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

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Form 10-Q for PROTHENA CORP PLC


15-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, 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 relate to future events or our future financial performance. Forward-looking statements may include words such as "may," "will," "should," "expect," "plan," "intend," "anticipate," "believe," "estimate," "predict," "potential," "continue" or other wording indicating future results or expectations. Forward-looking statements are subject to risks and uncertainties, and actual events or results may differ materially. Factors that could cause our actual results to differ materially include, but are not limited to, those discussed under "Risk Factors" in this report. We also face risks and uncertainties relating to our business including:

our ability to obtain additional financing;

our history of operating losses;

tax treatment of our separation from Elan and subsequent distribution of our ordinary shares;

restrictions on our taking certain actions due to tax rules and covenants with Elan;

our ability to successfully complete research and development of our drug candidates and the growth of the markets for those drug candidates;

our ability to develop and commercialize products before competitors that are superior to the alternatives developed by such competitors;

our ability to protect our patents and other intellectual property;

loss of key employees;

the impact of our separation from Elan and risks relating to our ability to operate effectively as a stand-alone, publicly traded company, including, without limitation:

our ability to achieve benefits from our separation;

changes in our cost structure, management, financing and business operations;

growth in costs and expenses;

our ability to maintain financial flexibility and sufficient cash, cash equivalents, and investments and other assets capable of being monetized to meet our liquidity requirements;

disruptions in the U.S. and global capital and credit markets;

fluctuations in foreign currency exchange rates;

the failure to comply with anti-kickback and false claims laws in the United States;

extensive government regulation;

the volatility of our share price;

general changes in U.S. generally accepted accounting principles and International Financial Reporting Standards as adopted by the European Union;

business disruptions caused by information technology failures; and

the other risks and uncertainties described in Part II, Item 1, "Risk Factors."

We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that arises after the date of this report, or to conform such statements to actual results or changes in our expectations.

Except with respect to our trademarks, the trademarks, trade names and service marks appearing in this report are the property of their respective owners.


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This discussion should be read in conjunction with the condensed consolidated financial statements and notes presented in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes in our Annual Report on Form 10-K for the year ended December 31, 2012.

Overview

We are a clinical stage biotechnology company focused on the discovery and development of novel antibodies for the potential treatment of a broad range of diseases that involve protein misfolding or cell adhesion. We focus on the discovery and development of potential therapeutic monoclonal antibodies directed specifically to disease causing proteins. These potential therapies have a broad range of indications including AL and AA forms of amyloidosis (NEOD001), Parkinson's disease and related synucleinopathies (PRX002) and autoimmune diseases and metastatic cancers (PRX003). We initiated a Phase 1 clinical trial for NEOD001, with the first patient dosing in April 2013. The Phase 1 clinical trial of NEOD001 will evaluate safety and tolerability in AL Amyloidosis patients. We also plan to initiate Phase 1 clinical trials for PRX002 and PRX003 in 2014 and 2015, respectively. Our strategy is to identify antibody candidates for clinical development by applying our extensive expertise in generating novel therapeutic antibodies and working with collaborators having expertise in specific animal models of disease.

We are a public limited company incorporated in Ireland. Our business, which for the period prior to the separation from Elan on December 20, 2012 we refer to as the Prothena Business, consists of a substantial portion of Elan's former drug discovery business platform, including Neotope Biosciences Limited (and its wholly-owned subsidiary Prothena Biosciences Inc) and Onclave Therapeutics Limited, each former wholly-owned subsidiaries of Elan. Our financial statements for the periods prior to December 21, 2012 have been derived from Elan's historical accounting records and reflect significant allocations of direct costs and expenses. All of the allocations and estimates in these financial statements are based on assumptions that we believe are reasonable. However, the financial statements do not necessarily represent our financial position or results of operations had we been operating as a separate independent entity. See "Critical Accounting Policies and Estimates" below as well as Note 2 of the "Notes to the Consolidated Financial Statements" included in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2012.

