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ZFGN > SEC Filings for ZFGN > Form 10-Q on 5-Aug-2016All Recent SEC Filings

Show all filings for ZAFGEN, INC.

Form 10-Q for ZAFGEN, INC.


5-Aug-2016

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 our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report, and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2015 included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2015. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the ''Risk Factors'' section of this Quarterly Report, our actual results could differ materially from the results described, in or implied, by these forward-looking statements.

Our actual results and timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking statements. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in future periods.

The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Quarterly Report, including those risks identified under the Risk Factors section.

We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

Overview

We are a biopharmaceutical company dedicated to significantly improving the health and well-being of patients affected by obesity and complex metabolic disorders. We are focused on developing novel therapeutics that treat the underlying biological mechanisms through the methionine aminopeptidase 2, or MetAP2, pathway. We have pioneered the study of MetAP2 inhibitors in both common and rare forms of obesity. Our lead product candidate is ZGN-1061, a novel fumagillin-class MetAP2 inhibitor administered by subcutaneous injection, which is currently being profiled for its utility in the treatment of severe and complicated types of obesity. We are also developing ZGN-839, a liver-targeted MetAP2 inhibitor, for the treatment of nonalcoholic steatohepatitis, or NASH, and abdominal obesity. We are currently screening patients to initiate a Phase 1 clinical trial evaluating ZGN-1061 for safety, tolerability and pharmacokinetics while also gaining an early indication of weight loss efficacy over four weeks of treatment, and currently expect Phase 1 clinical data by the end of the first quarter of 2017. ZGN-839 is still in pre-clinical development. In January 2016, we withdrew the ZGN-839 Investigational New Drug application, or IND, that we had previously submitted to the U.S. Food and Drug Administration, or FDA, in order to further support the submission package with additional pre-clinical and clinical data requested by the FDA.

On July 19, 2016, we announced that we were refocusing our resources on the development of ZGN-1061 and suspending further development of beloranib, an earlier generation MetAP2 inhibitor, that we had been developing as a treatment for obesity and hyperphagia in Prader-Willi syndrome, or PWS, and for hypothalamic injury associated obesity, or HIAO. The IND for beloranib was placed on full clinical hold in December 2015 by the FDA, as a result of an imbalance in the number of thrombotic events observed in patients treated with beloranib as compared to patients on placebo in our clinical trials. To address the full clinical hold, we held a Type A meeting with the FDA in June 2016 to discuss the clinical and pre-clinical data for beloranib, as well as a proposed risk mitigation strategy for beloranib in PWS. Following our discussions with the FDA, a comprehensive review of our assets and clinical programs, and review of other considerations, we determined that the obstacles, costs and development timelines to obtain marketing approval for beloranib were too great to justify additional investment in the program, particularly given the promising emerging profile of ZGN-1061. In connection with our corporate refocusing, we also announced that our workforce is being reduced by approximately 34%, to a total of 31 employees, by December 2016.


Table of Contents

Obesity is a complex medical disorder involving appetite dysregulation and altered lipid and energy metabolism that results in excessive accumulation of fat tissue. ZGN-1061 acts through potent inhibition of MetAP2, an enzyme that modulates the activity of key cellular processes that control metabolism. MetAP2 inhibitors work, at least in part, by directing MetAP2 binding to cellular stress and growth factor mediators, thereby reducing the tone of signals that drive lipid synthesis by the liver and fat storage throughout the body. In this manner, MetAP2 inhibition serves the purpose of re-establishing balance to the ways the body stores and metabolizes fat and glucose. MetAP2 inhibitors reduce the production of new fatty acid molecules by the liver and help convert stored fats into useful energy, while reducing hunger. In the setting of type 2 diabetes, these processes lead to improvement of glycemic control.

ZGN-1061 was discovered by our researchers as part of a multi-year campaign to identify novel compounds that avoided limiting pre-clinical safety concerns observed with beloranib, including teratogenicity and effects on testicular function. To date, the compound has similar efficacy, potency, and range of activity in animal models of obesity as beloranib, but displays highly differentiated properties and improved safety margins in pre-clinical studies, supporting the value of the compound as a more highly optimized MetAP2 inhibitor.

