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

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Form 10-Q for TRANZYME INC


14-May-2013

Quarterly Report


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

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes included in our Annual Report on Form 10-K, as well as the information relating to such audited financial statements contained under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report on Form 10-K, which includes annual financial statements as of and for the year ended December 31, 2012 as well as our subsequent reports filed with the SEC and other publicly available information.

Overview

Tranzyme Pharma is a biopharmaceutical company focused on discovering, developing and commercializing novel, mechanism-based therapeutics. All of our product candidates have been discovered by our scientists using our proprietary chemistry technology platform, MATCH (Macrocyclic Template Chemistry), which enables us to construct synthetic libraries of drug-like, macrocyclic compounds in a predictable and efficient manner. We have first-in-class product candidates and a strong drug discovery platform, and have pursued a licensing strategy with collaborators whose capabilities complement our own.
We were incorporated in Delaware on January 12, 1998. On December 17, 2003, we entered into a business combination with Neokimia Inc., a Quebec, Canada-based chemistry company which now operates under the name Tranzyme Pharma Inc., or Tranzyme Pharma. Tranzyme Pharma is a wholly-owned subsidiary and owns substantially all of our intellectual property and conducts our preclinical research.
In May 2012, following the receipt of the results of the two Phase 3 trials, both of which failed to meet their primary and secondary endpoints, we stopped development and regulatory activities for ulimorelin.
In December 2012, we stopped enrollment and further clinical development of our product candidate TZP-102, being evaluated in diabetic patients with gastroparesis, following the results of two Phase 2b trials, both of which failed to show superiority over placebo.
We have devoted substantially all of our resources to our drug discovery efforts which consist of research and development activities, clinical trials for our product candidates, the general and administrative support of these operations and intellectual property protection and maintenance. To date, we have funded our operations principally through private placements of our common stock, preferred stock and convertible debt; bank and other lender financings; and through payments received under collaborative licensing arrangements with Norgine B.V., or Norgine, and Bristol-Myers Squibb Company, or BMS, raising an aggregate of approximately $140.0 million. In April 2011, we completed an initial public offering, or IPO, of our common stock pursuant to a Registration Statement on Form S-1 (File No. 333-170749) raising an aggregate of $51.4 million in net proceeds. In September 2012, we completed a follow-on offering of our common stock pursuant to a Registration Statement on Form S-3 (File No. 333-181215) raising an aggregate of $10.6 million in net proceeds.

We have incurred significant losses since our inception. As of March 31, 2013 our accumulated deficit was approximately $132.9 million. We expect to incur significant operating losses over the next several years as we continue to develop our product candidates, pursue other strategic opportunities and operating as a public company.

On April 24, 2013, we announced that we entered into a definitive agreement under which Ocera Therapeutics, Inc., or Ocera, a privately held biopharmaceutical company developing novel therapeutics for liver diseases, will merge with a newly-formed subsidiary of our company in an all-stock transaction. The merger is expected to create a NASDAQ-listed company focused on the development of novel therapeutics for patients with acute and chronic decompensated liver disease, an area of high unmet medical need. Upon closing, the company will be named "Ocera Therapeutics, Inc."

On a pro forma basis, prior to the financing transaction discussed below, based upon the number of shares of our common stock to be issued in the merger, our current shareholders will own approximately 27.4% of the combined company and current Ocera shareholders will own approximately 72.6% of the combined company. The final number of shares will be subject to adjustments at closing based on each company's cash levels and other matters at closing. The transaction has been unanimously approved by the board of directors of both companies. The merger is expected to close in the third quarter of 2013, subject to approval by a majority of our stockholders, review by the Securities and Exchange Commission and customary closing conditions as detailed in the merger agreement.

Concurrently with the execution of the merger agreement, we entered into a securities purchase agreement pursuant to which certain investors agreed to purchase, and it agreed to sell, $20.0 million worth of our common stock at a price to be determined based on the weighted average trading price of our closing price for the 10 days prior to the closing of the merger.


The securities purchase agreement is conditioned on closing of the merger transaction and customary closing conditions as detailed in the securities purchase agreement, and contains customary representations, warranties, covenants and indemnities.

In connection with the merger, we plan to effect a reverse stock split intended to increase its trading price to above the minimum requirements of NASDAQ for allowing us to remain listed following the transaction. Whether we will remain listed following the transaction depends on whether we will satisfy all of the applicable NASDAQ requirements.

