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

Show all filings for RAPTOR PHARMACEUTICAL CORP

Form 10-Q for RAPTOR PHARMACEUTICAL CORP


9-May-2014

Quarterly Report


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

You should read the following discussion in conjunction with our condensed consolidated financial statements as of March 31, 2014, and the notes to such condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. All references to "the Company," "we," "our" and "us" include the activities of Raptor Pharmaceutical Corp., Raptor Pharmaceuticals Inc. or Raptor Pharmaceuticals, Raptor European Products, LLC, RPTP European Holdings C.V., Raptor Pharmaceuticals Europe B.V., Raptor Pharmaceuticals France SAS and Raptor Pharmaceuticals Germany GmbH.

This Quarterly Report on Form 10-Q, including this "Management's Discussion and Analysis of Financial Condition and Results of Operations" section, contains "forward-looking statements," within the meaning of the Private Securities Litigation Reform Act of 1995, that plan for or anticipate the future. In some cases, these statements can be identified by the use of terminology such as "believes," "expects," "anticipates," "plans," "may," "might," "will," "could," "should," "would," "projects," "predicts," "intends," "continues," "estimates," "potential," "opportunity" or the negative of these terms or other comparable terminology. All such statements, other than statements of historical facts, including our financial condition, future results of operations, projected revenues and expenses, business strategies, operating efficiencies or synergies, competitive positions, growth opportunities for existing intellectual properties, technologies, products, plans, and objectives of management, markets for our securities, and other matters, involve substantial risks and uncertainties and constitute forward-looking statements for the purpose of the safe harbor provided by Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Such forward-looking statements, wherever they occur, are necessarily estimates reflecting the best judgment of our senior management on the date on which they were made, or if no date is stated, as of the date of the filing made with the SEC in which such statements were made. You should not place undue reliance on these statements, which only reflect information available as of the date that they were made. We cannot give you any assurance that such forward-looking statements will prove to be accurate and such forward-looking events may not occur. Our business' actual operations, performance, development and results might differ materially from any forward-looking statement due to various known and unknown risks, uncertainties, assumptions and contingencies, including those described in the section titled "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q. Unless required by U.S. federal securities laws and the rules and regulations of the SEC, we do not undertake any obligation and disclaim any intention to update or release publicly any revisions to these forward-looking statements after the filing of this Quarterly Report on Form 10-Q to reflect later events or circumstances or to reflect the occurrence of unanticipated events or any other reason.

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 European Free Trade Association, or EFTA). 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 launched PROCYSBI in Germany in April 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 RP103, which contains the active pharmaceutical ingredient, cysteamine bitartrate. RP103 is our proprietary extended and delayed-release formulation capsule containing enteric coated microbeads 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 cystinosis. We have an exclusive worldwide license to delayed-release cysteamine bitartrate from the University of California, San Diego, or UCSD, which is the basis for our proprietary formulation of cysteamine. We currently have product candidates in clinical development designed to potentially treat Huntington's disease, or HD, non-alcoholic fatty liver disease, or NAFLD and 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 may seek development partners in the future, 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.

Future Activities

Over the next fiscal year, our efforts will be focused on increasing sales of PROCYSBI in the U.S. and Germany; launching PROCYSBI in other countries in the EU; filing a New Drug Submission, or NDS, for cysteamine bitartrate delayed-release capsules with Health Canada in the second half of 2014; conducting a clinical trial to evaluate PROCYSBI in cystinosis patients that are cysteamine-naïve, 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 adult nephropathic cystinosis patients; supporting our regulatory pathways and/or clinical trials of RP103 for the potential treatment of HD, NAFLD, Leigh syndrome and mitochondrial disorders; preparing for potential clinical studies of RP103 in new therapeutic indications; supporting our novel preclinical programs; and identifying promising in-licensing candidates.

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.

Results of Operations

Three months ended March 31, 2014 and 2013

Revenue

For the three months ended March 31, 2014, we recognized $12.1 million in PROCYSBI net product sales. The first U.S. sales of PROCYSBI commenced in June 2013 and the launch of PROCYSBI in Germany commenced in April 2014. There were no PROCYSBI product sales for the three months ended March 31, 2013.

