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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2014

 

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

For the transition period from                      to                     

Commission File Number 0-23155

 

 

SYNAGEVA BIOPHARMA CORP.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		56-1808663
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

33 Hayden Avenue,

Lexington, MA 02421

(Address of principal executive offices, including zip code)

(781) 357-9900

Registrant’s telephone number, including area code

 

 

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

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  x    No  ¨

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

 

Large accelerated filer		x		Accelerated filer		¨
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		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  x

The number of shares outstanding of the registrant’s common stock as of April 25, 2014 was 33,018,829.

 

 

 

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SYNAGEVA BIOPHARMA CORP.

TABLE OF CONTENTS

 

				Page
PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements			3
		Consolidated Balance Sheets as of March 31, 2014 (Unaudited) and December 31, 2013			3
		Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2014 and 2013			4
		Consolidated Statements of Comprehensive Loss (Unaudited) for the three months ended March 31, 2014 and 2013			5
		Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2014 and 2013			6
		Notes to the Consolidated 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			21
Item 1.		Legal Proceedings			21
Item 1A.		Risk Factors			21
Item 5.		Other Information			37
Item 6.		Exhibits			38
		SIGNATURES			39

 

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PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

SYNAGEVA BIOPHARMA CORP.

CONSOLIDATED BALANCE SHEETS

(Unaudited and in thousands, except per share amounts)

 

		March 31, 2014				December 31, 2013
Assets
Current assets:
Cash and cash equivalents		$	152,331			$	62,137
Short-term investments			422,887				346,596
Accounts receivable			1,446				1,373
Prepaid expenses and other current assets			8,925				6,617
Total current assets			585,589				416,723
Property and equipment, net			23,647				17,213
Developed technology, net			3,102				3,491
Goodwill			8,535				8,535
Other assets			2,231				1,987
Total assets		$	623,104			$	447,949
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	2,512			$	2,427
Accrued expenses			13,929				11,121
Deferred revenue			93				232
Other current liabilities			653				140
Total current liabilities			17,187				13,920
Other liabilities			4,825				3,828
Total liabilities		$	22,012			$	17,748
Commitments and contingencies (Note 8)
Stockholders’ equity:
Common stock, par value $0.001; 60,000 shares authorized at March 31, 2014 and December 31, 2013, respectively; 32,975 and 30,768 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively			33				31
Additional paid-in capital			891,735				684,468
Accumulated other comprehensive loss			(13	)			(59	)
Accumulated deficit			(290,663	)			(254,239	)
Total stockholders’ equity			601,092				430,201
Total liabilities and stockholders’ equity		$	623,104			$	447,949

The accompanying notes are an integral part of these consolidated financial statements.

 

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SYNAGEVA BIOPHARMA CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and in thousands, except per share amounts)

 

		Three Months Ended March 31,
		2014				2013
Revenue:
Royalty revenue		$	1,447			$	1,705
Collaboration and license revenue			139				3,413
Total revenue			1,586				5,118
Costs and expenses:
Research and development			27,868				13,338
Selling, general and administrative			9,804				5,654
Amortization of developed technology			390				699
Total costs and expenses			38,062				19,691
Loss from operations			(36,476	)			(14,573	)
Interest income			75				89
Other expense, net			(5	)			—
Loss before provision for income taxes			(36,406	)			(14,484	)
Provision for income taxes			18				—
Net loss		$	(36,424	)		$	(14,484	)
Basic and diluted net loss per common share		$	(1.16	)		$	(0.54	)
Weighted average shares used in basic and diluted per common share computations			31,338				26,826

The accompanying notes are an integral part of these consolidated financial statements.

 

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SYNAGEVA BIOPHARMA CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited and in thousands)

 

		Three Months Ended March 31,
		2014				2013
Net loss		$	(36,424	)		$	(14,484	)
Other comprehensive loss:
Change in fair market value of available for sale securities			51				8
Foreign currency translation adjustments			(5	)			(2	)
Total other comprehensive income			46				6
Comprehensive loss		$	(36,378	)		$	(14,478	)

The accompanying notes are an integral part of these financial statements.

