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CEMP > SEC Filings for CEMP > Form 10-Q on 25-Apr-2013All Recent SEC Filings

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Form 10-Q for CEMPRA, INC.


25-Apr-2013

Quarterly Report


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

The interim financial statements and this Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2012, and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2012. In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are subject to risks and uncertainties, including those set forth under "Part I. Item 1. Business - Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2012, and elsewhere in this report, that could cause actual results to differ materially from historical results or anticipated results.

Overview

We are a clinical-stage pharmaceutical company focused on developing antibiotics to meet critical medical needs in the treatment of bacterial infectious diseases, particularly respiratory tract infections and chronic and acute staphylococcal infections. Our lead program, solithromycin, which we are developing in both oral and IV formulations initially for the treatment of CABP, one of the most serious infections of the respiratory tract, recently initiated a pivotal Phase 3 clinical trial of the oral formulation for the treatment of CABP in a global multi-center double-blinded study. We have also released data from a Phase 2 study of solithromycin in uncomplicated gonorrhea. Our second program is Taksta, which we are developing in the U.S. as an oral treatment for prosthetic joint infections caused by S. aureus, including MRSA. In December 2012, we initiated a Phase 2 trial for Taksta in patients with prosthetic joint infections.

We acquired worldwide rights (exclusive of ASEAN countries) to a library of over 500 macrolide compounds, including solithromycin, from Optimer Pharmaceuticals, Inc. in March 2006. We entered into a long-term supply arrangement with Ercros, S.A. in March 2011, pursuant to which we have the exclusive right to acquire fusidic acid for the production of Taksta. We believe Ercros is one of only two currently known manufacturers that can produce fusidic acid compliant with the purity required for human use.

We have devoted substantially all of our resources to our drug development efforts, including conducting clinical trials of our product candidates, protecting our intellectual property and providing general and administrative support for these operations. We do not have any products approved for sale and have not generated any revenue from any source. From inception in November 2005 through March 31, 2013, we raised a total of $176.4 million from the issuance of debt, sale of convertible notes, convertible preferred shares, common shares and common stock, including $58.0 million from the sale of common stock in our IPO in February 2012 and $25.1 million from the sale of common stock in a private placement in October 2012.

We have incurred losses in each year since our inception in November 2005. Our net losses were approximately $3.2 million and $10.3 million for the three months ended March 31, 2012 and March 31, 2013. As of March 31, 2013, we had an accumulated deficit of approximately $133.3 million. Substantially all of our operating losses resulted from costs incurred in connection with our 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:

initiate or continue our clinical trials of solithromycin and Taksta and our other product candidates;

seek regulatory approvals for our product candidates that successfully complete clinical trials;

build appropriate manufacturing facilities for the manufacture of, or outsource the manufacture of, any products for which we may obtain regulatory approval;

establish our own sales force, or contract with third parties, for the sales, marketing and distribution of any products for which we obtain regulatory approval;

maintain, expand and protect our intellectual property portfolio;

continue our other research and development efforts;


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hire additional clinical, quality control, scientific and management personnel; and

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

We do not expect to generate product revenue 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 will need to raise additional capital prior to the commercialization of solithromycin and Taksta or any of our other product candidates. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our operating activities through a combination of equity offerings, debt financings, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. However, we may be unable to raise additional funds when needed on favorable terms or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to develop our product candidates.

Our Board of Directors approved a 1-for-9.5 reverse stock split of our common and preferred shares on January 12, 2012, which became effective on January 29, 2012. All references to common stock, common shares outstanding, average number of common shares outstanding and per share amounts in our consolidated financial statements and notes to consolidated financial statements have been restated to reflect the 1-for-9.5 reverse stock split on a retroactive basis.

Financial Overview

Revenue

To date, we have not generated revenue from the sale of any products or from any other source. In the future, we anticipate generating revenue from a combination of sales of our products, if approved, whether through our own or a third-party sales force, and license fees, milestone payments and royalties in connection with strategic collaborations regarding any of our product candidates. We expect that any revenue we generate will fluctuate from quarter to quarter. If we or our strategic partners fail to complete the development of solithromycin or Taksta in a timely manner or obtain regulatory approval for them, or if we fail to develop our own sales force or find one or more strategic partners for the commercialization of approved products, our ability to generate future revenue, and our financial condition and results of operations would be materially adversely affected.

Research and Development Expenses

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

employee-related expenses, which include salaries, benefits and share compensation expense, for personnel in research and development functions;

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

costs related to acquiring and manufacturing clinical trial materials;

costs related to compliance with regulatory requirements;

consulting fees paid to third parties related to non-clinical research and development;

research supplies; and

license fees and milestone payments related to in-licensed technologies.

From inception through March 31, 2013, we have incurred $91.1 million in research and development expenses. We plan to increase our research and development expenses for the foreseeable future as we seek to complete development of solithromycin for CABP and Taksta for prosthetic joint infections and to further advance our other product candidates.


