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ENTA > SEC Filings for ENTA > Form 10-Q on 12-Aug-2014All Recent SEC Filings

Show all filings for ENANTA PHARMACEUTICALS INC

Form 10-Q for ENANTA PHARMACEUTICALS INC


12-Aug-2014

Quarterly Report


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto for the year ended September 30, 2013 included in our Annual Report on From 10-K for our fiscal year ended September 30, 2013, referred to as an 2013 Annual report on Form 10-K. This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "should," "estimate," or "continue," and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled "Risk Factors," set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

Overview

We are a research and development-focused biotechnology company that uses its robust chemistry-driven approach and drug discovery capabilities to create small molecule drugs primarily in the infectious disease field. We are discovering and developing inhibitors designed for use against the hepatitis C virus, referred to as HCV. We believe that a successful approach to a complete cure for HCV in most patients will likely require treatment with a combination of drugs that attack different mechanisms necessary for replication and survival of HCV. Further, as there are many variants of HCV, we are developing inhibitors that may be used in multiple combination therapies, each designed and tested for effectiveness against one or more of those variants. Our development of inhibitors for validated HCV target mechanisms, as well as our collaborations with AbbVie (which name refers to Abbott Laboratories for all periods before January 1, 2013) and Novartis, should allow us to participate in multiple drug combinations as we seek the best combination therapies for HCV in its various forms. The reported worldwide sales of the two newest therapies for HCV (sofosbuvir and simeprevir) in the first six months of 2014 totaled $6.9 billion. We believe that annual worldwide sales of these therapies and future approved therapies could increase sales in this market to $10 billion to $20 billion within the next several years. In addition to our HCV programs, we have used our internal research capabilities to discover a new class of antibiotics which we are developing for the treatment of multi-drug resistant bacteria, including methicillin-resistant Staphylococcus aureus bacteria, also referred to as MRSA. We have utilized our internal chemistry and drug discovery capabilities and our collaborations to generate all of our development-stage programs, and we have active research efforts to broaden our infectious disease drug pipeline.


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The following table summarizes our product development pipeline in HCV antivirals as well as MRSA antibiotics:

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Our HCV portfolio includes inhibitors of four fundamental, validated HCV targets. Our lead product candidate, ABT-450, is a protease inhibitor being developed through our collaboration with AbbVie. In the quarter ended June 30, 2014, we received and recognized as revenue a total of $40.0 million in milestone payments from AbbVie as a result of a U.S. regulatory filing by AbbVie with the FDA and a comparable European Union regulatory filing with the EMA for the first regimens containing a collaboration compound. To date AbbVie has funded all research and development of our protease inhibitors since we entered into the collaboration in November 2006, and is responsible for obtaining regulatory approvals and commercializing ABT-450, ABT-493 and any other follow-on products worldwide. Our lead NS5A product candidate, EDP-239, is being developed through our collaboration with Novartis. Under our collaboration with Novartis, Novartis is responsible for all further development of our NS5A inhibitors. Novartis was also responsible for funding research that we conducted to discover additional NS5A compounds through August 2013.

Our independent HCV research activities are focused on our lead cyclophilin inhibitor candidates, which are in preclinical development. We also have a small-molecule drug discovery effort underway for nucleotide polymerase inhibitors. We are currently funding all research and development for our cyclophilin inhibitor and nucleotide polymerase inhibitor programs. We expect to incur substantially greater expenses as we seek to advance these programs into clinical development.


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In addition to our HCV programs, we have used our internal research capabilities to discover a new class of antibiotics called Bicyclolides, which we are developing for the treatment of multi-drug resistant bacteria, including methicillin-resistant Staphylococcus aureus bacteria, also referred to as MRSA. Initially, up to $14.3 million of the preclinical development of our lead antibiotic candidate, EDP-788, was funded under a September 2011 contract with the National Institute of Allergy and Infectious Diseases, a division of the National Institutes of Health, an agency of the United States Department of Health and Human Services, or NIAID, to develop EDP-788 for biodefence purposes. In August 2013 NIAID agreed to provide additional funding of $9.2 million under our contract, increasing total funding from NIAID to approximately $23.5 million.

Since commencing our operations in 1995, we have devoted substantially all of our resources to the discovery and development of novel inhibitors for the treatment of infectious diseases. We have historically funded our operations primarily through the sale of convertible preferred stock and payments received under our collaborations and a government contract. On March 26, 2013, we completed our IPO of 4,600,000 shares of common stock at an offering price of $14.00 per share, which included the exercise in full by the underwriters of their option to purchase up to 600,000 additional shares of common stock. We received net proceeds of approximately $59.9 million, after deducting underwriting discounts and commissions. As of June 30, 2014, we had $137.6 million in cash and investments.

