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HPTX > SEC Filings for HPTX > Form 10-Q on 14-Aug-2013All Recent SEC Filings




Quarterly Report

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

You should read the following management's discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes thereto for the year ended December 31, 2012, included in our Annual Report on Form 10-K/A, filed with the U.S. Securities and Exchange Commission ("SEC").


We are a biopharmaceutical company focused on the development and commercialization of novel therapeutics to treat disorders in the areas of orphan diseases and hepatology. We have developed our product, RAVICTIŽ (glycerol phenylbutyrate) Oral Liquid, to treat the most prevalent urea cycle disorders ("UCD") and are developing glycerol phenylbutyrate ("GPB") to treat hepatic encephalopathy ("HE"), two different diseases in which blood ammonia is elevated. UCD are inherited rare genetic diseases caused by a deficiency of one or more enzymes or protein transporters that constitute the urea cycle, which in a healthy individual removes ammonia through the conversion of ammonia to urea. HE may develop in some patients with liver scarring, known as cirrhosis, or acute liver failure and is a chronic disease which fluctuates in severity and may lead to serious neurological damage. On February 1, 2013, the U.S. Food and Drug Administration ("FDA"), granted approval of RAVICTI for use as a nitrogen-binding agent for chronic management of UCD in adult and pediatric patients greater than two years of age who cannot be managed by dietary protein restriction and/or amino acid supplementation alone. Limitations of use for RAVICTI include treatment of patients with acute hyperammonemia ("HA") crises for whom urgent intervention is typically necessary, patients with N-acetylglutamate synthetase deficiency for whom the safety and efficacy of RAVICTI has not been established, and UCD patients under two months of age for whom RAVICTI is contraindicated due to uncertainty as to whether newborns, who may have immature pancreatic function, can effectively digest RAVICTI. We commercially launched RAVICTI during the first quarter of 2013. On May 1, 2013, we received notification from the FDA that RAVICTI qualified for orphan drug exclusivity.

We originally obtained rights to develop RAVICTI in 2007 pursuant to a collaboration agreement with Ucyclyd Pharma, Inc. ("Ucyclyd"), a subsidiary of Valeant Pharmaceuticals International, Inc. ("Valeant"). In March 2012, we purchased the worldwide rights to RAVICTI for an upfront payment of $6.0 million, future payments based upon the achievement of regulatory milestones in indications other than UCD, sales milestones, and mid to high single digit royalties on global net sales of RAVICTI. Pursuant to an amended and restated collaboration agreement (the "restated collaboration agreement"), with Ucyclyd entered into in March 2012, we had an option to purchase all of Ucyclyd's worldwide rights to BUPHENYLŽ (sodium phenylbutyrate) Tablets and Powder, an FDA approved therapy for treatment of the most prevalent UCDs and AMMONULŽ (sodium phenylacetate and sodium benzoate) injection 10%/10%, the only adjunctive therapy currently FDA-approved for the treatment of HA crises in UCD patients, for an upfront payment of $22.0 million, plus subsequent milestone and royalty payments. On April 29, 2013, we exercised our option to acquire BUPHENYL and AMMONUL from Ucyclyd and subsequently, Ucyclyd exercised its option to retain AMMONUL. On May 31, 2013, we completed the acquisition of BUPHENYL and we received a net payment of $11.0 million which reflected the $32.0 million contractual purchase price for AMMONUL due to us less the $19.0 million contractual purchase price for BUPHENYL due to Ucyclyd and $2.0 million payment due to Ucyclyd for inventory we purchased from Ucyclyd.

As of June 30, 2013, we had an accumulated deficit of $123.0 million. We recorded losses from operations of $14.7 million and $16.0 million for the six months ended June 30, 2013 and 2012, respectively. During the second quarter of 2013, we had significant revenues from our principal operations and therefore, ceased being a development s stage company. We anticipate that a substantial portion of our capital resources and efforts in the foreseeable future will be focused on completing the development and obtaining regulatory approval of GPB in HE, expanding our organization, commercialization of RAVICTI and marketing of BUPHENYL.

