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RGLS > SEC Filings for RGLS > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for REGULUS THERAPEUTICS INC.



Annual Report

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis together with "Item 6. Selected Financial Data" and our financial statements and related notes included elsewhere in this Annual Report. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those expressed or implied in any forward-looking statements as a result of various factors, including those set forth under the caption "Item 1A. Risk Factors."


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. Additionally, we believe that microRNA biomarkers may be used to select optimal patient segments in clinical trials and to monitor disease progression or relapse. We believe these microRNA biomarkers can be applied toward drugs that we develop and drugs developed by other companies with which we partner or collaborate, including small molecules and monoclonal antibodies. In January 2014, we expanded our biomarkers efforts and established microMarkers™, a research and development division focused on identifying microRNAs as biomarkers of human disease, which is designed to support our therapeutic pipeline, collaborators and strategic partners.

We are currently optimizing anti-miRs in several distinct programs, both independently and with our strategic alliance partners, AstraZeneca, GSK and Sanofi. We also have a collaboration agreement with Biogen Idec to evaluate the potential use of microRNA signatures as a biomarker for human patients with MS. Under these strategic alliances, we are eligible to receive up to approximately $1.5 billion in milestone payments upon successful commercialization of microRNA therapeutics for the programs contemplated by our agreements. These payments include up to $128.0 million upon achievement of preclinical and IND milestones, up to $254.0 million upon achievement of clinical development milestones, up to $380.0 million upon achievement of regulatory milestones and up to $730.0 million upon achievement of commercialization milestones.

In 2013, we set forth certain corporate goals that seek to advance our microRNA therapeutic pipeline toward the clinic under our 'Road to the Clinic' strategy. 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. We successfully achieved all of these goals under our 'Road to the Clinic' strategy: (i) our first clinical candidate, RG-101, for which we have full ownership and commercial rights, is a GalNAc-conjugated anti-miR, which targets microRNA-122, for the treatment of patients with chronic HCV. We filed our first application for RG-101 with regulatory authorities in the Netherlands and recently received approval to commence a Phase I clinical trial. Additionally, we nominated RG-012, an anti-miR targeting miR-21 for the treatment of Alport Syndrome, an orphan, life-threatening kidney disease driven by genetic mutations, as our second microRNA candidate for clinical development. We are responsible for advancing RG-012 to proof-of-concept and Sanofi will have the

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exclusive option, exercisable after proof-of-concept, to take over further development and commercialization of RG-012 program. Lastly, our strong financial position supported our 'Road to the Clinic' goals as we ended 2013 with $114.0 million in cash, cash equivalents and short-term investments.

In February 2014, we launched our 'Clinical Map Initiative', which outlines certain corporate goals and objectives to advance our microRNA therapeutics pipeline over the next several years. Specifically, we intend to demonstrate human proof-of-concept results in the Phase I clinical study of RG-101 by the end of 2014, initiate a Phase I clinical study of RG-012 for the treatment of Alport Syndrome in the first half of 2015 and nominate a third microRNA candidate for clinical development by the end of 2014. In order to achieve these objectives, we intend to maintain a strong financial position and end 2014 with at least $75.0 million in cash, cash equivalents and short-term investments.

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.

In February 2014, we and Sanofi entered into a second amended and restated collaboration and license agreement to extend our strategic alliance. Under the terms of our extended alliance, Sanofi will have opt-in rights to our miR-21 pre-clinical fibrosis program targeting miR-21for the treatment of Alport Syndrome, our preclinical program targeting miR-21 for oncology indications, and our preclinical programs targeting miR-221/222 for oncology indications, each of which is to be led by us. If Sanofi chooses to exercise its option on any of these programs, Sanofi will reimburse us for a significant portion of our preclinical and clinical development costs and will also pay us an option exercise fee for any such program, provided that $1.25 million of the $2.5 million upfront option fee paid to us by Sanofi in connection with the June 2013 option agreement will be creditable against such option exercise fee. In addition, we will be eligible to receive clinical and regulatory milestone payments under these programs and potentially commercial milestone payments. We also continue to be eligible to receive royalties on microRNA therapeutic products commercialized by Sanofi or will have the right to co-promote these products. For additional information, see Notes 5 and 15 to our financial statements under Item 8 of Part II of this Annual Report.

