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VTL > SEC Filings for VTL > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for VITAL THERAPIES INC

Form 10-Q for VITAL THERAPIES INC


7-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our condensed consolidated financial statements and notes thereto included in Item 1 "Financial Statements" in this Quarterly Report on Form 10-Q and our final prospectus filed with the Securities and Exchange Commission (SEC) on April 17, 2014, relating to our Registration Statement on Form S-1 (File No. 333-191711) for our initial public offering. As used in this report, unless the context suggests otherwise, "we," "us," "our," "the Company" or "Vital Therapies" refer to Vital Therapies, Inc. and its subsidiaries.

Forward-Looking Statements

In addition to historical information, this Quarterly Report on Form 10-Q, or Quarterly Report, includes forward-looking statements within the meaning of federal securities laws. Forward-looking statements, many of which are beyond our control, are subject to certain risks and uncertainties, particularly those inherent in the process of discovering, developing and commercializing biologics and devices that are safe and effective for use as human therapeutics products. Such statements include, but are not limited to, statements preceded by, followed by or that otherwise include the words, "believe," "may," "might," "can," "could," "will," "would," "should," "estimate," "continue," "anticipate," "intend," "seek," "plan," "project," "expect," or similar expressions.

Forward-looking statements discuss matters that are not historical facts. Our forward-looking statements involve assumptions that, if they never materialize or prove correct, could cause our results to differ materially from those expressed or implied by such forward-looking statements. In this Quarterly Report, for example, we make forward-looking statements regarding: markets for the ELAD® System; strategy and timing of clinic trials, regulatory requirements, financial estimates and projections; and the sufficiency of our capital resources to fund our operations.

The inclusion of any forward-looking statements in this Quarterly Report should not be regarded as a representation that any of our plans will be achieved. Our actual results may differ from those anticipated in our forward looking statements as a result of various factors, including those set forth below under the caption "Part II, Item 1A-Risk Factors" and the differences may be material. These risk factors include, but are not limited to: the initiation, cost and timing of our clinical programs for the ELAD System; the timing of, and our ability to obtain and maintain regulatory approvals for the ELAD System; the performance of third parties in connection with the development of the ELAD System including, but not limited to, third parties involved in our clinical trials and third-party suppliers; our ability to reliably manufacture ELAD cartridges and ELAD bedside units in sufficient quantities and in compliance with regulatory requirements for clinical trials and commercialization; regulatory developments in the U.S. and foreign countries; our ability to obtain funding for our operations; and our ability to achieve and maintain effective internal control over financial reporting.

Although our forward-looking statements reflect the good faith judgment of our management, these statements are based only on facts and factors currently known by us. As a result, you are cautioned not to rely on these forward-looking statements, which speak only as of the date hereof. All forward-looking statements are qualified in their entirety by this cautionary statement and we undertake no obligation to revise or update such statements to reflect events or circumstances after the date hereof.

Overview

We are a biotherapeutic company focused on developing a cell-based therapy targeting the treatment of all forms of acute liver failure. Our product candidate, the ELAD System, is an extracorporeal bio-artificial liver therapy designed to allow the patient's own liver to regenerate to a healthy state, or to stabilize the patient until transplant. The ELAD System is the only bio-artificial liver support system containing immortal human liver-derived cells, or C3A cells, to enter Phase 3 clinical trials. We designed the ELAD System to supplement key aspects of normal liver function to improve patient survival. We estimate that at least 30,000 patients annually in the United States experience forms of acute liver failure, such as acute-on-chronic, surgically-induced and fulminant liver failures, for which the ELAD System may be a life-saving therapy. Outside of liver transplant, which is severely limited by availability of organs and not available to many patients, the current standard-of-care for acute liver failure is primarily focused on the management of complications, which does not restore lost liver function and is associated with a high rate of mortality. The ELAD System has received orphan designation in the United States and Europe for the treatment of patients with acute liver failure. This designation provides tax credits for qualified clinical testing, seven years of market exclusivity in the United States, and ten years of market exclusivity in Europe for the first orphan drug approved for a given indication. However, orphan designation does not alter the standard regulatory requirements or the process for obtaining marketing approval.