 

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SYNAGEVA BIOPHARMA CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

 

		Three Months Ended March 31,
		2014				2013
Cash flows from operating activities
Net Loss		$	(36,424	)		$	(14,484	)
Adjustments:
Depreciation and amortization			1,407				1,314
Stock compensation expense			3,181				1,716
Amortization of premium on investments			687				674
Changes in assets and liabilities:
Accounts receivable			(73	)			6
Prepaid expenses, other current assets and other assets			(2,552	)			(2,482	)
Accounts payable			(956	)			(495	)
Accrued expenses, other current liabilities and other liabilities			832				(481	)
Deferred revenue			(139	)			(2,919	)
Net cash used in operating activities			(34,037	)			(17,151	)
Cash flows from investing activities
Purchase of available for sale investments			(167,577	)			(103,776	)
Proceeds from sales and maturities available for sale investments			90,650				43,000
Capital expenditures			(3,245	)			(2,412	)
Restricted cash			320				(2,868	)
Net cash used in investing activities			(79,852	)			(66,056	)
Cash flows from financing activities
Proceeds from issuance of common stock, net of issuance costs			200,925				111,055
Proceeds from exercise of stock options			3,163				2,034
Net cash provided by financing activities			204,088				113,089
Effect of exchange rate on cash			(5	)			(3	)
Net increase in cash and equivalents			90,194				29,879
Cash and equivalents at the beginning of period			62,137				23,883
Cash and equivalents at the end of period		$	152,331			$	53,762
Capitalization of construction in progress related to facility lease obligation (Note 8)			1,574				—
Capital expenditures incurred but not yet paid			2,633				—

The accompanying notes are an integral part of these consolidated financial statements.

 

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SYNAGEVA BIOPHARMA CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts or as otherwise indicated)

(Unaudited)

 

1.	Nature of the Business

Synageva BioPharma Corp. (Synageva or the Company) is a biopharmaceutical company focused on the discovery, development, and commercialization of therapeutic products for patients with rare diseases. The Company’s most advanced pipeline programs are enzyme replacement therapies for lysosomal storage diseases (LSDs). The Company’s lead program, sebelipase alfa, is in global Phase 3 clinical trials for the treatment of infants, children and adults with lysosomal acid lipase deficiency (LAL Deficiency), a rare and devastating disease that causes significant morbidity and early mortality. In addition to sebelipase alfa, the Company has multiple other ongoing research programs at different stages of preclinical development, including SBC-103, another enzyme replacement therapy for an LSD known as mucopolysaccharidosis type IIIB (MPS IIIB) or Sanfilippo B. The Company’s pipeline programs target rare diseases that are characterized by significant morbidity and mortality and are selected based on scientific rationale, high unmet medical need, the potential to impact disease course and strategic alignment with our corporate focus. The Company has not yet received approval to market or commercialize sebelipase alfa or any other products.

The Company’s business is subject to risks including those common to companies in the biopharmaceutical industry, such as the successful development of products, patient enrollment, clinical trial uncertainty, regulatory approval, fluctuations in operating results and financial risks, potential need for additional funding, protection of proprietary technology and patent risks, compliance with government regulations, dependence on key personnel, competition, technological and medical risks and management of growth.

The Company has incurred losses since inception and at March 31, 2014, had an accumulated deficit of $290.7 million. The Company expects to incur losses over the next several years as it continues to expand its drug discovery, development efforts and commercial activities. As a result of continuing losses, the Company may seek additional funding through a combination of public or private financing, collaborative relationships, licensing or other arrangements. The Company may not be able to obtain financing on acceptable terms, or at all, and the Company may not be able to enter into new collaboration or license agreements. If the Company is unable to obtain additional funding on a timely basis, it may be required to curtail or terminate some or all of its development programs, including some or all of its drug candidates.

Through March 31, 2014, the Company has funded its operations primarily from proceeds of the sale of stock, royalty income and collaboration agreements. On March 5, 2013, the Company announced the closing of a $211.5 million underwritten public offering of 2.0 million shares of common stock at a price per share of $105.75. The Company received net proceeds of approximately $200.9 million from this offering. In addition to this financing, the Company received aggregate net proceeds of approximately $473.9 million from public equity offerings in fiscal 2013 and 2012.

