets for our future product candidates, and our ability to serve those markets;

our ability to successfully commercialize our future product candidates;

the rate and degree of market acceptance of our future product candidates;

our ability to develop sales and marketing capabilities, whether alone or with potential future collaborators;

regulatory developments in the United States and foreign countries;

the performance of our third-party suppliers and manufacturers;

the success of competing therapies that are or become available;

the loss of key scientific or management personnel;

our expectations regarding the time during which we will be an emerging growth company under the JOBS Act;

our use of the proceeds from our recently completed initial public offering and private placement; and

the accuracy of our estimates regarding expenses, future revenues, capital requirements and need for additional financing.

OVERVIEW

We are a biopharmaceutical company focused on discovering and developing first-in-class drugs that target microRNAs to treat a broad range of diseases. We were formed in 2007 when Alnylam Pharmaceuticals, Inc., or Alnylam, and Isis Pharmaceuticals, Inc., or Isis, contributed significant intellectual property, know-how and financial and human capital to pursue the development of drugs targeting microRNAs pursuant to a license and collaboration agreement. microRNAs are recently discovered, naturally occurring ribonucleic acid, or RNA, molecules that play a critical role in regulating key biological pathways. Scientific research has shown the improper balance, or dysregulation, of microRNAs is directly linked to many diseases. We believe we have assembled the leading position in the microRNA field, including expertise in microRNA biology and oligonucleotide chemistry, a broad intellectual property estate, key opinion leaders and disciplined drug discovery and development processes. We refer to these assets as our microRNA product platform. We are using our microRNA product platform to develop chemically modified, single-stranded oligonucleotides that we call anti-miRs. We use these anti-miRs to modulate microRNAs and by doing so return diseased cells to their healthy state. We believe microRNAs may be transformative in the field of drug discovery and that anti-miRs may become a new and major class of drugs with broad therapeutic application much like small molecules, biologics and monoclonal antibodies. We are currently optimizing anti-miRs in five distinct programs, both independently and with our strategic alliance partners, AstraZeneca AB, or AstraZeneca, GlaxoSmithKline plc, or GSK, and Sanofi.


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Under these strategic alliances, we are eligible to receive up to approximately $1.7 billion in milestone payments upon successful commercialization of microRNA therapeutics for the eleven programs contemplated by our agreements. These payments include up to $106.5 million upon achievement of preclinical and investigational new drug application, or IND, milestones, up to $350.0 million upon achievement of clinical development milestones, up to $420.0 million upon achievement of regulatory milestones and up to $850.0 million upon achievement of commercialization milestones. We anticipate that we will nominate at least two clinical development candidates within the next 12 months and file at least two INDs with the U.S. Food and Drug Administration, or FDA, by 2014.

Recent developments

On October 10, 2012, we completed our IPO whereby we sold 11,250,000 shares of common stock at $4.00 per share and received net proceeds of $40.7 million (after underwriting discounts and commissions and estimated offering costs not yet paid as of September 30, 2012);

On October 10, 2012, concurrent with the completion of our IPO, we sold 6,250,000 shares of common stock in a private placement to AstraZeneca at the initial public offering price of $4.00 per share and received net proceeds of $25.0 million;

On October 10, 2012, the automatic conversion of $5.0 million of outstanding principal plus accrued interest of $788,000 underlying a convertible note that we issued to GSK in April 2008 and amended and restated in July 2012 and the conversion of $5.0 million in outstanding principal plus accrued interest of $25,000 underlying a convertible note that we issued to Biogen Idec in August 2012, which together converted upon the completion of our IPO into an aggregate of 2,703,269 shares of our common stock. An aggregate of approximately $9,000 of interest was accrued from October 1, 2012 to October 10, 2012 which was included in the calculation of the shares issued but excluded from the pro forma adjustment to the accompanying balance sheet since such amounts were not yet accrued as of September 30, 2012;

On October 10, 2012, the 27,399,999 outstanding shares of convertible preferred stock automatically converted into an aggregate of 13,699,999 shares of common stock upon the closing of our IPO;

On October 10, 2012, we filed an amended and restated certificate of incorporation to authorize 200,000,000 shares of common stock and 10,000,000 shares of undesignated preferred stock; and

On October 23, 2012, our underwriters' partially exercised their option to purchase 1,480,982 additional shares of our common stock at $4.00 per share and we received net proceeds of $5.5 million (after underwriting discounts).

