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ACHN > SEC Filings for ACHN > Form 10-Q on 7-May-2013All Recent SEC Filings

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Form 10-Q for ACHILLION PHARMACEUTICALS INC


7-May-2013

Quarterly Report


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

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties. All statements other than statements relating to historical matters including statements to the effect that we "believe," "expect," "anticipate," "plan," "target," "intend" and similar expressions should be considered forward-looking statements. Our actual results could differ materially from those discussed in the forward-looking statements as a result of a number of important factors, including factors discussed in this section and elsewhere in this quarterly report on Form 10-Q, including those discussed in Item 1A of this report under the heading "Risk Factors," and the risks discussed in our other filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief or expectation only as the date hereof. We assume no obligation to update these forward-looking statements to reflect events or circumstances that arise after the date hereof.

Overview

We are a biopharmaceutical company that was established to discover, develop and commercialize innovative treatments for infectious diseases. Within the anti-infective market, we are currently concentrating on the development of antivirals for the treatment of chronic hepatitis C viral infection, or HCV. We are currently focusing our efforts on developing the following three clinical-stage drug candidates which we intend to study in combination with each other and/or potentially in combination with compounds owned by others:

• Sovaprevir, a NS3 protease inhibitor being investigated for the treatment of HCV, currently in phase II clinical development;

• ACH-3102, a NS5A inhibitor being investigated for the treatment of HCV, currently in phase II clinical development;

• ACH-2684, a NS3 protease inhibitor being investigated for the treatment of HCV, which recently completed phase I clinical development.

We recently initiated an international Phase II clinical trial with sovaprevir and ACH-3102 for the treatment of genotype 1 HCV. The trial will evaluate an all-oral 12-week interferon-free regimen consisting of sovaprevir, ACH-3102, and ribavirin in patients with chronic HCV who have not received prior therapy.

In addition, we have established a pipeline of certain antibacterial product candidates for which we have or are seeking appropriate collaborative partners, but to which we are not devoting significant resources at this time. We have also developed and out licensed certain development and commercialization rights to elvucitabine, for the treatment of both Hepatitis B, or HBV, and human immunodeficiency virus, or HIV.

We have devoted and are continuing to devote substantially all of our efforts toward product research and development. We have incurred losses of $321 million from inception through March 31, 2013 and had an accumulated deficit of $335 million at March 31, 2013, which includes preferred stock dividends recognized until our initial public offering in 2006. Our net losses were $11.7 million and $9.1 million for the three months ended March 31, 2013 and 2012, respectively.

We have funded our operations primarily through proceeds from the sale of equity securities, including our initial public offering in October 2006, private placements of our common stock in August 2008 and August 2010 and registered offerings of our common stock in January 2010, June 2011, August 2012 and February 2013.

In February 2013, we issued 16,894,410 shares of our common stock in underwritten public offering, including the underwriter's exercise of an over-allotment option. We received net proceeds of $133.2 million.

In August 2012, we issued 6,367,853 shares of our common stock in a registered direct offering with funds managed by QVT Financial LP. We received net proceeds of $41.7 million.

In June 2011, we issued 11,040,000 shares of our common stock in an underwritten public offering, including the underwriters' exercise of an over-allotment option. We received net proceeds of $60.9 million.

In August 2010, we issued 19,775,101 shares of our common stock and warrants to purchase 6,921,286 shares of common stock in a private placement to institutional and other accredited investors. We received net proceeds of $49.9 million.


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In January 2010, we issued 10,275,000 shares of our common stock in an underwritten public offering. In February 2010, we issued an additional 1,541,250 shares of common stock in connection with the underwriters' exercise of an over-allotment option. We received net proceeds of $22.6 million.

We expect to incur substantial and increasing losses for at least the next several years as we seek to:

• continue clinical testing of sovaprevir, ACH-3102 and ACH-2684; and

• identify and progress additional drug candidates.

We will need substantial additional financing to obtain regulatory approvals, fund operating losses, and, if deemed appropriate, establish manufacturing and sales and marketing capabilities, which we will seek to raise through public or private equity or debt financings, collaborative or other arrangements with third parties or through other sources of financing. There can be no assurance that such funds will be available on terms favorable to us, if at all.

