ttph-10q_20180630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                      

Commission File Number: 001-35837

 

TETRAPHASE PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

20-5276217

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

480 Arsenal Way

Watertown, MA

(Address of principal executive offices)

02472

(Zip Code)

 

Registrant’s telephone number, including area code: (617) 715-3600

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

 

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of August 1, 2018, there were 52,858,585 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

 

 

 

 


 

TETRAPHASE PHARMACEUTICALS, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2018

TABLE OF CONTENTS

 

 

 

Page No.

 

 

PART I. FINANCIAL INFORMATION

3

 

 

 

Item 1.

Financial Statements (Unaudited)

3

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017

3

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2018 and 2017

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

 

 

 

Item 4.

Controls and Procedures

25

 

 

PART II. OTHER INFORMATION

27

 

 

 

Item 1.

Legal Proceedings

27

 

 

 

Item 1A.

Risk Factors

27

 

 

 

Item 6.

Exhibits

52

 

 

 

 

SIGNATURES

54

 

 

2


 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

TETRAPHASE PHARMACEUTICALS, INC.

Condensed Consolidated Balance Sheets

(In thousands, except par value amounts)

(Unaudited)

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

111,202

 

 

$

136,411

 

Accounts receivable

 

 

3,112

 

 

 

4,653

 

Prepaid expenses and other current assets

 

 

6,031

 

 

 

6,382

 

Total current assets

 

 

120,345

 

 

 

147,446

 

Property and equipment, net

 

 

1,246

 

 

 

1,395

 

Restricted cash

 

 

199

 

 

 

199

 

Other assets

 

 

 

 

 

 

Total assets

 

$

121,790

 

 

$

149,040

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,119

 

 

$

5,306

 

Accrued expenses

 

 

8,735

 

 

 

12,559

 

Deferred revenue

 

 

109

 

 

 

660

 

Total current liabilities

 

 

10,963

 

 

 

18,525

 

Other long term liabilities

 

 

96

 

 

 

105

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, par value $0.001 per share; 5,000 shares authorized;

   no shares issued and outstanding

 

 

 

 

 

 

Common stock, par value $0.001 per share; 125,000 shares authorized; 52,851 and 51,458

   shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively

 

 

53

 

 

 

51

 

Additional paid-in capital

 

 

603,680

 

 

 

592,243

 

Accumulated deficit

 

 

(493,002

)

 

 

(461,884

)

Total stockholders’ equity

 

 

110,731

 

 

 

130,410

 

Total liabilities and stockholders’ equity

 

$

121,790

 

 

$

149,040

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 

 

3


 

TETRAPHASE PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except per share data)

(Unaudited)

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License revenue

$

9,500

 

 

$

 

 

$

9,500

 

 

$

 

Government revenue

 

2,079

 

 

 

1,586

 

 

 

3,969

 

 

 

3,071

 

Total revenues

 

11,579

 

 

 

1,586

 

 

 

13,469

 

 

 

3,071

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

14,370

 

 

 

28,513

 

 

 

32,497

 

 

 

54,460

 

General and administrative

 

7,165

 

 

 

5,065

 

 

 

12,869

 

 

 

10,198

 

Total operating expenses

 

21,535

 

 

 

33,578

 

 

 

45,366

 

 

 

64,658

 

Loss from operations

 

(9,956

)

 

 

(31,992

)

 

 

(31,897

)

 

 

(61,587

)

Other income

 

413

 

 

 

181

 

 

 

778

 

 

 

318

 

Net loss

$

(9,543

)

 

$

(31,811

)

 

$

(31,119

)

 

$

(61,269

)

Net loss per share-basic and diluted

$

(0.18

)

 

$

(0.83

)

 

$

(0.60

)

 

$

(1.63

)

Weighted-average number of common shares used in net loss

   per share-basic and diluted

 

51,839

 

 

 

38,273

 

 

 

51,721

 

 

 

37,686

 

Comprehensive loss

$

(9,543

)

 

$

(31,811

)

 

$

(31,119

)

 

$

(61,269

)

See accompanying notes to unaudited condensed consolidated financial statements

 

 

 

4


 

TETRAPHASE PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2018

 

 

2017 (as revised) *

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(31,119

)

 

$

(61,269

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

237

 

 

 

201

 

Stock-based compensation expense

 

 

6,364

 

 

 

6,236

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

1,541

 

 

 

(893

)

Prepaid expenses and other assets

 

 

351

 

 

 

1,465

 

Accounts payable

 

 

(3,187

)

 

 

4,363

 

Accrued expenses and other liabilities

 

 

(3,832

)

 

 

4,411

 

Deferred revenue

 

 

(551

)

 

 

293

 

Net cash used in operating activities

 

 

(30,196

)

 

 

(45,193

)

Investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(88

)

 

 

(676

)

Net cash used in investing activities

 

 

(88

)

 

 

(676

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from sale of common stock, net of issuance costs

 

 

4,713

 

 

 

21,703

 

Proceeds from issuance of stock under stock plans

 

 

362

 

 

 

294

 

Net cash provided by financing activities

 

 

5,075

 

 

 

21,997

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(25,209

)

 

 

(23,872

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

136,610

 

 

 

142,285

 

Cash, cash equivalents and restricted cash at end of period

 

$

111,401

 

 

$

118,413

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 

*

Cash flow presentation has been revised due to adoption of ASU 2016-18.

 

5


 

Tetraphase Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Organization and Operations

Tetraphase Pharmaceuticals, Inc. (the “Company”) is a clinical-stage biopharmaceutical company using its proprietary chemistry technology to create and commercialize novel antibiotics for serious and life-threatening multidrug-resistant infections. The Company is developing its lead product candidate, XeravaTM (eravacycline), a fully synthetic fluorocycline, as an intravenous (IV) antibiotic for use as a first-line empiric monotherapy for the treatment of multidrug-resistant infections, including multidrug-resistant (MDR), Gram-negative infections, such as those found in complicated intra-abdominal infections (cIAI).

The Company has conducted a global phase 3 clinical program for eravacycline called IGNITE (Investigating Gram-Negative Infections Treated with Eravacycline).

In January 2018, the Company announced that it had submitted a new drug application (NDA) for IV eravacycline for the treatment of cIAI to the United States Food and Drug Administration (FDA) based on the positive results from two of its phase 3 clinical trials (IGNITE1 and IGNITE4). The Company’s Prescription Drug User Fee Act goal date for the FDA’s completion of its review of the NDA for eravacycline is August 28, 2018. In the third quarter of 2017, the Company submitted a marketing authorization application (MAA), to the European Medicines Agency (EMA) for IV eravacycline for the treatment of cIAI primarily based upon the results of IGNITE1.