On March 13, 2013, we completed a follow-on offering and issued 2,875,000 shares of our common stock at an offering price of $20.75 per share. In addition, we sold an additional 431,250 shares of common stock directly to our underwriters when they exercised their over-allotment option in full at an offering price of $20.75 per share. We received net proceeds from the offering of $63.7 million, after deducting underwriting discounts and commissions of $4.1 million and expenses of $0.8 million.

On July 31, 2012, we completed our initial public offering ("IPO") and issued 5,000,000 shares of our common stock at an initial offering price of $10.00 per share. We sold an additional 750,000 shares of common stock directly to our underwriters when they exercised their over-allotment option in full at the initial offering price of $10.00 per share. Our shares began trading on the NASDAQ Global Market on July 26, 2012. We received net proceeds from the IPO of $51.3 million, after deducting underwriting discounts and commissions of $4.0 million and expenses of $2.2 million.

In April 2012, our Phase II HE trial data was unblinded and the trial met its primary endpoint, which was to demonstrate that the proportion of patients experiencing an HE event was significantly lower on GPB versus placebo, both administered in addition to a standard of care, including lactulose and/or rifaximin. We expect our research and development expenses to increase when we initiate a Phase III trial of GPB in HE. We will likely continue to incur significant commercial, sales, marketing and outsourced manufacturing expenses in connection with the commercialization of RAVICTI and BUPHENYL in UCD. These increased expenses, as compared to prior years, include payroll related expenses due to the addition of employees in the commercial, manufacturing and regulatory departments, costs related to the initiation and operation of our distribution network, and marketing costs and general infrastructure expenses as we expand our organization.

Financial Overview


Our product revenues consist of the following:

ˇ revenues from the sale of our first commercial product, RAVICTI which was approved by the FDA on February 1, 2013 and was commercially launched in the U.S. during the period ended March 31, 2013 and

ˇ revenues from the sale of BUPHENYL which we acquired from Ucyclyd on May 31, 2013, pursuant to the restated collaboration agreement, and we currently distribute BUPHENYL in the U.S. and certain countries outside the U.S.

See "Results of Operations" below for more detailed discussion on revenues.

Cost of sales

Our cost of sales includes third-party manufacturing costs, royalty fees payable under our restated collaboration agreement with Ucyclyd, and other indirect costs including compensation cost of personnel, shipping and supplies.

The manufacturing costs we incurred prior to FDA approval of RAVICTI have been recorded as research and development expenses in our condensed consolidated statement of operations. For RAVICTI, we expect that cost of sales as a percentage of sales will increase in future periods as product manufactured prior to FDA approval is utilized as these products have been fully expensed as research and development expenses in prior periods.

As a result of the business combination related to the purchase of BUPHENYL, cost of sales was higher and not indicative of cost of sales in future periods due to the recording of the step-up value on BUPHENYL inventories acquired from Ucyclyd which will be expensed to cost of sales as that inventory is sold. Since the inventories we purchased were part of the business combination, the inventories were recorded at fair value on the acquisition date. For additional information see Note 4 to our unaudited condensed consolidated financial statements appearing elsewhere in this report.

Research and Development Expenses

We recognize research and development expenses as they are incurred. Our research and development expenses consist primarily of:

ˇ salaries and related expenses for personnel, including expenses related to stock options or other stock-based compensation granted to personnel in development functions;

ˇ fees paid to clinical consultants, clinical trial sites and vendors, including clinical research organizations ("CROs"), in conjunction with implementing and monitoring our clinical trials and acquiring and evaluating clinical trial data, including all related fees, such as for investigator grants, patient screening fees, laboratory work and statistical compilation and analysis;

ˇ other consulting fees paid to third parties;

ˇ expenses related to production of clinical supplies, including fees paid to contract manufacturers;

ˇ expenses related to license fees and milestone payments under in-licensing agreements;

ˇ expenses related to compliance with drug development regulatory requirements in the United States, the European Union and other foreign jurisdictions;

ˇ depreciation and other allocated expenses; and

ˇ expenses incurred to manufacture RAVICTI prior to FDA approval.