In addition to the risks associated with early-stage companies, there can be no assurance that we will successfully complete our research and development, obtain adequate patent protection for our technology, obtain necessary government regulatory approval for drug candidates we develop, find and maintain appropriate collaboration partners or that any approved drug candidates will be commercially viable. In addition, we may not be profitable even if we succeed in commercializing any of our drug candidates.

Financial Operations Overview

Revenue

To date, we have not generated revenue from the sale of any drugs. The majority of our revenue recognized to date has been derived from our former collaboration with Gilead, which was terminated in February 2012, to develop compounds for use in treating HCV.

During the three months ended March 31, 2013 and 2012 we recognized $0 and $2.5 million, respectively, under this collaboration agreement. Revenue recognized during the three months ended March 31, 2012 consisted of recognition of the remaining deferred revenue related to this former collaboration, as effective with the termination of the collaboration we no longer have any future obligations under the collaboration.

Research and Development

Our research and development expenses reflect costs incurred for our proprietary research and development projects as well as costs for research and development projects conducted as part of collaborative arrangements. These costs consist primarily of salaries and benefits for our research and development personnel, costs of services by clinical research organizations, other outsourced research, materials used during research and development activities, facility-related costs such as rent and utilities associated with our laboratory and clinical development space and operating supplies.

Within the anti-infective market, we are concentrating on the development of antivirals for the treatment of HCV. Currently, we are developing our three lead clinical-stage drug candidates for the treatment of HCV, including sovaprevir and ACH-3102, each currently in phase II clinical development, and ACH-2684, currently in phase I clinical development. In the near term, we intend to focus our efforts on (i) completing clinical development of a combination regimen including sovaprevir and ACH-3102, with and without ribavirin, (ii) continuing non-therapeutic studies of sovaprevir and ACH-3102 and (iii) exploring potential development of our drug candidates with other drug developers under cooperative or other study arrangements.

In addition, we have established a pipeline of certain antibacterial product candidates for which we have or are seeking appropriate collaborative partners, but to which we are not devoting significant resources at this time. We have also developed and out licensed certain development and commercialization rights to elvucitabine, for the treatment of both Hepatitis B, or HBV, and human immunodeficiency virus, or HIV.

We have established our current HCV drug candidate pipeline entirely through our internal discovery capabilities. Through these efforts we have identified and are developing the following portfolio of drug candidates which we intend to study in combination with each other and/or potentially in combination with compounds owned by others:

• Sovaprevir, a NS3 Protease Inhibitor. We have most recently completed a phase IIa clinical trial conducted in both the United States and Europe to assess the compound's safety, tolerability, pharmacokinetic properties and efficacy when dosed with pegylated interferon and ribavirin (P/R) in treatment-naοve, genotype 1 HCV-infected subjects. In this trial, sovaprevir was demonstrated to achieve a complete early virologic response, or cEVR, after twelve weeks of dosing, in 94% to 100% of patients. Mean viral load, a measurement of the amount of virus in the blood stream, was reduced in HCV-infected patients by 4.56 log10 to 5.08 log10, or reduction of over 99.9% of the virus. Sovaprevir continued to be safe and well-tolerated with no significant drug-related adverse events. Liver enzyme elevations were observed with higher doses of sovaprevir, were transient, and returned to baseline while on treatment. In addition, sustained virologic


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response twelve weeks (SVR12) after the completion of therapy was achieved in 77% to 85% of patients after completion of 24 weeks of therapy (12 weeks of sovaprevir plus P/R, followed by 12 weeks of P/R). Mutations commonly associated with protease inhibitor therapy including mutations at R155, A156 and D168 were not observed with sovaprevir treatment. Sovaprevir has been granted Fast Track status by the United States Food and Drug Administration, or FDA. During the second quarter of 2013, we initiated a randomized, double-blind phase II clinical trial that will evaluate a 12 week treatment consisting of sovaprevir and our NS5A inhibitor, ACH-3102, with ribavirin for the treatment of genotype 1 HCV and we expect initial RVR data to be available in the third quarter of 2013.