In addition to eravacycline, the Company is pursuing development of TP-271, a fully synthetic fluorocycline being developed for respiratory disease caused by bacterial biothreat pathogens, as well as bacterial pathogens associated with community-acquired bacterial pneumonia, and TP-6076, a fully synthetic fluorocycline, targeted at unmet medical needs, including MDR Gram-negative bacteria such as carbapenem-resistant Enterobacteriaceae and carbapenem-resistant Acinetobacter baumanii. Both of these product candidates are in phase 1 clinical trials.

The Company has incurred annual net operating losses each year since its inception. As of June 30, 2018, the Company had an accumulated deficit of $493.0 million. The Company has not generated any product revenues and has financed its operations primarily through public offerings and private placements of its equity securities, debt financings and funding from the United States government.

There can be no assurance that the Company will be able to obtain additional debt or equity financing or generate product revenue or revenues from collaborative partners, on terms acceptable to the Company, on a timely basis or at all. The failure of the Company to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the Company’s business, results of operations and financial condition.

2.  Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim condensed consolidated financial statements are unaudited. These unaudited financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles (“GAAP”) for complete financial statements. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes for the year ended December 31, 2017 contained in the Company’s annual report on Form 10-K filed with the SEC on March 6, 2018 (the “2017 Form 10-K”). The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position as of June 30, 2018 and the results of operations and comprehensive loss and cash flows for the three and six months ended June 30, 2018 and 2017. Interim operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for future interim periods or for the fiscal year ending December 31, 2018.

The December 31, 2017 condensed consolidated balance sheet included herein was derived from audited consolidated financial statements, but does not include all disclosures including notes required by GAAP for complete financial statements.   

 

6


 

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. On an ongoing basis, the Company’s management evaluates its estimates, including estimates related to its going concern evaluation, clinical trial accruals, stock-based compensation expense, contract, grant and license revenues, and expenses. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions.

Out-Licensing Revenue Recognition

The Company has entered into an out-licensing agreement that is evaluated under Accounting Standards Codification, Topic 606 (“Topic 606”), Revenue from Contracts with Customers, through which the Company licenses certain of its product candidates’ rights to a third party. Any future out-licensing agreements entered into by the Company and additional third parties shall also be evaluated under Topic 606. Terms of these arrangements include various payment types, typically including one or more of the following: upfront license fees; development, regulatory and commercial milestone payments; payments for manufacturing supply services; and/or royalties on net sales of licensed products.

To determine the amount and timing of revenue to be recognized under each agreement, the Company evaluates the following criteria: (i) confirming the goods or services in the contract; (ii) defining the performance obligations under the agreement; (iii) determining the transaction price, including any constraint on variable consideration; (iv) allocating the transaction price to the performance obligations; and (v) defining how the revenue will be recognized for each performance obligation. In determining the accounting treatment for these arrangements, the Company develops assumptions to determine the stand-alone selling price for each performance obligation in the contract. These assumptions may include forecasted revenues, development timelines, discount rates and probabilities of technical and regulatory success.

Licenses of Intellectual Property: If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue from upfront fees allocated to the license when the license, including any associated know-how, is transferred to the licensee and the licensee can use and benefit from the license. For licenses that are bundled with other obligations, the Company uses judgment to evaluate the combined performance obligation to determine whether it is satisfied over time or at a point in time and the appropriate method of measuring completion for purposes of recognizing revenue.  

Milestone Payments: For arrangements that include development milestone payments, the Company evaluates whether the milestones are considered probable and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the Company’s control or the licensee’s control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received.  

Manufacturing Supply: Arrangements that include a promise for future supply of drug substance or drug product for either clinical development or commercial supply at the licensee’s discretion are generally considered as options. The Company assesses if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations. If the Company is entitled to additional payments when the licensee exercises these options, the Company recognizes revenue when the licensee obtains control of the goods, which is upon delivery.

Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).  

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

7


 

Going Concern Assessment

Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements - Going Concern, requires management to evaluate the company’s ability to continue as a going concern one year beyond the filing date of the given financial statements. This evaluation requires management to perform two steps. First, management must evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern. Second, if management concludes that substantial doubt is raised, management is required to consider whether it has plans in place to alleviate that doubt. Disclosures in the notes to the financial statements are required if management concludes that substantial doubt exists or that its plans alleviate the substantial doubt that was raised.

Based on its current operating plans, the Company expects its cash to last more than one year beyond the filing date of the financial statements. Based on this analysis, no additional disclosures are required.

Recently Adopted Accounting Pronouncements

In November 2016, the Financial Accounting Standard Board (FASB) issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statements of cash flows. The Company adopted the new standard effective January 1, 2018, using the retrospective transition approach. The reclassified restricted cash balances from operating activities to changes in cash, cash equivalents and restricted cash on the condensed consolidated statements of cash flows were not material for all periods presented.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of the new standard from January 1, 2017 to January 1, 2018. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. The FASB has subsequently issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net); ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.

The Company has concluded that its government grants are not within the scope of Topic 606, as they do not meet the definition of a contract with a “customer”. The Company has concluded that the grants meet the definition of a contribution and are non-reciprocal transactions. The Company has further concluded that Subtopic 958-605, Not-for-Profit-Entities-Revenue Recognition also does not apply, as the Company is a business entity and the grants are with governmental agencies or units. The government grant is technically to a non-profit entity that specializes in government grant administration, project management and oversight (i.e. CUBRC). However, the Company has concluded that, in effect, it is a grant from the government; as the contracting counterparty CUBRC is merely administering the agreement between the government (who is funding the work) and the Company (who is performing the work).  

In the absence of applicable guidance under GAAP as of January 1, 2018 for the grants, the Company has developed a policy for the recognition of revenue for the grants as follows:

 

Revenue is recognized when the right to payment is realized or is realizable

 

Revenues are realized when services are exchanged for cash or claims to cash. Revenues are not recognized until earned.

 

The Company’s revenue-earning activities involve rendering services that constitute its ongoing major or central operations, and revenues are considered to have been earned when the Company has substantially accomplished what it must do to be entitled to the benefits represented by the revenues.

 

8


 

The Company believes this policy is consistent with the overarching premise in Topic 606, to ensure that it recognizes revenues to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services, even though there is no “exchange” as defined in the ASC. The Company believes the recognition of revenue as costs are incurred and amounts become earned/realizable is analogous to the concept of transfer of control of a service over time under ASC 606.

Prior to January 1, 2018, the Company recognized revenue as it performed services under the grants so long as an agreement had been executed and the fees for these services were fixed or determinable, legally billable and reasonably assured of collection. Recognized amounts reflected the Company’s partial performance under the grants and equal direct and indirect costs incurred plus fixed fees, where applicable. Revenues and expenses under these arrangements were presented gross. Revenue recognition under this new policy is not materially different than would have been calculated under the old guidance. As a result of the adoption of this policy, there was no change to the amounts the Company has historically recorded to its financial statements.

There have been no other significant changes to the Company’s significant accounting policies since the beginning of this fiscal year.