We expense both internal and external research and development expenses as they are incurred. We did not begin tracking our research and development expenses on a program-by-program basis until January 1, 2010. We develop RAVICTI in UCD and GPB for HE in parallel, and we typically use our employees, consultants and infrastructure resources across our two programs. Thus, some of our research and development expenses are not attributable to an individual program, but rather are allocated across our two clinical stage programs and these costs are included in unallocated costs as detailed below. In 2012, unallocated costs included $5.7 million incurred in connection with the purchase of RAVICTI from Ucyclyd. Allocated expenses include salaries, stock-based compensation and related benefit expenses for our employees, consulting fees and fees paid to clinical suppliers. The following table shows our research and development expenses for the three and six months ended June 30, 2013 and 2012 (in thousands):

                        Three Months Ended                  Six Months Ended
                             June 30,                           June 30,
                       2013             2012             2013             2012
                            (unaudited)                       (unaudited)
         UCD Program $  1,618         $    948         $  2,545         $   2,052
         HE Program       235              745              549             1,620
         Unallocated      709            1,039            1,307             7,968
         Total       $  2,562         $  2,732         $  4,401         $  11,640

We expect our research and development expenses to increase when we initiate our Phase III trial of GPB for the treatment of patients with episodic HE. Due to the inherently unpredictable nature of product development, we are currently unable to estimate the expenses we will incur.

Our research and development expenditures are subject to numerous uncertainties in timing and cost to completion. Development timelines, the probability of success and development expenses can differ materially from expectations. Clinical trials in orphan diseases, such as UCD and HE, may be difficult to enroll given the small number of patients with these diseases. Completion of clinical trials may take several years or more, but the length of time generally varies according to the type, complexity, novelty and intended use of a product candidate. The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others:

ˇ the number of trials required for approval;

ˇ the number of sites included in the trials;

ˇ the length of time required to enroll suitable patients;

ˇ the number of patients that participate in the trials;

ˇ the drop-out or discontinuation rates of patients;

ˇ the duration of patient follow-up;

ˇ the number and complexity of analyses and tests performed during the trial;

ˇ the phase of development of the product candidate; and

ˇ the efficacy and safety profile of the product candidate.

Our expenses related to clinical trials are based on estimates of patient enrollment and related expenses at clinical investigator sites as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions and contract research organizations that conduct and manage clinical trials on our behalf. We generally accrue expenses related to clinical trials based on contracted amounts applied to the level of patient enrollment and activity according to the protocol. If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we modify our estimates of accrued expenses accordingly on a prospective basis.

As a result of the uncertainties discussed above, we are unable to determine with certainty the duration and completion costs of our RAVICTI and GPB development programs.

Selling, General and Administrative Expenses

Selling general and administrative expenses consist primarily of salaries, benefits and stock-based compensation for employees in administration, finance and business development, legal, investor relations, marketing, commercial and sales functions, including fees to third party vendors providing customer support services. Other significant expenses include consulting fees, allocated facilities expenses and professional fees for accounting and legal services, including legal services associated with obtaining and maintaining patents. We expect that our selling, general and administrative expenses will increase with the continued commercialization of

RAVICTI and marketing of BUPHENYL. We expect these increases will likely include increased expenses for insurance, expenses related to the hiring of additional personnel and payments to outside consultants, lawyers and accountants.

Amortization of intangible asset

In 2013, the amortization of intangible asset pertains to the amortization expense of BUPHENYL product rights acquired on May 31, 2013. For additional information, see Notes 4 and 7 to our unaudited condensed consolidated financial statements appearing elsewhere in this report.

Interest Income

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

Interest Expense

Interest expense consists primarily of non-cash and cash interest costs related to our borrowings.

