2017 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, 2017

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, small reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company, and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check one):



 



Large accelerated filer 

Accelerated filer



Non-accelerated filer 

Smaller reporting company   



 

Emerging growth company 



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

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

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

6,595,509



Shares Outstanding as of October 27, 2017



 



 

1


 





PAIN THERAPEUTICS, INC.



TABLE OF CONTENTS





 

 



 

Page No.

PART I.

FINANCIAL INFORMATION

 



 

 

  Item 1.

Financial Statements

 



 

 



Condensed Balance Sheets – September 30, 2017 and December 31, 2016

3



 

 



Condensed Statements of Operations – Three and Nine Months Ended September 30, 2017 and September 30, 2016

4



 

 



Condensed Statements of Comprehensive Income (Loss) – Three and Nine Months Ended September 30, 2017 and September 30, 2016

5



 

 



Condensed Statements of Cash Flows – Nine Months Ended September 30, 2017 and September 30, 2016

6



 

 



Notes to Condensed Financial Statements

7



 

 

  Item 2.

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

13



 

 

  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.



 

 

 

 

BALANCE SHEETS

(in thousands, except share and per share data)



 

 

 

 



September 30,

December 31,



2017

2016



 

 

 

 

ASSETS

Current assets:

 

 

 

 

Cash and cash equivalents

$

11,916 

$

16,615 

Marketable securities

 

 —

 

2,099 

Other current assets

 

288 

 

356 

Total current assets

 

12,204 

 

19,070 

Property and equipment, net

 

173 

 

232 

Total assets

$

12,377 

$

19,302 



 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

 

 

 

 

Accounts payable

$

712 

$

303 

Accrued development expense

 

 —

 

27 

Accrued compensation and benefits

 

298 

 

335 

Total current liabilities

 

1,010 

 

665 

Noncurrent liabilities

 

 —

 

 —

Total liabilities

 

1,010 

 

665 

Commitments and contingencies

 

 

 

 

Stockholders' equity:

 

 

 

 

Preferred stock

 

 —

 

 —

Common stock

 

 

Additional paid-in capital

 

166,342 

 

164,118 

Accumulated other comprehensive income

 

 —

 

 —

Accumulated deficit

 

(154,982)

 

(145,488)

Total stockholders' equity

 

11,367 

 

18,637 

Total liabilities and stockholders' equity

$

12,377 

$

19,302 



 

 

 

 





See accompanying notes to condensed financial statements.

3


 







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

PAIN THERAPEUTICS, INC.



 

 

 

 

 

 

 

 

 

 

 

STATEMENTS OF OPERATIONS

(in thousands, except per share data)



 

 

 

 

 

 

 

 

 

 

 



Three months ended

 

Nine months ended



September 30,

 

September 30,



2017

 

2016

 

2017

 

2016

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Research and development

$

1,619 

 

$

2,657 

 

$

6,071 

 

$

7,841 

General and administrative

 

977 

 

 

884 

 

 

3,455 

 

 

4,573 

Total operating expenses

 

2,596 

 

 

3,541 

 

 

9,526 

 

 

12,414 

Operating loss

 

(2,596)

 

 

(3,541)

 

 

(9,526)

 

 

(12,414)

Interest income

 

 

 

23 

 

 

33 

 

 

86 

Net loss

$

(2,590)

 

$

(3,518)

 

$

(9,493)

 

$

(12,328)

Net loss per share, basic and diluted

$

(0.40)

 

$

(0.54)

 

$

(1.45)

 

$

(1.89)

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

 

6,538 

 

 

6,535 

 

 

6,537 

 

 

6,515 



 

 

 

 

 

 

 

 

 

 

 











See accompanying notes to condensed financial statements.

4


 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

PAIN THERAPEUTICS, INC.



 

 

 

 

 

 

 

 

 

 

 

 

STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)



 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended

 

Nine months ended



 

September 30,

 

September 30,



 

2017

 

2016

 

2017

 

2016

Net loss

 

$

(2,590)

 

$

(3,518)

 

$

(9,493)

 

$

(12,328)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains (losses) on marketable securities

 

 

 —

 

 

 

 

 —

 

 

Comprehensive loss

 

$

(2,590)

 

$

(3,517)

 

$

(9,493)

 

$

(12,327)



 

 

 

 

 

 

 

 

 

 

 

 











See accompanying notes to condensed financial statements.

5


 







 

 

 

 

 



 

 

 

 

 

PAIN THERAPEUTICS, INC.



