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

Show all filings for REGULUS THERAPEUTICS INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for REGULUS THERAPEUTICS INC.


15-May-2013

Quarterly Report


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

The interim unaudited condensed financial statements and this Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2012 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report. Past operating results are not necessarily indicative of results that may occur in future periods.


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FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q may contain "forward-looking statements" within the meaning of the federal securities laws made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under Part II, Item 1A, "Risk Factors" in this quarterly report on Form 10-Q. Except as required by law, we assume no obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise. These statements, which represent our expectations or beliefs concerning various future events, may contain words such as "may," "will," "expect," "anticipate," "intend," "plan," "believe," "estimate" or other words indicating future results. Such statements may include, but are not limited to, statements concerning the following:

the initiation, cost, timing, progress and results of our research and development activities, preclinical studies and future clinical trials, including our expected timeline for nominating clinical development candidates under our strategic alliances and our expected timeline for filing our first applications with regulatory authorities;

our ability to obtain and maintain regulatory approval of our future product candidates, and any related restrictions, limitations, and/or warnings in the label of an approved product candidate;

our ability to obtain funding for our operations;

our plans to research, develop and commercialize our future product candidates;

our strategic alliance partners' election to pursue development and commercialization;

our ability to attract collaborators with development, regulatory and commercialization expertise;

our ability to obtain and maintain intellectual property protection for our future product candidates;

the size and growth potential of the markets for our future product candidates, and our ability to serve those markets;

our ability to successfully commercialize our future product candidates;

the rate and degree of market acceptance of our future product candidates;

our ability to develop sales and marketing capabilities, whether alone or with potential future collaborators;

regulatory developments in the United States and foreign countries;

the performance of our third-party suppliers and manufacturers;

the success of competing therapies that are or become available;

the loss of key scientific or management personnel;

our expectations regarding the time during which we will be an emerging growth company under the JOBS Act;

our use of the proceeds from our recently completed initial public offering and private placement; and

the accuracy of our estimates regarding expenses, future revenues, capital requirements and need for additional financing.

OVERVIEW

We are a biopharmaceutical company focused on discovering and developing first-in-class drugs that target microRNAs to treat a broad range of diseases. We were formed in 2007 when Alnylam Pharmaceuticals, Inc., or Alnylam, and Isis Pharmaceuticals, Inc., or Isis, contributed significant intellectual property, know-how and financial and human capital to pursue the development of drugs targeting microRNAs pursuant to a license and collaboration agreement. microRNAs are recently discovered, naturally occurring ribonucleic acid, or RNA, molecules that play a critical role in regulating key biological pathways. Scientific research has shown the improper balance, or dysregulation, of microRNAs is directly linked to many diseases. We believe we have assembled the leading position in the microRNA field, including expertise in microRNA biology and oligonucleotide chemistry, a broad intellectual property estate, key opinion leaders and disciplined drug discovery and development processes. We refer to these assets as our microRNA product platform. We are using our microRNA product platform to develop chemically modified, single-stranded oligonucleotides that we call anti-miRs. We use these anti-miRs to modulate microRNAs and by doing so return diseased cells to their healthy state. We believe microRNAs may be transformative in the field of drug discovery and that anti-miRs may become a new and major class of drugs with broad therapeutic application much like small molecules, biologics and monoclonal antibodies. We are currently optimizing anti-miRs in multiple therapeutic areas, both independently and with our strategic alliance partners, AstraZeneca AB, or AstraZeneca, GlaxoSmithKline plc, or GSK, and Sanofi. We also have a collaboration agreement with Biogen Idec to evaluate the potential use of microRNA signatures as a biomarker for human patients with multiple sclerosis.

Under these strategic alliances, we are eligible to receive up to approximately $1.7 billion in milestone payments upon successful commercialization of microRNA therapeutics for the 11 programs contemplated by our agreements. These payments include up to $102.0 million upon achievement of preclinical and investigational new drug application, or IND, milestones, up to $344.0 million upon achievement of clinical development milestones, up to $420.0 million upon achievement of regulatory milestones and up to $850.0 million upon achievement of commercialization milestones. We anticipate that we will nominate at least two clinical development candidates in 2013 and file our first applications with regulatory authorities in 2014.


