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

Show all filings for RETROPHIN, INC.

Form 10-K for RETROPHIN, INC.


28-Mar-2014

Annual Report


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

The following discussion includes forward-looking statements about our business, financial condition and results of operations, including discussions about management's expectations for our business. These statements represent projections, beliefs and expectations based on current circumstances and conditions and in light of recent events and trends, and you should not construe these statements either as assurances of performance or as promises of a given course of action. Instead, various known and unknown factors are likely to cause our actual performance and management's actions to vary, and the results of these variances may be both material and adverse. A description of material factors known to us that may cause our results to vary, or may cause management to deviate from its current plans and expectations, is set forth under "Risk Factors." See "Cautionary Note Regarding Forward-Looking Statements."

The following discussion should also be read in conjunction with our audited and unaudited consolidated financial statements, including the notes thereto.

Overview

We are a fully integrated biopharmaceutical company focused on the development, acquisition and commercialization of therapies for the treatment of serious, catastrophic or rare diseases. We are developing Syntocinon TM Nasal Spray in the U.S. to assist initial postpartum milk ejection, and for the treatment of Schizophrenia and Autism. Syntocinon Nasal Spray is currently marketed by Novartis and Sigma-Tau in Europe and other countries for aiding milk let-down. In addition, we are developing RE-034, a synthetic hormone analogue that is composed of the first 24 amino acids of the 39 amino acids contained in ACTH for the treatment of IS and NS. We are developing RE-024, a novel small molecule, as a potential treatment for PKAN. Also, we are developing sparsentan, formerly known as RE-021, a dual acting receptor antagonist of angiotensin and endothelin receptors, for the treatment of FSGS. We also have several additional programs in preclinical development, including RE-001, a therapy for the treatment of DMD.

Our results of operations discussed below reflect our operations during the period in which we are in development stage and starting up our operations. As a result, these results should not be considered indicative of our anticipated results of operations on a going forward basis.

Restatement of December 31, 2012 Financial Statements

On September 13, 2013, we determined that we were required to file an amendment to our audited consolidated financial statement for the year ended December 31, 2012 included in our Transitional Report on Form 10-K. We determined, after consultation with our board of directors and our independent registered public accounting firm that it would be necessary to restate our December 31, 2012 consolidated financial statements to include disclosures of certain agreements that we entered into subsequent to the date of the balance sheet and corrections to our accounting for proceeds received in a financing transaction we completed in February 2013. The addition of these footnote disclosures in our December 31, 2012 consolidated financial statements had no impact on our balance sheet, or related consolidated statements of operations, changes in stockholders' (deficit) equity, loss per share or cash flows for the year ended December 31, 2012. On September 16, 2013, we amended our Transition Report on Form 10-K for the transition period from March 1, 2012 to December 31, 2012, as filed with the SEC on June 13, 2013, solely for the purpose of amending Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Part II, Item 8. Financial Statements and Supplementary Data to include disclosure and a footnote to our financial statements relating to events that occurred after the conclusion of the period covered by the original filing. The disclosure below reflects the changes made in such amendment. We further determined that it would be necessary for us to restate our March 31, 2013 condensed consolidated financial statements to include the same disclosures in these financial statements that we were required to make in our December 31, 2012 financial statements, and to correct our accounting for the allocation of $360,000 in proceeds we received in the financing transaction we completed in February 2013.


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Plan of Operation

Our plan of operation for the years ending December 31, 2014 and 2015 is to continue implementing our business strategy, including the clinical development of our four drug candidates, focusing primarily on the development of Sparsentan for the treatment of FSGS, RE-024 for the treatment of PKAN, RE-034 for the treatment of Infantile Spasms and Nephrotic Syndrome, and Syntocinon for the treatment of Schizophrenia and possibly Autism. We also intend to expand our drug product portfolio by acquiring additional drugs for marketing or development. During the next 12 months, our principal expenditures may include the following:

We expect to incur operating expenses, including expanded research and development and general and administrative expenses

We expect to incur product development expenses, including the costs incurred with respect to applications to conduct clinical trials in the United States for our four products and the costs of ongoing and planned clinical trials. We expect to conduct multiple clinical trials for our assets, including a Phase 2 clinical trial for Sparsentan for the treatment of FSGS, a Phase 1 clinical trial for RE-024 for the treatment of PKAN, Phase 1 and 3 trials for RE-034 for the treatment of Infantile Spasms and Nephrotic Syndrome, and a Phase 2 trial for Syntocinon for the treatment of Schizophrenia. The expected costs associated with these trials amount to approximately $12.1 million through March 2015.

