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

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Form 10-Q for TRIUS THERAPEUTICS INC


8-May-2013

Quarterly Report


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and related notes included in this Quarterly Report on Form 1O-Q and the audited financial statements and notes thereto as of and 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 filed by us with the Securities and Exchange Commission, or SEC, on March 13, 2013.

Forward-Looking Statements

The information in this discussion contains forward-looking statements and information within the meaning of 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, which are subject to the "safe harbor" created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management. The words "anticipates", "believes", "estimates", "expects", "intends", "may", "plans", "projects", "will", "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item IA, "Risk Factors" in this Quarterly Report on Form 10-Q and in our other filings with the SEC. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements.

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of innovative antibiotics for serious infections. We are developing tedizolid phosphate, a new, novel antibiotic, for the treatment of serious Gram-positive bacterial infections, including those caused by methicillin-resistant staphylococcus aureus, or MRSA. Tedizolid phosphate is being developed for acute bacterial skin and skin structure infections, or ABSSSI, and pneumonia, and potentially for other indications. ABSSSI is the current classification for complicated skin and skin structure infections. In addition, we are discovering antibiotics for infections caused by Gram-negative bacteria using our structure-based discovery platform.

We have completed two Phase 3 clinical trials of tedizolid phosphate for the treatment of ABSSSI in which all primary and secondary endpoints were achieved. In December 2011, we reported top-line data from our first Phase 3 clinical trial, the ESTABLISH 1 (TR701-112) study, of the oral dosage form of tedizolid phosphate for the treatment of ABSSSI. In March 2013, we reported top-line results from our second Phase 3 clinical trial, the ESTABLISH 2 (TR701-113) study, which was an intravenous, or IV, to oral transition study for the treatment of ABSSSI. The U.S. Food and Drug Administration, or FDA, has designated tedizolid phosphate as a Qualified Infectious Disease Product, or QIDP, for the treatment of ABSSSI as well as for the treatment of pneumonia, which designation enables us to benefit from certain incentives for the development of new antibiotics, including priority review and eligibility for fast-track status. The QIDP designations were granted for both the IV and oral dosage forms of tedizolid phosphate. We currently expect to submit a New Drug Application, or NDA, to the FDA, for tedizolid phosphate for the treatment


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of ABSSSI during the second half of 2013. Given the QIDP designation and if tedizolid phosphate is approved by the FDA, we could potentially commercially launch in the U.S. in the second half of 2014.

We also expect to initiate a Phase 3 program of tedizolid phosphate for the treatment of pneumonia using the same 200 mg, once daily dose of tedizolid phosphate that we are testing for ABSSSI. We have met with the FDA and the European Medicines Agency, or EMA, to discuss the protocol for the Phase 3 study and, subject to the acceptance of the protocol by the regulatory agencies, we plan to initiate it in the second half of 2013.

In January 2013, we raised approximately $31.6 million in net proceeds from a public offering of our common stock in which we sold 7,169,135 shares at an offering price of $4.75 per share.

In February 2013, we were notified by the National Institute of Allergy and Infectious Disease, or NIAID, that funding under our federal contract to support the development of novel dual-target antibacterial agents as therapeutics for the treatment of Gram-negative biodefense pathogens would not be extended beyond March 31, 2013. Our Gyrase-B research program had been substantially funded by our NIAID contract. We will continue to fund the preclinical research for the Gyrase-B program, including Investigational New Drug, or IND, enabling studies and we plan to seek additional external funding for the long-term advancement of the program. If our preclinical activities for the Gyrase-B program are successful, we plan to file an IND application in 2014.

In July 2011, we signed a collaboration and license agreement with Bayer Pharma AG, or Bayer, under which we granted Bayer exclusive rights to develop and commercialize tedizolid phosphate in China, Japan and substantially all other countries in Asia, Africa, Latin America and the Middle East, excluding North and South Korea, which we refer to as the Bayer Licensed Territory. We continue to evaluate potential strategic alliances for tedizolid phosphate in Europe.

