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RPTP > SEC Filings for RPTP > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for RAPTOR PHARMACEUTICAL CORP


8-May-2013

Quarterly Report


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

You should read the following discussion in conjunction with our condensed consolidated financial statements as of March 31, 2013, and the notes to such condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. All references to "the Company", "we", "our" and "us" include the activities of Raptor Pharmaceutical Corp., Raptor Pharmaceuticals Inc. or Raptor Pharmaceuticals, Raptor European Products, LLC, RPTP European Holdings C.V., Raptor Pharmaceuticals Europe B.V. and Raptor Pharmaceuticals France SAS.

This Quarterly Report on Form 10-Q, including this "Management's Discussion and Analysis of Financial Condition and Results of Operations" section, contains "forward-looking statements," within the meaning of the Private Securities Litigation Reform Act of 1995, that plan for or anticipate the future. In some cases, these statements can be identified by the use of terminology such as "believes," "expects," "anticipates," "plans," "may," "might," "will," "could," "should," "would," "projects," "predicts," "intends," "continues," "estimates," "potential," "opportunity" or the negative of these terms or other comparable terminology. All such statements, other than statements of historical facts, including our financial condition, future results of operations, projected revenues and expenses, business strategies, operating efficiencies or synergies, competitive positions, growth opportunities for existing intellectual properties, technologies, products, plans, and objectives of management, markets for our securities, and other matters, are about us and our industry that involve substantial risks and uncertainties and constitute forward-looking statements for the purpose of the safe harbor provided by Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Such forward-looking statements, wherever they occur, are necessarily estimates reflecting the best judgment of our senior management on the date on which they were made, or if no date is stated, as of the date of the filing made with the SEC in which such statements were made. You should not place undue reliance on these statements, which only reflect information available as of the date that they were made. We cannot give you any assurance that such forward-looking statements will prove to be accurate and such forward-looking events may not occur. Our business' actual operations, performance, development and results might differ materially from any forward-looking statement due to various known and unknown risks, uncertainties, assumptions and contingencies, including those described in the section titled "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q. Unless required by U.S. federal securities laws and the rules and regulations of the SEC, we do not undertake any obligation and disclaim any intention to update or release publicly any revisions to these forward-looking statements after the filing of this Quarterly Report on Form 10-Q to reflect later events or circumstances or to reflect the occurrence of unanticipated events or any other reason.

Change in Fiscal Year End

In December 2012, our board of directors approved a change in our fiscal year end from August 31 to December 31. The following discussions compare the unaudited periods from January 1 through March 31, 2013, the first quarter of our newly adopted fiscal year and our prior year's fiscal quarter from December 1, 2011 through February 29, 2012. The prior fiscal year quarter ended February 29, 2012 is reported on the basis of our previous fiscal year cycle. As a result of the change in our fiscal year end, the quarterly periods of our newly adopted fiscal year do not coincide with the historical quarterly periods that we had previously reported. We believe the comparative information provided for the three-month period ended February 29, 2012 provides a meaningful comparison to the three-month period ended March 31, 2013 and there are no factors, seasonal or otherwise, that materially impact the comparability of information or trends.

Plan of Operation and Overview

We are an emerging biopharmaceutical company focused on developing and commercializing life-altering therapeutics that treat debilitating and often fatal diseases.

Our first product, PROCYSBITM (cysteamine bitartrate) delayed-release capsules, or PROCYSBITM, received marketing approval from the U.S. Food and Drug Administration, or FDA, on April 30, 2013 for the management of nephropathic cystinosis in adults and children six years and older. PROCYSBITM (formerly known as RP103) capsules contain cysteamine formulated into innovative microspheronized beads that are individually enteric coated providing a delayed-release pharmacokinetic profile. The enteric coating makes PROCYSBI™ pH sensitive, allowing the microbeads to bypass the stomach and be absorbed in the more alkaline environment of the proximal small intestine. PROCYSBITM is dosed every twelve hours for the management of nephropathic cystinosis. We plan to commence the launch of PROCYSBITM in the U.S. in the second quarter of 2013. In conjunction with the pending launch of PROCYSBITM, we have initiated a dedicated call center, which will serve as an integrated resource for PROCYSBITM prescription intake, third-party payor reimbursement adjudication, patient financial support and ongoing outreach for managing compliance. This call center, along with one specialty pharmacy and proactive physician and patient disease education initiatives, reflect our commitment to helping patients manage their disease. In Europe, we submitted a marketing authorization application, or MAA, to the European Medicines Agency, or EMA, in the first quarter of calendar 2012, requesting approval to market PROCYSBITM for the management of nephropathic cystinosis in the EU. We anticipate a decision from the EMA in the second half of 2013.