Strategic Partnerships

Norgine, B.V. In June 2010, we entered into a license agreement with Norgine, a leading, GI-focused European specialty pharmaceutical company, to co-develop and commercialize ulimorelin in licensed territories that include Europe, Australia, New Zealand, Middle East, North Africa and South Africa. Under the terms of the agreement, we received a nonrefundable, upfront license fee of $8.0 million. The $8.0 million nonrefundable up-front payment was deferred and was being recognized on a straight-line basis over 31 months, through December 31, 2012, the estimated period of time over which our involvement in the collaboration was a substantive performance obligation. In addition, Norgine purchased 1,047,120 shares of our Series B convertible preferred stock for $1.91 per share, resulting in total net proceeds of approximately $2.0 million. Upon closing of our IPO in 2011, these shares converted into 149,588 shares of our common stock.

Under the agreement, Norgine shared the cost of our Phase 3 clinical trials and the cost of procuring clinical manufacturing supply for the trials. Each party was solely responsible for managing and covering the cost of regulatory filings in its own territories. In addition, each party was solely responsible for the cost of any special studies required for regulatory approval specific to its own territory. Costs for development services provided under the agreement are expensed as incurred. Reimbursement of expenses under this agreement are offset against costs as incurred. We recognized a reduction in research and development expenses of $90,000 and $35,000 as a result of payments received for cost-sharing activities under this agreement for the three month periods ended March 31, 2013 and 2012, respectively.

In 2012, following the receipt of the results of the two Phase 3 trials, both of which failed to meet their primary and secondary endpoints, we stopped development and regulatory activities for ulimorelin. On July 19, 2012, we received notice of termination of the license agreement with Norgine. The termination became effective on October 19, 2012. As a result of the termination agreement, all rights and licenses granted under the agreement by us to Norgine terminated and reverted to us as of the effective date of the termination. We incurred no termination penalties as result of the termination of the agreement.

Bristol-Myers Squibb Company. In December 2009, we entered into a collaboration agreement with BMS to discover, develop and commercialize additional novel compounds discovered using our MATCH technology platform, other than our product candidates and internal programs, against a limited number of targets of interest to BMS. Under the terms of the agreement, BMS was funding our early lead discovery efforts on these targets. BMS will be solely responsible for preclinical and clinical development of all product candidates arising from the collaboration and, if successful products are developed, for their commercialization globally. As part of the agreement, we received a $10.0 million nonrefundable upfront license fee. The $10.0 million nonrefundable upfront license fee was deferred and was being recognized on a straight-line basis over thirty months, the estimated initial research and collaboration period of the agreement. In September 2011, BMS extended the collaboration agreement for an additional six-month period and we changed the amortization period for the remaining unamortized upfront payment from 30 months to 36 months. In April 2012, BMS further extended the research collaboration for an additional three-month period through September 2012, and we further extended the amortization period for the remaining upfront payment from 36 months to 39 months, through March 31, 2013, the estimated period of time over which our involvement in the collaboration is a substantive performance obligation. In September 2012, BMS further extended the research collaboration for an additional three-month period through December 2012, and we further extended the amortization period for the remaining upfront payment from 39 months to 42 months, through June 30, 2013, the estimated period of time over which our involvement in the collaboration is a substantive performance obligation. As of March 31, 2013, we have not received any milestone or royalty payments, and we are not certain if and when we will be eligible for such payments in the future.
The agreement provided for up to $6.0 million in research funding, payable in quarterly installments, over the initial two-year research program to support personnel related expenses, laboratory supplies and equipment to support the discovery efforts. Up to $2.5 million in research funding was provided during the six-month extension period and $600,000 in funding was provided during the three-month extension period through September 30, 2012. Up to $375,000 in funding was provided during the three-month extension period through December 31, 2012. We recognized revenue for reimbursement of research costs under this agreement of $1.2 million for the three month period ended March 31, 2012.


On January 4, 2013, we announced the successful completion of our chemistry-based drug discovery collaboration with BMS. As a result of the joint research efforts, we have transferred compounds to BMS for further development across multiple drug targets. As part of the collaboration agreement, we may receive up to approximately $80.0 million in additional development milestone payments, and $30.0 million in sales milestone payments, for each target program if development and regulatory milestones, or commercial milestones, respectively, are achieved. In addition, we would receive graduated single-digit percentage royalties on sales of commercialized products.
Open Biosystems, Inc. In October 2005, we entered into a license and marketing agreement whereby Open Biosystems, Inc. acquired a worldwide royalty-bearing license to certain of our intellectual property unrelated to our product candidates and MATCH drug discovery technology. The agreement provides for royalty revenue on annual net sales at rates ranging from mid-single digits to 20 percent based on sales by licensed product category or, through 2010, minimum annual royalties if greater than earned, until the expiration date of the last-to-expire licensed patent or 12 years, whichever occurs last. We have recognized royalty revenue from this agreement of $50,000 for each of the three month periods ended March 31, 2013, and 2012, respectively.