FINANCIAL OPERATIONS OVERVIEW

Revenues

Our revenues generally consist of upfront payments for licenses or options to obtain licenses in the future, research and development funding and milestone payments under strategic alliance agreements, as well as funding received under government grants.

In the future, we may generate revenue from a combination of license fees and other upfront payments, research and development payments, milestone payments, product sales and royalties in connection with strategic alliances. We expect that any revenue we generate will fluctuate from quarter-to-quarter as a result of the timing of our achievement of preclinical, clinical, regulatory and commercialization milestones, if at all, the timing and amount of payments relating to such milestones and the extent to which any of our products are approved and successfully commercialized by us or our strategic alliance partners. If our strategic alliance partners do not elect or otherwise agree to fund our development costs pursuant to our strategic alliance agreements, or we or our strategic alliance partners fail to develop product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenues, and our results of operations and financial position would be adversely affected.

Research and development expenses

Research and development expenses consist of costs associated with our research activities, including our drug discovery efforts, the preclinical development of our therapeutic programs, and our microRNA biomarker program. Our research and development expenses include:

employee-related expenses, including salaries, benefits, travel and stock-based compensation expense;


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external research and development expenses incurred under arrangements with third parties, such as contract research organizations, or CROs, consultants and our scientific advisory board;

license and sublicense fees; and

facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of leasehold improvements and equipment, and laboratory and other supplies.

We expense research and development costs as incurred. We account for nonrefundable advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been received.

To date, we have conducted research on many different microRNAs with the goal of understanding how they function and identifying those that might be targets for therapeutic modulation. At any given time we are working on multiple targets, primarily within our five therapeutic areas of focus. Our organization is structured to allow the rapid deployment and shifting of resources to focus on the best targets based on our ongoing research. As a result, in the early phase of our development, our research and development costs are not tied to any specific target. However, we are currently spending the vast majority of our research and development resources on our lead development programs.

Since our conversion to a corporation in January 2009, we have grown from 15 researchers to 34 and have spent a total of $61.2 million in research and development expenses through September 30, 2012.

We expect our research and development expenses to increase for the foreseeable future as we advance our research programs toward the clinic and initiate clinical trials. The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time consuming. We or our strategic alliance partners may never succeed in achieving marketing approval for any of our product candidates. The probability of success for each product candidate may be affected by numerous factors, including preclinical data, clinical data, competition, manufacturing capability and commercial viability. Under our strategic alliance with GSK, we may be responsible for the development of product candidates through clinical proof-of-concept, depending on the time at which GSK may choose to exercise its option to obtain an exclusive license to develop, manufacture and commercialize product candidates on a program-by-program basis. Under our strategic alliance with Sanofi, we are responsible for the development of product candidates up to initiation of Phase 1 clinical trials, after which time Sanofi would be responsible for the costs of clinical development and commercialization and all related costs. Under our strategic alliance agreement with AstraZeneca, we are responsible for certain research and development activities with respect to each alliance target under a mutually agreed upon research and development plan until the earlier to occur of IND approval in a major market or the end of the research term under the agreement. We also have several independent programs for which we are responsible for all of the research and development costs, unless and until we partner any of these programs in the future.

Most of our product development programs are at an early stage, and successful development of future product candidates from these programs is highly uncertain and may not result in approved products. Completion dates and completion costs can vary significantly for each future product candidate and are difficult to predict. We anticipate that we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to our ability to maintain or enter into new strategic alliances with respect to each program or potential product candidate, the scientific and clinical success of each future product candidate, as well as ongoing assessments as to each future product candidate's commercial potential. We will need to raise additional capital and may seek additional strategic alliances in the future in order to advance our various programs.

General and administrative expenses

General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation, related to our executive, finance, legal, business development and support functions. Other general and administrative expenses include allocated facility-related costs not otherwise included in research and development expenses, travel expenses and professional fees for auditing, tax and legal services. We expect that general and administrative expenses will increase in the future as we expand our operating activities and incur additional costs associated with being a publicly-traded company. These increases will likely include legal fees, accounting fees, directors' and officers' liability insurance premiums and fees associated with investor relations.