 

 

 

 

 

STATEMENTS OF CASH FLOWS

(in thousands)



 

 

 

 

 



Nine months ended



September 30,



2017

 

2016

Cash flows from operating activities:

 

 

 

 

 

Net loss

$

(9,493)

 

$

(12,328)

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

 

 

 

 

 

Non-cash stock-based compensation

 

2,223 

 

 

3,489 

Depreciation and amortization

 

51 

 

 

41 

Non-cash net interest income

 

(2)

 

 

(3)

Changes in operating assets and liabilities:

 

 

 

 

 

Other current assets

 

68 

 

 

(18)

Accounts payable

 

417 

 

 

49 

Accrued development expense

 

(27)

 

 

(150)

Accrued compensation and benefits

 

(37)

 

 

(283)

Net cash used in operating activities

 

(6,800)

 

 

(9,203)

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

 —

 

 

(76)

Purchases of marketable securities

 

(399)

 

 

(2,046)

Sales of marketable securities

 

400 

 

 

 —

Maturities of marketable securities

 

2,100 

 

 

1,500 

Net cash provided (used in) investing activities

 

2,101 

 

 

(622)

Cash flows from 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

 

(4,699)

 

 

(10,085)

Cash and cash equivalents at beginning of period

 

16,615 

 

 

31,299 

Cash and cash equivalents at end of period

$

11,916 

 

$

21,214 



 

 

 

 

 











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. 



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, 2017 are not necessarily indicative of the results that may be expected for any other interim period or for the year 2017.  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, 2016. 



On November 16, 2016, we received a letter from the Listing Qualifications staff of Nasdaq (the “Staff”) notifying us that, for the previous 30 consecutive business days, the bid price for our common stock had closed below the minimum $1.00 per share requirement (the “Minimum Price Requirement”) under NASDAQ’s Listing Rule 5450(a)(1) for continued listing on The Nasdaq Global Market. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), if during the 180 calendar days following the date of the notification, or prior to May 15, 2017, the closing bid price of our common stock is at or above $1.00 for a minimum of 10 consecutive business days, the Staff will provide us with written confirmation of compliance. On May 24, 2017, we received a letter from the Staff indicating that we had regained compliance with the $1.00 minimum closing bid requirement following completion of the reverse stock split described below.



On May 4, 2017, following stockholder approval, our board of directors approved a reverse stock split ratio of 7-for-1. On May 4, 2017, we filed with the Secretary of State of the State of Delaware a Certificate of Amendment of the Company’s Amended and Restated Certificate of Incorporation to effect the 7-for-1 reverse stock split of our outstanding shares of common stock. The number of outstanding shares of common stock on the date of the reverse split was reduced from 46.1 million to 6.6 million shares. Our common stock began trading on the NASDAQ Global Market on a split-adjusted basis when the market opened for trading on May 10, 2017. As a result, all common stock share amounts included in these condensed consolidated financial statements have been retroactively reduced by a factor of seven, and all common stock per share amounts have been increased by a factor of seven, with the exception of our common stock par value.



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.



7


 

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.



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” 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 nine  months ended September 30, 2017 and 2016, we received $0.9 million and $1.3 million respectively, 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.



8


 

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.



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,

 



 

2017

 

2016

 

2017

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,590)

 

$

(3,518)

 

$

(9,493)

 

$

(12,328)

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

6,538 

 

 

6,535 

 

 

6,537 

 

 

6,515 

 

Net loss per share, basic and diluted

 

$

(0.40)

 

$

(0.54)

 

$

(1.45)

 

$

(1.89)

 

Dilutive common shares excluded from net loss per share, diluted

 

 

2,436 

 

 

2,432 

 

 

2,414 

 

 

2,565 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



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.



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 at September 30, 2017 and December 31, 2016 were 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, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

451 

 

$

 —

 

$

 —

 

$

451 

 

$

 —

 

$

451 

Cash equivalents

 

11,465 

 

 

 —

 

 

 —

 

 

11,465 

 

 

 —

 

 

11,465 

Commercial paper

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —



$

11,916 

 

$

 —

 

$

 —

 

$

11,916 

 

$

 —

 

$

11,916 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

11,916 

 

 

 —

 

 

 —

 

$

11,916 

 

$

 —

 

$

11,916 

Marketable securities

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —



$

11,916 

 

$

 —

 

$

 —

 

$

11,916 

 

$

 —

 

$

11,916 

Maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Matures in one year or less

$

11,916 

 

$

 —

 

$

 —

 

$

11,916 

 

$

 —

 

$

11,916 

Matures one to three years

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —



$

11,916 

 

$

 —

 

$

 —

 

$

11,916 

 

$

 —

 

$

11,916 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

1,434 

 

$

 —

 

$

 —

 

$

1,434 

 

$

 —

 

$

1,434 

Cash equivalents

 

12,783 

 

 

 —

 

 

 —

 

 

12,783 

 

 

 —

 

 

