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RGLS > SEC Filings for RGLS > Form 10-Q on 14-Nov-2013All Recent SEC Filings

Show all filings for REGULUS THERAPEUTICS INC.

Form 10-Q for REGULUS THERAPEUTICS INC.


14-Nov-2013

Quarterly Report


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

The interim unaudited condensed financial statements and this Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2012 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations for Regulus Therapeutics Inc., or we, us, our, or the Company, both of which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 19, 2013. Past operating results are not necessarily indicative of results that may occur in future periods.

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q may contain "forward-looking statements" within the meaning of the federal securities laws made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under Part II, Item 1A, "Risk Factors" in this quarterly report on Form 10-Q. Except as required by law, we assume no obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise. These statements, which represent our expectations or beliefs concerning various future events, may contain words such as "may," "will," "expect," "anticipate," "intend," "plan," "believe," "estimate" or other words indicating future results. Such statements may include, but are not limited to, statements concerning the following:

the initiation, cost, timing, progress and results of our research and development activities, preclinical studies and future clinical trials, including our expected timeline for nominating clinical development candidates under our strategic alliances and our expected timeline for filing our first applications with regulatory authorities and potentially commencing Phase 1 clinical trials;

our ability to obtain and maintain regulatory approval of our future product candidates, and any related restrictions, limitations, and/or warnings in the label of an approved product candidate;

our ability to obtain funding for our operations;

our plans to research, develop and commercialize our future product candidates;

our strategic alliance partners' election to pursue development and commercialization;

our ability to attract collaborators with development, regulatory and commercialization expertise;

our ability to obtain and maintain intellectual property protection for our future product candidates;

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

our ability to successfully commercialize our future product candidates;

the rate and degree of market acceptance of our future product candidates;


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our ability to develop sales and marketing capabilities, whether alone or with potential future collaborators;

regulatory developments in the United States and foreign countries;

the performance of our third-party suppliers and manufacturers;

the success of competing therapies that are or become available;

the loss of key scientific or management personnel;

our expectations regarding the time during which we will be an emerging growth company under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act;

our use of the proceeds from our initial public offering and concurrent private placement or subsequent public offerings; and

the accuracy of our estimates regarding expenses, future revenues, capital requirements and need for additional financing.

OVERVIEW

We are a biopharmaceutical company focused on discovering and developing first-in-class drugs that target microRNAs to treat a broad range of diseases. We were formed in 2007 when Alnylam, and Isis contributed significant intellectual property, know-how and financial and human capital to pursue the development of drugs targeting microRNAs pursuant to a license and collaboration agreement. microRNAs are recently discovered, naturally occurring ribonucleic acid, or RNA, molecules that play a critical role in regulating key biological pathways. Scientific research has shown that the improper balance, or dysregulation, of microRNAs is directly linked to many diseases. We believe we have assembled the leading position in the microRNA field, including expertise in microRNA biology and oligonucleotide chemistry, a broad intellectual property estate, key opinion leaders and disciplined drug discovery and development processes. We refer to these assets as our microRNA product platform. We are using our microRNA product platform to develop chemically modified, single-stranded oligonucleotides that we call anti-miRs. We use these anti-miRs to modulate microRNAs and by doing so return diseased cells to their healthy state. We are pursuing several microRNA targets and are focusing our proprietary efforts in oncology and orphan diseases. We believe microRNAs may be transformative in the field of drug discovery and that anti-miRs may become a new and major class of drugs with broad therapeutic application much like small molecules, biologics and monoclonal antibodies.

We are currently optimizing anti-miRs in several distinct programs, both independently and with our strategic alliance partners, AstraZeneca AB, or AstraZeneca, GlaxoSmithKline plc, or GSK, and Sanofi. We also have a collaboration agreement with Biogen Idec MA Inc., or Biogen Idec, to evaluate the potential use of microRNA signatures as a biomarker for human patients with multiple sclerosis, or MS. Under these strategic alliances, we are eligible to receive up to approximately $1.3 billion in milestone payments upon successful commercialization of microRNA therapeutics for the programs contemplated by our agreements. These payments include up to $42.0 million upon achievement of preclinical and investigational new drug application, or IND, milestones, up to $272.0 million upon achievement of clinical development milestones, up to $305.0 million upon achievement of regulatory milestones and up to $670.0 million upon achievement of commercialization milestones.