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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 related clinical trial fees. Our internal resources, employees and infrastructure are not directly tied to any individual research project and are typically deployed across multiple projects. Through our clinical development programs, we are advancing solithromycin and Taksta in parallel primarily for the treatment of CABP and prosthetic joint infections, respectively, as well as for other indications. Through our pre-clinical development programs, we are seeking to develop macrolide product candidates for non-antibacterial indications.

The following table sets forth costs incurred on a program-specific basis for solithromycin and Taksta, excluding personnel-related costs. Macrolide research includes costs for discovery programs. All employee-related expenses for those employees working in research and development functions are included in "Research and development payroll" in the table, including salary, bonus, employee benefits and share-based compensation. We do not allocate insurance 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.

                                                            Three Months Ended March 31,
                                                             2012                  2013
                                                              (Unaudited, in thousands)
Direct research and development expense by program:
Solithromycin                                            $       1,214         $       5,746
Taksta                                                              30                   416
Macrolide research                                                   3                    12
Research and development personnel cost                            605                 1,078

Total direct research and development expense                    1,852                 7,252
Indirect research and development expense                           24                   119

Total research and development expense                   $       1,876         $       7,371

The successful development of our clinical and pre-clinical 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 pre-clinical 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 of 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 FDA or another regulatory authority were to require us to conduct clinical trials beyond those which we currently anticipate 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.

We have begun our pivotal trial program for solithromycin, which we believe will require two Phase 3 trials, including one trial with oral solithromycin and one trial with IV solithromycin stepping down to oral solithromycin. Both of these trials will be randomized, double-blinded studies conducted against a comparator drug agreed upon with the FDA, for which we will have to show non-inferiority from an efficacy perspective and acceptable safety and tolerability. Using feedback received from the FDA, we began the Phase 3 trial with oral solithromycin in


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December 2012. We plan to have an end-of Phase 2 meeting with the FDA in the first half of 2013 and initiate the IV to oral Phase 3 study in the second half of 2013, depending on funds being available.

In 2010, we successfully completed a Phase 2 clinical trial with Taksta in ABSSSI patients. In this trial, the Taksta loading dose regimen demonstrated efficacy, safety and tolerability that was comparable to linezolid. Like ABSSSI, prosthetic joint infections are often caused by S. aureus, including MRSA. At this time, however, we do not intend to pursue Taksta as a treatment for ABSSSI. In December 2012, we initiated a Phase 2 trial of Taksta in patients with prosthetic joint infections.

General and Administrative Expenses

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

We expect that our general and administrative expenses will increase with the continued development and potential commercialization of our product candidates. We believe that these increases will likely include increased costs related to the hiring of additional personnel and increased fees for outside consultants, lawyers and accountants. We also expect to incur significant costs to comply with corporate governance, internal controls and similar requirements applicable to public companies.

Other Income (Expense), Net

Interest income consists of interest earned on our cash and equivalents as well as changes in fair value of warrants issued in connection with the December 2011 Note. We expect our interest income to decrease during 2013 as we incur costs in our operations.

Interest expense consists of interest incurred on the August 2011 Notes issued to various investors and that converted to common stock at the close of our initial public offering ("IPO") in February 2012 and the December 2011 Note issued to Hercules Technology Growth Capital, Inc. as well as changes in fair value of warrants issued in connection with the notes. We expect interest expense to decrease during 2013 as we continue to make principle payments on the outstanding December 2011 Note.

Accretion of Redeemable Preferred Shares

Our redeemable convertible preferred shares were initially recorded on our balance sheet at their cost, less associated issuance costs. The amount reflected on the balance sheet for our convertible preferred shares is increased by periodic accretion so that the amount reflected on the balance sheet will equal the aggregate redemption price at the redemption date.

Yield is cumulative and payable to the holders of preferred shares in advance of any distributions on common shares but only when, if and as declared by our board of directors. The holders of Class C preferred shares have been earning an annual yield at a rate of 8.0% of the original purchase price since May 13, 2009. Through May 13, 2009, the holders of Class A preferred shares and Class B preferred shares earned an annual yield at a rate of 8.0% of the original purchase price. Yield is recorded through periodic accretions which increase the carrying value of the preferred shares and is charged against additional paid-in capital to the extent available or shareholders' equity (deficit).

Upon completion of our IPO, all of our outstanding preferred shares, including $13.7 million of accrued yield converted into a total of 9,958,502 shares of common stock.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities in our financial statements. We evaluate our estimates and judgments, including those related to accrued expenses and share-based compensation, on an ongoing basis. We base our estimates on historical experience, known trends and events and various other factors that are believed to be reasonable under the circumstances, the


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results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

For a description of our critical accounting policies and estimates, please refer to the "Critical Accounting Policies and Estimates" section of the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 7, 2013. There have been no material changes in any of our accounting policies since December 31, 2012.

Results of Operations

Comparison of Three Months Ended March 31, 2012 and Three Months Ended March 31, 2013

The following table summarizes the results of our operations for each of three-month periods ended March 31, 2012 and 2013, together with the changes in those items in dollars:

                                                            Three Months Ended March 31,
                                                                                      Increase/
                                                      2012             2013           (Decrease)
                                                              (Unaudited, in thousands)
Revenue                                             $     -           $   -          $        -
Research and development expense (1)                    1,876           7,371               5,495
General and administrative expense (1)                    972           2,647               1,675
Other income (expense), net                              (301 )          (327 )               (26 )

(1) Includes the following stock-based
compensation expenses:
Research and development expense                    $      65         $   291        $        226
General and administrative expense                         99             700                 601

Revenue

We did not recognize any revenue for the three months ended March 31, 2012 and 2013.