We are currently enrolling patients in one Phase 3 clinical trial, have regulatory allowance and five sites open for enrollment in a second Phase 3 trial, and also have initiated a Phase 2 clinical trial, each in forms of acute liver failure. In March 2013, we initiated VTI-208, a Phase 3 randomized, controlled clinical trial in 200 subjects with alcohol-induced liver decompensation, or AILD. As of August 5, 2014, 138 subjects had been enrolled in this trial and 49 clinical sites were open for enrollment. In addition, we have obtained regulatory allowance in the United States, United Kingdom, Spain and Australia to begin enrolling patients


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in our second Phase 3 randomized, controlled clinical trial, VTI-210, in subjects with severe acute alcoholic hepatitis, or AAH. We recently requested regulatory guidance from the Scientific Advice Working Party (SAWP) of the European Medicines Agency (EMA) on VTI-210 and, based on the response, we are modifying the trial protocol to stratify subjects into groups based on AAH diagnosis either by biopsy or by clinical grounds without biopsy, and are modifying the statistical plan to allow for an event-driven clinical design with a minimum of 150 subjects. We expect the enrollment of subjects in the modified VTI-210 protocol to begin in the second half of 2014 and as of August 5, 2014, five clinical sites were open for enrollment. Finally, we have enrolled our first patient in VTI-212, a single-arm clinical trial, which is being modified to enroll 40 subjects with fulminant hepatic failure, or FHF, and surgery-induced acute liver failure, or SILF.

Vital Therapies, Inc. was formed in May 2003 to acquire the assets of VitaGen (formerly Hepatix) in a bankruptcy proceeding. Our predecessor companies developed the ELAD System, completing two pilot trials in acute liver failure and two randomized, controlled Phase 1 and Phase 2 trials in FHF, but failed to attract funds sufficient to continue development of the ELAD system. Beginning in June 2003, we refocused the company to pursue regulatory approval and commercialization of the ELAD System in China. In 2007, we completed a pivotal trial in acute liver failure in subjects with viral hepatitis in China, and we submitted an application for marketing in China. Our application is still under review in China; however, we do not expect approval in China until we have approval in the United States.

We restarted our clinical program in the United States and Europe in 2008. Since then, we have run two Phase 2 trials and selected AILD and AAH as indications for our Phase 3 pivotal trial program in the United States and Europe. We have also made significant improvements in the ELAD System bedside unit and our proprietary cartridge cell growth production process, including (i) the incorporation of an updated version of the cardiovascular base unit that has improved features, functionality and reliability; (ii) new and improved cartridges for ultrafiltrate, cell filters and the ELAD cartridges; (iii) tubing sets that have been optimized to recirculate smaller volumes of ultrafiltrate and blood through the system to reduce the risk of clotting and other potential adverse side effects; and (iv) improvements to our cell culture and growth processes to reduce cost and increase manufacturing efficiency and yield.

We have incurred net losses since inception of $124.1 million through June 30, 2014. We anticipate that we will continue to incur increasing losses for at least the next several years. Due to the uncertainties involved with biological product development and the clinical trial process, we cannot predict the timing or accuracy of future expenses, when product approval for the ELAD System might occur, or when profitability may be achieved or sustained.

In April 2014, we completed our initial public offering, or IPO, of 4,500,000 shares of common stock at an offering price of $12.00 per share. We received net proceeds of approximately $44.4 million, after deducting underwriting discounts, commissions and offering-related transaction costs. In May 2014, the underwriters exercised their option to purchase an additional 675,000 shares of our common stock at $12.00 per share in full. As a result, we received an additional $7.5 million in net proceeds after underwriters' discounts and commissions, for total net proceeds of $51.9 million from the offering.

