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ICPT > SEC Filings for ICPT > Form 10-Q on 26-Nov-2012All Recent SEC Filings

Show all filings for INTERCEPT PHARMACEUTICALS INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for INTERCEPT PHARMACEUTICALS INC


26-Nov-2012

Quarterly Report


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

The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited financial statements and the notes to those financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2011 included in our prospectus dated October 10, 2012 filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, or the Securities Act, with the Securities and Exchange Commission on October 11, 2012. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth in Part II, Item 1.A. Risk Factors of this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

We are a biopharmaceutical company focused on the development and commercialization of novel therapeutics to treat chronic liver disease utilizing our proprietary bile acid chemistry. Our product candidates have the potential to treat orphan and more prevalent liver diseases for which there currently are limited therapeutic solutions.

We have devoted substantially all of our resources to our development efforts relating to our product candidates, including conducting clinical trials of our product candidates, providing general and administrative support for these operations and protecting our intellectual property. We do not have any products approved for sale and have not generated any revenue from product sales. From our inception through September 30, 2012, we have funded our operations primarily through the private placement of preferred stock, common stock, convertible notes and warrants to purchase common stock totaling $105.4 million and through the receipt of $16.4 million of up-front payments under our collaborative agreements.

In October 2012, we completed the initial public offering of our common stock, or IPO, pursuant to a registration statement on Form S-1. In the IPO, we sold an aggregate of 5,750,000 shares of common stock under the registration statement at a public offering price of $15.00 per share. Net proceeds were approximately $78.7 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Upon the closing of the IPO, all outstanding shares of our preferred stock were converted into 7,403,817 shares of common stock.

We have incurred net losses in each year since our inception in 2002. Our net losses were approximately $9.1 million and $12.9 million for the nine months ended September 30, 2011 and 2012, respectively. As of September 30, 2012, we had an accumulated deficit of approximately $87.4 million. Substantially all our net losses resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations.

We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We anticipate that our expenses will increase substantially as we:

complete the development of our lead product candidate, obeticholic acid, or OCA, for the treatment of primary biliary cirrhosis, or PBC;

seek to obtain regulatory approvals for OCA;

outsource the commercial manufacturing of OCA for any indications for which we receive regulatory approval;

contract with third parties for the sales, marketing and distribution of OCA for any indications for which we receive regulatory approval;

continue our research and development efforts with our preclinical development compounds, such as INT-767 and INT-777;

maintain, expand and protect our intellectual property portfolio;

add operational, financial and management information systems and personnel, including personnel to support our product development and commercialization efforts; and

operate as a public company.

We do not expect to generate revenue from product sales unless and until we successfully complete development and obtain marketing approval for one or more of our product candidates, which we expect will take a number of years and is subject to significant uncertainty. Accordingly, we anticipate that we will need to raise additional capital in addition to the net proceeds of our initial public offering completed in October 2012 as described above, prior to the commercialization of OCA or any of our other product candidates. Until such time, if ever, as we can generate substantial revenue from product sales, we expect to finance our operating activities through a combination of equity offerings, debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop our product candidates.

Prior to April 2011, we operated a wholly-owned subsidiary in Italy where our bile acid receptor research was primarily conducted. We are currently in the process of liquidating this subsidiary. However, we are continuing our early stage TGR5 research through our collaboration with Les Laboratories Servier and Institut de Recherches Servier, or collectively Servier. Although our Italian subsidiary is currently in liquidation and essentially inactive, we do not intend to liquidate this subsidiary for some time because it acts as our legal representative for our clinical trials in the European Union to satisfy European Union regulatory requirements.

Financial Overview

Revenue

To date, we have not generated any revenue from the sale of products. All our revenue has been derived from our collaborative agreements for the development and commercialization of certain of our product candidates. In March 2011, we entered into an exclusive licensing agreement with Dainippon Sumitomo Pharma Co. Ltd., or DSP, for the development of OCA in Japan and China. Under the terms of the agreement, we received an up-front payment of $15.0 million and may be eligible to receive up to approximately $300 million in additional payments for development, regulatory and commercial sales milestones for OCA in Japan and China. In August 2011, we entered into a collaboration agreement with Servier, for the discovery, research and development of bile acid-derived agonists, or substances that bind to receptors of cells and trigger responses by those cells, for a dedicated bile acid receptor called TGR5. Under the terms of the agreement, we received an up-front payment from Servier of $1.4 million. Servier may be required to pay us up to an aggregate amount of approximately 108 million (approximately $138.8 million as of September 30, 2012) upon the achievement of specified development, regulatory and commercial sale milestones, as well as royalties on sales, based on the successful outcome of the collaboration. For accounting purposes, the up-front payments from both transactions are recorded as deferred revenue and amortized over time. Through the nine months ended September 30, 2012, we recognized $2.0 million in license revenue for the relevant amortization of the two up-front payments. We expect to recognize as revenue an additional $400,000 for the amortization of these payments through 2012 and do not expect to receive any milestone payments during 2012 related to these agreements. As the Servier up-front payment has been fully recognized as of September 30, 2012, no further revenue will be recognized. We anticipate that we will recognize revenue of approximately $1.6 million per year through 2020, the expected end of the development period, for the amortization of the up-front payment from DSP.