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We expect that our near term efforts will be focused on:

? Commercializing PROCYSBITM in the U.S.;

? Gaining regulatory approval of PROCYSBITM in the EU;

? Negotiating reimbursement country by country within the EU and the launching of PROCYSBITM in those countries, if approved by the EMA;

? Supporting our clinical trials that are evaluating PROCYSBITM in cystinosis patients that are cysteamine-naïve, as well as other supporting studies;

? Supporting our clinical trials of RP103 for the potential treatment of Huntington's disease, or HD, and nonalcoholic fatty liver disease, or NAFLD, in children;

? Continuing the development of our novel preclinical programs.

Nephropathic Cystinosis, or Cystinosis

Cystinosis is a rare, inherited condition that affects every cell of the body by causing the buildup of a protein building block called cystine. The buildup of cystine causes kidney and other problems throughout the body. These problems cause the body to lose too much sugar (glucose), proteins and salts (electrolytes) through urine and harm tissue. Cystinosis may lead to slow body growth and small stature, weak bones, hypothyroidism, blindness, muscle weakness, pulmonary dysfunction and developing and worsening kidney failure.

It is estimated that there are currently about 500 people in the U.S. - 2,000 worldwide - diagnosed with this disorder. Cystinosis is classically associated with blond-haired, blue-eyed children of European descent, although all races and ethnic backgrounds may be affected. The disease tends to affect slightly more males than females, with a male-to-female ratio of 1.4 to 1.


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Results of Operations

Quarters ended March 31, 2013 and February 29, 2012

Revenue

On April 30, 2013, the FDA granted marketing approval in the U.S. for the sale of our first product, PROCYSBITM, for the management of nephropathic cystinosis. As such, through March 31, 2013, we have not yet generated revenues from the sale of PROCYSBITM.

Research and Development

Research and development expenses include medical, clinical, regulatory and scientists' compensation and benefits, expenses associated with the manufacturing and testing of PROCYSBITM in anticipation of our commercial launch in the U.S. (all drug product manufactured before drug approval is expensed as research and development expense), lab collaborations, preclinical studies, clinical trials, clinical trial materials, regulatory and clinical consultants, lab supplies, lab services, lab equipment maintenance and small equipment purchased to support the research laboratory, amortization of intangible assets and allocated human resources and facilities expenses. Research and development expenses for the quarter ended March 31, 2013 increased by approximately $4.4 million compared to the quarter ended February 29, 2012. The increase was primarily due to:

                                                                            Increase
Reason for increase (In thousands)                                         (decrease)
In anticipation of the U.S. launch of PROCYSBITM:
Increased product manufacture of PROCYSBITM for cystinosis               $        2,653
Increase in consulting and external services                                        699
Build-up in staffing for medical affairs, quality and regulatory                    556
Increase in clinical trial activity                                                 420
Other, net                                                                          113

Total increase in research and development expenses for the quarter
ended March 31, 2013 versus the quarter ended February 29, 2012          $        4,441

General and Administrative Expenses

General and administrative expenses include finance, executive and pre-commercial operations compensation and benefits; pre-commercial expenses, such as reimbursement and marketing studies, expenses associated with the commercial launch of PROCYSBITM such as printing of physician and patient education materials, setting up RaptorCares.com to adjudicate insurance claims and provide patient support, and establishing a customer relationship management system for our PROCYSBITM sales team; corporate costs, such as legal and auditing fees, business development expenses, travel, board of director fees and expenses, investor relations expenses, intellectual property expenses associated with filed (but not issued) patents, administrative consulting and allocated human resources and facilities costs. General and administrative expenses for the quarter ended March 31, 2013 increased by approximately $5.4 million compared to the quarter ended February 29, 2012. The increase was primarily due to:

                                                                            Increase
Reason for increase (In thousands)                                         (decrease)
In anticipation of the U.S. launch of PROCYSBITM:
Increase in staffing for pre-commercialization ramp-up                   $        1,933
Increase in advertising and promotion work related to
pre-commercialization                                                             1,020
Increase in consulting and legal fees incurred for
pre-commercialization activities                                                  1,265
Increase in other marketing work incurred as part of
pre-commercialization activities                                                    648
Other, net                                                                          545

Total increase in general and administrative expenses for the quarter
ended March 31, 2013 versus the quarter ended February 29, 2012          $        5,411


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Major program expenses recorded as research and development expenses:

                                                                                             September 8,
                                                                                           2005 (Inception)
                                                          For the quarter ended                   to
Major Program (stage of development) (in              March 31,         February 29,          March 31,
thousands)                                              2013                2012                 2013

PROCYSBITM: Cystinosis (pre-commercial)              $     4,179       $        2,249      $         41,587
RP103: HD (clinical)                                         212                  190                 3,265
RP103: NAFLD in children (clinical)                          445                  212                 4,831
Preclinical programs                                         200                   15                 2,520
Minor or inactive programs                                   254                  (11 )               6,168
Research and development personnel and other costs
not allocated to programs                                  3,122                1,316                19,685