Recently Issued Accounting Pronouncements

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, forfeiture rates, and classification on the statement of cash flows. The new guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those annual reporting periods. The Company adopted ASU No. 2016-09 as of January 1, 2017. As a result of adopting ASU No. 2016-09, the Company elected to recognize share-based award forfeitures only as they occur rather than by applying an estimated forfeiture rate as previously required. ASU No. 2016-09 requires that this change be applied using a modified-retrospective transition method by means of a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year in which the guidance is adopted. The Company did not make an adjustment to retained earnings as the amount was immaterial to the financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard requires that all lessees recognize the assets and liabilities that arise from leases on the balance sheet and disclose qualitative and quantitative information about its leasing arrangements. The new standard will be effective for the Company on January 1, 2019. The Company is currently evaluating the potential impact that this standard may have on its financial position, results of operations and cash flows.

3.  Fair Value of Financial Instruments

The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities. Fair value measurements are classified and disclosed in one of the following three categories:

 

 

 

 

Level 1

Quoted prices in active markets for identical assets or liabilities.

 

 

 

Level 2

Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

 

 

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Financial instruments measured at fair value as of June 30, 2018 and December 31, 2017 are classified below based on the three fair value hierarchy tiers described above (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements at

Reporting Date Using

 

 

 

Balance

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

 

$

111,202

 

 

$

111,202

 

 

$

 

 

$

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

 

$

136,411

 

 

$

136,411

 

 

$

 

 

$

 

 

 

9


 

The Company measures cash equivalents at fair value on a recurring basis. The fair value of cash equivalents is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets.

4.  Net Loss per Common Share

Basic net loss per share is calculated by dividing the net loss by the weighted average number of shares of common stock outstanding for the period, without consideration for common stock equivalents. The Company’s potentially dilutive shares, which include outstanding stock options, unvested restricted stock units and warrants, are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

The amounts in the table below were excluded from the calculation of net loss per share, due to their anti-dilutive effect:

 

 

 

June 30,

 

 

 

2018

 

 

2017

 

Warrants

 

 

 

 

 

1,103

 

Unvested restricted stock units

 

 

1,088,689

 

 

 

340,616

 

Outstanding stock options

 

 

7,149,909

 

 

 

6,087,428

 

Totals

 

 

8,238,598

 

 

 

6,429,147

 

 

5.  Significant Agreements and Contracts

Harvard License Agreement

In August 2006, the Company entered into a license agreement for certain intellectual property with Harvard University (“Harvard”). Under the license agreement, as of June 30, 2018, the Company has paid Harvard an aggregate of $9.1 million in upfront license fees and development milestone payments and has issued 31,379 shares of common stock to Harvard. For each product covered by the license agreement, the Company is obligated to make certain payments totaling up to approximately $15.1 million upon achievement of certain development and regulatory milestones and to pay additional royalties on net sales of such product. The Company is also obligated to make certain payments to Harvard based on amounts received under its license agreement with Everest Medicines Limited. During the three months ended June 30, 2018 the Company paid Harvard $1.9 million related to the Everest Medicines license agreement.

Other Material Agreements

Everest Medicines License Agreement

In February 2018, the Company entered into a license agreement (the “Everest License Agreement”) with Everest Medicines Limited (“Everest Medicines”), whereby the Company granted Everest Medicines an exclusive license to develop and commercialize eravacycline, for the treatment of complicated intra-abdominal infections and other indications, in mainland China, Taiwan, Hong Kong, Macau, South Korea and Singapore (the “Territory”).

 

Under the terms of the Everest License Agreement, the Company received from Everest Medicines an upfront cash payment of $7.0 million in the first quarter of 2018 and a cash payment of $2.5 million related to Everest Medicines’ submission of an Investigational New Drug Application, or IND, with the Chinese Food and Drug Administration in June 2018. The Company is also eligible to receive up to an aggregate of $14.0 million in future clinical development milestone payments and up to an aggregate of $20.0 million in additional sales milestone payments. There can be no guarantee that any such milestones or sales thresholds will in fact be met. The Company is obligated to make certain payments to Harvard based on amounts received from Everest Medicines under the Everest License Agreement pursuant to the existing license agreement by and between Harvard and the Company.

 

The Company will also be entitled to receive low double-digit tiered royalties on sales in the Territory, if any, of products containing eravacycline. Royalties are payable with respect to each jurisdiction in the Territory until the latest to occur of: (i) the last-to-expire of specified patent rights in such jurisdiction in the Territory; (ii) expiration of marketing or regulatory exclusivity in such jurisdiction in the Territory; or (iii) ten (10) years after the first commercial sale of a product in such jurisdiction in the Territory. In addition, royalties payable under the Everest License Agreement will be subject to reduction on account of generic competition and after patent expiry in a jurisdiction if required by applicable law, with any such reductions capped at certain percentages of the amounts otherwise payable during the applicable royalty payment period.

 

 

10


 

Under the terms and conditions of the Everest License Agreement, Everest Medicines will be solely responsible for the development and commercialization of licensed products in the Territory. The Company agreed to manufacture clinical material, which will be paid by Everest at the Company’s cost, as well as commercial supply, which will be paid by Everest at cost plus a reasonable margin.

In evaluating the recognition of revenue under the Agreement, the Company identified the following three performance obligations under the Agreement: (i) exclusive license to develop and commercialize eravacycline for the treatment of complicated intra-abdominal infections and other potential, future indications, in the Territory, (ii) provision of information and technical assistance related to the know-how transfer for the development of eravacycline; and (iii) provision of clinical supply to Everest Medicines.

The Company evaluated the Everest License Agreement under Topic 606 at the time of execution of the arrangement. Based on that evaluation, the upfront fee of $7.0 million represented the amount of the consideration to be included in the transaction price, which will be allocated to the identified performance obligations. Subsequent to execution, the Company deemed a $2.5 million milestone payment to the Chinese IND as probable and included the amount in the transaction price.  

No other clinical milestones, regulatory milestones, sales-based milestones or sales royalties have been included in the transaction price, as these milestones are not considered probable given Everest’s relatively short operating history, the uncertainty of regulatory processes in China and that commercial sales have not commenced. The Company determined that the license and related know-how were a combined performance obligation as the license is not distinct without the provision of the related know-how transfer. The Company’s requirement to manufacture clinical supply for Everest Medicines is dependent on Everest Medicines’ future purchases, the payment for which was determined to be at cost and therefore potentially represents a material right. However, based on the amount of clinical supply expected to be ordered by Everest Medicines, the Company has estimated that the value of this right would be immaterial.

The Company satisfied the combined performance obligation and recognized the $7.0 million upfront payment as revenue during the three months ended June 30, 2018. The Company also realized the $2.5 million Chinese IND milestone payment as revenue during the three months ended June 30, 2018.