Research and Development Expenses

Since our inception, we have focused our resources on our research and development activities, including conducting preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings for our product candidates. We recognize research and development expenses as they are incurred. Our research and development expenses consist primarily of:

salaries and related overhead expenses for personnel in research and development functions;

fees paid to consultants and clinical research organizations, or CROs, including in connection with our preclinical and clinical trials, and other related clinical trial fees, such as for investigator grants, patient screening, laboratory work, clinical trial database management, clinical trial material management and statistical compilation and analysis;

costs related to acquiring and manufacturing clinical trial materials;

depreciation of leasehold improvements, laboratory equipment and computers;

costs related to compliance with regulatory requirements; and

costs related to stock options or other stock-based compensation granted to personnel in research and development functions.

From inception through September 30, 2012, we have incurred approximately $66.6 million in research and development expenses. We plan to increase our research and development expenses for the foreseeable future as we continue the development of OCA for the treatment of PBC and other indications and to further advance the development of our other product candidates, subject to the availability of additional funding.

The table below summarizes our direct research and development expenses by program for the periods indicated. Our direct research and development expenses consist principally of external costs, such as fees paid to investigators, consultants, central laboratories and CROs, in connection with our clinical trials, and costs related to acquiring and manufacturing clinical trial materials. We have been developing OCA and other agonists of the farnesoid X receptor, or FXR, as well as TGR5 agonists, and typically use our employee and infrastructure resources across multiple research and development programs. We do not allocate salaries, stock-based compensation, employee benefit or other indirect costs related to our research and development function to specific product candidates. Those expenses are included in "Indirect research and development expense" in the table below.

                               Three Months Ended September 30,               Nine Months Ended September 30,
                                 2011                     2012                2011                     2012
                                                               (In thousands)
                                                                 (Unaudited)
Direct research and
development expense        $          1,691         $          2,187     $         5,036         $           8,122
Personnel costs                         742                      933               1,922                     2,763
Indirect research and
development expense                      79                      198                 305                       511
Total research and
development expense        $          2,512         $          3,318     $         7,263         $          11,396

The successful development of our clinical and preclinical product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the remainder of the development of any of our clinical or preclinical product candidates or the period, if any, in which material net cash inflows from these product candidates may commence. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

the scope, rate of progress and expense of our ongoing, as well as any additional, clinical trials and other research and development activities;
future clinical trial results; and

the timing and receipt of any regulatory approvals.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the U.S. Food and Drug Administration, or FDA, or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

OCA

The majority of our research and development resources are focused on our Phase 3 clinical trial in patients with PBC, or POISE trial, and our other planned clinical and preclinical studies and other work needed to submit OCA for the treatment of PBC for regulatory approval in the United States and Europe. We have incurred and expect to continue to incur significant expense in connection with these efforts, including:

In January 2012, we initiated enrollment in our POISE trial, and as of September 30, 2012, we had enrolled approximately two-thirds of the total number of patients targeted for our POISE trial. We currently expect results from the trial to be available by mid-2014. Patients who complete twelve months of treatment will be eligible to continue in an open label safety extension trial for five years.

We are continuing to treat PBC patients from our Phase 2 trial with OCA in a long-term safety extension trial. As of September 30, 2012, there were 27 patients being followed in this trial and we anticipate the trial to continue through 2014.

We are currently dosing both mice and rats to investigate the carcinogenic potential of OCA. We anticipate dosing will be completed in the first quarter of 2014.

We plan to initiate a Phase 1 clinical trial in healthy volunteers to evaluate the effect of OCA on the heart's electrical cycle, known as the QT interval, and additional Phase 1 clinical trials in 2013.

We have contracted with third-party manufacturers to produce the quantities of OCA needed for regulatory approval as well as the necessary supplies for our other contemplated trials.

In addition, we are evaluating OCA in other chronic liver and other diseases. In connection with these efforts, we have incurred and expect to incur significant expenses relating to our agreement with the National Institute of Diabetes and Digestive and Kidney Diseases, or NIDDK, for milestones related to the FLINT trial, a Phase 2b clinical trial in patients with nonalcoholic steatohepatitis, or NASH. These expenses include $1.0 million that was paid in June 2012 and an additional $1.25 million that is required to be paid within 60 days of full enrollment of the FLINT trial, which occurred on November 12, 2012.