Since our inception in November 2005, we have devoted substantially all of our resources to developing beloranib, ZGN-1061, and ZGN-839, building our intellectual property portfolio, developing our supply chain, business planning, raising capital, and providing general and administrative support for such operations. Prior to our initial public offering, or IPO, in June 2014, we funded our operations primarily through sales of redeemable convertible preferred stock and, to a lesser extent, through the issuances of convertible promissory notes. From our inception through our IPO in June 2014, we received gross proceeds of $104.0 million from such transactions. During June 2014, we completed our IPO with net proceeds of $102.7 million after deducting underwriting discounts and commissions paid by us. We also incurred offering costs of $2.5 million related to the IPO. On January 28, 2015, we completed a follow-on offering of our common stock, which resulted in the sale of 3,942,200 shares at a price of $35.00 per share. We received net proceeds from the follow-on offering of $130.0 million based upon the price of $35.00 per share after deducting underwriting discounts and commissions paid by us. We also incurred offering costs of $0.5 million related to the follow-on offering.

We have never generated any revenue and have incurred net losses in each year since our inception. We have an accumulated deficit of $212.4 million as of June 30, 2016. Our net loss was $32.8 million for the six months ended June 30, 2016 and $74.3 million for the year ended December 31, 2015. These losses have resulted principally from costs incurred in connection with in-licensing of beloranib, research and development activities and general and administrative costs associated with our operations. We expect to incur significant expenses and operating losses for the foreseeable future.

We expect to continue to incur expenses in connection with our ongoing activities, if and as we:

advance the development of ZGN-1061 through a Phase 1 clinical trial and if successful, later-stage clinical trials;

advance ZGN-839 into clinical development and successfully complete clinical trials of ZGN-839;

seek to identify additional indications for our product candidates;

seek to obtain regulatory approvals for our product candidates;

add operational, financial and management information systems;

add personnel, including personnel to support our product development and future commercialization; and

maintain, leverage and expand our intellectual property portfolio.

As a result, we will need additional financing to support our continuing operations. Until such time that we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public, private equity, debt financings, or other sources, which may include collaborations with third parties. Arrangements with collaborators or others may require us to relinquish rights to certain of our technologies or product candidates. In addition, we may never successfully complete development of any of our product candidates, obtain adequate patent protection for our technology, obtain necessary regulatory approval for our product candidates or achieve commercial viability for any approved product candidates. 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. We will need to generate significant revenue to achieve profitability, and we may never do so.

We expect that our existing cash, cash equivalents and marketable securities as of June 30, 2016, will enable us to fund our operating expenses and capital expenditure requirements for at least the next 18 months. See "-Liquidity and Capital Resources."


Table of Contents

Financial Operations Overview

Revenue

We have not generated any revenue from product sales since our inception, and do not expect to generate any revenue from the sale of products in the near future. If our development efforts result in clinical success and regulatory approval or collaboration agreements with third parties for our product candidates, we may generate revenue from those product candidates or collaborations.

Operating Expenses

The majority of our operating expenses since inception have consisted primarily of in-licensing costs of beloranib, research and development activities, and general and administrative costs.

Research and Development Expenses

Research and development expenses, which consist primarily of costs associated with our product research and development efforts, are expensed as incurred. Research and development 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, pre-clinical studies and clinical trial activities;

external costs of outside consultants;

payments made under our third-party licensing agreements;

laboratory consumables; and

allocated facility-related costs.

We have been developing ZGN-1061 and ZGN-839, and until July 2016, beloranib, and typically use our employee, consultant and infrastructure resources across our development programs. We track outsourced development costs by product candidate or development program, but we do not allocate personnel costs, external consultant costs, payments made under our licensing agreements or other internal costs to specific development programs or product candidates unless the payments are specifically identifiable to a development program or product candidate. We record our research and development expenses net of any research and development tax incentives we are entitled to receive from government authorities.

Research and development activities are central to our business. 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. We expect that our research and development expenses will decrease for the remainder of 2016.

We cannot determine with certainty the duration and completion costs of the current or future clinical trials of our product candidates or if, when, or to what extent we will generate revenue from the commercialization and sale of any of our product candidates that obtain regulatory approval. We may never succeed in achieving regulatory approval for any of our 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 scope, rate of progress, and expense of clinical trials and other research and development activities;

clinical trial results;

uncertainties in clinical trial enrollment rate or design;

significant and changing government regulation;

the timing and receipt of any regulatory approvals; and

the FDA's or other regulatory authority's influence on trial design.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA, or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.