Patheon UK Limited Master Manufacturing Services Agreement

In June 2017, the Company and Patheon UK Limited and certain of its affiliates (“Patheon”) entered into a master manufacturing services agreement. Under the Patheon agreement, the Company is responsible for supplying the active pharmaceutical ingredient for eravacycline to Patheon, and Patheon is responsible for manufacturing eravacycline, conducting quality control, quality assurance, analytical testing and stability testing and packaging. The Company and Patheon entered into two related product agreements pursuant to the Patheon agreement that govern the terms and conditions of Patheon’s manufacture of commercial supplies of eravacycline at Patheon’s Greenville, North Carolina and Ferentino, Italy manufacturing sites. Pursuant to the Patheon agreement, the Company has agreed to order from Patheon at least a certain percentage of its annual commercial requirements for eravacycline in the United States and European Union each year for the term of the Patheon agreement. The Patheon agreement has an initial term ending December 31, 2022, and will automatically renew after the initial term for successive terms of two years each, unless either party gives notice of its intention to terminate at least 18 months prior to the end of the then current term. The Company may terminate a product agreement upon 30 days’ prior written notice under certain circumstances.

Finorga SAS Commercial Supply Agreement

In October 2017, the Company and Finorga SAS (“Novasep”) entered into a commercial supply agreement. Under the agreement, Novasep will, pursuant to accepted purchase orders entered into under the agreement, manufacture for commercial supply the active pharmaceutical ingredient for eravacycline. This agreement has an initial term ending October 16, 2022, and will automatically renew after the initial term, unless either party gives notice of its intention to terminate at least 18 months prior to the end of the then current term. The Company may terminate the Novasep agreement upon 30 days’ prior written notice under certain circumstances.

Government Grant and Contracts

BARDA Contract for Eravacycline

The Company has received funding for its 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 a five-year contract, which has since been extended, that provides for up to a total of $67.3 million in

 

11


 

funding for the development, manufacturing and clinical evaluation of eravacycline for the treatment of disease caused by bacterial biothreat pathogens (“BARDA Contract”). The funding under the BARDA Contract is also being used for the development, manufacturing and clinical evaluation of eravacycline to treat certain infections caused by life-threatening MDR bacteria.

In connection with the BARDA Contract, in February 2012, the Company entered into a cost-plus-fixed-fee subcontract with CUBRC Inc. (“CUBRC”), an independent, not for profit, research corporation that specializes in U.S. government-based contracts, which is also the direct recipient of the BARDA Contract. This subcontract, which currently expires on December 31, 2018, granted the Company initial funding of up to approximately $41.8 million, reflecting the portion of the BARDA Contract funding that may be paid to the Company for its activities.

Although the BARDA Contract and the Company’s subcontract with CUBRC under the BARDA Contract have terms which currently expire on December 31, 2018, 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 the Company. Committed funding from CUBRC under the Company’s BARDA subcontract is for up to approximately $41.8 million through December 31, 2018, the current contract end date, as a result of the exercise of several options by BARDA under the BARDA Contract. Total funds of $38.7 million had been received by the Company through June 30, 2018 under this contract. During the three months ended June 30, 2018 and 2017, the Company recognized revenue of $0.6 million and $1.0 million, respectively, from the Company’s subcontract under the BARDA Contract. During the six months ended June 30, 2018 and 2017, the Company recognized revenue of $1.0 million and $1.5 million, respectively, from the Company’s subcontract under the BARDA Contract.

NIAID Grant and Contract for TP-271

The Company has received funding for its phase 1 compound TP-271 under two awards from the National Institute of Allergy and Infectious Diseases, or NIAID, 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:

 

the NIAID Grant awarded in July 2011 that provides up to a total of approximately $2.9 million over five years; and

 

the NIAID Contract awarded in September 2011 that provides up to a total of approximately $35.8 million over five years.

In connection with the NIAID Grant, in November 2011, CUBRC, the direct recipient of the NIAID Grant, awarded the Company a no-fee subaward of approximately $0.9 million, reflecting the portion of the NIAID Grant funding that may be paid to the Company for its activities.

In connection with the NIAID Contract, in October 2011, the Company entered into a cost-plus-fixed-fee subcontract with CUBRC, the direct recipient of the NIAID Contract, which subcontract currently expires on March 31, 2019 under which the Company may receive funding of up to approximately $16.9 million, reflecting the portion of the NIAID Contract funding that may be paid to the Company for its activities. Through June 30, 2018, the Company had received all committed funding of $0.9 million from CUBRC under the Company’s subaward with respect to the NIAID Grant.

Although the NIAID Contract and the Company’s subcontract with CUBRC under the NIAID Contract have terms which currently expire on March 31, 2019, NIAID is entitled to terminate the project for convenience at any time and is not obligated to provide continued funding beyond the respective expiration dates. To the extent that NIAID ceases to provide funding of the programs to CUBRC, CUBRC has the right to cease providing funding to the Company. As of June 30, 2018, committed funding from CUBRC under the Company’s subcontract with respect to the NIAID Contract is $16.9 million, of which $14.7 million had been received through June 30, 2018.

During the three months ended June 30, 2018 and 2017, the Company recognized revenue of $0.9 million and $0.2 million, respectively, from the Company’s subcontract under the NIAID Contract. During the three months ended June 30, 2018, the Company recognized no revenue from its subaward under the NIAID Grant compared to revenue of $3,000 for the three months ended June 30, 2017, as the grant expired in May 2017. During the six months ended June 30, 2018 and 2017, the Company recognized revenue of $1.6 million and $1.2 million, respectively, from the Company’s subcontract under the NIAID Contract. During the six months ended June 30, 2018, the Company recognized no revenue from its subaward under the NIAID Grant compared to revenue of $9,000 for the six months ended June 30, 2017, as the grant expired in May 2017.

 

12


 

CARB-X Award for TP-6076

In March 2017, Combating Antibiotic Resistant Bacteria Biopharmaceutical Accelerator (CARB-X) selected the Company to receive up to $4.0 million in research funding over eighteen months for TP-6076. In connection with this funding, the Company entered into a cost reimbursement Sub-Award Agreement (the “Sub-Award Agreement”) with the Trustees of Boston University, the administrator of the program. The Company began recognizing revenue from the Sub-Award Agreement in April 2017. During the three months ended June 30, 2018 and 2017, the Company recognized revenue of $0.6 million and $0.4 million, respectively, under this Sub-Award Agreement. During the six months ended June 30, 2018 and 2017, the Company recognized revenue of $1.4 million and $0.4 million, respectively and has received $0.5 million from its inception through June 30, 2018. This Sub-Award Agreement will fund certain activities through the end of 2018. This Sub-Award Agreement can be terminated for convenience at any time, subject to 30 days prior written notice.

