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PSDV > SEC Filings for PSDV > Form 10-Q on 14-May-2013All Recent SEC Filings

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Form 10-Q for PSIVIDA CORP.


14-May-2013

Quarterly Report


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

Note Regarding Forward-Looking Statements

Various statements made in this Quarterly Report on Form 10-Q are forward-looking and involve risks and uncertainties. All statements that address activities, events or developments that we intend, expect or believe may occur in the future are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. All statements other than statements of current or historical facts are forward-looking statements, including, without limitation, any expectations of revenues, expenses, cash flows, earnings or losses from operations, capital or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning product research, development and commercialization timelines; any statements of expectations or belief; and any statements of assumptions underlying any of the foregoing. We often, although not always, identify forward-looking statements by using words or phrases such as "likely", "expect", "intend", "anticipate", "believe", "estimate", "plan", "project", "forecast" and "outlook".

The following are some of the factors that could cause actual results to differ materially from the anticipated results or other expectations expressed, anticipated or implied in our forward-looking statements: uncertainties with respect to: Alimera's ability to finance, achieve additional marketing approvals, successfully complete pricing and reimbursement discussions for, commercialize and achieve market acceptance of, and generate revenues to pSivida from, ILUVIEN for DME in the EU; Alimera's ability to obtain regulatory approval for, and if approved, to finance, successfully commercialize and achieve market acceptance of, and generate revenues to pSivida from, ILUVIEN for DME in the U.S.; financing and success of planned Phase III posterior uveitis trials, including efficacy, side effects and risk/benefit profile of the posterior uveitis micro-insert; initiation, financing and success of Latanoprost Product Phase II trials and exercise by Pfizer of its option; development of products using Tethadur and BioSilicon and potential collaborations for those products; initiation and completion of clinical trials and obtaining regulatory approval of product candidates; continued sales of Retisert; adverse side effects; ability to attain profitability; ability to obtain additional capital; further impairment of intangible assets; fluctuations in operating results; decline in royalty revenues; ability to, and to find partners to, develop and market products; termination of license agreements; competition and other developments affecting sales of products; market acceptance; protection of intellectual property and avoiding intellectual property infringement; retention of key personnel; product liability; consolidation in the pharmaceutical and biotechnology industries; compliance with environmental laws; manufacturing risks; risks and costs of international business operations; credit and financial market conditions; legislative or regulatory changes; volatility of stock price; possible dilution; possible influence by Pfizer; absence of dividends; and other factors described in our filings with the Securities and Exchange Commission. You should read and interpret any forward-looking statements together with these risks. Should known or unknown risks materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected in the forward-looking statements. You should bear this in mind as you consider any forward-looking statements.

Our forward-looking statements speak only as of the date on which they are made. We do not undertake any obligation to publicly update or revise our forward-looking statements even if experience or future changes makes it clear that any projected results expressed or implied in such statements will not be realized.

Our Business

We develop tiny, sustained-release, drug delivery products designed to deliver drug at a controlled and steady rate for months or years. We are focused on treatment of chronic diseases of the back of the eye utilizing our core technology platforms, Durasert and BioSilicon. We have developed three approved products and have two principal product candidates under development using successive generations of our Durasert technology system.

ILUVIEN. Our most recently approved product is an injectable, sustained-release micro-insert for the treatment of vision impairment associated with chronic diabetic macular edema ("DME") considered insufficiently responsive to available therapies. This product, to be marketed under the name ILUVIEN®, is being developed by our licensee, Alimera Sciences, Inc. ("Alimera"). ILUVIEN for DME has received marketing authorization in the U.K., Austria, France, Germany, Portugal and Spain, and has been recommended for marketing authorization in Italy. Alimera has reported that ILUVIEN for DME is now available in Germany as well as for private pay and privately insured patients in the U.K., it expects to launch the direct commercialization of ILUVIEN for DME in France later in 2013 and it is pursuing pricing and reimbursement.


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In the first quarter of 2013, Alimera resubmitted its New Drug Application ("NDA") for ILUVIEN for DME in response to the second Complete Response Letter ("2011 CRL") received from the U.S. Food and Drug Administration ("FDA") in November 2011. Alimera reported that the response was submitted based on a June 2012 meeting with the FDA and that, using clinical data available from its two previously completed pivotal Phase III clinical trials (the "FAME™ Study"), the response focused on the safety aspects of ILUVIEN and the subgroup population of patients with chronic DME considered insufficiently responsive to available therapies, the same subgroup for which marketing approval for ILUVIEN has been granted in six countries in the EU. Alimera also reported that data was submitted from the completed physician utilization study for the ILUVIEN applicator and from a special reading center assessment of photographs of the fundus, or interior surface of the eye, which were collected during the FAME Study. The FDA has set a Prescription Drug User Fee Act ("PDUFA") goal date of October 17, 2013 for its decision on Alimera's resubmission.