The Company currently intends to use its cash, cash equivalents and investments for general corporate purposes, which may include expanding its infrastructure, including commercial and manufacturing, to benefit sebelipase alfa and the rest of its pipeline, supporting its clinical studies, supporting the advancement of SBC-103, accelerating its early-stage programs, and acquiring technologies or businesses that are complementary to its current technologies and business focus. The Company expects that it will have sufficient cash and cash equivalents to sustain operations to at least the second half of 2016.

 

2.	Summary of Significant Accounting Policies

Basis of Presentation

The accompanying Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for Quarterly Reports on Form 10-Q and do not include all of the information and note disclosures required by the accounting principles generally accepted in the United States of America (U.S. GAAP) for complete financial statements. The Financial Statements should therefore be read in conjunction with the Financial Statements and Notes thereto for the fiscal year ended December 31, 2013 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 3, 2014.

The accompanying Financial Statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect amounts reported in the Financial Statements and accompanying disclosures. Although these estimates are based on the information reasonably available and actions that the Company may undertake in the future, actual results may be different from those estimates. The Financial Statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair statement of results for these interim periods. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2014.

 

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Principles of Consolidation

The Company’s consolidated financial statements include the accounts of Synageva and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Significant Accounting Policies

There have been no material changes to the Company’s significant accounting policies during the three months ended March 31, 2014, as compared to the significant accounting policies disclosed in Note 2, Summary of Significant Accounting Policies, of the Company’s financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2013.

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standard Board issued an accounting standards update clarifying the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The updated guidance requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward when settlement of the liability for an unrecognized tax benefit in this manner is available. The update is effective prospectively for reporting periods beginning after December 15, 2013, and early adoption and retrospective adoption are permitted. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements or disclosures.

 

3.	Fair Value of Financial Instruments

Cash and Cash Equivalents

The Company considers all highly liquid investments with a remaining maturity at the date of purchase of 90 days or less to be cash equivalents. At March 31, 2014 and December 31, 2013, substantially all cash equivalents were U.S. treasury bills and amounts held in money market accounts at commercial banks.

Investments

All of the Company’s investments were classified as available-for-sale at March 31, 2014 and December 31, 2013. The principal amounts of short-term investments are summarized in the tables below:

 

		Less Than 12 Months to Maturity
		Amortized Cost				Unrealized Gains				Unrealized Gains (Losses)				Fair Value
Balance at March 31, 2014:
U.S. Treasury securities		$	422,858			$	—			$	29			$	422,887
Total		$	422,858			$	—			$	29			$	422,887
Balance at December 31, 2013:
U.S. Treasury securities		$	346,618			$	—			$	(22	)		$	346,596
Total		$	346,618			$	—			$	(22	)		$	346,596

The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2014:

 

		March 31, 2014				Quoted Price in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets
Cash equivalents
Money market fund		$	111,778			$	111,778			$	—			$	—
US treasury securities		$	29,009			$	—			$	29,009			$	—
Marketable securities
US treasury securities		$	422,887			$	—			$	422,887			$	—
Total		$	563,674			$	111,778			$	451,896			$	—

 

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Level 1 inputs are quoted prices in active markets for identical assets or liabilities and consist of cash and money market funds. Items classified as Level 2 within the valuation hierarchy consist of U.S. government-related debt securities. We estimate the fair values of these marketable securities by taking into consideration valuations obtained from third-party pricing sources. These pricing sources utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include market pricing based on real-time trade data for the same or similar securities, issuer credit spreads, benchmark yields, and other observable inputs. We validate the prices provided by our third-party pricing sources by understanding the models used, obtaining market values from other pricing sources and analyzing pricing data in certain instances.

The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2013:

 

		December 31, 2013				Quoted Price in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets
Cash equivalents
Money market fund		$	27,899			$	27,899			$	—			$	—
US treasury securities		$	21,021			$	—			$	21,021			$	—
Marketable securities
US treasury securities		$	346,596			$	—			$	346,596			$	—
Total		$	395,516			$	27,899			$	367,617			$	—

 

4.	Supplemental Balance Sheet Information

Prepaid expenses and other current assets consist of the following:

 

		March 31, 2014				December 31, 2013
Prepaid clinical, manufacturing, and scientific costs		$	5,957			$	3,960
Interest receivable			828				859
Prepaid insurance			923				958
Other			1,217				840
		$	8,925			$	6,617

Other non-current assets consist of the following:

 

		March 31, 2014				December 31, 2013
Restricted cash		$	2,151			$	1,935
Other			80				52
		$	2,231			$	1,987

Restricted cash relates to deposits associated with construction activities at our new Bogart, GA facility and a long-term letter of credit associated with our headquarters in Lexington, MA.