As of March 31, 2013, we had an accumulated deficit of $166.6 million. These losses have resulted principally from costs incurred in connection with research and development activities, including the costs of clinical trial activities associated with tedizolid phosphate, license fees and general and administrative expenses. We expect to continue to incur operating losses for the next several years as we pursue the clinical development and commercialization of tedizolid phosphate and work to discover and develop additional product candidates through our research and discovery program. As a result, we will seek to fund our operations through public or private equity or debt financings or other sources, such as collaborations and government contracts. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategies.

Financial Obligations Related to the License of Tedizolid Phosphate

In January 2007, we entered into a license agreement with Dong-A ST Co., Ltd. (as successor-in-interest to Dong-A Pharmaceutical Co., Ltd.) or Dong-A, pursuant to which we acquired an exclusive license to certain patent applications and other intellectual property related to the oral and injectable forms of tedizolid phosphate to develop and commercialize licensed products, including tedizolid phosphate, outside of Korea. We have the right to grant sublicenses to third parties.

Since the inception of the license agreement, $5.7 million in license fees and milestone payments have been paid to Dong-A. In addition, we may be required to make up to an aggregate of $11.5 million in additional payments, upon the achievement of specified development and regulatory approval milestones. We are also obligated to pay Dong-A mid-single digit tiered royalties on net sales of tedizolid phosphate.


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Financial Overview

Revenues

We have recognized $88.9 million of revenues from inception through March 31, 2013. We have derived substantially all of our revenues from our collaboration and license agreement with Bayer, government contracts, small business innovation research grants funded by the National Institutes of Health, and collaborations with other third parties for the research and development of certain preclinical programs. We have no products approved for sale, and we have not generated any revenues from product sales. We expect to recognize revenues from our government contracts as well as through our license and collaboration agreement with Bayer. We continue to pursue government contract funding for our nonclinical, preclinical and clinical programs. If our development efforts for any of our product candidates result in clinical success and regulatory approval, or other collaboration agreements with third parties, we may generate revenues from those product candidates.

Research and Development Expenses

The majority of our operating expenses to date have been for research and development activities related to tedizolid phosphate and our preclinical and nonclinical programs. Research and development expenses consist of: (1) expenses incurred under agreements with contract research organizations, or CROs, and investigative sites, which conduct a substantial portion of our nonclinical and preclinical studies, and all of our clinical trials; (2) employee-related expenses, which include salaries, benefits and share-based compensation;
(3) payments to third-party manufacturers, which produce our active pharmaceutical ingredient, or API, and finished product; (4) license fees paid to third parties for use of their intellectual property; (5) facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities and equipment, depreciation of leasehold improvements and equipment and laboratory and other supplies; and
(6) payments to consultants.

The following table presents our research and development expenses for the periods indicated (in thousands):

                                                                  Three Months Ended
                                                                       March 31,
                                                                2013              2012
Clinical and nonclinical research and development
(including manufacturing)                                    $    10,782      $     13,730
Preclinical research and development                               1,763             3,116

Total                                                        $    12,545      $     16,846

At this time, due to the inherently unpredictable nature of preclinical, nonclinical and clinical development and given the early stage of our preclinical programs, we are unable to estimate with any certainty the costs we will incur in the continued development of tedizolid phosphate and our preclinical programs for potential commercialization. Clinical development timelines, the probability of success and development costs can differ materially from expectations. While we are currently focused on advancing tedizolid phosphate and our preclinical programs, our future research and development expenses will depend on the clinical success of each product candidate that we develop, as well as ongoing assessments of the commercial potential of such product candidates. In addition, other than our collaboration agreement with Bayer, we cannot forecast with any degree of certainty which product candidates may be subject to future collaborations or contracts, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements. We expect to incur increased research and development expenses as we continue our Phase 3 clinical programs for tedizolid phosphate. In addition, we expect to incur significant research and development costs as we perform additional clinical trials necessary to obtain regulatory approval of tedizolid phosphate for additional indications, as well as to advance our preclinical programs.

