2016 0930 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________



Form 10-Q

_____________________



 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)



OF THE SECURITIES EXCHANGE ACT OF 1934



For the Quarterly Period Ended September 30, 2016

or



 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)



OF THE SECURITIES EXCHANGE ACT OF 1934



Commission File Number: 000-29959

_______________



Pain Therapeutics, Inc.

(Exact name of registrant as specified in its charter)





 

Delaware

91-1911336

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification Number)



7801 N. Capital of Texas Highway, Suite 260, Austin, TX 78731

 (512) 501-2444

 (Address, including zip code, of registrant's principal executive offices and

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 No

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



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



 



Large accelerated filer 

Accelerated filer 



Non-accelerated filer 

Smaller reporting Company 



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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.



 

Common Stock, $0.001 par value

46,141,935



Shares Outstanding as of October 19, 2016



 

1


 









PAIN THERAPEUTICS, INC.



TABLE OF CONTENTS





 

 



 

Page No.

PART I.

FINANCIAL INFORMATION

 



 

 

  Item 1.

Financial Statements

 



 

 



Condensed Balance Sheets – September 30, 2016 and December 31, 2015

3



 

 



Condensed Statements of Operations – Three and Nine Months Ended September 30, 2016 and September 30, 2015

4



 

 



Condensed Statements of Comprehensive Loss – Three and Nine Months Ended September 30, 2016 and September 30, 2015 

5



 

 



Condensed Statements of Cash Flows – Nine Months Ended September 30, 2016 and September 30, 2015

6



 

 



Notes to Condensed Financial Statements

7



 

 

  Item 2.

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

14



 

 

  Item 3.

Quantitative and Qualitative Disclosures About Market Risk

20



 

 

  Item 4.

Controls and Procedures

20



 

 

PART II.

OTHER INFORMATION

 



 

 

  Item 1.

Legal Proceedings

21



 

 

  Item 1A

Risk Factors

21



 

 

  Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

41



 

 

  Item 3.

Defaults Upon Senior Securities

41



 

 

  Item 4.

Mine Safety Disclosures

41



 

 

  Item 5.

Other Information

41



 

 

  Item 6.

Exhibits

42



 

 

Signatures

43









2

 


 



PART I.  FINANCIAL INFORMATION



Item 1. Financial Statements







 

 

 

 

 



 

 

 

 

 

PAIN THERAPEUTICS, INC.



 

 

 

 

 

CONDENSED BALANCE SHEETS

(Unaudited, in thousands)



 

 

 

 

 





 



September 30,

 

December 31,



2016

 

2015(1)



 

 

 

 

 

ASSETS

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

21,214 

 

$

31,299 

Marketable securities

 

550 

 

 

 —

Other current assets

 

456 

 

 

392 

Total current assets

 

22,220 

 

 

31,691 

Property and equipment, net

 

250 

 

 

215 

Other assets

 

12 

 

 

12 

Total assets

$

22,482 

 

$

31,918 



 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

 

 

 

 

 

Accounts payable

$

1,083 

 

$

1,034 

Accrued development expense

 

744 

 

 

894 

Accrued compensation and benefits

 

340 

 

 

623 

Total current liabilities

 

2,167 

 

 

2,551 

Noncurrent liabilities

 

 —

 

 

 —

Total liabilities

 

2,167 

 

 

2,551 

Commitments and contingencies

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

Preferred stock

 

 —

 

 

 —

Common stock

 

46 

 

 

46 

Additional paid-in capital

 

163,234 

 

 

159,959 

Accumulated other comprehensive income

 

 

 

 —

Accumulated deficit

 

(142,966)

 

 

(130,638)

Total stockholders' equity

 

20,315 

 

 

29,367 

Total liabilities and stockholders' equity

$

22,482 

 

$

31,918 



 

 

 

 

 



 (1) Derived from the Company’s audited financial statements as of December 31, 2015, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.



See accompanying notes to condensed financial statements.



3


 











 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

PAIN THERAPEUTICS, INC.



 

 

 

 

 

 

 

 

 

 

 

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)



 

 

 

 

 

 

 

 

 

 

 



Three months ended

 

Nine months ended



September 30,

 

September 30,



2016

 

2015

 

2016

 

2015

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Research and development

$

2,657 

 

$

2,356 

 

$

7,841 

 

$

5,480 

General and administrative

 

884 

 

 

1,330 

 

 

4,573 

 

 

4,188 

Total operating expenses

 

3,541 

 

 

3,686 

 

 

12,414 

 

 

9,668 

Operating loss

 

(3,541)

 

 

(3,686)

 

 

(12,414)

 

 

(9,668)

Interest income

 

23 

 

 

15 

 

 

86 

 

 

40 

Net loss

$

(3,518)

 

$

(3,671)

 

$

(12,328)

 

$

(9,628)

Net loss per share, basic and diluted

$

(0.08)

 

$

(0.08)

 

$

(0.27)

 

$

(0.21)

Shares used in computing net loss per share, basic and diluted

 

45,742 

 

 

45,356 

 

 

45,603 

 

 

45,356 



 

 

 

 

 

 

 

 

 

 

 











See accompanying notes to condensed financial statements.

4


 







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

PAIN THERAPEUTICS, INC.



 

 

 

 

 

 

 

 

 

 

 

CONDENSED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited, in thousands)



 

 

 

 

 

 

 

 

 

 

 



Three months ended

 

Nine months ended



September 30,

 

September 30,



2016

 

2015

 

2016

 

2015

Net loss

$

(3,518)

 

$

(3,671)

 

$

(12,328)

 

$

(9,628)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains on marketable securities

 

 

 

 —

 

 

 

 

 —

Comprehensive loss

$

(3,517)

 

$

(3,671)

 

$

(12,327)

 

$

(9,628)



 

 

 

 

 

 

 

 

 

 

 











See accompanying notes to condensed financial statements.

5


 







 

 

 

 

 



 

 

 

 

 

PAIN THERAPEUTICS, INC.



