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TTPH > SEC Filings for TTPH > Form 10-Q on 12-Aug-2013All Recent SEC Filings

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Form 10-Q for TETRAPHASE PHARMACEUTICALS INC


12-Aug-2013

Quarterly Report


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

The interim financial statements included in this Quarterly Report on Form 10-Q 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, contained in our prospectus filed with the United States Securities and Exchange Commission, or the SEC, pursuant to Rule 424(b)(4) on March 20, 2013, which we refer to as the Prospectus. In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements are subject to risks and uncertainties, including those set forth in Part II - Other Information, Item 1A. Risk Factors below and elsewhere in this report, that could cause actual results to differ materially from historical results or anticipated results.

Overview

We are a clinical stage biopharmaceutical company using our proprietary chemistry technology to create novel antibiotics for serious and life-threatening multi-drug resistant infections. Our lead product candidate, eravacycline, is a fully synthetic tetracycline derivative that we are developing as a broad-spectrum intravenous and oral antibiotic for use as a first-line empiric monotherapy for the treatment of multi-drug resistant infections, including multi-drug Gram-negative infections. We have completed a successful Phase 2 clinical trial of eravacycline with intravenous administration for the treatment of patients with complicated intra-abdominal infections, or cIAI, in 2012. We plan to conduct two global Phase 3 clinical trials of eravacycline, one for the treatment of cIAI, which we expect to commence in the third quarter of 2013, and one for the treatment of complicated urinary tract infections, or cUTI, which we expect to commence in the fourth quarter of 2013. We are currently finalizing our plans for the Phase 3 program for eravacycline. We are also conducting a Phase 1 clinical program evaluating the pharmacokinetics and safety of oral formulations of eravacycline which we expect to complete in the second half of 2013. Subject to obtaining additional financing, we intend to pursue development of eravacycline for the treatment of additional indications, including acute bacterial skin and skin structure infections, or ABSSSI, acute bacterial pneumonias and other serious and life-threatening infections. We are also pursuing the discovery and development of additional antibiotics to target unmet medical needs.

We commenced business operations in July 2006. Our operations to date have been limited to organizing and staffing our company, business planning, raising capital, acquiring and developing our proprietary chemistry technology, identifying potential product candidates and undertaking preclinical studies and clinical trials of our product candidates. To date, we have not generated any product revenue and have primarily financed our operations through the public offering and private placement of our equity securities, debt financings and revenue from government awards. As of June 30, 2013, we had received an aggregate of $171.8 million in net proceeds from the issuance of equity securities and borrowings under debt facilities and an aggregate of $11.3 million from government grants and contracts. As of June 30, 2013, our principal source of liquidity was cash and cash equivalents, which totaled $77.2 million.

As of June 30, 2013, we had a deficit accumulated during the development stage of $98.3 million. Our net losses were $5.4 million and $8.2 million for the three and six months ended June 30, 2013, respectively. Our net losses were $4.3 million and $9.0 million for the three and six months ended June 30, 2012, respectively. We expect that our expenses will increase substantially as we commence our Phase 3 clinical trials of eravacycline for the treatment of patients with cIAI and cUTI, respectively, pursue development of an oral formulation of eravacycline, seek marketing approval for eravacycline, pursue development of eravacycline for additional indications, including ABSSSI, acute bacterial pneumonias and other serious and life-threatening infections, advance our other product candidates and satisfy our obligations under our license agreement with Harvard University. If we obtain marketing approval of eravacycline, we also expect to incur significant sales, marketing, distribution and outsourced manufacturing expenses, as well as ongoing research and development expenses. Furthermore, we expect to incur additional costs associated with operating as a public company and expect that our general and administrative costs will increase as we grow and operate as a public company. We will need to generate significant revenue to achieve profitability, and we may never do so.