Results of Operations

Research and Development Expenses

Research and development expenses relate to the development of the ELAD System and are expensed as incurred. Our research and development expenses consist primarily of:

• expenses incurred under agreements with clinical sites, clinical research organizations, or CROs, and statistical and regulatory consultants that assist us with our clinical trials;

• employee-related expenses, which include salaries, benefits, travel and stock-based compensation;

• the cost of acquiring and manufacturing clinical trial materials;

• facilities, depreciation, and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities and equipment, and depreciation of fixed assets; and

• costs associated with other research and regulatory activities.

We do not track our employee and facility related research and development costs by clinical trial, as we typically use our employee and infrastructure resources across multiple clinical trials and the allocation of such costs would be arbitrary and would not provide a meaningful assessment.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs for personnel in executive, finance, information technology, marketing, and legal functions. Other general and administrative expenses include related facility costs, stock-based compensation, and professional fees for legal, consulting, accounting and tax services.


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Comparison of the Three Months Ended June 30, 2014

The following table summarizes our operating expenses for the three months ended
June 30, 2014 and 2013.



                                       Three Months Ended
                                            June 30,                   Change
                                        2014          2013          $           %
        (dollars in thousands)                        (unaudited)
        Operating expenses:
        Research and development     $     9,125     $ 4,538     $ 4,587        101 %
        General and administrative         2,513       2,525         (12 )      (-  %)

        Total operating expenses     $    11,638     $ 7,063     $ 4,575         65 %

The $4.6 million increase in research and development expense during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 was primarily associated with an increase in our Phase 3 clinical trial activities. The increase during the three months ended June 30, 2014 was principally attributable to increases of $1.2 million in fees paid to CROs, clinical sites and other related costs, $1.5 million in salaries and wages, stock-based compensation and other compensation related costs due to increased headcount, $835,000 in third-party consulting, $593,000 in manufacturing supplies and related costs, $119,000 in travel expenses and $317,000 of facilities related costs, which includes depreciation, computer and equipment costs, utilities and lease expenses.

The $12,000 decrease in general and administrative expense during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 was primarily attributable to increases of $352,000 in salaries and wages, stock-based compensation, and other compensation related expenses due to increased headcount to support our operations, $160,000 for insurance coverage increases associated with becoming a publicly-traded company, and $71,000 associated with computer and equipment costs, other facilities related costs and depreciation. These increases were offset by decreases of $216,000 primarily associated with lower recruiting expenses, $117,000 in consulting fees due to the completion of our IPO in April 2014, and $264,000 related to lower corporate legal expenses and audit fees.

Separate from operating expenses, the $1.5 million of other income recognized for the revaluation of future purchase rights liabilities for the three months ended June 30, 2014 was the result of the termination of the remaining purchase rights liabilities upon the conversion of all senior preferred stock to common stock in conjunction with the completion of our IPO. This compares to $922,000 recognized as other income for the revaluation of future purchase rights liabilities for the three months ended June 30, 2013.

Comparison of Six Months Ended June 30, 2014 and 2013

The following table summarizes our operating expenses for the six months ended
June 30, 2014 and 2013.



                                         Six Months Ended
                                             June 30,                  Change
                                         2014         2013          $           %
          (dollars in thousands)                       (unaudited)
          Operating expenses:
          Research and development     $ 18,345     $  7,970     $ 10,375       130 %
          General and administrative      5,170        4,019        1,151        29 %

          Total operating expenses     $ 23,515     $ 11,989     $ 11,526        96 %

The $10.4 million increase in research and development expense during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 was principally associated with an increase in our Phase 3 clinical trial activities. The higher costs were primarily attributable to increases of $3.5 million in fees paid to CROs, clinical sites and other related costs, $2.9 million in salaries and wages, stock-based compensation and other compensation related costs due to increased headcount, $1.8 million in consulting fees, $1.0 million in manufacturing supplies and related costs, $471,000 in travel and seminar expenses and $616,000 in facilities related costs, which includes depreciation, computer and equipment costs, utilities and lease expenses.