We are currently executing on our 'Road to the Clinic' Strategy which set forth certain corporate goals that seek to advance our microRNA therapeutic pipeline toward the clinic. Specifically, we set the goal of nominating two microRNA candidates for clinical development in 2013, be positioned to file our first applications with regulatory authorities by the first half of 2014 and maintain a strong year-end cash position to support these goals. In May 2013, we announced our first clinical candidate, RG-101, for which we have full ownership and commercial rights. RG-101 is a GalNAc-conjugated anti-miR, which targets microRNA-122, for the treatment of patients with chronic hepatitis C virus infection, or HCV. We expect to file our first application with regulatory authorities for RG-101 in the near term and potentially commence Phase 1 clinical trials of RG-101 in early 2014. Additionally, our strong financial position continues to support these stated goals and we continue to expect to end 2013 with approximately $110 million in cash, cash equivalents and short-term investments. Lastly, we anticipate that we will nominate a second microRNA candidate for clinical development by the end of 2013, which we expect may come from our microRNA-21 ("miR-21") fibrosis program.

On July 22, 2013, we completed a public offering whereby we sold 5,175,000 shares of common stock at $9.50 per share and received net proceeds of $45.8 million, after deducting underwriting discounts, commissions and other offering expenses. On October 10, 2012, we completed our initial public offering whereby we issued and sold 11,250,000 shares of common stock at a public offering price of $4.00 per share, resulting in net proceeds to us of approximately $39.5 million. Concurrently with the completion of our initial public offering on October 10, 2012, $5.0 million of outstanding principal plus accrued interest of $0.8 million underlying a convertible note that we issued to GSK in April 2008 and amended and restated in July 2012, together with $5.0 million of outstanding principal plus accrued interest of $25,000 underlying a convertible note that we issued to Biogen Idec in August 2012, was automatically converted upon the closing of our initial public offering into an aggregate of 2,703,269 shares of our common stock. Upon the closing of our initial public offering, all shares of our outstanding convertible preferred stock automatically converted into an aggregate of 13,699,999 shares of common stock. On October 23, 2012, the underwriters for our initial public offering partially exercised an over-allotment option to purchase 1,480,982 shares of our common stock at $4.00 per share, resulting in net proceeds to us of approximately $5.5 million.


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Recent Developments

In November 2013, we presented positive new preclinical data demonstrating that miR-21 plays an important role in Alport Syndrome at the American Society of Nephrology's Kidney Week 2013 meeting. In a poster presentation, we and Genzyme, a Sanofi company, presented new preclinical data demonstrating that miR-21 plays an important role in the disease progression of Alport Syndrome in collagen 4A3 deficient mice. Treatment with an anti-miR-21 candidate significantly improved renal function, significantly reversed regulated genes and pathways associated with renal pathology, and increased the lifespan of the mice by 20 percent.

In November 2013, we presented positive data on RG-101, a GalNAc-conjugated anti-miR targeting miR-122 for the treatment of HCV, in a late-breaking poster at the 64thAnnual American Association for the Study of Liver Diseases from preclinical studies evaluating RG-101 for in vitro and in vivo potency, pharmacokinetic/pharmacodynamics, toxicology and safety pharmacology and inhibition of HCV replication. Pharmacologic potency of RG-101 was significantly enhanced by approximately 20 fold in vivo in both mice and non-human primates, relative to the unconjugated oligonucleotide of RG-101.In addition to the potency studies, we tested the efficacy of RG-101 to reduce HCV viral load titer in a human chimeric liver mouse model infected with HCV and observed up to a 2 log reduction in HCV viral load titer with a single dose, which is similar to that observed for oral direct-acting antivirals as monotherapy in this mouse model. The duration of action observed for RG-101 supports the potential for a once-a-month dosing regimen. Additionally, RG-101 has demonstrated an excellent preclinical safety profile to date, although additional preclinical toxicology and safety pharmacology studies are currently ongoing.

In October 2013, we announced the selection of an undisclosed oncology target by AstraZeneca under the strategic alliance to discover, develop, and commercialize microRNA therapeutics. We and AstraZeneca continue to collaborate on three exclusive microRNA targets in cardiovascular and metabolic diseases and oncology.

FINANCIAL OPERATIONS OVERVIEW

Revenues

Our revenues generally consist of upfront payments for licenses or options to obtain licenses in the future, research and development funding and milestone payments under strategic alliance agreements.

In the future, we may generate revenue from a combination of license fees and other upfront payments, research and development payments, milestone payments, product sales and royalties in connection with strategic alliances. We expect that any revenue we generate will fluctuate from quarter-to-quarter as a result of the timing of our achievement of preclinical, clinical, regulatory and commercialization milestones, if at all, the timing and amount of payments relating to such milestones and the extent to which any of our products are approved and successfully commercialized by us or our strategic alliance partners. If our strategic alliance partners do not elect or otherwise agree to fund our development costs pursuant to our strategic alliance agreements, or we or our strategic alliance partners fail to develop product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenues, and our results of operations and financial position would be adversely affected.

