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PETX > SEC Filings for PETX > Form 10-Q on 13-Aug-2013All Recent SEC Filings

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

Form 10-Q for ARATANA THERAPEUTICS, INC.


13-Aug-2013

Quarterly Report


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

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the "Risk Factors" section of this Quarterly Report on Form 10-Q for a discussion of important factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a development-stage biopharmaceutical company focused on the licensing, development and commercialization of innovative medications for pets. We believe that we can leverage the investment in the human biopharmaceutical industry to bring therapeutics to pets in a capital and time efficient manner. Our strategy is to in-license proprietary compounds from human biopharmaceutical companies and to develop these product candidates into therapeutics specifically for use in pets. We believe the development and commercialization of these therapeutics will permit veterinarians and pet owners to manage pets' medical needs safely and effectively, resulting in longer and improved quality of life for pets.

In order to successfully execute our plan, we have assembled an experienced management team consisting of veterinarians, physicians, scientists and other professionals that apply the core principles of drug development to the medical needs of pets. The members of our senior management team combined have over 100 years of experience in the animal health and human biopharmaceutical industries, as well as a strong track record of successfully developing and commercializing therapeutics for pets. Our Chief Scientific Officer and our Head of Drug Evaluation and Development have each been actively involved in the development of over 20 animal health products that have obtained regulatory approval. Our Chief Commercial Officer has been responsible for guiding the launch of 22 animal health products, including Rimadyl, the highest selling product for the treatment of pain in dogs.

Since our founding in 2010, we have licensed three compounds, AT-001, AT-002 and AT-003, that we are developing into six products for use in pets in the United States and Europe. We are conducting clinical studies designed to confirm the safety and effectiveness of selected dose regimens, referred to as dose confirmation studies, for AT-001 for the treatment of pain in dogs and cats, and for AT-002 for the treatment of inappetence in both cats and dogs. Once these studies are complete, we intend to start clinical studies intended to provide substantial evidence required for regulatory approval, referred to as pivotal effectiveness studies. We aim to submit new animal drug applications, or NADAs, for U.S. approval for the majority of these potential products in 2015 and 2016 and to make similar regulatory filings for European approval in 2016 and 2017. We plan to commercialize our products in the United States through a direct sales force, complemented by distributor relationships, and in Europe and rest of world through commercial partners.

We are a development stage company with no products approved for marketing and sale and we have not generated any revenue. We have incurred significant net losses since our inception. We incurred net losses of $3.4 million and $6.7 million during the three months and six months ended June 30, 2013, respectively. These losses have resulted principally from costs incurred in connection with in-licensing our product candidates, research and development activities and general and administrative costs associated with our operations. As of June 30, 2013, we had a deficit accumulated during development stage of $28.9 million and cash, cash equivalents and short-term investments of $20.2 million.

Financial Overview

Revenue

We do not have any products approved for sale, have not generated any revenues from product sales since our inception and do not expect to generate any revenue from the sale of products in the near future. If our development efforts result in clinical success and regulatory approval or collaboration agreements with third parties for any of our product candidates, we may generate revenues from those product candidates.


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Operating Expenses

The majority of our operating expenses to date have been for the licensing of and the research and development activities related to AT-001, AT-002, and AT-003.

Research and Development Expense

Research and development costs, which consist primarily of costs associated with our product development efforts, including target animal studies, are expensed as incurred. Research and development expense consists primarily of wages, stock-based compensation and employee benefits for all employees engaged in scientific research and development functions, and other operational costs related to our research and development activities, including facility-related expenses, external costs of outside contractors engaged to conduct target animal studies, contract manufacturers and active pharmaceutical ingredient (API) chemistry service providers, license payments made under our licensing agreements, regulatory, professional and consulting fees, travel costs and allocated corporate costs.

We have been developing AT-001, AT-002 and AT-003 in parallel and typically use our employee and infrastructure resources across multiple development programs. We track outsourced development costs by development compound but do not allocate personnel or other internal costs related to development to specific programs or development compounds. These expenses are included in personnel costs and other internal costs, respectively.

General and Administrative Expense

General and administrative expense consists primarily of personnel costs, including salaries, related benefits and stock-based compensation for employees in administration, finance and business development. General and administrative expenses also includes allocated rent and other facilities costs; professional and consulting fees for general business purposes and for accounting and tax services, business development activities, and general legal services; and travel and other costs.

Other Income (Expense)

Interest Income

Interest income consists of interest earned on our cash and cash equivalents.

