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CARA > SEC Filings for CARA > Form 10-K on 28-Mar-2014All Recent SEC Filings

Show all filings for CARA THERAPEUTICS, INC.

Form 10-K for CARA THERAPEUTICS, INC.


28-Mar-2014

Annual Report


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

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing at the end of this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read "Cautionary Note Regarding Forward-Looking Statements" and Item 1A. Risk Factors of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

Introduction

We are a clinical-stage biopharmaceutical company focused on developing and commercializing new chemical entities designed to alleviate pain by selectively targeting kappa opioid receptors. We are developing a novel and proprietary class of product candidates that target the body's peripheral nervous system and have demonstrated efficacy in patients with moderate-to-severe pain without inducing many of the undesirable side effects associated with currently available pain therapeutics. Our most advanced product candidate, intravenous, or I.V., CR845, has demonstrated significant pain relief and favorable tolerability in three Phase 2 clinical trials in patients with acute postoperative pain. We are currently planning to request an End of Phase 2 meeting with the FDA in the second half of 2014 to discuss initiation of Phase 3 trials which we expect to initiate in the second half of 2014. We are also developing an oral version of CR845, or Oral CR845, for acute and chronic pain, for which we have successfully completed a Phase 1 clinical trial to demonstrate the ability to deliver CR845 orally.

We commenced operations in 2004, and our primary activities to date have been organizing and staffing our company, developing our product candidates, including conducting preclinical studies and clinical trials of CR845-based product candidates and raising capital. To date, we have financed our operations primarily through sales of our equity and debt securities and payments from license agreements. We have no products currently available for sale, and substantially all of our revenue to date has been revenue from license agreements, although we have received nominal amounts of revenue under research grants.

Since our inception and through December 31, 2013, we have received net proceeds of $65.9 million from the sale of various series of convertible preferred stock, $3.6 million from the issuance of convertible promissory notes and $3.8 million from the issuance of long-term debt. In addition to our financing activities, we have received aggregate payments of $28.9 million pursuant to license agreements related to CR845 and an earlier product candidate for which development efforts ceased in 2007. In April 2013, we received $15.0 million as an upfront payment pursuant to a license agreement with Maruishi Pharmaceutical Co., Ltd., or Maruishi, in connection with the license of rights to CR845 in Japan. In 2012, we received aggregate upfront and milestone payments of $1.2 million, net of foreign taxes, pursuant to a license agreement with Chong Kun Dang Pharmaceutical Corporation, or CKD, in connection with the license of rights to CR845 in South Korea.

Since inception, we have incurred significant operating and net losses. Our net losses were $9.8 million, $6.3 million and $4.0 million for the years ended December 31, 2011, December 31, 2012 and December 31, 2013, respectively. We generated a net loss of $4.0 million for the year ended December 31, 2013, although we recognized $12.0 million of revenue for the period in connection with the Maruishi license, and we expect to continue to incur significant expenses and operating and net losses over at least the next several years. As of December 31, 2013, we had an accumulated deficit of $62.5 million. Our net losses may fluctuate significantly from quarter to quarter and year to year, depending on the timing of our clinical trials, the receipt of milestone payments, if any, under our collaborations with Maruishi and CKD, the receipt of payments under any future collaborations we may enter into, and our expenditures on other research and development activities. We anticipate that our expenses will increase substantially as we:

initiate our planned Phase 3 clinical trials of I.V. CR845;


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continue the research and development of our Oral CR845 and other product candidates;

seek regulatory approvals for I.V. CR845 and any product candidates that successfully complete clinical trials;

establish a sales, marketing and distribution infrastructure and scale up external manufacturing capabilities to commercialize any products for which we may obtain regulatory approval;

maintain, expand and protect our global intellectual property portfolio;

hire additional clinical, quality control and scientific personnel; and

add operational, financial and management information systems and personnel, including personnel to support our drug development and potential future commercialization efforts.

To fund further operations, we will need to raise capital in addition to the net proceeds of our initial public offering. As of December 31, 2013, we had cash and cash equivalents of approximately $12.4 million. We may obtain additional financing in the future through the issuance of our common stock, through other equity or debt financings or through collaborations or partnerships with other companies. We may not be able to raise additional capital on terms acceptable to us, or at all, and any failure to raise capital as and when needed could compromise our ability to execute on our business plan. Although it is difficult to predict future liquidity requirements, we believe that the net proceeds from our initial public offering (see Recent Developments, below) and our existing cash and cash equivalents as of December 31, 2013, together with interest thereon, will be sufficient to fund our operations for at least the next 24 months. However, our ability to successfully transition to profitability will be dependent upon achieving a level of revenues adequate to support our cost structure. We cannot assure you that we will ever be profitable or generate positive cash flow from operating activities.

