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

Show all filings for TETRAPHASE PHARMACEUTICALS INC

Form 10-Q for TETRAPHASE PHARMACEUTICALS INC


12-Aug-2014

Quarterly Report


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

The interim financial statements included in this quarterly report on Form 10-Q 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, contained in our annual report on Form 10-K filed with the United States Securities and Exchange Commission, or the SEC, on March 6, 2014, which we refer to as our annual report. In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements are subject to risks and uncertainties, including those set forth in Part II - Other Information, Item 1A. Risk Factors below and elsewhere in this report that could cause actual results to differ materially from historical results or anticipated results.

Overview

We are a clinical-stage biopharmaceutical company using our proprietary chemistry technology to create novel antibiotics for serious and life-threatening multidrug-resistant infections. Our lead product candidate, eravacycline, is a fully synthetic tetracycline derivative that we are developing as a broad-spectrum intravenous and oral antibiotic for use as a first-line empiric monotherapy for the treatment of multidrug-resistant infections, including multidrug-resistant Gram-negative infections. We are developing eravacycline in a Phase 3 global clinical program called IGNITE (Investigating Gram-Negative Infections Treated with Eravacycline) and are conducting two Phase 3 clinical trials - IGNITE 1, a Phase 3 clinical trial evaluating the safety and efficacy of eravacycline with intravenous administration for the treatment of complicated intra-abdominal infections, or cIAI, and IGNITE 2, a second Phase 3 clinical trial of eravacycline for the treatment of complicated urinary tract infections, or cUTI, with intravenous-to-oral switch therapy. IGNITE 2 is a two-part Phase 3 clinical trial that includes a lead-in portion which is designed to inform the selection of an oral dose to be evaluated in the pivotal portion of the trial. In July 2014, we announced completion of enrollment of IGNITE 1 and in June 2014, we announced completion of enrollment of the lead-in portion of IGNITE 2. We expect to have data from the lead-in portion of IGNITE 2 in the third quarter of 2014, top-line data from IGNITE 1 in early first quarter of 2015, and top-line data from the pivotal portion of IGNITE 2 in mid-2015.

Consistent with draft guidance issued by the United States Food and Drug Administration, or FDA, with respect to the development of antibiotics for cIAI and our discussions with the FDA, we expect that positive results from our two Phase 3 clinical trials would be sufficient to support submission of a new drug application, or NDA, for eravacycline for the treatment of cIAI and for the treatment of cUTI. If we complete the Phase 3 clinical trials of eravacycline when we anticipate and the trials are successful, we expect to submit an NDA to the FDA in the second half of 2015 and a marketing authorization application to the European Medicines Agency, or EMA, in the first half of 2016. Eravacycline has been designated by the FDA as a Qualified Infectious Disease Product, or QIDP, for both the cIAI and cUTI indications. The QIDP designation makes eravacycline eligible for priority review and an additional five years of U.S. market exclusivity, if approved. In April 2014, the FDA granted Fast Track designations for both the cIAI and cUTI indications and the intravenous and oral formulations of eravacycline. Fast Track designation is awarded to expedite the study and regulatory review of drugs intended to treat serious or life-threatening conditions and that demonstrate the potential to address unmet medical needs.

Subject to obtaining additional financing, we intend to pursue development of eravacycline for the treatment of additional indications, including hospital-acquired bacterial pneumonias and other serious and life-threatening infections following our development of eravacycline for the treatment of cIAI and for the treatment of cUTI. We are also pursuing the discovery and development of TP-271, a fully synthetic broad-spectrum preclinical compound that we are developing for respiratory diseases caused by bacterial biothreat pathogens, and additional antibiotics that target unmet medical needs, including multidrug-resistant Gram-negative bacteria.

We commenced business operations in July 2006. Our operations to date have been limited to organizing and staffing our company, business planning, raising capital, acquiring and developing our proprietary chemistry technology, identifying potential product candidates and undertaking preclinical studies and clinical trials of our product candidates. To date, we have not generated any product revenue and have primarily financed our operations through public offerings and private placements of our equity securities, debt financings and funding from the United States government. As of June 30, 2014, we had received an aggregate of $217.4 million in net proceeds from the issuance of equity securities and borrowings under debt facilities and an aggregate of $20.7 million from government grants and contracts. As of June 30, 2014, our principal source of liquidity was cash and cash equivalents, which totaled $75.4 million.