Interest Expense

In March 2013, we borrowed $5.0 million under our credit facility and we will incur interest expense associated with those borrowings. A more detailed description of our credit facility is available under the caption "Liquidity and Capital Resources."

Other Income

Other income consists primarily of amounts received under a research and development voucher program grant agreement with the Kansas Bioscience Authority (KBA), which was executed in March 2012. We are eligible to receive up to $1.3 million over an estimated two year period, in the form of a quarterly reimbursement of 33% of costs incurred during that period for pre-formulation, formulation, manufacture and pivotal studies associated with the AT-001 and AT-002 programs, to the extent that such costs are incurred with specifically-named Kansas companies. From inception through June 30, 2013, we have received $0.5 million under this agreement.

Income Taxes

As of December 31, 2012, we had federal and state net operating loss carryforwards of $1.1 million and $1.0 million, respectively, and federal and state research and development tax credit carryforwards of $42,000 and $45,000, respectively. We have not recorded any U.S. Federal or state income tax benefits for the losses or research and development tax credits, as they have been offset in full by valuation allowances.

Critical Accounting Policies and Significant Judgments and Estimates

Our management's discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and revenues, costs and expenses and related disclosures during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those described below. 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. Actual results may differ from these estimates under different assumptions or conditions.


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The critical accounting policies that we believe impact significant judgments and estimates used in the preparation of our financial statements presented in this report are described in our Management's Discussion and Analysis of Financial Condition and Results of Operations in our final prospectus filed with the SEC on June 27, 2013 relating to our registration statement on Form S-1 and in Note 1 to our financial statements appearing elsewhere in this report. There have been no material changes to our critical accounting policies through June 30, 2013 from those discussed in our final prospectus filed on June 27, 2013.

Results of Operations

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



                                          Three Months Ended June 30,               Six Months Ended June 30,
                                           2013                  2012               2013                  2012
                                             (Dollars in thousands)                   (Dollars in thousands)
Revenue                                $         -           $         -        $         -           $         -
Operating expenses
Research and development                      2,469                 1,929              4,583                 3,680
General and administrative                    1,258                   623              2,484                 1,121
Other income
Interest income                                  22                     3                 25                     7
Interest expense                                (78 )                  -                (102 )                  -
Other income                                    343                    -                 411                    -

Revenue

We did not generate any revenue during either of the three month or six month
periods ended June 30, 2012 or 2013.

Research and development expense



                                              Three Months Ended June 30,
                                               2013                2012
                                                (Dollars in thousands)

          Outsourced development costs
          AT-001                           $         993       $       1,147
          AT-002                                     412                 562
          AT-003                                     197                  -
          Personnel costs                            509                 167
          Other costs                                358                  53


          Total research and development   $       2,469       $       1,929


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During the three months ended June 30, 2013, research and development expense increased by $0.5 million as compared to the same period in 2012. This increase was primarily due to a $0.3 million increase in personnel costs as a result of increased headcount and a $0.3 million increase in other costs related to an option agreement to in-license a new compound, which were partially offset by a $0.1 million decrease in outsourced development costs due to the timing of the outsourced work performed when compared quarter to quarter.

                                               Six Months Ended June 30,
                                                2013               2012
                                                (Dollars in thousands)

           Outsourced development costs
           AT-001                           $      1,770       $      1,832
           AT-002                                  1,040              1,417
           AT-003                                    197                 -
           Personnel costs                         1,006                282
           Other costs                               570                149


           Total research and development   $      4,583       $      3,680

During the six months ended June 30, 2013, research and development expense increased by $0.9 million as compared to the same period in 2012. This increase was primarily due to a $0.7 million increase in personnel costs as a result of increased headcount; a $0.2 million increase in outsourced development costs related to commencement of development of AT-003; and a $0.4 million increase in other costs primarily related to an option agreement to in-license a new compound. The increase is partially offset by a decrease of $0.4 million in outsourced development costs.

We expect research and development expense will increase for the foreseeable future as we continue to increase our headcount, commence pivotal field effectiveness studies and further develop our compounds. At this time, due to the inherently unpredictable nature of our development, we cannot reasonably estimate or predict the nature, specific timing or estimated costs of the efforts that will be necessary to complete the development of our product candidates. We expect to fund our research and development expenses from our cash and cash equivalents, a portion of the net proceeds from our initial public offering and any future collaboration arrangements. We cannot forecast with any degree of certainty which product candidates may be subject to future collaborations or contracts, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

General and administrative expense

During the three months ended June 30, 2013, general and administrative expense increased by $0.6 million as compared to the same period in 2012. This increase was primarily due to a $0.5 million increase in personnel-related costs, which was the result of increased headcount, higher salaries, employee benefits, travel and supplies and a $0.1 million one-time charge for costs associated with the initial public offering.

