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LPCN > SEC Filings for LPCN > Form 10-Q on 13-Nov-2013All Recent SEC Filings

Show all filings for LIPOCINE INC.

Form 10-Q for LIPOCINE INC.


13-Nov-2013

Quarterly Report


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

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes thereto and other financial information included elsewhere in this report. For additional context with which to understand our financial condition and results of operations, see the management discussion and analysis included in our Form S-1, filed with the SEC on August 29, 2013, as amended, as well as the financial statements and related notes contained therein.

On July 24, 2013, Marathon Bar Corp. ("Marathon Bar"), a Delaware corporation and MBAR Acquisition Corp. ("Merger Sub"), a wholly owned subsidiary of Marathon Bar, and Lipocine Operating Inc. ("Lipocine Operating"), a privately held company incorporated in Delaware, executed an Agreement and Plan of Merger ("Merger Agreement"). Pursuant to the Merger Agreement, Merger Sub merged with and into Lipocine Operatingand Lipocine Operating was the surviving entity. Additionally pursuant to the Merger Agreement, Marathon Bar changed its name to Lipocine Inc. The Merger is accounted for as a reverse-merger and recapitalization. Lipocine Operating is the acquirer for financial reporting purposes and Marathon Bar is the acquired company. Consequently, the assets and liabilities and the operations that are reflected in the historical financial statements prior to the Merger are those of Lipocine Operating and are recorded at the historical cost basis of Lipocine Operating, and the consolidated financial statements after completion of the Merger include the assets, liabilities and operations of Marathon Bar and Lipocine Operating ("Combined Company"), from the closing date of the Merger. Additionally all historical equity accounts of Lipocine Operating, including par value per share, share and per share numbers , have been adjusted to reflect the number of shares received in the Merger.

As used in the discussion below, "we," "our," and "us" refers to the historical financial results of Lipocine.

Forward Looking Statements

This section and other parts of this report contain forward-looking statements that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements may refer to such matters as anticipated financial performance, future revenues or earnings, business prospects, projected ventures, new products and services, anticipated market performance, and similar matters. Such words as "may", "will", "expect", "continue", "estimate", "project", and "intend" and similar terms and expressions are intended to identify forward looking statements. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part II, Item 1A (Risk Factors) of this Form 10-Q. Except as required by applicable law, we assume no obligation to revise or update any forward-looking statements for any reason.

Overview of Our Business

We are a specialty pharmaceutical company focused on applying our oral drug delivery technology for the development of pharmaceutical products in the area of men's and women's health. Our proprietary delivery technology is designed to improve patient compliance and safety through orally available treatment options. Our primary development programs are based on oral delivery solutions for poorly bioavailable drugs. We have a portfolio of proprietary product candidates designed to produce favorable pharmacokinetic characteristics and facilitate lower dosing requirements, bypass first-pass metabolism, reduce side effects, and eliminate gastrointestinal interactions that limit bioavailability. Our lead product LPCN 1021 is a Phase III ready oral testosterone replacement therapy ("TRT") product designed for convenient twice-a-day dosing. Additionally, we have two earlier stage product candidates in our pipeline, a next generation once-a-day oral testosterone therapy (LPCN 1111) and an oral product for the prevention of preterm birth (LPCN 1107).

We completed a successful Phase II study for LPCN 1021 that produced results in line with FDA guidelines for approval of TRT. The primary outcome of the trial, serum testosterone levels in the eugonadal range, was met and there were no significant adverse events or changes in serum cholesterol levels or liver enzymes. Lipocine presented the results of this study and a Phase III protocol synopsis to the FDA in November 2012 and obtained clear guidance on the requirements for a LPCN 1021 NDA filing, with no additional pre-clinical studies required. We intend to begin enrolling patients in the Phase III trial in the fourth quarter of 2013 or early 2014, with results expected in 2015.