Research and Development Expense

Research and development expense increased $5.5 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012 as a result of a $4.5 million increase in expenses incurred for solithromycin, primarily related to our phase 3 clinical trial that initiated in December 2012, a $0.4 million increase in expenses incurred for Taksta primarily related to our phase 2 PJI trial that initiated in December 2012 and a $0.6 million increase in employee and travel expenses.

General and Administrative Expense

General and administrative expense increased by $1.7 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012 as a result of increased employee expense of $0.8 million, primarily stock compensation expense, franchise tax of $0.4 million and professional service fees of $0.5 million.

Other Income (Expense), Net

Other income (expense) remained consistent during the three months ended March 31, 2013 compared to the three months ended March 31, 2012.


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Liquidity and Capital Resources

Sources of Liquidity

Since our inception in November 2005 through March 31, 2013, we have funded our operations primarily with $176.4 million from a combination of debt, and the sale of convertible notes, convertible preferred shares, common shares and common stock.

The gross proceeds we have received from the issuance and sale of our convertible notes and preferred and common shares are as follows (dollars in thousands):

                                                          Number of        Gross
     Issue                                                 Shares        Proceeds

     Class A                                    2006         789,191     $  7,497  (1)
     Class A                                    2007       1,557,895        14,800
     Class B                                    2007         809,717        10,000
     Class C                                    2009       2,488,686        25,500
     Class C                                    2010       2,000,700        20,500
     August 2011 Notes                          2011              -          5,000
     December 2011 Note                         2011              -         10,000
     Common Stock / Initial Public Offering     2012       9,660,000        57,960
     Common Stock / Private Placement           2012       3,864,461        25,119

(1) Includes $3,197 of converted notes payable and accrued interest.

Cash Flows

The following table sets forth the major sources and uses of cash for the
periods set forth below:



                                                          Three Months Ended
                                                               March 31
                                                        2012               2013
                                                      (Unaudited, in thousands)
  Net cash provided by (used in):
  Operating activities                              $      (3,762 )      $  (9,938 )
  Investing activities                                         (5 )            (19 )
  Financing activities                                     54,075               -

  Net increase (decrease) in cash and equivalents   $      50,308        $  (9,957 )

Operating Activities. Cash used in operating activities of $3.8 million for the three months ended March 31, 2012 was primarily a result of our $3.2 million net loss and cash used by changes in operating assets and liabilities of $0.8 million partially offset by non-cash items of $0.2 million. Cash used in operating activities of $9.9 million for the three months ended March 31, 2013 was primarily a result of our $10.0 million net loss and cash used by changes in operating assets and liabilities of $0.9 million partially offset by non-cash items of $1.0 million.

Investing Activities. Net cash used in investing activities was $5,000 for the three months ended March 31, 2012 and $19,000 for the three months ended March 31, 2013. Cash used in investing activities during each of these periods reflected our purchases of equipment.

Financing Activities. Net cash provided by financing activities was $54.1 million for the three months ended March 31, 2012. The cash provided by financing activities in 2012 consisted of gross proceeds of $58.0 million from the IPO offset by $3.2 million of underwriting discounts and $0.7 million of offering costs.


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Funding Requirements

To date, we have not generated any product revenue from our development stage product candidates or from any other source. We do not know when, or if, we will generate any product revenue. We do not expect to generate product revenue unless and until we obtain marketing approval of and commercialize solithromycin and/or Taksta or any of our other product candidates. At the same time, we expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval for, solithromycin and Taksta and our other product candidates. In addition, subject to obtaining regulatory approval of any of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. We will need substantial additional funding in connection with our continuing operations.

We expect that our existing cash and equivalents, including interest thereon, will enable us to fund our operating expenses and capital expenditure requirements into 2015. This projection does not include funds to initiate the solithromycin Phase 3 IV-to-oral clinical trial. We will need to obtain additional financing for the continued development of solithromycin, Taksta and our other product candidates and prior to the commercialization of any of these product candidates. We have based our estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Due to 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 necessary to complete the development of our product candidates.

Our future capital requirements will depend on many factors, including:

the progress, costs and results of our ongoing oral solithromycin Phase 3 trial, the results of our planned end-of-Phase 2 meeting with the FDA for the planned Phase 3 IV-to-oral trial for solithromycin, our ongoing Taksta Phase 2 trial and any future trials for solithromycin and Taksta;

the scope, progress costs, and results of pre-clinical development, laboratory testing and clinical trials for our other product candidates;

the costs, timing and outcome of regulatory review of our product candidates;

the costs of commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive regulatory approval;

our ability to establish collaborations on favorable terms;

the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims;

revenue if any, received from sales of our product candidates, if approved by the FDA;

the extent to which we acquire or invest in businesses, products and . . .

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