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

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Form 10-Q for HYPERION THERAPEUTICS INC


10-May-2013

Quarterly Report


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

You should read the following management's discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes thereto for the year ended December 31, 2012, included in our Annual Report on Form 10-K/A, filed with the U.S. Securities and Exchange Commission ("SEC").

Overview

We are a biopharmaceutical company focused on the development and commercialization of novel therapeutics to treat disorders in the areas of orphan diseases and hepatology. We have developed our product, Ravicti™ (glycerol phenylbutyrate) Oral Liquid ("Ravicti"), to treat the most prevalent urea cycle disorders ("UCD") and are developing Ravicti to treat hepatic encephalopathy ("HE"), two different diseases in which blood ammonia is elevated. UCD are inherited rare genetic diseases caused by a deficiency of one or more enzymes or protein transporters that constitute the urea cycle, which in a healthy individual removes ammonia through the conversion of ammonia to urea. HE may develop in some patients with liver scarring, known as cirrhosis, or acute liver failure and is a chronic disease which fluctuates in severity and may lead to serious neurological damage. On February 1, 2013, the U.S. Food and Drug Administration ("FDA"), granted approval of Ravicti for use as a nitrogen-binding agent for chronic management of UCD in adult and pediatric patients greater than two years of age who cannot be managed by dietary protein restriction and/or amino acid supplementation alone. Limitations of use for Ravicti include treatment of patients with acute hyperammonemia ("HA") crises for whom urgent intervention is typically necessary, patients with N-acetylglutamate synthetase deficiency for whom the safety and efficacy of Ravicti has not been established, and UCD patients under two months of age for whom Ravicti is contraindicated due to uncertainty as to whether newborns, who may have immature pancreatic function, can effectively digest Ravicti. We commercially launched Ravicti during the first quarter of 2013. On May 1, 2013, we received notification from the FDA that Ravicti qualified for orphan drug exclusivity.

We originally obtained rights to develop Ravicti in 2007 pursuant to a collaboration agreement with Ucyclyd Pharma, Inc. ("Ucyclyd"), a wholly owned subsidiary of Medicis Pharmaceutical Corporation, which became a wholly owned subsidiary of Valeant Pharmaceuticals International, Inc. ('Valient") on December 11, 2012. In March 2012, we purchased the worldwide rights to Ravicti for an upfront payment of $6.0 million, future payments based upon the achievement of regulatory milestones in indications other than UCD, sales milestones, and mid to high single digit royalties on global net sales of Ravicti. Pursuant to an amended and restated collaboration agreement (the "restated collaboration agreement"), with Ucyclyd entered into in March 2012, we have an option to purchase all of Ucyclyd's worldwide rights in BUPHENYL and AMMONULฎ (sodium phenylacetate and sodium benzoate) injection 10%/10%, the only adjunctive therapy currently FDA-approved for the treatment of HA crises in UCD patients, for an upfront payment of $22.0 million, plus subsequent milestone and royalty payments. To fund this upfront payment, we may draw on a loan commitment from Ucyclyd, which loan would be payable over eight quarters. On April 29, 2013, we exercised our option to acquire BUPHENYL and AMMONUL from Ucyclyd. Ucyclyd has until May 19, 2013, to exercise its option to retain AMMONUL at a purchase price of $32.0 million. If Ucyclyd exercises its option and retains AMMONUL, the upfront purchase price for Ucyclyd's worldwide rights to BUPHENYL will be $19.0 million plus subsequent payments and milestones resulting in a net payment from Ucyclyd to us of $13.0 million upon close of the transaction.

We are a development stage company and have incurred net losses since our inception. As of March 31, 2013, we have a deficit accumulated during the development stage of $148.0 million. We recorded net losses of $9.0 million and $11.9 million for the three months ended March 31, 2013 and 2012, respectively. We expect to exit development stage designation when we have sufficient revenue from our principal operations. We anticipate that a substantial portion of our capital resources and efforts in the foreseeable future will be focused on completing the development and obtaining regulatory approval of Ravicti in HE and preparing for the commercialization of BUPHENYL and AMMONUL, if purchased from Ucyclyd. In addition, any future acquisitions of products or product candidates may require additional capital and personnel.