INT-767 and INT-777

We are currently conducting research in collaboration with Servier to discover and develop additional novel TGR5 agonists. We intend to continue to develop our two existing compounds not included in this collaboration, our dual FXR/TGR5 agonist INT-767 and INT-777 directly or through potential collaborations with third parties, over the next several years.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs for employees in executive, operational, finance and human resources functions. Other significant general and administrative expenses include allocation of facilities costs, professional fees for directors, accounting and legal services and expenses associated with obtaining and maintaining patents.

We expect that our general and administrative expenses will increase as we operate as a public company and due to the potential commercialization of our product candidates. We believe that these increases will likely include increased costs for director and officer liability insurance, costs related to the hiring of additional personnel and increased fees for outside consultants, lawyers and accountants. We also expect to incur increased costs to comply with corporate governance, internal controls and similar requirements applicable to public companies.

Interest and Dividend Income (Expense), Net

Interest income consists of interest earned on our cash and cash equivalents. We expect our interest income to increase as we invest the net proceeds from the IPO.

Interest expense pertains to equipment currently under a capitalized lease. This capitalized lease matured in 2012 and, as such, we will no longer be subject to the interest expense under this capitalized lease.

Revaluation of Warrants

In conjunction with various financing transactions, we issued warrants to purchase shares of our common stock. Certain of the warrants include a provision that provides for a reduction in the warrant exercise price if there are subsequent issuances of additional shares of common stock for consideration per share less than the applicable per share warrant exercise price. The warrants containing this provision are deemed to be derivative instruments and as such, are recorded as a liability and marked-to-market at each reporting period using a Black-Scholes option-pricing model. Certain warrants that do not have these down-round provisions, and were classified in equity, as of September 30, 2012, contain provisions that may require the shares of common stock underlying them to be registered upon an initial public offering. Due to the completion of our IPO, these warrants will be reclassified as liabilities and warrant revaluation income (expense) will be recorded in the statement of operations in subsequent reporting periods. The fair value estimates of these warrants are based, in part, on subjective assumptions and could differ materially in the future. Non-cash changes in the fair value of the common stock warrant liability from the prior period is recorded as a component of other income and expense. We will continue to adjust the fair value of the common stock warrant liability at the end of each reporting period for changes in fair values until the earlier of the exercise or expiration of the applicable common stock warrants or until such time that the warrants are no longer determined to be derivative instruments. Now that the Company is a public company, these fluctuations are expected to increase or decrease significantly based on changes in the price of the Company's common stock.

Results of Operations

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

The following table summarizes our results of operations for each of the three months ended September 30, 2011 and 2012, together with the changes in those items in dollars and as a percentage:

                                          Three Months Ended
                                            September 30,             Dollar Change       % Change
                                         2011            2012
                                            (In thousands)
                                             (Unaudited)
Licensing revenue                     $       641     $      523     $          (118 )         (18.4 %)
Costs and expenses:
Research and development                    2,512          3,318                 806            32.1 %
General and administrative                  1,154            991                (163 )         (14.1 %)
Total costs and expenses                    3,666          4,309                 643            17.5 %
Other income (expense):
Revaluation of warrants                       174         (1,418 )            (1,592 )             *
Interest and dividend income and
expense, net                                   10             17                   7               *
Net loss                              $    (2,841 )   $   (5,187 )   $        (2,346 )          82.6 %

* Not meaningful or not calculable.

Licensing Revenue

Licensing revenue was $641,000 and $523,000 for the three months ended September 30, 2011 and 2012, respectively, resulting from the amortization of the up-front payments from the collaboration agreements entered into with DSP on March 29, 2011 and with Servier on August 1, 2011.

Research and Development Expenses

Research and development expenses were $2.5 million and $3.3 million for the three months ended September 30, 2011 and 2012, respectively, representing an increase of $806,000, or 32.1%. This increase in research and development expense primarily reflects:

increased direct development expense for our Phase 3 POISE trial of approximately $927,000;
an increase in personnel on our development team to manage the increased activities around our development program for OCA, resulting in increased compensation expense of approximately $191,000 and associated overhead of approximately $79,000;
increased direct development expense for our two-year animal carcinogenicity studies in two species of approximately $122,000; and
a partial offset by decreases in costs related to (i) research expenses for our earlier stage pipeline assets of $160,000; (ii) decreased costs to manufacture our clinical trial supplies of $153,000; (iii) decreased costs associated with regulatory consultants of $100,000; and (iv) decreased costs associated with market research of $105,000.