Durasert Product Development. We plan to develop the same micro-insert used in ILUVIEN for the treatment of chronic, non-infectious uveitis affecting the posterior segment of the eye ("posterior uveitis"). The FDA has cleared our IND, permitting us to move directly to two Phase III trials for this indication without the necessity of conducting Phase I or Phase II trials. The FDA has agreed that the primary end point in these trials, which are expected to involve a total of 300 patients, will be recurrence of uveitis within 12 months and that we can reference much of the data, including the clinical safety data, from the clinical trials for ILUVIEN for DME. Treatment of posterior uveitis with this micro-insert is also being studied in an investigator-sponsored Phase II study. We did not license Alimera the rights to use this micro-insert for the treatment of uveitis.

We are also developing a bioerodible, injectable micro-insert delivering latanoprost (the "Latanoprost Product") to treat glaucoma and ocular hypertension. An investigator-sponsored Phase I/II dose-escalation study is ongoing to assess the safety and efficacy of this micro-insert in patients with elevated intraocular pressure. Pfizer has an option, under certain circumstances, to license the development and commercialization of the Latanoprost Product worldwide.

We are also investigating the use of Durasert technology for the treatment of orthopedic diseases.

BioSilicon. BioSilicon is the second key technology platform we are targeting for sustained drug delivery. Our primary research focus is on Tethadur, which seeks to utilize BioSilicon to deliver peptides, proteins and other large biologic molecules on a sustained basis. Our BioSilicon technology can also be designed for smaller molecules. Our research program with respect to Tethadur includes a feasibility study of ophthalmic applications under a technology evaluation agreement with a global biopharmaceutical company and pre-clinical testing of a sustained release peptide for systemic application. We are also investigating the use of BioSilicon in our Latanoprost Product.

FDA Approved Products. Our FDA-approved product, Retisert for the treatment of posterior uveitis, is licensed to and sold by Bausch & Lomb. We also developed Vitrasert for the treatment of AIDS-related cytomegalovirus retinitis, which was approved by the FDA in 1996 and was licensed to and sold by Bausch & Lomb.

Durasert™, BioSilicon™ and Tethadur™ are our trademarks. Retisert® and Vitrasert® are Bausch & Lomb's trademarks, and ILUVIEN® and FAME™ are Alimera's trademarks.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with GAAP requires that we make certain estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates, judgments and assumptions on historical experience, anticipated results and trends, and on various other factors that we believe are reasonable under the circumstances at the time. By their nature, these estimates, judgments and assumptions are subject to an inherent degree of uncertainty. Actual results may differ from our estimates under different assumptions or conditions. In our Annual Report on Form 10-K for the year ended June 30, 2012 ("fiscal year 2012"), we set forth our critical accounting policies and estimates, which included revenue recognition and valuation of our intangible assets. There have been no material changes to our critical accounting policies from the information provided in our Annual Report on Form 10-K for fiscal year 2012.


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Results of Operations

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012:



                                      Three Months Ended
                                           March 31,                    Change
                                      2013           2012         Amounts         %
                                            (In thousands except percentages)

       Revenues                     $     513      $    538      $     (25 )       (5 )%

       Operating expenses:
       Research and development         1,587         1,508             79          5 %
       General and administrative       1,738         1,757            (19 )       (1 )%

       Total operating expenses         3,325         3,265             60          2 %

       Loss from operations            (2,812 )      (2,727 )          (85 )       (3 )%

       Other income:
       Interest income                      3            10             (7 )      (70 )%
       Other income                        -              1             (1 )       na

       Total other income                   3            11             (8 )      (73 )%

       Loss before income taxes        (2,809 )      (2,716 )          (93 )       (3 )%
       Income tax benefit                  15            30            (15 )      (50 )%

       Net loss                     $  (2,794 )    $ (2,686 )    $    (108 )       (4 )%

Revenues

Revenues decreased by $25,000, or 5%, to $513,000 for the three months ended March 31, 2013 from $538,000 for the three months ended March 31, 2012. Collaborative research and development revenue increased by $81,000, primarily attributable to the upfront fee under the Enigma license agreement. Royalty income from Bausch & Lomb decreased to $274,000 for the three months ended March 31, 2013 compared to $380,000 for the three months ended March 31, 2012 due to lower Retisert sales and the cessation of royalty payments with respect to Vitrasert.