In April 2012, our Phase II HE trial data was unblinded and the trial met its primary endpoint, which was to demonstrate that the proportion of patients experiencing an HE event was significantly lower on Ravicti versus placebo, both administered in addition to a standard of care, including lactulose and/or rifaximin. We expect our research and development expenses to increase when we initiate a Phase III trial of Ravicti in HE. We will likely continue to incur significant commercial, sales, marketing and outsourced manufacturing expenses in connection with the commercialization of Ravicti in UCD. These increased expenses include payroll related expenses as we add employees in the commercial and regulatory departments, costs related to the initiation and operation of our distribution network, and marketing costs and general infrastructure expenses as we expand our organization. Accordingly, we expect to continue to incur significant and increasing operating losses for the foreseeable future.

On July 31, 2012, we completed our initial public offering ("IPO") and issued 5,000,000 shares of our common stock at an initial offering price of $10.00 per share. We sold an additional 750,000 shares of common stock directly to our underwriters when they exercised their over-allotment option in full at the initial offering price of $10.00 per share. Our shares began trading on the NASDAQ Global Market on July 26, 2012. We received net proceeds from the IPO of $51.3 million, after deducting underwriting discounts and commissions of $4.0 million and expenses of $2.2 million.


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Prior to our IPO, substantially all of our operations were funded through the private placement of equity securities and convertible debt. Through December 31, 2011, we have raised net cash proceeds of approximately $66.1 million from the sale of convertible preferred stock and $15.3 million from the issuance of convertible notes, which subsequently converted into shares of convertible preferred stock. Additionally, during 2011 and the first quarter of 2012, we issued approximately $32.5 million of convertible notes.

On March 13, 2013, we completed a follow-on offering and issued 2,875,000 shares of our common stock at an offering price of $20.75 per share. In addition, we sold an additional 431,250 shares of common stock directly to our underwriters when they exercised their over-allotment option in full at an offering price of $20.75 per share. We received net proceeds from the offering of $63.7 million, after deducting underwriting discounts and commissions of $4.1 million and expenses of $0.8 million.

Financial Overview

Net Revenue

For the period from inception to March 31, 2013, we have generated no revenue from the sale of any products other than product revenue generated during the first quarter of 2013 following FDA approval and the commercial launch of Ravicti. We have only generated limited revenue from the promotion of BUPHENYL and AMMONUL during 2007 and 2008.

Cost of sales

The manufacturing costs we incurred prior to FDA approval of Ravitcti have been recorded as research and development expenses in our condensed consolidated statement of operations. Our cost of sales during the quarter ended March 31, 2013 consists mainly of, royalty fees payable under our restated collaboration agreement with Ucyclyd, and other indirect costs including compensation cost of personnel, shipping and supplies. We expect that cost of sales as a percentage of sales will increase in future periods as product manufactured prior to FDA approval, and therefore fully expensed, is utilized.

Cost of sales in 2007 and 2008 were related to royalty payments to a third party in connection with the commissions received from Ucyclyd related to sales of BUPHENYL and AMMONUL under our prior collaboration agreement with Ucyclyd.

Research and Development Expenses

Since our inception, we have focused on our clinical development programs. We recognize research and development expenses as they are incurred. Our research and development expenses consist primarily of:

• salaries and related expenses for personnel, including expenses related to stock options or other stock-based compensation granted to personnel in development functions;

• fees paid to clinical consultants, clinical trial sites and vendors, including clinical research organizations, or CROs, in conjunction with implementing and monitoring our clinical trials and acquiring and evaluating clinical trial data, including all related fees, such as for investigator grants, patient screening fees, laboratory work and statistical compilation and analysis;

• other consulting fees paid to third parties;

• expenses related to production of clinical supplies, including fees paid to contract manufacturers;

• expenses related to license fees and milestone payments under in-licensing agreements;

• expenses related to compliance with drug development regulatory requirements in the United States, the European Union and other foreign jurisdictions; and

• depreciation and other allocated expenses;

• expenses incurred to manufacture Ravicti prior to FDA approval.