We believe that our available funds will be sufficient to enable us to obtain top-line data from both of our planned Phase 3 clinical trials of eravacycline. We expect that these funds will not, however, be sufficient to enable us to seek marketing approval for eravacycline or commercially launch eravacycline. It is also possible that we will not achieve the progress that we expect with respect to eravacycline because the actual costs and timing of clinical development activities are difficult to predict and are subject to substantial risks and delays. In particular, we have not yet finalized our plans for our Phase 3 clinical trial of eravacycline for the treatment of cUTI. We will be required to obtain further funding through public or private equity offerings, debt financings, collaboration and licensing arrangements or other sources in order to continue to fund our operations after the first quarter of 2015. Adequate additional financing may not be available to us on acceptable terms, or at all. 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 strategy.


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Financial overview

Contract and Grant Revenue

We have derived all of our revenue to date from funding provided under three U.S. government awards for the development of our compounds as potential counter measures for the treatment of disease caused by bacterial biothreat pathogens through our collaborator CUBRC Inc., or CUBRC, an independent, not-for-profit, research corporation that specializes in U.S. government-based contracts:

We have received funding for our lead product candidate, eravacycline, under an award from the Biomedical Advanced Research and Development Authority, or BARDA, an agency of the U.S. Department of Health and Human Services. In January 2012, BARDA awarded CUBRC a five-year contract that provides for up to a total of $67.0 million in funding for the development, manufacturing and clinical evaluation of eravacycline for the treatment of disease caused by bacterial biothreat pathogens. We refer to this contract as the BARDA Contract.

We have received funding for our preclinical compound TP-271 under two awards from the National Institute of Allergy and Infectious Diseases, or NIAID, a division of National Institutes of Health, for the development, manufacturing and clinical evaluation of TP-271 for respiratory diseases caused by biothreat and antibiotic-resistant public health pathogens, as well as bacterial pathogens associated with community-acquired bacterial pneumonia:

a grant awarded to CUBRC in July 2011 that provides up to a total of approximately $2.8 million over five years, which we refer to as the NIAID Grant, and

a contract awarded to CUBRC in September 2011 that provides up to a total of approximately $35.8 million in funding over five years, which we refer to as the NIAID Contract.

We are collaborating with CUBRC because when we initially determined to seek government funding we recognized that we did not have any expertise in bidding for, or the administration and management of, government-funded contracts. CUBRC serves as the prime contractor under the BARDA Contract, the NIAID Grant and the NIAID Contract, primarily carrying out a program management and administrative role with additional responsibility for the management of preclinical studies. We serve as lead technical expert on all aspects of these awards and also serve as a subcontractor responsible for management of chemistry, manufacturing and control activities and clinical studies. We derive all of our revenue under these collaborations through subcontracts with, and a subaward from, CUBRC, with the flow of funds following the respective activities being conducted by us and by CUBRC.

In connection with the BARDA Contract, in February 2012, we entered into a five-year cost-plus-fixed-fee subcontract with CUBRC under which we may receive funding of up to approximately $39.8 million, reflecting the portion of the BARDA Contract funding that may be paid to us for our activities.

In connection with the NIAID Contract, in October 2011, we entered into a five-year cost-plus-fixed-fee subcontract with CUBRC under which we may receive funding of up to approximately $13.3 million, reflecting the portion of the NIAID Contract funding that may be paid to us for our activities.

In connection with the NIAID Grant, in November 2011, CUBRC awarded us a 55-month, no-fee subaward of approximately $980,000, reflecting the portion of the NIAID Grant funding that may be paid to us for our activities.

Although the BARDA Contract, and our subcontract with CUBRC under the BARDA Contract, have five-year terms, BARDA is entitled to terminate the project for convenience at any time, and is not obligated to provide continued funding beyond current-year amounts from Congressionally approved annual appropriations. To the extent that BARDA ceases to provide funding of the program to CUBRC, CUBRC has the right to cease providing funding to us. As of June 30, 2013, committed funding from CUBRC under the BARDA subcontract has increased by $9.3 million from $6.3 million during the original twelve-month base period ended January 31, 2013 to $15.6 million through the current contract end date, which has been extended to April 30, 2015 as a result of the exercise of several options by BARDA under the BARDA Contract. Total funds of $7.5 million had been received through June 30, 2013 under this contract.