 

 

 

 

 

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)



 

 

 

 

 



Nine months ended



September 30,



2016

 

2015

Cash flows used in operating activities:

 

 

 

 

 

Net loss

$

(12,328)

 

$

(9,628)

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

 

 

 

 

 

Non-cash stock-based compensation

 

3,489 

 

 

2,639 

Depreciation and amortization

 

41 

 

 

32 

Non-cash net interest income

 

(3)

 

 

(3)

Changes in operating assets and liabilities:

 

 

 

 

 

Other current assets

 

(18)

 

 

(281)

Accounts payable

 

49 

 

 

725 

Accrued development expense

 

(150)

 

 

617 

Accrued compensation and benefits

 

(283)

 

 

394 

Net cash used in operating activities

 

(9,203)

 

 

(5,505)

Cash flows provided by (used in) investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(76)

 

 

(195)

Purchases of marketable securities

 

(2,046)

 

 

(3,847)

Maturities of marketable securities

 

1,500 

 

 

2,950 

Net cash used in investing activities

 

(622)

 

 

(1,092)

Cash flows used in financing activities:

 

 

 

 

 

Cash used for statutory taxes for net exercise of Performance Awards

 

(214)

 

 

 —

Deferred financing costs

 

(46)

 

 

 —

Net cash used in financing activities

 

(260)

 

 

 —

Net decrease in cash and cash equivalents

 

(10,085)

 

 

(6,597)

Cash and cash equivalents at beginning of the period

 

31,299 

 

 

40,590 

Cash and cash equivalents at end of the period

$

21,214 

 

$

33,993 



 

 

 

 

 











See accompanying notes to condensed financial statements.

6


 

PAIN THERAPEUTICS, INC.



Notes to Condensed Financial Statements

(Unaudited)



Note 1.  General



Pain Therapeutics, Inc. develops proprietary drugs that offer significant improvements to patients and healthcare professionals. We generally focus our drug development efforts on disorders of the nervous system, such as chronic pain.



In the course of our development activities, we have sustained cumulative operating losses. There are no assurances that additional financing will be available on favorable terms, or at all.



We have prepared the accompanying unaudited condensed financial statements of Pain Therapeutics, Inc. in accordance with generally accepted accounting principles for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In our opinion, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for any other interim period or for the year 2016.  For further information, refer to the consolidated financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2015.



We have evaluated subsequent events through the date of filing this Form 10-Q.





Note 2.  Significant Accounting Policies



Use of Estimates



We make estimates and assumptions in preparing our financial statements in conformity with accounting principles generally accepted in the United States of America. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue earned and expenses incurred during the reporting period. Actual results could differ from these estimates and assumptions.



Cash Equivalents, Marketable Securities and Concentration of Credit Risk



We invest in cash equivalents and marketable securities. We consider highly-liquid financial instruments with original maturities of three months or less to be cash equivalents. Our marketable securities include interest-bearing financial instruments, generally consisting of corporate or government securities.



We are subject to credit risk due to our investments. Our investment policy allows for investments in marketable securities with active secondary or resale markets, establishes diversification and credit quality requirements and limits investments by maturity and issuer.  We maintain our investments at one financial institution.



A change in prevailing interest rates may cause the fair value of the investment to fluctuate. We don’t recognize an impairment charge related to this type of fluctuation because the fluctuation is temporary and eliminated by the time an investment matures. We would recognize an impairment charge if and when we determine that a decline in the fair value below the amortized cost of an investment is other-than-temporary. We consider various factors in determining whether to recognize an impairment charge, including any adverse changes in the investees’ financial condition, how long the fair value has been below the amortized cost and whether it is more likely than not that we would elect to or be required to sell the marketable security before its anticipated recovery.



We may elect to sell marketable securities before they mature. We hold these investments as “available for sale”

7


 

and include these investments in our Balance Sheets as current assets, even though the contractual maturity of a particular investment may be beyond one year.



Fair Value Measurements



We report our cash equivalents and marketable securities at fair value as Level 1, Level 2 or Level 3 using the following inputs:



·

Level 1 includes  quoted prices in active markets. We base the fair value of money market funds and U.S. treasury securities on Level 1 inputs.

·

Level 2 includes significant observable inputs, such as quoted prices for identical or similar investments, or other inputs that are observable and can be corroborated by observable market data for similar securities.  We use market pricing and other observable market inputs obtained from third-party providers. We use the bid price to establish fair value where a bid price is available.  We base the fair value of our marketable securities on Level 2 inputs.

·

Level 3 includes unobservable inputs that are supported by little or no market activity. We do not have any investments where the fair value is based on Level 3 inputs.



We include  unrealized gains or losses on our investments  as Accumulated other comprehensive loss in the Stockholders’ equity section of our Balance Sheets. We include changes in net unrealized gains or losses in our Statements of Comprehensive Income. We would recognize significant realized gains and losses on a specific identification basis as other income in our Statements of Operations.



Proceeds from Grants



During the first nine months of 2016, we received $1.1 million pursuant to a grant from the National Institutes of Health, or NIH, that we recorded as a reduction to our research and development expenses.



Non-cash Stock-based Compensation 



We recognize non-cash expense for the fair value of all stock options and other share-based awards.  We use the Black-Scholes option valuation model to calculate the fair value of stock options, using the single-option award approach and straight-line attribution method. For options granted to employees and directors, we recognize the resulting fair value as expense on a straight-line basis over the vesting period of each respective stock option, generally four years. For options granted to non-employees, we remeasure the fair value expense using Black-Scholes each reporting period.



We have granted share-based awards that vest upon achievement of certain performance criteria, or Performance Awards. We multiply the number of Performance Awards by the fair market value of our common stock on the date of grant to calculate the fair value of each award. We estimate an implicit service period for achieving performance criteria for each award.  We recognize the resulting fair value as expense over the implicit service period when we conclude that achieving the performance criteria is probable. We periodically review and update as appropriate our estimates of implicit service periods and conclusions on achieving the performance criteria. Performance Awards vest and common stock is issued upon achievement of the performance criteria.

