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ENTA > SEC Filings for ENTA > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for ENANTA PHARMACEUTICALS INC


15-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 the unaudited financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto for the year ended September 30, 2012 included in our final prospectus filed with the Securities and Exchange Commission on March 21, 2013. This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "should," "estimate," or "continue," and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled "Risk Factors," set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

Overview

We are a research and development-focused biotechnology company that uses its robust chemistry-driven approach and drug discovery capabilities to create small molecule drugs in the infectious disease field. We are discovering and developing inhibitors designed for use against the hepatitis C virus, referred to as HCV. We believe that a successful approach to a complete cure for HCV in most patients will likely require treatment with a combination of drugs that attack different mechanisms necessary for replication and survival of HCV. Further, as there are many variants of HCV, we are developing inhibitors that may be used in multiple combination therapies, each designed and tested for effectiveness against one or more of those variants. Our development of inhibitors for validated HCV target mechanisms, as well as our collaborations with AbbVie (which name refers to Abbott Laboratories for all periods before January 1, 2013) and Novartis, should allow us to participate in multiple unique drug combinations as we seek the best combination therapies for HCV in its various forms.

Our HCV portfolio includes inhibitors of four fundamental, validated HCV targets. Our lead product candidate, ABT-450, is a protease inhibitor being developed in several combination regimens in multiple Phase 2 and Phase 3 trials through our collaboration with AbbVie. AbbVie has funded all research and development of our protease inhibitors since we entered into the collaboration in November 2006, and is responsible for obtaining regulatory approvals and commercializing ABT-450 and any follow-on products worldwide. Our lead NS5A product candidate, EDP-239, is being developed through our collaboration with Novartis. Under our collaboration with Novartis, Novartis is responsible for all further development of our NS5A inhibitors. Novartis is also responsible for funding further research that we conduct to discover additional NS5A compounds at least through August 2013. Our independent research activities are focused on our lead cyclophilin inhibitor candidates, which are in preclinical development. We also have a small-molecule drug discovery effort underway for nucleotide polymerase inhibitors. We are currently funding all research and development for our cyclophilin inhibitor and nucleotide polymerase inhibitor programs. We expect to incur substantially greater expenses as we seek to advance these programs into clinical development.

In addition to our HCV programs, we have used our internal research capabilities to discover a new class of antibiotics called Bicyclolides, which we are developing for the treatment of multi-drug resistant bacteria, including methicillin-resistant Staphylococcus aureus bacteria, also referred to as MRSA. Up to $14.3 million of the preclinical development of our lead antibiotic candidate, EDP-788, is funded under a September 2011 contract with the National Institute of Allergy and Infectious Diseases, a division of the National Institutes of Health, an agency of the United States Department of Health and Human Services, or NIAID, and there is potential for further NIAID funding of early clinical development.


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Since commencing our operations in 1995, we have devoted substantially all of our resources to the discovery and development of novel inhibitors for the treatment of infectious diseases. We have historically funded our operations primarily through the sale of convertible preferred stock and payments received under our collaborations and a government contract. On March 26, 2013, we completed our initial public offering of 4,600,000 shares of common stock at an offering price of $14.00 per share, which included the exercise in full by the underwriters of their option to purchase up to 600,000 additional shares of common stock. We received net proceeds of approximately $59.9 million, after deducting underwriting discounts and commissions. As of March 31, 2013, we had $121.7 million in cash and investments.

Our revenue from our collaboration agreements has resulted in our reporting net income in each of our past three fiscal years and in the first quarter of our fiscal 2013. However, we reported a net loss in the second quarter of our fiscal 2013, had an accumulated deficit of $98.9 million as of March 31, 2013 and have generated no royalties or other revenue from product sales. We expect that our revenue in the near term will continue to be substantially dependent on our collaborations with AbbVie and Novartis and their continued advancement of the related development programs. Given the schedule of potential milestone payments and the uncertain nature and timing of clinical development, we cannot predict when or whether we will receive further milestone payments under these collaborations or whether we will report either revenue or net income in future years.

Financial Operations Overview

Revenue

Since our inception, our revenue has been derived from two primary sources:
collaboration agreements with pharmaceutical companies and one government research and development contract. We have not generated any revenue from product sales. In November 2006, we entered into a collaboration agreement with AbbVie and in February 2012 we entered into a collaboration agreement with Novartis. In September 2011, we entered into a contract with NIAID, which will fund the preclinical development of our lead product candidate in our new class of Bicyclolide antibiotics.

