XOTC:RDHE Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

 

For the quarterly period ended June 30, 2012.

 

Or

 

o

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 000-53173

 

Radius Health, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

80-0145732

(State or other jurisdiction of

 

(IRS Employer

Incorporation or organization)

 

Identification Number)

 

201 Broadway

 

 

Sixth Floor

 

 

Cambridge, Massachusetts

 

02142

(Address of Principal Executive Offices)

 

(Zip Code)

 

(617) 551-4700

(Registrant’s telephone number, including area code)

 

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 x  No o

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

 

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

 

Number of shares of the registrant’s Common Stock, $0.001 par value per share, outstanding as of August 7, 2012: 857,301 shares

 

 

 



Table of Contents

 

RADIUS HEALTH, INC.

QUARTERLY REPORT FOR THE QUARTER ENDED June 30, 2012

ON FORM 10-Q

 

INDEX

 

PART I FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements (Unaudited)

 

Condensed Balance Sheets as of June 30, 2012 and December 31, 2011

 

Condensed Statements of Operations for the Three- and Six-Month Periods ended June 30, 2012 and 2011

 

Condensed Statements of Convertible Preferred Stock and Stockholders’ Deficit for the Three- and Six-Month Period ended June 30, 2012

 

Condensed Statements of Cash Flows for the Three- and Six-Month Periods ended June 30, 2012 and 2011

 

Notes to Unaudited Financial Statements

Item 2.

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

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

 

 

PART II OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Item 2.

Unregistered Sales of Equity Securities and the Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

Item 5.

Other Information

Item 6.

Exhibits

 

 

SIGNATURES

 

 

2



Table of Contents

 

CURRENCY AND CONVERSIONS

 

In this report, references to “dollar” or “$” are to the legal currency of the United States, and references to “euro” or “€” are to the single currency introduced on January 1, 1999 at the start of the third stage of European Economic and Monetary Union, pursuant to the Treaty establishing the European Communities, as amended by the Treaty on European Union and the Treaty of Amsterdam. Unless otherwise indicated, the financial information in this report has been expressed in U.S. dollars. Unless otherwise stated, the U.S. dollar equivalent information translating euros into U.S. dollars has been made, for convenience purposes, on the basis of the noon buying rate published by the Board of Governors of the Federal Reserve as of June 29, 2012, which was €1.00 = $1.2668. Such translations should not be construed as a representation that the euro has been, could have been or could be converted into U.S. dollars at the rate indicated, any particular rate or at all.

 

Trademarks appearing in this report are the property of their respective holders.

 

3



Table of Contents

 

Item 1. Financial Statements—Unaudited

 

 

Radius Health, Inc.

Condensed Balance Sheets

(Unaudited, in thousands, except share and per share amounts)

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

18,832

 

$

25,128

 

Marketable securities

 

27,042

 

31,580

 

Prepaid expenses and other current assets

 

5,952

 

6,682

 

Total current assets

 

51,826

 

63,390

 

Property and equipment, net

 

98

 

167

 

Other assets

 

45

 

80

 

Total assets

 

$

51,969

 

$

63,637

 

 

 

 

 

 

 

Liabilities, convertible preferred stock, redeemable convertible preferred stock and stockholders’ deficit

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

1,247

 

$

313

 

Accrued expenses

 

2,134

 

3,590

 

Current portion of note payable

 

5,836

 

2,880

 

Total current liabilities

 

9,217

 

6,783

 

 

 

 

 

 

 

Note payable, net of current portion and discount

 

17,083

 

8,886

 

Warrant liability

 

862

 

450

 

Other liabilities

 

17,456

 

10,470

 

 

 

 

 

 

 

Series A-1 Convertible Preferred Stock, $.0001 par value; 1,000,000 shares authorized, 939,612 issued and outstanding at December 31, 2011 and June 30, 2012

 

68,755

 

65,675

 

 

 

 

 

 

 

Series A-2 Convertible Preferred Stock, $.0001 par value; 983,213 shares authorized, 983,208 issued and outstanding at December 31, 2011 and June 30, 2012

 

83,238

 

79,979

 

 

 

 

 

 

 

Series A-3 Convertible Preferred Stock, $.0001 par value; 142,230 shares authorized, 142,227 issued and outstanding at December 31, 2011 and June 30, 2012

 

10,679

 

10,208

 

 

 

 

 

 

 

Series A-4 Convertible Preferred Stock, $.0001 par value; 4,000 shares authorized, 3,998 issued and outstanding at December 31, 2011 and June 30, 2012

 

271

 

271

 

 

 

 

 

 

 

Series A-5 Convertible Preferred Stock, $.0001 par value; 7,000 shares authorized, 6,443 issued and outstanding at December 31, 2011 and June 30, 2012

 

525

 

525

 

 

 

 

 

 

 

Series A-6 Convertible Preferred Stock, $.0001 par value; 800,000 shares authorized, no shares issued and outstanding at December 31, 2011 and June 30, 2012

 

 

 

Stockholders’ deficit:

 

 

 

 

 

Common stock, $.0001 par value; 34,859,964 shares authorized, 855,116 and 645,399 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively

 

 

 

Additional paid-in-capital

 

 

2,744

 

Accumulated other comprehensive loss

 

10

 

5

 

Accumulated deficit

 

(156,127

)

(122,359

)

Total stockholders’ deficit

 

(156,117

)

(119,610

)

 

 

 

 

 

 

Total liabilities, convertible preferred stock, redeemable convertible preferred stock and stockholders’ deficit

 

$

51,969

 

$

63,637

 

 

See accompanying notes.

 

4



Table of Contents

 

Radius Health, Inc.

Condensed Statements of Operations

(Unaudited, in thousands, except share and per share amounts)

 

 

 

Three-Month Period

 

Six-Month Period

 

 

 

Ended June 30,

 

Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

$

14,499

 

$

16,553

 

$

24,366

 

$

20,689

 

General and administrative

 

2,179

 

945

 

4,291

 

1,842

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(16,678

)

(17,498

)

(28,657

)

(22,531

)

Interest income

 

18

 

6

 

35

 

20

 

Other income (expense)

 

(717

)

12

 

(1,184

)

22

 

Interest expense

 

(584

)

(108

)

(1,027

)

(108

)

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(17,961

)

$

(17,588

)

$

(30,833

)

$

(22,597

)

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

$

(17,955

)

$

(17,588

)

$

(30,828

)

$

(22,594

)

Earnings (loss) attributable to common stockholders - basic and diluted (Note 5)

 

$

(21,417

)

1,401

 

$

(37,643

)

$

1,013

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share (Note 5):

 

 

 

 

 

 

 

 

 

Basic

 

$

(25.06

)

$

2.89

 

$

(46.18

)

$

2.51

 

Diluted

 

$

(25.06

)

$

0.44

 

$

(46.18

)

$

0.27

 

Weighted average shares:

 

 

 

 

 

 

 

 

 

Basic

 

854,517

 

484,237

 

815,053

 

403,967

 

Diluted

 

854,517

 

3,175,348

 

815,053

 

3,790,913

 

 

See accompanying notes.

 

5



Table of Contents

 

Radius Health, Inc.

Statements of Convertible Preferred Stock and Stockholders’ Deficit

(Unaudited, in thousands except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid

 

Other

 

 

 

Total

 

 

 

Convertible Preferred Stock

 

 

 

 

 

In

 

Comprehensive

 

Accumulated

 

Stockholders’

 

 

 

Series A-1

 

Series A-2

 

Series A-3

 

Series A-4

 

Series A-5

 

Series A-6

 

Common Stock

 

Capital

 

Income (Loss)

 

Deficit

 

Deficit

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Amount

 

Amount

 

Amount

 

Amount

 

Balance at December 31, 2011

 

939,612

 

$

65,675

 

983,208

 

$

79,979

 

142,227

 

$

10,208

 

3,998

 

$

271

 

6,443

 

$

525

 

 

$

 

645,399

 

$

 

$

2,744

 

$

5

 

$

(122,359

)

$

(119,610

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(30,833

)

(30,833

)

Unrealized gain from available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

5

 

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(30,828

)

Accretion of dividends on preferred stock

 

 

 

3,080

 

 

 

3,259

 

 

 

471

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,875

)

 

 

(2,935

)

(6,810

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

873

 

 

 

 

 

873

 

Stock options exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

209,717

 

 

 

258

 

 

 

 

 

258

 

Balance at June 30, 2012

 

939,612

 

$

68,755

 

983,208

 

$

83,238

 

142,227

 

$

10,679

 

3,998

 

$

271

 

6,443

 

$

525

 

 

$

 

855,116

 

$

 

$

 

$

10

 

$

(156,127

)

$

(156,117

)

 

See accompanying notes.

 

6



Table of Contents

 

Radius Health, Inc.

Statements of Cash Flows

(Unaudited, in thousands)

 

 

 

Six months ended

 

 

 

June 30,

 

 

 

2012

 

2011

 

Operating activities

 

 

 

 

 

Net loss

 

$

(30,833

)

$

(22,597

)

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

 

 

 

 

 

Depreciation

 

24

 

15

 

Stock-based compensation expense

 

873

 

106

 

Research and development expense to be settled in stock

 

5,335

 

3,421

 

Amortization of premium (accretion of discount) on short-term investments, net

 

80

 

21

 

Non-cash interest

 

199

 

30

 

Change in fair value of warrant liability and other liability

 

1,184

 

 

Milestone payment settled with stock

 

 

1,410

 

Changes in operating assets and liabilities:

 

 

 

 

 

Prepaid expenses and other current assets

 

1,219

 

(3,028

)

Other long-term assets

 

35

 

31

 

Accounts payable

 

934

 

(541

)

Accrued expenses

 

(1,456

)

1,507

 

Net cash used in operating activities

 

(22,406

)

(19,625

)

Investing activities

 

 

 

 

 

Purchases of property and equipment

 

 

(3

)

Proceeds from sale of equipment

 

45

 

 

Purchases of marketable securities

 

(17,722

)

(899

)

Sales and maturities of marketable securities

 

22,185

 

8,850

 

Net cash provided by investing activities

 

4,508

 

7,948

 

Financing activities

 

 

 

 

 

Proceeds from the exercise of stock options

 

258

 

152

 

Net proceeds from the issuance of preferred stock

 

 

20,452

 

Proceeds on note payable, net

 

12,469

 

5,883

 

Deferred financing costs

 

 

(56

)

Payments on note payable

 

(1,125

)

 

Net cash provided by financing activities

 

11,602

 

26,431

 

Net increase in cash and cash equivalents

 

(6,296

)

14,754

 

Cash and cash equivalents at beginning of period

 

25,128

 

10,582

 

Cash and cash equivalents at end of period

 

$

18,832

 

$

25,336

 

Supplemental disclosures

 

 

 

 

 

Cash paid for interest

 

$

721

 

$

 

Noncash financing activities

 

 

 

 

 

Fair value of preferred stock issued in the recapitalization, net of issuance costs

 

$

 

$

85,879

 

Accretion of dividends on preferred stock

 

$

6,810

 

$

5,595

 

Fair value of warrants issued

 

$

379

 

$

217

 

 

See accompanying notes.

 

7



Table of Contents

 

Radius Health, Inc.

Notes to Financial Statements

(Unaudited)

 

1. Organization

 

Radius Health, Inc. (“Radius” or the “Company”), which was formerly known as MPM Acquisition Corp., is a biopharmaceutical company focused on acquiring and developing new therapeutics for the treatment of osteoporosis and other women’s health conditions. The Company’s lead product candidate, currently in Phase 3 clinical development, is BA058 Injection, a daily subcutaneous injection of novel synthetic peptide analog of human parathyroid hormone-related protein (hPTHrP) for the treatment of osteoporosis. The BA058 Injection Phase 3 study began dosing patients in April 2011. The Company is also developing BA058 Microneedle Patch, a short wear time, transdermal form of BA058 delivered using a microneedle technology from 3M Drug Delivery Systems (3M), for which the Company expects to have a Phase 2 clinical study begin in the third quarter of 2012, with top-line data expected to be available in the second half of 2013. The Company also has two other product candidates, RAD1901, a selective estrogen receptor modulator, or SERM, in Phase 2 clinical development for the treatment of vasomotor symptoms (hot flashes) in women entering menopause, and RAD140, a selective androgen receptor modulator, or SARM, currently in preclinical development as a potential treatment for age-related muscle loss, frailty, weight loss associated with cancer cachexia and osteoporosis. As used throughout these financial statements, the terms “Radius,” “Company,” “we,” “us” and “our” refer to Radius Health, Inc. (f/k/a MPM Acquisition Corp.).

 

Pursuant to an Agreement and Plan of Merger (the “Merger Agreement” or the “Merger”) entered into in April 2011 by and among the Company (a public-reporting, Form 10 shell company at the time), RHI Merger Corp., a Delaware corporation and wholly owned subsidiary of the Company (“MergerCo”), and Radius Health, Inc., a privately-held Delaware corporation (“Former Operating Company”), MergerCo merged with and into the Former Operating Company, with the Former Operating Company remaining as the surviving entity and a wholly-owned subsidiary of the Company.  This transaction is herein referred to as the “Merger”. The Merger was effective as of May 17, 2011, upon the filing of a certificate of merger with the Delaware Secretary of State.  Following the Merger on May 17, 2011, the Company’s Board of Directors approved a transaction pursuant to which the Former Operating Company merged with and into the Company, leaving the Company as the surviving corporation (the “Short-Form Merger”).  As part of the Short-Form Merger, the Company, then named MPM Acquisition Corp., changed its name to Radius Health, Inc. and assumed the operations of the Former Operating Company.

