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RCPT > SEC Filings for RCPT > Form 10-Q on 20-Jun-2013All Recent SEC Filings

Show all filings for RECEPTOS, INC.

Form 10-Q for RECEPTOS, INC.


20-Jun-2013

Quarterly Report


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

The interim unaudited condensed consolidated 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 final prospectus filed with the Securities and Exchange Commission (SEC) on May 9, 2013 relating to our Registration Statement on Form S-1 (File No. 333-187737) for our initial public offering. As used in this report, unless the context suggests otherwise, "the Company" and "Receptos" mean Receptos, Inc.

Information Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements. All statements other than statements of historical fact contained in this quarterly report, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations for future operations, are forward-looking statements. The words "believe," "may," "will," "estimate," "continue," "anticipate," "design," "intend," "expect" or the negative version of these words and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in "Risk Factors." In light of these risks, uncertainties and assumptions, actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements in this quarterly report and you should not place undue reliance on these forward-looking statements.

Forward-looking statements include, but are not limited to, statements about:

the initiation, cost, timing, progress and results of our research and development activities, including preclinical and clinical studies;

our ability to obtain and maintain regulatory approval of RPC1063, RPC4046 and any of our other 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 product
candidates;

          our ability to enter into collaboration agreements to pursue the

development, regulatory approval and commercialization of our product candidates;

our collaboration partners' election to pursue development and commercialization;

our ability, and the ability of our in-licensors, to obtain and maintain intellectual property protection for our product candidates;

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

          our ability to successfully commercialize our product candidates, if
approved;

          the rate and degree of market acceptance of our product candidates,

if approved;

our ability to develop sales and marketing capabilities, whether alone or with potential collaborators, to commercialize our product candidates, if approved;

regulatory developments in the US and foreign countries;

the performance of third parties in connection with the development of our product candidates, including third parties conducting our clinical trials as well as third-party suppliers and manufacturers;

the development, regulatory approval and commercial success of competing therapies;

          our ability to retain 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 net proceeds from our initial public offering, or IPO;
and

          the accuracy of our estimates regarding expenses, future revenues,

capital requirements and need for additional financing.

Although we believe that the expectations and assumptions reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Any forward-looking statement made by us in this quarterly report speaks only as of the date on which it is made. We disclaim any duty to update any of these forward-looking statements after the date of this quarterly report to conform these statements to actual results or revised expectations.


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Overview

We are a biopharmaceutical company focused on discovering, developing and commercializing innovative therapeutics in immune disorders. Our product candidates span three distinct specialty disease areas. Our lead asset, RPC1063, is being developed as an oral therapy for the treatment of Relapsing Multiple Sclerosis (RMS) and Inflammatory Bowel Disease (IBD). Our second asset, RPC4046, is being developed for the treatment of an allergic/immune-mediated disorder, Eosinophilic Esophagitis (EoE), which is an Orphan Disease. Our strategy is to develop best-in-class (by mechanism of action) drug candidates and selectively pursue first-in-class (based on projected timing of approval) market positions.

Since our inception, we have focused our attention on, and devoted substantial resources to, developing RPC1063 and preparing to develop RPC4046. We are currently conducting two randomized Phase 2 studies for RPC1063. In addition, with respect to RPC4046, we plan to request a pre-Investigational New Drug application (IND) meeting with the US Food and Drug Administration (FDA) by the end of 2013, subsequently submit an IND in the first half of 2014 and thereafter initiate a randomized Phase 2 study.

We have entered into various collaboration arrangements and a license arrangement related to our G protein-coupled receptor (GCPR) structure-based drug design technology platform. Under these agreements we have received upfront payments, license fees, research and development funding and research and/or development milestones.

We have not generated any revenue from product sales. Through March 31, 2013, we have funded our operations primarily through the sale of our convertible preferred stock and through the receipt of upfront payments, research funding and preclinical milestones from our collaboration arrangements.

