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PSDV > SEC Filings for PSDV > Form 10-Q on 12-Feb-2014All Recent SEC Filings

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Form 10-Q for PSIVIDA CORP.


12-Feb-2014

Quarterly Report


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

Note Regarding Forward-Looking Statements

Various statements made in this Quarterly Report on Form 10-Q are forward-looking and involve risks and uncertainties. All statements that address activities, events or developments that we intend, expect or believe may occur in the future are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. All statements other than statements of current or historical facts are forward-looking statements, including, without limitation, any expectations of revenues, expenses, cash flows, earnings or losses from operations, capital or other financial items; any statements of the plans, strategies and objectives of management for future operations; any plans or expectations with respect to product research, development and commercialization; any other statements of expectations, plans, intentions or beliefs; and any statements of assumptions underlying any of the foregoing. We often, although not always, identify forward-looking statements by using words or phrases such as "likely", "expect", "intend", "anticipate", "believe", "estimate", "plan", "project", "forecast" and "outlook".

The following are some of the factors that could cause actual results to differ materially from the anticipated results or other expectations expressed, anticipated or implied in our forward-looking statements: uncertainties with respect to: Alimera's ability to finance, achieve additional marketing approvals, obtain adequate pricing and reimbursement for, successfully commercialize and achieve market acceptance of, and generate revenues to pSivida from, ILUVIEN for DME in the EU; Alimera's ability to obtain regulatory approval for, and if approved, to finance, successfully commercialize and achieve market acceptance of, and generate revenues to pSivida from, ILUVIEN for DME in the U.S.; our ability to finance, complete and achieve a successful outcome for Phase III trials for, and file and achieve marketing approvals for, Medidur for posterior uveitis, including achieving acceptable risk-to-benefit and safety profiles in light of the CRL for ILUVIEN; initiation, financing and success of Latanoprost Product Phase II trials and any exercise by Pfizer of its option; ability of Tethadur to deliver proteins, peptides and other large biologic molecules successfully; ability to develop product candidates and products and potential related collaborations; initiation and completion of clinical trials and obtaining regulatory approval of product candidates; continued sales of Retisert; adverse side effects; ability to attain profitability; ability to obtain additional capital; further impairment of intangible assets; fluctuations in operating results; decline in royalty income; ability to, and to find partners to, develop and market products; termination of license agreements; competition and other developments affecting sales of products; market acceptance; protection of intellectual property and avoiding intellectual property infringement; retention of key personnel; product liability; consolidation in the pharmaceutical and biotechnology industries; compliance with environmental laws; manufacturing risks; risks and costs of international business operations; credit and financial market conditions; legislative or regulatory changes; volatility of stock price; possible dilution; absence of dividends; and other factors described in our filings with the SEC. You should read and interpret any forward-looking statements together with these risks. Should known or unknown risks materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected in the forward-looking statements. You should bear this in mind as you consider any forward-looking statements.

Our forward-looking statements speak only as of the date on which they are made. We do not undertake any obligation to publicly update or revise our forward-looking statements even if experience or future changes makes it clear that any projected results expressed or implied in such statements will not be realized.

Our Business

We develop tiny, sustained-release products designed to deliver drugs and biologics at a controlled and steady rate for weeks, months or years. Using our core technology platforms, Durasert and BioSilicon, we are focused on treatment of chronic diseases of the back of the eye and are also exploring applications outside ophthalmology. We have developed three of the four sustained-release products for treatment of retinal diseases that have been approved in the U.S. or EU, and our lead development product began a Phase III clinical trial in the quarter ended June 2013. Our strategy includes developing products independently while continuing to leverage our technology platforms through collaborations and license agreements.

Medidur, our lead development product, is an injectable, sustained-release micro-insert designed to provide treatment of posterior uveitis over a period of up to three years. We commenced the first of two planned pivotal


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Phase III clinical trials for Medidur in the quarter ended June 2013. Medidur uses the same Durasert micro-insert used in ILUVIEN and delivers a lower dose of the same drug as our FDA-approved Retisert for posterior uveitis. We are developing Medidur independently.

ILUVIEN, our lead licensed product, is an injectable, sustained-release micro-insert that provides treatment over a period of up to three years of vision impairment associated with chronic DME. ILUVIEN is licensed to Alimera, and we are entitled to a share of the net profits less certain net losses (as defined) from Alimera's sales of ILUVIEN for DME on a country-by-country basis.