As of June 30, 2014, we had an accumulated deficit of $151.7 million. Our net losses were $18.5 and $32.0 million for the three and six months ended June 30, 2014, respectively. Our net losses were $5.4 million and $8.2 million for the three and six months ended June 30, 2013, respectively. We expect that our expenses will increase substantially as we continue our ongoing Phase 3 clinical trials of eravacycline for the treatment of cIAI and cUTI, seek marketing approval for eravacycline, pursue development of eravacycline for additional indications, including hospital-acquired bacterial pneumonias and other serious and life-threatening infections, advance our other product candidates and satisfy our obligations under our license agreement with Harvard University. If we obtain marketing approval of eravacycline, we also expect to incur significant sales, marketing, distribution and manufacturing expenses. Furthermore, we expect to incur ongoing research and development expenses relating to our product candidates other than eravacycline and that our general and administrative costs will increase as we grow and continue to operate as a public company. We will need to generate significant revenue to achieve profitability, and we may never do so.


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We believe that our available funds will be sufficient to enable us to obtain top-line data from our ongoing Phase 3 clinical trials of eravacycline for the treatment of cIAI and cUTI. We expect that these funds will not, however, be sufficient to enable us to commercially launch eravacycline. It is also possible that we will not achieve the progress that we expect with respect to eravacycline because the actual costs and timing of clinical development activities are difficult to predict and are subject to substantial risks and delays. We will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.

Financial overview

Contract and Grant Revenue

We have derived all of our revenue to date from funding provided under three U.S. government awards for the development of our compounds as potential counter measures for the treatment of disease caused by bacterial biothreat pathogens through our collaborator CUBRC Inc., or CUBRC, an independent, not-for-profit, research corporation that specializes in U.S. government-based contracts:

We have received funding for our lead product candidate, eravacycline, under an award from the Biomedical Advanced Research and Development Authority, or BARDA, an agency of the U.S. Department of Health and Human Services. In January 2012, BARDA awarded CUBRC a five-year contract that provides for up to a total of $67.0 million in funding for the development, manufacturing and clinical evaluation of eravacycline for the treatment of disease caused by bacterial biothreat pathogens. We refer to this contract as the BARDA Contract.

We have received funding for our preclinical compound TP-271 under two awards from the National Institute of Allergy and Infectious Diseases, or NIAID, a division of National Institutes of Health, for the development, manufacturing and clinical evaluation of TP-271 for respiratory diseases caused by biothreat and antibiotic-resistant public health pathogens, as well as bacterial pathogens associated with community-acquired bacterial pneumonia:

a grant awarded to CUBRC in July 2011 that provides up to a total of approximately $2.8 million over five years, which we refer to as the NIAID Grant; and

a contract awarded to CUBRC in September 2011 that provides up to a total of approximately $35.8 million in funding over five years, which we refer to as the NIAID Contract.

We are collaborating with CUBRC, because when we initially decided to seek government funding, we recognized that we did not have any expertise in bidding for, administrating or managing government-funded contracts. CUBRC serves as the prime contractor under the BARDA Contract, the NIAID Grant and the NIAID Contract, primarily carrying out a program management and administrative role with additional responsibility for the management of preclinical studies. We serve as lead technical expert on all aspects of these awards and also serve as a subcontractor responsible for management of chemistry, manufacturing and control activities and clinical studies. We derive all of our revenue under these collaborations through subcontracts with, and a subaward from, CUBRC, with the flow of funds following the respective activities being conducted by us and by CUBRC.

In connection with the BARDA Contract, in February 2012, we entered into a five-year cost-plus-fixed-fee subcontract with CUBRC under which we may receive funding of up to approximately $39.8 million, reflecting the portion of the BARDA Contract funding that may be paid to us for our activities.

In connection with the NIAID Contract, in October 2011, we entered into a five-year cost-plus-fixed-fee subcontract with CUBRC under which we may receive funding of up to approximately $13.3 million, reflecting the portion of the NIAID Contract funding that may be paid to us for our activities.

In connection with the NIAID Grant, in November 2011, CUBRC awarded us a 55-month, no-fee subaward of approximately $980,000, reflecting the portion of the NIAID Grant funding that may be paid to us for our activities.

Although the BARDA Contract, and our subcontract with CUBRC under the BARDA Contract, have five-year terms, BARDA is entitled to terminate the project for convenience at any time, and is not obligated to provide continued funding beyond current-year amounts from Congressionally approved annual appropriations. To the extent that BARDA ceases to provide funding of the program to CUBRC, CUBRC has the right to cease providing funding to us. Committed funding from CUBRC under our BARDA subcontract is $22.0 million from the initial contract date through January 31, 2016, of which $14.3 million had been received through June 30, 2014.