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We expense both internal and external research and development expenses as they are incurred. We did not begin tracking our research and development expenses on a program-by-program basis until January 1, 2010. We have been developing Ravicti in both UCD and HE in parallel, and we typically use our employees, consultants and infrastructure resources across our two programs. Thus, some of our research and development expenses are not attributable to an individual program, but rather are allocated across our two clinical stage programs and these costs are included in unallocated costs as detailed below. In 2012, unallocated costs included $5.7 million incurred in connection with the purchase agreement with Ucyclyd. Allocated expenses include salaries, stock-based compensation and related benefit expenses for our employees, consulting fees and fees paid to clinical suppliers. The following table shows our research and development expenses for the three months ended March 31, 2013 and 2012:

                                          Three Months Ended
                                               March 31,
                       (in thousands)      2013          2012
                                              (unaudited)
                       UCD Program      $      926      $ 1,104
                       HE Program              314          873
                       Unallocated             609        6,925

                       Total            $    1,849      $ 8,902

We expect our research and development expenses to increase when we initiate our Phase III trial of Ravicti for the treatment of patients with episodic HE. Due to the inherently unpredictable nature of product development, we are currently unable to estimate the expenses we will incur in the continued development of Ravicti.

Our research and development expenditures are subject to numerous uncertainties in timing and cost to completion. Development timelines, the probability of success and development expenses can differ materially from expectations. Clinical trials in orphan diseases, such as UCD and HE, may be difficult to enroll given the small number of patients with these diseases. Completion of clinical trials may take several years or more, but the length of time generally varies according to the type, complexity, novelty and intended use of a product candidate. The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others:

• the number of trials required for approval;

• the number of sites included in the trials;

• the length of time required to enroll suitable patients;

• the number of patients that participate in the trials;

• the drop-out or discontinuation rates of patients;

• the duration of patient follow-up;

• the number and complexity of analyses and tests performed during the trial;

• the phase of development of the product candidate; and

• the efficacy and safety profile of the product candidate.

Our expenses related to clinical trials are based on estimates of patient enrollment and related expenses at clinical investigator sites as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions and contract research organizations that conduct and manage clinical trials on our behalf. We generally accrue expenses related to clinical trials based on contracted amounts applied to the level of patient enrollment and activity according to the protocol. If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we modify our estimates of accrued expenses accordingly on a prospective basis.

As a result of the uncertainties discussed above, we are unable to determine with certainty the duration and completion costs of our Ravicti development programs.

Selling, General and Administrative Expenses

Selling general and administrative expenses consist primarily of salaries, benefits and stock-based compensation for employees in administration, finance and business development, marketing, commercial and sales functions, including fees to third party vendors providing customer support services. Other significant expenses include consulting fees, allocated facilities expenses and professional fees for accounting and legal services, including legal services associated with obtaining and maintaining patents. We expect that our selling, general and administrative expenses will increase with the continued commercialization of Ravicti, and BUPHENYL and AMMONUL, if purchased from Ucyclyd. We expect these increases will likely include increased expenses for insurance, expenses related to the hiring of additional personnel and payments to outside consultants, lawyers and accountants.

Interest Income

Interest income consists of interest earned on our cash and cash equivalents.


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Interest Expense

Interest expense consists primarily of non-cash and cash interest costs related to our borrowings.