We have incurred losses since our inception and, as of March 31, 2013, we had an accumulated deficit of $57.2 million. Substantially all of our operating losses resulted from expenses incurred in connection with our drug candidate development programs, our research activities and general and administrative costs associated with our operations. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. In the near-term, we anticipate that our expenses will increase substantially as we:

          advance the current Phase 2 portion of our Phase 2/3 study of RPC1063
in RMS;

          advance our current Phase 2 study of RPC1063 in UC,

          prepare for and initiate a Phase 2 study of RPC4046 in EoE;

          continue research efforts;

          maintain, expand and protect our intellectual property portfolio; and

          hire additional staff, including clinical, scientific, operational,

financial and management personnel.

To fund further operations we will likely need to raise additional capital. The net proceeds from our initial public offering, together with our existing cash and cash equivalents and our access to funds through the credit and security agreement we entered into with MidCap in April 2013, will not be sufficient for us to complete advanced clinical development of any of our product candidates or, if applicable, to prepare for commercializing any product candidate which may receive approval. Accordingly, we will continue to require substantial additional capital beyond the proceeds from our initial public offering to continue our clinical development and potential commercialization activities. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our clinical development efforts. We anticipate that we will seek to fund our operations through public or private equity or debt financings or other sources, such as potential collaboration arrangements. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategies.

Critical Accounting Policies and Estimates

Our management's discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which we have prepared in accordance with generally accepted accounting principles in the US (GAAP). The preparation of these condensed consolidated financial statements requires us to make


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estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported revenues and expenses during the reporting periods. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are 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. Our actual results may differ materially from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 2 to our condensed consolidated financial statements appearing elsewhere in this Form 10-Q, we believe that the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations.

Clinical Trial Accruals

We make estimates of our accrued expenses as of each balance sheet date in our condensed consolidated financial statements based on the facts and circumstances known to us at that time. Our expense accruals for clinical trials are based on estimates of the fees associated with services provided by clinical trial investigational sites and CROs. Payments under some of the contracts we have with such parties depend on factors such as successful enrollment of patients, site initiation and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If possible, we obtain information regarding unbilled services directly from these service providers. However, we may be required to estimate these services based on other information available to us. If we underestimate or overestimate the activity or fees associated with a study or service at a given point in time, adjustments to research and development expenses may be necessary in future periods. Historically, our estimated accrued liabilities have approximated actual expense incurred. Subsequent changes in estimates may result in a material change in our accruals.

Revenue Recognition

Our revenues generally consist of upfront payments, license fees for research and development arrangements, research and development funding and milestone payments under collaborative agreements. Each deliverable from us in a collaboration agreement is evaluated to determine whether it meets the criteria to be accounted for as a separate unit of accounting or whether it should be combined with other deliverables. We recognize revenues when all four of the following criteria are met: (i) persuasive evidence that an agreement exists;
(ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured.

Collaboration Arrangements. In December 2011, we entered into a collaboration agreement with Ono Pharmaceuticals Co., Ltd., or Ono, which contains multiple deliverables but only one unit of accounting. As a result, the upfront consideration received is being amortized into revenue on a straight-line basis over our estimated period of performance.

Our collaborative arrangement with Eli Lilly and Company, or Lilly, was subject to the previous accounting guidance for multiple-element arrangements and was analyzed to determine whether the elements within each of the arrangements could be separated or whether they must be accounted for as a single unit of accounting. Under this arrangement, we determined that there was not objective and reliable evidence of fair value of the undelivered element items, which for us was performing research and development activities. Consideration received under the arrangements was recognized as revenue on a straight-line basis over our estimated period of performance, which for this contract was the contract term.

Upfront Fees. When we determine we have a single unit of accounting on deliverables under our license and collaborative arrangements, upfront fees received for license and collaborative agreements are recognized ratably over our expected performance period under each respective arrangement. Our collaborations to date have had stated periods of performance. However, our agreement with Ono contains an option whereby Ono may choose to extend the development period and, as a result, our management makes its best estimate of the period over which we expect to fulfill our performance obligations under that agreement. Any amounts received under an agreement in advance of performance, if deemed substantive, are recorded as deferred revenue and recognized as revenue as we complete our performance obligations.

Milestones. We evaluate all milestones at the beginning of the agreement to determine if they meet the definition of a substantive milestone.