The Separation and Distribution

Elan's board of directors and its management team periodically assesses the optimal alignment of Elan's assets, and in particular the benefits and risks of maintaining both a late-stage products development business and an early-stage discovery business and the income statement dynamics such businesses present to the marketplace and Elan shareholders. On August 13, 2012, Elan announced that its board of directors had approved the separation of Elan and its drug discovery business into two independent, publicly traded companies: Elan and Prothena. On December 7, 2012, the Elan board of directors approved a deemed in specie distribution by Prothena issuing directly to the holders of Elan ordinary shares and Elan ADSs, on a pro rata basis, Prothena ordinary shares representing 99.99% of Prothena's outstanding shares (with the remaining 0.01% of Prothena's outstanding shares, which were previously issued to the original incorporators of Prothena and which we refer to as the "incorporator shares," being mandatorily redeemed by Prothena after the related demerger). On December 12, 2012, shareholders of Elan voted to approve the "in specie distribution" as required by Elan's Articles of Association. On December 20, 2012, each holder of Elan ordinary shares or ADSs received 1 Prothena ordinary share for every 41 Elan ordinary shares or Elan ADSs held at the close of business on the record date for the distribution, subject to certain conditions.

Immediately after the separation and distribution, a wholly-owned subsidiary of Elan acquired newly-issued ordinary shares of Prothena, representing 18% of the outstanding ordinary shares of Prothena (as calculated immediately following the acquisition), for a cash payment to Prothena of $26.0 million. Immediately after the consummation of this purchase, the incorporator shares were mandatorily redeemed by Prothena pursuant to their terms for their initial subscription price, and cancelled. Immediately following the separation and distribution and Elan's purchase of Prothena ordinary shares, Elan shareholders owned directly 82% of the outstanding ordinary shares of Prothena, and Elan owned the remaining 18%.

Basis of Presentation and Preparation of the Financial Statements

Our business consists of a substantial portion of Elan's former drug discovery business platform, including Neotope Biosciences Limited (and its wholly-owned subsidiary Prothena Biosciences Inc) and Onclave Therapeutics Limited, each former wholly-owned subsidiaries of Elan, and related tangible assets and liabilities.

Prior to December 21, 2012, the Prothena Business operated as part of Elan and not as a separate stand-alone entity. Our Condensed Consolidated Financial Statements for the three months ended March 31, 2012 have been prepared on a "carve-out" basis from the consolidated financial statements of Elan to represent our financial performance as if we had existed on a stand-alone basis during the three months ended March 31, 2012.

Prior to the separation and distribution on December 20, 2012, centralized support costs were allocated to us for the purposes of preparing the Condensed Consolidated Financial Statements based on estimated usage of the resources by us. The estimated usage of the centralized support resources allocated to us was determined by estimating our portion of the most appropriate driver of each category of centralized support costs such as headcount or labor hours, depending on the nature of the costs. We believe that such allocations were made on a reasonable basis, but may not necessarily be indicative of the costs that would have been incurred if we had operated on a standalone basis. For additional information regarding the basis of preparation, refer to Note 2 of the "Notes to the Condensed Consolidated Financial Statements" included in Item 1 of this report.


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Critical Accounting Policies and Estimates

Management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Actual results could differ from these estimates. Set forth below are certain changes to our accounting policies that are critical to the judgments and estimates used in the preparation of our financial statements during three months ended March 31, 2013, as compared to the accounting policies that are critical to the judgments and estimates used in the preparation of our financial statements described in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2012 Form 10-K.

Carve-out of the results of operations, financial condition and cash flows of the Prothena Business

Prior to December 21, 2012, the Prothena Business operated as part of Elan and not as a separate stand-alone entity. Our Condensed Consolidated Financial Statements have been prepared on a "carve-out" basis from the consolidated financial statements of Elan to represent the financial position and performance of Prothena as if we had existed on a stand-alone basis during the three months ended March 31, 2012, and as if Financial Accounting Standards Board, or FASB, Accounting Standard Codification, or ASC, Topic 810, Consolidation, had been applied throughout. The Condensed Consolidated Financial Statements have been prepared in conformity with US GAAP, by aggregating financial information from the components of Prothena described in Note 1 of the "Notes to Condensed Consolidated Financial Statements," included in Item 1 of this report.

The accompanying Condensed Consolidated Financial Statements include allocations of direct costs and indirect costs attributable to our operations. Indirect costs relate to certain support functions that were provided on a centralized basis within Elan. The support functions provided to us by Elan included, but were not limited to: accounting, information technology, taxation, legal, corporate strategy, investor relations, corporate governance and other professional services, employee benefit administration, including equity award and pension services, and cash and treasury management. Central support costs of our business for the three months ended March 31, 2012 were $2.0 million. These costs have been allocated to us for the purposes of preparing the Condensed Consolidated Financial Statements based on estimated usage of the resources by us. The estimated usage of the central support resources allocated to us has been determined by estimating our portion of the most appropriate driver of each category of central support costs such as headcount or labor hours, depending on the nature of the costs. We believe that such allocations have been made on a reasonable basis, but may not necessarily be indicative of the costs that would have been incurred if we had operated on a standalone basis.