Similarly, although the NIAID Contract, the NIAID Grant and our subcontract with CUBRC under the NIAID Contract have terms of five years, and our subaward under the NIAID Grant has a term of 55 months, NIAID is entitled to terminate the project for convenience at any time, and is not obligated to provide continued funding beyond the original 25-month base period ended September 30, 2016. To the extent NIAID ceases to provide funding of the programs to CUBRC, CUBRC has the right to cease providing funding to us. As of June 30, 2013, committed funding from CUBRC under our subcontract with


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respect to the NIAID Contract has increased by $1.6 million from $5.9 million during the original 25-month base period ended October 31, 2013 to $7.5 million through the current contract end date, which has been extended to September 30, 2016. Total funds of $3.4 million had been received through June 30, 2013. Committed funding from CUBRC under our subaward with respect to the NIAID Grant increased by $0.1 million during the three months ended June 30, 2013 from $0.6 million to $0.7 million through the current contract end date, which has been extended from May 31, 2013 to May 31, 2016. Total funds of $0.4 million had been received through June 30, 2013.

We have no products approved for sale. Other than the government funding described above, we do not expect to receive any revenue from any product candidates that we develop, including eravacycline, until we obtain regulatory approval and commercialize such products, which we do not expect will occur before 2016, or until we potentially enter into collaborative agreements with third parties for the development and commercialization of such product candidates. We continue to pursue government funding for other preclinical and clinical programs. If our development efforts for any of our product candidates result in clinical success and regulatory approval, or collaboration agreements with third parties, we may generate revenue from those product candidates.

We expect that our revenue will be less than our expenses for the foreseeable future and that we will experience increasing losses as we continue our development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products. Even if we are able to generate revenue from the sale of one or more products, we may not become profitable.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for the research and development of our preclinical and clinical candidates, which include:

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

expenses incurred under agreements with contract research organizations, or CROs, contract manufacturing organizations, or CMOs, and consultants that conduct our clinical trials and preclinical activities;

payments made under our license agreement with Harvard University;

the cost of acquiring, developing and manufacturing clinical trial materials and lab supplies; and

facility, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies.

We expense research and development costs to operations as incurred. We recognize costs for certain development activities, such as clinical trials, based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations or information provided to us by our vendors.

The following table identifies research and development expenses on a program-specific basis for our product candidates for the three and six months ended June 30, 2013, and 2012. Expenses related to facilities, consulting, travel, conferences, stock-based compensation and depreciation are not allocated to a program and are separately classified as other research and development expenses in the table below.

                                                                                            The Period from
                                                                                             July 7, 2006
                                                                                            (inception) to
                                             Three Months              Six Months              June 30,
                                            Ended June 30,           Ended June 30,              2013
                                           2013        2012         2013        2012
                                                                    (in thousands)
Eravacycline                              $ 2,790     $ 2,399     $  3,781     $ 4,411     $          34,506
BARDA Contract                              3,001         544        4,721         626                 9,000
NIAID Contract and NIAID Grant                568         393        1,391         794                 4,101
Other development programs                    262         337          394         646                20,842
Other research and development                303         588          735       1,785                17,680

Total research and development expenses   $ 6,924     $ 4,261     $ 11,022     $ 8,262     $          86,129

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials.