Cost of Sales

Prior to FDA approval of PROCYSBI, our commercial manufacturing costs had been recorded as research and development expenses. As a result, our cost of sales for the next several quarters will reflect a lower average per unit cost of goods than will be recorded in the future. Cost of sales for the three months ended March 31, 2014 were $1.3 million and primarily included capitalized commercial product sold, amortization of licensing milestone payments, royalty fees payable to UCSD on our net product sales and other indirect costs such as distribution, labeling, shipping and supplies. We began capitalizing commercial inventory costs upon FDA approval of PROCYSBI on April 30, 2013.

Research and Development

Research and development expenses include medical, clinical, regulatory, quality, pharmacovigilance and research salaries and benefits; expenses associated with the manufacturing and testing of PROCYSBI inventory for our commercial launch in the U.S. which were expensed prior to drug approval; preclinical studies; clinical trials; regulatory and clinical consultants; research supplies and materials; amortization of intangible assets and allocated human resources and facilities expenses.


Research and development expenses increased approximately 13% to $9.5 million for the three months ended March 31, 2014 from $8.4 million during the three months ended March 31, 2013. The increase of $1.1 million was primarily due to an increase in staffing and associated salaries and benefits for medical, clinical, quality and regulatory personnel, as well as increased spending for preclinical studies, clinical trials and non-commercial drug manufacturing expenses.

Major program expenses recorded as research and development expenses:

                                                                 For the three months ended
                                                                          March 31,
 (In thousands)                                                   2014                2013
RP103:
Cystinosis (pre-commercial and extension)                      $     3,661         $     4,179
HD (clinical)                                                          504                 212
NAFLD (clinical)                                                       442                 445
Preclinical programs                                                   572                 200
Other programs                                                         653                 254
R & D personnel and other costs not allocated to programs            3,715               3,122
Total research and development expenses                        $     9,547         $     8,412

Selling, General and Administrative Expenses

Selling, general and administrative expenses primarily includes commercial expenses related to marketing and sales efforts in the U.S. and EU, including marketing and pricing studies, advertising, sales force commissions and other expenses, and market access support activities; commercial launch expenses for PROCYSBI, including patient support activities such as reimbursement assistance and establishing a customer relationship management system for our PROCYSBI sales team; intellectual property, legal and audit fees, finance, executive and commercial operations salaries and benefits; and other administrative and facilities costs.

Selling, general and administrative expenses increased approximately 53% to $12.1 million for the three months ended March 31, 2014 from $7.9 million in the three months ended March 31, 2013. The $4.2 million increase was primarily due to $3.3 million for increased staffing and personnel-related expenses for the commercialization of PROCYSBI in the U.S., for the establishment of our EU commercial headquarters and build out of our German commercial team in anticipation of the recent launch of PROCYSBI in Germany and $0.9 million of increased spending for external services to support commercial operations.

Interest Expense

Interest expense for the three months ended March 31, 2014 and 2013 was $3.0 million and $0.7 million, respectively. The increase in interest expense was due primarily to the $50.0 million loan agreement that we entered into with HealthCare Royalty Partners II, L.P., or HC Royalty, in December 2012, of which net proceeds of $23.4 million and $23.7 million were received in December 2012 and May 2013, respectively. Interest expense for the three months ended March 31, 2014 also includes an interest expense royalty fee based on net sales for the quarter. We did not have product sales in the comparable period last year.

Adjustment to the Fair Value of Common Stock Warrants

The adjustment to the fair value of common stock warrants was loss of $1.2 million for the three months ended March 31, 2014 compared to a gain of $1.1 million for the three months ended March 31, 2013. The loss for the three months ended March 31, 2014 was due primarily to the increases in the price of our stock through the dates that warrants were exercised during the quarter. The gain for the three months ended March 31, 2013 was due primarily to a decrease in the volatility of our stock price. At March 31, 2014, the remaining warrants outstanding were 334,764 compared to 3,962,772 at March 31, 2013.