Research and development expenses

Research and development expenses consist of costs associated with our research activities, including our drug discovery efforts, the preclinical development of our therapeutic programs, and our microRNA biomarker program. Our research and development expenses include:

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

external research and development expenses incurred under arrangements with third parties, such as contract research organizations, or CROs, contract manufacturing organizations, or CMOs, consultants and our scientific advisory board;

license fees; and

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

We expense research and development costs as incurred. We account for nonrefundable advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been received.

To date, we have conducted research on many different microRNAs with the goal of understanding how they function and identifying those that might be targets for therapeutic modulation. We are pursuing several microRNA targets and focusing our proprietary efforts in oncology and orphan diseases. Our organization is structured to allow for the rapid deployment and shifting of resources to focus on the best targets based on our ongoing research. As a result, in the early phase of our development, our research and development costs are not tied to any specific target. However, we are currently spending the vast majority of our research and development resources on our lead development programs.

Since our conversion to a corporation in January 2009, we have grown from 15 research and development personnel to 56 and have incurred approximately $88.6 million in research and development expenses through September 30, 2013.

We expect our research and development expenses to increase for the foreseeable future as we advance our research programs toward the clinic and initiate clinical trials. The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time consuming. We or our strategic alliance partners may never succeed in achieving marketing approval for any of our product candidates. The probability of success for each product candidate may be affected by numerous factors, including preclinical data, clinical data, competition, manufacturing capability and commercial viability. Under our strategic alliance with GSK, we may be responsible for the development of product candidates through clinical proof-of-concept, depending on the time at which GSK may choose to exercise its option to obtain an exclusive license to develop, manufacture and commercialize product candidates on a program-by-program basis. Under our strategic alliance agreement with AstraZeneca, we are responsible for certain research and development activities with respect to each alliance target under a mutually agreed upon research and development plan until the earlier of IND approval in a major market or the end of the research term under the agreement. We also have several independent programs for which we are responsible for all of the research and development costs, unless and until we partner any of these programs in the future.


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Most of our product development programs are at an early stage, and successful development of future product candidates from these programs is highly uncertain and may not result in approved products. Completion dates and completion costs can vary significantly for each future product candidate and are difficult to predict. We anticipate we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to our ability to maintain or enter into new strategic alliances with respect to each program or potential product candidate, the scientific and clinical success of each future product candidate, as well as ongoing assessments as to each future product candidate's commercial potential. We will need to raise additional capital and may seek additional strategic alliances in the future in order to advance our various programs.

General and administrative expenses

General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation, related to our executive, finance, legal, business development and support functions. Other general and administrative expenses include allocated facility-related costs not otherwise included in research and development expenses, travel expenses and professional fees for auditing, tax and legal services. We expect that general and administrative expenses will increase in the future as we expand our operating activities and incur additional costs associated with being a publicly-traded company. These increases will likely include legal fees, accounting fees, directors' and officers' liability insurance premiums and fees associated with investor relations.

Other income (expense), net

Other income (expense) consists primarily of interest income and expense, changes in convertible note payable valuation each reporting period, and on occasion income or expense of a non-recurring nature. We earn interest income from interest-bearing accounts and money market funds for cash and cash equivalents and marketable securities, such as interest-bearing bonds, for our short-term investments. Interest expense has historically represented interest payable under convertible notes payable and equipment and tenant improvement financing arrangements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the revenues and expenses incurred during the reported periods. We believe that the estimates, assumptions and judgments involved in the accounting policies described in Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. There were no material changes to our critical accounting policies and estimates during the quarter ended September 30, 2013.

RESULTS OF OPERATIONS

The following table summarizes our results of operations for the periods
indicated (in thousands):



                                                  Three months ended            Nine months ended
                                                    September 30,                 September 30,
                                                 2013            2012           2013          2012
Revenue under strategic alliances              $   6,118       $  2,809       $ 14,115      $  9,462
Research and development expenses                  7,106          5,248         21,710        14,735
General and administrative expenses                1,917          1,093          5,545         2,998
Loss on extinguishment of debt                        -          (1,738 )           -         (1,738 )
Gain (loss) from changes in valuation of
convertible note payable                             671           (331 )       (3,787 )        (331 )

Revenue under strategic alliances

Our revenues are generated from ongoing strategic alliance and collaborations, and generally consist of upfront payments for licenses or options to obtain licenses in the future, research and development funding and milestone payments. The following table summarizes our total revenues for the periods indicated (in thousands):


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                                                     Three months ended           Nine months ended
                                                       September 30,                September 30,
                                                     2013           2012           2013         2012
Sanofi                                            $    5,422       $ 2,500      $   10,828     $ 7,530
GSK                                                      144           186           1,634       1,809
AstraZeneca                                              465            94           1,394          94
Biogen Idec                                               87            29             259          29

Total net revenues from research collaborators    $    6,118       $ 2,809      $   14,115     $ 9,462

Revenue under strategic alliances were $6.1 million and $14.1 million for the three and nine months ended September 30, 2013, compared to $2.8 million and $9.5 million for the same periods in 2012.