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As of June 30, 2013, we had incurred an aggregate of $34.5 million in research and development expenses related to the development of eravacycline. We expect that our research and development expenses will increase as we plan for and commence our two planned Phase 3 clinical trials of eravacycline, one for the treatment of cIAI, which we expect to commence in the third quarter of 2013, and one for the treatment of cUTI, which we expect to commence in the fourth quarter of 2013. We expect that our Phase 3 clinical trial for the treatment of cIAI will be a global, multi-center, randomized, double-blind trial to evaluate the efficacy and safety of eravacycline compared to ertapenem and that we will enroll 536 patients in the trial. We are currently finalizing our plans for our Phase 3 clinical trial of eravacycline for cUTI. Subject to finalizing our plans for the cUTI clinical trial, we expect that the total external costs of the Phase 3 clinical trials of eravacycline will be approximately $50.0 million, including approximately $11.8 million in 2013, exclusive of the $2.0 million milestone payment described below that would become due to Harvard University upon dosing of the first patient in the first of these Phase 3 clinical trials.

Because of the numerous risks and uncertainties associated with product development, however, we cannot determine with certainty the duration and completion costs of these or other current or future clinical trials of eravacycline or our other product candidates. We may never succeed in achieving regulatory approval for eravacycline or any of our other product candidates. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including the uncertainties of future clinical and preclinical studies, uncertainties in clinical trial enrollment rate and significant and changing government regulation. In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability.

We have licensed our proprietary chemistry technology from Harvard University on an exclusive worldwide basis under a license agreement that we entered into in August 2006. Under the license agreement, we have paid Harvard an aggregate of $1.7 million in upfront license fees and development milestone payments, and issued 31,379 shares of our common stock to Harvard. In addition, we have agreed to make payments to Harvard upon the achievement of specified future development and regulatory milestones totaling up to $15.2 million per licensed product and to pay tiered royalties in the single digits based on annual worldwide net sales, if any, of licensed products by us, our affiliates and our sublicensees. We are also obligated to pay Harvard a specified share of non-royalty sublicensing revenues that we receive from sublicensees for the grant of sublicenses under the license and to reimburse Harvard for specified patent prosecution and maintenance costs. The next milestone payment that we expect to make under the license agreement is a $2.0 million payment that will become due to Harvard upon dosing of the first patient in our first Phase 3 clinical trial of eravacycline.

General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs such as stock-based compensation and travel expenses for personnel in executive, finance, business development, and human resource functions. Other general and administrative expenses include facility costs not otherwise included in research and development expenses, patent filing fees, and professional fees for legal, consulting, auditing and tax services.

We anticipate that our general and administrative expenses will increase for, among others, the following reasons:

support of the anticipated expansion of our research and development activities as we continue the development of our product candidates;

increases in payroll, expansion of infrastructure and higher consulting, legal, accounting and investor relations costs, and directors and officers insurance premiums, all associated with being a public company; and

if and when we believe a regulatory approval of our first product candidate appears likely, anticipated increases in our payroll and expense as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of our product candidates.

Interest Income

Interest income consists of interest earned on our cash and cash equivalents. The primary objective of our investment policy is capital preservation.

Interest Expense

Interest expense consists primarily of interest accrued on our outstanding indebtedness and non-cash interest related to the amortization of debt discount costs associated with our term loan facility with Silicon Valley Bank and Oxford Finance. We expect that our interest expense will increase in future periods in connection with additional indebtedness of $6.2 million that we borrowed in December 2012 under an amendment to our loan and security agreement with Silicon Valley Bank and Oxford Finance and an additional $3.0 million of indebtedness we borrowed in February 2013 under this debt facility.


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Other Income (Expense)

Other income (expense) consists of fair value adjustments on warrants for the purchase of our preferred stock, which was recorded during the three months ended March 31, 2013. We do not anticipate that we will recognize any further amounts with respect to these fair value adjustments as a result of the conversion of all outstanding warrants to purchase our preferred stock into warrants to purchase our common stock in connection with the completion of our initial public offering, or the IPO.

Critical Accounting Policies and Significant Judgments and Estimates

There have been no significant changes to our critical accounting policies since the beginning of this fiscal year. Our critical accounting policies are described under Management's Discussion and Analysis of Financial Condition and Results of Operations in the Prospectus, which was filed with the SEC on March 20, 2013 pursuant to Rule 424(b) under the Exchange Act.