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On October 10, 2012, we completed our initial public offering whereby we issued and sold 11,250,000 shares of common stock at a public offering price of $4.00 per share, resulting in net proceeds to the Company of approximately $39.5 million. Concurrently with the completion of our initial public offering on October 10, 2012, $5.0 million of outstanding principal plus accrued interest of $0.8 million underlying a convertible note that we issued to GSK in April 2008 and amended and restated in July 2012, together with $5.0 million of outstanding principal plus accrued interest of $25,000 underlying a convertible note that we issued to Biogen Idec in August 2012, was automatically converted upon the closing of our initial public offering into an aggregate of 2,703,269 shares of our common stock. Upon the closing of our initial public offering, all shares of our outstanding convertible preferred stock automatically converted into an aggregate of 13,699,999 shares of common stock. On October 23, 2012, the underwriters for our initial public offering partially exercised an over-allotment option to purchase 1,480,982 shares of our common stock at $4.00 per share, resulting in net proceeds to us of approximately $5.5 million.

FINANCIAL OPERATIONS OVERVIEW

Revenues

Our revenues generally consist of upfront payments for licenses or options to obtain licenses in the future, research and development funding and milestone payments under strategic alliance agreements, as well as funding received under government grants.

In the future, we may generate revenue from a combination of license fees and other upfront payments, research and development payments, milestone payments, product sales and royalties in connection with strategic alliances. We expect that any revenue we generate will fluctuate from quarter-to-quarter as a result of the timing of our achievement of preclinical, clinical, regulatory and commercialization milestones, if at all, the timing and amount of payments relating to such milestones and the extent to which any of our products are approved and successfully commercialized by us or our strategic alliance partners. If our strategic alliance partners do not elect or otherwise agree to fund our development costs pursuant to our strategic alliance agreements, or we or our strategic alliance partners fail to develop product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenues, and our results of operations and financial position would be adversely affected.

Research and development expenses

Research and development expenses consist of costs associated with our research activities, including our drug discovery efforts, the preclinical development of our therapeutic programs, and our microRNA biomarker program. Our research and development expenses include:

employee-related expenses, including salaries, benefits, travel and stock-based compensation expense;

external research and development expenses incurred under arrangements with third parties, such as contract research organizations, or CROs, contract manufacturing organizations, or CMOs, consultants and our scientific advisory board;

license fees; and

facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of leasehold improvements and equipment, and laboratory and other supplies.

We expense research and development costs as incurred. We account for nonrefundable advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been received.

To date, we have conducted research on many different microRNAs with the goal of understanding how they function and identifying those that might be targets for therapeutic modulation. At any given time we are working on multiple targets, primarily within our five therapeutic areas of focus. Our organization is structured to allow for the rapid deployment and shifting of resources to focus on the best targets based on our ongoing research. As a result, in the early phase of our development, our research and development costs are not tied to any specific target. However, we are currently spending the vast majority of our research and development resources on our lead development programs.

Since our conversion to a corporation in January 2009, we have grown from 15 research and development personnel to 57 and have spent a total of approximately $73.7 million in research and development expenses through March 31, 2013.

We expect our research and development expenses to increase for the foreseeable future as we advance our research programs toward the clinic and initiate clinical trials. The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time consuming. We or our strategic alliance partners may never succeed in achieving marketing approval for any of our product candidates. The probability of success for each product candidate may be affected by numerous factors, including preclinical data, clinical data, competition, manufacturing capability and commercial viability. Under our strategic alliance with GSK, we may be responsible for the development of product candidates through clinical proof-of-concept, depending on the time at which GSK may choose to exercise its option to obtain an exclusive license to develop, manufacture and commercialize


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product candidates on a program-by-program basis. Under our strategic alliance with Sanofi, we are responsible for the development of product candidates up to initiation of Phase 1 clinical trials, after which time Sanofi would be responsible for the costs of clinical development and commercialization and all related costs. Under our strategic alliance agreement with AstraZeneca, we are responsible for certain research and development activities with respect to each alliance target under a mutually agreed upon research and development plan until the earlier to occur of IND approval in a major market or the end of the research term under the agreement. We also have several independent programs for which we are responsible for all of the research and development costs, unless and until we partner any of these programs in the future.

Most of our product development programs are at an early stage, and successful development of future product candidates from these programs is highly uncertain and may not result in approved products. Completion dates and completion costs can vary significantly for each future product candidate and are difficult to predict. We anticipate we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to our ability to maintain or enter into new strategic alliances with respect to each program or potential product candidate, the scientific and clinical success of each future product candidate, as well as ongoing assessments as to each future product candidate's commercial potential. We will need to raise additional capital and may seek additional strategic alliances in the future in order to advance our various programs.