Gain from settlement of retention option

The amount of gain is comprised of (i) fair value of BUPHENYL of $20.4 million and (ii) net cash received from Ucyclyd of $10.9 million off-set by (iii) the $0.3 million carrying value of the option to purchase the rights to BUPHENYL and AMMONUL. Accordingly, we recorded the resulting net settlement of $31.1 million as gain from our settlement of the retention option on our condensed consolidated statements of operations. For additional information, see Note 4 to our unaudited condensed consolidated financial statements appearing elsewhere in this report.

Other Income (Expense), net

During the six months ended June 30, 2013 other income (expense), net consisted of a $0.5 million payment from Ucyclyd in accordance with the restated collaboration agreement. During the three and six months ended June 30, 2012, other income (expense), net consisted primarily of the changes in the fair value of the common and preferred stock warrants liability and call option liability associated with the issuance of approximately $32.5 million of convertible notes. Under ASC 815, Derivatives and Hedging and ASC 480, Distinguishing Liabilities from Equity, we account for the common stock warrants issued in 2011 and preferred stock warrants issued in 2012 and 2011, at fair value and recorded each as liabilities on the date of each issuance. The fair value was determined and subsequently re-measured using the Black-Scholes option-pricing model on each reporting date. On July 31, 2012, upon closing our IPO, we performed a final re-measurement of the common stock warrants issued in 2011 and preferred stock warrants issued in 2012 and 2011, and recorded the impact of the re-measurement to other income (expense), net. These warrants automatically net exercised into shares of common stock on July 31, 2012. As a result, these warrants will no longer be re-measured after July 31, 2012.

Income Taxes

We were granted orphan drug designation in 2009 by the FDA for our products currently under development. The orphan drug designation allowed us to claim increased federal tax credits for its research and development activities. We have $16.4 million of federal credit carryforwards of which $15.9 million relates to Orphan Drug Credit claims for 2009 through 2012. These federal credit carryforwards were fully provided with 100% valuation allowance.

We did not record income tax expense for the three and six month periods ended June 30, 2013. Our expected taxable income in 2013 will be offset by federal and state net operating losses and credits.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. GAAP. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Actual results could differ from those estimates.

Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. For additional information on our critical accounting policies, please refer to the information contained in Note 2 of the accompanying unaudited condensed consolidated financial statements and the Critical Accounting Policies and Estimates section of our Management's Discussion and Analysis of Financial Condition and Results of Operations included in Annual Report on Form 10-K/A for the year ended December 31, 2012.

In relation to our commercial launch of RAVICTI during the period ended March 31, 2013 and our acquisition of BUPHENYL on May 31, 2013, we implemented the following critical accounting policies and estimates:

Business Combination

We allocate the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The purchase price allocation process requires us to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Direct transaction costs associated with the business combination are expensed as incurred.

Accounts Receivable

Our trade accounts receivable are recorded net of product sales allowances for prompt-payment discounts, chargebacks and doubtful accounts. We estimate chargebacks and prompt-payment discounts based on contractual terms, historical trends and our expectations regarding the utilization rates for these programs.


Our inventories are stated at the lower of cost or market value with cost determined under the first-in-first-out (FIFO) cost method. Our inventories consist of raw materials, supplies, and work in process and finished goods. Subsequent to the FDA approval of RAVICTI on February 1, 2013, we began capitalizing inventories as the related costs were expected to be recoverable through the commercialization of the product. Prior to the FDA approval of RAVICTI, we recorded the costs incurred as research and development expenses in the condensed consolidated statements of operations. If information becomes available that suggest that our inventories may not be realizable, we may be required to expense a portion or all of the previously capitalized inventories.

The costs of our inventories consists mainly of third party manufacturing costs, associated compensation related costs of personnel indirectly involved in the manufacturing process and other overhead costs attributable to the manufacture of inventories.

Products that have been approved by the FDA or other regulatory authorities, such as RAVICTI are also used in clinical programs, to assess the safety and efficacy of the products for usage in diseases that have not been approved by the FDA or other regulatory authorities. The form of RAVICTI utilized for both commercial and clinical programs is identical and, as a result, the inventory has an "alternative future use". Raw materials and purchased drug product associated with clinical development programs are included in inventory and charged to research and development expense when the product enters the research and development process and no longer can be used for commercial purposes and, therefore, does not have an "alternative future use".

