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RGLS > SEC Filings for RGLS > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for REGULUS THERAPEUTICS INC.

Form 10-Q for REGULUS THERAPEUTICS INC.


9-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The interim unaudited condensed financial statements and this Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2013 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2013, or Annual Report, filed with the Securities and Exchange Commission on February 28, 2014. Past operating results are not necessarily indicative of results that may occur in future periods.

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q and the documents incorporated by reference herein may contain "forward-looking statements" within the meaning of the federal securities laws made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under Part II, Item 1A, "Risk Factors" in this quarterly report on Form 10-Q. Except as required by law, we assume no obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise. These statements, which represent our current expectations or beliefs concerning various future events, may contain words such as "may," "will," "expect," "anticipate," "intend," "plan," "believe," "estimate" or other words indicating future results. Such statements may include, but are not limited to, statements concerning the following:

• the initiation, cost, timing, progress and results of our research and development activities, preclinical studies and future clinical trials;


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• our ability to obtain and maintain regulatory approval of our future product candidates, and any related restrictions, limitations, and/or warnings in the label of an approved product candidate;

• our ability to obtain funding for our operations;

• our plans to research, develop and commercialize our future product candidates;

• our strategic alliance partners' election to pursue development and commercialization;

• our ability to attract collaborators with development, regulatory and commercialization expertise;

• our ability to obtain and maintain intellectual property protection for our future product candidates;

• the size and growth potential of the markets for our future product candidates, and our ability to serve those markets;

• our ability to successfully commercialize our future product candidates;

• the rate and degree of market acceptance of our future product candidates;

• our ability to develop sales and marketing capabilities, whether alone or with potential future collaborators;

• regulatory developments in the United States and foreign countries;

• the performance of our third-party suppliers and manufacturers;

• the success of competing therapies that are or become available;

• the loss of key scientific or management personnel;

• our ability to successfully secure and deploy capital;

• our ability to satisfy our debt obligations;

• our expectations regarding the time during which we will be an emerging growth company under the Jumpstart our Business Startups Act of 2012, or the JOBS Act;

• our use of the proceeds from our initial public offering and concurrent private placement or our subsequent public offering in July 2013;

• the accuracy of our estimates regarding expenses, future revenues, capital requirements and need for additional financing; and

• the additional risks and other factors described under the caption "Risk Factors" under Item 1A of this quarterly report on Form 10-Q.

OVERVIEW

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. We have established strategic alliances with AstraZeneca, GSK and Sanofi to discover, develop and commercialize microRNA therapeutics. 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.

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 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.


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In addition to our microRNA product platform, we have established RegulusmicroMarkers™, a research and development division focused on identifying microRNAs as biomarkers of human disease to support our therapeutic pipeline, collaborators and strategic partners. Regulus microMarkers™ utilizes a clinically-validated, highly reproducible, proprietary technology platform to identify microRNAs as potential biomarkers for disease and we control key intellectual property and know-how related to the division. We believe that microRNA biomarkers are of significant value and may be used to select optimal patient segments for our clinical trials and the clinical trials of our strategic alliance partners and collaborators. We have a research collaboration with Biogen Idec MA Inc. to identify microRNA biomarkers for multiple sclerosis, and more recently, we entered into an arrangement with another leading, commercial-stage pharmaceutical company to explore microRNAs as biomarkers for specific patient populations.

Currently, we are pursuing several microRNA targets across multiple therapeutic areas to advance our therapeutics pipeline, with a primary focus on orphan diseases and oncology, both independently and with our strategic alliance partners. In February 2014, we launched our 'Clinical Map Initiative', which outlines certain corporate goals and objectives to advance our microRNA therapeutic pipeline over the next several years. Recently, we commenced dosing human subjects in our first clinical trial, a Phase I study of our wholly owned compound, RG-101, a GalNac-conjugated anti-miR targeting microRNA-122 ("miR-122") for the treatment of hepatitis C virus infection ("HCV"). Under our 'Initiative', we intend to demonstrate human proof-of-concept results in the Phase I clinical study of RG-101 by the end of 2014. Also recently, we nominated our second microRNA candidate for clinical development, RG-012, an anti-miR targeting microRNA-21 ("miR-21") for the treatment of Alport Syndrome, a life-threatening kidney disease driven by genetic mutations with no approved therapy. We expect to initiate a Phase I clinical study of RG-012 for the treatment of Alport Syndrome in the first half of 2015 and to nominate a third microRNA candidate for clinical development by the end of 2014. Additionally, we expect to maintain a strong financial position and end 2014 with at least $75.0 million in cash, cash equivalents and short-term investments.