We licensed LPCN 1021 to Solvay, in May 2009. Solvay was subsequently acquired by Abbott. We reacquired the rights to LPCN 1021 from Abbott in March 2012. All obligations under the prior license agreement have been completed except that Lipocine will owe Abbott a perpetual 1.5% royalty on net sales should Lipocine decide to use certain Solvay/Abbott formulations or a perpetual 1% royalty on net sales should Lipocine use data generated during the term of the Solvay/Abbott agreement in any regulatory filings for a product. Such royalties are limited to $1 million in the first two calendar years following product launch, after which period there is not a cap on royalties and no maximum aggregate amount. If generic versions of any such product are introduced, then royalties are reduced by 50%.


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LPCN 1111 is a next-generation, novel ester prodrug of testosterone which uses the Lip'ral technology to enhance solubility and improve systemic absorption. A Phase I single dose randomized, open label, crossover study in 8 postmenopausal women has been completed and the pharmacokinetics suggested feasibility of either once-daily dosing or twice daily dosing with high Cavg. We recently completed a pre-IND meeting with the FDA in the fourth quarter of 2013 in which we broadly discussed the requirements for an NDA filing for LPCN 1111. The next steps in the development for this program include a Phase I/II proof of concept study in hypogonadal men.

We believe LPCN 1107 has the potential to become the first oral hydroxyprogesterone caproate product indicated for the prevention of preterm birth in women with a prior history of at least one preterm birth. The product has completed a 28-day repeat dose toxicity study in dogs. A pre-IND meeting has also been completed with the FDA, paving the way for a proof-of-concept Phase I/II study in pregnant women with a history of preterm birth.

We have not generated any revenues from product sales. To date, we have funded our operations primarily through the private sale of equity securities and convertible debt and through up-front payments, research funding and milestone payments from our license and collaboration arrangements. We do not expect to generate revenue from product sales unless and until we obtain regulatory approval of LPCN 1021 or other products.

We have incurred losses in most years since our inception. As of September 30, 2013, we had an accumulated deficit of $43.5 million. Income and losses fluctuate from quarter to quarter and from year to year, primarily depending on the timing of recognition of revenues from our license and collaboration agreements. Our net loss was $3.5 million for the three months ended September 30, 2013, compared to our net loss of $1.0 million for the three months ended September 30, 2012. Our net loss was $6.2 million for the nine months ended September 30, 2013 compared to net income of $4.8 million for the nine months ended September 30, 2012. The net income in 2012 was primarily due to the recognition of deferred revenue at the time of the termination of our license agreement with Abbott. Substantially all of our operating losses resulted from expenses incurred in connection with our product 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 as we:

manufacture registration batches of LPCN 1021;

complete our pivotal Phase III trial and other pharmacokinetic studies of LPCN 1021 and, if these trials are successful, prepare and file our NDA for LPCN 1021;

conduct further clinical development of our other product candidates, including LPCN 1111 and LPCN 1107;

continue our research efforts;

maintain, expand and protect our intellectual property portfolio; and

provide general and administrative support for our operations.

To fund future long term operations we will need to raise additional capital. The amount and timing of future funding requirements will depend on many factors, including the timing and results of our ongoing development efforts, the potential expansion of our current development programs, potential new development programs and related general and administrative support. We anticipate that we will seek to fund our operations through public or private equity or debt financings or other sources, such as potential license and collaboration agreements. We cannot be certain that anticipated additional financing will be available to us on favorable terms, or at all. Although we have previously been successful in obtaining financing through our license and collaboration agreements and private equity securities offerings, there can be no assurance that we will be able to do so in the future.

Financial Operations Overview

Revenue

To date, we have not generated any revenues from product sales and do not expect to do so for a number of years. Revenues to date have been generated substantially from license fees, milestone payments and research support from our licensees. Since our inception through September 30, 2013, we have generated $27.5 million in revenue under our various license and collaboration arrangements and from government grants. We do not anticipate significant revenue from any license arrangements in the foreseeable future. We may never generate revenues from LPCN 1021 or any of our other clinical or preclinical development programs or licensed products, as we may never succeed in obtaining regulatory approval or commercializing any of these product candidates.


