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SGYP > SEC Filings for SGYP > Form 10-K on 18-Mar-2013All Recent SEC Filings

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

Form 10-K for SYNERGY PHARMACEUTICALS, INC.


18-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

You should read this discussion together with the Financial Statements, related Notes and other financial information included elsewhere in this Form 10-K. The following discussion contains assumptions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under "Risk Factors," and elsewhere in this Form 10-K. These risks could cause our actual results to differ materially from those anticipated in these forward-looking statements. On November 30, 2011 we filed a certificate of amendment to our amended and restated certificate of incorporation to effect a 1 for 2 reverse split of our common stock. On the effective date, each two shares of our outstanding common stock automatically converted into one share of common stock. All share and per share amounts have been restated for all periods presented to reflect this reverse stock split.

FINANCIAL OPERATIONS 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 CIC, and constipation-predominant irritable bowel syndrome, or IBS-C. CIC and IBS-C are functional gastrointestinal disorders that afflict millions of sufferers worldwide. CIC 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.

On February 14, 2012, we entered into an agreement and plan of merger with our wholly-owned subsidiary, Synergy Pharmaceuticals Inc., a Delaware corporation for the purpose of changing our state of incorporation to Delaware from Florida. Pursuant to the merger agreement, we merged with and into Synergy-DE with Synergy-DE continuing as the surviving corporation. The directors and officers in office of Synergy Florida upon the effective date of the merger became our directors and officers (Synergy-DE).

From inception through December 31, 2012, we have sustained cumulative net losses of approximately $109,053,000. We currently operate in one reportable business segment-human therapeutics. Substantially all of our resources have been expended for the research and development of our product candidates. From inception through December 31, 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.

HISTORY

On July 14, 2008, Pawfect Foods Inc. ("Pawfect"), a Florida corporation incorporated on November 15, 2005, acquired 100% of the common stock of Synergy Pharmaceuticals, Inc. and its wholly-owned subsidiary, Synergy Advanced Pharmaceuticals, Inc. (collectively "Synergy-DE"), a Delaware corporation incorporated on September 11, 1992, under the terms of an Exchange Transaction among Pawfect, Callisto Pharmaceuticals, Inc. ("Callisto'), Synergy-DE, and certain other holders of Synergy-DE common stock ("Exchange Transaction"). For a more detailed discussion of this exchange transaction, see Item 8. Financial Statements-Note 3 Acquisitions and Stockholders' Equity (Deficit).

On July 21, 2008, Pawfect amended its articles of incorporation to effect the actions necessary to complete the transactions contemplated by the Exchange Transaction and changed its name to Synergy Pharmaceuticals, Inc.

Immediately following the Exchange Transaction we discontinued its pet food business and are now exclusively focused on the development of drugs to treat GI disorders and diseases. We acquired the GI drugs and related technology in connection with the Exchange Transaction.

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 the over-allotment option resulting in additional gross proceeds of $6,750,000, before deducting underwriting discounts and commissions and other offering expenses of $405,000, bringing total gross proceeds from the offering to $51,750,000.


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On June 21, 2012, we entered into a controlled equity sales agreement with a placement agent and agreed that we may issue and sell through the placement agent, up to $30,000,000 of our common stock. From October 8, 2012 through December 31, 2012, we sold 815,654 shares of common stock with gross proceeds of $4,111,802, at an average selling price of $5.04 per share. Selling agent fees totaled $123,385 on these sales.

On August 23, 2012, we signed an Asset Purchase Agreement with Bristol-Myers Squibb Company and acquired the assets related to FV-100, an orally available nucleoside analogue, 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 payment of $1 million, subsequent milestone payments covering marketing approval and 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.

Synergy - Callisto Merger

On July 20, 2012, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Callisto as amended on October 15, 2012. At the time Callisto was our largest stockholder and is a development stage biopharmaceutical company.