The following table is a summary of revenue recognized from our collaboration agreements and government contract for the three and six months ended March 31, 2013 and 2012:

                                                    Three Months Ended              Six Months Ended
                                                         March 31,                      March 31,
                                                   2013             2012           2013           2012
                                                                     (in thousands)
AbbVie agreement:
Milestone payments                               $      -         $     -        $ 15,000       $     -
Novartis agreement:
Upfront license payment and research funding           465          34,667            877         34,667
Milestone payments                                      -               -          11,000             -
NIAID contract                                         731           1,898          2,178          2,639

Total revenue                                    $   1,196        $ 36,565       $ 29,055       $ 37,306

AbbVie Agreement

Under the terms of the AbbVie agreement, as amended, we received total payments comprised of an upfront license payment, payments to fund research and reimburse certain expenses and milestone payments totaling $92.5 million through June, 2011. We recognized revenue from these payments, as well as from a $1.6 million premium above fair value paid for Series G-1 redeemable convertible preferred stock that AbbVie purchased concurrently with the execution of the original agreement, over the period from the date of the original agreement through June, 2011 using the proportional performance model. Since all of our research obligations under the


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agreement were concluded by June 30, 2011, any future milestone payments received will be recognized as revenue when each milestone is achieved by AbbVie. During the six months ended March 31, 2013, we earned and recognized as revenue a $15.0 million milestone payment based on AbbVie's initiation of dosing in a Phase 3 clinical trial that includes ABT-450. Under the terms of the AbbVie agreement, we are eligible to receive aggregate future milestone payments of $195 million related to the successful development of the first HCV treatment regimen by AbbVie incorporating our collaboration's protease inhibitor. We are also eligible to receive royalties on AbbVie's net sales, if any, allocable to any one of our collaboration's protease inhibitors.

Novartis Agreement

Under the terms of the Novartis agreement, we received an upfront payment of $34.4 million in February 2012 and a commitment to fund research at an agreed amount for one year. We recognized the upfront license payment upon receipt as we determined that the license to which the payment related and the research services were separable elements under the agreement that could be accounted for as each was delivered or provided. Our agreement with Novartis provides that we will receive up to $1.8 million in research funding during the first year of the agreement, which began in February 2012. In March 2013 the agreement was amended to extend the funding period for an additional six months through August 2013 at the same reimbursement rate. Additionally, our collaboration with Novartis provides for aggregate milestone payments of up to $406 million if certain goals related to drug development and net product sales are achieved by Novartis. In January 2013, we received an $11.0 million milestone payment based on Novartis' November 2012 initiation of dosing in a Phase 1 clinical trial that includes EDP-239. During the three months ended March 31, 2013 and 2012, revenue recognized under this agreement was $0.5 million and $34.7 million, respectively. The amounts recognized during the three months ended March 31, 2013 consisted of research funding and amounts recognized during the three months ended March 31, 2012 consisted of the upfront license payment and research funding earned during that period.

During the six months ended March 31, 2013, we recognized $11.9 million of revenue under the Novartis agreement, of which $11.0 million was attributed to license fees and $0.9 million was attributed to the performance of research services. An additional milestone payment of $15.0 million will be due upon Novartis' initiation of a subsequent Phase 2 trial using a combination containing an NS5A inhibitor. We are also eligible to receive royalties on Novartis' net sales, if any, allocable to our collaboration's NS5A inhibitors.

NIAID Contract

Under the terms of the NIAID contract, NIAID will pay us research and development funding payments of up to $14.3 million over an initial period of 30 months. The contract also contains six option periods, which in aggregate could extend the contract, at the option of NIAID, up to an additional 30 months and provide us additional funding of up to $28.4 million. We recognize revenue under this contract as research and development services are performed. We recognized revenue of $0.7 million and $1.9 million under this agreement during the three months ended March 31, 2013 and 2012, respectively, and $2.2 million and $2.6 million during the six months ended March 31, 2013 and 2012, respectively.

Operating Expenses

The following table summarizes our operating expenses for the three and six
months ended March 31, 2013 and 2012:



                                       Three Months Ended          Six Months Ended
                                            March 31,                  March 31,
                                        2013          2012         2013         2012
        Research and development     $    3,704      $ 3,263     $   8,502     $ 5,935
        General and administrative        1,493        1,207         2,645       2,458

        Total operating expenses     $    5,197      $ 4,470     $  11,147     $ 8,393


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Research and Development Expenses

Research and development expenses consist of costs incurred to conduct basic research, such as the discovery and development of novel small molecules as therapeutics. We expense all costs of research and development as incurred. These expenses consist primarily of:

personnel costs, including salaries, related benefits and stock-based compensation for employees engaged in scientific research and development functions;

third-party contract costs relating to research, formulation, manufacturing, preclinical study and clinical trial activities;

third-party license fees;

laboratory consumables; and

allocated facility-related costs.

