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RPTP > SEC Filings for RPTP > Form 10-K on 17-Mar-2014All Recent SEC Filings

Show all filings for RAPTOR PHARMACEUTICAL CORP

Form 10-K for RAPTOR PHARMACEUTICAL CORP


17-Mar-2014

Annual Report


ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview
You should read the following discussion in conjunction with our consolidated financial statements as of December 31, 2013, and the notes to such consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The "Management's Discussion and Analysis of Financial Condition and Results of Operations" section contains forward-looking statements. Please see "Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions associated with these statements. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly under the heading "Risk Factors."
Change in Fiscal Year End
On December 4, 2012, our board of directors approved a change in our fiscal year end from August 31 to December 31. The change became effective at the end of the four months ended December 31, 2012. All references to "fiscal years" or "years" prior to this change refer to the twelve-month fiscal period covering September 1 through August 31, and each year after December 31, 2012, the fiscal year covers January 1 through December 31. Plan of Operation and Overview
We are a biopharmaceutical company focused on developing and commercializing life-altering therapeutics that treat debilitating and often fatal diseases. On April 30, 2013, our first product, PROCYSBI® (cysteamine bitartrate) delayed-release capsules, or PROCYSBI, received marketing approval from the U.S. Food and Drug Administration, or FDA, for the management of nephropathic cystinosis in adults and children six years and older. On September 6, 2013, our European equivalent, PROCYSBI gastro-resistant hard capsules of cysteamine (as mercaptamine bitartrate), received a Community or EU marketing authorization from the European Commission, or EC, as an orphan medicinal product for the management of proven nephropathic cystinosis. The EU marketing authorization allows us to commercialize PROCYSBI in the 28 Member States of the EU plus Norway, Liechtenstein, and Iceland (which are not EU Member States but are part of the EEA). PROCYSBI received 7 years and 10 years of market exclusivity as an orphan drug in the U.S. and the EU, respectively. We commenced commercial sales of PROCYSBI in the U.S. in mid-June 2013 and plan to launch PROCYSBI in the EU in the first half of 2014. With FDA approval of PROCYSBI and the commencement of commercial sales, we are no longer considered to be in the development stage. Clinical Development Programs
Our three active clinical development programs utilize the same active pharmaceutical ingredient, cysteamine bitartrate, or RP103, our proprietary extended and delayed-release formulation capsule containing enteric coated micro-beads of cysteamine bitartrate. Cysteamine bitartrate was approved in the U.S. in 1994 and the EU in 1997 as an orally available immediate-release powder in a capsule for the management of, and is the current standard of care for, cystinosis. We have an exclusive worldwide license to delayed-release cysteamine bitartrate from UCSD which is the basis for our proprietary formulation of cysteamine. Our proprietary extended and delayed-release formulation, RP103, is a capsule containing enteric-coated microbeads of cysteamine bitartrate. We currently have product candidates in clinical development designed to potentially treat Huntington's disease, or HD, non-alcoholic fatty liver disease, or NAFLD, Leigh syndrome and other mitochondrial disorders.
Our other clinical-stage product candidate is Convivia™, our proprietary oral formulation of 4-methylpyrazole, for the potential management of acetaldehyde toxicity due to alcohol consumption by individuals with aldehyde dehydrogenase, or ALDH2, deficiency, an inherited metabolic disorder. Preclinical Product Candidates
Our preclinical programs, for which we are seeking development partners include our cysteamine dioxygenase, or ADO, program and our HepTide™ program, for the potential treatment of hepatocellular carcinoma and other cancers susceptible to induced lysosomal storage.