Table of Contents

General and Administrative Expenses

General and administrative expenses consist primarily of personnel costs, consisting of 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, insurance expenses, and professional fees for auditing, tax and legal services, including legal expenses to pursue patent protection of our intellectual property. We expect that general and administrative expenses will remain reasonably consistent for the remainder of 2016.

Other Income (Expense)

Interest income. Interest income consists of interest earned on our cash equivalents and marketable securities. Our interest income has not been significant due to low interest earned on invested balances. We anticipate that our interest income will decrease as we incur operating losses.

Interest expense. Interest expense relates to outstanding borrowings under the 2014 Credit Facility, consisting of the stated interest of 8.1% per year due on outstanding borrowings, a final payment of 6% of amounts drawn down that is being recorded as interest expense over the term through the maturity date using the effective-interest method, the amortization of deferred financing costs, the accretion of debt discounts relating to the 2014 Credit Facility, and a fee which was paid to the lender upon the completion of our IPO.

Foreign currency transaction gains (losses), net. Foreign currency transaction gains (losses), net consists of the realized and unrealized gains and losses from foreign currency-denominated cash balances, vendor payables and tax-related receivables from the Australian government. We currently do not engage in hedging activities related to our foreign currency-denominated receivables and payables; as such, we cannot predict the impact of future foreign currency transaction gains and losses on our operating results. See "-Quantitative and Qualitative Disclosures about Market Risk."

Income Taxes

Since our inception in 2005, we have not recorded any U.S. federal or state income tax benefits for the net losses we have incurred in each year or our earned tax credits, due to our uncertainty of realizing a benefit from those items. As of December 31, 2015, we had net operating loss carryforwards for federal and state income tax purposes of $42.5 million and $31.2 million, respectively, which begin to expire in 2026 and 2030, respectively. Included within these net operating loss carryforwards are amounts of $12.8 million and $10.6 million, respectively, that were attributable to stock option exercises, which will be recorded as an increase in additional paid-in capital once they are realized in accordance with accounting for stock-based compensation awards. As of December 31, 2015, we also had available tax credit carryforwards for federal and state income tax purposes of $10.6 million and $1.5 million, respectively, which begin to expire in 2026 and 2021, respectively.

Results of Operations

Comparison of Three Months Ended June 30, 2016 and 2015

The following table summarizes our results of operations for the three months ended June 30, 2016 and 2015:


Table of Contents

Research and development expenses

                                                 Three Months Ended June 30,             Increase
                                                  2016                 2015             (Decrease)
                                                                 (in thousands)
Statement of Operations Data:
Revenue                                       $          -                    -        $         -

Operating expenses:
Research and development                             10,163               12,526             (2,363 )
General and administrative                            4,899                5,084               (185 )

Total operating expenses                             15,062               17,610             (2,548 )

Loss from operations                                (15,062 )            (17,610 )            2,548

Other income (expense):
Interest income                                         225                   63                162
Interest expense                                       (140 )               (213 )               73
Foreign currency transaction gains
(losses), net                                           (51 )                  4                (55 )

Total other income (expense), net                        34                 (146 )              180

Net loss                                      $     (15,028 )      $     (17,756 )     $      2,728

                                                   Three Months Ended June 30,            Increase
                                                    2016                 2015            (Decrease)
                                                                  (in thousands)
Direct research and development expenses by
program:
Beloranib:
Pre-clinical and manufacturing                 $        1,304       $        2,329      $     (1,025 )
Clinical trials and related                             1,965                4,646            (2,681 )

Subtotal                                                3,269                6,975            (3,706 )
ZGN-839                                                   377                  943              (566 )
Second-generation MetAP2 inhibitors,
including ZGN-1061                                      1,446                1,234               212

Subtotal                                                5,092                9,152            (4,060 )

Unallocated expenses:
Personnel related                                       2,238                1,497               741
Non-cash stock-based compensation                       1,002                  738               264
Consultants                                             1,291                  828               463
Other                                                     540                  311               229

Subtotal                                                5,071                3,374             1,697

Total research and development expenses        $       10,163       $       12,526      $     (2,363 )