Project-specific expenses reflect costs directly attributable to our clinical development candidates and preclinical candidates nominated and selected for further development. Remaining research and development expenses are reflected in research and drug discovery, which represents early-stage drug discovery programs. At any given time, we typically have several active early stage research and drug discovery projects. Our internal resources, employees and infrastructure are not directly tied to any individual research or drug discovery project and are typically deployed across multiple projects. As such, we do not maintain information regarding costs incurred for our early-stage research and drug discovery programs on a project-specific basis.

We expect that our research and development expenses will increase in the future as we advance our two independent HCV programs and our antibiotic program for MRSA into clinical development. In our fiscal year ending September 30, 2013, we expect to incur approximately $21.0 million of expenses associated with research and development, which amount is exclusive of expenses incurred by our collaborators in developing our licensed product candidates ABT-450 and EDP-239.

Our research and drug discovery programs are at an early stage; therefore, the successful development of our product candidates is highly uncertain and may not result in approved products. Completion dates and completion costs can vary significantly for each product candidate and are difficult to predict. Given the uncertainty associated with clinical trial enrollments and the risks inherent in the development process, we are unable to determine the duration and completion costs of the current or future clinical trials of our product candidates or if, or to what extent, we will generate revenue from the commercialization and sale of any of our product candidates. We anticipate that we will make determinations as to which development programs to pursue and how much funding to direct to each program on an ongoing basis in response to the preclinical and clinical success of each product candidate, as well as ongoing assessments of the commercial potential of each product candidate.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel costs, consisting of salaries, related benefits and stock-based compensation, of our executive, finance, business and corporate development and other administrative functions. General and administrative expenses also include travel expenses, allocated facility-related costs not otherwise included in research and development expenses, and professional fees for auditing, tax and legal services, including legal expenses to pursue patent protection of our intellectual property.

We expect that general and administrative expenses will increase in the future as we expand our operating activities and incur additional costs associated with operating as a public company. These public company related increases will likely include costs of additional personnel, additional legal fees, accounting and audit fees and directors' and officers' liability insurance premiums, and costs related to investor relations.


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Other Income (Expense)

Interest income. Interest income consists of interest earned on our cash and investment balances. Our interest income has not been significant due to the low rate of interest earned on invested balances. We anticipate that our interest income will increase in the future due to our higher cash and investment balances now existing as a result of the $34.4 million upfront payment we received from Novartis in March 2012, a $15.0 million milestone payment we received from AbbVie in December 2012 and an $11.0 million milestone payment we received from Novartis in January 2013, as well as our receipt of $59.9 million of cash proceeds, net of underwriters discounts and commissions, from our initial public offering in March 2013.

Interest expense. Interest expense consists of non-cash interest expense which is being accreted to the value of accrued third-party license fees over the term of the obligation.

Change in fair value of warrant liability. We have issued warrants for the purchase of our redeemable convertible preferred stock and nonconvertible preferred stock that we believe are financial instruments that may require a transfer of assets because of the redemption features of the underlying stock. Therefore, we have classified these warrants as liabilities that we remeasure to fair value at each reporting period and we record the changes in the fair value of the warrants as a component of other income (expense).

Critical Accounting Policies

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of our financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We believe that the estimates and assumptions involved in the accounting policies described below may have the greatest potential impact on our financial statements and, therefore, consider these to be our critical accounting policies. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions. See also Note 2 to our financial statements included elsewhere in this Quarterly Report on Form 10-Q and our registration statement on Form S-1 for information about these accounting policies as well as a description of our other significant accounting policies. We believe that of our significant accounting policies, the following accounting policies involve the most judgment and complexity:

Revenue recognition;

Income taxes;

Fair value of financial instruments; and

Stock-based compensation

Accordingly, we believe the policies set forth above are critical to fully understanding and evaluating our financial condition and results of operations. If actual results or events differ materially from the estimates, judgments and assumptions used by us in applying these policies, our reported financial condition and results of operations could be materially affected.

There have been no material changes in our critical accounting policies since September 30, 2012. For further information, please see the discussion of critical accounting policies included in our registration statement on Form S-1.