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Future Activities
Over the next fiscal year, our efforts will be focused on increasing sales of PROCYSBI in the U.S. and successfully launching PROCYSBI in the EU in the first half of 2014; filing a New Drug Submission, or NDS, for PROCYSBI with Health Canada in the second half of 2014; conducting a clinical trial to evaluate PROCYSBI in cystinosis patients that are cysteamine-naďve, as well as other supporting trials in underdeveloped markets; developing select global markets with significant numbers of known cystinosis patients; screening for undiagnosed and unidentified late-onset nephropathic cystinosis patients; initiating and supporting our clinical trials of RP103 for the potential treatment of Leigh syndrome and mitochondrial disorders; supporting our novel preclinical programs; identifying promising in-licensing candidates; and continuing the development of our RP103 clinical pipeline in new indications including Rett Syndrome,. We plan to seek additional business development partners in Asia for our Convivia™ product candidate. We may also develop new preclinical, clinical and or commercial opportunities, including proprietary molecules discovered in-house and in-licensed and acquired technologies. Application of Critical Accounting Policies Our consolidated financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles used in the U.S. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by management's application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our consolidated financial statements is critical to an understanding of our consolidated financial position and results of operations. Many of the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements.
Revenue Recognition and Accounts Receivable We recognize revenue in accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC 605, Revenue Recognition, when the following criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred and risk of loss has passed; the seller's price to the buyer is fixed or determinable and collectability is reasonably assured. We determine that persuasive evidence of an arrangement exists based on written contracts that define the terms of the arrangements. Pursuant to the contract terms, we determine when title to products and associated risk of loss has passed onto the customer. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess collectability based primarily on the customer's payment history and creditworthiness.
PROCYSBI is currently only available for distribution from our U.S. specialty pharmacy partner, the Accredo Health Group, Inc., or Accredo, which is currently our only customer and ships directly to patients. Our distributor in the EU will be the Almac Group, Ltd. for the commercial launch in the EU anticipated to occur in the first half of 2014. PROCYSBI is not available in retail pharmacies. Prior authorization of coverage level by patients' private insurance plans, our patient assistance program, or PAP, or government payors is a prerequisite to the shipment of PROCYSBI to patients. Revenue is recognized once the product has been shipped by the specialty pharmacy to patients because at this time, we are unable to reasonably estimate rebate percentages based upon our lack of sufficient historical data. Billings to our distributor in advance of product shipment and delivery by the specialty pharmacy to patients are recorded as deferred revenue by us until such shipments to patients occur. We record revenue net of expected discounts, distributor fees, returns and rebates, including those paid to Medicare and Medicaid in the U.S. Allowances are recorded as a reduction of revenue at the time product sales are recognized. Allowances for government rebates and discounts are established based on the actual payor information, which is known at the time of shipment to patients, and the government-mandated discount rates applicable to government-funded programs. The allowances are adjusted to reflect known changes in the factors that may impact such allowances in the quarter the changes are known.
Trade accounts receivable are recorded net of product sales allowances for prompt-payment discounts and chargebacks. Estimates for chargebacks and prompt-payment discounts are based on contractual terms and our expectations regarding the utilization rates.