FINANCIAL OPERATIONS OVERVIEW

Revenues

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.

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 development of our therapeutic programs, and our Regulus 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.


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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 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 conversion to a corporation in January 2009, we have grown from 15 research and development personnel to 59 and have spent a total of approximately $106.4 million in research and development expenses through March 31, 2014.

We expect our research and development expenses to increase for the foreseeable future as we continue to advance our research programs toward the clinic and initiate additional 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 are responsible for the development of product candidates through proof-of-concept, after which time Sanofi would be responsible for the costs of clinical development and commercialization and all related costs, in the event it exercises its option to such program. 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 the valuation of convertible notes payable from period to 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 interest payable under convertible notes payable and 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 believe that the estimates, assumptions and judgments involved in the accounting policies described in Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and under Note 1 to our financial statements contained in our Annual Report have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. There were no material changes to our critical accounting policies and estimates during the quarter ended March 31, 2014.


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RESULTS OF OPERATIONS

Comparison of the three months ended March 31, 2014 and 2013

The following table summarizes our results of operations for the three months
ended March 31, 2014 and 2013, together with the changes in those items in
dollars (in thousands):



                                                 Three months ended
                                                     March 31,
                                               2014              2013           Increase/(Decrease)
Revenue under strategic alliances            $   1,631         $  3,238        $              (1,607 )
Research and development expenses                9,604            6,883                        2,721
General and administrative expenses              2,732            1,905                          827
Loss from changes in valuation of
convertible note payable                        (2,124 )         (1,761 )                        363

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):

                                                        Three months ended
                                                             March 31,
                                                         2014          2013
        Sanofi                                        $      925      $ 2,500
        GSK                                                  144          187
        AstraZeneca                                          465          465
        Biogen Idec                                           87           86
        Other                                                 10           -

        Total net revenues from strategic alliances   $    1,631      $ 3,238

Revenue under strategic alliances was $1.6 million for the three months ended March 31, 2014, compared to $3.2 million for the three months ended March 31, 2013. Our revenue during these periods consisted primarily of amortization of upfront payments received from the Sanofi, GSK and AstraZeneca strategic alliances, which we amortize monthly on a straight-line basis over our estimated period of performance.

Revenue recognized from our Sanofi strategic alliance was $0.9 million for the three months ended March 31, 2014 compared to $2.5 million for the three months ended March 31, 2013. This decrease was primarily due to the expiration of the research term under the Sanofi alliance in June 2013. Revenue associated with payments received from Sanofi under the research program was $1.25 million in the three months ended March 31, 2013. Revenue associated with the amortization of other payments received from Sanofi was $0.9 million and $1.25 million for the three months ended March 31, 2014 and 2013, respectively. Revenue from our other strategic alliances was materially consistent for the three months ended March 31, 2014 compared to the three months ended March 31, 2013.

As of March 31, 2014, we had $10.2 million of deferred revenue, which consists of payments received through our strategic alliances, but have not yet recognized in accordance with our revenue recognition policies and remaining estimated period of performance.

Research and development expenses

Research and development expenses were $9.6 million for the three months ended March 31, 2014 compared to $6.9 million for the three months ended March 31, 2013. This increase was primarily driven by the initiation of a Phase I clinical study for RG-101 and the continued advancement of other pre-clinical programs totaling $3.4 million for the three months ended March 31, 2014, compared to pre-clinical development costs of $0.8 million for the three months ended March 31, 2013. We had 59 employees engaged in research and development activities as of March 31, 2014, compared to 57 as of March 31, 2013. We expect our research and development expenses to continue to increase to the extent we continue clinical studies and initiate additional pre-clinical and clinical programs.