General and Administrative Expenses

General and administrative expenses were $1.1 million and $1.0 million in the three months ended September 30, 2011 and 2012, respectively. The $163,000 decrease was primarily related to additional legal costs associated with the Servier collaboration agreement and higher patent costs incurred in the three months ended September 30, 2011.

Revaluation of Warrants

Some of our outstanding warrants are deemed to be derivative instruments that require liability classification and mark-to-market accounting. As such, at the end of each reporting period, the fair values of the warrants were determined by us using a Black-Scholes option-pricing model, resulting in the recognition of a gain of $174,000 and a loss of $1.4 million for the three months ended September 30, 2011 and 2012, respectively. These fluctuations in value were primarily due to the declines in the estimated life of the warrants and changes in volatility of the shares of common stock underlying the warrants. For the three months ended September 30, 2012, the fair value was also affected by the increase in the price of the common stock underlying the warrants. Now that we are a public company, these fluctuations are expected to increase or decrease significantly based on changes in the price of our common stock.

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



The following table summarizes our results of operations for each of the nine
months ended September 30, 2011 and 2012, together with the changes in those
items in dollars and as a percentage:


                                          Nine Months Ended
                                            September 30,            Dollar Change       % Change
                                         2011           2012
                                           (In thousands)
                                             (Unaudited)
Licensing revenue                     $    1,046     $    2,041     $           995            95.0 %
Costs and expenses:
Research and development                   7,263         11,396               4,133            56.9 %
General and administrative                 3,174          2,994                (180 )          (5.7 %)
Total costs and expenses                  10,437         14,390               3,953            37.9 %
Other income (expense):
Revaluation of warrants                      269           (438 )              (707 )             *
Foreign currency loss in
liquidation                                    -           (192 )              (192 )             *
Interest and dividend income and
expense, net                                  30             27                  (3 )         (12.4 %)
Net loss                              $   (9,092 )   $  (12,952 )   $        (3,860 )          42.4 %

* Not meaningful or not calculable.

Licensing Revenue

Licensing revenue was $1.0 million and $2.0 million for the nine months ended September 30, 2011 and 2012, respectively, resulting from the amortization of the up-front payments from the collaboration agreements entered into with DSP on March 29, 2011 and with Servier on August 1, 2011.

Research and Development Expenses

Research and development expenses were $7.3 million and $11.4 million for the nine months ended September 30, 2011 and 2012, respectively. The increase in research and development expenses of $4.1 million, or 56.9%, was primarily due to:

increased direct development expense for our Phase 3 POISE trial of approximately $2.4 million;
increased expenses of $1.7 million payable by us to the NIDDK relating to milestones achieved and expected to be achieved under the NIDDK agreement;
an increase in personnel on our development team to manage the increased activities around our development program for OCA, resulting in increased compensation expense of approximately $841,000 and associated overhead of $205,000;
increased direct development expense for our two-year animal carcinogenicity studies in two species of approximately $822,000;
increased direct development expense for the Phase 2 clinical trial for portal hypertension of approximately $137,000;
reduced direct research and development expense of approximately $1.0 million resulting from the closure of our research facility in June 2011 and research associated with our TGR5 program, which was previously paid by us and is now funded through our collaboration with Servier;
reduced direct research and development expense with respect to the completion of our Phase 2 trials for OCA of approximately $270,000;
reduced direct research and development expense relating to INT-777 of approximately $140,000;
decreased costs to manufacture our clinical trial supplies of approximately $214,000;
decreased costs associated with regulatory consultants of $95,000 and
decreased costs associated with market research of $105,000.

General and Administrative Expenses

General and administrative expenses were $3.2 million and $3.0 million for the nine months ended September 30, 2011 and 2012, respectively. The decrease in general and administrative expenses of $180,000, or 5.7%, was mainly primarily due to legal costs associated with the DSP and Servier collaboration agreements of $150,000 incurred 2011, but not in 2012.

Revaluation of Warrants

Some of our outstanding warrants are deemed to be derivative instruments that require liability classification and mark-to-market accounting. At the end of each reporting period, the fair values of the warrants were determined using a Black-Scholes option-pricing model, resulting in the recognition of a gain of $268,000 and loss of $438,000 for the nine months ended September 30, 2011 and 2012, respectively. These fluctuations were primarily due to the reduction in value of the warrants as their estimated life declines and changes in volatility of the shares of common stock underlying the warrants. For the nine months ended September 30, 2012, the fair value was also affected by the increase in the price of the common stock underlying the warrants. Now that we are a public company, these fluctuations are expected to increase or decrease significantly based on changes in the price of our common stock.

Liquidity and Capital Resources

Sources of Liquidity

We have incurred losses and cumulative negative cash flows from operations since . . .

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