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We recognize revenue from milestone payments when earned, provided that (i) the milestone event is substantive in that it can only be achieved based in whole or in part on either our performance or on the occurrence of a specific outcome resulting from our performance and its achievability was not reasonably assured at the inception of the agreement, (ii) we do not have ongoing performance obligations related to the achievement of the milestone and (iii) it would result in the receipt of additional payments. A milestone payment is considered substantive if all of the following conditions are met: (i) the milestone payment is non-refundable; (ii) achievement of the milestone was not reasonably assured at the inception of the arrangement; (iii) substantive effort is involved to achieve the milestone; and (iv) the amount of the milestone payment appears reasonable in relation to the effort expended, the other milestones in the arrangement and the related risk associated with the achievement of the milestone. Under the Ono collaboration, we have earned a total of $1.5 million in milestone payments that our management determined did not meet the definition of a substantive milestone and therefore such amount is being amortized over the remaining term of the agreement.

Our collaboration arrangements provide for payments to us upon the achievement of research milestones, such as providing structure solutions with candidate compounds for certain targets. Given the challenges inherent in determining high resolution structure solutions for G protein-coupled receptor (GPCR) targets, there was substantial uncertainty whether any such milestones would be achieved at the time we entered into these collaboration arrangements. In addition, we evaluated whether the research milestones met the remaining criteria to be considered substantive. As a result of our analysis, we consider most of our research milestones to be substantive and, accordingly, we expect to recognize as revenue future payments received based on milestones as each milestone is achieved.

Our collaboration agreement with Ono also provides for contingent payments to us for development milestones based solely upon Ono's performance. For such contingent amounts, even if they do not meet the definition of a substantive milestone, since they will be achieved based upon Ono's effort, as we will have no ongoing obligation as of this time, we expect to recognize the payments as revenue when earned under the applicable contract, provided that collection is reasonably assured.

Deferred Revenue. Amounts received prior to satisfying the above revenue recognition criteria are recorded as deferred revenue. Amounts not expected to be recognized within the next 12 months are classified as non-current deferred revenue.

Stock-Based Compensation

We account for stock-based compensation expense related to stock options granted to employees and members of our board of directors by estimating the fair value of each stock option on the date of grant using the Black-Scholes options-pricing model. For awards subject to time-based vesting conditions, we recognize stock-based compensation expense using the straight-line method. In accordance with the authoritative accounting literature, our options subject to both performance and time-based vesting conditions are expensed using the accelerated multiple-option approach. Under the accelerated multiple-option approach (also known as the graded-vesting method), we recognize compensation expense over the requisite service period for each separately vesting tranche of the award as though the award was in substance multiple awards, resulting in accelerated expense recognition during the earlier vesting periods.

We account for stock options granted to non-employees, which primarily consists of founders and members of our scientific advisory board, using the fair value approach. Stock options granted to non-employees are subject to periodic revaluation over their vesting terms.

Results of Operations



Comparison of Three Months Ended March 31, 2012 and 2013



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



                                        Three months ended
                                            March 31,
                                         2012         2013     Increase
Collaborative revenues                $    1,325    $  1,488   $     163
Research and development expenses          4,398       8,020       3,622
General and administrative expenses          825       1,062         237
Deemed dividend                                -       2,056       2,056


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Collaborative Revenues. The following table summarizes our sources of revenue by partner for each of the three months ending March 31, 2012 and 2013 (in thousands):

                                       Upfront Fees
                                         and Non-                       Research &
                                        Substantive                     Development
                                         Milestone       Milestone        Funding         Total
Partner                                  Payments        Payments        Payments        Revenue
Ono Pharmaceutical Co., Ltd.           $         278    $         -    $         417    $     695
Eli Lilly and Company                            630              -                -          630
Total for the three months ended
March 31, 2012                         $         908    $         -    $         417    $   1,325

Ono Pharmaceutical Co., Ltd.           $         420    $       250    $         818    $   1,488
Total for the three months ended
March 31, 2013                         $         420    $       250    $         818    $   1,488

Upfront payments are amortized monthly on a straight-line basis over the period of performance. During the first quarter of 2012, we amortized three months each of upfront payments from Ono and Lilly. The Lilly contract was completed in December 2012. During the first quarter of 2013, we amortized three months of upfront payments from Ono.