8


 

Net Loss per Share



We compute basic net loss per share on the basis of the weighted-average number of common shares outstanding for the reporting period. We compute diluted net loss per share on the basis of the weighted-average number of common shares outstanding plus potential dilutive common shares outstanding using the treasury-stock method. Potential dilutive common shares consist of outstanding stock options.



We include the following in the calculation of basic and diluted net loss per share (in thousands, except per share data):



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three months ended

 

Nine months ended



September 30,

 

September 30,



2016

 

2015

 

2016

 

2015

Numerator:

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(3,518)

 

$

(3,671)

 

$

(12,328)

 

$

(9,628)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

Shares used in computing net loss per share, basic and diluted

 

45,742 

 

 

45,356 

 

 

45,603 

 

 

45,356 

Net loss per share, basic and diluted

$

(0.08)

 

$

(0.08)

 

$

(0.27)

 

$

(0.21)



 

 

 

 

 

 

 

 

 

 

 

Dilutive common shares excluded from net loss per share, diluted

 

17,024 

 

 

16,939 

 

 

17,957 

 

 

17,466 



 

 

 

 

 

 

 

 

 

 

 

We excluded options outstanding from the calculation of net loss per share, diluted because the effect of including options outstanding would have been anti-dilutive.



Income Taxes 



We make estimates and judgments in determining the need for a provision for income taxes, including the estimation of our taxable income or loss for each full fiscal year. In 2016, we adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting.  The adoption of this standard had no impact on our financial statements for 2016.



We have accumulated significant deferred tax assets that reflect the tax effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of certain deferred tax assets is dependent upon future earnings. We are uncertain about the timing and amount of any future earnings. Accordingly, we offset these deferred tax assets with a valuation allowance.



We may in the future determine that certain deferred tax assets will likely be realized, in which case we will reduce our valuation allowance in the period in which such determination is made. If the valuation allowance is reduced, we may recognize a benefit from income taxes in our Statement of Operations in that period.



We classify interest recognized pursuant to our deferred tax assets as interest expense, when appropriate. 





9


 

Note 3.  Cash, Cash Equivalents and Marketable Securities and Assets Measured at Fair Value



Our cash, cash equivalents and marketable securities are as follows (in thousands):



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Cash, Cash Equivalents and Marketable Securities



Amortized Cost

 

Unrealized Gains

 

Unrealized Losses

 

Estimated Fair Value

 

Accrued Interest

 

Total Value

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

403 

 

$

 —

 

$

 —

 

$

403 

 

$

 —

 

$

403 

Cash equivalents

 

17,062 

 

 

 —

 

 

 —

 

 

17,062 

 

 

 —

 

 

17,062 

Commercial paper

 

4,298 

 

 

 

 

 —

 

 

4,299 

 

 

 —

 

 

4,299 



$

21,763 

 

$

 

$

 —

 

$

21,764 

 

$

 —

 

$

21,764 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

21,213 

 

 

 

 

 —

 

$

21,214 

 

$

 —

 

$

21,214 

Marketable securities

 

550 

 

 

 —

 

 

 —

 

 

550 

 

 

 —

 

 

550 



$

21,763 

 

$

 

$

 —

 

$

21,764 

 

$

 —

 

$

21,764 

Maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Matures in one year or less

$

21,763 

 

$

 

$

 —

 

$

21,764 

 

$

 —

 

$

21,764 

Matures one to three years

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —



$

21,763 

 

$

 

$

 —

 

$

21,764 

 

$

 —

 

$

21,764 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

273 

 

$

 —

 

$

 —

 

$

273 

 

$

 —

 

$

273 

Cash equivalents

 

22,630 

 

 

 —

 

 

 —

 

 

22,630 

 

 

 —

 

 

22,630 

Commercial paper

 

8,396 

 

 

 

 

(1)

 

 

8,396 

 

 

 —

 

 

8,396 



$

31,299 

 

$

 

$

(1)

 

$

31,299 

 

$

 —

 

$

31,299 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

31,299 

 

$

 

$

(1)

 

$

31,299 

 

$

 —

 

$

31,299 

Marketable securities

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —



$

31,299 

 

$

 

$

(1)

 

$

31,299 

 

$

 —

 

$

31,299 

Maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Matures in one year or less

$

31,299 

 

$

 

$

(1)

 

$

31,299 

 

$

 —

 

$

31,299 

Matures one to three years

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —



$

31,299 

 

$

 

$

(1)

 

$

31,299 

 

$

 —

 

$

31,299 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We did not realize any gains or losses on our investments in marketable securities in 2016 or 2015. To date we have not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value.



Our assets measured at fair value on a recurring basis are as follows (in thousands):





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Level 1

 

Level 2

 

Level 3

 

Total

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

17,465 

 

$

 —

 

$

 —

 

$

17,465 

Commercial paper

 

 —

 

 

4,299 

 

 

 —

 

 

4,299 



$

17,465 

 

$

4,299 

 

$

 —

 

$

21,764 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

22,903 

 

$

 —

 

$

 —

 

$

22,903 

Commercial paper

 

 —

 

 

8,396 

 

 

 —

 

 

8,396 



$

22,903 

 

$

8,396 

 

$

 —

 

$

31,299 



 

 

 

 

 

 

 

 

 

 

 

There were no transfers between Level 1, Level 2 and Level 3 in 2016 or 2015.







10


 

Note 4.  Equity and Stock-Based Compensation Expense



Stockholders’ equity activity in 2016



During 2016, our common stock outstanding and stockholders’ equity (in thousands) changed as follows:





 

 

 

 



Common Stock

 

Stockholders' equity
(in thousands)

Balance at December 31, 2015

45,756,117 

 

$

29,367 

Non-cash stock-related compensation for:

 

 

 

 

Stock options for employees

 —

 

 

2,634 

Stock options for non-employees

 —

 

 

21 

Performance Awards and related non-cash compensation

485,000 

 

 

834 

Performance Awards related to statutory taxes

(99,182)

 

 

(214)

Other comprehensive income

 —

 

 

Net loss

 —

 

 

(12,328)

Balance at September 30, 2016

46,141,935 

 

$

20,315 



 

 

 

 

In April 2016, certain employees elected to receive common stock from vested Performance Awards net of statutory taxes. This net issuance resulted in fewer shares of common stock issued and used our cash to pay these taxes on behalf of employees.