Alimera reported that ILUVIEN for DME is now available in Germany, as well as for the treatment of private pay and privately insured patients in the U.K., and it expects to launch ILUVIEN for DME in France later in 2013. Under the Alimera Agreement, we will be entitled to 20% of net profits, as defined, on a country-by-country basis from sales by Alimera of ILUVIEN for DME. We do not know when and if Alimera will achieve net profits in each EU country where ILUVIEN has marketing approval and Alimera intends to commercialize ILUVIEN directly. Alimera resubmitted its NDA for ILUVIEN for DME to the FDA in the first quarter of 2013 in response to the 2011 CRL, and the FDA has set a PDUFA goal date of October 17, 2013 for its decision. If ILUVIEN for DME were approved by the FDA, we would be entitled to receive a $25.0 million milestone payment from Alimera within 30 days following such FDA approval and 20% of the net profits from sales by Alimera of ILUVIEN for DME in the U.S.

Research and Development

Research and development increased by $79,000, or 5%, to $1.6 million for the three months ended March 31, 2013 from $1.5 million for the three months ended March 31, 2012. This increase was primarily attributable to increases in clinical and pre-clinical costs and incentive compensation accruals, partially offset by lower stock-based compensation. We expect to incur additional research and development expense during the remainder of fiscal year 2013 with respect to commencement of an internally funded Phase III clinical trial of our sustained-release micro-insert to treat patients with posterior uveitis.


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General and Administrative

General and administrative decreased by $19,000, or 1%, to $1.7 million for the three months ended March 31, 2013 from $1.8 million for the three months ended March 31, 2012. The decrease was primarily attributable to lower professional fees, partially offset by higher incentive compensation accruals.

Income Tax Benefit

Income tax benefit was $15,000 for the three months ended March 31, 2013 compared to $30,000 for the quarter a year earlier, reflecting a smaller amount of refundable foreign research and development tax credits.

Nine Months Ended March 31, 2013 Compared to Nine Months Ended March 31, 2012:



                                           Nine Months Ended
                                               March 31,                    Change
                                          2013          2012          Amounts         %
                                                (In thousands except percentages)

  Revenues                              $  1,651      $   2,827      $  (1,176 )       (42 )%

  Operating expenses:
  Research and development                 4,685          5,629           (944 )       (17 )%
  General and administrative               5,016          5,269           (253 )        (5 )%
  Impairment of intangible assets             -          14,830        (14,830 )        na

  Total operating expenses                 9,701         25,728        (16,027 )       (62 )%

  Loss from operations                    (8,050 )      (22,901 )       14,851          65 %

  Other income (expense):
  Change in fair value of derivatives         -             170           (170 )      (100 )%
  Interest income                             14             30            (16 )       (53 )%
  Other expense, net                          (2 )           (1 )           (1 )      (100 )%

  Total other income                          12            199           (187 )       (94 )%

  Loss before income taxes                (8,038 )      (22,702 )       14,664          65 %
  Income tax benefit                          85            129            (44 )       (34 )%

  Net loss                              $ (7,953 )    $ (22,573 )    $  14,620          65 %

Revenues

Revenues decreased by approximately $1.2 million, or 42%, to $1.7 million for the nine months ended March 31, 2013 from $2.8 million for the nine months ended March 31, 2012. Collaborative research and development revenue decreased by $1.2 million principally as a result of $1.1 million recognized in the prior year period due to the July 2011 termination by Intrinsiq of its exclusive field-of-use license for nutraceutical and food science applications of BioSilicon and a $222,000 decrease in revenue recognized under the Restated Pfizer Agreement, partially offset by $100,000 of upfront fees under the Enigma license agreement and increased research and development revenue from feasibility study agreements. Royalty income from Bausch & Lomb totaled approximately $1.0 million for each of the nine month periods ended March 31, 2013 and 2012. Increased Retisert royalty income was offset by decreased Vitrasert royalty income due to the cessation of royalty payments with respect to Vitrasert.


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Research and Development

Research and development decreased by $944,000, or 17%, to $4.7 million for the nine months ended March 31, 2013 from $5.6 million for the nine months ended March 31, 2012. This decrease was primarily attributable to a $1.3 million decrease in amortization of intangible assets resulting from a $14.8 million intangible asset impairment write-down at December 31, 2011, partially offset by increased personnel expenses and incentive compensation accruals.

General and Administrative

General and administrative decreased by $253,000, or 5%, to $5.0 million for the nine months ended March 31, 2013 from $5.3 million for the nine months ended March 31, 2012. This decrease was primarily attributable to lower professional fees and stock-based compensation, partially offset by higher incentive compensation accruals.