 

The Company is subject to the risks associated with emerging companies with a limited operating history, including dependence on key individuals, a developing business model, market acceptance of the Company’s product candidates, competition for its product candidates, and the continued ability to obtain adequate financing to fund the Company’s future operations. The Company has an accumulated deficit of $156.1 million through June 30, 2012. The Company has incurred losses and expects to continue to incur additional losses for the foreseeable future. The Company intends to obtain additional equity and/or debt financing in order to meet working capital requirements and to further develop its product candidates. The Company believes that its existing cash and cash equivalents and marketable securities are sufficient to finance its operations, including its obligations under the Nordic agreement described in Note 12, into the first quarter of 2013.

 

2. Basis of Presentation

 

The accompanying unaudited condensed financial statements and the related disclosures of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and as required by Regulation S-X, Rule 10-01.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including those which are normal and recurring) considered necessary for a fair presentation of the interim financial information have been included. When preparing financial statements in conformity with GAAP, the Company must make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and related disclosures at the date of the financial statements. Actual results could differ from those estimates. Additionally, operating results for the three months ended June 30, 2012 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2012. For further information, refer to the financial statements and footnotes included in the Company’s audited financial statements for the year ended December 31, 2011 included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on February 6, 2012.

 

3. Summary of Significant Accounting Policies

 

The significant accounting policies identified in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2011 related to accrued clinical expenses, research and development expenses, stock-based compensation, accrued expenses and income taxes. There were no changes to significant accounting policies in the three months ended June 30, 2012.

 

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Table of Contents

 

Recently Adopted Accounting Standards

 

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update No. 2011-05, Comprehensive Income (“ASU No. 2011-05”), which requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. ASU No. 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The update does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income. The Company adopted ASU No. 2011-05 on January 1, 2012. Its adoption did not have a material impact on the Company’s financial statements or results of operations.

 

In May 2011, FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurement (Topic 82) —Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU No. 2011-04”). The amendments in this update ensure that fair value has the same meaning in U.S. GAAP and in IFRS and that their respective fair value measurement and disclosure requirements are the same. This update is effective prospectively for interim and annual periods beginning after December 15, 2011. The Company adopted ASU No. 2011-04 on January 1, 2012. Its adoption did not have a material impact on the Company’s results of operations, financial position or cash flows.

 

4. Net Income (Loss) Per Share

 

Basic and diluted net income (loss) per share is calculated as follows:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 (In thousands, except share and per share numbers)

 

2012

 

2011

 

2012

 

2011

 

Numerator:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(17,961

)

$

(17,588

)

$

(30,833

)

$

(22,597

)

Extinguishment of preferred stock

 

 

60,937

 

 

60,937

 

Accretion of preferred stock

 

(3,456

)

(2,719

)

(6,810

)

(5,595

)

Earnings attributable to participating preferred stockholders

 

 

(39,229

)

 

(31,732

)

Earnings (loss) attributable to common stockholders - basic

 

(21,417

)

1,401

 

(37,643

)

1,013

 

Effect of dilutive convertible preferred stock

 

 

 

 

 

Earnings (loss) attributable to common stockholders - diluted

 

$

(21,417

)

$

1,401

 

$

(37,643

)

$

1,013

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares used in earnings (loss) per share - basic

 

854,517

 

484,237

 

815,053

 

403,967

 

Effect of dilutive options to purchase common stock

 

 

409,113

 

 

261,193

 

Effect of dilutive convertible preferred stock

 

 

2,281,998

 

 

3,125,753

 

Weighted-average number of common shares used in earnings (loss) per share - diluted

 

854,517

 

3,175,348

 

815,053

 

3,790,913

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share - basic

 

$

(25.06

)

$

2.89

 

$

(46.18

)

$

2.51

 

Effect of dilutive options to purchase common stock

 

 

(1.32

)

 

(0.99

)

Effect of dilutive convertible preferred stock

 

 

(1.13

)

 

(1.25

)

Earnings (loss) per share - diluted

 

$

(25.06

)

$

0.44

 

$

(46.18

)

$

0.27

 

 

The following potentially dilutive securities, prior to the use of the treasury stock method, have been excluded from the computation of diluted weighted-average shares outstanding, as they would be anti-dilutive:

 

9



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Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Convertible preferred stock

 

5,005,450

 

13,557,238

 

4,574,107

 

9,267,677

 

Options to purchase common stock

 

3,911,483

 

 

3,864,265

 

418,215

 

Warrants

 

15,000

 

4,154

 

15,000

 

4,154

 

 

5. Marketable Securities

 

Available-for-sale marketable securities consist of the following:

 

 

 

June 30, 2012

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(In thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

Marketable securities:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

2,513

 

 

(1

)

2,512

 

Corporate commercial paper

 

21,234

 

11

 

 

21,245

 

U.S Government Securities

 

3,285

 

 

 

3,285

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

27,032

 

$

11

 

$

(1

)

$

27,042

 

 

 

 

December 31, 2011

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Carrying

 

Unrealized

 

Unrealized

 

 

 

(In thousands)

 

Value

 

Gains

 

Losses

 

Fair Value

 

Marketable securities:

 

 

 

 

 

 

 

 

 

Domestic corporate debt securities

 

10,260

 

 

(6

)

10,254

 

Domestic corporate commercial paper

 

18,987

 

11

 

 

18,998

 

U.S. government securities

 

2,328

 

 

 

2,328

 

Total

 

$

31,575

 

$

11

 

$

(6

)

$

31,580

 

 

The Company held 6 debt securities at June 30, 2012 that had been in an unrealized loss position for less than 12 months. The fair value on these securities was $5.8 million. The Company evaluated these securities for other-than-temporary impairments based on quantitative and qualitative factors. The Company considered the decline in market value for these 6 securities to be primarily attributable to current economic and market conditions.  It is not more likely than not that the Company will be required to sell these securities, and it does not intend to sell these securities before the recovery of their amortized cost bases. Based on the Company’s analysis, it does not consider these investments to be other-than-temporarily impaired as of June 30, 2012.

 

6. Fair Value Measurements

 

The Company has certain assets and liabilities recorded at fair value which have been classified as Level 1, 2 or 3 within the fair value hierarchy as described in the accounting standards for fair value measurements.

 

·                             Level 1—Quoted market prices in active markets for identical assets or liabilities. Assets utilizing Level 1 inputs include money market funds and bank deposits;

 

·                             Level 2—Inputs other than Level 1 inputs that are either directly or indirectly observable, such as quoted market prices, interest rates and yield curves. Assets utilizing Level 2 inputs include U.S. government securities, including direct issuance bonds and corporate bonds; and

 

·                             Level 3—Unobservable inputs developed using estimates and assumptions developed by the Company, which reflect those that a market participant would use.

 

The following table summarizes the financial instruments measured at fair value on a recurring basis in the accompanying consolidated

 

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balance sheet as of June 30, 2012 and December 31, 2011:

 

 

 

June 30, 2012

 

(In thousands)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Marketable Securities

 

 

 

 

 

 

 

 

 

Domestic corporate debt securities

 

$

 

 

$

2,512

 

$

 

 

$

2,512

 

Domestic corporate commercial paper

 

 

 

21,245

 

 

 

21,245

 

U.S Government Securities

 

 

 

3,285

 

 

 

3,285

 

Stock dividend asset

 

 

 

 

 

3,706

 

3,706

 

 

 

$

 

$

27,042

 

$

3,706

 

$

30,748

 

 

 

 

June 30, 2012

 

(In thousands)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Warrant liability

 

$

 

$

 

$

862

 

$

862

 

Other liability

 

 

 

 

 

17,456

 

17,456

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

$

 

$

18,318

 

$

18,318

 

 

Fair value for Level 1 is based on quoted market prices. Fair value for Level 2 is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Inputs are obtained from various sources including market participants, dealers and brokers. Fair value for Level 3 is based upon the fair values determined using the probability-weighted expected return method, or PWERM, as discussed below. Changes in fair value of the Level 3 assets and liabilities are recorded as other income (expense) in the statement of operations.

 

The stock dividend asset represents the prepaid balance of the accrued stock dividend (“other liability” or “stock liability”) to issue shares of Series A-6 preferred stock (‘‘Series A-6’’) to Nordic Bioscience Clinical Development VII A/S (“Nordic”) (Note 12) and the amount of research and development expense related to stock dividend amounts being recognized ratably over the estimated per patient treatment period. The fair value of the stock liability is based upon the fair value of the Series A-6 shares as determined using PWERM, which considers the value of preferred and common stock based upon analysis of the future values for equity assuming various future outcomes. Accordingly, share value is based upon the probability weighted present value of expected future net cash flows, considering each of the possible future events, discount rate as determined using the capital asset pricing model, as well as the rights and preferences of each share class. PWERM is complex as it requires numerous assumptions relating to potential future outcomes of equity, hence, the use of this method can be applied: (i) when possible future outcomes can be predicted with reasonable certainty; and (ii) when there is a complex capital structure (i.e., several classes of preferred and common stock). The Company utilized the PWERM approach in its valuation based on the Company’s expectations regarding the time to becoming a listed, publicly-traded entity as well as the Company’s Series A-1 financing and the initiation of BA058 Injection Phase 3 study that resolved sufficient uncertainty regarding a discrete range of outcomes that could be identified and evaluated. As such, the valuation of the stock dividend asset was determined to be a Level 3 valuation.

 

The warrant liability represents the liability for the warrants issued to a placement agent and to the lenders in connection with the Company’s credit facility in the year ended December 31, 2011 and three months ended June 30, 2012. The warrant liability is calculated using the Black-Scholes option pricing method. This method of valuation includes using inputs such as the fair value of the Company’s various classes of preferred stock, historical volatility, the term of the warrant and risk-free interest rates. The fair value of the Company’s shares of common and preferred stock was estimated using PWERM, as described above. As such, the valuation of the warrant liability was determined to be a Level 3 liability.

 

The other liability represents the liability to issue shares of Series A-6 to Nordic for services rendered in connection with the Company’s Phase 3 clinical study of BA058 Injection (Note 12). The liability is calculated based upon the number of shares earned by Nordic through the performance of clinical trial services multiplied by the estimated fair value of the Company’s Series A-6 at each reporting date. The estimated fair value of the Series A-6 is determined using PWERM, as described above. As such the valuation of the other

 

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liability was determined to be a Level 3 liability.

 

The Company’s Level 3 fair value measurements, related to its stock dividend asset, warrant liability and other liability, are measurements of the fair value of the Company’s preferred stock. The following table provides quantitative information about the fair value measurement of the Company’s preferred stock, including significant unobservable inputs:

 

Instrument

 

Valuation
Technique

 

Unobservable Input

 

Estimate

Preferred Stock

 

PWERM

 

· Time to becoming a listed, publicly-traded entity (years)

 

· 0.2 — 0.3

 

 

 

 

· Probability of BA058 coming to market

 

· 70% — 80%

 

 

 

 

· Discount rate

 

· 20% — 30%

 

 

 

 

· Long-term revenue growth rate (1)

 

· 2% — 117%

 

 

 

 

· Long-term revenue growth rate (2)

 

· 8% — 63%

 

 

 

 

· Long-term pretax operating margin (3)

 

· 13% — 79%

 

 

 

 

· Long-term pretax operating margin (4)

 

· 28% — 73%

 

 

 

 

· Discount for lack of marketability

 

· 24% — 53%

 

 

Market Comparable Companies

 

· Revenue multiple (5)

 

· 3.3 — 7.2

 


(1) Estimated long-term revenue growth rate in one scenario has the above range and an average of approximately 24% over 16 revenue years.

(2) Estimated long-term revenue growth rate in a second scenario has the above range and an average of approximately 20% over 16 revenue years.

(3) Estimated long-term pretax operating margin in one scenario has the above range after achieving positive pretax operating margin and an average of approximately 69% for 17 years.

(4) Estimated long-term pretax operating margin in a second scenario has the above range after achieving positive pretax operating margin and an average of approximately 59% for 17 years.

(5) Represents amounts used when the Company has determined that market participants would use such multiples when valuing the Company’s preferred stock.

 

As of June 30, 2012, the stock dividend asset, warrant liability and other liability have fair values of $3.7 million, $0.9 million and $17.5 million, respectively. Significant changes in the significant unobservable inputs used in the fair value measurement of the Company’s preferred stock in isolation would result in a significantly different fair value measurement of the stock dividend asset, warrant liability and other liability. Generally, a change in the assumption used for the probability of successful development is accompanied by a directionally similar change in the assumption used for the long-term revenue growth rate and long-term pretax operating margin and estimated fair value measurement of the Company’s preferred stock.

 

Significant increases (decreases) in the significant unobservable inputs used in the fair value measurement of the warrant liability and other liability in isolation would result in a significantly higher (lower) fair value measurement. Generally, a change in the assumption used for the probability of successful development is accompanied by a directionally similar change in the assumption used for the long-term revenue growth rate and long-term pretax operating margin.