12,783 

Commercial paper

 

4,497 

 

 

 —

 

 

 —

 

 

4,497 

 

 

 —

 

 

4,497 



$

18,714 

 

$

 —

 

$

 —

 

$

18,714 

 

$

 —

 

$

18,714 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

16,615 

 

 

 —

 

 

 —

 

$

16,615 

 

$

 —

 

$

16,615 

Marketable securities

 

2,099 

 

 

 —

 

 

 —

 

 

2,099 

 

 

 —

 

 

2,099 



$

18,714 

 

$

 —

 

$

 —

 

$

18,714 

 

$

 —

 

$

18,714 

Maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Matures in one year or less

$

18,714 

 

$

 —

 

$

 —

 

$

18,714 

 

$

 —

 

$

18,714 

Matures one to three years

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —



$

18,714 

 

$

 —

 

$

 —

 

$

18,714 

 

$

 —

 

$

18,714 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



We did not realize any material gains or losses on our investments in marketable securities during the nine months ended September 30, 2017 and 2016. 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, 2017

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

11,916 

 

$

 —

 

$

 —

 

$

11,916 

Commercial paper

 

 —

 

 

 —

 

 

 —

 

 

 —



$

11,916 

 

$

 —

 

$

 —

 

$

11,916 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

14,217 

 

$

 —

 

$

 —

 

$

14,217 

Commercial paper

 

 —

 

 

4,497 

 

 

 —

 

 

4,497 



$

14,217 

 

$

4,497 

 

$

 —

 

$

18,714 



 

 

 

 

 

 

 

 

 

 

 



The transfers between Level 1 and Level 2 during the nine months ended September 30, 2017 was primarily due to the sale of the marketable securities.



 

10


 

 

Note 4.  Equity and Stock-Based Compensation Expense



Stockholders’ equity activity in 2017



During the nine months ended September 30, 2017, our common stock outstanding and stockholders’ equity

(in thousands) changed as follows:





 

 

 

 



Common Stock

 

Stockholders' equity
(in thousands)

Balance at December 31, 2016

6,591,705 

 

$

18,637 

Non-cash stock-related compensation for:

 

 

 

 

Stock options for employees

 —

 

 

2,212 

Stock options for non-employees

 —

 

 

11 

Issuance of common stock pursuant to 7 for 1 Reverse Stock Split

3,804 

 

 

 —

Net loss

 —

 

 

(9,493)

Balance at September 30, 2017

6,595,509 

 

$

11,367 



 

 

 

 



Stock option and Performance Award activity in 2017



During the nine months ended September 30, 2017, 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, 2016

 

2,435,249 

 

 

222,060 

Granted

 

653,210 

 

 

 —

Vested Performance Awards

 

 —

 

 

 —

Forfeited/expired

 

(417,059)

 

 

(14,723)

Outstanding as of September 30, 2017

 

2,671,400 

 

 

207,337 



 

 

 

 

 



The weighted average exercise price of options outstanding at September 30, 2017 was $18.92. As outstanding options vest over the current remaining vesting period of  3.2 years, we expect to recognize non-cash expense of $5.2 million. If and when outstanding Performance Awards vest, we would recognize non-cash expense of $4.4 million over the implicit service period.



11


 

Stock-based Compensation Expense in 2017



During the three and nine months  ended September 30, 2017 and 2016, our non-cash stock-related compensation expenses were as follows (in thousands):



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended

 

Nine months ended



 

September 30,

 

September 30,



 

2017

 

2016

 

2017

 

2016

Research and development

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of stock options

 

$

286 

 

$

318 

 

$

887 

 

$

997 

Vesting of Performance Awards

 

 

 —

 

 

 —

 

 

 —

 

 

430 



 

 

286 

 

 

318 

 

 

887 

 

 

1,427 

General and administrative

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of stock options

 

 

402 

 

 

527 

 

 

1,336 

 

 

1,658 

Vesting of Performance Awards

 

 

 —

 

 

 —

 

 

 —

 

 

404 



 

 

402 

 

 

527 

 

 

1,336 

 

 

2,062 

Total non-cash stock-based compensation expenses

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of stock options

 

 

688 

 

 

845 

 

 

2,223 

 

 

2,655 

Vesting of Performance Awards

 

 

 —

 

 

 —

 

 

 —

 

 

834 



 

$

688 

 

$

845 

 

$

2,223 

 

$

3,489 



 

 

 

 

 

 

 

 

 

 

 

 



Capital on Demand Sales Agreement



In December 2015, we entered into a Capital on Demand™ Sales Agreement with JonesTrading Institutional Services, or the ATM Agreement, relating to the offering of up to 10.0 million shares of our Common Stock in “at the market” offerings. We did not issue any shares under the ATM Agreement during the nine months of 2017 or 2016. In March 2017, the ATM Agreement expired and was not renewed.