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General and administrative expenses

General and administrative expenses were $2.7 million for the three months ended March 31, 2014 compared to $1.9 million for the three months ended March 31, 2013. This increase was primarily driven by an increase in salaries and related employee costs of $0.2 million and an increase in operating costs of $0.6 million associated with general business activities.

Loss from valuation of convertible note payable

We recorded a loss from changes in value of convertible notes payable of $2.1 million and $1.8 million in the statements of operations and comprehensive loss for the three months ended March 31, 2014 and 2013, respectively. Changes in value were primarily driven by increases in our stock price during the respective periods.

LIQUIDITY AND CAPITAL RESOURCES

Since our inception through March 31, 2014, we have received $65.5 million principally from upfront payments, research funding and preclinical milestones from our strategic alliances and collaborations, $180.8 million from the sale of our equity and convertible debt securities, including $70.0 million in net proceeds from our initial public offering and concurrent private placement of our common stock in October 2012, and $2.5 million from government grants and loans.

As of March 31, 2014, we had $114.6 million in cash, cash equivalents and short-term investments. The following table shows a summary of our cash flows for the three months ended March 31, 2014 and 2013 (in thousands):

                                                  Three months ended
                                                      March 31,
                                                 2014           2013
                                                     (unaudited)
             Net cash (used in) provided by:
             Operating activities              $  (9,029 )    $  (7,155 )
             Investing activities                (10,483 )      (15,748 )
             Financing activities                 10,181            173

             Total                             $  (9,331 )    $ (22,730 )

Operating activities

Net cash used in operating activities was $9.0 million for the three months ended March 31, 2014, compared to $7.2 million for the three months ended March 31, 2013. The increase in net cash used in operating activities was attributable in part to a net loss to $12.7 million for the three months ended March 31, 2014 compared to a net loss of $7.2 million for the three months ended March 31, 2013. Adjustments for non-cash charges increased by $1.2 million for the three months ended March 31, 2014, primarily as a result of a $0.6 million increase in stock-based compensation and $0.4 million increase associated with the loss in valuation of the Post-IPO GSK Note. Changes in working capital resulted in net cash used in operating activities of $0.6 million for the three months ended March 31, 2014, compared to $3.1 million for the three months ended March 31, 2013. This reduction was primarily driven by the amortization of deferred revenue associated with upfront payments, compared to the period of revenue recognition.

Investing activities

Net cash used in investing activities for the periods presented primarily relate to the net of purchases, sales and maturities of investments used to fund the day-to-day needs of our business. We invest cash in excess of our immediate operating requirements in such a way that maturity is staggered to optimize our return on investment, while satisfying the liquidity needs of the company. As such, for the three months ended March 31, 2014 and 2013, net cash used in investing activities primarily reflects the net purchase of short-term investments, offset by sales and maturities. The net purchases of short-term investments were $10.4 million and $15.6 million for the three months ended March 31, 2014 and 2013, respectively.

Financing activities

Net cash provided by financing activities was $10.2 million for the three months ended March 31, 2014, compared to $0.2 million for the three months ended March 31, 2013. The increase in net cash provided by financing activities is primarily a result of the 2014 Sanofi Amendment and concurrent Common Stock Purchase Agreement with Aventis, which was completed in February 2014, and included a private placement of our common stock with proceeds of $9.6 million, which excludes $0.4 million in proceeds from the private placement attributed to the 2014 Sanofi Amendment.


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CONTRACTUAL OBLIGATIONS AND COMMITMENTS

There have been no material changes, outside of the ordinary course of business, in our outstanding contractual obligations from those disclosed within "Management's Discussion and Analysis of Financial Condition and Results of Operations", as contained in our Annual Report.

Off-Balance Sheet Arrangements

As of March 31, 2014, we did not have any off-balance sheet arrangements.

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