The $1.2 million increase in general and administrative expense during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 was primarily attributable to a $836,000 increase in salaries and wages, stock-based compensation, and other compensation related expenses due to increased headcount to support our operations, an increase of $179,000 in audit and corporate legal expenses, $256,000 for higher insurance costs associated with coverage related to becoming a publicly-traded company, and an increase of $153,000 associated with computer and equipment costs, other facilities related costs and depreciation, related to our increases in headcount, offset by a $317,000 decrease primarily related to lower recruiting expenses.


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Separate from operating expenses, the $2.6 million recognized as other income for the revaluation of future purchase rights liabilities for the six months ended June 30, 2014 reflects the termination of the remaining purchase rights liabilities in conjunction with the completion of our IPO in April 2014. The $3.5 million of other expense reflects the revaluation of future purchase rights liabilities for the six months ended June 30, 2013.

Liquidity and Capital Resources

To date, we have not generated significant revenues attributable to the ELAD System. We have a history of incurring losses and negative cash flows from operations and have an accumulated deficit of $124.1 million as of June 30, 2014. We expect that our research and development and general and administrative expenses will continue to increase through the completion of our Phase 3 clinical trials and, as a result, we will need additional capital to fund our operations, which we may seek to obtain through a combination of equity offerings, debt financings, government or other third-party financing, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements.

In April 2014, we completed our initial public offering selling 4,500,000 shares of our common stock at $12.00 per share. In May 2014, the underwriters exercised their option to purchase an additional 675,000 shares of our common stock at $12.00 per share. In total, we received net proceeds of $57.8 million after underwriters' discounts and commissions. In addition, we have incurred $5.8 million in offering expenses, resulting in total fees and costs of $10.2 million and net offering proceeds to us of $51.9 million.

As of June 30, 2014, we had cash and cash equivalents of approximately $90.8 million. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with an intent to maximize liquidity and preserve capital. As of June 30, 2014, such balances were held in cash and money market funds.

The following table shows a summary of our cash flows for the six months ended June 30, 2014 and 2013.

                                                 Six Months Ended
                                                     June 30,
                                               2014           2013
                                                  (In thousands)
                                                   (unaudited)
               Cash (used in) provided by:
               Operating activities          $ (19,242 )    $ (10,409 )
               Investing activities             (1,316 )        8,156
               Financing activities             73,213         34,213

Operating Activities

During the six months ended June 30, 2014, operating activities used $19.2 million of cash. The use of cash was primarily related to our net loss of $20.9 million adjusted for noncash income of $2.6 million related to the revaluation of future purchase rights liabilities, noncash charges of $543,000 and $1.1 million for depreciation and stock-based compensation, respectively, and $2.7 million of net changes in our operating assets and liabilities. Net cash provided by changes in our operating assets and liabilities during the six months ended June 30, 2014 consisted primarily of an increase of $337,000 in accounts payable and $2.6 million in accrued liabilities, reflecting an increase in clinical activities and related research and development expenditures, partially offset by an increase of $215,000 from other current assets and prepaid expenses. The net increase in other current assets and prepaid expenses was attributable to a reduction in prepaid clinical costs of $636,000 related to the utilization of prepayments to our CROs, offset by an increase of $779,000 related to prepaid expenses primarily attributable to the purchase of corporate insurance policies.

During the six months ended June 30, 2013, operating activities used $10.4 million of cash. The use of cash was primarily related to our net loss of $15.5 million, partially offset by noncash charges of $3.5 million related to the revaluation of future purchase rights liabilities, $337,000 and $299,000 for depreciation and stock-based compensation, respectively, and $965,000 of net changes in our operating assets and liabilities. Net cash provided by changes in our operating assets and liabilities during the six months ended June 30, 2013 consisted primarily of an increase of $1.4 million in accounts payable and accrued liabilities, due principally to the timing of payments made by us to vendors, partially offset by an increase of $198,000 related to a lease deposit and $256,000 of prepaid clinical and other costs.