 



Note 5.  Income Taxes 



We did not provide for income taxes during the three and nine months ended September 30, 2017 because we have projected a net loss for the full year 2017.



 

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):







 

 

 

 

 



 

 

 

 

 



2017

 

Total

Minimum lease payments

$

148 

 

$

148 



 

 

 

 

 



 

Note 7Recently 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. 



 

12


 

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 (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;

13


 

·

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.



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.



REMOXY



Our lead drug candidate is called REMOXY. REMOXY is a proprietary, abuse-deterrent, oral 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 multi-billion-dollar 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. In April 2016, the FDA determined that the NDA for REMOXY was 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. 

14


 



In September 2016, we received a Complete Response Letter, or CRL from the FDA on the resubmission of NDA for REMOXY.  The CRL informed us that the NDA for REMOXY 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 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. In conducting the following studies, we expect to generally compare REMOXY with 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 snorting: Conduct an intranasal abuse potential study in human volunteers. 



In addition, we had proposed in the REMOXY 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. 



On February 13, 2017, we met with the FDA regarding REMOXY. During this meeting, an agreement was reached on additional studies that are needed for REMOXY’s regulatory approval. Following completion of these studies, we intend to have a pre-NDA meeting with the FDA, followed by resubmission of the REMOXY NDA, with an anticipated priority review, under Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act.



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.



 Alzheimer's Disease and PTI-125



PTI-125 is an oral, small molecule, early-stage drug candidate that was designed in-house and characterized by outside collaborators.  We plan to develop PTI-125 as a treatment for Alzheimer’s Disease.



Alzheimer’s Disease (AD) is a progressive brain disorder that slowly destroys memory and thinking skills, and eventually the ability to carry out the simplest tasks.  There is no approved drug therapy to reverse, or even halt, the course of AD.  PTI-125 has been shown to significantly improve AD neuropathology in mouse models of the disease and in post-mortem brain tissue from AD patients, including receptor dysfunctions, neuroinflammation, tau hyperphosphorylation, insulin resistance and plaques and tangles that are hallmarks of AD.  To date, the underlying science for PTI-125 has been published in Journal of Neuroscience, Neurobiology of Aging, Journal of Biological Chemistry, PLOS-One and other peer-reviewed scientific journals.

 

In June 2017, we announced that the National Institutes of Health (NIH) had awarded us an approximately $1.7 million research grant to study PTI-125 in Alzheimer’s Disease.  This NIH research grant has enabled us to begin testing PTI-125 in human subjects. 



In September 2017, we announced that the NIH had awarded an approximately $1.8 million research grant to support innovative technology we have developed to diagnose Alzheimer’s disease with a simple blood test. 



Our NIH grants for PTI-125 are multi-year, milestone-based awards.  NIH has no obligation to continue funding for PTI-125 beyond the terms of the two grant awards.



15


 

Pain Therapeutics owns worldwide commercial rights to PTI-125 and related technology, without royalty or milestone obligations to any third-parties.



FENROCK™



FENROCK is a transdermal patch that contains the prescription drug fentanyl to manage severe pain and incorporates novel abuse-deterrent technology.  FENROCK is an early-stage drug candidate that was designed in-house and characterized by outside collaborators.

 

In September 2017, we announced that the National Institute on Drug Abuse (NIDA).had awarded us a research and development grant of approximately $2.2 million.  This grant award provides us with a path forward to develop FENROCK, a drug candidate for severe pain. 



Our NIH grant for FENROCK is a multi-year, milestone-based award.  NIH has no obligation to continue funding for FENROCK beyond the term of the grant award.



Pain Therapeutics owns worldwide commercial rights to FENROCK and related technology, without royalty or milestone obligations to any third-parties.





We have yet to generate any revenues from product sales. We have an accumulated deficit of $155 million at September 30, 2017. 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 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.



16


 

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,



 

2017

 

2016

 

2017

 

2016

Compensation

 

$

697 

 

$

479 

 

$

2,138 

 

$

2,838 

Contractor fees and supplies

 

 

789 

 

 

1,814 

 

 

3,410 

 

 

4,346 

Other common costs

 

 

133 

 

 

364 

 

 

523 

 

 

657 



 

$

1,619 

 

$

2,657 

 

$

6,071 

 

$

7,841 



 

 

 

 

 

 

 

 

 

 

 

 



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.





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, 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.



17


 

·

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, 2017 and 2016 



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 for the three months ended September 30, 2017 decreased to $1.6 million, respectively, from $2.7 million for the same period in 2016, primarily due to  a decrease in REMOXY related expenses and the receipt of grant funding from the National Institutes of Health, recorded as a reduction in research and development expenses.