Recent Accounting Pronouncements

As an emerging growth company under the JOBS Act, unlike other public companies, the Company is eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. The Company has an extended transition period for adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards apply to private companies. There have been no new accounting pronouncements or changes to accounting pronouncements during the three months ended March 31, 2013, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2012, that are of significance or potential significance to us.


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Results of Operations

Results for the three months ended March 31, 2013 and 2012



                                    Three Months Ended
                                         March 31,               Increase (Decrease)
                                    2013          2012              $               %
                                             (in thousands, except percents)
     Revenues - related party     $    171      $     404      $       (233 )       (58 )%

     Operating expenses:
     Research and development        5,957          8,757            (2,800 )       (32 )
     General and administrative      3,181          2,458               723          29

     Total operating expenses        9,138         11,215            (2,077 )       (19 )

     Loss from operations           (8,967 )      (10,811 )          (1,844 )       (17 )
     Interest income, net               22            -                  22          -

     Loss before income taxes       (8,945 )      (10,811 )          (1,866 )       (17 )
     Income taxes                        6            -                   6          -

     Net loss                     $ (8,951 )    $ (10,811 )          (1,860 )       (17 )

Revenue

Revenue for the three months ended March 31, 2013 and 2012 was comprised of fees earned from the provision of R&D services to Elan.

Total revenues decreased $0.2 million, or 58%, in the three months ended March 31, 2013 compared to the three months ended March 31, 2012, primarily as a result of a reduction in the scope of the R&D services provided to Elan.

Operating Expenses

Total operating expenses consist of R&D expenses and general and administrative, or G&A, expenses. For the three months ended March 31, 2013 and 2012, total operating expenses were $9.1 million and $11.2 million, respectively. R&D expenses primarily consist of employee and related expenses, costs associated with preclinical activities and regulatory operations, share-based compensation and other research costs we incurred in providing research services to Elan's ELND005 program. G&A expenses primarily consist of professional services expenses, management compensation expenses and, for the three months ended March 31, 2012, certain centralized support costs that had been allocated to us by Elan based on estimated usage of resources by us. Share-based compensation expense during the three months ended March 31, 2012 was allocated to us by Elan. For additional information regarding the allocation of centralized G&A expenses, refer to Note 2 of the "Notes to Condensed Consolidated Financial Statements" included in Item 1 of this report and Note 1 of "Notes to the Consolidated Financial Statements" included in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2012.

Research and Development Expenses

R&D expenses decreased by $2.8 million, or 32%, in the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The decrease was primarily due to decreases in share-based compensation expense, personnel costs attributable to Prothena programs and external expenses related to our NEOD001 development program, partially offset by increases in costs related to our PRX002 and PRX003 programs.

Our research activities are aimed at developing new drug products. Our development activities involve the translation of our research into potential new drugs. R&D expenses include personnel, materials, equipment and facilities costs that are allocated to clearly related R&D activities.

The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete development of our product candidates. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

the scope, rate of progress and expense of our drug discovery efforts and other R&D activities;

the potential benefits of our product candidates over other therapies;

clinical trial results; and

the terms and timing of regulatory approvals.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or other


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regulatory authority were to require us to conduct clinical trials beyond those which we currently anticipate will be required for the completion of clinical development of a product candidate or if we experience significant delays in enrollment in any clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

The following table sets forth the R&D expenses for our major program (specifically, any program where an Investigational New Drug Application has been filed with the FDA), NEOD001, and other R&D expenses for the three months ended March 31, 2013 and 2012, and the cumulative amounts to date (in thousands):

                                  Three Months Ended
                                       March 31,             Cummulative
                                   2013          2012          to Date
                NEOD001 (1)     $      788      $ 1,953     $      24,227
                Other R&D (2)        5,169        6,804

                                $    5,957      $ 8,757

(1) Cumulative R&D costs to date for NEOD001 include the costs incurred from the date when the program has been separately tracked in preclinical development. Expenditures in early discovery stage are not tracked by program and accordingly have been excluded from this cumulative amount.

(2) Other R&D is comprised of preclinical development and discovery programs that have not yet resulted in an Investigational New Drug Application filing with the FDA, including PRX002 and PRX003, and research costs we incurred in providing research services to Elan's ELND005 program.