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Investing Activities

During the six months ended June 30, 2014, investing activities used $1.3 million of cash, primarily related to $1.0 million in purchases of capital equipment for manufacturing and clinical areas and a net increase of $271,000 in restricted cash requirements. The net increase in our restricted cash is related to an increase in our clinical trial obligations of $558,000, which was offset by $288,000 related to the elimination of certain restrictions associated with the Junior Preferred Stock Purchase Agreement.

During the six months ended June 30, 2013, investing activities provided $8.2 million of cash, primarily related to a $9 million decrease in short-term investments, partially offset by $558,000 in purchases of capital equipment, and a $286,000 increase in restricted cash requirements associated with our clinical trial obligations and the Junior Preferred Stock Purchase Agreement.

Financing Activities

During the six months ended June 30, 2014, financing activities provided $73.2 million of cash, which included $55.0 million in net proceeds from our IPO and $18.2 million in net proceeds from the sale of senior redeemable convertible preferred stock. In April 2014, we completed our IPO selling 4,500,000 shares of our common stock at $12.00 per share with the underwriters exercising their option to purchase an additional 675,000 shares for $12.00 per share in May 2014 for total net proceeds of $55.0 million during the second quarter of 2014. The sale of senior redeemable convertible preferred stock occurred during the first quarter of 2014 and included the issuance of 555,000 shares of senior redeemable convertible preferred stock at $8.00 per share for net proceeds of $4.3 million under our Senior Preferred Stock Purchase Agreement. Additionally, in January 2014, we completed a private placement to new investors of 1.5 million shares of our senior redeemable convertible preferred stock at a price of $8.00 per share for net proceeds of $12.0 million. A pre-emptive rights offering, triggered by the private placement, raised a further $1.9 million in net proceeds from the sale of 241,016 shares of our senior redeemable convertible preferred stock at a price of $8.00 per share.

During the six months ended June 30, 2013, financing activities provided $34.2 million of cash, net of offering costs, primarily related to the sale of additional shares of our senior preferred stock at $8.00 per share. An additional $363,000 was received from the exercise of stock options during this same period.

Based on our current business plan, we believe that our existing cash and cash equivalents as of June 30, 2014 will be sufficient to fund our operations into the second quarter of 2016. In particular, we believe that the net proceeds from the initial public offering and our existing cash and cash equivalents will be sufficient to complete enrollment and receive data from our VTI-208 Phase 3 clinical trial. In addition, we project such funds may also be sufficient to complete enrollment and receive topline data from our VTI-212 Phase 2 clinical trial. Based on our current business plan and assuming a minimum 150 patient trial, we expect additional funding will be required before preliminary results from VTI-210 will be available. The amounts and timing of our actual expenditures depend on numerous factors, including the rate of subject enrollment in our clinical trials, filing requirements with various regulatory agencies, clinical trial results, and any unforeseen cash needs.

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. Our future capital requirements are difficult to forecast and will depend on many factors, including:

• the scope, progress, results and costs of research and development and clinical trials related to the ELAD System or any future product candidates;

• the cost and timing of scaling up and validating the manufacturing process for the ELAD System or any other product candidates for commercialization;

• the cost and timing of commercialization activities, including reimbursement, marketing, sales and distribution costs, both before and after product approval (if any);

• our ability to establish new collaborations, licensing or other arrangements and the financial terms of such agreements;

• the number and characteristics of any future product candidates we pursue;

• the costs involved with being a public company;

• the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patents, including litigation costs and the outcome of such litigation; and

• the timing, receipt and amount of sales of, or royalties on the ELAD System and any future product candidates.


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Off-Balance Sheet Arrangements

Through June 30, 2014, we have not entered into and did not have any relationships with unconsolidated entities or financial collaborations, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purpose.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect amounts reported in the accompanying condensed consolidated financial statements and related notes. In preparing our financial statements, we make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management considers relevant. Because future events and their effects cannot be determined with certainty, actual results could differ materially from our assumptions and estimates. We have reviewed these critical accounting policies . . .

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