Research and development expenses for the nine months ended September 30, 2017 decreased to $6.1 million, respectively, from $7.8 million for the same period in 2016, primarily due to decreases in REMOXY related expenses and compensation expenses related to Performance Awards in the nine months ended September 30, 2017 as compared to the same period in 2016.



Research and development expenses included non-cash stock-related compensation expenses of $0.3 million in both three months ended September 30, 2017 and 2016. Non-cash stock-related compensation expenses were $0.9 million in the nine months ended September 30, 2017 compared to $1.4 million for the same period in 2016.



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 slightly increased to $1.0 million in the three months ended September 30, 2017 from $0.9 million for the same period in 2016. 



General and administrative expenses for the nine months ended September 30, 2017 decreased to $3.5 million respectively, from $4.6 million for the same period in 2016, primarily due to decreases in compensation expense related to Performance Awards and the departure of our CFO in March 2017 in the nine months ended September 30, 2017 as compared to the same period in 2016.  



18


 

General and administrative expenses included non-cash stock-related compensation expenses of $0.4 million in the three months ended September 30, 2017 compared to $0.5 million for the same period in 2016.  Non-cash stock-related compensation expenses were $1.3 million in the nine months ended 2017 compared to $2.1 million for the same period in 2016.  



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 for the three months ended September 30, 2017 was $6,000 compared to $23,000 for the same period in 2016.  During the nine months ended September 30, 2017, interest income was $33,000 compared to $86,000 the same period in 2016.  The decreases in both periods were primarily due to a lower prevailing interest rate 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, 2017, cash and cash equivalents were  $11.9 million.



Net cash used in operating activities during the nine months ended September 30, 2017 was $6.8 million compared to $9.2 million for the same period in 2016. The decrease was primarily due to lower research and development expenses during the nine months ended September 30, 2017 compared to the same period in 2016, offset in part by changes in other balance sheet accounts.



Net cash provided by investing activities during the nine months ended September 30, 2017 was $2.1 million compared to $0.6 million net cash used by investing activities for the same period in 2016. Investing activities in both 2017 and 2016 consisted primarily of purchases, sales and maturities of marketable securities.



Net cash used by financing activities during the nine months ended September 30, 2016 was $0.3 million which resulted from cash used to pay statutory taxes for net exercise of vested  Performance Awards.



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):





 

 

 

 

 



 

 

 

 

 



2017

 

Total

Minimum lease payments

$

148 

 

$

148 



 

 

 

 

 



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, 2017. 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.



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

19


 

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 $155 million at September 30, 2017. 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, 2017, 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 would not affect the fair value of securities at September 30, 2017. To minimize  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, 2017, our investments consisted of money market accounts 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, 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 (as Principle Executive Officer and Principal Financial Officer) has 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 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. As previously announced, on February 14, 2017, Peter S. Roddy resigned, effective March 9, 2017, as Vice President, Chief Financial Officer and Secretary. Remi Barbier,

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President and Chief Executive Officer,  has assumed the role of Principal Financial Officer until such time as a new Chief Financial Officer is  appointed.



 

PART II – OTHER INFORMATION



Item 1.  Legal Proceedings



None.



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. In April 2016, the FDA determined that the NDA for REMOXY was 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 the NDA for REMOXY. The CRL informs that the NDA for REMOXY 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 and proposed drug labeling.



On February 13, 2017, we met with the FDA on the resubmission of NDA for REMOXY. During this meeting, an agreement was reached on additional studies that are needed for REMOXY’s regulatory approval. Following completion of these studies, we intend to have a pre-NDA meeting with the FDA, followed by resubmission of the

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REMOXY NDA, with an anticipated priority review, under Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act.



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:

·

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

·

diminish the competitive advantages that we may have otherwise enjoyed, which would have an adverse effect on our operating results and financial condition.



Even if we or our collaborators comply with all FDA regulatory requirements, our drug candidates may never obtain regulatory approval. If we or our collaborators fail to obtain regulatory approval for any of our drug candidates we will have fewer commercial products, if any, and corresponding lower product revenues, if any. Even if our drug candidates receive regulatory approval, such approval may involve limitations on the indications and conditions of use or marketing claims for our products. Further, later discovery of previously unknown problems or adverse events could result in additional regulatory restrictions, including withdrawal of products. The FDA may also require us or our collaborators to commit to perform lengthy Phase IV post-approval clinical efficacy or safety studies. Our expending additional resources on such trials would have an adverse effect on our operating results and financial condition.

In jurisdictions outside the United States, we must receive marketing authorizations from the appropriate regulatory authorities before commercializing our drugs. Regulatory approval processes outside the United States generally include all of the aforementioned requirements and risks associated with FDA approval.