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Results of Operations

Comparison of Three Months Ended March 31, 2013 and 2012



                                                       Three Months Ended
                                                            March 31,
                                                       2013           2012
                                                         (in thousands)
         Revenue                                     $   1,196      $ 36,565
         Research and development expenses               3,704         3,263
         General and administrative expenses             1,493         1,207
         Other income (expense):
         Interest income                                    47            15
         Interest expense                                   (9 )          -
         Change in fair value of warrant liability         214             1

Revenue. We recognized revenue of $1.2 million during the three months ended March 31, 2013, as compared to $36.6 million during the three months ended March 31, 2012. During the three months ended March 31, 2013, $0.7 million of revenue was from the EDP-788 program related to the contract with NIAID and $0.5 million was related to our performance of research services under our Novartis agreement. During the three months ended March 31, 2012, revenue related to NIAID contract was $1.9 million. In addition, during the three months ended March 31, 2012, we received an upfront payment of $34.4 million and $0.3 million related to research services from Novartis, which we recognized as revenue during the period.

Research and development expenses.

                                                      Three Months Ended
                                                           March 31,
                                                       2013          2012
                                                        (in thousands)
          Development programs:
          NS5A inhibitor                            $      461      $   714
          Antibiotic                                       611        1,272
          Research and drug discovery                    2,632        1,277

          Total research and development expenses   $    3,704      $ 3,263

Research and development expenses were $3.7 million in the three months ended March 31, 2013, as compared to $3.3 million for the same period in 2012. The $0.4 million increase period over period was due primarily to an increase of $1.3 million in expenses related to our early stage drug discovery programs offset by a $0.2 million decrease in expenses for our NS5A inhibitor program and a decrease of $0.7 million in preclinical expenses related to our antibiotic program, specifically EDP-788. Preclinical expenses related to our antibiotic program were higher in 2012 as compared to 2013 primarily due to the significant expense for materials necessary for the ramp-up of the development program under the contract with NIAID, which we entered into in September 2011. We incurred increased research expenses in 2013 as compared to 2012 in our early stage drug discovery programs due to an increase in the number of preclinical studies and the related costs. Our research costs related to our NS5A inhibitor program decreased as a result of our signing a collaboration agreement with Novartis in February 2012, at which time Novartis became responsible for further development costs. Prior to entering into the collaboration agreement with Novartis, we had been incurring costs for preclinical and clinical development of that program. We continue to incur research expense for NS5A to identify additional compounds, which research is being funded by Novartis through August 2013.

General and administrative expenses. General and administrative expenses increased by $0.3 million from $1.2 million in the three months ended March 31, 2012 to $1.5 million for the same period in 2013. The increase was


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related primarily to an increase in stock-based compensation expense as a result of additional stock option grants to employees and a higher value of our common stock partially offset by a decrease in legal and patent fees in the 2013 period as a result of the timing of services provided and a decrease in the number of patent application filings.

Other income (expense). Changes in components of other income (expense) were as follows:

Interest income. Interest income increased slightly due to higher investment balances during the three months ended March 31, 2013 as compared to the three months ended March 31, 2012.

Change in fair value of warrant liability. We account for our outstanding warrants for our Series 1 nonconvertible preferred stock as liabilities held at fair value, with changes in fair value recorded as a component of other income (expense). During the three months ended March 31, 2013, we recorded income of $0.2 million due to a decrease in the fair value of our warrant liability as a result of the remeasurement of our Series 1 nonconvertible preferred stock warrants.

Comparison of Six Months Ended March 31, 2013 and 2012



                                                        Six Months Ended
                                                            March 31,
                                                        2013         2012
                                                         (in thousands)
          Revenue                                     $ 29,055     $ 37,306
          Research and development expenses              8,502        5,935
          General and administrative expenses            2,645        2,458
          Other income (expense):
          Interest income                                   82           29
          Interest expense                                 (16 )         -
          Change in fair value of warrant liability        234           10

Revenue. We recognized revenue of $29.1 million during the six months ended March 31, 2013, as compared to $37.3 million during the six months ended March 31, 2012. During the six months ended March 31, 2013, we received a $15.0 million milestone payment under our collaboration with AbbVie based on AbbVie's initiation of dosing in a Phase 3 clinical trial that includes ABT-450, which amount was recognized as revenue in the six months ended March 31, 2013. We did not have any revenue related to the AbbVie collaboration during the same period in 2012. During the six months ended March 31, 2013, we also recognized revenue . . .

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