We plan to re-introduce Syntocinon to the market for its original indication for aiding milk let-down. The re-launch is expected to cost approximately $3.2 million, which includes the contracting of a salesforce, market analysis, marketing and physician outreach and other related launch expenses.

We plan to incur approximately $8.5 million in pre-clinical expenses in non-human studies to confirm safety and efficacy of our assets. Such amount includes sponsored research to which we have committed to.

As part of our planned expansion, we expect to aggressively increase our work staff by hiring up to 75 full-time employees by the end of 2014 for research and development activities and general and administrative activities. Total personnel costs through March 2015 are expected to be approximately $16.7 million, with $10.2 million in research and development and $6.5 million in general and administrative. We expect to incur approximately $2.2 million in expenses related to operating as a public entity. We will also continue to rely on outside counsel until we are ready to hire internal counsel. We also will incur $4 million in license maintenance fees due to Novartis ($3 million) for the Syntocinon license, and to Dr. Weg ($1 million) for the license of a product for the treatment of central nervous system disorders. In addition, we intend to use clinical research organizations and third parties to perform our clinical studies and manufacturing. At our current and desired pace of commercialization and clinical development of our drugs, through March 2015, we cannot assure you these amounts will be sufficient to fund our operations over the course of the next two years and we may need to expend significantly greater amounts to accomplish our goals.

Research and Development Projects

Syntocinon Nasal Spray

Syntocinon (oxytocin nasal spray, USP) is our product candidate for aiding milk let-down and for the treatment of Schizophrenia and Autism. Syntocinon is currently sold in Europe and other countries by Novartis and Sigma-Tau to aid mothers experiencing problems with milk let-down. Oxytocin is a nonapeptide hormone synthesized by the brain and released by the pituitary gland.

Syntocinon Nasal Spray was an FDA-approved product for aiding milk let-down. Syntocinon Nasal Spray was voluntarily withdrawn from sale by Novartis Pharmaceutical Corporation, or Novartis, in 1997 for commercial reasons. On December 12, 2013, we secured a royalty-bearing license from Novartis to the U.S. rights for Syntocinon Nasal Spray, including the intellectual property to develop, manufacture, and sell the product in the United States.

Syntocinon Nasal Spray in Milk Let-Down

We intend to reintroduce Syntocinon to the U.S. market to assist initial postpartum milk ejection from the breasts. Disruption of oxytocin plays an important role in preventing the release of milk from the lactating breast. Numerous psychological and chemical stressors have been implicated in the inhibition of oxytocin release in new mothers resulting in impaired milk-ejection. There are currently no FDA-approved drugs for the treatment of milk let-down in the U.S. We believe that reintroduction of intranasal oxytocin would provide a convenient therapy for new mothers suffering from lactation deficiency.


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Syntocinon Nasal Spray in Schizophrenia

We intend to develop Syntocinon as a potential treatment for Schizophrenia. Current pharmaceutical treatment is limited to powerful antipsychotics with serious side effects and compliance problems. According to the National Institute of Mental Health, approximately one percent of Americans suffer from Schizophrenia. Over the past four years, three randomized, double-blind, placebo-controlled, independent proof-of-concept schizophrenia trials were held. In all three trials, patients were highly symptomatic despite receiving therapeutic doses of an atypical antipsychotic. We believe that the findings of these studies suggest that intranasal oxytocin administered as an adjunct to subjects' antipsychotic drugs will improve positive and negative symptoms. We are partially funding a Phase 2 clinical study regarding the effects of oxytocin on the treatment of Schizophrenia . This trial is currently enrolling patients, and we expect approximately 143 patients to be enrolled. We expect results from this trial in 2014.