During the six months ended June 30, 2013, general and administrative expense increased by $1.4 million as compared to the same period in 2012. This increase was primarily due to a $0.8 million increase in personnel-related costs, which was the result of increased headcount, higher salaries, employee benefits, travel and supplies; $0.2 in accrued professional fees associated with the higher costs of public company requirements; $0.2 in one-time charges for costs associated with the initial public offering, including travel; and $0.2 in costs associated with our commercial infrastructure and business development initiatives.

We expect general and administrative expense to continue to increase as we begin operating as a public company and continue to build our corporate infrastructure in the support of continued development and commercialization of AT-001, AT-002 and AT-003 and other development programs.


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Other income (expense)

Interest expense increased by $78,000 and $102,000 for the three month and six month period ended June 30, 2013, respectively compared to the same periods in 2012. This increase was due to interest expense related to our credit facility, which was entered into during March 2013. Accretion of the debt discount and deferred financing costs totaled $6,000, and $8,000 for the three month and six month periods ended June 30, 2013, respectively, which is non-cash interest included in our interest expense above.

Interest income

Interest income increased slightly for the three month and six month periods ended June 30, 2013 compared to the same periods in 2012, which primarily relates to interest earned related to investments in certificates of deposit.

Other income

Other income increased by $0.3 million and $0.4 million during the quarter and six-months ended June 30, 2013, respectively, as compared to the same periods in 2012. These increases related primarily to a research and development voucher program grant agreement with the Kansas Bioscience Authority, which was executed in March 2012. We are eligible to receive up to $1.3 million over an estimated two year period, in the form of a quarterly reimbursement of 33% of costs incurred during that period for pre-formulation, formulation, manufacture and pivotal studies associated with the AT-001 and AT-002 programs, to the extent that such costs are incurred with specifically-named Kansas companies. From inception through June 30, 2013, we have received $0.5 million under this agreement.

Liquidity and Capital Resources

We have incurred losses and negative cash flows from operations and have not generated revenue since our inception in December 2010, and as of June 30, 2013, we had a deficit accumulated during development stage of $28.9 million.

As of June 30, 2013, we had cash, cash equivalents and short-term investments of $20.2 million. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Currently, our funds are held in cash and certificates of deposit.

In July 2013, we completed our initial public offering in which we issued and sold 6,612,500 shares of common stock at a public offering price of $6.00 per share. We received net proceeds of approximately $34.2 million after deducting underwriting discounts and commissions of approximately $2.8 million and other offering expenses of approximately $2.7 million. Upon the closing of the initial public offering, all shares of our then-outstanding convertible preferred stock and accumulated dividends automatically converted into an aggregate of 13,351,902 shares of common stock.

We believe that our cash, cash equivalents and short term investments as of June 30, 2013, together with our existing credit facility and the net proceeds of the initial public offering, are sufficient to fund operations through at least the next 24 months. We anticipate that we will continue to incur losses for at least the next several years. We expect that our research and development and general and administrative expenses will continue to increase and, as a result, we may need additional capital to fund our operations, which we may obtain from public or private equity, debt financings or other sources, such as corporate collaborations and licensing arrangements.

Indebtedness

In March 2013, we entered into a loan and security agreement, or credit facility, with Square 1 Bank pursuant to which we borrowed $5.0 million, or Tranche One. We are eligible to borrow an additional $5.0 million, or Tranche Two, through March 4, 2014. We are obligated to make monthly interest-only payments until March 4, 2014 at a variable rate equal to the greater of 2.25% above the prime rate (currently 5.5%), or 5.5% per annum, and commencing after March 4, 2014, we will make consecutive equal monthly payments of principal and interest through March 1, 2016 at a fixed interest rate equal to the greater of 2.25% above the prime rate as of March 4, 2014, or 5.5% for the remainder of the loan. For further information on this indebtedness see Note 6 to the financial statements.