Application of Critical Accounting Policies

Our condensed 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 condensed 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 available for U.S. distribution from our U.S. specialty pharmacy partner, the Accredo Health Group, Inc., or Accredo, which is currently our only U.S. customer and ships directly to patients. Our commercial launch in Germany commenced in April 2014, with the Almac Group, Ltd. as our distributor in the EU. PROCYSBI is not available in U.S. retail pharmacies. Prior authorization of coverage by patients' commercial insurance plans, our patient assistance program, or PAP, or government payors is a prerequisite to the shipment of PROCYSBI to U.S. patients. Revenue is recognized once the product has been shipped by the specialty pharmacy to patients because we have not yet been able to reasonably estimate the third-party payor mix and resulting rebates based on 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 in the U.S. 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.

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 EC 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 FDA approval, we began capitalizing these costs and manufacturing overhead as commercial inventory. Cost of sales includes the cost of inventory sold or reserved; manufacturing, manufacturing overhead and supply chain costs; product shipping and handling costs; amortization of licensing approval milestone payments and licensing royalties payable to UCSD.


Note Payable

Note payable consists of our loan agreement with 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 up to $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 up to $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. 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.

We reported a net loss of $14.9 million for the three months ended March 31, 2014. If our March 31, 2014 closing stock price had been 10% lower, our net loss would have been approximately $0.1 million lower. If our March 31, 2014 closing stock price had been 10% higher, our net loss would have been approximately $0.1 million higher.

A 10% increase or decrease of our volatility assumption for warrants at March 31, 2014 would not have had a material effect on our net loss due to the lower number of warrants that remain outstanding at March 31, 2014.


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 March 31, 2014, we have identified no uncertain tax positions.

We file U.S. Federal, California, various other state and other income 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.


Liquidity and Capital Resources

Capital Resource Requirements

As of March 31, 2014, we had approximately $68.1 million in cash and cash equivalents, approximately $21.3 million in current liabilities (of which approximately $0.7 million represented the common stock warrant liability, which is expected to be settled in shares) and approximately $64.2 million of net working capital.

We estimate that without regard to any other future sources of funds, our cash and cash equivalents of approximately $68.1 million as of March 31, 2014 will be sufficient to meet our projected operational requirements and obligations at least through the first half of 2015.

Under the terms of the HC Royalty loan agreement executed on December 20, 2012, we received $23.4 million in net proceeds from the first tranche of the loan at closing in December 2012. We received an additional $23.7 million in net proceeds in May 2013 from the second tranche upon FDA approval of PROCYSBI. No additional funds can be borrowed under the loan agreement without HCR's consent. The loan matures on March 31, 2020, bears interest at an annual fixed rate of 10.75% and has a synthetic royalty, tiered down, based on a percentage of net product sales. The loan is interest-only until May 2015. The proceeds from the loans are being used primarily to fund the commercialization of PROCYSBI for the management of cystinosis, advance our development programs and for general corporate purposes.

On April 30, 2012, we entered into a Sales Agreement with Cowen and Company, or Cowen, to sell shares of our common stock, with aggregate gross sales proceeds of up to $40 million, from time to time through an "at the market" , or ATM, equity offering program under which Cowen acts as sales agent. We pay a 3% commission to Cowen on any sales pursuant to this Sales Agreement. On July 3, 2013, we amended and restated the Sales Agreement to increase the aggregate gross sales proceeds that may be raised to $100 million. Cumulatively through March 31, 2014, we sold 7,599,474 shares under the ATM offerings at a weighted-average selling price of $7.08 per share for net proceeds of approximately $52.1 million. As of March 31, 2014, we had used approximately $53.8 million under the ATM.

Future Funding Requirements

We will need to raise additional capital either through the sale of equity or debt securities (including convertible debt securities) to fund our operations and to, among other activities, continue to commercialize PROCYSBI and develop . . .

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