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

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Form 10-K for VENTRUS BIOSCIENCES INC


18-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation

Overview

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

We have in-licensed our two proprietary product candidates that are in clinical development that address large market opportunities, including our most advanced product candidate, VEN 307. VEN 307 is a pre-mixed and pre-packaged proprietary topical formulation of the drug diltiazem which we are developing for the treatment of anal fissures. VEN 308 is intended to treat fecal incontinence.

Our development partner, S.L.A. Pharma, conducted a Phase III trial of VEN 307 in Europe, the positive results of which we announced in May 2012. Based on those results, we initiated a second pivotal Phase III clinical trial of VEN 307 in anal fissures in the fourth quarter of 2012, and expect to report top line data in the fourth quarter of 2013. We intend to undertake technical development to create a twice daily patentable formulation of VEN 307 after which we will determine whether to pursue further development of an extended release formulation of VEN 307.

Based on disappointing results of our Phase III trial of VEN 309 for the treatment of hemorrhoids, which we reported in June 2012, we have ceased all activity related to VEN 309 other than the winding down of the program..

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, sales of our common stock in mid-2012 pursuant to an at-the-market program, and a public offering of our common stock and Series A non-voting convertible preferred stock in February 2013. 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 and VEN
308. As of December 31, 2012, we had a deficit accumulated during the development stage of $92,319,514. 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. We do not anticipate FDA approval and launch of VEN 307 until at least late 2014 or early 2015. As a result, our operating losses are likely to be substantial over the next two years as we continue the development and undertake commercialization of VEN 307 and thereafter if approval is not received or VEN 307 is not successfully launched. 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 FDA approval of VEN 307 and its initial launch and commercialization. Thereafter, we will need revenue from commercial sales of VEN 307, if any, or additional capital to continue operations.

Financial Operations Overview

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, 2012 audited financial statements included in this report. 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, measured at grant date, based on the estimated fair value of the award, which is recognized as expense over the employee'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 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 December 31, 2012, we incurred $59,043,406 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 full $12.5 million purchase price we paid in 2011 for VEN 309.

We plan to continue research and development expenses for the at least the next two years in order to complete development of our most advanced product candidate, VEN 307. 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 disappointing results of that Phase III trial, 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.

The following table summarizes the research and development expenses incurred since inception.

                                                                Period from
                                                              October 7, 2005
                                                              (inception) to
            YE 2010         YE 2011          YE 2012         December 31, 2012
VEN 307   $ 1,309,501     $  1,921,922     $  5,565,280     $        11,289,203
VEN 309   $   379,237     $ 22,230,856     $ 13,102,375     $        43,773,214
Other     $   161,928     $  1,124,904     $    846,508     $         3,980,989

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 clinical data, regulatory conversations with FDA, 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 and regulatory 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. 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 $15 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 the Company currently has sufficient funds to meet its operating requirements and scheduled regulatory and development activities through FDA approval and initial launch and commercialization of diltiazem. Assuming such approval and launch, thereafter, if the Company cannot generate significant cash from its operations, it intends to obtain any additional funding it requires through strategic relationships, public or private equity or debt financings, or other arrangements and it cannot assure such funding will be available on reasonable terms, or at all.

Our significant accounting policies are described in more detail in Note 1 to our audited financial statements included in this report.

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.

Contractual Obligations



The following table summarizes our future contractual obligations and commercial
commitments at December 31, 2012.



                                Less than 1 year       1-2 years

SLA Pharma                      $         498,000     $         -
Regus (office lease)            $          74,046     $    58,800
Total contractual obligations   $         572,046     $    58,800

Results of Operations

Comparison of the Years Ended December 31, 2012 and December 31, 2011

Research and Development Expense

Research and development expense was $19,514,163 for the year ended December 31, 2012, a decrease of $5,763,519 or 22.80%, from $25,277,682 for the same period in 2011. The primary reason for the decrease was the $12.5 million purchase price for VEN 309 that was paid to Sam Amer in 2011, which was offset by costs associated with preparing for and initiating the second clinical trial for VEN 307 in 2012.