Recent Developments

Initial Public Offering

On February 5, 2014, we closed the initial public offering of our common stock. We sold a total of 5,750,000 shares in the offering, including 750,000 shares upon the exercise in full by the underwriters of their option to purchase additional shares. The aggregate public offering price was $63.3 million, and we received net proceeds of approximately $55.9 million from the offering, after deducting $7.4 million of underwriting discounts and commissions and estimated offering expenses payable by us.

Collaborations with Maruishi and CKD

To date, we have entered into two license agreements relating to the development of CR845.

In April 2013, we entered into a license agreement with Maruishi under which we granted Maruishi an exclusive license to develop, manufacture and commercialize drug products containing CR845 in Japan in the acute pain and uremic pruritus fields. We and Maruishi are required to use commercially reasonable efforts, at our respective expense, to develop, obtain regulatory approval for and commercialize CR845 in the United States and Japan, respectively. In addition, we will provide Maruishi specific clinical development services for CR845 in Maruishi's field of use. Under the terms of the agreement, we received a non-refundable and non-creditable upfront license fee of $15.0 million and are eligible to receive up to an aggregate of $6.0 million in clinical development milestones and $4.5 million in regulatory milestones. We are also eligible to receive tiered royalties, with percentages ranging from the low double digits to the low twenties, based on net sales of products containing CR845 in Japan, if any, and share in any sub-license fees. In addition, in connection with the license agreement, Maruishi purchased 2,105,263 shares of our Junior A Preferred Stock for $3.80 per share, for an aggregate purchase price of $8.0 million, which shares were automatically converted into 842,105 shares of common stock upon the closing of our initial public offering.


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In April 2012, we entered into a license agreement with CKD under which we granted CKD an exclusive license to develop, manufacture and commercialize drug products containing CR845 in South Korea. We and CKD are required to use commercially reasonable efforts, at our respective expense, to develop, obtain regulatory approval for and commercialize CR845 in the United States and South Korea, respectively. Under the terms of the agreement, we received a non-refundable and non-creditable upfront license fee of $0.6 million and are eligible to receive up to an aggregate of $2.3 million in clinical development milestones and $1.5 million in regulatory milestones. We also issued 173,611 shares of our Junior Preferred Stock to CKD in consideration for $0.4 million, which shares were automatically converted into 69,444 shares of common stock upon the closing of our initial public offering. During 2012, we received $0.6 million, net of foreign taxes, from CKD upon the achievement of clinical development milestones under the license agreement. We are also eligible to receive tiered royalties with percentages ranging from the high single digits to the high teens, based on net sales of products containing CR845 in South Korea, if any, and share in any sub-license fees.

Components of Operating Results

Revenue

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the near future. Substantially all of our revenue recognized to date has consisted of upfront payments under license agreements with Maruishi and CKD for CR845, as well as license agreements for CR665, our first generation drug program for which development efforts have ceased. During 2012, we also received $0.6 million, net of foreign taxes, of clinical development milestone payments under our license agreement with CKD. During the year ended December 31, 2013, we recognized revenue of $0.1 million from the sale of clinical compound and $11.9 million under the Maruishi license agreement. However, we have not received any other significant development or regulatory milestone payments, or any royalties, under these collaborations.

Research and Development

To date, our research and development expenses have related primarily to the development of CR845. Research and development expenses consist of expenses incurred in performing research and development activities, including compensation and benefits for full-time research and development employees, facilities expenses, including laboratory build-out costs, overhead expenses, cost of laboratory supplies, clinical trial and related clinical manufacturing expenses, third-party formulation expenses, fees paid to contract research organizations, or CROs, and other consultants, stock-based compensation for research and development employees and other outside expenses. Our research and development expenses also include expenses related to preclinical activities, such as drug discovery, target validation and lead optimization for CR845 and our other, earlier stage programs.

Research and development costs are expensed as incurred. Non-refundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed.

Most of our research and development costs have been external costs, which we track on a program-by-program basis. Our internal research and development costs are primarily compensation expenses for our full-time research and development employees. We do not track internal research and development costs on a program-by-program basis.

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect our research and development expenses to increase significantly over the next several years as we seek to progress I.V. CR845 through Phase 3 trials and the FDA approval process. However, it is difficult to determine with certainty the duration and completion costs of our current or future preclinical programs and clinical trials of our product candidates, or if, when or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain regulatory approval. We may never succeed in achieving regulatory approval for any of our product candidates.