General and Administrative Expenses

G&A expenses increased by $0.7 million, or 29% in the three months ended March 31, 2013 compared to the three months ended March 31, 2012. For the three months ended March 31, 2013, G&A expenses consisted primarily of professional services fees (including payments to Elan under the Transitional Services Agreement), internal personnel costs and $0.3 million in share-based compensation expense. For the three months ended March 31, 2012, G&A expenses was presented on a "carve-out" basis as the Prothena Business consisted of a substantial portion of Elan's former drug discovery business platform, therefore the G&A expenses during this period consisted of $0.5 million of direct expense incurred by the Prothena Business and $2.0 million of indirect expenses which was based on an allocation to the Prothena Business by Elan. Generally, we anticipate that our G&A expenses will change in concert with changes in our R&D activities.

Taxation

Our operations were historically included in Elan's consolidated U.S. federal and state income tax returns and in returns of certain Elan foreign subsidiaries. The current and deferred tax provision calculations have been prepared as if we were a separate taxable entity during the three months ended March 31, 2012 and are consistent with the asset and liability method prescribed by ASC 740, Income Taxes. The current and deferred tax provision and the related tax disclosures are not necessarily representative of the tax provision (benefit) that may arise for the Company in the future.

The tax provision for the three months ended March 31, 2013 and 2012 was $6,000 and nil, respectively. The tax provision reflects U.S. federal and state taxes and the availability of Irish tax losses.

Liquidity and Capital Resources

Overview

Prior to the separation, our operating and capital resource requirements were funded by Elan. As part of the separation and distribution, Elan made a cash investment in us of $99.0 million, which we expect to be used to fund working capital expenses and for other general corporate purposes. Additionally, a wholly-owned subsidiary of Elan made a cash payment of $26.0 million to acquire 18% of our outstanding ordinary shares (as calculated immediately following the acquisition). As of March 31, 2013, we had $119.6 million in cash and cash equivalents. Based on our current business plan, we believe such cash and cash equivalents will be sufficient to meet our obligations for at least the next twelve months.

We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the development of our product candidates. Our future capital requirements will depend on numerous factors, including, without limitation, the timing of initiation, progress, results and costs of our clinical trials; the results of our research and preclinical studies; the costs of clinical manufacturing and of establishing commercial manufacturing arrangements; the costs of preparing, filing, and prosecuting patent applications and maintaining, enforcing, and defending intellectual


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property-related claims; the costs and timing of capital asset purchases; our ability to establish research collaborations, strategic collaborations, licensing or other arrangements; the costs to satisfy our obligations under potential future collaborations; and the timing, receipt, and amount of revenues or royalties, if any, from any approved drug candidates. In order to develop and obtain regulatory approval for our potential products we may need to raise substantial additional funds. We expect to raise any such additional funds through public or private equity or debt financings, collaborative agreements with corporate partners or other arrangements. We cannot assume that such additional financings will be available on acceptable terms, if at all, and such financings may only be available on terms dilutive to our shareholders.

Cash Flows for the Three Months Ended March 31, 2013 and 2012

The following table summarizes, for the periods indicated, selected items in our
Condensed Consolidated Statements of Cash Flows (in thousands):



                                                            Three Months Ended
                                                                 March 31,
                                                            2013           2012
    Net cash used in operating activities                 $  (5,103 )    $ (8,624 )
    Net cash used in investing activities                      (110 )        (137 )
    Net cash (used in) provided by financing activities         (84 )       8,761

    Net decrease in cash and cash equivalents             $  (5,297 )    $    -

Cash Used in Operating Activities

Net cash used in operating activities was $5.1 million and $8.6 million during the three months ended March 31, 2013 and 2012, respectively, in each case consisting primarily of net losses (adjusted to exclude non-cash charges) and changes in working capital accounts. The decrease was primarily due to a decrease in R&D expense, partially offset by an increase in G&A expense.

Cash Used in Investing Activities

Net cash used in investing activities was $0.1 million during the three months ended March 31, 2013 and 2012, consisting of purchases of property and equipment.

Cash (Used in) Provided by Financing Activities

Net cash used in financing activities was $0.1 million during the three months ended March 31, 2013, consisted of the final settlement of liabilities as a result of our separation from Elan. Net cash provided by financing activities was $8.8 million during the three months ended March 31, 2012, reflecting funding provided by Elan.

Off-Balance Sheet Arrangements

At March 31, 2013, we were not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

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