General and administrative expenses

General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation, related to our executive, finance, legal, business development and support functions. Other general and administrative expenses include allocated facility-related costs not otherwise included in research and development expenses, travel expenses and professional fees for auditing, tax and legal services. We expect that general and administrative expenses will increase in the future as we expand our operating activities and incur additional costs associated with being a publicly-traded company. These increases will likely include legal fees, accounting fees, directors' and officers' liability insurance premiums and fees associated with investor relations.

Other income (expense), net

Other income (expense) consists primarily of interest income and expense, and on occasion income or expense of a non-recurring nature, including changes in debt valuation each reporting period. We earn interest income from interest-bearing accounts and money market funds for cash and cash equivalents and marketable securities, such as interest-bearing bonds, for our short-term investments. Interest expense has historically represented interest payable under convertible notes payable and equipment and tenant improvement financing arrangements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the revenues and expenses incurred during the reported periods. We believe that the estimates, assumptions and judgments involved in the accounting policies described in Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. There were no material changes to our critical accounting policies and estimates during the quarter ended March 31, 2013.

RESULTS OF OPERATIONS

Comparison of the three months ended March 31, 2013 and 2012

The following table summarizes our results of operations for the three months
ended March 31, 2013 and 2012, together with the changes in those items in
dollars (in thousands):



                                            Three months ended March 31,
                                             2013                  2012              Increase/(Decrease)
                                                     (unaudited)
Revenue under strategic alliances        $       3,238         $       3,344        $                (106 )
Research and development expenses                6,883                 4,603                        2,280
General and administrative expenses              1,905                   921                          984
Loss from valuation of convertible
note payable                                     1,761                    -                         1,761

Revenue under strategic alliances

We recognized revenue of $3.2 million in the three months ended March 31, 2013 and $3.3 million in the three months ended March 31, 2012. Our revenue during these periods consisted primarily of amortization of upfront payments received from the Sanofi, GSK and AstraZeneca strategic alliances, which we amortize monthly on a straight-line basis over our period of performance. Revenue recognized from the amortization of payments from the Sanofi strategic alliance was $2.5 million for each of the three month periods ended March 31, 2013 and 2012. Revenue recognized from the amortization of payments from the GSK strategic alliance decreased to $0.2 million for the three months ended March 31, 2013 from $0.8 million for the three months ended March 31, 2012.


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This reduction was due to the June 2012 amendment of the collaboration agreement which extended our estimated period of performance and the resulting amortization period, applied on a prospective basis. In addition, we entered into a strategic alliance with AstraZeneca in August 2012, which included an upfront payment of $3.0 million which will be amortized over an estimated performance period of 48 months. This resulted in approximately $0.2 million in revenue for the three months ended March 31, 2013.

Concurrently with the AstraZeneca collaboration and license agreement, we entered into a Common Stock Purchase Agreement, or "CSPA", pursuant to which we agreed to sell to AstraZeneca an aggregate of $25.0 million of our common stock in a private placement concurrently with our initial public offering, at a price per share equal to the price at which we sell our common stock to the public in such initial public offering. In October 2012, in accordance with the CSPA, we sold AstraZeneca 6,250,000 shares of our common stock at a price per share of $4.00. Further, the CSPA stipulated that AstraZeneca could not sell, transfer, make any short sale of, or grant any option for the sale of any common stock for a 365-day period following the effective date of our initial public offering. Accounting guidance for multiple element arrangements contains a presumption that separate contracts negotiated and/or entered into at or near the same time with the same entity were negotiated as a package and should be evaluated as a single agreement. In order to quantify the discount applied to the shares of common stock due to the lack of marketability, we had an independent valuation performed to measure the value of restricting common stock for a period of one year. Based upon restricted stock studies of similar duration and a Black-Scholes valuation to measure the lack of marketability discount, $4.3 million was attributed to the collaboration and license agreement. We will recognize the $4.3 million into revenue ratably over the estimated period of performance of the collaboration. As such, revenue of $0.3 million was recognized for the three months ended March 31, 2013.