 

The following table provides a rollforward of the fair value of the assets, where fair value is determined by Level 3 inputs:

 

(In thousands)

 

 

 

Balance at January 1, 2012

 

$

3,379

 

Reductions

 

(173

)

Change in fair value

 

500

 

Balance at June 30, 2012

 

$

3,706

 

 

The following table provides a rollforward of the fair value of the liabilities, where fair value is determined by Level 3 inputs:

 

(In thousands)

 

 

 

Balance at January 1, 2012

 

$

10,920

 

Additions

 

5,714

 

Change in fair value

 

1,684

 

Balance at June 30, 2012

 

$

18,318

 

 

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Additions represents i) the value of the liability for additional accrued shares of Series A-6 issuable to Nordic for services rendered in connection with the Company’s Phase 3 clinical study of BA058 Injection (Note 12) and ii) warrants issued the lenders in connection with the Company’s credit facility in the three months ended June 30, 2012.

 

The fair value of the Company’s notes payable is determined using current applicable rates for similar instruments as of the balance sheet date.  The carrying value of the Company’s notes payable approximates fair value because the Company’s interest rate is near current market rates.  The Company’s notes payable are Level 3 liabilities within the fair value hierarchy.

 

7. Accrued Expenses

 

Accrued expenses consist of the following:

 

 

 

June 30,

 

December 31,

 

(In thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Research costs

 

$

805

 

$

2,276

 

Payroll and employee benefits

 

515

 

586

 

Professional fees

 

304

 

472

 

Vacation

 

118

 

79

 

Accrued interest on notes payable

 

392

 

177

 

 

 

 

 

 

 

Total accrued expenses

 

$

2,134

 

$

3,590

 

 

8. Loan and Security Agreement

 

On May 29, 2012, the Company borrowed $12.5 million (“Term Loan C”) from Oxford Finance Corporation and General Electric Capital Corporation (collectively, the “Lender”) pursuant to the terms of the loan and security agreement (the “Loan and Security Agreement”) entered into between the Company and the Lender on May 23, 2011.

 

The Company is required to pay interest on Term Loan C on a monthly basis through and including November 1, 2012. Beginning December 1, 2012 through the maturity of Term Loan C on November 24, 2014, the Company will be required to make payments of outstanding principal and interest on Term Loan C in 25 payments of principal and interest, which are payable monthly in arrears with a final balloon payment of $1,250,000. Interest is payable on Term Loan C at an annual interest rate of 10%.

 

Upon the last payment date of Term Loan C, whether on the maturity date of one of the term loans, on the date of any prepayment or on the date of acceleration in the event of a default, the Company will be required to pay the Lender a final payment fee equal to 3.5% of Term Loan C. In addition, if the Company repays all or a portion of Term Loan C prior to maturity, it will pay the Lender a prepayment fee of 3% of the total amount prepaid if the prepayment occurs prior to the first anniversary of the funding of Term Loan C, 2% of the total amount prepaid if the prepayment occurs between the first and second anniversary of the funding of Term Loan C, and 1% of the total amount prepaid if the prepayment occurs on or after the second anniversary of the funding of Term Loan C.

 

In connection with the borrowings under Term Loan C, the Company issued to the Lender warrants to purchase 6,140 shares of the Company’s Series A-1 Preferred Stock (the “Warrants”). The Warrants are exercisable, in whole or in part, immediately, and have a per share exercise price of $81.42 and may be exercised on a cashless basis. The Warrants will expire on May 29, 2022. The exercise price may be adjusted in the event the Company issues shares of Series A-1 preferred stock (“Series A-1”) at a price lower than $81.42 per Warrants issued in connection with Term Loan C was $379,684 and was recorded as a discount to Term Loan C and is reflected in note payable in the balance sheet. The discount is being amortized to interest expense over the 30 month period that Term Loan C is outstanding. The Warrants are classified as a liability in the Company’s balance sheet and will be remeasured at their estimated fair value at each reporting period. The changes in fair value are recorded as other income (expense) in the Statement of Operations.

 

Future principal payments under the Loan and Security Agreement at June 30, 2012, are as follows:

 

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Principal

 

(In thousands)

 

Payments

 

2012

 

$

 

2,375

 

2013

 

8,188

 

2014

 

13,156

 

Total

 

$

 

23,719

 

Current portion of note payable

 

6,313

 

Discount on current portion of note payable

 

(477

)

Current portion of note payable, net of discount

 

$

 

5,836

 

 

 

 

 

Discount on noncurrent portion of note payable

 

(323

)

Note payable, net of current portion and discount

 

$

 

17,083

 

 

9. Convertible Preferred Stock

 

The rights, preferences, and privileges of the Series A-1, Series A-2 preferred stock (“Series A-2”), Series A-3 preferred stock (“Series A-3”), Series A-4 preferred stock (“Series A-4”), Series A-5 preferred stock (“Series A-5”) and Series A-6 are as follows:

 

Conversion

 

Each preferred stockholder has the right, at their option at any time, to convert any such shares of Preferred Stock into such number of fully paid shares of Common Stock as is determined by dividing the original purchase price of $81.42 by the conversion price (“Optional Conversion”). The conversion price of the Preferred Stock as of June 30, 2012 was $8.142 per share (the “Conversion Price”), which represents a conversion ratio of one share of Preferred Stock into ten shares of Common Stock.  Upon the Optional Conversion, the holder of the converted Preferred Stock is entitled to payment of all accrued, whether or not declared, but unpaid dividend in shares of the Common Stock of the Company at the then effective conversion price of shares of Preferred Stock.

 

Each share of Preferred Stock is automatically convertible into fully paid and non-assessable shares of Common Stock at the applicable Conversion Price then in effect upon (i) a vote of the holders of at least 70% of the outstanding shares of Series A-1, Series A-2 and Series A-3 to convert all shares of Preferred Stock or (ii) the Common Stock becoming listed for trading on a national stock exchange (“Special Mandatory Conversion”). Upon a Special Mandatory Conversion, all accrued, whether or not declared, but unpaid dividends shall be paid in cash or shares of Common Stock (calculated based on the then effective conversion price of the Series A-1) at the discretion of the Company’s Board of Directors.

 

Redemption

 

The shares of Preferred Stock are not currently redeemable.

 

Dividends

 

Holders of shares of Series A-1 are entitled to receive dividends at a rate of 8% per annum, compounding annually, which accrue on a quarterly basis commencing on the date of issuance of the shares of Series A-1. Dividends are payable, as accrued, upon liquidation, event of sale, and conversion to Common Stock as described above. The holders of shares of Series A-1 are also entitled to dividends declared or paid on any shares of Common Stock.

 

Following payment in full of required dividends to the holders of Series A-1, holders of Series A-2 are entitled to receive dividends at a rate of 8% per annum, compounding annually, which accrue on a quarterly basis commencing on the date of issuance of the shares of Series A-2. Dividends are payable, as accrued, upon liquidation, event of sale, and conversion to Common Stock as described above. holders of shares of Series A-2 are also entitled to dividends declared or paid on any shares of Common Stock.

 

Following payment in full of required dividends to the holders of Series A-1 and Series A-2, holders of Series A-3 are entitled to receive dividends at a rate of 8% per annum, compounding annually, which accrue on a quarterly basis commencing on the date of issuance of the shares of Series A-3.  Dividends are payable, as accrued, upon liquidation, event of sale and conversion to Common Stock as described above. The holders of shares of Series A-3 are also entitled to dividends declared or paid on any shares of Common Stock.

 

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Without regard to the payment of required dividends to the holders of Series A-1, Series A-2 and Series A-3, holders of Series A-5 are entitled to receive the Series A-5 Accruing Dividend paid in shares of Series A-6 as described in Note 12.  Holders of shares of Series A-6 are entitled to receive dividends on shares of Series A-6, when and if declared by the Board of Directors at a rate to be determined by the Board of Directors.  Dividends are payable, as accrued, upon liquidation, event of sale and conversion to Common Stock as described above. The holders of shares of Series A-5 and Series A-6 are also entitled to dividends declared or paid on any shares of Common Stock.

 

Following payment in full of required dividends to the holders of Series A-1, Series A-2, Series A-3 and Series A-5, holders of Series A-4 are entitled to receive dividends on shares of Series A-4, when and if declared by the Board of Directors at a rate to be determined by the Board of Directors. Dividends are payable, as accrued, upon liquidation, event of sale, and conversion to Common Stock as described above. The holders of shares of Series A-4 are also entitled to dividends declared or paid on any shares of Common Stock.

 

Dividends on the Preferred Stock are payable, at the sole discretion of the Board of Directors, in cash or in shares of the Company’s Common Stock, when and if declared by the Board of Directors, upon liquidation or upon an event of sale at the current market price of shares of Common Stock. Upon Optional Conversion, dividends are payable in shares of the Common Stock at the then effective conversion price of shares of Preferred Stock.

 

The Company has accrued dividends of $5.0 million, $7.3 million and $1.1 million on Series A-1, Series A-2 and Series A-3, respectively, as of June 30, 2012.

 

Voting

 

The preferred stockholders are entitled to vote together with the holders of the Common Stock as one class on an as-if converted basis.

 

In addition, as long as the shares of Series A-1 are outstanding, the holders of Series A-1, voting as a separate class, have the right to elect two members of the Company’s Board of Directors.

 

Liquidation

 

The shares of Series A-1 rank senior to all other classes of Preferred Stock. Series A-2 ranks junior to Series A-1 and senior to Series A-3, Series A-4, Series A-5 and Series A-6.  Series A-3, Series A-5 and Series A-6 rank equally but junior to Series A-1 and Series A-2 and senior to Series A-4. Series A-4 ranks senior to the Company’s Common Stock.

 

In the event of a liquidation, dissolution, or winding-up of the Company, the holders of the Series A-1 are entitled to be paid first out of the assets available for distribution, before any payment is made to the Series A-2, Series A-3, Series A-4, Series A-5 and Series A-6. Payment to the holders of Series A-1 shall consist of the original issuance price of $81.42, plus all accrued but unpaid dividends. After the distribution to the holders Series A-1, the holders of Series A-2 will be entitled to receive an amount per share equal to the original purchase price per share of $81.42, plus any accrued but unpaid dividends. After the distribution to the holders Series A-1 and Series A-2, the holders of Series A-3, Series A-5 and Series A-6 will be entitled to receive an amount per share equal to the original purchase price per share of $81.42, plus any accrued but unpaid or declared and unpaid dividends, as appropriate. After the distribution to the holders Series A-1, Series A-2, Series A-3, Series A-5 and Series A-6, the holders of Series A-4 will be entitled to receive an amount per share equal to the original purchase price per share of $81.42, plus any declared and unpaid dividends. If the assets of the Company are insufficient to pay the full preferential amounts to the holders of Series A-1, the assets will be distributed ratably among the holders of Series A-1 in proportion to their aggregate liquidation preference amounts. If the assets of the Company are insufficient to pay the full preferential amounts to the holders of Series A-2, the assets will be distributed ratably among the holders of Series A-2 in proportion to their aggregate liquidation preference amounts. If the assets of the Company are insufficient to pay the full preferential amounts to the holders of Series A-3, Series A-5 and Series A-6, the assets will be distributed ratably among the holders of Series A-3, Series A-5 and Series A-6 in proportion to their aggregate liquidation preference amounts. If the assets of the Company are insufficient to pay the full preferential amounts to the holders of Series A-4, the assets will be distributed ratably among the holders of Series A-4 in proportion to their aggregate liquidation preference amounts. After all liquidation preference payments have been made to the holders of the Preferred Stock, the holders of the Preferred Stock shall participate in the distribution of the remaining assets with the holders of the Company’s Common Stock on an as-if converted basis.

 

In the event of, and simultaneously with, the closing of an event of sale of the Company (as defined in the Company’s Amended Articles of Incorporation), the Company shall redeem all of the shares of Series A-1, Series A-2, Series A-3, Series A-4, Series A-5 and Series A-6 then outstanding at the Special Liquidation Price, as defined. If the event of sale involves consideration other than cash, the Special Liquidation Price may be paid with such consideration having a value equal to the Special Liquidation Price. The Special Liquidation Price shall be equal to an amount per share, which would be received by each Preferred Stockholder if, in connection with the event of sale, all the consideration paid in exchange for the assets or the shares of capital stock of the Company was actually paid to and received

 

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by the Company, and the Company was immediately liquidated thereafter and its assets distributed pursuant to the liquidation terms above.

 

10. Stock-based Compensation

 

A summary of stock option activity is as follows:

 

(In thousands, except for per share amounts)

 

Shares

 

Weighted-
Average
Exercise
Price

 

Weighted-
Average
Contractual
Life (In
Years)

 

Aggregate
Intrinsic
Value

 

 

 

 

 

 

 

 

 

 

 

Options outstanding at December 31, 2011

 

3,950

 

$

2.94

 

 

 

 

 

Granted

 

198

 

4.21

 

 

 

 

 

Exercised

 

(210

)

1.23

 

 

 

 

 

Cancelled

 

(1

)

1.20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options outstanding at June 30, 2012

 

3,937

 

$

3.10

 

8.57

 

$

4,617

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at June 30, 2012

 

1,030

 

$

1.53

 

6.21

 

$

2,826

 

 

 

 

 

 

 

 

 

 

 

Options vested or expected to vest at June 30, 2012

 

3,827

 

$

3.10

 

8.57

 

$

4,257

 

 

The total grant-date fair value of stock options that vested during the three- and six-month periods ended June 30, 2012 was approximately $130,000 and $270,000, respectively. The aggregate intrinsic value of options that vested during the three- and six-month periods ended June 30, 2012 was approximately $155,000 and $286,000 respectively.

 

As of June 30, 2012, there was approximately $4.8 million of total unrecognized compensation expense related to unvested employee share-based compensation arrangements, which is expected to be recognized over a weighted-average period of approximately 3.5 years.