If we are unable to design, conduct and complete preclinical and clinical trials successfully, our drug candidates will not be able to receive regulatory approval.

In order to obtain FDA approval for any of our drug candidates, we must submit to the FDA an NDA that demonstrates with substantive evidence that the drug candidate is both safe and effective in humans 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.

Preclinical studies may not provide results we believe are sufficient to support the filing of an IND. Success in early preclinical studies does not ensure success in later preclinical or clinical studies. The FDA may disagree with the design of our preclinical studies or our interpretations of data from preclinical studies. The FDA may not accept an IND for our product candidate and may require additional preclinical studies to support the filing of an IND.

Success in preclinical studies and early clinical trials does not ensure that later clinical trials will be successful. Results from Phase I clinical programs may not support moving a drug candidate to Phase II or Phase III clinical trials. Phase III clinical trials may not demonstrate the safety or efficacy of our drug candidates. Results of later clinical trials may not replicate the results of prior clinical trials and preclinical studies. Even if the results of Phase III clinical trials are positive, we or our collaborators may have to commit substantial time and additional resources to conducting further preclinical studies and clinical trials before obtaining FDA approval for any of our drug candidates.

Clinical trials are very expensive and difficult to design and implement, in part because they are subject to rigorous requirements. The clinical trial process also consumes a significant amount of time. Furthermore, if patients in clinical trials suffer drug-related adverse reactions during the course of such clinical trials, or if we, our collaborators or the FDA believe that participating patients are being exposed to unacceptable health risks, such clinical trials will have to be suspended or terminated. Failure can occur at any stage of the clinical trials, and we or our collaborators could encounter problems that cause abandonment or repetition of clinical trials.

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Clinical trials with REMOXY and our potential future clinical trials for other drug candidates for treatment of pain measure clinical symptoms, such as pain and physical dependence, that are not biologically measurable. The success in these clinical trials depends on reaching statistically significant changes in patients’ symptoms based on clinician-rated scales. Due in part to a lack of consensus on standardized processes for assessing clinical outcomes, these scores may or may not be reliable, useful or acceptable to regulatory agencies.

In addition, completion of clinical trials can be delayed by numerous factors, including:

·

delays in identifying and agreeing on acceptable terms with prospective clinical trial sites;

·

slower than expected rates of patient recruitment and enrollment;

·

unanticipated patient dropout rates;

·

increases in time required to complete monitoring of patients during or after participation in a clinical trial; and

·

unexpected need for additional patient-related data.

Any of these delays could significantly impact the timing, approval and commercialization of our drug candidates and could significantly increase our overall costs of drug development.

Even if clinical trials are completed as planned, their results may not support expectations or intended marketing claims. The clinical trials process may fail to demonstrate that our drug candidates are safe and effective for indicated uses. Such failure would cause us to abandon a drug candidate and could delay development of other drug candidates.

Clinical trial designs that were discussed with regulatory authorities prior to their commencement may subsequently be considered insufficient for approval at the time of application for regulatory approval.

We discuss with and obtain guidance from regulatory authorities on certain of our clinical development activities. With the exception of our SPA, these discussions are not binding obligations on the part of regulatory authorities.

Regulatory authorities may revise previous guidance or decide to ignore previous guidance at any time during the course of our clinical activities or after the completion of our clinical trials. Even with successful clinical safety and efficacy data, including such data from a clinical trial conducted pursuant to an SPA, we or our collaborators may be required to conduct additional, expensive clinical trials to obtain regulatory approval.

Developments by competitors may establish standards of care that affect our ability to conduct our clinical trials as planned.

We have conducted clinical trials of our drug candidates comparing our drug candidates to both placebo and other approved drugs. Changes in standards related to clinical trial design could affect our ability to design and conduct clinical trials as planned. For example, regulatory authorities may not allow us to compare our drug candidates to placebo in a particular clinical indication where approved products are available. In that case, both the cost and the amount of time required to conduct a clinical trial could increase.

The U.S. Drug Enforcement Agency, or DEA, limits the availability of the active ingredients in certain of our current drug candidates and, as a result, quotas for these ingredients may not be sufficient to complete clinical trials, or to meet commercial demand, or may result in clinical delays.