 

6.  Accrued Expenses

Accrued expenses at June 30, 2018 and December 31, 2017 consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Salaries and benefits

 

$

2,060

 

 

$

4,137

 

Drug supply and development

 

 

2,575

 

 

 

2,298

 

Clinical trial and related

 

 

1,529

 

 

 

3,401

 

Preclinical

 

 

835

 

 

 

188

 

Professional fees

 

 

814

 

 

 

1,911

 

Commercial

 

 

396

 

 

 

213

 

Other

 

 

526

 

 

 

411

 

Total

 

$

8,735

 

 

$

12,559

 

 

7.  Stock-Based Compensation

In January 2018, the number of shares available for issuance under the Tetraphase Pharmaceuticals, Inc. 2013 Stock Incentive Plan, as amended (“2013 Plan”) was increased by approximately 2.1 million shares as a result of the automatic increase provision of the 2013 Plan. As of June 30, 2018, the total number of shares of common stock available for issuance under the 2013 Plan was approximately 1.3 million.

Stock-Based Compensation Expense

During the three and six months ended June 30, 2018 and 2017, the Company recognized the following stock-based compensation expense (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Research and development

 

$

1,586

 

 

$

1,596

 

 

$

2,946

 

 

$

3,174

 

General and administrative

 

 

1,806

 

 

 

1,564

 

 

 

3,418

 

 

 

3,062

 

Total

 

$

3,392

 

 

$

3,160

 

 

$

6,364

 

 

$

6,236

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Stock options

 

$

2,799

 

 

$

2,946

 

 

$

5,586

 

 

$

5,815

 

Restricted stock units

 

 

557

 

 

 

185

 

 

 

726

 

 

 

368

 

Employee stock purchase plan

 

 

36

 

 

 

29

 

 

 

52

 

 

 

53

 

Total

 

$

3,392

 

 

$

3,160

 

 

$

6,364

 

 

$

6,236

 

 

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Stock Options

The following table summarizes the stock option activity for the six months ended June 30, 2018:

 

 

 

Shares

 

 

Weighted-

Average

Exercise

Price

 

Outstanding at December 31, 2017

 

 

5,997,794

 

 

$

13.33

 

Granted

 

 

2,235,475

 

 

$

5.92

 

Exercised

 

 

(112,564

)

 

$

2.32

 

Forfeited

 

 

(970,796

)

 

$

10.59

 

Outstanding at June 30, 2018

 

 

7,149,909

 

 

$

11.56

 

Exercisable at June 30, 2018

 

 

3,210,763

 

 

$

16.40

 

 

As of June 30, 2018, there was $18.4 million of total unrecognized stock-based compensation cost related to employee unvested stock options granted under the 2013 Plan. The Company expects to recognize that cost over a remaining weighted-average period of 2.6 years.

Restricted Stock Units

In April 2018, the Company granted restricted stock units to employees. These restricted stock units vest in quarterly increments over one to two years, subject to continued employment with the Company and had a grant date fair value of $3.04 per share, which was the closing price of the Company’s common stock on the date of grant.  

In January 2018 and 2017, the Company issued 284,000 and 175,000 restricted stock units, respectively, with service and performance conditions to certain employees, none of which vested during the six months ended June 30, 2018. Vesting of these awards is contingent on the occurrence of certain milestone events and fulfillment of any remaining service condition. As a result, the related compensation cost is recognized as an expense when achievement of the milestone is considered probable over the remaining requisite service period.

The following table summarizes the restricted stock unit activity for the six months ended June 30, 2018:

  

 

 

Shares

 

 

Weighted-

Average

Grant Date Fair Value

 

Unvested at December 31, 2017

 

 

282,034

 

 

$

6.09

 

Granted

 

 

937,460

 

 

$

4.02

 

Forfeited

 

 

(62,277

)

 

$

5.28

 

Vested/Released

 

 

(68,528

)

 

$

8.47

 

Unvested at June 30, 2018

 

 

1,088,689

 

 

$

4.20

 

 

As of June 30, 2018, there was $2.2 million of total unrecognized stock-based compensation expense related to restricted stock units granted under the 2013 Plan. The expense is expected to be recognized over a weighted-average period of 1.5 years.    

Employee stock purchase plan

Under the Company’s 2014 Employee Stock Purchase Plan (“2014 ESPP”), an aggregate of 300,000 shares of common stock have been reserved for issuance pursuant to purchase rights granted to the Company’s employees. As of June 30, 2018, 106,833 shares remained available for issuance. During the three months ended June 30, 2018 and 2017 the Company issued 32,045 shares and 44,785 shares of common stock under the 2014 ESPP and recognized approximately $52,000 and $53,000 in related stock-based compensation expense, respectively. 

 

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8.  Equity

On January 17, 2017, the Company entered into a Controlled Equity Offering Sales Agreement (the “Sales Agreement”), with Cantor Fitzgerald & Co. as sales agent (“Cantor”). On July 7, 2017, the Company entered into an amendment to the Sales Agreement to increase the maximum aggregate offering price of the shares of common stock that it may issue and sell from time to time under the Sales Agreement from $40,000,000 to $80,000,000.

Under the Sales Agreement, as amended (the “Amended Sales Agreement”), Cantor may sell shares of the Company’s common stock by methods deemed to be an “at-the-market” offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, including sales made directly on the Nasdaq Global Select Market or on any other existing trading market for the Company’s common stock.

The Company is not obligated to make any sales of shares of its common stock under the Amended Sales Agreement. The Company or Cantor may suspend or terminate the offering of shares of the Company’s common stock upon notice to the other party and subject to other conditions. The Company will pay Cantor a commission rate equal to 3.0% of the gross proceeds per share sold.

As of June 30, 2018, the Company had sold an aggregate of 5,338,184 shares of common stock under the Sales Agreement, at an average selling price of approximately $6.97 per share for aggregate gross proceeds of $37.2 million and net proceeds of $35.9 million after deducting the sales commissions and offering expenses. An additional 5,130 shares had been sold under the Amended Sales Agreement subsequent to June 30, 2018, for net proceeds of $19,000 after deducting sales commissions. As of August 1, 2018, $42.8 million of common stock remained available to be sold under the amended Sales Agreement.

On August 2, 2017, the Company sold 10,000,000 shares of common stock in an underwritten public offering at an offering price to the public of $6.50 per share, resulting in net proceeds to the Company of $60.7 million after deducting underwriting discounts and commissions of $3.9 million and offering costs of $0.4 million. In connection with the offering, the Company granted the underwriters an option to purchase up to an additional 1,500,000 shares on the same terms and conditions as the offering, pursuant to which the underwriters exercised an option to purchase 107,000 additional shares on August 25, 2017, resulting in additional net proceeds to the Company of approximately $0.7 million after deducting underwriting discounts and commissions.

9. Subsequent Events

On July 27, 2018, the Company announced that the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency adopted a positive opinion recommending Xerava (eravacycline) for approval as a treatment for adult patients with complicated intra-abdominal infections (cIAI). The CHMP’s opinion will be reviewed by the European Commission (EC) which is expected to make a final decision within three months. If approved by the EC, marketing authorization for Xerava will be granted in all 28 countries of the European UnionNorwayIceland and Liechtenstein.