Financial Operations Overview

Revenues

Our revenue consists primarily of licensing and royalty revenue as well as research revenue, which consists of fees for research services from license or collaboration agreements. The upfront licensing fees received pursuant to our license agreements are deferred and are being recognized in licensing and royalty revenue on a straight-line basis over a period which represents the estimated period of time over which our involvement in the collaboration represents a substantive performance obligation. These fees under our collaboration agreement with BMS are being recognized over a 42 month period, through June 2013, the estimated period of time over which our involvement in the collaboration is a substantive performance obligation. Upfront licensing fees under our license agreement with Norgine were recognized over 31 months. Revenue for research services provided under our collaboration agreement with BMS is recognized in research revenue as such services are performed. Royalty revenue from our agreement with Open Biosystems, Inc. is recognized in licensing and royalty revenue as applicable products are sold.

In the future, we may generate revenue from product sales, upfront licensing fees and milestone payments from collaborations, and royalties from the sale of products commercialized under licenses of our intellectual property. We do not expect to generate any significant revenue unless or until we commercialize our product candidates or reach milestones contained in our collaboration agreements. We expect that our revenue will fluctuate from quarter to quarter as a result of the timing and amount of licensing and milestone payments received, research and development reimbursements for collaborative agreements, and other payments received from partnerships. If we fail to complete the development of our product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue from product sales and milestones payments or royalties from product sales may adversely affect our results of operations and financial position.

Research and Development

We expense research and development costs as they are incurred. Research and development expenses consist of expenses incurred in the discovery and development of our product candidates, and primarily include:

expenses, including salaries, benefits and non-cash share-based compensation expenses for research and development personnel;

          expenses incurred under third party agreements with contract research
          organizations, or CROs, investigative sites and consultants in
          conducting clinical trials;

costs of acquiring and manufacturing clinical trial supplies;

costs associated with our discovery efforts and preclinical activities;

costs associated with non-clinical activities and regulatory submissions; and

costs associated with the maintenance and protection of our intellectual property.


Direct development expenses and certain indirect overhead expenses associated with our research and development activities are allocated to our product candidates. The allocation of indirect overhead is based on management's estimate of the use of such resources on a program-by-program basis. Indirect costs related to our research and development activities that are not allocated to a product candidate, including salaries and benefits for our clinical development personnel, and costs associated with the development of our preclinical product candidates and in support of our discovery collaboration are included in "Other research and development expenses" in the table below.

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

                                            Three Months
                                           Ended March 31,
                                           2013        2012
ulimorelin                              $       -    $ 3,457
TZP-102                                       644      2,583
Other research and development expenses     1,212      2,100
                                        $   1,856    $ 8,140

We expect to fund our research and development expenses from our current cash and cash equivalents, from cost-sharing reimbursement payments received from collaboration agreements, if any, and potentially, additional financing transactions or collaboration arrangements.

Operating losses may be incurred over the next several years as we commence the development and seek regulatory approval for our pre-clinical product candidates or other product candidates. At this time, we cannot reasonably estimate or know the nature, specific timing and estimated costs of the efforts that will be necessary to complete the development of our product candidates, or the period, if any, in which material net cash inflows may commence from our product candidates. This is due to the numerous risks and uncertainties associated with developing our product candidates, including:

the progress, costs, results of and timing of future clinical trials of any of our pre-clinical product candidates;

the costs and timing of obtaining regulatory approval in the United States and abroad for our product candidates;

the costs of obtaining, maintaining and enforcing our patents and other intellectual property rights globally;

         the costs and timing of obtaining or maintaining manufacturing for our
          product candidates, including commercial manufacturing if any of our
          product candidates is approved;

the costs and timing of establishing sales and marketing capabilities in selected markets; and

the terms and timing of establishing collaborations, license agreements and other partnerships on terms favorable to us.

Our expenses related to clinical trials are based on estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and clinical research organizations that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Generally, these agreements provide a fixed fee or unit price for services performed. Payments under the contracts depend on factors such as the successful enrollment of patients or the achievement of clinical trial milestones. Expenses related to clinical trials generally are accrued based on services performed at contractual amounts and the achievement of milestones such as number of patients enrolled. If timelines or contracts are modified based upon changes to the clinical trial design or scope of work to be performed, we modify our estimates of accrued expenses accordingly on a prospective basis. A change in the outcome of any of these variables with respect to the development of a product candidate could result in a significant change in the costs and timing associated with the development of that product candidate.