Research and development expenses for the three months ended June 30, 2016 decreased $2.4 million compared to the three months ended June 30, 2015. The decrease was primarily due to a $3.7 million decrease in our beloranib program, and a decrease of $0.6 million associated with our ZGN-839 program, partially offset by increased costs of $1.7 million associated with our unallocated expenses and $0.2 million associated with our work on ZGN-1061 and other second-generation MetAP2 inhibitors. Of the decrease in our beloranib program, clinical trials and related expenses for beloranib decreased by $2.7 million period over period as a result of the timing of our clinical trials in 2016 and 2015. During the three months ended June 30, 2016, our Phase 2b trial in patients with severe obesity complicated by type 2 diabetes trial was closing as we reported top-line clinical data from this and our U.S. Phase 3 trial in patients with PWS in the first quarter of 2016. Prior to the FDA placing the IND for beloranib on full clinical hold in December 2015, we suspended dosing of patients in the randomized portion of both of these clinical trials in October 2015. Safety visits were still being conducted in patients in our Phase 3 clinical trial during the three months ended June 30, 2016. During the three months ended June 30, 2015, both of the clinical trials noted above were ongoing and enrolling and dosing patients. Clinical trial activities undertaken by our Australian subsidiary are recorded net of a 45% research and development tax incentive from the Australian government. This tax incentive reduced our expenses by $0.2 million and $0.4 million for the three months ended June 30, 2016 and 2015, respectively. The decrease in ZGN-839 costs is due to the withdrawal of our IND in January 2016 in order to generate data from additional pre-clinical studies requested by the FDA.


Table of Contents

Unallocated expenses increased period over period primarily due to an increase in personnel related costs of $0.7 million, non-cash stock-based compensation expense of $0.3 million, $0.5 million in consultants and $0.2 million in other costs. Personnel related and non-cash stock-based compensation expense increases resulted primarily from an increase in hiring. During the second half of 2015, and the first quarter of 2016, we hired eight and three new employees in research and development, respectively. Non-cash stock-based compensation expense was also impacted by an increase in the annual stock option grant to employees during 2016. Consultants have increased primarily related to our ZGN-1061 program as ZGN-1061 will be in the clinic in the second half of 2016. Other unallocated expenses are also driven by the increase in new hires, primarily travel expenses and facilities expenses.

Costs related to our ZGN-1061 program increased during the 2016 period as a result of our increased focus on ZGN-1061, including work in chemistry, toxicology, pharmacology and contract manufacturing costs. During the 2015 period, we were working with a number of second-generation MetAP2 inhibitors and had not yet identified ZGN-1061 as our lead second-generation molecule.

General and administrative expenses

                                                   Three Months Ended June 30,            Increase
                                                    2016                 2015            (Decrease)
                                                                   (in thousands)
Personnel related                               $       1,039        $         968       $        71
Non-cash stock-based compensation                       1,852                1,201               651
Professional fees                                       1,497                2,331              (834 )
Travel and other                                          511                  584               (73 )

Total general and administrative expenses       $       4,899        $       5,084       $      (185 )

General and administrative expenses for the three months ended June 30, 2016 decreased $0.2 million compared to the three months ended June 30, 2015. Professional fees decreased $0.8 million, primarily due to the fact that we were not working on branding and commercial-readiness related to PWS as the beloranib IND was on full clinical hold during the 2016 period. These decreases were partially offset by increased non-cash stock-based compensation expense of $0.7 million due to granting additional stock-based awards to new hires and existing employees. Personnel related costs increased period over period primarily due to hiring additional employees, as three new employees were hired in general and administrative roles in the second half of 2015. The increases in personnel related costs for new employees were partially offset by a release of the bonus accrual for executives and employees that are a part of the reduction in force announced in July 2016.

Other income (expense), net

Interest expense. Interest expense for the three months ended June 30, 2016 and 2015 of $0.1 million and $0.2 million, respectively, was related to interest expense on our outstanding borrowings under the 2014 Credit Facility. Interest expense consists primarily of the stated interest of 8.1% per year due on outstanding borrowings. It also includes expense related to the final payment of 6% of amounts drawn down that is being recorded over the term through the maturity date using the effective-interest method and the amortization of deferred financing costs and debt discounts relating to the 2014 Credit Facility.

Interest income. Interest income of $0.2 million and $0.1 million for the three months ended June 30, 2016 and 2015, respectively, was related to interest earned on our marketable securities balances.

Foreign currency transaction gains (losses), net. We had foreign currency transaction losses of $0.1 million for the three months ended June 30, 2016 and foreign currency transaction gains of less than $0.1 million for the three months ended June 30, 2015. Foreign currency transaction gains and losses consisted of the realized and unrealized gains and losses from foreign currency-denominated cash balances, vendor payables and tax-related receivables . . .

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