In June 2013, the research term expired under the Sanofi alliance, upon which we and Sanofi entered into an option agreement pursuant to which we granted Sanofi an exclusive right to negotiate the co-development and commercialization of certain of our unencumbered microRNA programs and we were granted the exclusive right to negotiate with Sanofi for co-development and commercialization of certain miR-21 anti-miRs in oncology and Alport Syndrome. These options expire in December 2013, subject to a 30-day extension in certain circumstances. In addition, we agreed to continue specified research on the miR-21 programs during the option period. Upon the expiration of the research term and subsequent option agreement, we re-evaluated our estimated period of performance and are amortizing the remaining deferred revenue of $10.1 million associated with the initial upfront payment of $25.0 million ratably from June 2013 until the expiration of the option period in December 2013. As a result of the change in our estimated period of performance in June 2013, revenue recognized from the amortization of the upfront payment increased by $3.6 million and $3.9 million in the three and nine months ended September 30, 2013, compared to the three and nine months ended September 30, 2012.

In June 2013, the product development and commercialization agreement with GSK was amended to state that RG-101, and other formulations thereof, will be developed by us independently of our alliance with GSK for the treatment of chronic HCV infection. As a result, we accelerated the remaining unamortized deferred revenue of $1.1 million associated with the upfront payment from the February 2010 amendment that expanded our agreement with GSK to include potential microRNA therapeutics for the treatment of HCV, due to the completion of our remaining performance obligations. As such, revenue of $0.1 million and $1.6 million was recognized for the three and nine months ended September 30, 2013.

In June 2012, we amended our product development and commercialization agreement with GSK to extend the target selection period for the fourth collaboration target under the agreement. As a result of the extension of the target selection period, we extended our estimated period of performance for the then remaining deferred revenue to approximately eight years, which represented our new estimated performance period under the amended agreement. Revenue of $0.2 million and $1.8 million was recognized for the three and nine months ended September 30, 2012.

In August 2012, we entered into a strategic alliance and concurrent Common Stock Purchase Agreement, or CPSA, with AstraZeneca. The strategic alliance included an upfront payment of $3.0 million and is being amortized over an estimated performance period of 48 months, which resulted in approximately $0.2 million and $0.6 million for the three and nine months ended September 30, 2013. In October 2012, pursuant to the CSPA, we sold AstraZeneca 6,250,000 shares of our common stock at a price per share of $4.00. Accounting guidance for multiple element arrangements contains a presumption that separate contracts negotiated and/or entered into at or near the same time with the same entity were negotiated as a package and should be evaluated as a single agreement. We valued the discount applied to the shares of common stock due to the one-year restriction. Based upon restricted stock studies of similar duration and a Black-Scholes valuation to measure the lack of marketability discount, $4.3 million was attributed to the collaboration and license agreement, which is being amortized over the estimated period of performance of the collaboration. As such, revenue of $0.3 million and $0.8 million was recognized for the three and nine months ended September 30, 2013.

In August 2012, we entered into a collaboration and license agreement with Biogen Idec, which included an upfront payment of $0.8 million. We are recognizing revenue related to the upfront payment over our estimated period of performance, which is approximately two years. As such, revenue of $0.1 million and $0.3 million was recognized for the three and nine months ended September 30, 2013.

Research and development expenses

Research and development expenses were $7.1 million and $21.7 million for the three and nine months ended September 30, 2013, respectively, compared to $5.2 million and $14.7 million for the same periods in 2012. The increase was attributable to an expansion of our research and development personnel and increase in IND-enabling activities for RG-101. We expect our research and development expenses to increase over the coming quarters to the extent we commence clinical studies and initiate additional IND-enabling activities.


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General and administrative expenses

General and administrative expenses were $1.9 million and $5.5 million for the three and nine months ended September 30, 2013, respectively, compared to $1.1 million and $3.0 million for the same periods in 2012. The increase was primarily attributable to an increase in headcount, incremental operating expenses and other costs associated with being a public reporting company.

Loss on extinguishment of debt

In July 2012, we amended and restated our $5.0 million convertible promissory note originally issued in February 2010 to GSK, or the 2010 GSK Note, which resulted in a debt extinguishment for accounting purposes. As a result, we recognized a $1.7 million loss on extinguishment of debt in the three and nine months ended September 30, 2012.

Loss from valuation of convertible note payable

The amended and restated 2010 GSK Note provided for a rollover of the 2010 GSK Note into a new promissory note effective as of the closing date of a qualified initial public offering, or the Post-IPO GSK Note. We used a third party valuation firm to value the Post-IPO GSK Note at September 30, 2013 and 2012. Changes in the fair value of the Post-IPO GSK Note are recorded in non-operating . . .

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