In connection with our entry into the second amended and restated collaboration and license agreement with Sanofi, we sold and issued 1,303,780 shares of our common stock to Aventis, an entity affiliated with Sanofi, in a private placement at a price per share of $7.67 for an aggregate purchase price of $10.0 million.

Financial Operations Overview


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.

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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 microMarkersTM division. 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. At any given time we are working on multiple targets, primarily within our five therapeutic areas of focus. Our organization is structured to allow 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 inception in January 2009, we have grown from 15 research and development personnel to 59 and have spent a total of approximately $96.8 million in research and development expenses through December 31, 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 with Sanofi, we

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are responsible for the development of product candidates up through proof-of-concept, after which time Sanofi would be responsible for the costs of clinical development and commercialization and all related costs. 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 to occur 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.

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, and on occasion income or expense of a non-recurring nature, including changes in debt valuation each reporting period. 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 the amounts payable to under the convertible notes payable and interest payable under 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 base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in the notes to our financial statements appearing elsewhere in this Annual Report, we believe that the following critical accounting policies relating to revenue recognition and stock-based compensation are most important to understanding and evaluating our reported financial results.

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Revenue recognition

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, as well as funding received under government grants. We recognize revenues when all four of the following criteria are met: (1) persuasive evidence that an arrangement exists; (2) delivery of the products and/or services has occurred; (3) the selling price is fixed or determinable; and (4) collectability is reasonably assured.

Multiple element arrangements, such as our strategic alliance agreements with GSK, and Sanofi, are analyzed to determine whether the deliverables within the agreement can be separated or whether they must be accounted for as a single unit of accounting. Deliverables under the agreement will be accounted for as separate units of accounting provided that (i) a delivered item has value to the customer on a stand-alone basis; and (ii) if the agreement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the control of the vendor. The allocation of consideration amongst the deliverables under the agreement is derived using a "best estimate of selling price" if vendor specific objective evidence and third-party evidence of fair value is not available. If the delivered element does not have stand-alone value or if the fair value of any of the undelivered elements cannot be determined, the arrangement is then accounted for as a single unit of accounting, and we recognize the consideration received under the arrangement as revenue on a straight-line basis over our estimated period of performance, which for us is often the expected term of the research and development plan.


We recognize revenue from milestone payments when earned, provided that (i) the milestone event is substantive in that it can only be achieved based in whole or in part on either our performance or on the occurrence of a specific outcome resulting from our performance and its achievability was not reasonably assured at the inception of the agreement, (ii) we do not have ongoing performance obligations related to the achievement of the milestone and (iii) it would result in the receipt of additional payments. A milestone payment is considered substantive if all of the following conditions are met: (i) the milestone payment is non-refundable; (ii) achievement of the milestone was not reasonably assured at the inception of the arrangement; (iii) substantive effort is involved to achieve the milestone; and (iv) the amount of the milestone payments appears reasonable in relation to the effort expended, the other milestones in the arrangement and the related risk associated with the achievement of the milestone. Any amounts received under the agreements in advance of performance, if deemed substantive, are recorded as deferred revenue and recognized as revenue as we complete our performance obligations. The adoption of this guidance did not materially change our previous method for recognizing milestone payments.

Generally, the milestone events contained in our strategic alliance agreements coincide with the progression of our product candidates from target selection, to clinical candidate selection, to clinical trial, to regulatory approval and then to commercialization. The process of successfully discovering a new development candidate, having it approved and ultimately sold for a profit is highly uncertain. As such, the milestone payments we may earn from our partners involve a significant degree of risk to achieve. Therefore, as a product candidate progresses through the stages of its life-cycle, the value of the product candidate generally increases.