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 in 2012. We expect that our general and administrative expenses will increase as we add additional personnel to continue our commercialization plans for VEN 307.

General and administrative, or G&A, expense was $5,341,333 for the year ended December 31, 2012, a decrease of $3,383,058, or approximately 38.77%, from $8,724,391 for the year ended December 31, 2011. The biggest decrease in G&A expense in 2012 was associated with stock-based compensation expense for employees, consultants and directors which decreased by $3,524,000, as well as a decrease in investor relations expenses of $112,000, which was offset by increases in board fees of $105,000, directors and officers insurance of $86,000, and consulting fees of $65,000.

Interest Expense and Income

We had no outstanding loans during the year ended December 31, 2012 due to repayment of all loans in July 2011 and therefore had no interest expense for the year, a decrease of $116,664 from the year ended December 31, 2011. Interest income was $65,066 for the year ended December 31, 2012 compared to $76,334 for the year ended December 31, 2011.

Comparison of the Years Ended December 31, 2011 and December 31, 2010

Research and Development Expense

Research and development expense was $25,277,682 for the year ended December 31, 2011, an increase of $23,427,016, or 1265%, from $1,850,666 for the year ended December 31, 2010. The primary reason for the increase was the increased development activities of VEN 309, which commenced after we received the proceeds from our initial public offering in December 2010. We have incurred higher development costs due to initiation of the Phase III clinical trial as well as product development and manufacturing costs to support the clinical study. Additionally, we expensed $12,500,000 relating to the acquisition of title and rights to VEN 309 from Sam Amer.

General and Administrative Expense.

General and administrative, or G&A, expense was $8,724,391 for the year ended December 31, 2011, an increase of $5,808,801, or approximately 199%, from $2,915,590 for the year ended December 31, 2010. We had limited operations and related operating expenses in the first half of 2010 due to the lack of funds. We began increasing our operating activities in the second half of 2010. The largest G&A expense incurred in the year 2011 was associated with stock-based compensation expense for employees, consultants and directors which increased by $3,550,080 as well as G&A salaries of $1,331,211 which did not exist in 2010.

Interest Expense

Interest expense of $116,664 in 2011 consisted of interest incurred on related party note which was paid in full in July 2011. Additionally, there was $302,327 of amortization of debt discount and deferred financing costs. Interest expense in 2010 consisted of interest incurred on the 5% related parties' promissory notes which were issued from October 2005 to June 2008, the 8% related parties' promissory notes which were issued from July 2008 to December 2010, the 10% Paramount Credit Partners notes from January 2009 to June 2010, the 8% senior convertible notes which were issued from December 2007 to December 2008, the 10% senior convertible notes from December 2008 to December 2010, the 8% 2010 senior convertible notes which were issued from February 2010 to December 2010, our letter of credit borrowings and interest due on our license fee payments. Additionally, interest expense included the beneficial conversion charge of conventional convertible debt that was converted below market value as well as amortization of debt discount and deferred financing costs, as well as the debt discount for warrants issued in connection with debt financings.

Liquidity and Capital Resources

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 December 31, 2012 principally with debt (which in connection with the initial public offering, all of the convertible notes, and accrued interest thereon, were converted into common stock) 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 addition, in July 2011, we raised $47.6 million in net proceeds in a registered public offering of our common stock.

We also filed a shelf registration statement with the Securities and Exchange Commission, or SEC which was declared effective on February 10, 2012 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. As part of the shelf registration statement, we included a prospectus for an 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 common equity sales program. In February 2013, we raised approximately $20.7 million in net proceeds in a public offering of our common stock and our Series A non-voting convertible preferred stock, all of which shares were sold off of the shelf registration statement.

Net Cash Used in Operating Activities

Net cash used in operating activities was $21,379,790 for the year ended December 31, 2012 and funded our research and development program build out and general and administrative expenses. The net loss of $24,790,430 for the year ended December 31, 2012 was greater than cash used in operating activities by $3,410,640. The primary reason for the difference is attributed to a stock-based compensation charge of $3,171,093.