On January 17, 2013, we completed our acquisition of Callisto. As a result of the merger, each outstanding share of Callisto common stock was converted into the right to receive 0.1799 of one share of our common stock (the "Exchange Ratio") and the 22,295,000 shares of our common stock held by Callisto were canceled. In addition, each stock option exercisable for shares of Callisto common stock that was outstanding on January 17, 2013 was assumed by us and converted into a stock option to purchase the number of shares of our common stock that the holder would have received if such holder had exercised such stock option for shares of Callisto common stock prior to the merger and exchanged such shares for shares of our common stock in accordance with the Exchange Ratio. In addition, each Callisto stock option exercisable for shares of our common stock outstanding on the January 17, 2013 was assumed by us and each outstanding warrant or obligation to issue a warrant to purchase shares of Callisto common stock, whether or not vested, was cancelled. Upon consummation of the merger the related party balance due from Callisto, $3,305,636 as of December 31, 2012, was eliminated. In connection with the consummation of the merger, we issued a total of approximately 28,605,354 shares of our common stock to former Callisto stockholders in exchange for their shares of Callisto common stock.

As Callisto does not have the inputs, process and outputs that meet the definition of a business under ASC 805, the merger will not be accounted for as a business combination. The merger is expected to be accounted for as a recapitalization of us, effected through exchange of Callisto shares for our shares, and the cancellation of our shares held by Callisto. The excess of our shares issued to Callisto shareholders over our shares held by Callisto is the result of a discount associated with the restricted nature of our shares to be received by Callisto shareholders. Therefore, considering this discount, the share exchange has been determined to be equal from a fair value stand point. Upon the effective date of the merger, we will account for the merger by assuming Callisto's net liabilities, of approximately $1.7 million. Our financial statements will not be restated retroactively to reflect the historical financial position or results of operations of Callisto.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2012 AND DECEMBER 31, 2011

We had no revenues during the twelve months ended December 31, 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 twelve months ended December 31, 2012 ("Current Year") increased approximately $15.9 million or 119%, to approximately $29.3 million from $13.4 million for the twelve months ended December 31, 2011 ("Prior Year"). This increase in research and development expenses was largely attributable to a doubling of the development efforts of plecanatide, which accounted for $11.0 million of the increase, and the initiation of clinical development of SP-333 which accounted for $3.3 million of the increase. The following table sets forth our research and development expenses directly related to our product candidates for the twelve months ended December 31, 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:

(dollars in thousands)

                                          Year Ended
                                         December 31,
Drug candidates                         2012       2011
Plecanatide                           $ 22,360   $ 11,870
SP-333                                   3,298          -
Total direct cost                     $ 25,658   $ 11,870
Total indirect cost                      3,636      1,549
Total research and development cost   $ 29,294   $ 13,419


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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 approximately $2 million higher due to (i) higher compensation, employee benefits, and stock based compensation expenses of approximately $2.7 million in the Current Year, as compared to approximately $1.2 million during the Prior Year, as a result of increased staffing levels required to support the our large multicenter trial which was initiated in October 2011 and completed in December 2012,and (ii) higher scientific and regulatory advisory fees and expenses of approximately $0.8 million in the Current Year, as compared to approximately $0.3million during the Prior Year, due to the Investigational New Drug (IND) application for clinical evaluation of SP-333 to treat IBD filed on September 7, 2012, and an IND filing for clinical study of plecanatide in IBS-C patients filed on October 26, 2012.

General and administrative expenses increased $1.2 million or 17%, to approximately $7.9 million for the Current Year from approximately $6.7 million for the Prior Year. These increased expenses were primarily the result of
(a) higher legal cost of approximately $1.4 million in the Current Year as compared to approximately $0.5 million during the Prior Year, related to (i) the patent prosecution and defense (Part I, Item 1) , and the class action suit relating to the merger (footnote 6) and (ii) costs associated with defending against merger related class action suits filed in New York and Delaware during the Current Period and (b) higher facilities cost of approximately $1.3 million during Current Year as compared to approximately $0.9 million during the Prior Year.

Net loss for the Current Year was approximately $39.4 million, compared to a net loss of approximately $14.5 million incurred for the Prior Year. This increase in our net loss of approximately $24.9 million or 172% was a result of the increases in operating expenses discussed above plus purchased in-process research and development cost of $1 million on FV-100 (footnote 7), a loss in fair value of derivative instruments-warrants of approximately $1.9 million during the Current Year, as compared to a gain of approximately $5.3 million during the Prior Year. This change in fair value in the Current Year was principally due to an increase in our common stock price from $3.51 as of December 31, 2011 to $5.26 per share on December 31, 2012.