 

11. License Agreements

 

On September 27, 2005, the Company entered into a license agreement (the “Ipsen Agreement”), as amended, with SCRAS S.A.S, a French corporation on behalf of itself and its affiliates (collectively, “Ipsen”). Under the Ipsen Agreement, Ipsen granted to the Company an exclusive right and license under certain Ipsen compound technology and related patents to research, develop, manufacture and commercialize certain compounds and related products in all countries, except Japan and (subject to certain co-marketing and co-promotion rights retained by Ipsen) France. With respect to France, if Ipsen exercises its co-marketing and co-promotion rights, then Ipsen may elect to receive a percentage of the aggregate revenue from the sale of products by both parties in France (subject to a mid-double digit percentage cap) and Ipsen shall bear a corresponding percentage of the costs and expenses incurred by both parties with respect to such marketing and promotion efforts in France; Ipsen shall also pay Radius a mid-single digit royalty on Ipsen’s allocable portion of aggregate revenue from the sale of products by both parties in France. BA058 (the Company’s bone growth drug) is subject to the Ipsen Agreement. Ipsen also granted the Company an exclusive right and license under the Ipsen compound technology and related patents to make and have made compounds or product in Japan. Ipsen also granted the Company an exclusive right and license under certain Ipsen formulation technology and related patents solely for purposes of enabling the Company to develop, manufacture and commercialize compounds and products covered by the compound technology license in all countries, except Japan and (subject to certain co-marketing and pro-promotion rights retained by Ipsen) France. In consideration for these licenses, the Company made a nonrefundable, non-creditable payment of $250,000 to Ipsen, which was expensed during 2005.The Ipsen Agreement provides for further payments in the range of €10.0 million to €36.0 million ($12.7 million to $45.6 million) to Ipsen upon the achievement of certain development and commercialization milestones specified in the Ipsen Agreement, and for the payment of fixed 5% royalties on net sales of any product by the Company or its sublicensees on a country-by-country basis until the last to expire of the licensed patents or for a period of 10 years after the first commercial sale in such country of any product that includes the compound licensed from Ipsen or any analog thereof, whichever is longer.

 

If the Company sublicenses the rights licensed from Ipsen, then the Company will also be required to pay Ipsen a percentage of certain payments received from such sublicensee (in lieu of milestone payments not achieved at the time of such sublicense). The applicable percentage is in the low double digit range. In addition, if the Company or its sublicensees commercialize a product that includes a compound discovered by it based on or derived from confidential Ipsen know-how, it will be obligated to pay to Ipsen a fixed low single digit royalty on net sales of such product on a country-by-country basis until the last to expire of its patents that cover such product or for

 

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a period of 10 years after the first commercial sale of such product in such country, whichever is longer. In connection with the Ipsen Agreement, the Company recorded approximately $0.4 million, $0.2 million, $0.6 million, and $0.3 million in research and costs in the three- and six-month periods ended June 30, 2012 and 2011, respectively. The costs were incurred by Ipsen and charged to the Company for the manufacture of the clinical supply of the licensed compound.

 

12. Research Agreements

 

On March 29, 2011, the Company and Nordic entered into a Clinical Trial Services Agreement, a Work Statement NB-1 (the “Work Statement”) under such Clinical Trial Services Agreement and a related Stock Issuance Agreement. Pursuant to the Work Statement, Nordic is managing the Phase 3 clinical study (the “Clinical Study”) of BA058 Injection and Nordic will be compensated for such services in a combination of cash and shares of Series A-6.

 

In December 2011, the Company entered into an amendment to the Work Statement, or the First Amendment. Pursuant to the original terms of the Work Statement, the study was to be conducted in 10 countries at a specified number of sites within each country. The terms of the First Amendment provide for two additional countries (the United States and India) in which the study will be conducted, specify a certain number of sites within each such additional country for the conduct of the study, and amend various terms and provisions of the Work Statement to reflect the addition of such countries and sites within the study’s parameters. Payments to be made by the Company to Nordic under the First Amendment in connection with the conduct of the study in such additional countries are denominated in both euros and U.S. dollars and total up to both €717,700 ($909,182) and $289,663, respectively, for the 15 additional study sites in India contemplated by the First Amendment and up to both €1.2 million ($1.5 million) and $143,369, respectively, for the five additional study sites in the United States contemplated by the First Amendment.

 

In June 2012, the Company entered into a second amendment to the Work Statement, or the Second Amendment. Pursuant to the original terms of the Work Statement, as amended by the First Amendment, the study was to be conducted in 12 countries at a specified number of sites within each country. The terms of the Second Amendment (i) increase the overall number of sites by adding sites in Europe, Brazil and Argentina and removing other sites, (ii) specify a certain number of sites within each country for the conduct of the study, and (iii) amend various terms and provisions of the Work Statement to reflect additional services provided at existing sites and the addition of the new study sites within the study’s parameters. The Second Amendment also provided that cash payments to Nordic under the Clinical Trial Services Agreement as well as the payment of shares of Series A-6 under the related Stock Issuance Agreement shall each be reduced by an amount of €11,941 ($15,127) per subject for any subjects enrolled in India or the United States. Such reductions shall be applied in pro rata monthly installments. Payments to be made by the Company to Nordic under the Second Amendment in connection with the extra services provided at existing sites and the conduct of the study at the new study sites are denominated in both euros and U.S. dollars and total €3.7 million ($4.7 million) and $205,540, respectively.

 

Pursuant to the Work Statement, the Company is required to make certain per patient payments denominated in both euros and U.S. dollars for each patient enrolled in the Clinical Study followed by monthly payments for the duration of the study and final payments in two equal euro-denominated installments and two equal U.S. dollar-denominated installments. Changes to the Clinical Study schedule may alter the timing, but not the aggregate amounts, of the payments. The Work Statement, as amended on December 9, 2011 and June 18, 2012, provides for a total of up to approximately €41.2 million ($52.1 million) of euro-denominated payments and a total of up to approximately $3.2 million of U.S. dollar-denominated payments over the course of the Clinical Study.

 

Pursuant to the Stock Issuance Agreement, as amended, Nordic agreed to purchase the equivalent of €371,864 of Series A-5 Preferred Stock at $8.142 per share, and the Company sold 64,430 shares of Series A-5 to Nordic on May 17, 2011 for proceeds of $525,154 to the Former Operating Company. These shares were exchanged in the Merger for an aggregate of 6,443 shares of Series A-5.

 

The Stock Issuance Agreement provides that Nordic is entitled to receive quarterly stock dividends, payable in shares of Series A-6, or shares of common stock if the Company’s preferred stock has been automatically converted in accordance with its amended certificate of incorporation, having an aggregate value of up to €36.8 million ($46.6 million), or the Series A-5 Accruing Dividend. This right to receive the Series A-5 Accruing Dividend is non-transferrable and will remain with Nordic in the event it sells the shares of Series A-5 or in the event the shares of Series A-5 are converted into common stock in accordance with the Company’s amended Certificate of Incorporation.

 

The Series A-5 Accruing Dividend is determined based upon the estimated period that will be required to complete the Clinical Study. On the last business day of each calendar quarter (each, an “Accrual Date”), beginning with the quarter ended June 30, 2011, the Company has a liability to issue shares of Series A-6 to Nordic that is referred to as the Applicable Quarterly Amount and is equal to (A) €36.8 million ($46.6 million) minus the aggregate value of any prior Series A-5 Accruing Dividend accrued divided by (B) the number of calendar quarters it will take to complete the Clinical Study. To calculate the aggregate number of shares of Series A-6 due to Nordic in each calendar quarter, the Company converts the portion of €36.8 million ($46.6 million) to accrue in such calendar quarter into U.S. dollars using the simple average of the exchange rate for buying U.S. dollars with euros for all Mondays in such calendar quarter. The

 

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Company then calculates the aggregate number of shares of Series A-6 to accrue in such calendar quarter by dividing the U.S. dollar equivalent of the Applicable Quarterly Amount, by the greater of (i) the fair market value as of the applicable Accrual Date and (ii) $8.142 and rounding down the resulting quotient to the nearest whole number. Such shares due to Nordic will be issued when declared or paid by the Company’s board of directors, who are required to do so upon Nordic’s request, or upon an event of sale. During the three months ended March 31, 2012, additional information became available that required the Company to update the estimated period it will take to complete the Clinical Study, which is part of the calculation of the Applicable Quarterly Amount, as described above.  The estimated period that it will take to complete the Clinical Study was updated from a total of 11 calendar quarters as of December 31, 2011 to a total of 13 calendar quarters as of March 31, 2012.  Such change in the number of calendar quarters it will take to complete the Clinical Study resulted in a lower number of shares due to Nordic at the end of the quarter ended March 31, 2012 and June 30, 2012 and will result in a lower number of shares due to Nordic at the end of future quarters through the end of the Clinical Study and does not impact the Statement of Operations. As of June 30, 2012, 244,834 shares of Series A-6 are due to Nordic, or after the automatic conversion into common stock of the Company’s convertible preferred stock, 2,448,340 shares of common stock.

 

Prior to the issuance of shares of Series A-6 to Nordic, the liability to issue shares of Series A-6 will be accounted for as a liability in the Company’s Balance Sheet. As of June 30, 2012, the fair value of the liability was $17.5 million based upon the fair value of the Series A-6 as determined using PWERM (Note 6). Changes in the fair value from the date of accrual to the date of issuance of the shares are recorded as a gain or loss in other income (expense) in the Statement of Operations.

 

The Company recognizes research and development expense for the amounts due to Nordic under the Work Statement ratably over the estimated per patient treatment period beginning upon enrollment in the Clinical Study, or a twenty-month period. The Company recorded $6.9 million and $11.8 million of research and development expense in the three- and six-month periods ended June 30, 2012 for per patient costs incurred for patients that had enrolled in the Clinical Study as of June 30, 2012. As of June 30, 2012, in addition to the $17.5 million liability that is reflected in other liabilities on the Balance Sheet that will be settled in shares of Series A-6 Preferred Stock or common stock, as noted above, the Company has an asset resulting from payments to Nordic of approximately $4.6 million that is included in prepaid expenses on the Balance Sheet.

 

The Company is also responsible for certain pass through costs in connection with the Clinical Study.  Pass through costs are expensed as incurred or upon delivery. The Company recognized research and development expense of $3.6 million and $4.9 million for pass through costs in the three- and six-month periods ended June 30, 2012.

 

13. Commitments and Contingencies

 

The Company may be exposed to certain claims or assessments in the ordinary course of business. In the opinion of management, the outcome of these matters is not likely to have any material effect on the financial position, results of operations, or cash flows of the Company.

 

14. Subsequent Event

 

Letter of Intent regarding Clinical Trial Services

 

On July 26, 2012, the Company entered into a Letter of Intent (the “Letter of Intent”) with Nordic, which provides that the Company and Nordic will, subject to compliance by the Company with certain requirements of its Certificate of Incorporation and applicable securities laws, negotiate in good faith to enter into (1) a Work Statement NB-2 (the “Work Statement NB-2”), a draft of which is attached to the Letter of Intent, and (2) an amendment to that certain Amended and Restated Stock Issuance Agreement entered into by the Company and Nordic as of May 16, 2011 (the “Stock Issuance Agreement Amendment”). The Work Statement NB-2 is contemplated by the terms of that certain Clinical Trial Services Agreement, entered into as of March 29, 2011, between the Company and Nordic (the “Services Agreement”).

 

The Letter of Intent further provides that Nordic will begin providing clinical trial services relating to the Phase 2 clinical study of the Company’s BA058 Transdermal product, as contemplated by the Services Agreement and the draft Work Statement NB-2. Payments in cash to be made by the Company to Nordic under the Letter of Intent in connection with the services to be provided are denominated in both euros and U.S. dollars and total up to €3.5 million ($4.4 million) and $257,856, respectively. In addition, the Company will issue to Nordic, subject to the execution of the Work Statement NB-2 and the Stock Issuance Agreement Amendment, shares of its Series A-6 Convertible Preferred Stock having a value of at least $2.9 million, as additional payment for services to be provided under the Work Statement NB-2 and the Services Agreement.

 

The Letter of Intent will terminate on the earlier of (1) the date on which the Company and Nordic enter into the Work Statement NB-2 and the Stock Issuance Agreement Amendment and (2) September 30, 2012.

 

Amendment to Side Letter Agreement

 

On July 26, 2012, the Company entered into an Amendment (the “Side Letter Amendment”) to that certain Side Letter Agreement, dated March 29, 2011, between the Company and Nordic (the “Side Letter”). The Side Letter had provided that, upon entry into the Work Statement NB-2, a portion of the price for the services to be performed by Nordic thereunder would be paid in cash, and a portion would be paid in shares of the Company’s Series A-6 Convertible Preferred Stock worth at least $4.0 million. The Side Letter Amendment

 

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amends the Side Letter to provide that the value of the Series A-6 Convertible Preferred Stock issued as part of the payment made under the Work Statement NB-2 will be at least $2.9 million.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and results of Operation

 

Cautionary Statement

 

This Quarterly Report on Form 10-Q, including the information incorporated by reference herein, contains, in addition to historical information, forward-looking statements. We may, in some cases, use words such as “project,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “continue,” “should,” “would,” “could,” “potentially,” “will,” “may” or similar words and expressions that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q may include, among other things, statements about:

 

·the progress of, timing of and amount of expenses associated with our research, development and commercialization activities;

 

·the success of our clinical studies for our product candidates;

 

·our ability to obtain U.S. and foreign regulatory approval for our product candidates and the ability of our product candidates to meet existing or future regulatory standards;

 

·our expectations regarding federal, state and foreign regulatory requirements;

 

·the therapeutic benefits and effectiveness of our product candidates;

 

·the safety profile and related adverse events of our product candidates;

 

·our ability to manufacture sufficient amounts of BA058, RAD1901, and RAD140 for commercialization activities with target characteristics;

 

·our plans with respect to collaborations and licenses related to the development, manufacture or sale of our product candidates;

 

·our expectations as to future financial performance, expense levels and liquidity sources;

 

·our ability to compete with other companies that are or may be developing or selling products that are competitive with our product candidates;

 

·anticipated trends and challenges in our potential markets;

 

·our ability to attract and motivate key personnel; and

 

·other factors discussed elsewhere in this Quarterly Report on Form 10-Q.