Stock option and Performance Award activity in 2016



During 2016, stock options and unvested Performance Awards outstanding under our 2008 Equity Incentive Plan changed as follows:





 

 

 

 



 

 

 

 



 

Stock Options

 

Performance Awards

Outstanding as of December 31, 2015

 

18,515,254 

 

1,889,465 

Granted

 

355,000 

 

150,000 

Vested Performance Awards

 

 —

 

(485,000)

Canceled

 

(1,763,097)

 

 —

Outstanding as of September 30, 2016

 

17,107,157 

 

1,554,465 



 

 

 

 

The weighted average exercise price of options outstanding at September 30, 2016 was $3.60. As outstanding options vest over the current remaining vesting period of 2.4 years, we expect to recognize non-cash expense of $6.8 million. If and when outstanding Performance Awards vest, we would recognize non-cash expense of $4.7 million over the implicit service period.



11


 

Stock-based Compensation Expense in 2016



During 2016, our non-cash stock-related compensation expenses were as follows (in thousands):



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three months ended

 

Nine months ended



September 30,

 

September 30,



2016

 

2015

 

2016

 

2015

Research and development

 

 

 

 

 

 

 

 

 

 

 

Vesting of stock options

$

318 

 

$

280 

 

$

997 

 

$

904 

Vesting of Performance Awards

 

 —

 

 

 —

 

 

430 

 

 

 —



 

318 

 

 

280 

 

 

1,427 

 

 

904 

General and administrative

 

 

 

 

 

 

 

 

 

 

 

Vesting of stock options

 

527 

 

 

515 

 

 

1,658 

 

 

1,735 

Vesting of Performance Awards

 

 —

 

 

 —

 

 

404 

 

 

 —



 

527 

 

 

515 

 

 

2,062 

 

 

1,735 

Total non-cash stock-based compensation expenses

 

 

 

 

 

 

 

 

 

 

 

Vesting of stock options

 

845 

 

 

795 

 

 

2,655 

 

 

2,639 

Vesting of Performance Awards

 

 —

 

 

 —

 

 

834 

 

 

 —



$

845 

 

$

795 

 

$

3,489 

 

$

2,639 



 

 

 

 

 

 

 

 

 

 

 

Non-cash stock-related compensation expense for vesting of Performance Awards in the nine months ended September 30, 2016 resulted from the March 2016 resubmission of the NDA for REMOXY® ER (oxycodone capsules CII).





At-the-market equity program



In December 2015 we established an at-the-market equity program for the sale of up to 10.0 million shares of our common stock. We have not yet issued any shares under the program. At September 30, 2016, we have deferred financing costs of $0.1 million paid in connection with this program.







Note 5.  Income Taxes 



We did not provide for income taxes in the third quarter or first nine months of 2016 because we have projected a net loss for the full year 2016.





Note 6.  Commitments



We conduct our product research and development programs through a combination of internal and collaborative programs that include, among others, arrangements with universities, contract research organizations and clinical research sites. We have contractual arrangements with these organizations that are cancelable. Our obligations under these contracts are largely based on services performed.



We have a non-cancelable operating lease for approximately 6,000 square feet of office space in Austin, Texas that expires in December 2017.  Minimum lease payments are as follows (in thousands):





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



2016

 

2017

 

Total

Minimum lease payments

$

146 

 

$

147 

 

$

293 



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 









12


 

Note 7.  Legal Proceedings



KB Partners I, L.P., Individually and On Behalf of All Others Similarly Situated v. Pain Therapeutics, Inc., Remi Barbier, Nadav Friedmann and Peter S. Roddy, No. 11-cv-01034 (W.D. Tex.)



On December 2, 2011, a purported class action was filed against us and our executive officers in the U.S. District Court for the Western District of Texas. This complaint alleges, among other things, violations of Section 10(b), Rule 10b-5, and Section 20(a) of the Exchange Act arising out of allegedly untrue or misleading statements of material facts made by us regarding REMOXY’s development and regulatory status during the purported class period, February 3, 2011 through June 23, 2011. At a preliminary settlement conference on August 26, 2016, the Court approved a Stipulated Settlement Agreement and ordered a Final Settlement Hearing for December 16, 2016.





Note 8.  Recently Issued Accounting Pronouncements



We reviewed recently issued accounting pronouncements and have adopted or plan to adopt those that are applicable to us. We do not expect the adoption of these pronouncements to have a material impact on our financial position, results of operations or cash flows. 





13


 

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



This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included elsewhere in this quarterly report. Operating results are not necessarily indicative of results that may occur in future periods.



This quarterly report contains certain statements that are considered forward-looking statements within the meaning of the Private Securities Reform Act of 1995. We intend that such statements be protected by the safe harbor created thereby. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will” and “would” or the negatives of these terms or other comparable terminology.



The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. Forward-looking statements involve risks and uncertainties and our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. Examples of such forward-looking statements include, but are not limited to statements about:



·

actions and studies that are needed to potentially support obtaining approval of the New Drug Application, or NDA for REMOXY® ER (oxycodone capsules CII) with label claims on routes of abuse, by the U.S. Food and Drug Administration, or FDA;

·

our plans to rely on third parties, including Durect Corporation, or Durect, Noramco, Inc., or Noramco, and Mallinckrodt, Inc., or Mallinckrodt, to supply us with excipients and active pharmaceutical ingredients and to manufacture REMOXY;

·

discussions with potential strategic partners for the development and commercialization of REMOXY;

·

expectations with regard to the data, materials and information provided to us by Pfizer Inc., or Pfizer, related to Pfizer’s development activities with respect to REMOXY;

·

the outcome of research and development activities, including, without limitation, development activities for FENROCK™ and potential formulation of additional dosage forms of our drug candidates;

·

the potential benefits of our drug candidates;

·

the utility of protection of our intellectual property;

·

expected future sources of revenue and capital and increasing cash needs;

·

potential competitors or competitive products;

·

market acceptance of our drug candidates and potential drug candidates;

·

expectations regarding trade secrets, technological innovations, licensing agreements and outsourcing of certain business functions;

·

expenses increasing, interest income decreasing or fluctuations in our operating results;

·

operating losses and anticipated operating and capital expenditures;

·

expected uses of capital resources;

·

expectations regarding the issuance of shares of common stock to employees pursuant to equity compensation awards net of employment taxes;

·

anticipated hiring and development of our internal systems and infrastructure;

·

the sufficiency of our current resources to fund our operations over the next twelve months; and

·

assumptions and estimates used for our disclosures regarding stock-based compensation.