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Inventories and Cost of Sales
Inventories are stated at the lower of cost or market price, with cost determined on a first-in, first-out basis. Inventories are reviewed periodically to identify slow-moving inventory based on sales activity, both projected and historical, as well as product shelf-life. Prior to the approval of PROCYSBI by the FDA on April 30 2013 and in Europe, prior to EMA approval on September 6, 2013, we recorded the purchase of raw materials and the manufacturing costs relating to PROCYSBI as research and development expense. Subsequent to approval, we began capitalizing these costs as commercial inventory. Cost of sales includes the cost of inventory sold or reserved, manufacturing and supply chain costs, product shipping and handling costs, amortization of licensing approval milestone payments and licensing royalties payable to the University of California, San Diego, or UCSD. Note Payable
Note payable consists of our loan agreement with HealthCare Royalty Partners II, L.P., or HC Royalty, as lender, under which we borrowed $50.0 million in two $25.0 million tranches received in December 2012 and May 2013. The loan bears interest at an annual fixed rate of 10.75% of outstanding principal and includes a synthetic royalty component based on net product sales, including PROCYSBI, in a calendar year. With respect to the first $25.0 million tranche, for each calendar year, the loan bears a royalty rate of 6.25% of the first $25.0 million of product net revenues, 3.0% of product net revenues for such calendar year in excess of $25.0 million and below $50.0 million, and 1.0% of product net revenues for such calendar year in excess of $50.0 million, payable quarterly. With respect to the second $25.0 million tranche, for each calendar year, the loan bears a royalty rate of 6.0% of the first $25.0 million of net revenues for such calendar year, 3.0% of product net revenues for such calendar year in excess of $25.0 million and below $50.0 million, and 1.0% of product net revenues for such calendar year in excess of $50.0 million, payable quarterly. The fixed and royalty interest are recognized as interest expense as incurred. The revenue royalty related interest may lead to significant fluctuations in interest expense from period to period.
Impairment of Goodwill and Intangible Assets Goodwill represents the excess of the purchase price over the fair value of tangible and identified intangible net assets of businesses acquired. Goodwill is not amortized, but is evaluated for impairment on an annual basis or more often when impairment indicators are present. We have one reporting unit. Therefore, our consolidated net assets, including existing goodwill and other intangible assets, are considered to be the carrying value of the reporting unit. If the carrying value of the reporting unit is in excess of its fair value, an impairment may exist, and we must perform the second step of the analysis, in which the implied fair value of the goodwill is compared to its carrying value to determine the impairment charge, if any. If the estimated fair value of the reporting unit exceeds the carrying value of the reporting unit, goodwill is not impaired and no further analysis is required. We performed our goodwill impairment test as of December 31, 2013 and noted no impairment.
We make judgments about the recoverability of purchased intangible assets with finite lives whenever events or changes in circumstances indicate that impairment may exist. Recoverability of purchased intangible assets with finite lives is measured by comparing the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. Impairment, if any, is measured as the amount by which the carrying value exceeds the fair value of the impaired asset.
Assumptions and estimates about future values and remaining useful lives of our purchased intangible assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends and internal factors such as changes in our business strategy and our internal forecasts.
Common Stock Warrant Liabilities
The common stock warrants we issued in connection with certain fiscal year 2010 equity financings contain conditional obligations that may require us to transfer cash to settle the warrants upon the occurrence of certain fundamental transactions. Therefore, we have classified the warrants as liabilities. We re-measure the liability at the end of every reporting period with the change in value reported in our consolidated statements of operations and comprehensive loss. At the exercise date, the fair values of these warrants are re-measured and reclassified to equity.
We use the Black-Scholes option pricing model as our method of valuation for warrants that are subject to warrant liability accounting. The determination of the fair value as of the reporting date is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, expected stock price volatility over the term of the security and risk-free interest rate. In addition, the Black-Scholes option pricing model requires the input of an expected life for the securities for which we have estimated based upon the stage of our development. The fair value of the warrant liability is revalued each balance sheet date utilizing Black-Scholes valuation model computations with the decrease or increase in fair value being reported in the statement of operations and comprehensive loss as other income or expense, respectively. The primary factors affecting the fair value of the warrant liability are our stock price and volatility. In addition, the Black-Scholes option pricing model requires the input of highly subjective assumptions, and other reasonable assumptions could provide differing results.