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The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors including:

per patient trial costs;

the number of patients that participate in the trials;

the number of sites included in the trials;

the countries in which the trial is conducted;

the length of time required to enroll eligible patients;

the number of doses that patients receive;

the drop-out or discontinuation rates of patients;

potential additional safety monitoring or other studies requested by regulatory agencies;

the duration of patient follow-up; and

the efficacy and safety profile of the product candidate.

In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability. We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each product candidate, as well as an assessment of each product candidate's commercial potential.

General and Administrative

General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in executive, finance, accounting, business development and human resources functions. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees and fees for accounting and consulting services.

We anticipate that our general and administrative expenses will increase in the future to support our continued research and development activities, potential commercialization of our product candidates and the increased costs of operating as a public company. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, lawyers and accountants, as well as expenses related to services associated with maintaining compliance with NASDAQ listing rules and SEC requirements, insurance, and investor relations costs. In addition, if I.V. CR845 or any future product candidate obtains regulatory approval for marketing, we expect to incur expenses associated with building a sales and marketing team.

Interest Expense, Net

Interest expense, net, consists of interest paid on debt instruments, amortized deferred financing costs and amortized debt discount, as offset by any interest income earned on our cash and cash equivalents. The debt discount primarily consists of the intrinsic value of the beneficial conversion feature embedded in the convertible promissory notes we issued in December 2012 and February 2013.

Other Income (Expense), Net

Other income (expense), net, consists of the change in the fair value of the investor rights and obligations related to our Series D Convertible Preferred Stock financing, which we refer to as the investor right/obligation. This financing was completed in four tranches of $5.0 million, $3.0 million, $2.0 million and $5.0 million in July 2010, March 2011, July 2011 and August 2011, respectively. In connection with the first closing of the Series D Convertible Preferred Stock financing, we granted investors the right and, pursuant to the terms and conditions of the financing, such investors committed, to purchase additional shares of Series D Convertible Preferred Stock in


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subsequent closings. In accordance with accounting principles generally accepted in the United States ("U.S. GAAP" or "GAAP"), the investor right/obligation represented a free-standing financial instrument, which we recorded at its fair value of $733,900 as a liability on the date of the first closing. We then marked this liability to market at each subsequent reporting date that the instrument remained outstanding, reflecting the increase (decrease) in the value of the investor right/obligation as other (expense) income in our results of operations. Because the rights and obligations related to the Series D Convertible Preferred Stock financing terminated upon the final closing of Series D Convertible Preferred Stock in August 2011, we no longer record other income (expense) in connection with the investor right/obligation from that point forward.

Benefit from Income Taxes

The benefit from income taxes relates to state research and development tax credits exchanged for cash pursuant to the Connecticut Research and Development Tax Credit Exchange Program, which permits qualified small businesses engaged in research and development activities within Connecticut to exchange their unused research and development tax credits for a cash amount equal to 65% of the value of the exchanged credits.

Results of Operations

Comparison of the years ended December 31, 2012 and December 31, 2013

The following table sets forth our results of operations for the years ended
December 31, 2012 and 2013 (in thousands).




                                                                                       Period-to-
                                                  Year Ended December 31,                Period
                                                 2012                 2013               Change
Revenue                                      $      1,190         $     11,964        $     10,774

Cost and expenses:
Research and development                            4,597                8,685               4,088
General and administrative                          2,829                3,516                 687

                                                    7,426               12,201               4,775

Operating loss                                     (6,236 )               (237 )             5,999
Interest (expense), net                               (66 )             (3,756 )            (3,690 )

Loss before benefit from income taxes              (6,302 )             (3,993 )             2,309
Benefit from income taxes                              31                   30                  (1 )

Net loss                                     $     (6,271 )       $     (3,963 )      $      2,308

Revenue

Revenue increased $10.8 million, to $12.0 million, for the year ended December 31, 2013, compared to the same period of 2012. The increase was primarily a result of our recognition as revenue of a portion of the upfront payment received upon entry into the license agreement with Maruishi in April 2013. The revenue recognized in the 2012 period represents the revenue recognized in connection with the license agreement with CKD in April 2012.

Research and development expenses

Research and development expenses increased by $4.1 million to $8.7 million, for the year ended December 31, 2013, compared to the same period of 2012. The increase was primarily the result of a $3.7 million increase in direct preclinical studies and CR845 clinical trial costs, a $0.3 million increase in payroll and recruiting costs, a $0.3 million increase in consultant services in support of preclinical studies and clinical trials and a $0.1 million increase in travel costs, partially offset by a $0.2 million decrease in depreciation and amortization expense. The increase in CR845 clinical trial costs resulted primarily from the completion of the Phase 2 bunionectomy trial, the Phase 1 IV CR845 renal impairment trial and preclinical costs for formulation and studies related to oral tablets of CR845.