Such forward-looking statements involve risks and uncertainties, including, but not limited to, those risks and uncertainties relating to:



·

difficulties or delays in completing development activities needed to potentially obtain regulatory approval of the NDA for REMOXY, including the potential for requests by the FDA for additional data which may require an extended period of time to obtain and submit;

·

having or obtaining sufficient resources for the successful development and commercialization of REMOXY;

·

the quantity, quality or sufficiency of the data, materials and information transferred to us by Pfizer regarding the REMOXY development program;

14


 

·

continuing discussions with potential strategic partners for the development and commercialization of REMOXY;

·

the successful development of other drug candidates, independently as well as pursuant to our other collaboration agreements, and the continuation of such agreements;

·

difficulties or delays in development, testing, clinical trials (including patient enrollment), regulatory authorization or approval, production and commercialization of our drug candidates;

·

unexpected adverse side effects or inadequate therapeutic efficacy of our drug candidates that could slow or prevent product approval (including the risk that current and past results of clinical trials are not indicative of future results of clinical trials) or potential post-approval market acceptance;

·

the uncertainty of protection of our intellectual property rights or trade secrets;

·

potential infringement of the intellectual property rights of third parties;

·

pursuing in-license and acquisition opportunities;

·

maintenance or third party funding of our collaboration and license agreements;

·

legislation or regulatory actions affecting product pricing, reimbursement or access;

·

significant breakdown or interruption of our information technology and infrastructure;

·

significant issues that may arise related to outsourcing certain preclinical studies, clinical trials and formulation and manufacturing activities;

·

hiring and retaining personnel; and

·

our financial position and our ability to obtain additional financing if necessary.



In addition, such statements are subject to the risks and uncertainties discussed in the "Risk Factors" section and elsewhere in this document. 





Overview



Pain Therapeutics, Inc. develops proprietary drugs that offer significant improvements to patients and healthcare professionals. We generally focus our drug development efforts on disorders of the nervous system, such as chronic pain.



Our expertise consists of developing new drug candidates and guiding these through various regulatory and development pathways in preparation for their eventual commercialization. By necessity, the conduct of drug development is complex, lengthy, expensive and risky. The FDA has not yet established the safety or efficacy of our drug candidates.

 

For over a decade, we have pioneered technology, tools and techniques that enable the development of Abuse-Deterrent Formulations, or ADFs. ADFs are intended to make opioid drugs difficult to abuse yet provide steady pain relief when used appropriately by patients. ADFs are intended to help in the fight against prescription drug abuse.



Opioid drugs, such as oxycodone, are an important treatment option for patients with severe chronic pain. However, misuse, abuse and diversion of these prescription drugs remains a serious, persistent problem. Nearly 19,000 people died from opioid overdose in 2014, according to the NIH’s National Institute on Drug Abuse.



Our lead drug candidate is called REMOXY, a proprietary, abuse-deterrent, oral, extended-release formulation of oxycodone (CII). We developed REMOXY to make oxycodone difficult to abuse yet provide 12 hours of steady pain relief when used appropriately by patients.

In particular, REMOXY’s thick, sticky, high-viscosity formulation may deter unapproved routes of drug administration, such as injection, snorting or smoking. REMOXY targets the $2.5 billion marketplace for long-acting formulations of oxycodone. We own exclusive, worldwide rights to REMOXY.



In March 2016, we  resubmitted to the FDA the NDA for REMOXY. This NDA has priority review status with the FDA.  In April 2016, the FDA determined that the NDA for REMOXY is sufficiently complete to permit a substantive review. On May 19, 2016, we announced that the FDA planned to hold an Advisory Committee meeting to review the NDA for REMOXY. On July 1, 2016, we announced that the FDA had determined that an Advisory Committee meeting for REMOXY was unnecessary and would not be held. 



15


 

In September 2016, we received a Complete Response Letter, or CRL from the FDA on the resubmission of NDA for REMOXY ER. The CRL informed us that the NDA for REMOXY ER could not be approved in its present form and specifies additional actions and data that are needed for drug approval. The CRL focuses on the abuse-deterrent properties of REMOXY ER and proposed drug labeling. The CRL makes no mention of clinical safety, drug efficacy, manufacturing, stability, bioequivalence or any other issues from a prior Complete Response Letter. 



The CRL focuses on the actions and studies that are needed in order to obtain approval of REMOXY ER with label claims on three routes of abuse (i.e., injection, inhalation and snorting). In conducting the following studies, we expect to generally compare REMOXY ER vs. one or more commercially available oxycodone ER drug product:



·

To support a potential drug label claim against abuse by injection: Repeat an injectability/syringeability study using thin films of drug, smaller volumes of solvents, additional mixed solvents and alternative extraction methods and syringe filter.

·

To support a potential drug label claim against abuse by inhalation: Repeat a volatilization study using the same thickness for each drug to increase surface area.

·

To support a potential drug label claim against abuse by snorting: Conduct an intranasal abuse potential study in human volunteers (i.e., not the animal data we had submitted) with drug applied directly inside the human nasal cavity.



In addition, we had proposed in the REMOXY NDA a label claim against abuse by chewing. Our proposal was based on clinical results of an oral human abuse potential study that met all four co-primary endpoints with statistical significance and that also met several, but not all, secondary endpoints. The CRL asks us to submit a revised proposed label to indicate results of this study do not support a label claim against abuse by chewing. 