 

The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements. These important factors include our financial performance, our ability to attract and retain customers, our development activities and those factors we discuss in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on February 6, 2012 under the caption “Risk Factors.” You should read these factors and the other cautionary statements made in this Quarterly Report on Form 10-Q as being applicable to all related forward-looking statements wherever they appear in this Quarterly Report on Form 10-Q. These risk factors are not exhaustive and other sections of this Quarterly Report on Form 10-Q may include additional factors which could adversely impact our business and financial performance.

 

You should read the following discussion of our financial condition and results of operations in conjunction with our financial statements and related notes set forth in this report. Unless the context otherwise requires, “we,” “our,” “us” and similar expressions used in this Management’s Discussion and Analysis of Financial Condition and Results of Operation section refer to Radius Health, Inc., a Delaware corporation (“Radius”).

 

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Overview

 

We are a biopharmaceutical company focused on developing new therapeutics for the treatment of osteoporosis and other women’s health conditions. We have three product candidates in development, the most advanced of which is BA058. We have begun dosing subjects in a pivotal Phase 3 clinical study of BA058 Injection for the prevention of fractures in women suffering from osteoporosis. We are also developing BA058 Microneedle Patch, a short wear time, transdermal form of BA058 that is based on a microneedle technology from 3M Drug Delivery Systems, or 3M. We expect to have a Phase 2 clinical study of BA058 Microneedle Patch begin in the third quarter of 2012, and expect top-line data from this study to be available in the second half of 2013. We believe that BA058 Microneedle Patch may eliminate the need for injections and lead to better treatment compliance for patients. Our second clinical-stage product candidate is RAD1901, which has completed an initial Phase 2a clinical study for the treatment of vasomotor symptoms, commonly known as hot flashes, in women entering menopause. Our third product candidate, RAD140, is in preclinical development and is a potential treatment for age-related muscle loss, frailty, weight loss associated with cancer cachexia and osteoporosis.

 

BA058 is a novel synthetic peptide analog of hPTHrP we are developing as a bone anabolic treatment for osteoporosis. hPTHrP is a critical cytokine for the regulation of bone formation, able to rebuild bone with low associated risk of inducing hypercalcemia as a side effect. In August 2009, we announced positive Phase 2 data that showed BA058 Injection produced faster and greater bone mineral density, or BMD, increases at the spine and the hip after six months and 12 months of treatment than did Forteo, which was a comparator in our study. Key findings were that the highest dose of BA058 tested of 80 µg increased mean lumbar spine BMD at six months and 12 months by 6.7% and 12.9% compared to the increases seen with Forteo trial arms of 5.5% and 8.6%, respectively. BA058 also produced increases in mean femoral neck BMD at the hip at six months and 12 months of 3.1% and 4.1% compared to increases for Forteo of 1.1% and 2.2%, respectively. We believe there is a strong correlation between an increased level of BMD and a reduction in the risk of fracture for patients with osteoporosis. BA058 was generally safe and well tolerated in this study, with adverse events similar between BA058, placebo and Forteo groups. In addition, the occurrence of hypercalcemia as a side effect for the 80 µg dose of BA058 was half that seen with Forteo. In April 2011, we began the dosing of subjects in a pivotal Phase 3 clinical study managed by Nordic Bioscience Clinical Development VII A/S, or Nordic, and expect to report top-line 18 month fracture data from this study in the second half of 2014. We designed this Phase 3 study to enroll a total of 2,400 patients to be randomized equally to receive daily doses of one of the following: 80 micrograms (µg) of BA058, a matching placebo, or the approved dose of 20 µg of Forteo for 18 months. The study is powered to show that BA058 is superior to placebo for prevention of vertebral fracture. The study is also powered to show that BA058 is superior to Forteo for greater BMD improvement at major skeletal sites and for a lower occurrence of hypercalcemia, a condition in which the calcium level in a patient’s blood is above normal.

 

In early 2012, we received a letter from the U.S. Food and Drug Administration, or the FDA, stating that, after internal consideration, the agency believes that a minimum of 24-month fracture data are necessary for approval of new products for the treatment of postmenopausal osteoporosis. Our ongoing BA058 Injection pivotal Phase 3 clinical study is designed to produce fracture data based on an 18-month primary endpoint. The FDA’s letter solicited a meeting to review the status of our Phase 3 clinical study and discuss options for fulfilling the FDA’s new request for 24-month fracture data in the context of the ongoing Phase 3 study. We subsequently met with the FDA and exchanged correspondence to discuss satisfying the 24-month data request while preserving the current 18-month primary endpoint. Based on our discussions with the FDA, we believe that continued use of the 18-month primary endpoint will be acceptable, provided that our New Drug Application, or NDA, includes the 24-month fracture data derived from a 6-month extension of the BA058 80 µg and placebo groups in our Phase 3 study that will receive daily oral doses of alendronate (generic Fosamax®) or other standard of care for osteoporosis management. We intend to include the 24-month fracture data in our NDA submission, as requested by the FDA.

 

Our efforts and resources are focused primarily on developing BA058 and our other pharmaceutical product candidates, raising capital and recruiting personnel. We have no product sales to date and we will not receive any revenue from product sales until we receive approval for BA058 Injection from the FDA, or equivalent foreign regulatory bodies. However, developing pharmaceutical products is a lengthy and very expensive process. Assuming we do not encounter any unforeseen delays during the course of developing BA058, we do not expect to complete development and file the NDA submission for BA058 Injection until approximately mid-2015 and/or BA058 Microneedle Patch until approximately mid-2017. Accordingly, our success depends not only on the safety and efficacy of BA058, but also on our ability to finance the development of these products, which will require substantial additional funding to complete development and file for marketing approval. Our ability to raise this additional financing will depend on our ability to execute on the BA058 development plan, complete patient enrollment in clinical studies in a timely fashion, manage and coordinate on a cost-effective basis all the required components of the NDA submission for BA058 Injection and scale-up BA058 Injection and BA058 Microneedle Patch manufacturing capacity, as well as overall capital market conditions for companies with limited operating histories.

 

In addition, we currently have no sales, marketing or distribution capabilities and thus our ability to market BA058 will depend in part on our ability to enter into and maintain collaborative relationships for such capabilities, the collaborators’ strategic interest in the products under development and such collaborators’ ability to successfully market and sell any such products. Our ability to secure collaborators for BA058 will depend on the strength of our clinical data. However, we believe that there are certain favorable trends that will interest third parties to collaborate on BA058, including increasing prevalence of osteoporosis due to an increase in the elderly

 

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population in most developed countries, increased availability and reimbursement of diagnostic facilities, growing physician and patient awareness regarding the importance of treating osteoporosis, and concerns regarding the long-term safety profiles of the bisphosphonates prompting physicians to be interested in new therapies for osteoporosis. We are also evaluating strategic alternatives with respect to collaborating with third parties for the future development of RAD1901 and RAD140. Our ability to further develop these product candidates will be dependent upon the outcome of our collaboration strategy.

 

Financial Overview

 

Research and Development Expenses

 

Research and development expenses consist primarily of clinical testing costs, including payments in cash and stock made to contracted research organizations, salaries and related personnel costs, fees paid to consultants and outside service providers for regulatory and quality assurance support, licensing of drug compounds, and other expenses relating to the manufacture, development, testing and enhancement of our product candidates. We expense our research and development costs as they are incurred.

 

Our lead product candidate is BA058 and it represents the largest portion of our research and development expenses for our product candidates. BA058 is a novel synthetic peptide analog of hPTHrP being developed by us as a treatment for osteoporosis in both injection and transdermal methods of administration. BA058 Injection is currently in a Phase 3 study and BA058 Microneedle Patch is expected to be in a Phase 2 clinical study commencing in the third quarter of 2012, with top-line data expected to be available in the second half of 2013. Our other clinical-stage program is RAD1901, a SERM, which has completed an initial Phase 2a clinical study for the treatment of vasomotor symptoms, commonly known as hot flashes, in women entering menopause. A Phase 2 study is designed to test the efficacy of a novel treatment and confirm the safety profile established in a Phase 1 trial. Our third product candidate is RAD140, a SARM, which is in preclinical development.

 

The following table sets forth our research and development expenses related to BA058 Injection, BA058 Microneedle Patch, RAD1901 and RAD140 for the three-month periods ended June 30, 2012 and 2011. No research and development expenses in relation to our product candidates are currently borne by third parties. We began tracking program expenses for BA058 Injection in 2005, and program expenses from inception to June 30, 2012 were approximately $73.6 million. We began tracking program expenses for BA058 Microneedle Patch in 2007, and program expenses from inception to June 30, 2012 were approximately $14.1 million. We began tracking program expenses for RAD1901 in 2006, and program expenses from inception to June 30, 2012 were approximately $15.4 million. We began tracking program expenses for RAD140 in 2008, and program expenses from inception to June 30, 2012 were approximately $5.2 million. These expenses relate primarily to external costs associated with manufacturing, preclinical studies and clinical trial costs.

 

Costs related to facilities, depreciation, share-based compensation and research and development support services are not directly charged to programs as they benefit multiple research programs that share resources.

 

 

 

Three months

 

Six months

 

 

 

ended June 30,

 

ended June 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

BA058 Injection

 

$

12,492

 

$

13,797

 

$

20,166

 

$

16,774

 

BA058 Microneedle Patch

 

1,063

 

2,184

 

2,209

 

2,758

 

RAD1901

 

 

 

 

 

RAD140

 

 

3

 

18

 

23

 

 

The majority of our external costs are spent on BA058, as costs associated with later stage clinical trials are, in most cases, more significant than those incurred in earlier stages of our pipeline. In April 2011, we began the dosing of patients in a pivotal Phase 3 clinical study of BA058 Injection for the treatment of osteoporosis. In addition, we expect to begin a Phase 2 clinical study of BA058 Microneedle Patch in the third quarter of 2012, and expect top-line data from this study to be available in the second half of 2013. We expect that future development costs related to BA058 Injection and BA058 Microneedle Patch programs will increase significantly through possible marketing approval in the United States for BA058 Injection in mid-2016 and for BA058 Microneedle Patch in mid-2018. For BA058 Injection, we estimate that future development costs may exceed $118.0 million including $88.0 million for clinical costs, $17.0 million for license and milestone payments and NDA filing fees, $7.0 million for preclinical costs and $6.0 million for manufacturing costs. For BA058 Microneedle Patch, we estimate that future development costs may exceed $43.0 million, including $28.0 million for clinical costs, $11.0 million for manufacturing costs, $4.0 million for preclinical costs and NDA filing fees. We expect to finance these future development costs of BA058 with our existing cash and cash equivalents and marketable securities and future offerings of our common stock or preferred stock. In addition, our current strategy is to collaborate with third parties for the further development and

 

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commercialization of RAD1901 and RAD140. Therefore, we do not expect that we will incur substantial future costs for these programs because we expect these costs to be borne by third parties. Our ability to further develop these product candidates will be dependent upon our ability to secure third-party collaborators, and it is not possible to project the future development costs for RAD1901 and RAD140 or possible marketing approval timeline at this time.

 

The successful development of BA058 Injection and BA058 Microneedle Patch is subject to numerous risks and uncertainties associated with developing drugs, including the variables listed below. A change in the outcome of any of these variables with respect to the development of any of our product candidates could mean a significant change in the costs and timing associated with the development of that product candidate.

 

BA058 Injection is our only product candidate in late stage development, and our business currently depends heavily on its successful development, regulatory approval and commercialization. We have no drug products for sale currently and may never be able to develop marketable drug products. We have not submitted an NDA to the FDA or comparable applications to other regulatory authorities. Obtaining approval of an NDA is an extensive, lengthy, expensive and uncertain process, and any approval of BA058 Injection may be delayed, limited or denied for many reasons, including:

 

·we may experience delays in the enrollment of patients in our ongoing Phase 3 clinical trial;

 

·we may not be able to demonstrate that BA058 is safe and effective as a treatment for osteoporosis to the satisfaction of the FDA;

 

·the results of our clinical studies may not meet the level of statistical or clinical significance required by the FDA for marketing approval;

 

·the FDA may disagree with the number, design, size, conduct or implementation of our clinical studies;

 

·the clinical research organization, or CRO, that we retain to conduct clinical studies may take actions outside of our control that materially adversely impact our clinical studies;

 

·the FDA may not find the data from preclinical studies and clinical studies sufficient to demonstrate that BA058’s clinical and other benefits outweigh its safety risks;

 

·the FDA may disagree with our interpretation of data from our preclinical studies and clinical studies or may require that we conduct additional studies;

 

·the FDA may not accept data generated at our clinical study sites;

 

·if our NDA is reviewed by an advisory committee, the FDA may have difficulties scheduling an advisory committee meeting in a timely manner or the advisory committee may recommend against approval of our application or may recommend that the FDA require, as a condition of approval, additional preclinical studies or clinical studies, limitations on approved labeling or distribution and use restrictions;

 

·the FDA may require development of a Risk Evaluation and Mitigation Strategy, or REMS, as a condition of approval; or

 

·the FDA may identify deficiencies in the manufacturing processes or facilities of our third-party manufacturers.