 

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Accrued expenses consist of the following:

 

		March 31, 2014				December 31, 2013
Accrued compensation and benefits		$	2,760			$	3,244
Clinical, manufacturing and scientific costs			7,399				6,587
Professional fees			1,011				568
Accrued capital expenditures			1,592				—
Other			1,167				722
		$	13,929			$	11,121

 

5.	Share Based Payments

The Company’s 2005 Stock Plan is the only existing equity compensation plan from which the Company may make equity-based awards to employees, directors and consultants. The maximum number of shares that may be issued under the 2005 Stock Plan is approximately 4.9 million shares. Shares subject to outstanding awards under the 2005 Stock Plan totaled 2.4 million as of March 31, 2014. At March 31, 2014, there were 1.0 million shares remaining available for grant under the 2005 Stock Plan.

The Company uses the Black-Scholes option pricing model to measure the fair value of its option awards. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model. The expected life assumption is based on the limited exercise historical experience at the Company, management’s expectations based on the length of time that an employee will stay at the Company, the vesting period of four years and the contractual term of ten years. The Company estimates volatility using a blended approach encompassing: (i) Historical experience and peer group (including industry, size, life cycle and financial leverage), and (ii) Implied volatility from publicly traded options with the longest available contractual terms. The risk-free interest rate is based on the U.S. Treasury zero coupon rate with a remaining term approximating the expected term used as the input to the Black-Scholes option pricing model.

The Company also maintains an Employee Stock Purchase Plan (the ESPP), which allows eligible employees to use payroll deductions to purchase shares of the Company’s common stock at a discount of 15% to the lesser of the fair market value of the Company’s stock on (i) the date on which an employee elects to participate in the ESPP and (ii) the closing price on the last day of the ESPP option period. The plan is considered a compensatory employee stock purchase plan, results in incremental stock-based compensation expense in future periods. Option periods under the ESPP run from January 1 to June 30 and July 1 to December 31 of each year.

A summary of stock option activity under all equity plans for the three months ended March 31, 2014 is as follows:

 

		Number of Shares				Weighted Average Exercise Price
Outstanding at December 31, 2013			2,710			$	34.05
Options granted			100				97.93
Options exercised			(202	)			14.71
Options canceled or expired			(34	)			46.61
Outstanding at March 31, 2014			2,574			$	37.88

The Company recognized stock-based compensation expense on all stock option awards for the three months ended March 31, 2014 and 2013, as follows:

 

		Three Months Ended March 31,
		2014				2013
Research and development		$	1,467			$	664
Selling, general and administrative			1,714				1,052
		$	3,181			$	1,716

 

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6.	Accumulated Other Comprehensive Income (Loss)

The following table summarizes the changes in accumulated other comprehensive income (loss), net of tax by component:

 

		Unrealized Gains on Available for Sale Securities				Translation Adjustments				Total
Balance, as of December 31, 2013		$	(22	)		$	(37	)		$	(59	)
Other comprehensive loss before reclassifications			51				(5	)			46
Amounts reclassified from accumulated other comprehensive loss			—				—				—
Net current period other comprehensive income (loss)			51				(5	)			46
Balance, as of March 31, 2014		$	29			$	(42	)		$	(13	)

 

7.	Basic and Diluted Net Loss per Common Share

Basic net loss per common share has been computed by dividing net loss by the weighted average number of shares outstanding during the period. Diluted net income per share, if applicable, has been computed by dividing diluted net income by the diluted number of shares outstanding during the period. Except where the result would be antidilutive to loss from continuing operations, diluted net loss per share has been computed assuming the exercise of stock options, as well as their related income tax effects. The following table sets forth the computation of basic and diluted net loss per common share:

 

		Three Months Ended March 31,
		2014				2013
Numerator:
Net loss		$	(36,424	)		$	(14,484	)
Denominator
Weighted average common shares
Denominator for basic calculation			31,338				26,826
Denominator for diluted calculation			31,338				26,826
Net loss per share:
Basic		$	(1.16	)		$	(0.54	)
Diluted		$	(1.16	)		$	(0.54	)