These actions may take approximately a year to conduct and may cost approximately $5 million, pending discussions with the FDA and outside clinical and regulatory consultants.



The NDA includes five dosage strengths of REMOXY (5, 10, 20, 30, 40 mg). The proposed indication for REMOXY is “for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate. 



The safety and clinical efficacy of REMOXY is supported by multiple studies, including a successful Phase III efficacy program conducted under a FDA Special Protocol Assessment, or SPA.



We have yet to generate any revenues from product sales. We have an accumulated deficit of $143.0 million at September 30, 2016. These losses have resulted principally from costs incurred in connection with research and development activities, salaries and other personnel-related costs and general corporate expenses. Research and development activities include costs of preclinical and clinical trials as well as clinical supplies associated with our drug candidates. Salaries and other personnel-related costs include non-cash stock-based compensation associated with options and other equity awards granted to employees and non-employees. Our operating results may fluctuate substantially from period to period as a result of the timing of preclinical activities, enrollment rates of clinical trials for our drug candidates and our need for clinical supplies.



We expect to continue to use significant cash resources in our operations for the next several years. Our cash requirements for operating activities and capital expenditures may increase substantially in the future as we:



·

conduct preclinical and clinical trials for our drug candidates;

·

seek regulatory approvals for our drug candidates;

·

develop, formulate, manufacture and commercialize our drug candidates;

·

implement additional internal systems and develop new infrastructure;

·

acquire or in-license additional products or technologies, or expand the use of our technology;

·

maintain, defend and expand the scope of our intellectual property; and

·

hire additional personnel.



Product revenue will depend on our ability to receive regulatory approvals for, and successfully market, our drug candidates. If our development efforts result in regulatory approval and successful commercialization of our drug candidates, we will generate revenue from direct sales of our drugs and/or, if we license our drugs to future

16


 

collaborators, from the receipt of license fees and royalties from sales of licensed products. We conduct our research and development programs through a combination of internal and collaborative programs. We rely on arrangements with universities, our collaborators, contract research organizations and clinical research sites for a significant portion of our product development efforts.



We focus substantially all of our research and development efforts in the area of neurology. The following table summarizes expenses by category for research and development efforts (in thousands):



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three months ended

 

Nine months ended



September 30,

 

September 30,



2016

 

2015

 

2016

 

2015

Compensation

$

479 

 

$

683 

 

$

2,838 

 

$

2,091 

Contractor fees and supplies

 

1,814 

 

 

1,443 

 

 

4,346 

 

 

2,828 

Other common costs

 

364 

 

 

230 

 

 

657 

 

 

561 



$

2,657 

 

$

2,356 

 

$

7,841 

 

$

5,480 



 

 

 

 

 

 

 

 

 

 

 

Contractor fees and supplies generally include expenses for preclinical studies and clinical trials and costs for formulation and manufacturing activities. Other common costs include the allocation of common costs such as facilities. 



Our technology has been applied across certain of our drug candidates. Data, know-how, personnel, clinical results, research results and other matters related to the research and development of any one of our drug candidates also relate to, and further the development of, our other drug candidates. As a result, costs allocated to a specific drug candidate may not necessarily reflect the actual costs surrounding research and development of that drug candidate due to cross application of the foregoing.



Estimating the dates of completion of clinical development, and the costs to complete development, of our drug candidates would be highly speculative, subjective and potentially misleading. Pharmaceutical products take a significant amount of time to research, develop and commercialize. The clinical trial portion of the development of a new drug alone usually spans several years. We expect to reassess our future research and development plans based on our review of data we receive from our current research and development activities. The cost and pace of our future research and development activities are linked and subject to change.



On December 2, 2011, a purported class action was filed against us and our executive officers in the U.S. District Court for the Western District of Texas. This complaint alleges, among other things, violations of Section 10(b), Rule 10b-5, and Section 20(a) of the Exchange Act arising out of allegedly untrue or misleading statements of material facts made by us regarding REMOXY’s development and regulatory status during the purported class period, February 3, 2011 through June 23, 2011. At a preliminary settlement conference on August 26, 2016, the Court approved a Stipulated Settlement Agreement and ordered a Final Settlement Hearing for December 16, 2016.





Critical Accounting Policies



The preparation of our financial statements in accordance with United States generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and interest income in our financial statements and accompanying notes. We evaluate our estimates on an ongoing basis, including those estimates related to agreements, research collaborations and investments. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The following items in our financial statements require significant estimates and judgments:



·

Stock-based compensationWe recognize non-cash expense for the fair value of all stock options and other share-based awards. We use the Black-Scholes option valuation model to calculate the fair value of stock options, using the single-option award approach and straight-line attribution method. For options granted to employees and directors, we recognize the resulting fair value as expense on a straight-line basis over the vesting period of each respective stock option, generally four years. For options granted to non-employees,

17


 

we remeasure the fair value expense using Black-Scholes each reporting period.



We have granted share-based awards that vest upon achievement of certain performance criteria, or Performance Awards. We multiply the number of Performance Awards by the fair market value of our common stock on the date of grant to calculate the fair value of each award. We estimate an implicit service period for achieving performance criteria for each award. We recognize the resulting fair value as expense over the implicit service period when we conclude that achieving the performance criteria is probable. We periodically review and update as appropriate our estimates of implicit service periods and conclusions on achieving the performance criteria. Performance Awards vest and common stock is issued upon achievement of the performance criteria.



·

Income Taxes.  We make estimates and judgments in determining the need for a provision for income taxes, including the estimation of our taxable income or loss for each full fiscal year. We have accumulated significant deferred tax assets that reflect the tax effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of deferred tax assets is dependent upon future earnings, if any. We are uncertain as to the timing and amount of any future earnings. Accordingly, we offset these deferred tax assets with a valuation allowance. We may in the future determine that our deferred tax assets will likely be realized, in which case we will reduce our valuation allowance in the quarter in which such determination is made. If the valuation allowance is reduced, we may recognize a benefit from income taxes in our statement of operations in that period. We classify interest recognized in connection with our tax positions as interest expense, when appropriate.