 

In addition, the FDA may change its approval policies or adopt new regulations. For example, on February 15, 2012, we received a letter from the FDA stating that, after internal consideration, the agency believes that a minimum of 24-month fracture data are necessary for approval of new products for the treatment of postmenopausal osteoporosis, and our ongoing BA058 Injection pivotal Phase 3 clinical study is designed to produce fracture data based on an 18-month primary endpoint. Based on our discussions with the FDA, we believe that continued use of the 18-month primary endpoint will be acceptable, provided that our NDA includes the 24-month fracture data derived from a 6-month extension of the BA058 80 µg and placebo groups in our Phase 3 study that will receive daily oral doses of alendronate (generic Fosamax®) or other standard of care for osteoporosis management.We cannot be certain that the FDA will not change this approval policy again, or adopt other approval policies or regulations that adversely affect an NDA that we may submit.

 

We are unable to determine the duration and costs to be incurred by us to continue development of RAD1901 and RAD140 until such time as we are able to secure a third party to collaborate on the further development and commercialization of these product candidates. We anticipate that we will make determinations as to which additional programs to pursue and how much funding to direct to

 

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each program on an ongoing basis in response to the scientific and clinical data of each product candidate, progress on securing third-party collaborators, as well as ongoing assessments of such product candidate’s commercial potential and our ability to fund such product development. If we are unable to continue to fund the development of RAD1901 and/or RAD140 and are unable to secure third-party collaborators for these product candidates, our business will be adversely affected and we will depend solely on the successful development, regulatory approval and commercialization of BA058 Injection and BA058 Microneedle Patch.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of salaries and related expense for executive, finance and other administrative personnel, professional fees, business insurance, rent, general legal activities, including costs of maintaining our intellectual property portfolio and other corporate expenses. We expect our general and administrative expenses to increase as a result of higher costs associated with being a public company and any listing of our securities on a national securities exchange.

 

Our results include non-cash compensation expense as a result of the issuance of stock and stock option grants. Compensation expense for options granted to employees and directors represent the difference between the fair value of our common stock and the exercise price of the options at the date of grant. Compensation for options granted to consultants has been determined based upon the fair value of the equity instruments issued and the unvested portion of such option grants is remeasured at each reporting period. The stock-based compensation expense is included in the respective categories of expense in the statement of operations (research and development and general and administrative expenses). We expect to record additional non-cash compensation expense in the future, which may be significant.

 

Interest Income and Interest Expense

 

Interest income reflects interest earned on our cash, cash equivalents and marketable securities.

 

Interest expense reflects interest due under our current credit facility, which we entered into on May 23, 2011 and pursuant to which we borrowed an aggregate of $12.5 million during the year ended December 31, 2011 and $12.5 million during the three months ended June 30, 2012.

 

Other Income and Other Expense

 

Other expense primarily reflects changes in the fair value of the Series A-6 preferred stock liability from the date of the initial accrual to the reporting date as discussed in Note 12 to our condensed quarterly financial statements for the period ended June 30, 2012.

 

Accretion of Preferred Stock

 

Accretion of preferred stock reflects the periodic accretions of issuance costs, dividends and the investor rights/obligations on the Series B and C redeemable convertible preferred stock of MPM Acquisition Corp., or the Former Operating Company, and accretion of dividends on the Former Operating Company’s Series A-1, A-2 and A-3 convertible preferred stock.

 

Critical Accounting Policies and Estimates

 

The preparation of our financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and expenses during the reported periods. We believe the following accounting policies are “critical” because they require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates, which would have been reasonable could have been used, which would have resulted in different financial results.

 

The critical accounting policies we identified in our most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2011 related to accrued clinical expenses, research and development expenses, stock-based compensation, fair value measurements, accrued expenses and income taxes. It is important that the discussion of our operating results that follows be read in conjunction with the critical accounting policies disclosed in our Annual Report on Form 10-K, as filed with the SEC on February 6, 2012.

 

Results of Operations

 

The following discussion summarizes the key factors our management believes are necessary for an understanding of our financial statements. The discussion under “Results of Operations” discusses results for the three and six months ended June 30, 2012 in comparison with the three and six months ended June 30, 2011. The results for the three and six months ended June 30, 2011 include the results of the Former Operating Company. The results for the three and six months ended June 30, 2012 are post-Merger results.

 

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Table of Contents

 

 

 

Three months

 

Six months

 

 

 

Ended June 30,

 

Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

$

14,499

 

$

16,553

 

$

24,366

 

$

20,689

 

General and administrative

 

2,179

 

945

 

4,291

 

1,842

 

Loss from operations

 

(16,678

)

(17,498

)

(28,657

)

(22,531

)

Interest income

 

18

 

6

 

35

 

20

 

Other income (expense)

 

(717

)

12

 

(1,184

)

22

 

Interest expense

 

(584

)

(108

)

(1,027

)

(108

)

Net loss

 

$

(17,961

)

$

(17,588

)

$

(30,833

)

$

(22,597

)

 

Three months ended June 30, 2012 and 2011

 

 

 

Three months

 

 

 

 

 

 

 

Ended June 30,

 

Change

 

 

 

2012

 

2011

 

$

 

%

 

 

 

(In thousands)

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

$

14,499

 

$

16,553

 

(2,054

)

-12

%

General and administrative

 

2,179

 

945

 

1,234

 

131

%

Loss from operations

 

(16,678

)

(17,498

)

820

 

-5

%

Interest income

 

18

 

6

 

12

 

200

%

Other income (expense)

 

(717

)

12

 

(729

)

-6075

%

Interest expense

 

(584

)

(108

)

(476

)

441

%

Net loss

 

$

(17,961

)

$

(17,588

)

(373

)

2

%

 

Research and development expenses: For the three months ended June 30, 2012, research and development expense was $14.5 million compared to $16.6 million for the three months ended June 30, 2011, a decrease of $2.1 million and 12%. For the three months ended June 30, 2012, we incurred professional contract services associated with the development of BA058 Injection of $12.5 million compared to $13.8 million for the three months ended June 30, 2011. The decrease was primarily the result of both higher startup expenses incurred in 2011 for the initiation of the Phase 3 study of BA058 Injection, which began with the dosing of patients in April 2011, as well as lower contract services costs associated with the development of the BA058 Microneedle Patch in 2012. We expect that BA058 Injection expenses will be maintained or increase over the course of the Phase 3 study. However, there will be variability from quarter to quarter driven primarily by the rate of patient enrollment, the euro/dollar exchange rate, and fluctuations in the value of Radius stock issued to Nordic under the Stock Issuance Agreement.

 

General and administrative expenses: For the three months ended June 30, 2012, general and administrative expense was $2.2 million compared to $0.9 million for the three months ended June 30, 2011, an increase of $1.2 million and 131%. The increase is primarily the result of increased legal fees, including costs associated with maintaining our intellectual property portfolio and costs associated with being a public company, and additional personnel.

 

Other income (expense): For the three months ended June 30, 2012, other expense, net of other income, was $717,000. Other expense primarily reflects changes in the fair value of the Series A-6 liability from the date of the initial accrual to the reporting date as discussed in Note 12 to our condensed quarterly financial statements for the period ended June 30, 2012.

 

Interest expense: For the three months ended June 30, 2012, interest expense was $584,000. Interest expense reflects interest due on our loan and security agreement with Oxford Finance and GECC, which was effective on May 23, 2011.

 

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Table of Contents

 

Six months ended June 30, 2012 and 2011

 

 

 

Six months

 

 

 

 

 

 

 

Ended June 30,

 

Change

 

 

 

2012

 

2011

 

$

 

%

 

 

 

(In thousands)

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

$

24,366

 

$

20,689

 

3,677

 

18

%

General and administrative

 

4,291

 

1,842

 

2,449

 

133

%

Loss from operations

 

(28,657

)

(22,531

)

(6,126

)

27

%

Interest income

 

35

 

20

 

15

 

75

%

Other income (expense)

 

(1,184

)

22

 

(1,206

)

-5482

%

Interest expense

 

(1,027

)

(108

)

(919

)

851

%

Net loss

 

$

(30,833

)

$

(22,597

)

(8,236

)

36

%

 

Research and development expenses: For the six months ended June 30, 2012, research and development expense was $24.4 million compared to $20.7 million for the six months ended June 30, 2011, an increase of $3.7 million and 18%. For the six months ended June 30, 2012, we incurred professional contract services associated with the development of BA058 Injection of $20.2 million compared to $16.8 million for the six months ended June 30, 2011. The increase was primarily the result of expenses incurred for continuing enrollment of patients in our Phase 3 study of BA058 Injection, which began with the dosing of patients in April 2011. We expect this higher level of BA058 Injection expenses to be maintained or increase over the course of the Phase 3 study. However, there will be variability from quarter to quarter driven primarily by the rate of patient enrollment, the euro/dollar exchange rate, and fluctuations in the value of Radius stock issued to Nordic under the Stock Issuance Agreement. Offsetting these increases, we incurred $550,000 less in contract services associated with the development of BA058 Microneedle Patch in relation to the manufacture of Phase 2 clinical supplies.

 

General and administrative expenses: For the six months ended June 30, 2012, general and administrative expense was $4.3 million compared to $1.8 million for the six months ended June 30, 2011, an increase of $2.4 million and 133%. The increase is primarily the result of increased legal fees, including costs associated with maintaining our intellectual property portfolio and costs associated with being a public company, and additional personnel.

 

Other income (expense): For the six months ended June 30, 2012, other expense, net of other income, was $1.2 million. Other expense primarily reflects changes in the fair value of the Series A-6 liability from the date of the initial accrual to the reporting date as discussed in Note 12 to our condensed quarterly financial statements for the period ended June 30, 2012.

 

Interest expense: For the six months ended June 30, 2012, interest expense was $1.0 million. Interest expense reflects interest due on our loan and security agreement with Oxford Finance and GECC, which was effective on May 23, 2011.

 

Liquidity and Capital Resources

 

From inception to June 30, 2012, we have incurred an accumulated deficit of $156.1 million primarily as a result of expenses incurred through a combination of research and development activities related to our various product candidates and expenses supporting those activities.

 

We have financed our operations since inception primarily through the private sale of preferred stock as well as the receipt of $5.0 million in fees associated with an option agreement. We have also borrowed $25.0 million under our credit facility in three term loans. Our total cash, cash equivalents and marketable securities balance as of June 30, 2012 was $45.9 million.

 

The following table sets forth the major sources and uses of cash for each of the periods set forth below:

 

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Table of Contents

 

 

 

Six months ended

 

 

 

 

 

June 30,

 

Change

 

 

 

2012

 

2011

 

$

 

%

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

 

Operating activities

 

$

(22,406

)

$

(19,625

)

$

(2,781

)

-14

%

Investing activities

 

4,508

 

7,948

 

(3,440

)

-43

%

Financing activities

 

$

11,602

 

$

26,431

 

$

(14,829

)

-56

%

 

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

$

(6,296

)

$

14,754

 

$

(21,050

)

-143

%

 

Cash Flows From Operating Activities

 

Our operating activities used cash of $22.4 million and $19.6 million for the six months ended June 30, 2012 and 2011, respectively. The increase in the net cash used in operating activities was primarily attributed to a $3.7 million increase in research and development expense, which is primarily the result of expenses incurred for continuing enrollment of patients in our Phase 3 study of BA058 Injection, which began with the dosing of patients in April 2011. We expect this higher level of BA058 Injection expenses to be maintained or increase over the course of the Phase 3 study.

 

Cash Flows From Investing Activities

 

Our investing activities provided cash of $4.5 million and $7.9 million for the six months ended June 30, 2012 and 2011, respectively. The cash provided by investing activities for both the six months ended June 30, 2012 and 2011 was primarily due to the sales and maturities of our short-term investments.

 

Our investing cash flows will be impacted by the timing of purchases and sales of marketable securities. All of our marketable securities have contractual maturities of less than one year. Due to the short-term nature of our marketable securities, we would not expect our operational results or cash flows to be significantly affected by a change in market interest rates due to the short-term duration of our investments.

 

Cash Flows From Financing Activities

 

Our financing activities provided cash of $11.6 million and $26.4 million for the six months ended June 30, 2012 and 2011, respectively. The cash provided by financing activities for the six months ended June 30, 2012 consists of $12.5 million of net proceeds from our note payable and $258,000 of net proceeds from stock option exercises, offset by $1.1 million of payments on our notes payable.  The cash provided by financing activities for the six months ended June 30, 2011 consists of $20.5 million of net proceeds from the issuance of common stock, $5.9 million of net proceeds from our note payable and $152,000 of net proceeds from stock option exercises.