Alimera launched ILUVIEN for chronic DME considered insufficiently responsive to available therapies in the U.K. in April 2013 and in Germany in May 2013. Through the quarter ended September 30, 2013, Alimera reported that the majority of its sales of ILUVIEN were in Germany, where Alimera was permitted to sell without price restriction, but where it has continued to work with the statutory health insurance funds to streamline reimbursement for ILUVIEN.

In November 2013, the U.K.'s National Institute for Health and Care Excellence ("NICE") recommended ILUVIEN as a treatment option for pseudophakic eyes (those that have had cataract surgery), subject to a patient access scheme, resulting in U.K. National Health Service ("NHS") reimbursement for these patients, and in January 2014 Alimera commenced shipments of initial orders for ILUVIEN to U.K. NHS facilities. Previously, ILUVIEN for DME was available only for private pay and privately insured patients in the U.K.

Alimera intends to launch in France in 2014, where patients will be reimbursed for 100% of the cost of ILUVIEN under the Affection de Longue Duree, a specific program for severe chronic diseases such as diabetes.

ILUVIEN has also received marketing authorization in Austria, Portugal and Spain, and has been recommended for marketing authorization in Italy. In addition, Alimera has filed for ten additional EU country approvals through the Mutual Recognition Procedure.

In an October 2013 third Complete Response Letter ("CRL"), the U.S. Food and Drug Administration ("FDA") identified concerns regarding the benefit to risk and safety profiles of ILUVIEN for DME and stated that the New Drug Application ("NDA") could not be approved in its present form. In December 2013, Alimera announced that it had entered into labeling discussions with the FDA. Alimera plans to respond to the CRL in the first quarter of 2014 and provide a safety update on ILUVIEN, including data from ILUVIEN patients and from physician experience with the applicator in the U.K. and Germany. The FDA has indicated that new clinical trials will not be required in connection with the FDA's review of ILUVIEN for DME prior to any approval. Alimera also intends to address concerns the FDA raised in the CRL regarding the facility at which ILUVIEN is manufactured. FDA approval of ILUVIEN for DME would entitle the Company to a $25.0 million milestone payment.

Our FDA-approved product Retisert provides sustained release treatment of posterior uveitis for approximately two and a half years and is licensed to and sold by Bausch & Lomb.

The Company is engaged in pre-clinical research with respect to both its BioSilicon and Durasert technology platforms. The primary focus of the BioSilicon technology research is the use of Tethadur for the sustained delivery of peptides, proteins, antibodies and other large biologic molecules in both ophthalmic and non-ophthalmic applications. The Company's research program also includes the use of Durasert technology in orthopedic applications and for systemic delivery of therapeutic agents.

We are also developing the Latanoprost Product to treat glaucoma and ocular hypertension. Under an amended collaboration agreement, Pfizer has an option, under certain circumstances, to license the development and commercialization of the Latanoprost Product worldwide.

Durasert™, Medidur™, BioSilicon™ and Tethadur™ are our trademarks, Retisert® is Bausch & Lomb's trademark, and ILUVIEN® and FAME™ are Alimera's trademarks.

All information in this Form 10-Q with respect to ILUVIEN for DME, including regulatory and marketing information, and Alimera's plans and intentions, reflects information reported by Alimera.


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Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with GAAP requires that we make certain estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates, judgments and assumptions on historical experience, anticipated results and trends, and on various other factors that we believe are reasonable under the circumstances at the time. By their nature, these estimates, judgments and assumptions are subject to an inherent degree of uncertainty. Actual results may differ from our estimates under different assumptions or conditions. In our Annual Report on Form 10-K for the year ended June 30, 2013 ("fiscal year 2013"), we set forth our critical accounting policies and estimates, which included revenue recognition and valuation of our intangible assets. There have been no material changes to our critical accounting policies from the information provided in our Annual Report on Form 10-K for fiscal year 2013, with the exception of the following:

Recognition of Expense in Outsourced Clinical Trial Agreements

We recognize research and development expense with respect to outsourced agreements for clinical trials as the services are provided based on our assessment of the services performed. We have an agreement with two contract research organizations ("CRO") to conduct the first of two planned Phase III clinical trials of Medidur for posterior uveitis. We were contractually obligated for up to approximately $9.9 million for services under these agreements as of December 31, 2013. The timing of actual amounts owed under the agreements will depend on various factors, including patient enrollment and other progress of the clinical trial. Differences between the amounts paid and our estimate of the work completed are recorded as a prepaid asset or accrued liability. We make our assessments of the services performed based on various factors, including evaluation by the third-party CRO and our own internal review of the work performed during the period, measurements of progress by us or by the third-party provider, data analysis with respect to work completed and our management's judgment. During the three and six months ended December 31, 2013, we recognized approximately $1.1 million and $2.4 million, respectively, of research and development expense attributable to the Medidur for posterior uveitis clinical trial. Changes in our estimates or differences between the actual level of services performed and our estimates may result in changes to our research and development expenses in future periods.