Fair Value Option

Accounting standards for fair value measurements establishes a three-level hierarchy for disclosure of financial instruments measured at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the measurement valuation methodology are observable or unobservable. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data. The following three-level fair value hierarchy is based on the transparency of the inputs used to measure the fair value of the financial instruments:

• Level 1 includes financial instruments for which quoted market prices for identical instruments are available in active markets.

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• Level 2 includes financial instruments for which there are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

• Level 3 includes financial instruments for which fair value is derived from valuation techniques in which one or more significant inputs are unobservable in determining fair values of the instruments.

Applicable accounting policies permit entities to choose, at specified election dates, to measure specified items at fair value if the decision about the election is: 1) applied instrument by instrument, 2) irrevocable, and 3) applied to an entire instrument. In July 2012, we amended and restated the 2010 GSK note, which resulted in a debt extinguishment for accounting purposes. Concurrently with the debt extinguishment, we elected the fair value option for the 2010 GSK note. We performed valuations at the extinguishment date and subsequently on a quarterly basis with changes in fair value recorded in non-operating earnings. This instrument has been classified in Level 3 within the fair value hierarchy.

Our valuation technique uses an income approach in the form of a convertible bond valuation model to value the note. The convertible bond model considers the debt and option characteristics of the note. The key inputs to the model are volatility, risk-free rate and credit spread. The absolute stock and strike price are not key inputs because upon an initial public offering, the conversion option was assumed to be set at-the-money. The estimated fair value of the note was based on the probability weighted average of an initial public offering and a non-initial public offering scenario for the initial valuation in July 2012 and subsequent valuation in September 2012. The For valuations subsequent to our initial public offering, the valuation did not consider a probability weighting, as the initial public offering was completed in October 2012. The volatility inputs are based on historical and implied volatility of peer companies. Peer companies are materially consistent with those used previously in our 409A analyses. The risk-free rate inputs are based on the yield of US Treasury Strips as of each date. The credit spread inputs are based on a creditworthiness analysis of the Company and market rates for comparable straight debt instruments.

Our significant accounting policies and estimates are more fully described in Note 1 to the Financial Statements.

Recent Accounting Pronouncements

For a discussion of recently issued accounting pronouncements, refer to the section titled "Recently Issued Accounting Pronouncements" within "The Business, Basis of Presentation and Summary of Significant Accounting Policies" of our Financial Statements.

Results of Operations

Comparison of the years ended December 31, 2013 and 2012

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

                                             Years ended December 31,              Change 2013 vs. 2012
                                              2013                2012             Increase/(Decrease)
Revenue under strategic alliances         $     19,569          $  12,700         $                6,869
Research and development expenses               29,942             20,342                          9,600
General and administrative expenses              7,429              4,932                          2,497
Loss on extinguishment of debt                      -              (1,738 )                        1,738
Loss from changes in valuation of
convertible note payable                        (1,145 )           (2,969 )                        1,824

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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):

                                                            Years ended
                                                           December 31,
                                                         2013         2012
         Sanofi                                        $ 15,336     $ 10,030
         GSK                                              1,778        1,996
         AstraZeneca                                      1,859          559
         Biogen Idec                                        596          115

         Total net revenues from strategic alliances   $ 19,569     $ 12,700

Revenue under strategic alliances was $19.6 million for the year ended December 31, 2013 compared to $12.7 million for the year ended December 31, 2012.

In June 2013, the research term expired under the Sanofi alliance, at which time we entered into an option agreement pursuant to which Sanofi was granted 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. In July 2013, we received an upfront payment of $2.5 million, of which $1.25 million is creditable against future amounts payable by Sanofi to us under our second amended and restated collaboration and license agreement with Sanofi. The non-creditable portion of . . .

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