YEARS ENDED DECEMBER 31, 2011 AND DECEMBER 31, 2010

We had no revenues during the twelve months ended December 31, 2011 and 2010 because we do not have any commercial biopharmaceutical products and we do not expect to have such products for several years, if at all.

For the twelve months ended December 31, 2011, research and development expenses increased $3.8 million or 40% to $13.4 million, compared to $9.6 million during the twelve months ended December 31, 2010. This increase in research and development expenses was primarily attributable to initiating the large multicenter II/III clinical trial of our product candidate plecanatide and the pre-clinical development of SP-333. These clinical and preclinical expenses totaled approximately $10.8 million during the twelve months ended December 31, 2011, as compared to $5.5 million during the twelve months ended December 31, 2010. This increase was offset by lower manufacturing, formulation, testing and packaging of drug product, totaling approximately $1million during the twelve months ended December 31, 2011, as compared to approximately $2.6 million during the twelve months ended December 31, 2010.

For the twelve months ended December 31, 2011, general and administrative expenses increased to approximately $6.7 million, as compared to approximately $6.6 million during the twelve months ended December 31, 2010. This increase was primarily due to higher compensation related expenses, partially offset by lower legal expenses.

Net loss for the twelve months ended December 31, 2011 was approximately $14.5 million as compared to a net loss of approximately $15.2 million incurred for the twelve months ended December 31, 2010. This decrease in our net loss of approximately $0.8 million, or 5% was the result of higher research and development expenses discussed above, more than offset by a gain from the change in fair value of our derivative liability of approximately $5.3 million, as compared to a gain of approximately $0.3 million during the twelve months ended December 31, 2010.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2012, we have approximately $12.4 million of cash and cash equivalents and approximately $20.1 million in available- for- sale- securities. Net cash used in operating activities was approximately $31.1 million for the twelve months ended December 31, 2012 as compared to approximately $21.2 million during the twelve months ended December 31, 2011 and $11.5 million during the twelve months ended December 31. 2010. Net cash provided by financing activities for the twelve months ended December 31, 2012 was approximately $52.1 million as compared to approximately $32.6 million and $6.7 million provided during the twelve months ended December 31, 2011 and 2010, respectively.

As of December 31, 2012 we had working capital of approximately $26.7 million as compared to working capital of approximately $11.6 million on December 31, 2011.


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Our working capital requirements will depend upon numerous factors including but not limited to the nature, cost and timing of pharmaceutical research and development programs. We will be required to raise additional capital within the next twelve months to complete the development and commercialization of current product candidates and to continue to fund operations at our current cash expenditure levels. To date, our sources of cash have been primarily limited to the sale of equity securities. 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 of 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.

Our consolidated financial statements as of December 31, 2012 have been prepared under the assumption that we will continue as a going concern. Our independent registered public accounting firm has issued a report on our financial statements that included an explanatory paragraph referring to our projected future losses along with recurring losses from operations and expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available. 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 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following table is a summary of contractual obligations for the periods indicated that existed as of December 31, 2012, and is based on information appearing in the notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

(dollars in thousands)

                                                                                        More
                                          Less than                       3-5           than
                             Total         1 Year        1-2 Years       Years         5 Years
Operating leases           $    2,752    $       532    $       805    $    1,301    $       114
Purchase
obligations-principally
employment and
consulting services(1)          6,060          1,971          2,792         1,297              -
Purchase
Obligations-Major
Vendors(2)                     19,380         19,380              -             -              -

Total obligations          $   28,192    $    21,883    $     3,597    $    2,598    $       114



(1) Represents salary, bonus, and benefits for remaining term of employment agreements with Gary S. Jacob, CEO, Bernard F Denoyer, Senior Vice President, Finance, Kunwar Shailubhai, Chief Scientific Officer and consulting fees, bonus and benefits for remaining term of consulting agreement with Gabriele M. Cerrone, Chairman.

(2) Represents amounts that will become due upon future delivery of supplies, drug substance and test results from various suppliers, under open purchase orders as of December 31, 2012.

OFF-BALANCE SHEET ARRANGEMENTS

We had no off-balance sheet arrangements as of December 31, 2012.