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Results of Operations

Three Months Ended December 31, 2013 Compared to Three Months Ended December 31,
2012:




                                                 Three Months Ended
                                                    December 31,                     Change
                                                2013            2012         Amounts           %
                                                        (In thousands except percentages)

Revenues                                      $     592       $    585       $      7              1 %


Operating expenses:
Research and development                          2,494          1,575            919             58 %
General and administrative                        1,711          1,658             53              3 %
Gain on sale of property and equipment              (72 )           -             (72 )           na


Total operating expenses                          4,133          3,233            900             28 %


Loss from operations                             (3,541 )       (2,648 )         (893 )          (34 )%


Other income (expense):
Interest income                                       1              4             (3 )          (75 )%
Other expense, net                                   -              (1 )            1             na


Total other income                                    1              3             (2 )           na


Loss before income taxes                         (3,540 )       (2,645 )         (895 )          (34 )%
Income tax benefit                                   26             37            (11 )          (30 )%


Net loss                                      $  (3,514 )     $ (2,608 )     $   (906 )          (35 )%

Revenues

Total revenues were substantially equivalent for each of the three months ended December 31, 2013 and December 31, 2012. Increased collaborative research and development revenue was offset by lower Retisert royalty income.

Alimera launched ILUVIEN for DME in the U.K. and Germany in April 2013 and May 2013, respectively, and Alimera expects to launch ILUVIEN for DME in France in 2014. Under the Alimera Agreement, we will be entitled to 20% of any net profits (as defined), on a country-by-country basis, from sales by Alimera of ILUVIEN for DME. We do not know when and if Alimera will achieve net profits payable to us in each EU country where Alimera is commercializing or plans to commercialize ILUVIEN.

Research and Development

Research and development increased by $919,000, or 58%, to $2.5 million for the three months ended December 31, 2013 from $1.6 million for the three months ended December 31, 2012. This increase was primarily attributable to approximately $1.1 million of outsourced CRO costs incurred for the first of two planned Phase III clinical trials of Medidur for posterior uveitis, which commenced in the quarter ended June 30, 2013, partially offset by lower personnel costs. We expect to continue to incur significant research and development expense for this trial during the remainder of fiscal year 2014.

General and Administrative

General and administrative approximated $1.7 million for each of the three months ended December 31, 2013 and December 31, 2012.


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Gain on Sale of Property and Equipment

During the three months ended December 31, 2013, fully depreciated property and equipment no longer in use was sold for proceeds of $72,000 resulting in a gain.

Income Tax Benefit

Income tax benefit was $26,000 for the three months ended December 31, 2013 compared to $37,000 for the quarter a year earlier, and consisted of refundable foreign research and development tax credits.

Six Months Ended December 31, 2013 Compared to Six Months Ended December 31, 2012:

                                            Six Months Ended
                                              December 31,                   Change
                                           2013          2012        Amounts          %
                                                 (In thousands except percentages)

Revenues                                 $  1,189      $  1,138      $     51             4 %


Operating expenses:
Research and development                    4,998         3,098         1,900            61 %
General and administrative                  3,522         3,278           244             7 %
Gain on sale of property and equipment        (72 )          -            (72 )          na


Total operating expenses                    8,448         6,376         2,072            32 %


Loss from operations                       (7,259 )      (5,238 )      (2,021 )         (39 )%


Other income (expense):
Interest income                                 2            11            (9 )         (82 )%
Other expense, net                             -             (2 )           2            na


Total other income                              2             9            (7 )         (78 )%


Loss before income taxes                   (7,257 )      (5,229 )      (2,028 )         (39 )%
Income tax benefit                             56            70           (14 )         (20 )%


Net loss                                 $ (7,201 )    $ (5,159 )    $ (2,042 )         (40 )%

Revenues

Revenues increased by $51,000, or 4%, to approximately $1.2 million for the six months ended December 31, 2013 from approximately $1.1 million for the six months ended December 31, 2012. Increased collaborative research and development revenues were largely offset by a $58,000 decrease in royalty income from Bausch & Lomb.

Research and Development

Research and development increased by $1.9 million, or 61%, to $5.0 million for the six months ended December 31, 2013 from $3.1 million for the six months ended December 31, 2012. A $2.2 million net increase in pre-clinical and clinical development costs, predominantly CRO costs incurred for the first of two planned Phase III clinical trials of Medidur for posterior uveitis, was partially offset by lower personnel and stock-based compensation costs.