Results of Operations - Three and nine months ended September 30, 2016 and 2015 



Research and Development Expense



Research and development expense consists primarily of costs of drug development work associated with our drug candidates, including:



·

preclinical testing,

·

clinical trials,

·

clinical supplies and related formulation and design costs, and

·

compensation and other personnel-related expenses.



Research and development expenses increased to $2.7 million in the third quarter of 2016 from $2.3 million in the third quarter of 2015 and increased to $7.8 million in the first nine months of 2016 from $5.5 million to the first nine months of 2015, primarily due to increased expenses related to the REMOXY NDA resubmission, offset in part by receipt of NIH grant funding recorded as a reduction in research and development expense.  



Research and development expenses included non-cash stock-related compensation expense of $0.3 million in both the third quarter of 2016 and the third quarter of 2015,  $1.4 million in the first nine months of 2016 and $0.9 million in the first nine months of 2015. Non-cash stock-related compensation expense in the first nine months of 2016 included $0.4 million related to Performance Awards associated with the REMOXY NDA resubmission.



We expect research and development expenses to fluctuate over the next several years as we continue our development efforts. We expect our development efforts to result in our drug candidates progressing through various stages of clinical trials. Our research and development expenses may fluctuate from period to period due to the timing and scope of our development activities and the results of clinical trials and preclinical studies. We also expect non-cash equity-related expenses to increase in the future.



General and Administrative Expense



General and administrative expense consists primarily of compensation and other general corporate expenses. General and administrative expenses decreased to $0.9 million in the third quarter of 2016 from $1.3 million in the third quarter of 2015, primarily due to lower compensation expenses in the third quarter of 2016 compared to the third

18


 

quarter of 2015. General and administrative expense increased to $4.6 million in the first nine months of 2016 from $4.2 million to the first nine months of 2015, primarily due to higher non-cash equity-related expenses. 



General and administrative expenses included non-cash equity-related compensation expense of $0.5 million in the both the third quarter of 2016 and the third quarter of 2015, $2.1 million in the first nine months of 2016, and $1.7 million in the first nine months of 2015. Non-cash stock-related compensation expense in the first nine months of 2016 included $0.4 million related to Performance Awards associated with the REMOXY NDA resubmission.



We expect general and administrative expenses to increase over the next several years in connection with support of pre-commercialization and commercialization activities for our drug candidates. The increase may fluctuate from period to period due to the timing and scope of these activities and the results of clinical trials and preclinical studies. We also expect non-cash equity-related expenses to increase in the future.



Interest Income



Interest income increased to $23,000 in the third quarter of 2016 from $15,000 in the third quarter of 2015 and to $86,000 in the first nine months of 2016 from $40,000 in the first nine months of 2015, primarily due to higher prevailing interest rates on our investments.





Liquidity and Capital Resources



Since inception, we have financed our operations primarily through public and private stock offerings, payments received under collaboration agreements and interest earned on our investments. We intend to continue to use our capital resources to fund research and development activities, capital expenditures, working capital requirements and other general corporate purposes. As of September 30, 2016, cash, cash equivalents and marketable securities were $21.8 million.



Net cash used in operating activities increased to $9.2 million for the first nine months of 2016 from $5.5 million for the first nine months of 2015, primarily due to higher research and development expenses in the first nine months of 2016 compared to the first nine months of 2015, offset in part by changes in other balance sheet accounts. 



Net cash used by investing activities was $0.6 million for the first nine months of 2016 and $1.1 million for the first nine months of 2015. Investing activities in both 2016 and 2015 consisted primarily of purchases and maturities of marketable securities, as well as purchases of equipment.



Net cash used by financing activities of $0.3 million in the first nine months of 2016 resulted primarily from issuing shares of our common stock to employees for vested Performance Awards net of statutory employment taxes. As a result, we issued fewer shares of common stock and used cash to pay statutory taxes on behalf of employees.



Realization of our other deferred tax assets is dependent on future earnings, if any. We are uncertain about the timing and amount of any future earnings. Accordingly, we offset these net deferred tax assets with a valuation allowance.



We have a non-cancelable operating lease for approximately 6,000 square feet of office space in Austin, Texas that expires in December 2017.  Minimum lease payments are as follows (in thousands):



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



2016

 

2017

 

Total

Minimum lease payments

$

146 

 

$

147 

 

$

293 



 

 

 

 

 

 

 

 



We have license agreements that require us to make milestone payments upon the successful achievement of milestones, including clinical milestones. Our license agreements also require us to pay certain royalties to our licensors if we succeed in fully commercializing products under these license agreements. All of these potential future payments are cancelable as of September 30, 2016. Our formulation agreement with Durect Corporation, or Durect, obligates us to make certain milestone payments upon achieving clinical milestones and regulatory milestones and pay royalties on related drug sales.



19


 

Our employees have Performance Awards that vest upon certain conditions. If these Performance Awards vest, we may issue the employees shares of our common stock net of statutory employment taxes. This net issuance would result in fewer shares of common stock issued and uses our cash to pay these taxes on behalf of employees.  The use of cash could be higher or lower, depending on the fair value of our common stock on the date the Performance Awards vest.



We have an accumulated deficit of $143.0 million at September 30, 2016. We expect our cash requirements to be significant in the future. The amount and timing of our future cash requirements will depend on regulatory and market acceptance of our drug candidates, the resources we devote to researching and developing, formulating, manufacturing, commercializing and supporting our products and other corporate needs. We believe that our current resources should be sufficient to fund our operations for at least the next 12 months. We may seek additional future funding through public or private financing within this timeframe, if such funding is available and on terms acceptable to us. 





Off-balance Sheet Arrangements



As of September 30, 2016, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. Therefore, we are not materially exposed to financing, liquidity, market or credit risk that could arise if we had engaged in these relationships. We do not have relationships or transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties.