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The following table summarizes our research and development expenses by product candidate for the year ended December 31, 2012 and 2013 (in thousands):

                                                      Year Ended December 31,
                                                      2012               2013
    External research and development expenses:
    I.V. CR845                                    $      1,570       $      3,995
    Oral CR845                                             351              1,826
    Internal research and development expenses           2,676              2,864

    Total research and development expenses       $      4,597       $      8,685

General and administrative expenses

General and administrative expenses increased by $0.7 million, to $3.5 million, for the year ended December 31, 2013, compared to the same period of 2012. The increase was primarily attributable to an increase in accounting, legal and consulting professional fees of $0.8 million, including consulting services incurred in connection with the Maruishi license agreement of $0.4 million and preparation for the Company's initial public offering, and a $0.1 million increase in payroll and recruiting costs, partially offset by a decrease of $0.3 million related to a loss on sale of assets in the year ended December 31, 2012.

Interest expense, net

Interest expense, net, increased by $3.7 million, to $3.8 million, for the year ended December 31, 2013, compared to the same period of 2012. The increase in expense was primarily due to $3.7 million of non-cash expenses in connection with the convertible promissory notes, including the accretion of debt discount relating to the intrinsic value of the beneficial conversion feature embedded in the notes and amortization of deferred financing costs, and accrued interest expense on the convertible promissory notes we issued in December 2012 and February 2013.

Comparison of the years ended December 31, 2011 and 2012

The following table sets forth our results of operations for the years ended December 31, 2011 and 2012 (in thousands).

                                            Year Ended December 31,          Period-to-
                                                                               Period
                                             2011              2012            Change
 Revenue                                 $         -         $   1,190      $      1,190

 Cost and expenses:
 Research and development                       7,159            4,597            (2,562 )
 General and administrative                     2,407            2,829               422

                                                9,566            7,426            (2,140 )

 Operating (loss)                              (9,566 )         (6,236 )           3,330
 Other (expense):
 Interest (expense), net                          (95 )            (66 )              29
 Other (expense):                                (180 )             -                180

                                                 (275 )            (66 )             209

 Loss before benefit from income taxes         (9,841 )         (6,302 )           3,539
 Benefit from income taxes                         35               31                (4 )

 Net loss                                $     (9,806 )      $  (6,271 )    $      3,535


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Revenue

Revenue for the year ended December 31, 2012 was $1.2 million, consisting of $0.6 million, net of foreign taxes, related to the upfront payment received from CKD and $0.6 million, net of foreign withholding taxes, received from CKD upon the achievement of clinical development milestones under the agreement. We did not generate any revenue in 2011.

Research and development expenses

Research and development expenses decreased by $2.6 million, to $4.6 million, for the year ended December 31, 2012, compared to 2011. The decrease resulted primarily from a $2.1 million decrease in expenses related to our Phase 2 clinical trial of I.V. CR845, which was completed in early 2012, a $0.1 million decrease in payroll costs as a result of a workforce reduction effected in 2011 and a $0.1 million reduction in depreciation expense.

The following table summarizes our research and development expenses by product candidate for the years ended December 31, 2011 and 2012 (in thousands):

                                                      Year Ended December 31,
                                                      2011               2012
    External research and development expenses:
    I.V. CR845                                    $      3,123       $      1,570
    Oral CR845                                             874                351
    Internal research and development expenses           3,162              2,676

    Total research and development expenses       $      7,159       $      4,597

General and administrative expenses

General and administrative expenses increased by $0.4 million, to $2.8 million, for the year ended December 31, 2012, compared to 2011. The increase resulted primarily from a $0.3 million increase in consulting expenses as a result of the engagement of consultants for business development efforts and a $0.3 million loss on the sale of fixed assets consisting of idle laboratory equipment, partially offset by a $0.2 million reduction in payroll costs as a result of a workforce reduction in 2011.

Interest expense, net

Interest expense, net, decreased by $29 thousand to $66 thousand for the year ended December 31, 2012, compared to 2011. The decrease resulted primarily from a reduction in the outstanding principal balance on our loan from Connecticut Innovations Inc., or CII.

Other expense

Other expense for the year ended December 31, 2011 was $0.2 million. This expense related to an increase in the fair value of the investor right/obligation. There was no corresponding other expense incurred in 2012, as the investor right/obligation was terminated upon the date of the last closing of our Series D Convertible Preferred Stock financing in 2011.

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