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We reported a net loss of $69.4 million for the year ended December 31, 2013. If our December 31, 2013 closing stock price had been 10% lower, our net loss would have been approximately $0.9 million lower. If our December 31, 2013 closing stock price had been 10% higher, our net loss would have been approximately $0.9 million higher
If our December 31, 2013 volatility assumption had been 10% lower, our net loss would have been approximately $0.1 million lower. If our December 31, 2012 volatility assumption had been 10% higher, our net loss would have been approximately $0.1 million higher.
We reported a net loss of $19.3 million for the four months ended December 31, 2012. If our December 31, 2012 closing stock price had been 10% lower, our net loss would have been approximately $2.0 million lower. If our August 31, 2012 closing stock price had been 10% higher, our net loss would have been approximately $2.0 million higher.
If our December 31, 2012 volatility assumption had been 10% lower, our net loss would have been approximately $0.7 million lower. If our December 31, 2012 volatility assumption had been 10% higher, our net loss would have been approximately $0.7 million higher.
Income Taxes
Income taxes are recorded under the liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Based on the weight of available evidence, including cumulative losses since inception and expected future losses, we have determined that it is more likely than not that the deferred tax asset amount will not be realized and therefore a full valuation allowance has been provided on our net deferred tax assets. We intend to maintain the valuation allowance until sufficient positive evidence exists to support the reversal of the valuation allowance. Any decision to reverse part or all of the valuation allowance would be based on our estimate of future profitability.
We identify uncertain tax positions and record or disclose any resulting potential tax liability based upon whether the position is more likely than not sustainable upon examination. We consider proposed assessments by tax authorities, changes in facts and circumstances, issuance of new regulations or new case law and negotiations between tax authorities of different countries concerning our transfer prices or intellectual property transfers. As of December 31, 2013, we have identified no uncertain tax positions. We file U.S. Federal, California, various other state income and other tax returns and various foreign country income tax returns. We are currently not subject to any income tax examinations. Due to our net operating losses, all tax years generally remain open in each jurisdiction. Stock-Based Compensation
Determining the fair value of share-based awards at the grant date requires judgment, including estimating future stock price volatility and employee stock option exercise behavior.
We based our Black-Scholes inputs on the following factors: the risk-free interest rate was based upon our review of current constant maturity treasury bill rates for five years; the expected life of five years was based upon our assessment of the ten-year term of the stock options issued along with the fact that we are a development-stage company and our anticipation that option holders will exercise stock options when we are at a more mature stage of development; the volatility was based on a combination of the actual annualized volatility of our common stock price as quoted on NASDAQ since the closing of our 2009 Merger on September 30, 2009 and of annualized volatility of peer companies; the turnover rate was based on our assessment of our historical employee turnover; and the dividend rate was based on our current decision to not pay dividends on our stock at our current corporate stage of development. If actual results differ significantly from these estimates, stock-based compensation expense and results of operations could be materially impacted. See Note 8 of our consolidated financial statements for a further discussion of our accounting for stock-based compensation.

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Results of Operations
For the year ended December 31, 2013

                                                        For the year ended
(In millions)                                            December 31, 2013

Revenues                                                $              16.9
Operating expenses:
Cost of sales                                                           1.7
Research and development                                               29.2
Selling, general and administrative                                    37.9
   Total operating expenses                                            68.8
Loss from operations                                                  (51.9 )

Interest expense                                                       (6.9 )
Adjustment to the fair value of common stock warrants                 (10.7 )
Other                                                                   0.1
Net loss                                                $             (69.4 )

Revenue
We recognized $10.2 million in PROCYSBI net product sales for the fourth quarter of 2013. Net product sales for the year 2013 totaled $16.9 million. There were no product sales for the comparable prior periods as PROCYSBI became commercially available in the U.S. in June 2013. Cost of Sales
Prior to the approval of PROCYSBI by the FDA on April 30, 2013 and in Europe, prior to EMA approval on September 6, 2013, we recorded manufacturing costs relating to PROCYSBI as research and development expense. Subsequent to approval, we began capitalizing these costs as commercial inventory. PROCYSBI became commercially available in mid-June 2013, and we began recognizing manufacturing costs as capitalized inventory. Costs capitalized as inventory are expensed as cost of sales as product is sold. During the year ended December 31, 2013, we recorded a $0.4 million reserve as cost of sales representing commercial inventory that was capitalized subsequent to FDA approval but written off due to an unanticipated minor change in the finished product presentation. Cost of sales includes the cost of inventory sold, inventory and reserve costs, manufacturing and supply chain costs, product shipping and handling costs, amortization of licensing approval milestone payments and licensing royalties payable to UCSD. Research and Development
For the year ended December 31, 2013, our research and development expenses consisted primarily of costs associated with the manufacturing and testing of clinical and commercial materials in anticipation for our potential launch of RP103 for cystinosis, clinical trial research expenses and employee compensation. The increase in research and development expenses relates primarily to increased clinical product manufacture of RP103 for the potential treatment of cystinosis (prior to the capitalization of such amounts upon FDA and EMA approval); HD, NASH, cystinosis extension, and other supporting study expenses and related employee compensation, offset by a reduction in Phase 3 cystinosis clinical trial expenses.