Item 3.    Quantitative and Qualitative Disclosures About Market Risk



The primary objective of our cash investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the interest rate later rises, we expect the fair value of our investment will decline. A hypothetical 50 basis point increase in interest rates reduces the fair value of our available-for-sale securities at September 30, 2016 by approximately $1,000.  To minimize this risk, we intend to maintain our portfolio of cash equivalents and marketable securities in a variety of securities, including commercial paper, government and non-government debt securities and/or money market funds that invest in such securities. We are not aware of holdings of derivative financial or commodity instruments.



As of September 30, 2016, our investments consisted of investments in corporate obligations, money market accounts and checking funds with variable market rates of interest.  We believe our credit risk is immaterial. We measure our cash equivalents and marketable securities at fair value on a recurring basis and have significant observable inputs where there are identical or comparable assets in the market to use in establishing our fair value measurements. We use significant observable inputs that include but are not limited to benchmark yields, reported trades, broker/dealer quotes and issuer spreads. We consider these inputs to be Level 2 inputs. Generally, the types of instruments we invest in are not traded on a market such as the NASDAQ Global Market, which we would consider to be Level 1 inputs. We do not have any investments that would require inputs considered to be Level 3. We use the bid price to establish fair value where a bid price is available.





Item 4. Controls and Procedures



Evaluation of disclosure controls and procedures.  Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the

20


 

Securities and Exchange Commission, or SEC, rules and forms and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures.



Changes in internal control over financial reporting.  There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





PART II – OTHER INFORMATION



Item 1.  Legal Proceedings



KB Partners I, L.P., Individually and On Behalf of All Others Similarly Situated v. Pain Therapeutics, Inc., Remi Barbier, Nadav Friedmann and Peter S. Roddy, No. 11-cv-01034 (W.D. Tex.)



On December 2, 2011, a purported class action was filed against us and our executive officers in the U.S. District Court for the Western District of Texas. This complaint alleges, among other things, violations of Section 10(b), Rule 10b-5, and Section 20(a) of the Exchange Act arising out of allegedly untrue or misleading statements of material facts made by us regarding REMOXY’s development and regulatory status during the purported class period, February 3, 2011 through June 23, 2011. At a preliminary settlement conference on August 26, 2016, the Court approved a Stipulated Settlement Agreement and ordered a Final Settlement Hearing for December 16, 2016.





Item 1A.Risk Factors



Our future operating results may vary substantially from anticipated results due to a number of factors, many of which are beyond our control. The following discussion highlights some of these factors and the possible impact of these factors on future results of operations. You should carefully consider these factors before making an investment decision. If any of the following factors actually occur, our business, financial condition or results of operations could be harmed. In that case, the price of our common stock could decline, and you could experience losses on your investment in our common stock.



Clinical and Regulatory Risks

If we fail to obtain the necessary regulatory approvals, or if such approvals are limited, we and our collaborators will not be allowed to commercialize our drug candidates, and we will not generate product revenues.



Satisfaction of all regulatory requirements for commercialization of a drug candidate typically takes many years, is dependent upon the type, complexity and novelty of the drug candidate, and requires the expenditure of substantial resources for research and development. In December 2008, we received from the FDA a Complete Response Letter for the NDA for REMOXY. In this Complete Response Letter, the FDA indicated that additional non-clinical data was required to support the approval of REMOXY. However, the FDA did not request or recommend additional clinical efficacy studies prior to approval. In March 2009, King Pharmaceuticals, Inc., or King, assumed sole responsibility for the regulatory approval of REMOXY. In December 2010, King resubmitted the NDA for REMOXY. In June 2011, we and Pfizer announced that King received a Complete Response Letter from the FDA in response to King’s resubmission of the REMOXY NDA. The FDA’s Complete Response Letter raised concerns related to, among other matters, the Chemistry, Manufacturing, and Controls section of the NDA for REMOXY. Certain drug lots showed inconsistent release performance during in vitro testing. Pfizer completed work designed to address the June 2011 Complete Response Letter. On April 21, 2015, we announced that we resumed responsibility for REMOXY under the terms of a letter agreement with Pfizer. The letter agreement was entered into within the scope of the previously disclosed provisions of the Collaboration Agreement between us and Pfizer relating to the return of REMOXY.



We believe Pfizer has now transferred to us its data, materials, capital equipment and other assets related to REMOXY. Pfizer and the FDA had discussed and agreed to a regulatory plan to refile the NDA for REMOXY. The FDA agreed that we may follow this plan for the NDA for REMOXY.



In March 2016, we resubmitted to the FDA the NDA for REMOXY. This NDA has priority review status with

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the FDA. In April 2016, the FDA determined that the NDA for REMOXY is sufficiently complete to permit a substantive review. On May 19, 2016, we announced that the FDA planned to hold an Advisory Committee meeting to review the NDA for REMOXY. On July 1, 2016, we announced that the FDA had determined that an Advisory Committee meeting for REMOXY was unnecessary and would not be held.



In September 2016, we received a CRL from the FDA on the resubmission of NDA for REMOXY ER. The CRL informs that the NDA for REMOXY ER could be approved in its present form and specifies additional actions and data that are needed for drug approval. The CRL focuses on the abuse-deterrent properties of REMOXY ER and proposed drug labeling.



There can be no assurance that the FDA will approve an NDA for REMOXY or that the FDA will not require submission of additional clinical or non-clinical data. Obtaining data from such studies (even if completed) that is insufficient to support approval of REMOXY, or any adverse decisions by the FDA (including any decision by the FDA to require additional clinical or non-clinical data) may significantly delay or prevent the potential approval of REMOXY.



Our research and clinical approaches may not lead to drugs that the FDA considers safe for humans and effective for indicated uses we are studying. The FDA may require additional studies, in which case we or our collaborators would have to expend additional time and resources and would likely delay the date of potentially receiving regulatory approval. 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 our regulatory review. Delays in obtaining regulatory approvals would:

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delay commercialization of, and product revenues from, our drug candidates; and

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diminish the competitive advantages that we may have otherwise enjoyed, which would have an adverse effect on our oper