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Research and Development Expenses

Research and development expenses consist primarily of salaries, benefits, stock-based compensation and related personnel costs, fees paid to external service providers such as contract research organizations and contract manufacturing organizations, contractual obligations for clinical development, clinical sites, manufacturing and scale-up for late-stage clinical trials, formulation of clinical drug supplies, and expenses associated with regulatory submissions. Research and development expenses also include an allocation of indirect costs, such as those for facilities, office expense, travel, and depreciation of equipment based on the ratio of direct labor hours for research and development personnel to total direct labor hours for all personnel. We expense research and development expenses as incurred. Since our inception, we have spent approximately $47.6 million in research and development expenses through September 30, 2013.

We expect our research and developments costs for LPCN 1021 to increase substantially as we conduct our pivotal Phase III trial, conduct other pharmacokinetic studies, manufacture registration batches and if appropriate, file an NDA. We believe it will cost approximately $22 million to complete this process. However, these expenditures are subject to numerous uncertainties regarding timing and cost to completion.

Completion of our pivotal Phase III trial may take longer than currently estimated or the FDA may require additional clinical trials or non-clinical studies. The cost of clinical trials may vary significantly over the life of a project as a result of uncertainties in clinical development, including, among others:

the number of sites included in the trials;

the length of time required to enroll suitable subjects;

the duration of subject follow-ups;

the length of time required to collect, analyze and report trial results;

the cost, timing and outcome of regulatory review;

potential changes by the FDA in clinical trial and NDA filing requirements for testosterone replacement therapies; and

unanticipated safety issues that may prolong the Phase III trial

We also expect to incur significant manufacturing costs to prepare registration batches of finished product and customary regulatory costs associated with the preparation and filing of our NDA, if and when submitted, which will be significant. However, these expenditures are subject to numerous uncertainties regarding timing and cost to completion, including, among others:

the costs, timing and outcome of our other pharmacokinetic studies and other development activities of LPCN 1021;

our dependence on third-party manufacturers for the production of clinical trial materials and satisfactory finished product for registration;

the costs and timing of regulatory submission for LPCN 1021 and the outcome of regulatory reviews;

the potential for future license arrangements for LPCN 1021, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our future plans and capital requirements; and

the effect on our product development activities of action taken by the FDA or other regulatory authorities.

A change of outcome for any of these variables with respect to the development of LPCN 1021 could mean a significant change in the costs and timing associated with these efforts.


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Summary of Research and Development Expense

Our research and development efforts have primarily been focused on LPCN 1021,
and until March 2012, all research and development costs related to that product
candidate were incurred by Abbott. However, we incur significant costs for our
other product candidates and programs. The following table summarizes our
research and development expenses:



                                              Three months ended               Nine months ended
                                                September 30,                    September 30,
                                             2013            2012            2013             2012
External service provider costs:
LPCN 1021                                 $   938,427      $  10,360      $   993,684      $    15,780
LPCN 1111                                       1,530        104,412           14,697          181,003
LPCN 1107                                          -           7,215               -            92,807
Other product candidates                          182          7,025            1,805           19,644

Total external service provider costs         940,139        129,012        1,010,186          309,234
Internal personnel costs                      538,872        325,033        1,331,769        1,044,522
Other research and development costs           89,958         93,776          315,981          342,672

Total research and development            $ 1,568,969      $ 547,821      $ 2,657,936      $ 1,696,428

External service provider costs under a collaborative product development agreement are recorded net of reimbursement. No amounts were reimbursed under the agreement during the three months ended September 30, 2013 and 2012. A total of $468,348 and $397,852 was reimbursed under the agreement during the nine months ended September 30, 2013 and 2012 and recorded net in research and development expense. In July 2013, we assigned the collaborative agreement to an affiliated entity as described in Note 10 of the "Notes to Condensed Consolidated Financial Statements".