Other income (expense), net

Other income (expense) includes interest income and expense, and on occasion income or expense of a non-recurring nature. We earn interest income from interest-bearing accounts and money market funds for cash and cash equivalents and marketable securities, such as interest-bearing bonds, for our short-term investments. Interest expense represents the amounts payable to GSK and Biogen Idec under convertible notes and amounts paid under equipment and tenant improvement financing arrangements. In addition, we recognized a loss on the extinguishment of debt as a result of amending and restating our convertible note payable issued to GSK in February 2010. As a result of electing to value the note under the fair value option, we will recognize all changes to the fair value of the note as gain (loss) from valuation of convertible note payable.


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CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

The preparation of our unaudited condensed financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the revenues and expenses incurred 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 from these estimates under different assumptions or conditions. We discussed accounting policies and assumptions that involve a higher degree of judgment and complexity within Note 1 to our financial statements in our Registration Statement on Form S-1/A (File No. 333-183384). Except as set forth in the paragraph below, there have been no material changes to our critical accounting policies and estimates from those disclosed in our Registration Statement on Form S-1/A (File No. 333-183384).

Fair Value Option

Applicable accounting policies permit entities to choose, at specified election dates, to measure specified items at fair value if the decision about the election is: 1) applied instrument by instrument, 2) irrevocable, and 3) applied to an entire instrument. In addition, an entity may choose to elect the fair value option only at the date of an event (i.e., significant modifications of debt, as defined) that requires an eligible item to be measured at fair value at the time of the event but does not require fair value measurement at each reporting date after that. In July 2012, we accounted for the amended and restated note issued to GSK in February 2010 as a debt extinguishment of the original note. We elected to measure the amended note under the fair value option. The difference between the carrying value of the original note and the fair value of the amended note was recorded as a loss on extinguishment of debt to non-operating earnings. Thereafter, any change to the fair value of the amended note will be recorded as gain (loss) from valuation of convertible notes payable to non-operating earnings.

RESULTS OF OPERATIONS

Comparison of the three months ended September 30, 2012 and 2011

The following table summarizes the results of our operations for the three
months ended September 30, 2012 and 2011, together with the changes in those
items in dollars (in thousands):



                                          Three months ended September 30,
                                            2012                     2011              Increase/(Decrease)
                                                                   (unaudited)
Revenue under strategic alliances      $         2,809           $       3,809        $              (1,000 )
Research and development expenses                5,248                   3,875                        1,373
General and administrative
expenses                                         1,093                     907                          186
Loss on extinguishment of debt                  (1,738 )                    -                         1,738
Loss from valuation of
convertible note payable                          (331 )                    -                           331

Revenue. We recognized revenue of $2.8 million in the three months ended September 30, 2012 and $3.8 million in the same period in 2011. Our revenue during these periods consisted primarily of amortization of upfront payments received from Sanofi and GSK which we amortize monthly on a straight-line basis over our period of performance. The total amortization attributable to payments from Sanofi was $2.5 million for each of the three months ended September 30, 2012 and 2011, and the total amortization attributable to payments from GSK was $186,000 for the three months ended September 30, 2012 and $1.3 million for the three months ended September 30, 2011. The decrease in the amount amortized for GSK for the three months ended September 30, 2012 compared to 2011 is the result of our June 2012 amendment to the collaboration agreement which extended our estimated period of performance and the resulting amortization period.

Research and development expenses. Research and development expenses were $5.2 million in the three months ended September 30, 2012 and $3.9 million for the same period in 2011. The increase of $1.4 million is related to a $124,000 increase in payroll expenses, a $508,000 increase in laboratory supplies, and a $660,000 increase in external services which was driven by additional hiring and efforts to advance our preclinical programs.

General and administrative expenses. General and administrative expenses were $1.1 million in the three months ended September 30, 2012 and $907,000 for the same period in 2011. The increase of $186,000 primarily represents legal services related to our transactions with AstraZeneca and Biogen Idec completed in August 2012.

Loss on extinguishment of debt. We recognized a $1.7 million loss on extinguishment of debt as a result of amending our $5.0 million 2010 GSK convertible promissory note in July 2012.

Loss from valuation of convertible note payable. We recognized a $331,000 loss as a result of the change in the fair value on the $5.0 million 2010 GSK convertible promissory note in July 2012.