General and Administrative

General and administrative expenses consist primarily of compensation for employees in executive and administrative functions including non-cash, share-based compensation expense, costs associated with our corporate infrastructure, and professional fees for business development, commercialization activities and market research, accounting and legal services.


We anticipate that our general and administrative expenses in 2013 will approximate 2012 general and administrative expenses primarily due to costs of operating as a public company including costs associated with evaluating strategic opportunities, regulatory compliance, corporate governance, insurance and consulting fees for our legal and accounting activities.

Other Income (Expense), Net

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

Interest expense to date has consisted primarily of interest expense on convertible notes payable and long-term debt and the amortization of debt discounts and debt issuance costs. We amortize debt issuance costs over the life of the notes which are reported as interest expense in our statements of comprehensive income.

Other income and expense to date has primarily consisted of costs incurred from extinguishment of debt, changes in the fair value of our warrant liability and gains and losses on foreign currency transactions primarily from purchases made by Tranzyme Pharma.

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 us to make estimates and judgments 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 revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments related to preclinical, nonclinical and clinical development costs and drug manufacturing costs. We base our estimates on historical experience and on various other assumptions that we believe to be 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 materially from these estimates under different assumptions or conditions.

We discussed accounting policies and assumptions that involve a higher degree of judgment and complexity within 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.

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,        Increase        % Increase
                                      2013             2012          (Decrease)       (Decrease)
Licensing and royalties          $         599     $     1,443     $       (844 )          (58 )%
Research revenue                             -           1,165           (1,165 )         (100 )%
Total                            $         599     $     2,608     $     (2,009 )          (77 )%

The decrease in licensing and royalties for the three months ended March 31, 2013, was primarily due to a decrease in the amortization of deferred revenue from the upfront licensing fee received from our collaboration agreement with Norgine, which totaled $823,000 for the three month period ended March 31, 2012, as compared to no amortization for the three month period ended March 31, 2013. The decrease in research revenue was primarily due to a decrease in reimbursable laboratory supply expenses and FTE's as defined in our collaboration agreement with BMS.

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, Increase % Increase 2013 2012 (Decrease) (Decrease) Research and development expenses $ 1,856 $ 8,140 $ (6,284 ) (77 )%

The decrease in research and development costs during the three months ended March 31, 2013, was primarily due to a decrease in expenses incurred for our Phase 3 clinical trials for ulimorelin and our Phase 2b trials for TZP-102. Costs related to ulimorelin activities decreased by approximately $3.5 million, primarily due to completion of our Phase 3 clinical trials and the cessation of further development and regulatory activities following the results of the trials. Costs related to our Phase 2b trials for TZP-102 activities resulted in a decrease in clinical trial expenses of approximately $1.9 million primarily due to termination of our clinical activities following the results of these trials, both of which failed to show superiority to placebo. Other research and development expenses decreased by approximately $900,000 primarily due to a reduction in personnel related expenses and other expenses associated with our research activities.

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, Increase % Increase 2013 2012 (Decrease) (Decrease) General and administrative $ 2,136 $ 1,948 $ 188 10 %

The increase in general and administrative expenses was due primarily to legal expenses incurred for our strategic transaction process.

Other Income (Expense), Net

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

                                      Three Months Ended March 31,            Increase        % Increase
                                       2013                  2012            (Decrease)       (Decrease)
Interest expense, net            $          (2 )       $          (432 )   $       (430 )         (100 )%
Other income (expense)                       2                    (508 )            510            100  %
Total Change in Other Expense    $           -         $          (940 )   $       (940 )         (100 )%

The decrease in interest expense period was primarily due to a decrease in interest incurred on our term loan for the period. The increase in other income is due to a loss on extinguishment of debt as a result of refinancing of our term loan during the three month period ended March 31, 2012.

Liquidity and Capital Resources

Sources of Liquidity

We have incurred losses since our inception and we anticipate that we will continue to incur losses for at least the next several years. Historically, we have financed our operations primarily through private placements of common stock and convertible preferred stock, issuance of convertible promissory notes to our stockholders, upfront payments from strategic partnerships, bank, other lender financing and development grants from governmental authorities and our public offerings of common stock. As of March 31, 2013, we had $10.8 million in cash and cash equivalents. Cash in excess of immediate requirements is invested in accordance with our investment policy primarily with a view to liquidity and capital preservation.


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