The Company’s potential dilutive securities, which include stock options, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted-average common stock outstanding used to calculate both basic and diluted net loss per share are the same. The following shares of potentially dilutive securities have been excluded from the computations of diluted weighted average shares outstanding as the effect of including such securities would be antidilutive (in thousands):

 

		March 31,
		2014				2013
Options to purchase common stock			2,574				2,294

 

8.	Commitments and Contingencies

Occupancy Arrangements

Bogart, GA Manufacturing Facility Lease and Buildout

In October 2013, the Company entered into a lease agreement for two 35,000 square foot shell buildings on twelve acres in Bogart, Georgia. The construction of the shell buildings is being provided by the landlord and is expected to be completed in mid-2014. In conjunction with the construction, the Company will be outfitting the shell buildings to its specifications, at an estimated cost of approximately $11 million.

The landlord construction and tenant improvements will be in accordance with the Company’s plans and include substantial outfitting of the building. The scope of the planned tenant improvements do not qualify as “normal tenant improvements” under the lease accounting guidance. Accordingly, for accounting purposes, the Company is the deemed owner of the buildings during the construction period. As construction progresses, the Company records the project construction costs incurred as an asset, along with a corresponding facility lease obligation, on the balance sheet for the total amount of project costs incurred whether funded by the Company or the landlord. Upon completion of the buildings, the Company will determine if the assets and

 

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corresponding financing obligation should continue to be carried on its balance sheet under the accounting guidance. Based on the current terms of the lease, the Company expects to continue to be the deemed owner of the buildings upon completion of the construction period.

As of March 31, 2014, the Company has recorded total construction in process for the Bogart facility of $6.9 million, $3.3 million of which related to landlord funded construction.

Lexington, MA Headquarters and Lab Buildout

In January 2013, the Company entered into a lease agreement to accommodate the Company’s continued growth and to relocate its corporate headquarters in Lexington, Massachusetts. The Company began occupying the facility in the second quarter of 2013. The Company spent approximately $5.0 million to buildout the lab facilities, $1.2 million of which was in the form of a landlord funded tenant allowance. The Company has established a long-term liability for the landlord funded tenant allowance that is being amortized ratably over the life of the lease.

In addition, on February 20, 2014, the Company entered into a lease amendment to expand the currently leased corporate headquarters located at 33 Hayden Avenue, Lexington, Massachusetts by 29,316 rentable square feet. The Company anticipates that it will occupy the expanded space in June 2014 upon the completion of landlord building modifications. The initial rent for the additional space will be $22.50 per square foot plus certain operating expenses and taxes. The Company will have the right to occupy the entire additional space upon the completion of the building modifications, but it will pay rent on only 9,524 square feet for the first two months and on 19,048 for the following eight months, before paying rent on the full 29,316 rentable square feet thereafter. The total combined leased space, including the additional space, will consist of 80,872 square feet. The initial term of the amendment begins upon the Company occupying the additional space, through December 2019, concurrent with the original lease.

 

9.	Subsequent Events

In connection with the March equity offering, on May 1, 2014, the Company entered into an amendment (the Amendment) to the Amended and Restated Registration Rights Agreement dated April 1, 2009, between the Company and the investors signatory thereto, as amended through the date hereof. The Amendment eliminates the prohibition against the Company granting investors new information or registration rights.

Also related to the March equity offering, on May 1, 2014, the Company entered into a new Registration Rights Agreement (the Registration Rights Agreement) with certain investors, including our director, Thomas Tisch, and certain entities affiliated with our directors Felix Baker, Stephen Biggar and Thomas Tisch. The Registration Rights Agreement provides that, among other things, within 10 business days of signing the agreement, the Company will file a final prospectus to its existing registration statement covering the resale of the Registrable Securities (as defined therein) of each investor party thereto.

 

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” as defined under federal securities laws. Many of these statements can be identified by the use of words such as “believes,” “expects,” “anticipates,” “plans,” “may,” “will,” “projects,” “continues,” “estimates,” “potential,” “opportunity” or the negative versions of these terms and other similar expressions. Our actual results or experience could differ significantly from the forward-looking statements. Factors that could cause or contribute to these differences include those discussed in “Risk Factors,” in Part II, Item 1A of this Quarterly Report on Form 10-Q. You should carefully consider that information before you make an investment decision.