Syntocinon Nasal Spray in Autism Spectrum Disorders

We also plan to develop Syntocinon for the potential treatment of symptoms in patients with Autism Spectrum Disorders. Approximately one in fifty children in the U.S. suffers from Autism Spectrum Disorders according to the Center for Disease Control and Prevention. Risperidone and aripiprazole are the only approved treatments for the behavioral disturbances associated with Autism. Common adverse effects from these drugs include weight gain, sedation, and extrapyramidal symptoms. Recent small clinical studies suggest that oxytocin may improve social cognition and quality of life in patients with Autism. We believe that these studies support the development of Syntocinon for this indication. We plan to provide support to investigator studies of Syntocinon for the treatment of Autism Spectrum Disorders.

Sparsentan

Sparsentan, formerly known as RE-021, is an investigational therapeutic agent which acts as both a potent angiotensin receptor blocker, or ARB, which is a type of drug that modulates the renin-angiotensin-aldosterone system and is typically used to treat hypertension, diabetic nephropathy and congestive heart failure, as well as a selective endothelin receptor antagonist, or ERA, which is a type of drug that blocks endothelin receptors, preferential for endothelin receptor type A. We have secured a license to sparsentan from Ligand and Bristol-Myers Squibb (who referred to it as DARA). We are developing sparsentan as a treatment for FSGS . FSGS is a leading cause of end-stage renal disease and Nephrotic Syndrome . We are currently enrolling patients for a Phase 2 clinical study of sparsentan for the treatment of FSGS and we expect approximately 100 patients to be enrolled.

RE-034 (Tetracosactide Zinc)

RE-034 is a synthetic hormone analog of the first 24 amino acids of the 39 amino acids contained in ACTH, formulated together with zinc. RE-034 exhibits the same physiological actions as endogenous ACTH by binding to all five melanocortin receptors (MCR), resulting in its anti-inflammatory and immunomodulatory effects. In 2014, we plan to submit an IND, for RE-034 for the treatment of Infantile Spasms and Nephrotic Syndrome to the FDA.

RE-034 in Infantile Spasms

Infantile Spasms, or IS, also known as West syndrome, is a form of epileptic encephalopathy that begins in infancy . IS is considered a catastrophic form of epilepsy due to the difficulty in controlling seizures and normalization of electroencephalography in addition to strong association with sequelae of developmental delay and mental retardation. Commercially available ACTH formulations that are substantially similar to RE-034 have been shown to be an effective treatment of Infantile Spasms . We intend to initiate a Phase 3 clinical trial of RE-034 for the treatment of Infantile Spasms in 2014.

RE-034 in Nephrotic Syndrome

We intend to initiate studies of RE-034 for the treatment of Nephrotic Syndrome, or NS. Nephrotic Syndrome is a kidney disorder that leads to proteinuria, a condition in which an excess of proteins are contained in a patient's urine . Long-term conventional immunosuppression therapies have been used effectively to induce remission of proteinuria ; however, many patients with Nephrotic Syndrome will relapse after remission or are resistant to primary and secondary treatments. Commercially available ACTH formulations that are substantially similar to RE-034 have been shown to successfully induce remission o f proteinuria in patients with Nephrotic Syndrome . We intend to initiate a Phase 3 clinical trial of RE-034 for the treatment of Nephrotic Syndrome in 2014.


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RE-024

We are developing RE-024, a novel small molecule, as a potential treatment for PKAN. PKAN is the most common form of neurodegeneration with brain iron accumulation. Classic PKAN is a genetic disorder that is typically diagnosed in the first decade of life. Consequences of PKAN include dystonia, dysarthria, rigidity, retinal degeneration, and severe digestive problems. PKAN is estimated to affect 1 to 3 persons per million . PKAN typically manifests in childhood with a profound, progressive dystonia and is usually lethal. There are currently no viable treatment options for patients with PKAN. RE-024 is a phosphopantothenate prodrug replacement therapy with the goal of restoring the supply of this operative substrate in PKAN patients. We intend to file an IND with the FDA for RE-024, so that we will be able to initiate a Company-sponsored Phase 1 clinical trial of RE-024. We expect that the first patients will be treated with RE-024 in early 2014 under an emergency IND.

RE-001

RE-001 is a recombinant, modified form of utrophin, a protein similar to the dystrophin protein that is missing in the muscles of DMD patients. RE-001 is a preclinical investigational program. Production scale-up the molecule is underway, and in vivo evaluation of clinical trial quality material may begin in 2014.