• ACH-3102, a NS5A Inhibitor. We have completed a proof-of-concept clinical trial of our second-generation, pan-genotypic NS5A inhibitor, ACH-3102, and we are currently studying the drug candidate in two phase II clinical trials. In phase Ia safety and pharmacokinetic studies, more than 70 healthy volunteers received either a single ascending dose of ACH-3102, or 14 days of once-daily ACH-3102. Data from both the single and multiple ascending dose groups demonstrated that ACH-3102 was well tolerated with no serious adverse events. In phase Ib, ACH-3102 demonstrated proof-of-concept efficacy results after a single dose of ACH-3102 in patients with genotype 1a HCV. In all, 12 patients were treated with a single dose of either 50 mg, 150 mg, or 300 mg of ACH-3102, with a mean maximum decline in HCV RNA of 3.78, 3.52, and 3.93 log10 achieved, respectively. In phase II, we are studying ACH-3102 in an open-label phase IIa pilot trial evaluating 12-weeks of once-daily ACH-3102 in combination with ribavirin for the treatment of HCV genotype 1b. Interim results from that trial revealed that 75% of patients (6 of 8) who had completed 4 weeks of therapy achieved rapid virologic response, or RVR, meaning undetectable levels of virus at 4 weeks of therapy, and 75% of patients (6 of 8) achieved undetectable levels of virus at end of treatment, or ETR. Further, 63% of patients (5 of 8) receiving 12 weeks of therapy demonstrated undetectable levels of HCV 4 weeks after cessation of therapy, or SVR4. This study remains on-going and we expect that final data will be available at a future medical meeting. ACH-3102 has been granted Fast Track status by the FDA. In a second phase II clinical trial, we are also studying ACH-3012 in a blinded study in combination with sovaprevir, our protease inhibitor, and ribavirin. This trial was initiated in the second quarter of 2013 and we expect initial RVR data to be available in the third quarter of 2013.

• ACH-2684, a NS3 Protease Inhibitor. ACH-2684 has most recently completed phase Ib proof-of-concept clinical studies, including three segments:
once-daily dosing in genotype 1, twice-daily dosing in patients with genotype 3 and once-daily dosing in patients with cirrhosis. Once-daily doses of 400mg of ACH-2684 reduced viral load by a mean maximum 3.73 log10 in patients with HCV genotype 1. In addition, twice daily doses of 400mg of ACH-2684 reduced viral load by a maximal 2.03 log10 in patients with HCV genotype 3. Lastly, once-daily doses of 400mg administered for three days to HCV patients with cirrhosis achieved a mean maximum 3.67 log10 reduction in HCV viral load, similar to the antiviral activity achieved in non-cirrhotic genotype 1 HCV patients receiving the same dose of ACH-2684. ACH-2684 demonstrated good safety and tolerability in these phase Ib clinical studies, as well as in phase Ia studies in healthy volunteers. Our current strategic plan does not include the combination development of ACH-2684 with our other drug candidates in the near-term, but we remain interested in combining ACH-2684 with our other drug candidates in the future, or with other compounds under cooperative study arrangements. We are currently in the process of completing a phase I clinical trial of ACH-2684.

We intend to continue to focus on the discovery and development of new drug candidates through our extensive expertise in virology, microbiology and synthetic chemistry. Although significant additional funding and research and development will be required to support these efforts, we believe our drug discovery capabilities will allow us to further expand our product candidate portfolio, providing us with strong growth potential and, over time, reducing our reliance on the success of any single drug candidate.

All costs associated with internal research and development, and research and development services for which we have externally contracted, are expensed as incurred. The costs of obtaining patents for our candidates are expensed as incurred as indirect costs.