We cannot guarantee any future results, levels of activity, performance or achievements. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this Quarterly Report on Form 10-Q as anticipated, believed, estimated or expected. The forward-looking statements contained in this Quarterly Report on Form 10-Q represent our estimates as of the date of this Quarterly Report on Form 10-Q (unless another date is indicated) and should not be relied upon as representing our expectations as of any other date. While we may elect to update these forward-looking statements, we specifically disclaim any obligation to do so.

The following discussion of our financial condition and results of operations should be read in conjunction with our Financial Statements and the related Notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

Our Business

We are a biopharmaceutical company focused on the discovery, development, and commercialization of therapeutic products for patients with rare diseases. Our most advanced pipeline programs are enzyme replacement therapies for lysosomal storage diseases (LSDs) and we have additional protein therapeutic programs for other rare diseases, which are currently at different stages of preclinical development. These programs are selected based on scientific rationale, unmet medical need within the patient population, potential to substantially impact disease course, and strategic alignment with our corporate and commercial efforts. Our lead program, sebelipase alfa for lysosomal acid lipase deficiency (LAL Deficiency), is in global Phase 3 clinical trials.

Sebelipase Alfa for LAL Deficiency

LAL Deficiency is a rare autosomal recessive LSD caused by a marked decrease in LAL enzyme activity. LAL Deficiency presenting in children and adults, historically called Cholesteryl Ester Storage Disease (CESD), is an underappreciated cause of cirrhosis and accelerated atherosclerosis. These complications are due to the buildup of fatty material in the liver, blood vessel walls and other tissues as a result of the decreased LAL enzyme activity. Infants presenting with LAL Deficiency, historically called Wolman disease, show very rapid progression, with death usually in the first six months of life. Affected infants develop growth failure, severe liver complications, and malabsorption.

Sebelipase alfa is a recombinant form of the human LAL enzyme being developed by us as an enzyme replacement therapy for LAL Deficiency. We are evaluating sebelipase alfa in global Phase 3 clinical trials in infants, children and adults with LAL Deficiency. Sebelipase alfa has been granted orphan designation by the U.S. Food and Drug Administration (FDA), the European Medicines Agency (EMA), and the Japanese Ministry of Health, Labour and Welfare. Additionally, sebelipase alfa received fast track designation by the FDA, and Breakthrough Therapy designation by the FDA for LAL Deficiency presenting in infants.

We are pursuing a development strategy for sebelipase alfa to assess safety and tolerability in a broad population of patients, including infants, children, and adults, and to demonstrate efficacy, safety and tolerability of sebelipase alfa in the treatment of LAL Deficiency. We intend to submit a Biologic License Application (BLA) and a New Animal Drug Application (NADA) to the FDA and a Marketing Authorization Application (MAA) to the European Medicines Agency (EMA), as well as submit marketing applications in other regions of the world if clinical trials are successful.

The current clinical trials for sebelipase alfa are:

 

•

Phase 3 Trial of Sebelipase Alfa in Children and Adults with LAL Deficiency. In December 2013, we announced the completion of the target enrollment in our global, Phase 3 ARISE clinical trial with sebelipase alfa for LAL Deficiency. ARISE is a randomized, double-blind, placebo-controlled study of sebelipase alfa in children and adults with LAL Deficiency. We plan to report top-line results from this study during the third quarter of 2014, and plan to submit a BLA to the FDA and MAA to the EMA for sebelipase alfa for the treatment of LAL Deficiency by the end of the first quarter of 2015.

 

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•

Phase 1/2 Open Label Dose Escalation Study in Adult Patients with Liver Dysfunction Due to LAL Deficiency; and Phase 1/2 Extension Study to Evaluate the Long-Term Safety, Tolerability, and Efficacy of Sebelipase Alfa in Adult Subjects With LAL Deficiency. In addition to the ARISE trial, we conducted a Phase 1/2 trial and have an ongoing extension study in adults with LAL Deficiency.

 

•

Phase 2/3 Open Label Dose Escalation Study in Children with Growth Failure Due to LAL Deficiency. We are also conducting a Phase 2/3 open-label trial with sebelipase alfa in infants with LAL Deficiency and in January 2014 announced that we met the target enrollment for the study. Initial results were presented at the LDN WORLD Symposium in February 2014.