Results of Operations

Comparison of the Three Months Ended June 30, 2013 and 2012

The following table summarizes the results of our operations for each of the
three months ended June 30, 2013 and 2012, together with the changes in those
items in dollars and as a percentage:



                                    Three Months Ended
                                         June 30,               Increase/
                                    2013           2012         (decrease)         %
                                                     (in thousands)
     Revenues                     $   3,722      $  1,316      $      2,406         183 %
     Operating expenses:
     Research and development         6,924         4,261             2,663          62 %
     General and administrative       1,756         1,002               754          75 %

     Total operating expenses         8,680         5,263             3,417          65 %

     Loss from operations            (4,958 )      (3,947 )          (1,011 )        26 %
     Interest income                      2            -                  2         100 %
     Interest expense                  (470 )        (216 )            (254 )       118 %
     Other expense                       -           (105 )             105        (100 )%

     Net loss                     $  (5,426 )    $ (4,268 )    $     (1,158 )        27 %

The following table sets forth our contract and grant revenue for the three months ended June 30, 2013 and 2012:

                                Three Months Ended
                                     June  30,             Increase/
             Revenue             2013          2012        (decrease)        %
                                                (in thousands)
             BARDA            $    3,122      $   895     $      2,227       249 %
             NIAID Contract          522          378              144        38 %
             NIAID Grant              78           43               35        81 %

                              $    3,722      $ 1,316     $      2,406       183 %

Contract and grant revenue was $3.7 million for the three months ended June 30, 2013 compared to $1.3 million for the three months ended June 30, 2012, an increase of $2.4 million, or 183%. This increase was primarily due to an increase in the activities under our subcontract with respect to the BARDA Contract related to various clinical studies conducted during the quarter ended June 30, 2013, as well as an increase in activities under our subcontract with respect to the NIAID Contract and our subaward with respect to the NIAID Grant.


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Research and Development Expenses

Research and development expenses for the three months ended June 30, 2013 were $6.9 million compared to $4.3 million for the three months ended June 30, 2012, an increase of approximately $2.7 million or 62%. This increase was primarily due to an increase of $2.6 million in expenses related to activities having increased under our subcontracts with CUBRC with respect to the BARDA Contract and the NIAID Contract and our subaward with respect to the NIAID Grant; an increase of $1.3 million in clinical costs associated with the preparation for our Phase 3 clinical trials of eravacycline; and an increase of $0.5 million in clinical and drug manufacturing costs associated with our ongoing Phase 1 clinical program for the oral formulation of eravacycline. These increases were partially offset by a decrease in clinical and drug manufacturing costs of $1.8 million attributable to the completion of our Phase 2 clinical trial of eravacycline in the first half of 2012.

General and Administrative Expenses

General and administrative expenses for the three months ended June 30, 2013 were $1.8 million compared to $1.0 million for the three months ended June 30, 2012, an increase of approximately $0.8 million or 75%. This increase was primarily due to an increase of $0.5 million in audit, legal, insurance and consulting costs primarily due to being a public company; and an increase in personnel-related costs of $0.3 million mainly to support our increased activities related to the NIAID Contract, the BARDA Contract and the NIAID Grant.

Interest Income

Interest income for the three months ended June 30, 2013 and June 30, 2012 was immaterial.

Interest Expense

Interest expense for the three months ended June 30, 2013 was $0.5 million compared to $0.2 million for the three months ended June 30, 2012, an increase of approximately $0.3 million or 118%. The increase in interest expense was primarily attributable to an increase in debt under the term loan facility with Silicon Valley Bank and Oxford Finance associated with our borrowings in December 2012 and February 2013.

Other Income (Expense)

Other expense for the three months ended June 30, 2012 was $0.1 million, with no expense for the comparable period in 2013. Other expense during the three months . . .

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