Our revenue from our collaboration agreements has resulted in our reporting net income in each of our past four fiscal years and in the three and nine months ended June 30, 2014. However, we had an accumulated deficit of $68.0 million as of June 30, 2014 and have generated no royalties or other revenue from product sales. We expect that our revenue in the near term will continue to be substantially dependent on our collaborations with AbbVie and Novartis and their continued advancement of the related development programs. Given the schedule of potential milestone payments and the uncertain nature and timing of clinical development and regulatory approval, we cannot be certain as to when or whether we will receive further milestone payments under these collaborations or whether we will report either revenue or net income in future years.

Financial Operations Overview

Revenue

Since our inception, our revenue has been derived from two primary sources:
collaboration agreements with pharmaceutical companies and one government research and development contract. We have not generated any revenue from product sales. In November 2006, we entered into a collaboration agreement with AbbVie and in February 2012 we entered into a collaboration agreement with Novartis. In September 2011, we entered into a contract with NIAID, which is funding the preclinical and Phase 1 development of our lead product candidate in our new class of Bicyclolide antibiotics.

The following table is a summary of revenue recognized from our collaboration agreements and government contract for the three and nine months ended June 30, 2014 and 2013:

                                                    Three Months Ended              Nine Months Ended
                                                         June 30,                        June 30,
                                                   2014             2013           2014           2013
                                                                     (in thousands)
AbbVie agreement:
Milestone payments                              $    40,000      $       -       $  40,000      $  15,000
Novartis agreement:
Upfront license payment and research funding             -              473             -           1,350
Milestone payments                                       -               -              -          11,000
NIAID contract                                        2,051           1,176          5,104          3,354

Total revenue                                   $    42,051      $    1,649      $  45,104      $  30,704


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AbbVie Agreement

Under the terms of the AbbVie agreement, as amended, we received total payments comprised of an upfront license payment, payments to fund research and reimburse certain expenses and milestone payments totaling $92.5 million through June 2011. Since all of our research obligations under the agreement were concluded by June 30, 2011, any future milestone payments received will be recognized as revenue when each milestone is achieved by AbbVie. In the quarter ended June 30, 2014, we earned and recognized as revenue a total of $40.0 million in milestone payments as a result of a U.S. regulatory filing by AbbVie with the FDA and comparable European Union regulatory filing with the EMA for the first protease inhibitor product resulting from our collaboration with AbbVie. Under the terms of the AbbVie agreement, we are eligible to receive additional future milestone payments totaling $155 million related to the successful development by AbbVie of the first HCV treatment regimen incorporating one of our collaboration's protease inhibitors. We are also eligible to receive royalties on AbbVie's net sales, if any, allocable to any one of our collaboration's protease inhibitors. We and AbbVie have not yet completed the contractual process to determine the portion of AbbVie's net sales of any protease-inhibitor-containing regimen that would be allocated to the protease inhibitor.

Novartis Agreement

Under the terms of the Novartis agreement, we received an upfront payment of $34.4 million in February 2012 and a commitment to fund research at an agreed amount for one year. We recognized the upfront license payment upon receipt as we determined that the license to which the payment related and the research services were separable elements under the agreement that could be accounted for as each was delivered or provided. Our agreement with Novartis provides that we will receive up to $1.8 million in research funding during the first year of the agreement, which began in February 2012. In March 2013 the agreement was amended to extend the funding period for an additional six months through August 2013 at the same reimbursement rate. Additionally, our collaboration with Novartis provides for aggregate milestone payments of up to $406 million if certain goals related to drug development and net product sales are achieved by Novartis. In January 2013, we received an $11.0 million milestone payment based on Novartis' November 2012 initiation of dosing in a Phase 1 clinical trial that include EDP-239. During the three months ended June 30, 2013, revenue recognized under this agreement was $0.5 million and consisted of research funding. No revenue was recognized under this agreement during the three months ended June 30, 2014.

During the nine months ended June 30, 2013, we recognized $12.4 million of revenue under the Novartis agreement, of which $11.0 million was attributed to license fees and $1.4 million was attributed to the performance of research services. An additional milestone payment of $15.0 million will be due upon Novartis' initiation of a subsequent Phase 2 trial using a combination containing an NS5A inhibitor. We are also eligible to receive royalties on Novartis' net sales, if any, allocable to our collaboration's NS5A inhibitors. No revenue was recognized under this agreement during the nine months ended June 30, 2014.