The costs of clinical trials may vary significantly over the life of a project owing to but not limited to the following:

Per patient trial costs;

The number of sites included in the trials;


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The countries in which the trials are conducted;

The length of time required to enroll eligible patients;

The number of patients that participate in the trials;

The number of doses that patients receive;

The cost of comparative agents used in trials;

The drop-out or discontinuation rates of patients;

Potential additional safety monitoring or other studies requested by regulatory agencies;

The duration of patient follow-up; and

The efficacy and safety profile of the product candidate.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related expenses for personnel in administration, finance, commercial strategy and business development. Other significant expenses include professional fees for general legal services, legal expenses to pursue patent protection of our intellectual property, accounting fees, director fees, directors' and officers' insurance premiums, fees for investor relations services, share-based compensation and allocated facility costs. We expect our general and administrative expense to increase as we continue to operate as a public company and build our corporate infrastructure, particularly our commercial group, as we pursue approval of our first commercial product and in support of continued development of tedizolid phosphate and our preclinical programs. These increases likely will include additional salaries and related expenses, consultant fees, and expenses related to enhanced business systems.

Interest Income

Interest income consists of interest earned on our cash, cash equivalents and short-term investments in marketable securities.

Income Taxes

We assess income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where there is a greater than 50% likelihood that a tax benefit will be sustained, we have recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements.

We have federal and state net operating loss carryforwards and federal and state research and development tax credit carryforwards. Under Section 382/383 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, substantial changes in our ownership may limit the amount of net operating loss carryforwards and development tax credit carryforwards that could be utilized annually in the future to offset taxable income. Any such annual limitation may significantly reduce the utilization of the net operating losses and tax credits before they expire. After a public offering of common stock in January 2012, we performed an analysis under Section 382 through January 31, 2012 and determined that an "ownership change" had occurred, but the resulting annual limitation does not have a material impact on our ability to use our net operating loss and tax credit carryforwards. After our public offering in January 2013, we updated our Section 382 analysis and determined that it would not result in an additional "ownership change." In each period since our inception, we have recorded a valuation allowance for the full amount of our net deferred tax asset, as the realization of such net deferred tax asset is uncertain.

Change in Fair Value of Common Stock Warrants Liability

We have issued warrants to purchase our common stock that may require us to purchase unexercised warrants for a cash amount equal to their fair value following the announcement of specified events defined as Fundamental


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Transactions involving us (e.g., merger, sale of all or substantially all assets, tender offer, or share exchange) or a delisting, which is deemed to occur when the common stock is no longer listed on a national securities exchange. The cash settlement provisions require use of the Black-Scholes model in calculating the cash payment value in the event of a Fundamental Transaction or a delisting. As a consequence of these provisions, the warrants are classified as a liability on our balance sheets. The cash settlement value at the time of any future Fundamental Transaction or delisting will depend upon the value of the following inputs at that time: the price per share of our common stock, the volatility of our common stock, the expected term of the warrant, the risk-free interest rate based on U.S. Treasury security yields, and our dividend yield.

The fair value of the warrants is determined using a Black-Scholes model. The valuation of warrants is subjective and is affected by changes in inputs to the valuation model including the price per share of our common stock, the historical volatility of the stock prices of our peer group, risk-free rates based on U.S. Treasury security yields, the expected term of the warrants and our dividend yield. Changes in these assumptions can materially affect the fair value estimate. We could ultimately incur amounts to settle the warrant at a cash settlement value that is significantly different than the carrying value of the liability on our financial statements. We will continue to classify the fair value of the warrants as a liability until the warrants are exercised, expire, or are amended in a way that would no longer require these warrants to be classified as a liability. Changes in the fair value of the common stock warrants liability are recognized as a component of other income (expense) in the statements of operations.

Critical Accounting Policies and Significant Judgments and Estimates

Our management's discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments related to revenues earned under our contracts, preclinical, nonclinical and clinical development costs and drug manufacturing costs (research and development expense), and share-based compensation. We base our estimates on historical experience and on various other factors that we 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 may differ from these estimates under different assumptions or conditions.

We discussed accounting policies and assumptions that involve a higher degree of judgment and complexity within Note 1 to our financial statements in our Annual Report on Form 10-K for the year ended December 31, 2012. There have been no material changes to our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012.