General and Administrative

General and administrative increased by $244,000, or 7%, to $3.5 million for the six months ended December 31, 2013 from $3.3 million for the six months ended December 31, 2012, primarily attributable to higher professional fees.


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Gain on Sale of Property and Equipment

During the six months ended December 31, 2013, fully depreciated property and equipment no longer in use was sold for $72,000 resulting in a gain.

Income Tax Benefit

Income tax benefit totaled $56,000 for the six months ended December 31, 2013 compared to $70,000 for the six months ended December 31, 2012, and consisted of refundable foreign research and development tax credits.

Liquidity and Capital Resources

During the past three fiscal years and the first two quarters of the current fiscal year, we financed our operations primarily from sales of equity securities, as well as operating cash flows from license fees, research and development funding and royalty income from our collaboration partners. At December 31, 2013, our principal sources of liquidity consisted of cash, cash equivalents and marketable securities totaling $15.7 million.

With the exception of net income in fiscal year 2010 resulting from a non-recurring event, we have incurred operating losses each year since inception and at December 31, 2013, we had a total accumulated deficit of $270.9 million. We do not currently have any assured sources of revenue, and we generally expect negative cash flows from operations on a quarterly basis unless and until such time as we receive sufficient revenues from ILUVIEN for DME or one or more of our other product candidates achieve regulatory approval and provide us sufficient revenues. We believe that our capital resources of $15.7 million at December 31, 2013, together with expected Retisert royalty income and other expected cash inflows under existing collaboration and technology evaluation agreements, should enable us to fund our operations as currently planned through the first quarter of calendar year 2015. This includes expected costs through that date of Phase III clinical trials of Medidur for posterior uveitis, but excludes any potential milestone or net profits receipts under the Alimera collaboration agreement. Our capital resources would be enhanced if Alimera were to obtain FDA approval for ILUVIEN or generate net profits distributable to us from sales of ILUVIEN for DME in the EU and, if approved, in the U.S., although even so, the amount and timing of such receipts, if any, is uncertain. Accordingly, we expect to need additional resources to fund our planned Phase III trials for Medidur for posterior uveitis, as well as other research and development and operations. Whether we will require, or desire, to raise additional capital will be influenced by many factors, including, but not limited to:

• whether, when and to what extent we receive revenues from Alimera with respect to ILUVIEN for DME, including from commercialization in the EU or upon any approval or commercialization in the U.S.;

• the timing and cost of development of Medidur for posterior uveitis;

• whether and when we initiate Phase II clinical trials for the Latanoprost Product and Pfizer exercises its option;

• whether and to what extent we internally fund, when we initiate, and how we conduct product development programs, including with respect to BioSilicon and Tethadur applications;

• whether and when we are able to enter into strategic arrangements for our product candidates and the nature of those arrangements;

• timely and successful development, regulatory approval and commercialization of our products and product candidates;

• the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing any patent claims; and

• changes in our operating plan resulting in increases or decreases in our need for capital.

Management currently believes that our cash position beyond the first quarter of calendar year 2015 depends significantly on possible cash flows from an FDA approval of ILUVIEN and the successful commercialization by Alimera of ILUVIEN for DME. However, there is no assurance that ILUVIEN for DME will be approved by the FDA, achieve market acceptance in any country in the EU, or if approved, in the U.S. or that we will receive significant, if any, revenues from ILUVIEN for DME.

If we determine that it is desirable or necessary to raise additional capital in the future, we do not know if it will be available when needed or on terms favorable to us or our stockholders. Although we may sell common


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shares having an aggregate offering price of up to $17.9 million under our ATM facility subsequent to December 31, 2013, we do not know whether and to what extent we will seek to sell shares pursuant to that program and, when and if we decide to sell shares, we do not know if we will be able to do so and on what terms. The state of the economy and the financial and credit markets at the time or times we seek additional financing may make it more difficult and more expensive to obtain. If available, additional equity financing may be dilutive to stockholders, debt financing may involve restrictive covenants or other unfavorable terms and potential dilutive equity, and funding through collaboration agreements may be on unfavorable terms, including requiring us to relinquish rights to certain of our technologies or products. If adequate financing is not available if and when needed, we may be required to delay, reduce the scope of or eliminate research or development programs, postpone or cancel the pursuit of product candidates, including pre-clinical and clinical trials and new business opportunities, reduce staff and operating costs or otherwise significantly curtail our operations to reduce our cash requirements and extend our capital.

Our consolidated statements of historical cash flows are summarized as follows (in thousands):

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