Given the early stage of clinical development and the significant risks and uncertainties inherent in the clinical development, manufacturing and regulatory approval process, we are unable to estimate with any certainty the time or cost to complete the development of LPCN 1111, LPCN 1107 and other product candidates. Clinical development timelines, the probability of success and development costs can differ materially from expectations and results from our clinical trials may not be favorable. If we are successful in progressing LPCN 1111, LPCN 1107 or other product candidates into later stage development, we will require additional capital. The amount and timing of our future research and development expenses for these product candidates will depend on the preclinical and clinical success of both our current development activities and potential development of new product candidates, as well as ongoing assessments of the commercial potential of such activities.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation related to our executive, finance, business development and support functions. Other general and administrative expenses include rent and utilities, travel expenses and professional fees for auditing, tax and legal services.

They also include expenses for the cost of preparing, filling and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims.

We expect that general and administrative expenses will increase materially as we operate as a public company. These increases will likely include salaries and related expenses, legal and consulting fees, accounting and audit fees, director fees, increased directors' and officers' insurance premiums, fees for investor relations services and enhanced business and accounting systems and other costs. In addition, if our pivotal Phase III trial of LPCN 1021 is successful and we then prepare and file our NDA for LPCN 1021, we expect general and administrative expenses to increase as we incur costs of pre-commercialization and, potentially, commercialization activities.

Reverse Merger Costs

Reverse merger costs relate to external expenses associated with our reverse merger with Marathon Bar on July 24, 2013. Reverse merger costs consist primarily of professional fees for accounting, legal, printing and transfer agent services. Additionally reverse merger costs include the cost related to the purchase of the Marathon Bar shell company.

Other Income, Net

Other income, net consists primarily of interest earned on our cash and cash equivalents.


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Results of Operations

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

The following table summarizes our results of operations for the three months
ended September 30, 2013 and 2012:



                                              Three months ended
                                                 September 30,
                                              2013           2012          Variance
     License and milestone revenue         $        -      $      -       $        -
     Research revenue                               -             -                -
     Research and development expenses       1,568,969       547,821        1,021,148
     General and administrative expenses     1,181,894       467,180          714,714
     Reverse merger costs                      794,902            -           794,902
     Other income, net                          15,084         2,295           12,789
     Income tax benefit (expense)               55,342          (171 )         55,513

Research and Development Expenses

The increase in research and development expenses in the three months ended September 30, 2013 was primarily due to an increase in external contract manufacturing costs related to our product candidates of $821,000 and higher personnel costs of $214,000 primarily due to the following: bonuses awarded to employees totaling $194,000; an increase of $36,000 in stock-based compensation due to the modification of stock options in January 2013, acceleration of stock-compensation in 2013 on performance based awards due to the probability of achieving the milestone and new stock grants; overall salary increases of research and development employees that occurred during the quarter; offset by a reduction in the total number of research and development employees between 2012 and 2013.

General and Administrative Expenses

The increase in general and administrative expenses in the three months ended September 30, 2013 was primarily due to an increase in professional fees, including legal, accounting, audit and investor relation services, of $316,000 in preparation for and becoming a public company and completing the Merger which occurred in July 2013; higher personnel costs of $354,000 primarily due to the following: bonuses awarded to employees and directors totaling $228,000; an increase of $88,000 in stock-based compensation due to the modification of stock options in January 2013, acceleration of stock-compensation in 2013 on performance based awards due to the probability of achieving the milestone and new stock grants; and, overall salary increases of general and administrative employees that occurred during the quarter.