Other Income (Expense), net

In the three months ended March 31, 2013 other income (expense), net consists of a $0.5 million payment from Ucyclyd in accordance with the restated collaboration agreement. During the three months ended March 31, 2012, other income (expense), net consists primarily of the changes in the fair value of the common and preferred stock warrants liability and call option liability associated with the issuance of approximately $32.5 million of convertible notes. Under ASC 815, Derivatives and Hedging and ASC 480, Distinguishing Liabilities from Equity, we account for the common stock warrants issued in 2011 and preferred stock warrants issued in 2012 and 2011, at fair value and recorded as liabilities on the date of each issuance. The fair value was determined and subsequently re-measured using the Black-Scholes option-pricing model on each reporting date. On July 31, 2012, upon closing of the IPO, we performed a final re-measurement of the common stock warrants issued in 2011 and preferred stock warrants issued in 2012 and 2011, and recorded the impact of the re-measurement to other income (expense), net. These warrants automatically net exercised into shares of common stock on July 31, 2012. As a result, these warrants will no longer be re-measured after July 31, 2012.

Income Taxes

Since inception, we have only generated revenues in the U.S. and have not generated revenues outside the U.S. The only revenues generated in the U.S. prior to the product sales of Ravicti in the three months ended March 31, 2013, have been from commissions for promotion services in 2007 and 2008 through the Ucyclyd collaboration agreement related to the sales of BUPHENYL and AMMONUL for UCD. We have incurred net losses and have not recorded any U.S. federal or state income tax benefits for the losses as they have been offset by valuation allowances.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. GAAP. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Actual results could differ from those estimates.

Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. For additional information on our critical accounting policies, please refer to the information contained in Note 2 of the accompanying unaudited condensed consolidated financial statements and the Critical Accounting Policies and Estimates section of our Management's Discussion and Analysis of Financial Condition and Results of Operations included in Annual Report on Form 10-K/A for the year ended December 31, 2012.

In relation to our commercial launch of Ravicti during the quarter ended March 31, 2013, we implemented the following new critical accounting policies:

Accounts Receivable

Our trade accounts receivable are recorded net of product sales allowances for prompt-payment discounts, chargebacks and doubtful accounts. We estimates chargebacks and prompt-payment discounts based on contractual terms, historical trends and our expectations regarding the utilization rates for these programs.

Inventories

Our inventories are stated at the lower of cost or market value with cost determined under the first-in-first-out (FIFO) cost method. Our inventories consist of raw materials, supplies, and work in process and finished goods. We began capitalizing inventories post FDA approval of Ravicti on February 1, 2013 as the related costs were expected to be recoverable through the commercialization of the product. Our costs incurred prior to the FDA approval of Ravicti have been recorded as research and development expense in the


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condensed statements of operations. The costs of our inventories during the quarter ended March 31, 2013 consists mainly of packaging and labeling costs from our third party vendor, indirect costs including compensation cost of personnel and supplies. As of March 31, 2013, our inventories include $0.3 million of work in process and $0.2 million of finished goods. In the future, our capitalizable inventories will include third party manufacturing costs, associated compensation related costs of personnel indirectly involved in the manufacturing process and other overhead costs attributable to the manufacture of inventories. If information becomes available that suggest that our inventories may not be realizable, we may be required to expense a portion or all of the previously capitalized inventories.

We evaluate for potential excess inventory by analyzing current and future product demand relative to the remaining product shelf life. We build demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance and patient usage. We classified inventory as current on the consolidated balance sheets when we expect inventory to be consumed for commercial use within the next 12 months.

Revenue Recognition

We recognize revenue in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 605, Revenue Recognition, when the following criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred and risk of loss has passed; and the seller's price to the buyer is fixed or determinable and collectability is reasonably assured. We determine that persuasive evidence of an arrangement exists based on written contracts that define the terms of our arrangements. In addition, we determine that services have been delivered in accordance with the arrangement. We assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess collectability based primarily on the customer's payment history and on the creditworthiness of the customer.