 

Our continued operations will depend on whether we are able to raise additional funds through various potential sources, such as equity and debt financing and potential collaboration agreements. Through June 30, 2012, almost all of our financing has been through private placements of preferred stock and borrowings under our credit facility. We will seek to continue to fund operations from cash on hand and through additional equity and/or debt financing and potential collaboration agreements. We can give no assurances that any additional capital that we are able to obtain will be sufficient to meet our needs. We believe that our existing resources will be sufficient to fund our planned operations into the first quarter of 2013. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. After such date, we will need additional financing until we can achieve profitability, if ever, including funds to conduct clinical and non-clinical studies, achieve regulatory approvals and, subject to such approvals, commercially launch our product candidates. Our future capital requirements will depend on many factors, including the scope and progress made in our research and development activities and our clinical studies. We may also need additional funds for possible future strategic acquisitions of businesses, products or technologies complementary to our business. If additional funds are required, we may raise such funds from time to time through public or private sales of equity or from borrowings. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could materially adversely impact our growth plans and our financial condition and results of operations. Additional equity financing may be dilutive to the holders of our common stock and debt financing, if available, may involve significant cash payment obligations and covenants that restrict our ability to operate our business.

 

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Table of Contents

 

Financings

 

On May 23, 2011, we entered into our credit facility with GECC, as agent and a lender, and Oxford Finance, as a lender, consisting of three term loans, pursuant to which we may draw an aggregate of $25.0 million. We drew $12.5 million under the initial and second term loans in the year ended December 31, 2011 and $12.5 million under the third term loan in the three months ended June 30, 2012. In connection with the funding of the third term loan, we issued warrants to purchase an additional 6,140 shares of Series A-1 at a purchase price of $81.42 per share. The exercise period of each warrant is 10 years from the date of issuance.

 

Research and Development Agreements:

 

On March 29, 2011, we and Nordic entered into a Clinical Trial Services Agreement, a Work Statement NB-1, or the Work Statement, under such Clinical Trial Services Agreement and a related Stock Issuance Agreement. Pursuant to the Work Statement, Nordic is managing the Phase 3 clinical study, or the Clinical Study, of BA058 Injection and Nordic will be compensated for such services in a combination of cash and shares of Series A-6 or after the automatic conversion into common stock of our convertible preferred stock, in shares of common stock.

 

In December 2011, we entered into an amendment to the Work Statement, or the First Amendment. Pursuant to the original terms of the Work Statement, the study was to be conducted in 10 countries at a specified number of sites within each country. The terms of the First Amendment provide for two additional countries (the United States and India) in which the study will be conducted, specify a certain number of sites within each such additional country for the conduct of the study, and amend various terms and provisions of the Work Statement to reflect the addition of such countries and sites within the study’s parameters. Payments to be made by us to Nordic under the First Amendment in connection with the conduct of the study in such additional countries are denominated in both euros and U.S. dollars and total up to both €717,700 ($909,182) and $289,663, respectively, for the 15 additional study sites in India contemplated by the First Amendment and up to both €1.2 million ($1.5 million) and $143,369, respectively, for the five additional study sites in the United States contemplated by the First Amendment.

 

In June 2012, we entered into a second amendment to the Work Statement, or the Second Amendment. Pursuant to the original terms of the Work Statement, as amended by the First Amendment, the study was to be conducted in 12 countries at a specified number of sites within each country. The terms of the Second Amendment (i) increase the overall number of sites by adding sites in Europe, Brazil and Argentina and removing other sites, (ii) specify a certain number of sites within each country for the conduct of the study, and (iii) amend various terms and provisions of the Work Statement to reflect additional services provided at existing sites and the addition of the new study sites within the study’s parameters. The Second Amendment also provided that cash payments to Nordic under the Clinical Trial Services Agreement as well as the payment of shares of Series A-6 under the related Stock Issuance Agreement shall each be reduced by an amount of €11,941 ($15,127) per subject for any subjects enrolled in India or the United States. Such reductions shall be applied in pro rata monthly installments. Payments to be made by us to Nordic under the Second Amendment in connection with the extra services provided at existing sites and the conduct of the study at the new study sites are denominated in both euros and U.S. dollars and total €3.7 million ($4.7 million) and $205,540, respectively.

 

Pursuant to the Work Statement, we are required to make certain per patient payments denominated in both euros and U.S. dollars for each patient enrolled in the Clinical Study followed by monthly payments for the duration of the study and final payments in two equal euro-denominated installments and two equal U.S. dollar-denominated installments. Changes to the Clinical Study schedule may alter the timing, but not the aggregate amounts, of the payments. The Work Statement, as amended on December 9, 2011 and June 18, 2012, provides for a total of up to approximately €41.2 million ($52.1 million) of euro-denominated payments and a total of up to approximately $3.2 million of U.S. dollar-denominated payments over the course of the Clinical Study.

 

Pursuant to the Stock Issuance Agreement, as amended, Nordic agreed to purchase the equivalent of €371,864 of series A-5 preferred stock at $8.142 per share, and we sold 64,430 shares of series A-5 preferred stock to Nordic on May 17, 2011, for proceeds of $525,154 to the Former Operating Company. These shares were exchanged in the Merger for an aggregate of 6,443 shares of our Series A-5.

 

The Stock Issuance Agreement provides that Nordic is entitled to receive quarterly stock dividends, payable in shares of Series A-6, or shares of common stock if our preferred stock has been automatically converted into common stock in accordance with our certificate of incorporation, having an aggregate value of up to €36.8 million ($46.6 million), or the Series A-5 Accruing Dividend. This right to receive the Series A-5 Accruing Dividend is non-transferrable and will remain with Nordic in the event it sells the shares of series A-5 preferred stock or in the event the shares of Series A-5 are converted into common stock in accordance with our amended certificate of incorporation. As of June 30, 2012, 244,834 shares of Series A-6 preferred stock are due to Nordic, or after the automatic conversion into common stock of our convertible preferred stock, 2,448,340 shares of common stock.

 

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Table of Contents

 

We recorded $6.9 million and $11.8 million of research and development expense in the three- and six month periods ended June 30, 2012 for per-patient costs incurred for patients that had enrolled in the Clinical Study as of June 30, 2012. As of June 30, 2012, in addition to the $17.5 million liability that is reflected in other liabilities on the Balance Sheet that will be settled in shares of Series A-6 or common stock, as noted above, we have an asset resulting from payments to Nordic of approximately $4.6 million that is included in prepaid expenses on the Balance Sheet.

 

We are also responsible for certain pass through costs in connection with the Clinical Study.  We recognized research and development expense of $3.6 million and $4.9 million for pass through costs in the three- and six-month periods ended June 30, 2012.

 

License Agreement Obligations

 

BA058

 

In September 2005, we exclusively licensed the worldwide rights (except Japan) to BA058 and analogs from an affiliate of Ipsen Pharma SAS, or Ipsen, including US Patent No. 5,969,095, (effective filing date March 29, 1996, statutory term expires March 29, 2016) entitled “Analogs of Parathyroid Hormone” that claims BA058 and US Patent No. 6,544,949, (effective filing date March 26, 1996, statutory term expires March 29, 2016) entitled “Analogs of Parathyroid Hormone” that claims methods of treating osteoporosis using BA058 and pharmaceutical compositions comprising BA058, and the corresponding foreign patents and continuing patent applications. In addition, we have rights to joint intellectual property related to BA058, including rights to the jointly derived intellectual property contained in US Patent No. 7,803,770, (effective filing date October 3, 2007, statutory term expires October 3, 2027, plus 175 days of patent term adjustment due to delays in patent prosecution by the United States Patent and Trademark Office, or USPTO), US Patent No. 8,148,333 (effective filing date October 3, 2007, statutory term expires October 3, 2027 plus 36 days of patent term adjustment due to delays in patent prosecution by the USPTO) and related patents and patent applications both in the United States and worldwide (excluding Japan) that cover the method of treating osteoporosis using the Phase 3 clinical study dosage strength and form. In consideration for the rights to BA058 and in recognition of certain milestones having been met as of December 31, 2011, we have paid to Ipsen an aggregate amount of $1.0 million. The license agreement further requires us to make payments upon the achievement of certain future clinical and regulatory milestones. The range of milestone payments that could be paid under the agreement is €10.0 million to €36.0 million ($12.7 million to $45.6 million). Should BA058 become commercialized, we or our sublicensees will be obligated to pay to Ipsen a fixed five percent royalty based on net sales of the product on a country by country basis until the later of the last to expire of the licensed patents or for a period of 10 years after the first commercial sale in such country. The date of the last to expire of the BA058 patents, barring any extension thereof, is expected to be March 26, 2028. In the event that we sublicense BA058 to a third party, we are obligated to pay a percentage of certain payments received from such sublicensee (in lieu of milestone payments not achieved at the time of such sublicense). The applicable percentage is in the low double digit range. In addition, if we or our sublicensees commercialize a product that includes a compound discovered by us based on or derived from confidential Ipsen know-how, we will be obligated to pay to Ipsen a fixed low single digit royalty on net sales of such product on a country-by-country basis until the later of the last to expire of our patents that cover such product or for a period of 10 years after the first commercial sale of such product in such country. The license agreement contains other customary clauses and terms as are common in similar agreements in the industry.

 

RAD1901

 

In June 2006, we exclusively licensed the worldwide rights (except Japan) to RAD1901 from Eisai Co. Ltd., or Eisai. In particular, we have licensed US Patent No. 7,612,114 (effective filing date December 25, 2003, statutory term extended to August 18, 2026 with 967 days of patent term adjustment due to delays by the USPTO). In consideration for the rights to RAD1901 and in recognition of certain milestones having been met to date, we have paid to Eisai an aggregate amount of $1.5 million. The range of milestone payments that could be paid under the agreement is $1.0 million to $20.0 million. The license agreement further requires us to make payments upon the achievement of certain future clinical and regulatory milestones. Should RAD1901 become commercialized, we will be obligated to pay to Eisai a royalty in a variable mid-single digit range based on net sales of the product on a country by country basis for a period that expires on the later of (i) date the last remaining valid claim in the licensed patents expires, lapses or is invalidated in that country, the product is not covered by data protection clauses, and the sales of lawful generic version of the product account for more than a specified percentage of the total sales of all pharmaceutical products containing the licensed compound in that country; or (ii) a period of 10 years after the first commercial sale of the licensed products in such country, unless it is sooner terminated. The latest valid claim is expected to expire, barring any extension thereof, on August 18, 2026. The royalty rate shall then be subject to reduction and the royalty obligation will expire at such time as sales of lawful generic version of such product account for more than a specified minimum percentage of the total sales of all products that contain the licensed compound. We were also granted the right to sublicense with prior written approval from Eisai, but subject to a right of first negotiation held by Eisai if we seek to grant sublicenses limited to particular Asian countries. If we sublicense RAD1901 to a third party, we will be obligated to pay Eisai, in addition to the milestones referenced above, a fixed low double digit percentage of certain fees we receive from such sublicensee and royalties in a variable mid-single digit range based on net sales of the sublicensee. The license agreement contains other customary clauses and terms as are common in similar agreements in the industry.

 

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Table of Contents

 

Net Operating Loss Carryforwards

 

As of December 31, 2011, we had federal and state net operating loss carryforwards of approximately $128.3 million and $109.7 million, respectively. If not utilized, the net operating loss carryforwards will begin expiring in 2023 and 2012 for federal and state purposes, respectively.

 

Under Section 382 of the Code, substantial changes in our ownership may limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset taxable income. Specifically, this limitation may arise in the event of a cumulative change in ownership of our company of more than 50% within a three-year period. Any such annual limitation may significantly reduce the utilization of the net operating loss carryforwards before they expire. The private placements and other transactions that have occurred since our inception may have triggered an ownership change pursuant to Section 382, which could limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset taxable income, if any. Any such limitation, whether as the result of prior private placements, sales of common stock by our existing stockholders or additional sales of common stock by us, could have a material adverse effect on our results of operations in future years. We have not completed a study to assess whether an ownership change has occurred, or whether there have been multiple ownership changes since our inception, due to the significant costs and complexities associated with such study. In addition, we have not, as yet, conducted a study of research and development credit carryforwards. These studies may result in adjustments to our research and development credit carryforwards and net operating loss carryfowards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position. In each period since our inception, we have recorded a valuation allowance for the full amount of our deferred tax asset, as the realization of the deferred tax asset is uncertain. As a result, we have not recorded any federal or state income tax benefit in our statement of operations.

 

Internal Control Over Financial Reporting

 

We are not currently required to comply with Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and are therefore not required to make an assessment of the effectiveness of our internal control over financial reporting. Further, our independent registered public accounting firm has not been engaged to express, nor have they expressed, an opinion on the effectiveness of our internal control over financial reporting. As a public company that may become listed on a national securities exchange, we intend to hire additional accounting personnel with public company and SEC reporting experience and to focus on implementing appropriate internal controls and other procedures.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements or any relationships with unconsolidated entities of financial partnerships, such as entities often referred to as structured finance or special purpose entities.

 

New Accounting Standards

 

Refer to Note 3, Summary of Significant Accounting Policies — Recently Adopted Accounting Standards, in “Notes to Condensed Financial Statements,” for a discussion of new accounting standards.

 

Item 3.            Quantitative and Qualitative Disclosure about Market Risk

 

Our primary exposure to market risk is foreign currency exposure. A substantial portion of our BA058 development costs are denominated in euro and an immediate 10 percent adverse change in the dollar/euro exchange rate will result in increased costs and would have a material adverse impact on our financial statements and require us to raise additional capital to complete the development of our products. We do not hedge our foreign currency exchange rate risk.