Financial Overview

The following discussion summarizes the key factors our management believes are necessary for an understanding of our financial statements as of December 31, 2013.

Compensation and Related Costs

Our compensation and related costs consist primarily of salaries, benefits and stock-based compensation. We expect our compensation and related costs to increase as we expand our research and development programs and general and administrative activities.

Professional Fees

Professional fees consist of expenses for outside professional services, including legal, human resource, audit, tax and accounting services.

Research and Development Costs

Research and development expenses represent costs incurred to conduct research of our proprietary product candidates. We expense all research and development costs as they are incurred. Our research and development expenses consist of employee salaries and related benefits, including stock-based compensation, third-party contract costs relating to research, manufacturing, preclinical studies, clinical trial activities, regulatory activities, laboratory consumables, and allocated facility costs.

At any point in time, we typically have various early stage research and drug discovery projects. Our internal resources, employees and infrastructure are not directly tied to any one research or drug discovery project and are typically deployed across multiple projects. As such, we do not maintain information regarding these costs incurred for these early stage research and drug discovery programs on a project-specific basis.

We routinely engage vendors and service providers for scientific research, clinical trial, regulatory compliance, manufacturing and other consulting services. To date, such engagements have been generally based on pre-determined prices or rates. We also make grants to research and non-profit organizations to conduct research which may lead to new intellectual properties that we may subsequently license under separately negotiated license agreements. Such grants may be funded in lump sums or installments.

The following table summarizes our research and development expenses during the years ended December 31, 2013 and 2012 and for the period from March 11, 2011 (inception) through December 31, 2013. The internal costs include personnel, facility costs, laboratory consumables and discovery and research related activities associated with our pipeline. The external program costs reflect external costs attributable to our clinical development candidates and preclinical candidates selected for further development. Such expenses include third-party contract costs relating to manufacturing, clinical trial activities, translational medicine and toxicology activities.


Index

                                                                      For the period
                                                                      from March 11,
                                                                       2011 through
                                   December 31,     December 31,       December 31,
                                       2013             2012               2013
External service provider costs:
Sparsentan                         $  2,443,273     $    297,833     $      2,619,723
RE-024                                1,548,957          124,635            1,673,592
Weg license in process R&D            1,000,000                -            1,000,000
Syntocinon                              250,540                -              250,540
RE-034                                  230,279                -              230,279
General                                 159,080          240,034              493,569
Other product candidates                117,771                -              376,710
Total external service provider
costs:                                5,749,900          662,502            6,644,413
Internal personnel costs:             1,334,109                -            1,334,109
Total research and development     $  7,084,009     $    662,502     $      7,978,522

We expect our research and development expenses will increase in the future as we progress our product candidates, advance our discovery research projects into the preclinical stage and continue our early stage research. The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time consuming. We may never succeed in achieving marketing approval for any of our product candidates. The probability of success of each product candidate may be affected by numerous factors, including preclinical data, clinical data, competition, manufacturing capability and commercial viability.

Most of our product development programs are at an early stage; therefore, the successful development of our product candidates is highly uncertain and may not result in approved products. Completion dates and completion costs can vary significantly for each product candidate and are difficult to predict. Given the uncertainty associated with clinical trial enrollments and the risks inherent in the development process, we are unable to determine the duration and completion costs of current or future clinical trials of our product candidates or if and to what extent we will generate revenues from the commercialization and sale of any of our product candidates. We anticipate that we and our strategic alliance partners 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 the scientific and clinical success of each product candidate, as well as an ongoing assessment as to each product candidate's commercial potential. We will need to raise additional capital or may seek additional strategic alliances in the future in order to complete the development and commercialization of our product candidates.

Selling, General and Administrative

Selling, general and administrative expenses consist of compensation, professional fees, rent, depreciation and amortization, settlement charges, travel and entertainment, recruiting, insurance, business development, advertising, and other operating expenses. We expect to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange and costs related to compliance and reporting obligations pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. In addition, as a public company, we expect to incur increased expenses related to additional insurance, investor relations and other increases related to needs for additional human resources and professional services.