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Similarly, although the NIAID Contract and our subcontract with CUBRC under the NIAID Contract have five-year terms, NIAID is entitled to terminate the project for convenience at any time, and is not obligated to provide continued funding beyond September 30, 2016. To the extent NIAID ceases to provide funding of the programs to CUBRC, CUBRC has the right to cease providing funding to us. Committed funding from CUBRC under our subcontract with respect to the NIAID Contract is $7.6 million, from the initial contract date through September 30, 2016, of which $5.8 million had been received through June 30, 2014. In addition, although the NIAID Grant has a term of five years and our subaward from CUBRC has a term of 55 months, NIAID is entitled to terminate the project for convenience at any time, and is not obligated to provide continued funding beyond May 30, 2016. To the extent NIAID ceases to provide funding of the programs to CUBRC, CUBRC has the right to cease providing funding to us. Committed funding from CUBRC under our subaward with respect to the NIAID Grant is $0.8 million from the initial grant date through May 30, 2016, of which $0.6 million had been received through June 30, 2014.

We have no products approved for sale. Other than the government funding described above, we do not expect to receive any revenue from any product candidates that we develop, including eravacycline, until we obtain regulatory approval and commercialize such products, which we do not expect will occur before 2016, or until we potentially enter into collaborative agreements with third parties for the development and commercialization of such product candidates. We continue to pursue government funding for other preclinical and clinical programs. If our development efforts for any of our product candidates result in clinical success and regulatory approval, or collaboration agreements with third parties, we may generate revenue from those product candidates.

We expect that our revenue will be less than our expenses for the foreseeable future and that we will experience increasing losses as we continue our development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products. Even if we are able to generate revenue from the sale of one or more products, we may not become profitable.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for the research and development of our preclinical and clinical candidates, and include:

personnel-related expenses, including salaries, benefits and stock-based compensation expense;

expenses incurred under agreements with contract research organizations, contract manufacturing organizations, and consultants that conduct our clinical trials and preclinical activities;

payments made under our license agreement with Harvard University;

the cost of acquiring, developing and manufacturing clinical trial materials and lab supplies;

facility, depreciation and other expenses, which include direct and allocated expenses for rent, maintenance of our facilities, insurance and other supplies; and

costs associated with preclinical activities and regulatory operations.

We expense research and development costs to operations as incurred. We recognize costs for certain development activities, such as clinical trials, based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations or information provided to us by our vendors on their actual costs incurred.

We track external development expenses and personnel expense on a program-by-program basis and allocate common expenses, such as scientific consultants and laboratory supplies, to each program based on the personnel resources allocated to such program. Expenses related to facilities, stock-based compensation, depreciation, conferences, research and development management and research and development support services are not allocated to a program and are separately classified as other research and development expenses. The following table is a summary of our research and development expenses for the three and six months ended June 30, 2014 and 2013:

                                                 Three Months              Six Months
                                                Ended June 30,           Ended June 30,
                                               2014        2013         2014         2013
                                                             (in thousands)
   Eravacycline                              $ 13,492     $ 2,790     $ 22,459     $  3,781
   BARDA Contract                                 992       3,001        2,603        4,721
   NIAID Contract and NIAID Grant                 426         568        1,089        1,391
   Other development programs                     240         262          487          394
   Other research and development               1,363         303        2,379          735

   Total research and development expenses   $ 16,513     $ 6,924     $ 29,017     $ 11,022


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Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials.

As of June 30, 2014, we had incurred an aggregate of $70.9 million in research and development expenses related to the development of eravacycline, which excludes the $14.2 million of expenses that were funded under the BARDA Contract. We expect that our research and development expenses will increase substantially as we continue our ongoing Phase 3 clinical trials of eravacycline for the treatment of cIAI and cUTI, pursue development of eravacycline for additional indications, including hospital-acquired bacterial pneumonias and other serious and life-threatening infections, advance our other product candidates and satisfy our obligations under our license agreement with Harvard University. We expect that the total external costs of the Phase 3 clinical trials of eravacycline for the treatment of cIAI and cUTI will be approximately $65.0 - $70.0 million, of which $29.7 million had been incurred through June 30, 2014.

Because of the numerous risks and uncertainties associated with product development, however, we cannot determine with certainty the duration and completion costs of these or other current or future clinical trials of eravacycline or our other product candidates. We may never succeed in achieving regulatory approval for eravacycline or any of our other product candidates. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including the uncertainties of future clinical and preclinical studies, uncertainties in clinical trial enrollment rate and significant and changing government regulation. In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability.

We have licensed our proprietary chemistry technology from Harvard University on an exclusive worldwide basis under a license agreement that we entered into in August 2006. Under our license agreement, we have paid Harvard an aggregate of $3.8 million in upfront license fees and development milestone payments, including a $2.0 million milestone fee that we paid in October 2013 in connection with the dosing of the first patient in our Phase 3 clinical trial of eravacycline for the treatment of cIAI. We have also issued 31,379 shares of our common stock to Harvard under the license agreement. In addition, we have agreed to make payments to Harvard upon the achievement of specified future development and regulatory milestones totaling up to $15.1 million for each licensed product candidate ($3.1 million of which has already been paid with respect to eravacycline), and to pay tiered royalties in the single digits based on annual worldwide net sales, if any, of licensed products, our affiliates and our sublicensees. We are also obligated to pay Harvard a specified share of non-royalty sublicensing revenues that we receive from sublicensees for the grant of sublicenses under the license and to reimburse Harvard for specified patent prosecution and maintenance costs. The next milestone payment that would come due under the license agreement with respect to eravacycline is a $3.0 million payment that would become due to Harvard upon acceptance of an NDA filing to the FDA for eravacycline.