On May 31, 2013, we acquired BUPHENYL including inventory from Ucyclyd (see Note 4 to our unaudited condensed consolidated financial statements appearing elsewhere in this report). We recorded these inventories at fair value in the amount of $3.9 million on the acquisition date. We will expense the difference between the fair value and book value of inventory as that inventory is sold.

We evaluate for potential excess inventory by analyzing current and future product demand relative to the remaining product shelf life. We build demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance and patient usage. We classified inventory as current on the consolidated balance sheets when we expect inventory to be consumed for commercial use within the next 12 months.

Intangible Asset

We record intangible assets at acquisition cost less accumulated amortization and impairment. We amortize intangible assets with finite lives over their estimated useful lives. Our intangible asset pertains to BUPHENYL product rights acquired on May 31, 2013. We calculate the amortization of our intangible asset over its estimated useful life using the economic use method, which reflects the pattern that the economic benefits of the intangible asset is consumed as revenue is generated. The pattern of consumption of the economic benefits is estimated using the future projected cash flows of the intangible asset.

Impairment of Long-lived Assets

We review our property and equipment and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset class may not be recoverable. Recoverability is measured by comparing the carrying amount to the future net undiscounted cash flows that the assets are expected to generate. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value determined using projected discounted future net cash flows arising from the assets.

Revenue Recognition

We recognize revenue in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 605, Revenue Recognition, when the following criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred and risk of loss has passed; and the seller's price to the buyer is fixed or determinable and collectability is reasonably assured. We determine that persuasive evidence of an arrangement exists based on written contracts that define the terms of our arrangements. In addition, we determine that services have been delivered in accordance with the arrangement. We assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess collectability based primarily on the customer's payment history and on the creditworthiness of the customer.

Product Revenue

During the three month and six month period ended June 30, 2013, our product revenues represent sales of RAVICTI and BUPHENYL in the U.S. and a limited amount of BUPHENYL sales outside the U.S. We recognized revenue once all four revenue recognition criteria described above are met.

During the first quarter of 2013, we began distributing RAVICTI to two specialty pharmacies through a specialty distributor. The specialty pharmacies, then in turn dispense RAVICTI to patients in fulfillment of prescriptions. As RAVICTI is a new product, and our first commercial product, we could not reasonably assess potential product sales allowances at the time of sale to the specialty distributor. As a result, the price of RAVICTI was not deemed fixed or determinable. We deferred the recognition of revenues on product shipments of RAVICTI to the specialty distributor until the product was shipped to patients by the specialty pharmacies at which time our related product sales allowances could be reasonably estimated. In future periods, once we have sufficient historical information to reasonably estimate our product sales allowances, we will re-evaluate our revenue recognition policy to determine whether the Company has sufficient information to recognize revenue upon receipt of RAVICTI by the specialty distributor.

On May 31, 2013, we acquired BUPHENYL from Ucyclyd. We sell BUPHENYL in the United States to a specialty distributor, who in turn sells this product to retail pharmacies, hospitals and other dispensing organizations. We recognized revenue from BUPHENYL sales upon receipt by the specialty distributor. For product sales of BUPHENYL outside the United States, revenue is recognized once the product is accepted by the customer or once their acceptance period has expired whichever comes first.

We recognize revenue net of product sales allowances, including estimated rebates, chargebacks, prompt-payment discounts, returns, distribution service fees and Medicare Part D coverage gap reimbursements. Product shipping and handling costs are included in cost of sales.

Product Sales Allowances

We establish reserves for prompt-payment discounts, government and commercial rebates, product returns and chargebacks. Allowances relating to prompt-payment discounts and chargebacks are recorded at the time of revenue recognition, resulting in a reduction in product sales revenue and a decrease in trade . . .

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