Other Expenses

Other expenses consist of charges from the change in fair value of derivative financial instruments, interest income and expense, charges from transactions denominated in foreign currencies, realized gains and losses on the sale of marketable securities, and registration payment income and expense.

License Agreements

Novartis

On December 12, 2013, we entered into an agreement with Novartis and Novartis AG pursuant to which Novartis and Novartis AG agreed to grant us an exclusive, perpetual, and royalty-bearing license for the manufacture, development and commercialization of Syntocinon and related intranasal products in the United States. Under the license, Novartis and Novartis AG are obligated to transfer to us certain information that is necessary for or related to the development or commercialization of Syntocinon. We are responsible for conducting research and preclinical, clinical and other development of Syntocinon at our own expense, and must use commercially reasonably efforts to develop Syntocinon in the United States.


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As consideration for the license, we paid to Novartis and Novartis AG a $5 million upfront fee and are required to pay annual maintenance fees of $3 million after each anniversary until there has been regulatory approval, up to $34 million in developmental milestones for the first indication and up to $32 million in developmental milestones for the second indication. Should we commercialize Syntocinon, we will be obligated to pay Novartis and Novartis AG a 10%-20% royalty on net sales of such products. We are also required to pay annual maintenance fees to Novartis and Novartis AG. The license agreement contains other customary clauses and terms as are common in similar agreements in the industry.

Ligand

In February 2012, we entered into an agreement pursuant to which Ligand agreed to grant us a worldwide license for the development, manufacture and commercialization of sparsentan, an ARB and ERA which we are initially using in connection with the treatment of FSGS. Under the license agreement, Ligand granted us a sublicense under certain of its patents and other intellectual property in connection with the development and commercialization of sparsentan. Under the license agreement, Ligand is obligated to transfer to us certain information, records, regulatory filings, materials and inventory controlled by Ligand and relating to or useful for developing sparsentan. We must use commercially reasonable efforts to develop and commercialize sparsentan in specified major market countries and other countries in which we believe it is commercially reasonable to develop and commercialize such products.

As consideration for the license, we are required to make substantial payments payable upon the achievement of certain milestones totaling up to $106.9 million. Should we commercialize sparsentan or any products containing any of these compounds, we will be obligated to pay to Ligand an escalating annual royalty between 10% and 20% of net sales of all such products. In the event that we desire to enter into a license arrangement with respect to any licensed compound under the license agreement, Bristol-Myers Squibb Company will have a right of first negotiation and Ligand will have a right of second negotiation with respect to any such license arrangement for a licensed compound. The license agreement contains other customary clauses and terms as are common in similar agreements in the industry. Through December 31, 2013, we made payments to Ligand of $2.3 million under the license agreement.

Weg License Agreement

On December 12, 2013, we entered into an agreement, which we refer to as the "Weg License Agreement," with Stuart Weg, MD, pursuant to which Dr. Weg agreed to grant us an exclusive worldwide license for the manufacture, development and distribution of products to be developed for the treatment of central nervous system disorders. As consideration for the license, we paid Dr. Weg an upfront fee, which amount included $1,000,000 in payments prior to and upon the execution of the Weg License Agreement. We are also obligated to pay Dr. Weg certain maintenance and sublicensing fees, as well as certain royalties on sales of FDA-approved products. Through December 31, 2013, we made payments to Dr. Weg of $1,000,000 under the Weg License Agreement.

The Weg License Agreement contains other customary clauses and terms as are common in similar agreements in the industry.

The Weg License Agreement will continue in perpetuity unless terminated by us or by Dr. Weg. We may terminate the agreement at any time by giving written notice to Dr. Weg. Dr. Weg may terminate the agreement due to our uncured material breach of the agreement.

Results of Operations

We believe our ability to continue operations depends on our ability to raise capital. Our future depends on the costs, timing, and outcome of regulatory reviews of our product candidates and the costs of commercialization activities, including product marketing, sales and distribution. These conditions raise substantial doubt about our ability to continue as a going concern. These consolidated financial statements do not include any adjustments relating to the recovery of assets or the classification of liabilities that might be necessary should we be unable to continue as a going concern.

Year ended December 31, 2013 Compared to the Year ended December 31, 2012

Revenue. We had no revenues for the year ended December 31, 2013 and 2012.

. . .

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