 

We are also exposed to market risk related to changes in interest rates. As of June 30, 2012 and December 31, 2011, we had cash, cash equivalents and short-term investments of $45.9 million and $56.7 million, respectively, consisting of money market funds, U.S. Treasuries, Certificates of Deposit and cash equivalents. This exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are in short-term marketable securities. Our short-term investments are subject to interest rate risk and will fall in value if market interest rates increase. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 10 percent change in interest rates would not have a material effect on the fair market value of our portfolio. We have the ability to hold our short-investments until maturity, and therefore we would not expect our operations results or cash flows to be affected by any significant degree by the effect of a change in market interest rates on our investments. We carry our investments based on publicly available information. We do not currently have any hard to value investment securities or securities for which a market is not readily available or active.

 

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Table of Contents

 

We are not subject to significant credit risk as this risk does not have the potential to materially impact the value of assets and liabilities.

 

Item 4.            Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As required by Rule 13a—15(b) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, the Company’s principal executive officer and principal financial officer, respectively, conducted an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective at the reasonable assurance level in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

PART II— OTHER INFORMATION

 

Item 1.            Legal Proceedings

 

We are not currently a party to any material litigation, and we are not aware of any pending or threatened litigation against us that could have a material adverse effect on our consolidated financial position, results of operations or cash flows.

 

Item 1A.         Risk Factors

 

Set forth below and elsewhere in this Quarterly Report on Form 10-Q and in other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Quarterly Report on Form 10-Q. Because of the following factors, as well as other variables affecting our operating results, past financial performance should not be considered as a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods.

 

Risks Related to Our Business

 

Risks Related to Our Financial Position and Need for Capital

 

We are not currently profitable and may never become profitable.

 

We have a history of net losses and expect to incur substantial losses and have negative operating cash flow for the foreseeable future, and may never achieve or maintain profitability. We had a net loss of $18.0 million for the three months ended June 30, 2012, $42.5 million for the year ended December 31, 2011 and $14.6 million for the year ended December 31, 2010. As of June 30, 2012, we had an accumulated deficit of $156.1 million. Even if we succeed in developing and commercializing one or more of our product candidates, we expect to incur substantial losses for the foreseeable future and may never become profitable. We also expect to continue to incur significant operating and capital expenditures and anticipate that our expenses will increase substantially in the foreseeable future as we:

 

·continue to undertake preclinical development and clinical trials for product candidates;

 

·seek regulatory approvals for product candidates;

 

·implement additional internal systems and infrastructure; and

 

·hire additional personnel.

 

We also expect to experience negative cash flow for the foreseeable future as we fund our operating losses and capital expenditures. As a result, we will need to generate significant revenues in order to achieve and maintain profitability. We may not be able to generate these revenues or achieve profitability in the future. Accordingly, unless and until we generate revenues and become profitable, we will need to raise additional capital to continue to operate our business, including after the consummation of this offering. Our failure to achieve or maintain profitability or to raise additional capital could negatively impact the value of our securities.

 

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We currently have no product revenues and will need to raise additional capital to operate our business.

 

To date, we have generated no product revenues. Until, and unless, we receive approval from the FDA and other regulatory authorities for our product candidates, we will not be permitted to sell our drugs and will not have product revenues. Currently, our only product candidates are BA058, RAD1901 and RAD140, and none of these products candidates is approved by the FDA for sale. Therefore, for the foreseeable future, we will have to fund our operations and capital expenditures from cash on hand, borrowings, licensing fees and grants and, potentially, future offerings of our securities. We believe that our existing resources will be sufficient to fund our planned operations into the first quarter of 2013. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Our future capital requirements will depend on many factors, including the scope and progress made in our research and development activities and our clinical studies.

 

Our credit facility imposes significant restrictions on our business, and if we default on our obligations, the lenders would have a right to foreclose on substantially all our assets.

 

In May 2011, we entered into our $25.0 million credit facility with GECC, as agent and lender, and Oxford Finance, as lender. We drew $12.5 million and $12.5 million under our credit facility during 2011 and 2012, respectively. Our credit facility contains a number of covenants that impose significant operating and financial restrictions on us. These covenants limit our ability to:

 

·dispose of our business or certain assets;

 

·change our business, management, ownership or business locations;

 

·incur additional debt or liens;

 

·make certain investments or declare dividends;

 

·acquire or merge with another entity for consideration in excess of an allowable amount;

 

·engage in transactions with affiliates; or

 

·encumber our intellectual property.

 

Our credit facility may limit our ability to finance future operations or capital needs or to engage in, expand or pursue our business activities. It may also prevent us from engaging in activities that could be beneficial to our business and our stockholders unless we repay the outstanding debt, which may not be desirable or possible.

 

We have pledged substantially all of our assets other than our intellectual property to secure our obligations under our credit facility. If we default on our obligations and are unable to obtain a waiver for such a default, the lenders would have a right to accelerate the debt and terminate all commitments under our credit facility. They would also have the right to foreclose on the pledged assets, including our cash and cash equivalents. Any such action on the part of lenders against us would significantly harm our business and our ability to operate.

 

We will need to seek additional sources of financing, which may not be available on favorable terms, if at all.

 

If we do not succeed in the timely raising of additional funds on acceptable terms, we may be unable to complete planned preclinical and clinical trials or obtain approval of any product candidates from the FDA and other regulatory authorities. In addition, we could be forced to discontinue product development, reduce or forego sales and marketing efforts and forego attractive business opportunities. Any additional sources of financing will likely involve the issuance of additional equity securities, which will have a dilutive effect on stockholders.

 

Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.

 

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing and distribution arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt financing, if available, may involve agreements

 

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that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

 

We are a company with a limited operating history upon which to base an investment decision.

 

We are a company with a limited operating history and have not demonstrated an ability to perform the functions necessary for the successful commercialization of any product candidates. The successful commercialization of any product candidates will require us to perform a variety of functions, including:

 

·continuing to undertake preclinical development and clinical trials;

 

·participating in regulatory approval processes;

 

·formulating and manufacturing products; and

 

·conducting sales and marketing activities.

 

Our operations have been limited to organizing and staffing our company, acquiring, developing and securing our proprietary technology and undertaking preclinical and clinical trials of our product candidates. These operations provide a limited basis for you to assess our ability to commercialize our product candidates and the advisability of investing further in our securities.

 

Our financial results may fluctuate from quarter to quarter, which makes our results difficult to predict and could cause our results to fall short of expectations.

 

Our financial results may fluctuate as a result of a number of factors, many of which are outside of our control. For these reasons, comparing our financial results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. Our revenues, if any, may fluctuate from quarter to quarter and our future quarterly and annual expenses as a percentage of our revenues may be significantly different from those we have recorded in the past or which we expect for the future. Our financial results in some quarters may fall below expectations. Any of these events as well as the various risk factors listed in this section could adversely affect our financial results and cause our stock price to fall.

 

Risks Related to the Discovery, Development and Commercialization of Our Product Candidates

 

We are heavily dependent on the success of BA058 Injection, which is under clinical development. We cannot be certain that BA058 Injection will receive regulatory approval or be successfully commercialized even if we receive regulatory approval.

 

BA058 Injection is our only product candidate in late-stage clinical development, and our business currently depends heavily on its successful development, regulatory approval and commercialization. We have no drug products for sale currently and may never be able to develop marketable drug products. The research, testing, manufacturing, labeling, approval, sale, marketing and distribution of drug products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, which regulations differ from country to country. We are not permitted to market BA058 Injection in the United States unless and until we receive approval of an NDA from the FDA, or in any foreign countries unless and until we receive the requisite approval from regulatory authorities in such countries. In addition, the approval of BA058 Microneedle Patch as a follow-on product is dependent on the earlier approval of BA058 Injection. We have not submitted an NDA to the FDA or comparable applications to other regulatory authorities. Obtaining approval of an NDA is an extensive, lengthy, expensive and uncertain process, and any approval of BA058 Injection may be delayed, limited or denied for many reasons, including:

 

·we may experience delays in the enrollment of patients in our ongoing Phase 3 clinical trial;

 

·we may not be able to demonstrate that BA058 is safe and effective as a treatment for osteoporosis to the satisfaction of the FDA;

 

·the results of our clinical studies may not meet the level of statistical or clinical significance required by the FDA for marketing approval; the FDA may disagree with the number, design, size, conduct or implementation of our clinical studies;

 

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·the CRO that we retain to conduct clinical studies may take actions outside of our control that materially adversely impact our clinical studies;

 

·the FDA may not find the data from preclinical studies and clinical studies sufficient to demonstrate that BA058’s clinical and other benefits outweigh its safety risks;

 

·the FDA may disagree with our interpretation of data from our preclinical studies and clinical studies or may require that we conduct additional studies;

 

·the FDA may not accept data generated at our clinical study sites;

 

·if our NDA is reviewed by an advisory committee, the FDA may have difficulties scheduling an advisory committee meeting in a timely manner or the advisory committee may recommend against approval of our application or may recommend that the FDA require, as a condition of approval, additional preclinical studies or clinical studies, limitations on approved labeling or distribution and use restrictions;

 

·the FDA may require development of a REMS as a condition of approval; or

 

·the FDA may identify deficiencies in the manufacturing processes or facilities of our third-party manufacturers.

 

In addition, the FDA may change its approval policies or adopt new regulations. For example, on February 15, 2012, we received a letter from the FDA stating that, after internal consideration, the agency believes that a minimum of 24-month fracture data are necessary for approval of new products for the treatment of postmenopausal osteoporosis, and our ongoing BA058 Injection pivotal Phase 3 clinical study is designed to produce fracture data based on an 18-month primary endpoint. Based on our discussions with the FDA, we believe that continued use of the 18-month primary endpoint will be acceptable, provided that our NDA includes the 24-month fracture data derived from a 6-month extension of the BA058 80 µg and placebo groups in our Phase 3 study that will receive daily oral doses of alendronate (generic Fosamax®) or other standard of care for osteoporosis management. We cannot be certain that the FDA will not change this approval policy again, or adopt other approval policies or regulations that adversely affect any NDA that we may submit.

 

Before we submit an NDA to the FDA for BA058 as a treatment for osteoporosis, we must complete several additional studies, including our pivotal Phase 3 study, a thorough QT Phase 1 study, a Phase 1 PK study in renal patients, a Phase 1 PK study in hepatic patients, a Phase 1 absolute bioavailability PK study, a carcinogenicity study in rats, and bone quality studies in rats and monkeys. We have not commenced all of these required studies and the results of these studies will have an important bearing on the approval of BA058. In addition to fracture and BMD, our pivotal Phase 3 study will measure a number of other potential safety indicators, including anti-BA058 antibodies which will have an important bearing on the approval of BA058.  We have observed osteosarcomas in the rats in our carcinogenicity study.  The final results from the rat carcinogenicity study, which includes hPTH(1-34), a daily subcutaneous injection of human parathyroid hormone as a comparator, may show that BA058 dosing results in more osteosarcomas than PTH, which may have a material adverse bearing on approval of BA058.

 

If we experience delays in the enrollment of patients in our Phase 3 clinical trial of BA058 Injection or any other clinical trial, our receipt of necessary regulatory approvals could be delayed or prevented.

 

We may not be able to initiate or continue clinical trials for some of our product candidates if we are unable to locate and enroll a sufficient number of eligible patients to participate in these trials as required by the FDA or other regulatory authorities. If we do not enroll patients in our Phase 3 clinical trial of BA058 Injection at the rate that we expect, we will not be able to complete the trial in a timely manner and may be required to incur additional expenses in order to seek to accelerate the rate of patient enrollment. In addition, many of our competitors have ongoing clinical trials for product candidates that could be competitive with our product candidates, and patients who would otherwise be eligible for our clinical trials may instead enroll in clinical trials of our competitors’ product candidates.

 

Enrollment delays in our clinical trials may result in increased development costs for our product candidates, which would cause the value of the company to decline and limit our ability to obtain additional financing. Our inability to enroll a sufficient number of patients for any of our current or future clinical trials would result in significant delays or may require us to abandon one or more clinical trials altogether.

 

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If we do not obtain the necessary United States or foreign regulatory approvals to commercialize any product candidate, we will not be able to sell our product candidates.

 

We cannot assure you that we will receive the approvals necessary to commercialize any of our product candidates, including BA058, RAD1901 and RAD140, or any product candidate we acquire or develop in the future. We will need FDA approval to commercialize our product candidates in the United States and approvals from the FDA-equivalent regulatory authorities in foreign jurisdictions to commercialize our product candidates in those jurisdictions. In order to obtain FDA approval of any product candidate, we must submit to the FDA an NDA demonstrating that the product candidate is safe for humans and effective for its intended use. This demonstration requires significant research and animal tests, which are referred to as preclinical studies, as well as human tests, which are referred to as clinical trials. Satisfaction of the FDA’s regulatory requirements typically takes many years, depends upon the type, complexity and novelty of the product candidate and requires substantial resources for research, development and testing. We cannot predict whether our research and clinical approaches will result in drugs that the FDA considers safe for humans and effective for indicated uses. The FDA has substantial discretion in the drug approval process and may require us to conduct additional preclinical and clinical testing or to perform post-marketing studies. The approval process may also be delayed by changes in government regulation, future legislation or administrative action or changes in FDA policy that occur prior to or during its regulatory review, such as the request for a minimum of 24-month fracture data for approval of new products for the treatment of postmenopausal osteoporosis. Delays in obtaining regulatory approvals may:

 

·delay commercialization of, and our ability to derive product revenues from, our product candidates;

 

·impose costly procedures on us; and

 

·diminish any competitive advantages that we may otherwise enjoy.