Net Cash Used in Investing Activities

Net cash used in investing activities was $3,241 for the year ended December 31, 2012.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $4,896,816 for the year ended December 31, 2012. Net cash provided by financing activities during the year ended December 31, 2012 consisted of the sale of common stock in an at-the-market program of $4,166,494. We also received $730,322 from the exercise of warrants and options in 2012.

Funding Requirements

We expect to incur losses for at least the next two years as we develop VEN 307 and thereafter if the FDA does not approve VEN 307 or we do not launch it successfully. We expect to incur increasing research and development expenses for VEN 307. We expect that our general and administrative expenses will also increase as we add infrastructure for the planned commercialization of VEN 307, and continue to incur costs related to being a public company, including increased professional fees. Our future capital requirements will depend on a number of factors, including the timing and outcome of clinical trials and regulatory approvals, 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.

We anticipate that to complete the clinical trial process to obtain the approval of VEN 307 will cost approximately $15 million. Based on our cash position at December 31, 2012, and our analysis of our future development costs, 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 initial launch and commercialization of VEN 307. 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 two years, assuming the FDA approves VEN 307 and we successfully launch that product. 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 two years as we continue the development of VEN 307 and prepare for its commercialization.

We may need to finance our future cash needs through public or private equity offerings, debt financings, corporate collaboration and licensing arrangements, or a bank credit facility or other financing vehicle if one or more of our assumptions prove to be incorrect or if we choose to expand our product development efforts more rapidly than we presently anticipate, and we may decide to raise additional funds even before we need them if the conditions for raising capital are favorable. We do not currently have any commitments for future external funding. The sale of additional equity or debt securities, if convertible, could result in dilution to our stockholders. The incurrence of indebtedness would result in increased fixed obligations and could also result in covenants that would restrict our operations.

Additional equity or debt financing or corporate collaboration and licensing arrangements may not be available on acceptable terms, if at all. If we need additional capital and adequate funds are not available, we may be required to delay, reduce the scope of or eliminate our research and development programs, reduce our planned commercialization efforts or obtain funds through arrangements with collaborators or others that may require us to relinquish rights to certain product candidates that we might otherwise seek to develop or commercialize independently.

Recent Accounting Pronouncements

In May 2011, the financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, NO. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This ASU represents the converged guidance of the FASB and the International Accounting Standards Board, or IASB (together, the "Board") on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU No. 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term "fair value." The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and international financial reporting standards, or IFRS. The amendments to the FASB Accounting Standards Codification in this ASU are to be applied prospectively. The amendments are effective for annual periods beginning after December 15, 2011. The application of ASU No. 2011-04 did not have a material effect on our financial statements.

Cautionary Statement

We operate in a highly competitive environment that involves a number of risks, some of which are beyond our control. The following statement highlights some of these risks. For more detail, see "Item 1A. Risk Factors".

Statements contained in this Form 10-K that are not historical facts, are or might constitute forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, our expectations might not be attained. Forward-looking statements involve known and unknown risks that could cause actual results to differ materially from expected results. Factors that could cause actual results to differ materially from our expectations expressed in the report include, among others: risks related to the costs, timing, regulatory review and results of our studies and clinical trials; our ability to obtain FDA approval of our product candidates; differences between historical studies on which we have based our planned clinical trials and actual results from our trials; our anticipated capital expenditures, our estimates regarding our capital requirements, and our need for future capital; our liquidity and working capital requirements; our expectations regarding our revenues, expenses and other results of operations; the unpredictability of the size of the markets for, and market acceptance of, any of our products, including VEN 307; our ability to sell any approved products and the price we are able realize; our ability to obtain future funding on acceptable terms; our ability to retain and hire necessary employees and to staff our operations appropriately; our ability to compete in our industry and innovation by our competitors; our ability to stay abreast of and comply with new or modified laws and regulations that currently apply or become applicable to our business; estimates and estimate methodologies used in preparing our financial statements; the future trading prices of our common stock and the impact of securities analysts' reports on these prices; and the risks set out in our filings with the SEC.

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