In July 2018, a purported securities class action lawsuit was filed against the Company, its chief executive officer, its chief scientific officer and the underwriters of its July 2017 public offering, in the United States Southern District Court for New York. The complaint is brought on behalf of an alleged class of those who purchased Tetraphase securities pursuant and/or traceable to the Company’s July 2017 secondary public offering and those who purchased the Company’s securities between March 8, 2017 and February 13, 2018. The complaint purports to allege claims arising under Sections 10 and 20 of the Exchange Act of 1934, as amended, and Sections 11 and 15 of the Securities Act of 1933, as amended. The complaint generally alleges that the defendants violated the federal securities laws by, among other things, making material misstatements or omissions concerning IGNITE3. The complaint seeks, among other relief, unspecified compensatory damages, attorneys’ fees, and costs. The Company believes it has valid defenses against these claims, and will engage in a vigorous defense of such litigation.

 

 

 

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

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, 2017, 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, 2018, 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 and commercialize novel antibiotics for serious and life-threatening multidrug-resistant, or MDR, infections. We are developing our lead product candidate, eravacycline, a fully synthetic fluorocycline, as an intravenous, or IV antibiotic for use as a first-line empiric monotherapy for the treatment of multidrug-resistant infections, including MDR Gram-negative infections in patients, such as those with complicated intra-abdominal infections, or cIAI.  

We conducted a global phase 3 clinical program for eravacycline called IGNITE (Investigating Gram-Negative Infections Treated with Eravacycline).

On July 25, 2017, we announced top-line data from our IGNITE4 trial, a global phase 3 randomized, double-blind, double-dummy, multicenter, prospective study assessing the efficacy, safety and pharmacokinetics of twice-daily IV eravacycline (1.0 mg/kg every 12 hours) compared with meropenem (1g every 8 hours) for the treatment of cIAI that we conducted in 500 patients. In the trial, eravacycline met the primary endpoint of statistical non-inferiority of clinical response at the test-of-cure, or TOC, visit, under the guidance set by the United States Food and Drug Administration, or FDA, and the European Medicines Agency, or EMA. Prior to IGNITE4, we conducted IGNITE1, a phase 3 clinical trial of twice-daily IV eravacycline (1.0 mg/kg every 12 hours) compared with ertapenem (1.0g IV every 24 hours) for the treatment of cIAI. In IGNITE1, eravacycline met the primary endpoint of statistical non-inferiority of clinical response. 

On January 2, 2018, we announced the submission of a New Drug Application, or NDA, to the FDA for IV eravacycline for the treatment of cIAI. The NDA submission includes data from the IGNITE1 and IGNITE4 phase 3 clinical trials. Our Prescription Drug User Fee Act goal date for the FDA’s completion of its review of our NDA is August 28, 2018. The FDA has granted Qualified Infectious Disease Product (QIDP) and Fast Track designations for IV eravacycline for cIAI.

In the third quarter of 2017, we submitted a marketing authorization application, or MAA, to the EMA for IV eravacycline for the treatment of cIAI primarily based upon the results of IGNITE1. On July 27, 2018, we announced that the Committee for Medicinal Products for Human Use, or CHMP, of the EMA, had notified us that it is recommending eravacycline for approval as a treatment for adult patients with cIAI. The CHMP’s opinion will be reviewed by the European Commission, or EC, which is expected to make a final decision within three months. If approved by the EC, marketing authorization for eravacycline is expected to be granted in all 28 countries of the European Union, Norway, Iceland and Liechtenstein.

In February 2018, we announced top-line data from our IGNITE3 trial, a global phase 3 randomized, multi-center, double-blind, clinical trial evaluating the efficacy and safety of once-daily IV eravacycline, at a dose of 1.5mg/kg every 24 hours, compared to ertapenem, at a dose of 1g every 24 hours, for the treatment of complicated urinary tract infections, or cUTI. We conducted the trial in 1,205 patients who were randomized 1:1 to receive eravacycline or ertapenem for a minimum of 5 days, and then were eligible for transition to an appropriate approved oral agent. In this trial, eravacycline did not meet the co-primary endpoints of responder rate, a combination of clinical cure and microbiological success, the microbiological intent-to-treat, or micro-ITT, population at the end-of-IV treatment visit and at the TOC visit (5-10 days post therapy). These endpoints were evaluated using a 10% non-inferiority margin. Given the IGNITE3 results, in the first quarter of 2018 we ceased development of IV and oral eravacycline for the treatment of cUTI.

Eravacycline is designed to treat a broad range of infections, including infections due to MDR bacteria. In in vitro experiments, eravacycline has demonstrated the ability to cover a wide variety of multidrug-resistant Gram-negative, Gram-positive, anaerobic and atypical bacteria, including multidrug-resistant Klebsiella pneumoniae and multi-drug resistant Acinetobacter. Multidrug-resistant Klebsiella pneumoniae is one of the carbapenem-resistant Enterobacteriaceae (or CREs) listed as an urgent threat and multi-drug resistant Acinetobacter is listed as a serious threat by the Centers for Disease Control and Prevention in a September 2013 report. They are also listed as “Priority 1; Critical Pathogens” in the World Health Organization’s priority pathogens list for R&D, published in February 2017. CREs were a confirmed area of great concern by the World Health Organization in an April 2014 global surveillance report. Gram-negative bacteria that are resistant to multiple available antibiotics are increasingly common and a

 

16


 

growing threat to public health. We believe that the ability of eravacycline to cover MDR Gram-negative bacteria, as well as MDR Gram-positive, anaerobic and atypical bacteria, will enable eravacycline to become the drug of choice for first-line empiric treatment of patients with cIAI.

In June 2017, we announced positive results from a phase 1 single-ascending dose clinical trial of the IV formulation of TP-271 in healthy volunteers. TP-271 is a fully-synthetic fluorocycline being developed for respiratory disease caused by bacterial biothreat and antibiotic-resistant public health pathogens, as well as bacterial pathogens associated with community-acquired bacterial pneumonia. In the study, TP-271 was well-tolerated at single doses that resulted in high plasma exposures. There were no clinically significant changes in lab values, ECG parameters, or physical exam findings. There were no serious or severe adverse events, or discontinuations due to an adverse event during the study. We are also completing a single-ascending dose trial for the oral formulation of TP-271, and multiple-ascending dose trials for the IV and oral formulations of TP-271. In February 2017, we received Qualified Infectious Disease Product and Fast Track designations from the FDA for TP-271.