Reverse Merger Costs

The increase in reverse merger costs relates to the Merger with Marathon Bar which closed on July 24, 2013, and is comprised of $290,000 for the cost of the Marathon Bar shell, $366,000 in legal services, $92,000 in accounting services, $38,000 in printer fees and $9,000 in other miscellaneous expenses.

Other Income, Net

The increase in other income, net primarily reflects increased interest earned on a larger balance in cash and cash equivalents between periods as a result of an offering of common stock in July 2013.

Income Tax Benefit (Expense)

The decrease in income tax expense relates to a reversal of accrued income taxes payable in 2013 due to the reversal of an uncertain tax position taken by us in prior periods.


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Comparison of the Nine Months Ended September 30, 2013 and 2012

The following table summarizes our results of operations for the nine months
ended September 30, 2013 and 2012:



                                              Nine months ended
                                                September 30,
                                            2013            2012            Variance
   License and milestone revenue         $        -      $ 7,523,437      $ (7,523,437 )
   Research revenue                               -          186,233          (186,233 )
   Research and development expenses       2,657,936       1,696,428           961,508
   General and administrative expenses     2,601,557       1,256,691         1,344,866
   Reverse merger costs                    1,011,630              -          1,011,630
   Other income, net                          16,295           8,436             7,859
   Income tax benefit (expense)               55,048          (1,581 )          56,629

License and Milestone Revenue

The decrease in license and milestone revenue in the nine months ended September 30, 2013 is primarily due to the termination of our license and collaboration agreement with Abbott in March 2012. The entire balance of deferred revenue was recognized in the first quarter of 2012 as we no longer had any future performance obligations under the agreement.

Research Revenue

The decrease in research revenue in the nine months ended September 30, 2013 is primarily due to the termination of our license and collaboration agreement with Abbott in March 2012.

Research and Development Expenses

The increase in research and development expenses in the nine months ended September 30, 2013 was primarily due to a increase in external contract manufacturing costs related to our product candidates of $839,000 and higher personnel costs of $293,000, primarily due to the following: bonuses awarded to employees totaling $194,000; an increase of $215,000 in stock-based compensation due to the modification of stock options in January 2013, acceleration of stock-compensation in 2013 on performance based awards due to the probability of achieving the milestone and new stock grants; overall salary increases of research and development employees; offset by a reduction of $100,000 in personnel costs due to the total number of research and development employees decreasing between 2012 and 2013. The increase in research and development expenses in the nine months ended September 30, 2013 was partially offset by a decrease in external clinical related research and development expenses of $173,000.

General and Administrative Expenses

The increase in general and administrative expenses in the nine months ended September 30, 2013 was primarily due to an increase in professional fees, including legal, accounting, audit and investor relation services, of $631,000 in preparation for and becoming a public company and completing the Merger which occurred in July 2013; higher personnel costs of $690,000 primarily due to the following: bonuses awarded to employees and directors totaling $228,000; an increase of $454,000 in stock-based compensation due to the modification of stock options in January 2013, acceleration of stock-compensation in 2013 on performance based awards due to the probability of achieving the milestone and new stock grants; and, overall salary increases of general and administrative employees.

Reverse Merger Costs

The increase in reverse merger costs in the nine months ended September 30, 2013 relates to the Merger with Marathon Bar which closed on July 24, 2013 and is comprised of $340,000 for the cost of the Marathon Bar shell, $527,000 in legal services, $98,000 in accounting services, $38,000 in printer fees and $9,000 in other miscellaneous expenses.

Other Income, Net

The increase in other income, net primarily reflects increased interest earned on a larger balance in cash and cash equivalents between periods as a result of an offering of common stock in July 2013.


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Income Tax Benefit (Expense)

The decrease in income tax expense relates to a reversal of accrued income taxes payable in 2013 due to the reversal of an uncertain tax position taken by us in prior periods.

Liquidity and Capital Resources

Since our inception, our operations have been primarily financed through private sales of our equity and payments received under our license and collaboration arrangements. We have devoted our resources to funding research and development . . .

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