Results of Operations

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

Revenues

The following table summarizes our revenues for the three months ended March 31,
2013 and 2012 (in thousands, except percentages):



                                 Three Months Ended
                                      March 31,               $             %
                                  2013          2012        Change       Change
           Contract research   $      529      $ 3,011     $ (2,482 )        (82 )%
           Collaborations           1,198        4,871       (3,673 )        (75 )%
           License fees                -         1,950       (1,950 )       (100 )%

           Total               $    1,727      $ 9,832       (8,105 )        (82 )%

Contract research revenues decreased for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 primarily due to reduced research for our Gram-negative pathogen program under our


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NIAID contract. We were notified in February 2013 of NIAID's election to discontinue funding for research under the contract beyond March 31, 2013. In addition, our contract research revenues decreased from the comparable period in 2012 because we no longer receive funding for our marine natural products research program that was previously being funded under our contract with the Defense Threat Reduction Agency, or DTRA. In May 2012, we were notified of DTRA's election not to extend funding under the contract.

License and collaboration revenues for the three months ended March 31, 2013 and 2012 relate to activities performed under our collaboration and license agreement with Bayer. The decrease in license and collaboration revenues as compared to the prior year was primarily due to the fact that we earned a $5.0 million milestone payment upon successfully completing our first Phase 3 clinical trial for tedizolid phosphate in ABSSSI during the three months ended March 31, 2012. We earned no milestone payments under our collaboration and license agreement with Bayer during the three months ended March 31, 2013.

Research and Development Expenses

The following table summarizes our research and development expenses for the three months ended March 31, 2013 and 2012 (in thousands, except percentages):

Three Months Ended March 31, $ % 2013 2012 Change Change Research and development expenses $ 12,545 $ 16,846 $ (4,301 ) (26 )%

During the three months ended March 31, 2013 our research and development costs related primarily to our clinical and nonclinical trials of tedizolid phosphate, drug product manufacturing, and expenses incurred in connection with the preparation for the submission of regulatory applications for tedizolid phosphate. Clinical trial expenses decreased from the comparable period in 2012 as there were fewer studies ongoing during the three months ended March 31, 2013. In addition, our research and development costs included expenses resulting from research under our government contracts and other preclinical activities. Expenses related to our government contracts decreased as research under our contract with NIAID wound down during the three months ended March 31, 2013. Furthermore, there were no expenses from our marine natural products research program in the first quarter of 2013 as this program was discontinued in May 2012 after DTRA's election not to exercise its option to extend funding under the contract.

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the three months ended March 31, 2013 and 2012 (in thousands, except percentages):

Three Months Ended March 31, $ % 2013 2012 Change Change General and administrative expenses $ 4,504 $ 3,004 $ 1,500 50 %

The increase in general and administrative expenses was primarily due to additional market planning activities as we prepare for the commercial launch of tedizolid phosphate.

Other Income (Expense)

The following table summarizes our other income (expense) for the three months
ended March 31, 2013 and 2012 (in thousands, except percentages):



                                                 Three Months Ended
                                                      March 31,                   $               %
                                                 2013            2012           Change         Change
Interest income                               $        11       $     0        $     11             -
Other income (expense)                                 -             (3 )             3            100 %
Fair value adjustment of common stock
warrant liability                                  (1,969 )       2,417          (4,386 )         (181 )%

Total Other Income (Expense)                  $    (1,958 )     $ 2,414          (4,372 )         (181 )%


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Other income and expense for the three months ended March 31, 2013 and 2012 resulted primarily from the remeasurement of the estimated fair value of the common stock warrant liability. This liability was recorded upon the issuance of warrants in connection with our private placement in May 2011 and is remeasured at each reporting date with changes in estimated fair value recognized as other income or expense.

Liquidity and Capital Resources

We have incurred losses since our inception and we anticipate that we will continue to incur losses for at least the next several years. We expect that our operating expenses will continue to increase and, as a result, we will need additional capital to fund our operations, which we may obtain from financings, research funding, collaborations, contract revenues or other sources.

Since our inception, we have funded our operations principally through the receipt of funds from the placement of equity securities and convertible notes payable, collaboration fees under our partnership with Bayer, contract research funding under our NIAID, DTRA and Lawrence Livermore National Laboratory, or LLNL, contracts, license and research grants. As of March 31, 2013, we had cash, cash equivalents and investments of approximately $83.6 million. Cash in excess of immediate requirements is invested in accordance with our investment policy primarily with a view to liquidity and capital preservation. As of March 31, 2013, our funds are held in cash, money market funds and United States Treasury securities.


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