NIAID Contract

Under the terms of the NIAID contract, NIAID will pay us research and development funding payments of up to $14.3 million over an initial period of 30 months. The contract also contains six option periods, which in aggregate could extend the contract, at the option of NIAID, up to an additional 30 months and provide us additional funding of up to $28.4 million. In August 2013 NIAID agreed to provide additional funding of $9.2 million, increasing total funding from NIAID to approximately $23.5 million. We recognize revenue under this contract as research and development services are performed. We recognized revenue of $2.1 million and $1.2 million under this agreement during the three months ended June 30, 2014 and 2013, respectively, and $5.1 million and $3.4 million during the nine months ended June 30, 2014 and 2013, respectively.


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Operating Expenses

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



                                      Three Months Ended            Nine Months Ended
                                           June 30,                     June 30,
                                     2014            2013          2014          2013
                                                       (in thousands)
     Research and development     $    4,553      $    4,039     $  13,538     $  12,541
     General and administrative        2,603           1,788         7,255         4,433

     Total operating expenses     $    7,156      $    5,827     $  20,793     $  16,974

Research and Development Expenses

Research and development expenses consist of costs incurred to conduct basic research, such as the discovery and development of novel small molecules as therapeutics. We expense all costs of research and development as incurred. These expenses consist primarily of:

personnel costs, including salaries, related benefits and stock-based compensation for employees engaged in scientific research and development functions;

third-party contract costs relating to research, formulation, manufacturing, preclinical study and clinical trial activities;

third-party license fees;

laboratory consumables; and

allocated facility-related costs.

Project-specific expenses reflect costs directly attributable to our clinical development candidates and preclinical candidates nominated and selected for further development. Remaining research and development expenses are reflected in research and drug discovery, which represents early-stage drug discovery programs. At any given time, we typically have several active early stage research and drug discovery projects. Our internal resources, employees and infrastructure are not directly tied to any individual research or drug discovery project and are typically deployed across multiple projects. As such, we do not maintain information regarding costs incurred for our early-stage research and drug discovery programs on a project-specific basis.

We expect that our research and development expenses will increase in the future as we advance our two independent HCV programs and our antibiotic program for MRSA into clinical development. In our fiscal year ending September 30, 2014, we expect to incur approximately $18.0 - $22.0 million of expenses associated with research and development, which amount is exclusive of expenses incurred by our collaborators in developing our licensed product candidates ABT-450, ABT-493 and EDP-239.

Our research and drug discovery 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 the current or future clinical trials of our product candidates or if, or to what extent, we will generate revenue from the commercialization and sale of any of our product candidates. We anticipate that we will make determinations as to which development programs to pursue and how much funding to direct to each program on an ongoing basis in response to the preclinical and clinical success of each product candidate, as well as ongoing assessments of the commercial potential of each product candidate.


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General and Administrative Expenses

General and administrative expenses consist primarily of personnel costs, which include salaries, related benefits and stock-based compensation, of our executive, finance, business and corporate development and other administrative functions. General and administrative expenses also include travel expenses, allocated facility-related costs not otherwise included in research and development expenses, and professional fees for auditing, tax and legal services, including legal expenses to pursue patent protection of our intellectual property.

Other Income (Expense)

Interest income. Interest income consists of interest earned on our cash and investment balances. Our interest income has not been significant due to the low rate of interest earned on invested balances.

Interest expense. Interest expense consists of non-cash interest expense which is being accreted to the value of accrued third-party license fees over the term of the obligation.

Change in fair value of warrant liability and Series 1 nonconvertible preferred stock. We have issued warrants for the purchase of our nonconvertible preferred stock and we have issued Series 1 nonconvertible preferred stock that we believe are financial instruments that may require a transfer of assets because of the liquidation preferecnce features of the underlying stock. Therefore, we have classified these warrants as liabilities that we remeasure to fair value at each reporting period and we record the changes in the fair value of the warrants and the Series 1 nonconvertible preferred stock as a component of other income (expense).

Income Tax Benefit

Income tax benefit resulted from a reversal of our valuation allowance related to our deferred tax assets.