In addition, we are developing TP-6076, a fully-synthetic fluorocycline derivative, as a lead candidate under our second-generation program to target unmet medical needs, including MDR Gram-negative bacteria such as carbapenem-resistant Enterobacteriaceae and carbapenem-resistant Acinetobacter baumanii. In June 2017, we announced positive results from a phase 1 randomized, placebo-controlled, double-blind, single-ascending dose study evaluating the safety, tolerability and pharmacokinetics of IV TP-6076. In the study, TP-6076 was well-tolerated, and there were no serious or severe adverse events, or discontinuations due to an adverse event. There were no clinically significant safety findings in any laboratory assessments, vital signs, ECGs or physical examinations. We also are conducting a multiple-ascending study in healthy volunteers of the IV formulation of TP-6076 and expect to report the results of this study in the fourth quarter of 2018. 

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, 2018, we had received an aggregate of $557.8 million in net proceeds from the issuance of equity securities and borrowings under debt facilities and an aggregate of $54.8 million from government grants and contracts. As of June 30, 2018, our principal source of liquidity was cash and cash equivalents, which totaled $111.2 million.

As of June 30, 2018, we had an accumulated deficit of $493.0 million. Our net losses were $9.5 million and $31.8 million for the three months ended June 30, 2018 and 2017, respectively, and $31.1 million and $61.3 million for the six months ended June 30, 2018 and 2017, respectively. We expect that our expenses will decrease in 2018 compared with 2017, as the completion of the IGNITE clinical program will offset cost increases associated with conducting pre-commercialization activities for eravacycline and, if approved, the launch of eravacycline. If we obtain marketing approval for eravacycline, we do expect to incur significant sales, marketing, distribution and outsourced manufacturing expenses.

We believe that our available funds will be sufficient to support our operations through the third quarter of 2019, which we believe will allow us to fund the initial launch of IV eravacycline for the treatment of cIAI. We will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources to fund our operations including ongoing spending to commercialize eravacycline. 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

Revenue

We have derived all of our revenue to date from our license agreement with Everest Medicines and from funding provided under three U.S. government awards for the development of our compounds.

We have no products approved for sale. Other than the license agreement and government awards 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 or enter into additional ex-US outlicensing agreements. We continue to pursue government funding for other preclinical and clinical programs.

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.

 

17


 

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 provide preclinical, clinical, regulatory and manufacturing services;

 

payments made under our license agreement with Harvard University or Harvard;

 

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, regulatory and medical affairs activities.

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.

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, consulting, travel, conferences, stock-based compensation and depreciation are not allocated to a program and are separately classified as other research and development expenses. The following table summarizes our research and development expenses on a program-specific basis for the three and six months ended June 30, 2018 and 2017:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

 

(in thousands)

 

Eravacycline

 

$

6,977

 

 

$

22,361

 

 

$

18,235

 

 

$

42,792

 

NIAID Contract and NIAID Grant

 

 

835

 

 

 

58

 

 

 

1,528

 

 

 

959

 

CARB-X Award

 

 

598

 

 

 

398

 

 

 

1,292

 

 

 

398

 

BARDA Contract

 

 

588

 

 

 

925

 

 

 

998

 

 

 

1,344

 

TP-6076

 

 

350

 

 

 

920

 

 

 

893

 

 

 

1,650

 

Other development programs

 

 

294

 

 

 

706

 

 

 

765

 

 

 

981

 

Other research and development

 

 

4,728

 

 

 

3,145

 

 

 

8,786

 

 

 

6,336

 

Total research and development expenses

 

$

14,370

 

 

$

28,513

 

 

$

32,497

 

 

$

54,460

 

 

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, 2018, we had incurred an aggregate of $274.9 million in research and development expenses related to the development of eravacycline, and $37.7 million in research and development expenses related to the development of eravacycline that were funded under the BARDA Contract. We expect that our research and development expenses will decrease as we complete the IGNITE program for eravacycline.

Because of the numerous risks and uncertainties associated with product development, however, we cannot determine with certainty the duration and completion costs of 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.

 

18


 

We have licensed our proprietary chemistry technology from Harvard 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 $9.1 million in upfront license fees, and development and regulatory milestone payments. 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 ($7.8 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 payments due under the license agreement with respect to eravacycline total an aggregate of $4.8 million upon approval of eravacycline by the FDA and EMA.

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, legal, operational, corporate communications, marketing 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 our anticipated research and development activities as we continue the development of our product candidates;

 

expansion of infrastructure, including increases in personnel-related costs, consulting, legal, accounting and investor relations costs, and directors and officers insurance premiums; 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.

Other Income

Other income consists primarily of interest income earned on our cash and cash equivalents.

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 these estimates 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.

In May 2014, the Financial Accounting Standard Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of the new standard from January 1, 2017 to January 1, 2018. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. The FASB has subsequently issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net); ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.

We have concluded that our grants are not within the scope of Topic 606, as they do not meet the definition of a contract with a “customer”. We have concluded that the Grants meet the definition of a contribution and are non-reciprocal transactions. We have further concluded that Subtopic 958-605, Not-for-Profit-Entities-Revenue Recognition also does not apply, as we are a business entity

 

19


 

and the grants are with governmental agencies or units. The government grants are technically to a non-profit entity that specializes in government grant administration, project management and oversight (i.e. CUBRC). However, we have concluded that, in effect, it is a grant from the government; as the contracting counterparty CUBRC is merely administering the agreement between the government (who is funding the work) and us (who are performing the work).  

In the absence of applicable guidance under GAAP as of January 1, 2018 for the grants, we have developed a policy for the recognition of revenue for the grants as follows:

 

Revenue is recognized when the right to payment is realized or is realizable

 

Revenues are realized when services are exchanged for cash or claims to cash. Revenues are not recognized until earned.

 

Our revenue-earning activities involve rendering services that constitute our ongoing major or central operations, and revenues are considered to have been earned when we have substantially accomplished what we must do to be entitled to the benefits represented by the revenues.

We believe this policy is consistent with the overarching premise in Topic 606, to ensure that we recognize revenues to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services, even though there is no “exchange” as defined in the ASC. We believe the recognition of revenue as costs are incurred and amounts become earned/realizable is analogous to the concept of transfer of control of a service over time under ASC 606.

Prior to January 1, 2018, we recognized revenue as we performed services under the grants so long as an agreement had been executed and the fees for these services were fixed or determinable, legally billable and reasonably assured of collection. Recognized amounts reflected our partial performance under the grants and equal direct and indirect costs incurred plus fixed fees, where applicable. Revenues and expenses under these arrangements were presented gross. Revenue recognition under this new policy is not materially different than would have been calculated under the old guidance. As a result of adoption of this policy, there was no change to the amounts we have historically recorded to our financial statements.

Out-Licensing Revenue Recognition

We entered into an out-licensing agreement that is evaluated under Topic 606, through which we license certain of our product candidates’ rights to a third party. Any future out-license agreement entered into by us and additional third parties shall also be evaluated under Topic 606. Terms of these arrangements include various payment types, typically including one or more of the following: upfront license fees; development, regulatory and commercial milestone payments; payments for manufacturing supply services; and/or royalties on net sales of licensed products.