Research and development expenses

Research and development expenses increased to $6.9 million in the three months ended March 31, 2013 from $4.6 million for the three months ended March 31, 2012. This increase was primarily driven by an increase of $0.9 million in salaries and related benefits in response to the incremental research and development personnel required to support the growth in activity within our strategic alliances and collaborations and internal development programs. In addition to the increase in personnel costs, pre-clinical study costs, external services and laboratory supplies also increased by $0.8 million, $0.4 million and $0.1 million, respectively, over the same period in 2012.

General and administrative expenses

General and administrative expenses increased to $1.9 million in the three months ended March 31, 2013 from $0.9 million for the three months ended March 31, 2012. This increase was primarily driven by an increase of $0.5 million in salaries and related benefits, in addition to increases in legal, insurance and general operating costs of $0.4 million associated with the growth of the business and an increase in overall operating costs associated with being an SEC registrant.

Loss from valuation of convertible note payable

In July 2012, we amended and restated our $5.0 million convertible promissory note originally issued in February 2010 to GSK, or the 2010 GSK Note, which resulted in a debt extinguishment for accounting purposes. The amended and restated 2010 GSK Note provided for a rollover of the 2010 GSK Note into a new promissory note effective as of the closing date of a qualifying initial public offering ("Post-IPO GSK Note"). We used a third party valuation firm to value the Post-IPO GSK Note. Changes in the fair value of the Post-IPO GSK Note have been recorded on a periodic basis with changes in fair value recorded in non-operating earnings. We recorded a loss from valuation of convertible notes payable of $1.8 million in the statements of operations and comprehensive loss for the three months ended March 31, 2013.

LIQUIDITY AND CAPITAL RESOURCES

Since our inception through March 31, 2013, we have received $65.4 million principally from upfront payments, research funding and preclinical milestones from our strategic alliances, collaborations and government grants, and $125.0 million from the sale of our equity and convertible debt securities, including $70.0 million in net proceeds from our initial public offering and concurrent private placement of our common stock in October 2012.

As of March 31, 2013, we had $90.7 million in cash, cash equivalents and short-term investments. The following table shows a summary of our cash flows for the three months ended March 31, 2013 and 2012 (in thousands):

                                             Three months ended March 31,
                                              2013                  2012
                                                     (unaudited)
       Net cash provided by (used in):
       Operating activities              $       (7,155 )       $      (5,128 )
       Investing activities                     (15,748 )               6,123
       Financing activities                         173                   (74 )

       Total                             $      (22,730 )       $         921


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Operating activities

Net cash used in operating activities increased to $7.2 million for the three months ended March 30, 2013, compared to net cash used in operating activities of $5.1 million for the three months ended March 31, 2012. The increase in net loss to $7.2 million for the three months ended March 31, 2013 from $2.2 million for the three months ended March 31, 2013 included a non-cash charge of $1.8 million associated with the loss in valuation of the Post-IPO GSK Note. Additionally, non-cash stock-based compensation charges increased by $0.7 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. Changes in working capital were materially consistent in the three months ended March 31, 2013 and 2012, respectively.

Investing activities

Net cash provided by or used in investing activities for the periods presented primarily relate to the purchase, sale and maturity of investments used to fund the day-to-day needs of our business. In October 2012, we completed an initial public offering and concurrent private placement, resulting in net proceeds of $70.0 million. As such, the increase in net cash used in investing activities in the three months ended March 31, 2013 compared to net cash provided by investing activities in the three months ended March 31, 2012 was primarily due to an increase in purchases of short-term securities and decreased maturities of investment securities. The net investment of short-term investments was $18.1 million and $4.6 million for the three months ended March 31, 2013 and 2012, respectively. The net sales and maturities of short-term investments was $2.4 million and $11.1 million for the three months ended March 31, 2013 and 2012, respectively.

Financing activities

Net cash provided by financing activities was $0.2 million for the three months ended March 31, 2013, compared to $0.1 million used in financing activities for the three months ended March 31, 2012. The change in cash from financing activities is primarily due to an increase in proceeds from the exercise of common stock options and proceeds from the purchases from the Employee Stock Purchase Plan, which totaled $0.2 million for the three months ended March 31, 2013.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

There have been no material changes, outside of the ordinary course of business, in our outstanding contractual obligations from those disclosed within "Management's Discussion and Analysis of Financial Condition and Results of Operations", as contained in our Annual Report on Form 10-K filed by us with the SEC on February 19, 2013.

Off-Balance Sheet Arrangements

As of March 31, 2013, we did not have any off-balance sheet arrangements.

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