Comparison of the nine months ended September 30, 2012 and 2011

The following table summarizes the results of our operations for the nine months ended September, 2012 and 2011, together with the changes in those items in dollars (in thousands):

                                           Nine months ended September 30,
                                            2012                     2011              Increase/(Decrease)
Revenue under strategic alliances
and grants                             $        9,462           $       10,426        $                (964 )
Research and development expenses              14,735                   12,823                        1,912
General and administrative
expenses                                        2,998                    2,864                          134
Loss on extinguishment of debt                 (1,738 )                     -                         1,738
Loss from valuation of
convertible note payable                         (331 )                     -                           331


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Revenue. We recognized revenue of $9.5 million for the nine months ended September 30, 2012 and $10.4 million for the nine months ended September 30, 2011. Our revenue during these periods consisted primarily of amortization of upfront payments received from Sanofi and GSK which we amortize monthly on a straight-line basis over our period of performance. The total amortization attributable to payments from Sanofi was $7.5 million for each of the nine months ended September 30, 2012 and 2011, and the total amortization attributable to payments from GSK was $1.8 million for the nine months ended September 30, 2012 and $2.9 million for the nine months ended September 30, 2011. The decrease in the amount amortized for GSK is the result of our June 2012 amendment to the collaboration agreement which extended our estimated period of performance and the resulting amortization period.

Research and development expenses. Research and development expenses were $14.7 million for the nine months ended September 30, 2012 and $12.8 million for the nine months ended September 30, 2011. The increase of $1.9 million is related to a $311,000 increase in payroll expenses, a $842,000 increase in external services, and a $854,000 increase in laboratory supplies which was driven by additional hiring and efforts to advance our preclinical programs.

General and administrative expenses. General and administrative expenses were $3.0 million for the nine months ended September 30, 2012 and $2.9 million for the nine months ended September 30, 2011. The increase of $134,000 is primarily related to a $97,000 increase in accruals for our annual performance bonuses, and a $357,000 increase in consulting services and legal fees, the latter of which related to our transactions with AstraZeneca and Biogen Idec, offset by a $332,000 reduction in support services received from Isis.

Loss on extinguishment of debt. We recognized a $1.7 million loss on extinguishment of debt as a result of amending our $5.0 million 2010 GSK convertible promissory note in July 2012.

Loss from valuation of convertible note payable. We recognized a $331,000 loss as a result of the change in the fair value on the $5.0 million 2010 GSK convertible promissory note in July 2012

LIQUIDITY AND CAPITAL RESOURCES

From our inception in September 2007 through September 30, 2012, we have raised $116.6 million to fund our operations primarily through upfront payments, research funding and preclinical milestones from our strategic alliances, from government grants and from the sale of equity and convertible debt securities. As of September 30, 2012, we had received $61.6 million in upfront payments, research funding and preclinical milestones from our strategic alliances with GSK and Sanofi and government grants, and $55.0 million from the sale of equity and convertible debt securities.

As of September 30, 2012, we had $30.9 million in cash, cash equivalents and short-term investments. The following table shows a summary of our cash flows for the nine months ended September 30, 2012 and 2011:

                                            Nine months ended September 30,
                                             2012                    2011
                                                      (unaudited)
                                                    (in thousands)
      Net cash provided by (used in):
      Operating activities              $       (9,572 )       $         (9,578 )
      Investing activities                      14,354                     (803 )
      Financing activities                       3,469                     (269 )

      Total                             $        8,251         $        (10,650 )

Operating activities. Net cash used in operating activities were $9.6 million for each of the nine months ended September 30, 2012 and 2011. The primary drivers of the use of cash in operating activities for 2012 was the $3.0 million receivable outstanding from AstraZeneca at September 30, 2012, and amortization of deferred revenue relating to payments received under our strategic alliances of $9.4 million, offset by the addition of $8.8 million in deferred revenue related to R&D funding from Sanofi and our agreements with AstraZeneca and Biogen Idec entered into in August 2012. The primary driver of the use of cash in operating activities for 2011 was amortization of deferred revenue relating to payments received under our strategic alliances of $4.9 million. In addition, during the first quarter of 2011 we paid down our year-end accruals related to CROs and year-end management bonuses earned in 2010. The decrease in cash used from operating activities of $1.4 million between the nine months ended September 30, 2012 and 2011 was the result of lower payments made on our accounts payables and accrued payroll, which includes prior year bonuses, during the first quarter of 2012.


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Investing activities. Net cash provided by or used in investing activities for periods presented primarily relate to the purchase, sale and maturity of . . .

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