The DEA regulates chemical compounds as Schedule I, II, III, IV or V substances, with Schedule I substances considered to present the highest risk of substance abuse and Schedule V substances the lowest risk. Certain active ingredients in our current drug candidates, such as oxycodone, are listed by the DEA as Schedule II under the Controlled Substances Act of 1970. Consequently, their manufacture, research, shipment, storage, sale and use are subject to a high degree of oversight and regulation. For example, all Schedule II drug prescriptions must be signed by a physician, physically presented to a pharmacist and may not be refilled without a new prescription. Furthermore, the amount of Schedule II substances that can be obtained for clinical trials and commercial distribution is limited by the DEA and quotas for these substances may not be sufficient to complete clinical trials or meet commercial demand. There is a risk that DEA regulations may interfere with the supply of the drugs used in clinical trials for our product candidates, and, in the future, the ability to produce and distribute our products in the volume needed to meet commercial demand.

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Conducting clinical trials of our drug candidates or potential commercial sales of a drug candidate may expose us to expensive product liability claims, and we may not be able to maintain product liability insurance on reasonable terms or at all.

The risk of product liability is inherent in the testing of pharmaceutical products. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit or terminate testing of one or more of our drug candidates. Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of our drug candidates. We currently carry clinical trial insurance but do not carry product liability insurance. If we successfully commercialize one or more of our drug candidates, we may face product liability claims, regardless of FDA approval for commercial manufacturing and sale. We may not be able to obtain such insurance at a reasonable cost, if at all. Even if our agreements with any current or future corporate collaborators entitle us to indemnification against product liability losses, such indemnification may not be available or adequate should any claim arise.

If our drug candidates receive regulatory approval, we and our collaborators will be subject to ongoing FDA obligations and continued regulatory review, such as continued safety reporting requirements, and we and our collaborators may also be subject to additional FDA post-marketing obligations or new regulations, all of which may result in significant expense and limit our and our collaborators’ ability to commercialize our potential drugs.

Any regulatory approvals that our drug candidates receive may also be subject to limitations on the indicated uses for which the drug may be marketed or contain requirements for potentially costly post-marketing follow-up studies. In addition, if the FDA approves any of our drug candidates, the labeling, packaging, adverse event reporting, storage, advertising, promotion and record keeping for the drug will be subject to extensive regulatory requirements. The subsequent discovery of previously unknown problems with the drug, including but not limited to adverse events of unanticipated severity or frequency, or the discovery that adverse events previously observed in preclinical research or clinical trials that were believed to be minor actually constitute much more serious problems, may result in restrictions on the marketing of the drug, and could include withdrawal of the drug from the market.

The FDA’s policies may change and additional government regulations may be enacted that could prevent or delay regulatory approval of our drug candidates. We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are not able to maintain regulatory compliance, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution. Any of these events could prevent us from marketing our drugs and our business could suffer.

We may not be able to successfully develop or commercialize FENROCK, a proprietary abuse-deterrent transdermal pain patch (fentanyl), designed to prevent common methods of abuse of fentanyl.

We have no history of developing transdermal patches. We do not know whether any of our planned development activities for FENROCK will result in approval of such drug candidate by the FDA, or, if FENROCK is approved, it will be a commercially viable product.





Risks Relating to our Collaboration Agreements

If Pfizer did not transfer to us all data and documentation or the quality of the data and documentation transferred is insufficient, our ability to achieve approval of the NDA for REMOXY will be negatively impacted and our business will suffer.



In April 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 transferred to us data, materials, capital equipment and other assets related to REMOXY. In preparing to resubmit the NDA for REMOXY, we may find that there are additional data, materials or agreements that Pfizer should have transferred to us. If Pfizer did not meet its obligations to transfer all such materials or if the quality of the data and documentation transferred is insufficient, we would be significantly delayed in our ability to achieve FDA approval of the NDA for REMOXY, and may need to conduct further development activities or clinical

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trials to prepare any potential resubmission. As a result, any further development, regulatory approval and product introduction for REMOXY would be delayed or prevented and our business would suffer.

If outside collaborators fail to devote sufficient time and resources to drug development programs related to our product candidates, or if their performance is substandard, regulatory submissions and introductions for our products may be delayed.

We rely on Durect as the sole-source provider of certain components of REMOXY. Durect’s failure for any reason to provide these components could result in delays or failures in product testing or delivery, cost overruns or other problems that could materially harm our business.

We depend on independent investigators and collaborators, such as universities and medical institutions, to conduct our clinical trials under agreements with us. These investigators and collaborators are not our employees, and we cannot control the amount or timing of resources that they devote to our programs. They may not assign as great a priority to our programs or pursue them as diligently as we would if we were undertaking such activities ourselves. If these investigators or collaborators fail to devote sufficient time and resources to our drug development programs, or if their performance is substandard, the approval of our regulatory submissions and our introductions of new drugs will be delayed or prevented.

Our collaborators may also have relationships with other commercial entities, some of which may compete with us. If outside collaborators assist our competitors to our detriment, the approval of our regulatory submissions will be delayed and the sales from our products, if any are commercialized, will be less than expected.