Research and Development Expenses. The following table summarizes our research and development, or R&D, expenses for each of the three months ending March 31, 2012 and 2013 (in thousands):

                                            Three months ended
                                                March 31,
                                             2012         2013      Increase
Third-party clinical trial costs:
RPC1063 - RMS study costs                 $      874    $  1,557   $      683
RPC1063 - UC study costs                           -       1,403        1,403
RPC1063 - Joint development study costs          875       2,404        1,529
Total external clinical trial costs            1,749       5,364        3,615
Other unallocated R&D costs                    2,649       2,656            7
Total R&D expenses                        $    4,398    $  8,020   $    3,622

R&D expenses primarily consist of costs associated with our research activities, including our drug discovery efforts, and the preclinical and clinical development of our product candidates. Our R&D expenses include:

external R&D expenses incurred under arrangements with third parties, such as contract research organizations (CROs), consultants and our scientific advisory board;

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

license and royalty fees; and

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

R&D expenses were $4.4 million for the three months ended March 31, 2012, compared to $8.0 million for the same period ended March 31, 2013. The increase of $3.6 million is primarily related to commencement of our Phase 2 trials of RPC1063 in RMS and UC.

We expect our research and development expenses to increase for the foreseeable future as we advance our clinical development programs and continue to develop other product candidates.

General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation, related to our executive, finance, corporate 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, patent costs and legal services.


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General and administrative expenses were $0.8 million for the three months ended March 31, 2012, compared to $1.1 million for the same period ended March 31, 2013. The increase of $0.3 million is primarily related to (i) a $0.1 million increase in personnel and travel costs associated with an overall 3.0% salary increase for employees and travel costs associated with business development activities and (ii) a $0.1 million increase in patent costs due to conversion of certain of our patents to an international filing.

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 and maintaining compliance with exchange listing and SEC requirements. These increases will likely include legal fees, accounting fees, directors' and officers' liability insurance premiums and fees associated with investor relations.

Deemed Dividend. On March 27, 2013, pursuant to the terms of the Series B Preferred Stock Purchase Agreement dated as of February 3, 2012, we closed a third tranche financing for 8.2 million shares of Series B Convertible Preferred Stock, at $1.03 per share, for aggregate net proceeds of $8.4 million. The Series B Convertible Preferred Stock issued in the third tranche financing was sold at a price per share below the reassessed deemed fair value of our common stock at that time. Accordingly, we recorded a deemed dividend charge of $2.1 million in the first quarter of 2013 associated with the issuance of such shares, which is equal to the number of shares of Series B Convertible Preferred Stock sold on that date multiplied by the difference between the estimated value of the underlying common stock and the Series B conversion price per share on that date.

Liquidity and Capital Resources

Overview

We have incurred losses since our inception and negative cash flows from operating activities and, as of March 31, 2013, we had an accumulated deficit of $57.2 million and cash and cash equivalents of $18.3 million. We anticipate that we will continue to incur net losses into the foreseeable future as we:
(i) continue the development and commercialization of our lead drug candidate RPC1063; (ii) work to develop additional drug candidates through research and development programs; and (iii) expand our corporate infrastructure, including the costs associated with becoming a public company. We plan to continue to fund losses from operations and capital funding needs through future debt and equity financing, as well as potential additional collaborations. The sale of additional equity or convertible debt could result in additional dilution to our stockholders. The incurrence of indebtedness would result in debt service obligations and could result in operating and financing covenants that would restrict our operations. No assurances can be provided that financing will be available in the amounts we need or on terms acceptable to us, if at all. If we are not able to secure adequate additional funding we may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these actions could materially harm our business, results of operations, and future prospects.

Prior to our IPO, we have funded our operations to date primarily from the sale of convertible equity securities and through the receipt of upfront payments, research funding and preclinical milestones from our collaboration arrangements. Through March 31, 2013, we have received $61.5 million in proceeds from the sale of our Series A and Series B Convertible Preferred Stock and $21.9 million in upfront payments, research funding and preclinical milestones from our collaborative arrangements with Lilly, Ortho-MacNeil-Jenssen Pharmaceuticals, or OMJP, and Ono.

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