To determine the amount and timing of revenue to be recognized under each agreement, we evaluate the following criteria: (i) confirming the goods or services in the contract; (ii) defining the performance obligations under the agreement; (iii) determining the transaction price, including any constraint on variable consideration; (iv) allocating the transaction price to the performance obligations; and (v) defining how the revenue will be recognized for each performance obligation. In determining the accounting treatment for these arrangements, we develop assumptions to determine the stand-alone selling price for each performance obligation in the contract. These assumptions may include forecasted revenues, development timelines, discount rates and probabilities of technical and regulatory success.

Licenses of Intellectual Property: If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenue from upfront fees allocated to the license when the license is transferred to the licensee, including any associated know-how and the licensee can use and benefit from the license. For licenses that are bundled with other obligations, we use judgment to evaluate the combined performance obligation to determine whether it is satisfied over time or at a point in time and the appropriate method of measuring completion for purposes of recognizing revenue.  

Milestone Payments: For arrangements that include development milestone payments, we evaluate whether the milestones are considered probable and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our control or the licensee’s control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received.  

 

20


 

Manufacturing Supply: Arrangements that include a promise for future supply of drug substance or drug product for either clinical development or commercial supply at the licensee’s discretion are generally considered as options. We assess if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations. If we are entitled to additional payments when the licensee exercises these options, we recognize revenue when the licensee obtains control of the goods, which is upon delivery.

Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).  

There have been no other 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, filed on form 10-K with the SEC on March 6, 2018 for the year ended December 31, 2017.

Results of Operations

Comparison of the Three Months Ended June 30, 2018 and 2017

The following table summarizes the results of our operations for the three months ended June 30, 2018 and 2017, together with the changes in those items in dollars and as a percentage:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

Increase/

 

 

 

 

 

 

 

2018

 

 

2017

 

 

(decrease)

 

 

%

 

 

 

(in thousands)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License revenue

 

$

9,500

 

 

$

 

 

$

9,500

 

 

n/a

 

Government revenue

 

 

2,079

 

 

 

1,586

 

 

 

493

 

 

 

31

%

Total revenues

 

 

11,579

 

 

 

1,586

 

 

 

9,993

 

 

 

630

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

14,370

 

 

 

28,513

 

 

 

(14,143

)

 

 

(50

)%

General and administrative

 

 

7,165

 

 

 

5,065

 

 

 

2,100

 

 

 

41

%

Total operating expenses

 

 

21,535

 

 

 

33,578

 

 

 

(12,043

)

 

 

(36

)%

Loss from operations

 

 

(9,956

)

 

 

(31,992

)

 

 

22,036

 

 

 

(69

)%

Other income

 

 

413

 

 

 

181

 

 

 

232

 

 

 

128

%

Net loss

 

$

(9,543

)

 

$

(31,811

)

 

$

22,268

 

 

 

(70

)%

License revenue was $9.5 million for the three months ended June 30, 2018 related to our license agreement with Everest Medicines. Government revenue was $2.1 million for the three months ended June 30, 2018 compared to $1.6 million for the three months ended June 30, 2017, an increase of $0.5 million, or 31%. This increase was due to the scope and timing of activities conducted under our subcontract with respect to the CARB-X Award and the BARDA and NIAID Contracts.

The following table sets forth our government contract and grant revenue for the three months ended June 30, 2018 and 2017:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

Increase/

 

 

 

 

 

 

 

2018

 

 

2017

 

 

(decrease)

 

 

%

 

 

 

(in thousands)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CARB-X Award

 

 

613

 

 

 

417

 

 

 

196

 

 

 

47

%

NIAID Contract

 

 

858

 

 

 

178

 

 

 

680

 

 

 

382

%

BARDA Contract

 

 

608

 

 

 

988

 

 

 

(380

)

 

 

(38

)%

NIAID Grant

 

 

 

 

 

3

 

 

 

(3

)

 

 

(100

)%

 

 

$

2,079

 

 

$

1,586

 

 

$

493

 

 

 

31

%

 

21


 

Research and Development Expenses

Research and development expenses for the three months ended June 30, 2018 were $14.4 million compared to $28.5 million for the three months ended June 30, 2017, a decrease of $14.1 million, or 50%. This decrease was primarily due to lower clinical trial costs associated with conducting our IGNITE3 and IGNITE4 phase 3 clinical trials during the three months ended June 30, 2018 as compared to the three months ended June 30, 2017.

General and Administrative Expenses

General and administrative expenses for the three months ended June 30, 2018 were $7.2 million compared to $5.1 million for the three months ended June 30, 2017, an increase of $2.1 million, or 41%. This increase was primarily due to an increase in pre-commercialization expenses.

Other Income

The increase in other income for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017 was driven by improved overall yields on our money market funds.

Comparison of the Six Months Ended June 30, 2018 and 2017

The following table summarizes the results of our operations for the six months ended June 30, 2018 and 2017, together with the changes in those items in dollars and as a percentage:

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

Increase/

 

 

 

 

 

 

 

2018

 

 

2017

 

 

(decrease)

 

 

%

 

 

 

(in thousands)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License revenue

 

$

9,500

 

 

$

 

 

$

9,500

 

 

n/a

 

Government revenue

 

 

3,969

 

 

 

3,071

 

 

 

898

 

 

 

29

%

Total revenues

 

 

13,469

 

 

 

3,071

 

 

 

10,398

 

 

 

339

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

32,497

 

 

 

54,460

 

 

 

(21,963

)

 

 

(40

)%

General and administrative

 

 

12,869

 

 

 

10,198

 

 

 

2,671

 

 

 

26

%

Total operating expenses

 

 

45,366

 

 

 

64,658

 

 

 

(19,292

)

 

 

(30

)%

Loss from operations

 

 

(31,897

)

 

 

(61,587

)

 

 

29,690

 

 

 

(48

)%

Other income

 

 

778

 

 

 

318

 

 

 

460

 

 

 

145

%

Net loss

 

$

(31,119

)

 

$

(61,269

)

 

$

30,150

 

 

 

(49

)%

License revenue was $9.5 million for the six months ended June 30, 2018 related to our license agreement with Everest Medicines. Contract and grant revenue was $4.0 million for the six months ended June 30, 2018 compared to $3.1 million for the six months ended June 30, 2017, an increase of $0.9 million, or 29%. This increase was due to the scope and timing of activities conducted under our subcontract with respect to the CARB-X Award and the BARDA and NIAID Contracts.

The following table sets forth our contract and grant revenue for the six months ended June 30, 2018 and 2017:

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

Increase/

 

 

 

 

 

 

 

2018

 

 

2017

 

 

(decrease)

 

 

%

 

 

 

(in thousands)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CARB-X Award

 

 

1,351