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-Note 3 Summary of Significant Accounting Policies and New Accounting Pronouncements. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. We believe that the following discussion represents our critical accounting policies.

Financial Instruments - Cash, Cash Equivalents and Marketable Securities

All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. Our marketable securities consist solely of investments in US Treasury Notes and have been classified and accounted for as available-for-sale.


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Management determines the appropriate classification of our investments at the time of purchase and reevaluates the available-for-sale designations as of each balance sheet date. Cash equivalents and marketable securities are carried at amounts that approximate fair value due to their short-term maturities. We consider the declines in market value of our marketable securities investment portfolio to be temporary in nature. Fair values were determined for each individual security in the investment portfolio. When evaluating the investments for other-than-temporary impairment, we reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and our intent to sell, or whether it is more likely than not we will be required to sell, the investment before recovery of the investment's amortized cost basis. For the year ended December 31, 2012, we did not consider any of our investments to be other-than-temporarily impaired, and there were no such investments for the year ended December 31, 2011.

Research and Development

Research and development costs include expenditures in connection with operating an in-house research and development laboratory, salaries and staff costs, application and filing for regulatory approval of proposed products, purchased in-process research and development, regulatory and scientific consulting fees, as well as contract research, patient costs, drug formulation and tableting, data collection, monitoring, clinical trial insurance.

We do not currently have any commercial biopharmaceutical products, and do not expect to have such for several years, if at all and therefore our research and development costs are expensed as incurred. These include expenditures in connection with an in-house research and development laboratory, salaries and staff costs, application and filing for regulatory approval of proposed products, purchased in-process research and development, regulatory and scientific consulting fees, as well as contract research, patient costs, drug formulation and tableting, data collection, monitoring, and clinical trial insurance. While certain of our research and development costs may have future benefits, our policy of expensing all research and development expenditures is predicated on the fact that we have no history of successful commercialization of biopharmaceutical products to base any estimate of the number of future periods that would be benefited.

In June 2007, the EITF of the FASB reached a consensus on ASC Topic 730, Research and Development ("ASC Topic 730"). This guidance requires that non-refundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. As the related goods are delivered or the services are performed, or when the goods or services are no longer expected to be provided, the deferred amounts are recognized as an expense. We adopted ASC Topic 730 on January 1, 2008 and the adoption did not have a material effect on our consolidated financial position, results of operations or cash flows. As of December 31, 2012 and 2011 we had $926,380 and $577,745, respectively, of such deferred amounts, which are included in prepaid and other current assets on the Company's consolidated balance sheets.

Share-Based Compensation

We rely heavily on incentive compensation in the form of stock options to recruit, retain and motivate directors, executive officers, employees and consultants. Incentive compensation in the form of stock options and restricted stock units is designed to provide long-term incentives, develop and maintain an ownership stake and conserve cash during our development stage. Since inception through December 31, 2012 stock-based compensation expense has totaled approximately $5,484,000, or 5.03% of our net loss from inception through December 31, 2012.

ASC Topic 718 "Compensation-Stock Compensation" requires companies to measure the cost of employee services received in exchange for the award of equity instruments based on the estimated fair value of the award at the date of grant. The expense is to be recognized over the period during which an employee is required to provide services in exchange for the award. We did not issue stock options until the year ended December 31, 2008.

Share-based compensation is recognized as an expense in the financial statements based on the grant date fair value. Upon adoption of ASC Topic 718 "Compensation-Stock Compensation" , we selected the Black-Scholes option pricing model as the most appropriate model for determining the estimated fair value for stock-based awards. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility is based on the historical volatility of our stock. Option term is based on the term used by similar public entities. The risk-free interest rate is based on observed interest rate appropriate for the expected term of our employee stock options. Forfeiture rates are estimated based on our historical experience plus management's judgment, at the time of grant.

Fair value of financial instruments

We have adopted FASB ASC 820 Fair Value Measurements and Disclosures ("ASC 820") for financial assets and liabilities that are required to be measured at fair value, and non-financial assets and liabilities that are not required to be measured at fair value on a recurring basis. The carrying value of cash and cash equivalents, marketable securities, accounts payable and accrued expenses approximates fair value due to the relatively short maturity of these instruments.

ASC 820 provides that the measurement of fair value requires the use of . . .

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