Product Revenue

Our product revenue represents U.S. sales of Ravicti and we recognized revenue once all four revenue recognition criteria described above are met. During the first quarter of 2013, we began distributing Ravicti to two specialty pharmacies through a specialty distributor. The specialty pharmacies, then in turn dispensed Ravicti to patients in fulfillment of prescriptions. As Ravicti is a new product, and our first commercial product, we could not reasonably assess potential product sales allowances at the time of sale to the specialty distributor. As a result of our inability to estimate product sales allowance at the time of sale to the specialty distributor, the price of Ravicti was not deemed fixed or determinable. We deferred the recognition of revenues on product shipments of Ravicti to the specialty distributor until the product was shipped to patients by the specialty pharmacies at which time our related product sales allowances could be reasonably estimated. We recognize revenue net of product sales allowances, including estimated rebates, chargebacks, prompt-payment discounts, returns, distribution service fees and Medicare Part D coverage gap reimbursements. Product shipping and handling costs are included in cost of sales.

Product Sales Allowances

We establish reserves for prompt-payment discounts, government and commercial rebates, product returns and chargebacks. Allowances relate to prompt-payment discounts and, are recorded at the time of revenue recognition, resulting in a reduction in product sales revenue and a decrease in trade accounts receivables. Accruals related to government rebates, product returns and other applicable allowances such as distributor fees are recognized at the time of revenue recognition, resulting in a reduction in product sales and an increase in accrued expenses or a reduction in the related accounts receivable depending on the nature of the sales deduction.

Cost of Sales

Costs incurred prior to FDA approval have been recorded as research and development expenses in our condensed consolidated statement of operations. Cost of sales during the quarter ended March 31, 2013 consists mainly of, royalty fees, and other indirect costs including compensation cost of personnel, shipping and supplies. We expect that cost of sales as a percentage of revenue will increase in future periods as product manufactured prior to FDA approval, and therefore fully expensed, is utilized.


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Results of Operations

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




                                              Three Months Ended                                     %
                                                   March 31,                 Increase/           Increase/
(in thousands, except for percentages)       2013             2012           (Decrease)          (Decrease)
Product revenue, net                       $     783        $     -         $        783                 100 %
Cost of sales                                     68              -                   68                 100
Research and development                       1,849           8,902              (7,053 )               (79 )
Selling, general and administrative            7,934           2,323               5,611                 242
Interest income                                    1               4                  (3 )               (75 )
Interest expense                                (408 )        (1,040 )              (632 )               (61 )
Other income (expense), net                      500             375                 125                  33

Revenues

During the three months ended March 31, 2013, $0.8 million of net product sales of Ravicti were recognized. Product revenues from the sale of Ravicti are recorded net of estimated product sales allowances including rebates offered pursuant to mandatory federal and state government programs and chargebacks, prompt pay discounts, sales returns and distribution fees.

Cost of Sales

We began capitalizing inventory costs after FDA approval of Ravicti as the related costs were expected to be recoverable through the commercialization of the product. Costs incurred prior to FDA approval have been recorded as research and development expenses in our 2012 consolidated statement of operations. As a result, cost of sales for the next several quarters will reflect a lower average per unit cost of materials. Cost of sales for the quarter ended March 31, 2013 of $68,000, includes royalty costs based on our restated collaboration agreement with Ucyclyd and other indirect costs including compensation cost of personnel indirectly involved in the manufacturing process, cost of shipping and supplies.

Research and Development Expenses

Research and development expenses decreased by $7.1 million, or 79%, to $1.9 million for the three months ended March 31, 2013, from $8.9 million for the three months ended March 31, 2012. This decrease was primarily due to decreases of $0.8 million in clinical development costs due to completion of our HE Phase II trial in 2012 and due to a $5.7 million expense recognized pertaining to purchase of Ravicti which occurred in first quarter of fiscal 2012.

For the period from inception to March 31, 2013, research and development expenses amounted to $89.1 million. Research and development expenses comprise primarily clinical and pre-clinical development costs of $46.4 million, payroll related costs of $15.9 million, professional and consulting costs of $8.3 million, the expenses incurred for the purchase of Ravicti of $5.7 million, regulatory related costs of $3.9 million and amortization of development and promotion rights acquisition cost of $3.1 million.

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