                                                  Three Months Ended March 31,
                                                   2013                  2012
                                                         (in thousands)
   Clinical candidate direct external costs:
   Sovaprevir (and related compounds)          $       1,839         $       2,984
   ACH-3102 (and related compounds)                    2,783                 1,446
   ACH-2684 (and related compounds)                      273                   695
   ACH-2928 (and related compounds)                       -                    444
   Other                                                 136                   294

                                                       5,031                 5,863
   Direct internal personnel costs                     2,840                 2,329

   Sub-total direct costs                              7,871                 8,192
   Indirect costs and overhead                           893                   821
   Research and development tax credit                   (45 )                 (71 )

   Total research and development              $       8,719         $       8,942


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We are currently conducting phase II clinical trials of sovaprevir and ACH-3102, as well as a phase II combination trial of sovaprevir and ACH-3102. We are also in the process of completing a phase I clinical trial of ACH-2684.

The State of Connecticut provides companies with the opportunity to exchange certain research and development credit carryforwards for cash in exchange for foregoing the carryforward of the research and development credit. The program provides for such exchange of the research and development credits at a rate of 65% of the annual research and development credit, as defined. This benefit is recorded as a reduction of research and development expenditures.

We expect research and development expenses associated with the completion of these programs to be substantial and to increase over time. We do not believe, however, that it is possible at this time to know or accurately project the nature, timing or total amount of program-specific expenses through commercialization. There exist numerous factors associated with the successful commercialization of any of our drug candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will evolve and therefore impact our clinical development programs and plans over time.

General and Administrative

Our general and administrative expenses consist primarily of salaries and benefits for management and administrative personnel, professional fees for legal, accounting and other services, travel costs and facility-related costs such as rent, utilities and other general office expenses.

Critical Accounting Standards and Estimates

Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. A summary of our critical accounting estimates is included in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2012. We continually review these estimates and their underlying assumptions to ensure they are appropriate for the circumstances. Changes in the estimates and assumptions we use could have a significant impact on our financial results. During the first three months of 2013, there were no significant changes in our estimates and critical accounting policies.

Results of Operations

Results of operations may vary from period to period depending on numerous factors, including the timing of payments received under existing or future strategic alliances, joint ventures or financings, if any, the progress of our research and development projects, technological advances and determinations as to the commercial potential of proposed products.

Comparison of Three Months Ended March 31, 2013 and 2012

Revenue. Revenue recognized during the three months ended March 31, 2012 consisted of amounts derived from our former collaboration with Gilead. During this period, effective with the termination of the collaboration, we recognized the remaining $2.5 million of deferred revenue as we no longer have any future obligations under the collaboration.

                                                Three Months Ended March 31,
                                   2013            2012                    Change
                                              (in thousands)
 Gilead collaboration revenue   $         -     $     2,489     $    (2,489 )              -

 Total revenue                  $         -     $     2,489     $    (2,489 )              -

Research and Development Expenses. Research and development expenses were $8.7 million and $8.9 million for the three months ended March 31, 2013 and 2012, respectively. The decrease for the three months ended March 31, 2013 was primarily due to decreased clinical costs for ACH-2928, offset by increased clinical and manufacturing costs for ACH-3102. We expect that research and development expenses will increase fairly significantly over the remainder of the year as we advance combination studies of sovaprevir and ACH-3102 and continue clinical testing of these compounds. Research and development expenses for the three months ended March 31, 2013 and 2012 are comprised as follows:


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                                                             Three Months Ended March 31,
                                               2013             2012                     Change
                                                           (in thousands)
Personnel costs                             $     2,280      $     1,945      $       335               17 %
Stock based compensation                            559              385              174               45 %
Outsourced research and supplies                  4,659            5,435             (776 )            (14 )%
Professional and consulting fees                    699              712              (13 )             (2 )%
Facilities costs                                    523              492              031                6 %
Travel and other costs                               44               44               -                -
Research and development tax credit                 (45 )            (71 )            026              (37 )%

Total                                       $     8,719      $     8,942      $      (223 )             (2 )%

General and Administrative Expenses. General and administrative expenses were $3.0 million and $2.7 million for the three months ended March 31, 2013 and 2012, respectively. The increase for the three months ended March 31, 2013 was primarily due to increased salaries and non-cash stock compensation charges partially offset by decreased professional fees. We expect that general and administrative expenses will be consistent during the remainder of the year. General and administrative expenses for the three months ended March 31, 2013 and 2012 are comprised as follows:

                                                             Three Months Ended March 31,
                                                2013            2012                    Change
                                                                    (in thousands)
Personnel costs                              $       901     $       841     $        60                7 %
Stock based compensation                             864             535             329               61 %
Professional and consulting fees                     745             873            (128 )            (15 )%
Facilities costs                                     285             215              70               33 %
Travel and other costs                               279             275               4                1 %

Total                                        $     3,074     $     2,739     $       335               12 %

Other Income (Expense). Interest income was $77,000 and $65,000 for three months ended March 31, 2013 and 2012, respectively. The $12,000, or 18% increase was primarily due to increased average cash balances in 2013. Interest expense was $22,000 and $14,000 for the three months ended March 31, 2013 and 2012, respectively. The $8,000, or 57%, increase was primarily due higher debt balances outstanding in 2013.

Liquidity and Capital Resources

Since our inception in August 1998, we have financed our operations primarily through proceeds from the sale of equity securities. Through March 31, 2013, we have received approximately $515.9 million in aggregate gross proceeds from stock issuances, including convertible preferred stock, our initial public offering in 2006, private placements of our common stock in 2008 and 2010 and registered offerings of our common stock in 2010, 2011, 2012 and 2013.

As of March 31, 2013, our debt balance due to borrowings was $611,000 with a weighted average interest rate of 6.55%.

We had $199.9 million and $77.4 million in cash, cash equivalents and marketable securities as of March 31, 2013 and December 31, 2012, respectively. We regularly review our investments and monitor the financial markets. As of March 31, 2013, our cash, cash equivalents and marketable securities included high-quality financial instruments, primarily money market funds, government sponsored bond obligations and other corporate debt securities which we believe are subject to limited credit risk.

Cash used in operating activities was $13.1 million for the three months ended March 31, 2013 and was primarily attributable to our $11.7 million net loss combined with $2.9 million in premiums paid on the purchase of marketable securities and an increase in prepaid expenses and other assets. This amount was partially offset by non-cash stock-based compensation. Cash used in operating activities was $11.3 million for the three months ended March 31, 2012 and was primarily attributable to our $9.1 million net loss combined with a decrease in deferred revenue and an increase in prepaid expenses, offset primarily by non-cash stock-based compensation.

Cash used in investing activities was $99.1 million for the three months ended March 31, 2013 and was primarily attributable to the purchases of marketable securities, offset by maturities of marketable securities. Cash provided by investing activities was $23.0 million for the three months ended March 31, 2012 and was primarily attributable to the maturities of marketable securities, offset by purchases of marketable securities.


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Cash provided by financing activities was $133.2 million for the three months ended March 31, 2013 and was primarily attributable to $133.2 million in net proceeds from our public offering in February 2013. Cash provided by financing activities was $1.7 million for the three months ended March 31, 2012 and was primarily attributable to proceeds from the exercise of stock options combined with borrowings from our credit facility.

We expect to incur continuing and increasing losses from operations for at least the next several years as we seek to:

• continue clinical testing of sovaprevir, ACH-3102 and ACH-2684; and

• identify and progress additional drug candidates.

We do not expect our existing capital resources, together with any milestone payments and research and development funding we may receive, to be sufficient to fund the completion of the development of any of our drug candidates. As a result, we will need to raise additional funds prior to, among other things, being able to market any drug candidates, to obtain regulatory approvals, fund operating losses, and, if deemed appropriate, establish manufacturing and sales and marketing capabilities. We will seek to raise such additional financing through (i) public or private equity or debt financings, (ii) collaborative or other arrangements with third parties or (iii) other sources of financing.

We believe that our existing cash, cash equivalents and marketable securities will be sufficient to meet our projected operating requirements through at least March 31, 2014. However, our funding resources and requirements may change and will depend upon numerous factors, including but not limited to:

• the costs involved in the clinical development, manufacturing and formulation of sovaprevir, ACH-3102 and ACH-2684;

• the scope of and costs associated with entering cooperative study arrangements, or CSAs, if any, for the collaborative development of our drug candidates in combination with other's drug candidates;

. . .

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