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Major Program expenses recorded as research and development:

For the year ended Major Program (stage of development) (In millions) December 31, 2013 RP103:

Cystinosis (pre-commercial and extension)                   $               14.8
HD (clinical)                                                                0.8
NASH (clinical)                                                              2.0
Preclinical programs                                                         1.1
Other programs                                                               0.8
R & D personnel and other costs not allocated to programs                    9.7
Total research and development expenses                     $               29.2

Selling, General and Administrative Expenses For the year ended December 31, 2013, our selling, general and administrative expenses consisted primarily of employee compensation, marketing and reimbursement studies, consulting, accounting, legal and patent fees. The increase in selling, general and administrative expenses relates primarily to increased expenses for pre-commercial operations requirements for RP103 for the potential treatment of cystinosis, employee compensation, stock-compensation for employees and directors, legal fees and investor relations costs.
Major Program expenses recorded as selling, general and administrative expenses:
For the year ended December 31, 2013, our program expenses in selling, general and administrative expenses consisted primarily of pre-commercial and commercial launch expenses for PROCYSBI.

For the year ended December Major Program (stage of development) (In millions) 31, 2013 RP103:

Cystinosis (pre-commercial and commercial)                                $      9.8
HD (clinical)                                                                    0.5
NASH (clinical)                                                                  0.1
Other programs                                                                   0.2
Total selling, general and  administrative expenses related to programs   $     10.6


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Current Status of Major Programs

Please refer to the Item 1 of this Annual Report on Form 10-K for a detailed discussion of each of our major programs. We currently have product candidates in clinical development as potential treatments for HD, NAFLD, Leigh syndrome and other mitochondrial disorders and ALDH2. Our preclinical programs are based upon bioengineered novel drug candidates that are designed to target cancer and other diseases. We continue efforts to out-license Convivia and our preclinical programs.

Any of our major programs could be partnered for further development and/or could be accelerated, slowed or ceased due to scientific results or challenges in obtaining funding. We anticipate that we will need additional funding in order to pursue our plans beyond the next 18 months. In addition, the timing and costs of development of our programs beyond the next 18 months is highly uncertain and difficult to estimate. See Part I, Item 1A of this Annual Report on Form 10-K titled "Risk Factors" for further discussion about the risks and uncertainties pertaining to drug development.

Interest Expense
Interest expense for the year ended December 31, 2013 was approximately $6.8
million, which primarily represented interest on our $50 million note payable to
HC Royalty including the "synthetic" royalty interest on sales of PROCYSBI.
Adjustment to the Fair Value of Common Stock Warrants

Adjustment to the fair value of common stock warrants was a loss of
approximately $10.7 million for the year ended December 31, 2013.
For the four months ended December 31, 2012 and 2011

                                                                  For the four months ended
                                                                         December 31,
(In millions)                                                      2012               2011
                                                                                   (Unaudited)
Revenues                                                       $          0       $           0
Operating expenses:
Research and development                                                8.9                 6.3
General and administrative                                              9.0                 3.2
   Total operating expenses                                            17.9                 9.5
Loss from operations                                                  (17.9 )              (9.5 )

Adjustment to the fair value of common stock warrants                  (1.5 )              (5.0 )
. . .
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