Critical Accounting Policies

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of our financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We believe that the estimates and assumptions involved in the accounting policies described below may have the greatest potential impact on our financial statements and, therefore, consider these to be our critical accounting policies. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions. See also Note 2 to our financial statements included elsewhere in this Quarterly Report on Form 10-Q and our 2013 Annual Report on Form 10-K for information about these accounting policies as well as a description of our other significant accounting policies. We believe that of our significant accounting policies, the following accounting policies involve the most judgment and complexity:

Revenue recognition;

Income taxes;

Fair value of financial instruments; and

Stock-based compensation

Accordingly, we believe the policies set forth above are critical to fully understanding and evaluating our financial condition and results of operations. If actual results or events differ materially from the estimates, judgments and assumptions used by us in applying these policies, our reported financial condition and results of operations could be materially affected.


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Income Taxes

Income taxes are provided for tax effects of transactions reported in the financial statements and consist of income taxes currently due plus deferred income taxes related to timing differences between the basis of certain assets and liabilities for financial statement purposes and for income tax reporting purposes. Deferred taxes are determined based on the difference between the financial statement value and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance is provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. At each balance sheet date, we assess the likelihood that deferred tax assets will be realized, and recognize a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income. As of September 30, 2013, December 31, 2013 and March 31, 2014 based on our analysis of both positive and negative factors, we had determined that it was more likely than not that we would not be able to realize our deferred tax assets, and therefore we had recorded a full valuation allowance against our deferred tax assets. Our analysis included an assessment of our past profitability and our future projections of forecasted revenue and expense levels.

However, during the three months ended June 30, 2014, we earned and collected $40.0 million in milestone payments as a result of U.S. and European Union regulatory approval filings by AbbVie with respect to our collaboration's leading product candidate. As a result of earning the $40.0 million during the three months ended June 30, 2014, we expect to report net income and taxable income for the year ending September 30, 2014. We previously reported net income for the years ended September 30, 2013, 2012, 2011 and 2010. Further, we are eligible to receive from AbbVie additional pre-commercial milestone payments totaling up to $155.0 million, most of which we expect to earn in fiscal 2015 upon AbbVie's receipt of regulatory approvals in the U.S. and European Union. We are also eligible to receive royalties on any net sales of AbbVie allocable to our collaboration's protease inhibitor, which are expected to begin in fiscal 2015 based on the anticipated approvals of AbbVie's allowed applications for HCV treatment regimens containing our lead product candidate. As a result, at June 30, 2014, we reassessed the need for a valuation allowance against our deferred tax assets and concluded that it was more likely than not that we would be able to realize our deferred tax assets primarily as a result of historical profitability for the years 2010 through 2013, expected profitability for the year ending September 30, 2014 and forecasted future profits resulting from future expected milestone payments and on-going royalty payments from collaboration partners. Accordingly, we reversed our valuation allowance related to our deferred tax assets and recorded an income tax benefit of approximately $15.1 million for the three and nine months ended June 30, 2014. The total amount of the valuation allowance released was approximately $22.9 million, of which approximately $15.3 million was recorded as a discrete item in the period ended June 30, 2014 representing the change in estimate regarding future years' income, and the remaining $7.6 million is released to income as the deferred tax assets are utilized in fiscal 2014.

There have been no material changes in our critical accounting policies since September 30, 2013. For further information, please see the discussion of critical accounting policies included in our Annual Report on Form 10-K.


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Results of Operations

Comparison of Three Months Ended June 30, 2014 and 2013



                                                                  Three Months Ended
                                                                       June 30,
                                                                  2014            2013
                                                                    (in thousands)
Revenue                                                        $   42,051        $ 1,649
Research and development expenses                                   4,553          4,039
General and administrative expenses                                 2,603          1,788
Other income (expense):
Interest income                                                       106             64
Interest expense                                                       (5 )           (7 )
Change in fair value of warrant liability and Series 1
preferred stock                                                       (65 )          (17 )
Income tax benefit                                                 15,122             -

Revenue. We recognized revenue of $42.1 million during the three months ended June 30, 2014, as compared to $1.6 million during the three months ended June 30, 2013. During the three month ended June 30, 2014, we received and recognized as revenue a total of $40.0 million in milestone payments from AbbVie as a result of its U.S. regulatory filing with the FDA and its European Union regulatory filing for the first regimen containing a collaboration compound. The balance of $2.1 million was derived from our contract with NIAID. During the three months ended June 30, 2013, $1.2 million of revenue was from the contract with NIAID and $0.5 million was related to our performance of research services under our Novartis agreement.

Research and development expenses.

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