If we fail to enter into or maintain collaboration agreements and licenses for REMOXY and other drugs designed to reduce potential risks of unintended use, we may have to reduce or delay our drug candidate development.

Our plan for developing, manufacturing and commercializing REMOXY currently requires us to successfully maintain our license from Durect. If we are unable to meet the obligations necessary to maintain our license with Durect for one or more potential products we may lose the rights to utilize Durect’s technology for such potential products, our potential future revenues may suffer and we may have to reduce or delay development of our other drug candidates. In addition, we expect to seek a new corporate collaborator with respect to REMOXY. If we do not enter into a new collaboration with respect to the continued development and potential commercialization of REMOXY, we will be required to undertake and fund such activities ourselves and may need to seek additional capital (which may not be available on acceptable terms, if at all), personnel or other resources. If we are not successful in such efforts, development and commercialization of REMOXY and our other drug candidates would be delayed or prevented, and our business would suffer.

We may not succeed at in-licensing drug candidates or technologies to expand our product pipeline.

We may not successfully in-license drug candidates or technologies to expand our product pipeline. The number of such candidates and technologies is limited. Competition among large pharmaceutical companies and biopharmaceutical companies for promising drug candidates and technologies is intense because such companies generally desire to expand their product pipelines through in-licensing. If we fail to carry out such in-licensing and expand our product pipeline, our potential future revenues may suffer.

Our collaborative agreements may not succeed or may give rise to disputes over intellectual property, disputes concerning the scope of collaboration activities or other issues.

Our collaborative agreements with third parties, such as our license agreement with Durect, are generally complex and contain provisions that could give rise to legal disputes, including potential disputes concerning ownership of intellectual property under collaborations or disputes concerning the scope of collaboration activities. Such disputes can delay or prevent the development of potential new drug products, or can lead to lengthy, expensive litigation or arbitration. Other factors relating to collaborative agreements may adversely affect our business, including:

·

the development of parallel products by our collaborators or by a competitor;

·

arrangements with collaborative partners that limit or preclude us from developing certain products or technologies;

·

premature termination of a collaborative or license agreement; or

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·

failure by a collaborative partner to provide required funding, to devote sufficient resources to the development of or legal defense of our potential products or to provide data or other information to us as required by our collaborative agreements.





Risks Relating to Commercialization

We currently have no in-house capabilities to commercialize our drug products and if we are unable to develop our own sales, marketing and distribution capabilities, or if we are not successful in contracting with third parties for these services on favorable terms, or at all, our product revenues could be disappointing.

We currently have no sales, marketing or distribution capabilities. We have not established commercial strategies regarding any of our product candidates, including REMOXY. In order to commercialize our products, if any approved by the FDA, we will either have to develop such capabilities internally or collaborate with third parties who can perform these services for us.

If we decide to commercialize any of our drugs ourselves, we may not be able to

·

hire and retain the necessary experienced personnel;

·

build sales, marketing and distribution operations in a cost effective manner which are capable of successfully launching new drugs;

·

obtain access to adequate numbers of physicians to prescribe our products; or

·

generate sufficient product revenues.

In addition, establishing such operations on our own will take time and involve significant expense. If our commercial operations lack complementary products, we may not be able to compete in a cost effective manner with competitors with more products to sell. If we engage third-party collaborators to perform any commercial operations, our future revenues may depend significantly upon the performance of those collaborators.

If we decide to enter into new co-promotion or other licensing arrangements with third parties, we may be unable to locate acceptable collaborators because the number of potential collaborators is limited and because of competition from others for similar alliances with potential collaborators. Even if we are able to identify one or more acceptable new collaborators, we may not be able to enter into any collaborative arrangements on favorable terms, or at all.

In addition, due to the nature of the market for our drug candidates, it may be necessary for us to license all or substantially all of our drug candidates to a single collaborator, thereby eliminating our opportunity to commercialize these other products independently. If we enter into any such new collaborative arrangements, our revenues are likely to be lower than if we marketed and sold our products ourselves.

In addition, any revenues we receive would depend upon our collaborators’ efforts which may not be adequate due to lack of attention or resource commitments, management turnover, change of strategic focus, business combinations or other factors outside of our control. Depending upon the terms of our collaboration, the remedies we have against an under-performing collaborator may be limited. If we were to terminate the relationship, it may be difficult or impossible to find a replacement collaborator on acceptable terms, or at all.

If physicians and patients do not accept and use our drugs, we will not achieve sufficient product revenues and our business will suffer.

Even if the FDA approves our drugs, physicians and patients may not accept and use them. Acceptance and use of our drugs will depend on a number of factors including:

·

when the drug is launched into the market and related competition;

·

approved label claims;

·

perceptions by members of the healthcare community, including ph