In addition to the studies noted above, we are planning to enroll patients in two other open label clinical trials, one targeting infants with LAL Deficiency and another for a broader patient population with LAL Deficiency, including children and adults. Additional studies may be initiated in order to support requirements for long-term safety and to provide patients with ongoing access to the drug until we receive BLA approval of sebelipase alfa, if ever.

SBC-103 for MPS IIIB

Our SBC-103 program is another enzyme replacement therapy for an LSD known as MPS IIIB. The mucopolysaccharidoses (MPS) consist of a group of rare LSDs caused by a deficiency of enzymes needed to break down complex sugars called glycosaminoglycans. The MPS III syndromes (also known as Sanfilippo syndromes) share complications with other MPS diseases but represent a clinically distinct subset with marked central nervous system degeneration. MPS IIIB is caused by a marked decrease in alpha-N-acetyl-glucosaminidase (NAGLU) enzyme activity which leads to the buildup of abnormal amounts of heparan sulfate (HS) in the brain and other organs. The accumulation of abnormal HS, particularly in the central nervous system, leads to severe cognitive decline, behavioral problems, speech loss, increasing loss of mobility, and premature death.

SBC-103 is a recombinant form of the human NAGLU enzyme which we are developing as an enzyme replacement therapy for MPS IIIB. SBC-103 has been granted orphan designation by the FDA and the EMA. We currently plan to initiate clinical trial sites for SBC-103 in patients with MPS IIIB in mid-2014.

Using various dosing approaches, SBC-103 reduced HS substrate storage in the brain, liver and kidney in an MPS IIIB animal model. At the LDN WORLD Symposium in February 2014, we presented data from a preclinical study with SBC-103 in a mouse model of MPS IIIB. Data from this study confirmed that SBC-103 delivered by intravenous and intrathecal administration reduced abnormal heparan sulfate levels in the brain of NAGLU-deficient mice. In addition, intravenously administered SBC-103 increased NAGLU enzyme activity levels in the brain of a MPS IIIB mouse model and increased cerebrospinal fluid NAGLU enzyme activity in non-human primates in preclinical studies. These findings suggest that SBC-103 may have properties that allow it to cross the normal blood-brain barrier.

Additional data at the meeting supporting this observation concerned an investigation of SBC-103 in an in vitro model of the blood-brain barrier. In this study, SBC-103 was effectively transported from the apical side (representing the blood) to the opposite basolateral side (representing the brain tissue). The addition of mannose-6-phospate inhibited directional transport by more than 90%, suggesting that the observed transport of SBC-103 was mediated by the mannose-6-phosphate receptor. These data suggest that the previously reported effects of intravenous SBC-103 on central nervous system substrate accumulation in an MPS IIIB disease model may be mediated by specific cellular transport across the blood-brain barrier.

Additional Pipeline Programs

In addition to sebelipase alfa and SBC-103, we are progressing protein therapeutic programs for rare diseases, which are currently at different stages of development. These protein therapeutic programs are selected based on scientific rationale, unmet medical need within the patient population, ability to make a meaningful impact on the lives of patients, a clinical endpoint that can be achieved with a small number of patients, a definable path to registration, and the attractiveness of the commercial opportunity.

 

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Financial Operations Overview

General

Our future operating results will depend on the progress of drug candidates currently in our research and development pipeline. The results of our operations will vary significantly from year-to-year and quarter-to-quarter and will depend largely on, among other factors, the cost and outcome of any preclinical development or clinical trials then being conducted and efforts for registration and commercialization of our products.

A discussion of certain risks and uncertainties that could affect our capital requirements and ability to raise additional funds is set forth under the section entitled “Risk Factors” in this Quarterly Report on Form 10-Q.

Revenue

Royalty Revenue

Royalty revenues are recognized in the period earned, based on contract terms when reported sales are reliably measurable and collectability is reasonably assured. Royalty revenue relates to amounts earned from the sale of FUZEON by Hoffman-La Roche, Inc. (Roche).