General and Administrative Expenses

General and administrative expenses consist principally of personnel-related costs, including salaries and related costs such as benefits and stock-based compensation for personnel in executive, finance, operational, business development, corporate communications and human resource functions. Other significant general and administrative expenses include professional fees for legal, patent, auditing and tax services, consulting, and facility costs not otherwise included in research and development expenses.

We anticipate that our general and administrative expenses will increase for a number of reasons, including:

support of the anticipated expansion of our research and development activities as we continue the development of our product candidates;

increases in personnel-related costs, expansion of infrastructure and higher consulting, legal, accounting and investor relations costs, and directors and officers insurance premiums, all associated with operating as a public company; and

if and when we believe a regulatory approval of our first product candidate appears likely, anticipated increases in our personnel-related and consulting costs as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of our product candidates.


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Interest Income

Interest income consists of interest earned on our cash and cash equivalents. The primary objective of our investment policy is capital preservation.

Interest Expense

Interest expense consists primarily of interest accrued on our outstanding indebtedness and non-cash interest related to the amortization of debt discount costs associated with our term loan facility with Silicon Valley Bank and Oxford Finance. We expect that our interest expense will decrease in future periods as we pay down principal on our indebtedness to Silicon Valley Bank and Oxford Finance over the term of the loan facility.

Other Income

Other income consists primarily of fair value adjustments on warrants for the purchase of our preferred stock. We do not anticipate that we will recognize any further amounts with respect to these fair value adjustments as a result of the conversion of all outstanding warrants to purchase our preferred stock into warrants to purchase our common stock in connection with the completion of our initial public offering, or IPO.

Critical Accounting Policies and Significant Judgments and Estimates

Our management's discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, accrued clinical expenses, and stock-based compensation. We base our estimates on historical experience, known trends and events and various other factors that we and our management believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

There have been no significant changes to our critical accounting policies since the beginning of this fiscal year. Our critical accounting policies are described under Management's Discussion and Analysis of Financial Condition and Results of Operations in our annual report.

Results of Operations

Comparison of the Three Months Ended June 30, 2014 and 2013

The following table summarizes the results of our operations for each of the
three months ended June 30, 2014 and 2013, together with the changes in those
items in dollars and as a percentage:



                                     Three Months Ended
                                          June 30,               Increase/
                                     2014           2013        (decrease)         %
                                                     (in thousands)
      Revenues                     $   1,275      $  3,722      $    (2,447 )      (66 )%
      Operating expenses:
      Research and development        16,513         6,924            9,589        138 %
      General and administrative       2,947         1,756            1,191         68 %

      Total operating expenses        19,460         8,680           10,780        124 %

      Loss from operations           (18,185 )      (4,958 )        (13,227 )      267 %
      Interest income                      4             2                2        100 %
      Interest expense                  (282 )        (470 )            188        (40 )%

      Net loss                     $ (18,463 )    $ (5,426 )    $   (13,037 )      240 %


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The following table sets forth our contract and grant revenue for the three months ended June 30, 2014 and 2013:

                               Three Months Ended
                                    June 30,              Increase/
            Revenue             2014          2013       (decrease)         %
                                               (in thousands)
            BARDA            $      827      $ 3,122     $    (2,295 )      (74 )%
            NIAID Contract          416          522            (106 )      (20 )%
            NIAID Grant              32           78             (46 )      (59 )%

                             $    1,275      $ 3,722     $    (2,447 )      (66 )%

Contract and grant revenue was $1.3 million for the three months ended June 30, 2014 compared to $3.7 million for the three months ended June 30, 2013, a decrease of $2.4 million, or 66%. This decrease was primarily due to timing of activities under our subcontract with respect to the BARDA Contract related to various clinical studies conducted during the quarter ended June 30, 2014 as compared to the quarter ended June 30, 2013.

Research and Development Expenses

Research and development expenses for the three months ended June 30, 2014 were $16.5 million compared to $6.9 million for the three months ended June 30, 2013, an increase of $9.6 million, or 138%. This increase was primarily due to an increase of $8.8 million in clinical costs primarily associated with our two ongoing Phase 3 clinical trials of eravacycline for the treatment of cIAI and cUTI; an increase of $1.3 million in drug manufacturing costs principally associated with supply for our ongoing Phase 3 clinical trial of eravacycline . . .

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