Other Income

Other income decreased by $187,000, or 94%, to $12,000 for the nine months ended March 31, 2013 from $199,000 for the nine months ended March 31, 2012. Other income for the nine months ended March 31, 2012 consisted primarily of the change in fair value of derivatives of $170,000. This income, which reduced the derivative liability balance to zero, was determined using the Black-Scholes valuation model. The last of the A$-denominated warrants expired in July 2012.

Income Tax Benefit

Income tax benefit was $85,000 for the nine months ended March 31, 2013 compared to $129,000 for the nine month period of the prior year. The net change was attributable to a $13,000 net reduction of deferred tax liabilities in the prior year period and lower refundable foreign research and development tax credits.

Liquidity and Capital Resources

During the past three fiscal years, we have financed our operations primarily from license fees, research and development funding, royalties and payment of a contingent note from our collaboration partners, and registered direct offerings of our common stock and warrants in January 2011 and August 2012. At March 31, 2013, our principal sources of liquidity consisted of cash, cash equivalents and marketable securities totaling $13.7 million. Our cash equivalents are predominantly invested in one institutional money market fund, and our marketable securities are primarily invested in investment-grade corporate debt and commercial paper with maturities at March 31, 2013 ranging from 15 days to 10 months.

With the exception of fiscal year 2010, we have incurred operating losses each year since inception and, at March 31, 2013, we had a total accumulated deficit of $259.7 million. We generally expect negative cash flows from operations on a quarterly basis at least until such time as we receive sufficient revenues from ILUVIEN for DME in the EU or one or more of our product candidates achieves regulatory approval and provides us sufficient revenues. We believe that our capital resources of $13.7 million at March 31, 2013, together with expected Retisert royalty income from Bausch & Lomb and other expected cash inflows under existing collaboration and evaluation agreements, will enable us to fund our operations as currently planned into the fourth quarter of fiscal year ending June 30, 2014. This includes planned Phase III clinical trials of the posterior uveitis micro-insert expected to commence during the fourth quarter of fiscal 2013, but excludes any potential milestone or net profits receipts under the Alimera collaboration agreement. Whether we will require, or desire, to raise additional capital will be influenced by many factors, including, but not limited to:

• whether, when and to what extent we receive revenues from Alimera with respect to ILUVIEN for DME, including from commercialization in the EU or upon any approval or commercialization in the U.S.;

• whether and when we are able to enter into strategic arrangements for our product candidates and the nature of those arrangements;

• when and if we initiate, how we conduct, and whether and the extent to which we internally fund product development and programs, including clinical trials and other research and development;

• whether and when Pfizer exercises its option with respect to the Latanoprost Product;

• timely and successful development, regulatory approval and commercialization of our products and product candidates;


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• the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing any patent claims; and

• changes in our operating plan resulting in increases or decreases in our need for capital.

Absent adequate levels of funding from existing and potential future collaboration or other agreements and/or financing transactions, management currently believes that our cash position beyond the fourth quarter of fiscal year 2014 depends significantly on possible revenues from the successful commercialization by Alimera of ILUVIEN for DME in the EU and, if approved by the FDA, in the U.S. However, there is no assurance that the FDA or other regulatory authorities will approve ILUVIEN for DME, that it will achieve market acceptance in any market or that we will receive significant, if any, revenues from ILUVIEN for DME. Exercise by Pfizer of its option for the Latanoprost Product would also enhance our cash position, although there is no assurance when the option will become exercisable or if Pfizer will exercise it.

We enhanced our capital resources in August 2012, raising net proceeds of $4.7 million through a registered direct offering of common stock and warrants. If we determine that it is desirable or necessary to raise additional capital in the future, we do not know if it will be available when needed or on terms favorable to us or our stockholders. The state of the economy and the financial and credit markets at the time we seek additional financing may make it more difficult and more expensive to obtain. If available, additional equity financing may be dilutive to stockholders, debt financing may involve restrictive covenants or other unfavorable terms and potential dilutive equity, and funding through collaboration agreements may be on unfavorable terms, including requiring us to relinquish rights to certain of our technologies or products. If adequate financing is not available if and when needed, we may be required to delay, reduce the scope of or eliminate research or development programs, postpone or cancel the pursuit of product candidates, including pre-clinical and clinical trials and new business opportunities, reduce staff and operating costs or otherwise significantly curtail our operations to reduce our cash requirements and extend our capital.

Our consolidated statements of historical cash flows are summarized as follows:

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