Total research and development expenses              $     8,412       $        3,971      $         78,056

Major program expenses recorded as general and administrative expenses:

                                                                                            September 8,
                                                                                          2005 (Inception)
                                                          For the quarter ended                  to
Major Program (stage of development) (in              March 31,         February 29,         March 31,
thousands)                                               2013               2012                2013

PROCYSBITM: Cystinosis (pre-commercial)              $      2,292       $         234     $          9,012
RP103: HD (clinical)                                           30                  10                   55
RP103: NAFLD in children (clinical)                            46                  21                  301
Preclinical programs                                           18                  15                  450
Minor or inactive programs                                    112                  47                1,209

Total program-related general and administrative
expenses                                             $      2,498       $         327     $         11,027

Additional major program expenses include expenses related to the preparation for the commercial launch of PROCYSBITM and patent fees and patent expenses which were recorded as general and administrative expenses as these fees are to support patent applications (not issued patents).

Any of our major programs could be partnered for further development and/or could be accelerated, slowed or ceased due to scientific results or challenges in obtaining funding. In addition, the timing and costs of development of our programs beyond the next 12 months are highly uncertain and difficult to estimate. See risks and other factors described under the section captioned "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q.


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Interest Income

Interest income for the quarters ended March 31, 2013 and February 29, 2012 was approximately $0.2 million and $0.1 million, respectively.

Interest Expense

Interest expense for the quarters ended March 31, 2013 and February 29, 2012 was approximately $0.7 million and nominal, respectively. The increase in interest expense was due to our debt facility we entered into in December 2012.

Foreign Currency Transaction Gain

Foreign currency transaction gain/loss for the quarters ended March 31, 2013 and February 29, 2012 was approximately a $34,000 loss and $18,000 gain, respectively.

Unrealized Gain/Loss on Short-Term Investments

Unrealized gain/loss on short-term investments represents the change in net asset value of our short-term bond fund. The unrealized loss on short-term investments for the quarter ended March 31, 2013 was approximately $0.1 million compared to an unrealized gain of approximately $0.1 million for the quarter ended February 29, 2012.

Adjustment to the Fair Value of Common Stock Warrants

Adjustment to the fair value of common stock warrants was a gain of approximately $1.1 million for the quarter ended March 31, 2013 compared to a loss of approximately $7.8 million for the quarter ended February 29, 2012. The gain for the quarter ended March 31, 2013 was due primarily to a decrease in the volatility of our stock price. The loss in the comparable quarter ended February 29, 2012 was due primarily to an increase of $1.46 per share in our stock price for which we were required to increase our warrant liability. These losses are non-cash.


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Application of Critical Accounting Policies

Our condensed consolidated financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles used in the U.S., or GAAP. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by management's application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our condensed consolidated financial statements is critical to an understanding of our consolidated financial position.

We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our condensed consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires our management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of our condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fair Value of Financial Instruments

The carrying amounts of certain of our financial instruments including cash and cash equivalents, restricted cash, prepaid expenses, accounts payable, accrued liabilities and capital lease liability approximate fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in our condensed consolidated financial statements. The warrant liability is carried at fair value which is determined using the Black-Scholes option valuation model at the end of each reporting period.

Accrued Liabilities

Accrued liabilities include estimates of certain expenses which we have not yet been invoiced and requires management's judgment in determining appropriate expenses to accrue. For example, because of the nature of how clinical trials are invoiced by clinical sites, especially outside of the U.S. where there is a significant time lag between the services provided by the clinical site and the time the clinical site bills us for their services, we must estimate such clinical site expenses on a monthly basis as clinical trial expenses. Although we believe our accrued liabilities reflect the best information available to us, our actual expenses could differ from our estimates.