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Cash Flows

The following table shows a summary of our cash flows for the periods set forth
below:



                                                            Six Months Ended
                                                                June 30,
                                                          2013              2012
                                                         (Dollars in thousands)
    Net cash used in operating activities              $    (8,535 )      $ (3,600 )
    Net cash (used)/provided by investing activities           485              (2 )
    Net cash provided by financing activities                8,426           7,699

Net cash used in operating activities

During the six months ended June 30, 2013, net cash used in operating activities was $8.5 million. Net cash used in operating activities primarily resulted from our net loss of $6.7 million, partially increased by net cash used from changes in operating assets and liabilities of $2.0 million. Our net losses were primarily attributed to research and development activities related to our AT-001, AT-002 and AT-003 programs and our general and administrative expenses, as we had no revenue in the period. Net cash provided by changes in our operating assets and liabilities consisted primarily of an increase of $1.1 million in accounts payable, offset by uses of cash related to an increase of $2.8 million in prepaid expenses and, a decrease of accrued expenses of $0.2 million. The increase in prepaid expenses relate primarily to the initial public offering. The increase in accounts payable primarily related to the timing of payments made for our outsourced research and development activities. The decrease in accrued expenses related primarily to research and development expenses during the period.

During the six months ended June 30, 2012, net cash used in operating activities was $3.6 million. Net cash used in operating activities primarily resulted from our net loss of $4.8 million, partially offset by net cash provided from changes in operating assets and liabilities of $1.1 million. Our net loss was primarily attributed to research and development activities related to our AT-001, and AT-002 programs and our general and administrative expenses, as we had no revenue in the period. Net cash provided by changes in our operating assets and liabilities consisted primarily of increased accrued research and development expenses of $1.4 million, partially offset by a $0.2 million decrease in accounts payable.

Net cash (used)/provided by investing activities

During the six months ended June 30, 2013, net cash provided by investing activities was $0.5 million, which related to maturities and purchases of marketable securities. During this period, we sold $2.0 million of marketable securities, and purchased $1.5 million of marketable securities.

During the six months ended June 30, 2012, we did not use cash for investing activities. During this period, we sold and purchased $2.0 million of marketable securities, resulting in no net change in cash.

Net cash provided by financing activities

During the six months ended June 30, 2013, net cash provided by financing activities was $8.4 million. Net cash provided by financing activities primarily resulted from net proceeds of $3.4 million raised from the private placement of our series C convertible preferred stock, net proceeds of $4.9 million from our credit facility and proceeds of $0.1 million received from the exercise of stock options.

During the six months ended June 30, 2012, net cash provided by financing activities was $7.7 million and resulted from net proceeds of $7.7 million raised from the private placement of our series B convertible preferred stock.


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Kansas Programs

In private offerings we conducted in December 2010, November 2011, February 2012 and January 2013, we issued to the KBA an aggregate of 500,000 shares of our series A convertible preferred stock, 166,666 shares of our series B convertible preferred stock and 81,037 shares of our series C convertible preferred stock in exchange for aggregate proceeds of approximately $1.3 million. Further, on March 6, 2012, the KBA granted us a research and development voucher award of up to $1.3 million.

Pursuant to Kansas law, we will be required to repay any amounts received from the KBA, which may include an obligation to repurchase the shares of capital stock purchased by the KBA, subject to the discretion of the KBA, if we relocate the operations in which the KBA invested outside of the State of Kansas within ten years after receiving such amounts.

In addition, 13 individual investors or permitted entity investors who purchased shares of our series B convertible preferred stock and up to 18 individual investors or permitted entity investors who purchased shares of our series C convertible preferred stock were allocated approximately $1.5 million in the aggregate in Kansas income tax credits from the Kansas Department of Commerce in connection with their purchase of such shares in private offerings. Each individual investor or owner of a permitted entity investor is required to certify to the Kansas Department of Commerce that he, she or it is an accredited investor as defined under Regulation D of Rule 501 under the Securities Act before receiving such tax credits. None of such recipients are directors, executive officers or beneficial owners of more than 5% of our capital stock.

Pursuant to Kansas law, if within ten years after the sale of our preferred stock to the KBA, we cease to be a qualified Kansas business meaning we do not meet one of the following three criteria (a) being a corporation domiciled in Kansas, (b) doing more than 50% of our business in Kansas or (c) doing more than 80% of our production in Kansas, then we will be required to repay the tax credits in an amount determined by the Kansas Department of Commerce.

Off-Balance Sheet Arrangements

Since inception, we have not engaged in the use of any off-balance sheet arrangements, such as structured finance entities, special purpose entities or variable interest entities.

Recently Issued and Adopted Accounting Pronouncements

Comprehensive Income - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income: In February 2013, the FASB issued guidance requiring entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount is required to be reclassified under U.S. GAAP. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. This guidance revised the previous guidance issued in June 2011 that was deferred. This guidance was applied by us for all interim and annual periods beginning on January 1, 2013. The adoption of . . .

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