Note Payable and Debt Issuance Costs

Note payable consists of our loan agreement with HealthCare Royalty Partners, or HC Royalty, as lender. We agreed to borrow $50.0 million in two $25.0 million tranches, or the HC Royalty Loan. As of March 31, 2013, we have drawn the first tranche in the amount of $25.0 million, which is stated at the borrowed amount.
Due to the approval of PROCYSBITM by the FDA on April 30, 2013, HC Royalty is required to fund the second tranche subject to the satisfaction of customary closing conditions. We are in the process of drawing down the second $25.0 million tranche. The loan bears interest at an annual fixed rate of 10.75% of outstanding principal and quarterly interest payments are included in interest expense in our Condensed Consolidated Statements of Comprehensive Loss for the quarter ended March 31, 2013. Principal payments, when made, reduce our note payable balance. There is a synthetic royalty component based on sales of products in a calendar year, and such royalty is payable quarterly. With respect to the first $25.0 million tranche, for each calendar year (prorated for any portion thereof), the loan bears a royalty rate of 6.25% of the first $25.0 million of PROCYSBITM and future approved product net revenues for such calendar year, 3.0% of PROCYSBITM and future approved product net revenues for such calendar year in excess of $25.0 million and not in excess of $50.0 million, and 1.0% of PROCYSBITM and future approved product net revenues for such calendar year in excess of $50.0 million, payable quarterly. With respect to the second $25.0 million tranche, for each calendar year (prorated for any portion thereof), the loan bears a royalty rate of 6.0% of the first $25.0 million of PROCYSBITM and future approved product net revenues for such calendar year, 3.0% of PROCYSBITM and future approved product net revenues for such calendar year in excess of $25.0 million and not in excess of $50.0 million, and 1.0% of PROCYSBITM and future approved product net revenues for such calendar year in excess of $50.0 million, payable quarterly.

As of March 31, 2013, there was no royalty expense accrued or paid since we had no approved products at that time and future revenues were not yet estimable. Subsequent to quarter-end, we received marketing approval of PROCYSBITM for nephropathic cystinosis by the FDA on April 30, 2013, and as a result, synthetic royalties will be payable to HC Royalty quarterly following commencement of sales of PROCYSBITM. The loan and our obligation to make any payments shall terminate immediately when all payments received by HC Royalty from us equals $97.5 million, except that if, by December 20, 2014, net revenues for the immediately preceding four fiscal quarters exceed $100.0 million, then the loan and our obligation to make any payments shall terminate immediately when all payments received by HC Royalty from us equals $90.0 million. Debt issuance costs, which were capitalized and included in other long-term assets, are being amortized over the life of the loan using the effective interest method. The amortization of debt issuance costs is included in interest expense in our Condensed Consolidated Statements of Comprehensive Loss. The synthetic royalty will be accrued quarterly upon commencement of sales of PROCYSBITM.


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Goodwill and Intangible Assets and Related Impairment of Long-Lived Assets

We periodically evaluate our long-lived assets for indicators of possible impairment by comparison of the carrying amounts to future net undiscounted cash flows expected to be generated by such assets when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Should an impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset's fair value or discounted estimates of future cash flows.

Goodwill represents the excess of the value of the purchase consideration over the identifiable assets acquired in the merger of our subsidiary with and into Raptor Pharmaceuticals Corp. in September 2009, or the 2009 Merger. Goodwill is reviewed annually, or when an indication of impairment exists. An impairment analysis is performed, and if necessary, a resulting write-down in valuation is recorded.

Intangible assets include the intellectual property and other rights relating to DR Cysteamine (currently developed as PROCYSBITM and RP103) and to an out-license acquired in the 2009 Merger. The intangible assets related to PROCYSBITM/RP103 are amortized using the straight-line method over the estimated useful life of 20 years, which is the life of the intellectual property patents. The 20-year estimated useful life is also based upon the typical development, approval, marketing and life cycle management timelines of pharmaceutical drug products. The intangible assets related to the out-license are amortized using the straight-line method over the estimated useful life of 16 years, which is the life of the intellectual property patents. During the quarter ended March 31, 2013, we did not identify any impairment losses.

Common Stock Warrant Liabilities

The warrants issued by us in our 2010 private placement contain a cash-out provision which may be triggered upon request by the warrant holders if we are acquired or upon the occurrence of certain other fundamental transactions involving us. This provision requires these warrants to be classified as liabilities and to be marked to market at each period-end commencing on August 31, 2010. The warrants issued by us in our December 2009 equity financing contain a conditional obligation that may require us to transfer assets to repurchase the warrants upon the occurrence of potential future events. Under the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 480, Distinguishing Liabilities from Equity, or ASC 480, a financial instrument that may require the issuer to settle the obligation by transferring assets is classified as a liability. Therefore, we have classified the warrants as liabilities and will mark them to fair value at each period-end. The common stock warrants are re-measured at the end of every reporting period with the change in value reported in our Condensed Consolidated Statements of Comprehensive Loss. Warrants which are recorded as liabilities that are exercised are re-measured and marked to market the day prior to exercise. Upon exercise of such warrants, the fair value of those warrants is reclassified to equity.

Income Taxes

Income taxes are recorded under the liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Our effective tax rate is 0% for income tax for the quarter ended March 31, 2013 and we have determined that our effective tax rate for our fiscal year ended August 31, 2012 and the short tax year from September 1, 2012 to December 31, 2012 is 0%. Based on the weight of available evidence, including cumulative losses since inception and expected future losses, we have determined that it is more likely than not that the deferred tax asset amount will not be realized and therefore a full valuation allowance has been provided on our net deferred tax assets.

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