Collaboration and License Revenue

Collaboration and license revenue relates to revenue from the licensing of our intellectual property. In 2013 and 2012, revenues were primarily driven by our collaboration agreements with Mitsubishi Tanabe Corporation (Mitsubishi Tanabe) whereby we utilized our proprietary expression technology in two development programs, in exchange for upfront license payments and funded development. Under the first agreement, which was entered into in August 2011, we received an upfront license payment of $3.0 million and on-going funding of development costs. Additionally, we entered into a second agreement in March 2012, where we received an upfront license payment of $9.0 million and on-going funding of development costs. Both programs were completed in the fourth quarter of 2013. We recognized revenue under a proportional performance method.

Research and Development

We expense research and development costs as incurred. Research and development expense consists of costs incurred to discover, research and develop drug candidates, including personnel and facility-related expenses, outside contracted services including clinical trial costs, manufacturing and process development costs, research costs, medical affairs and regulatory costs outside consulting services, research license fees, depreciation and amortization of lab facilities, lab supplies and other external costs. We accrue costs for clinical trial activities based upon estimates of the services received and related expenses incurred that have yet to be invoiced by the vendors that perform the services. Research and development expense includes any costs associated with generating collaboration or grant revenue.

Selling, General and Administrative

Selling, general and administrative expense consists primarily of salaries, stock-based compensation expense and other related costs for personnel in commercial, executive, business development, finance, human resource, legal, information technology, and support personnel functions. Other costs include facility costs not otherwise included in research and development expense, insurance, and professional fees for legal, accounting and commercial services.

Amortization of Developed Technology

We provide for the cost of amortization of developed technology, computed using an accelerated method based on the undiscounted cash flows received from the FUZEON royalty stream, in proportion to the estimated total undiscounted cash flows.

Interest Income, net

Interest income relates to interest earned on our cash equivalent and short-term investment balances.

Provision for Income Taxes

Provision for income taxes is comprised of the taxes currently payable as a result of foreign operations. We have certain international subsidiaries that are profitable on a stand-alone basis. Accordingly, a tax provision is reflected for the taxes incurred in such jurisdictions based on intercompany service arrangements.

 

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Results of Operations

Three Months Ended March 31, 2014 and 2013

Revenues

The following table presents total revenue for the three months ended March 31, 2014 and 2013, respectively (in thousands):

 

		Three Months Ended March 31,
		2014				2013				$ Change				% Change
Royalty revenue		$	1,447			$	1,705			$	(258	)			(15	)%
Collaboration and license revenue			139				3,413				(3,274	)			(96	)
Total revenue		$	1,586			$	5,118			$	(3,532	)			(69	)%

Total revenues decreased by approximately $3.5 million for the three months ended March 31, 2014, as compared to the comparable period of the prior year, primarily as a result of decreased collaboration revenue. Collaboration and license revenue was driven by the first and second Mitsubishi Tanabe programs in the prior year. These collaboration programs were completed in the fourth quarter of 2013 and as a result, collaboration and licensing revenue was lower for the three months ended March 31, 2014. For the three months ended March 31, 2013, we recognized $0.5 million and $2.9 million related to the first and second Mitsubishi Tanabe programs, respectively. In addition, royalty revenue decreased $0.3 million to $1.4 million in the three months ended March 31, 2014, as compared to the prior year period.

We expect license and collaboration revenue to continue to decrease in 2014 due to the completion of the Mitsubishi Tanabe programs in 2013. In addition, we estimate that royalty revenue in 2014 will be lower than 2013. FUZEON royalty revenues are unpredictable, as we are not marketing the product and inconsistent sales in certain regions can cause period to period variability. Prior year royalty revenues benefited from a higher than usual second quarter royalty, which contributed favorably to fiscal 2013 royalty revenues.

Research and Development Expenses

Research and development expenses for the three months ended March 31, 2014 and 2013 are summarized as follows (in thousands):

 

		Three Months Ended March 31,
		2014				2013				$ Change				% Change
Compensation and benefits-related		$	5,576			$	3,738			$	1,838				49	%
Clinical trials and manufacturing			14,069				6,010				8,059				134
Other development related external services			4,117				1,497				2,620				175
Facilities and related			2,639				1,429				1,210				85
Stock-based compensation expense			1,467				664				803				121
Total research and development expense		$	27,868			$	13,338			$	14,530				109	%

Research and development expense increased by approximately $14.5 million, or 109%, to $27.9 million for the three months ended March 31, 2014 as compared to $13.3 million for the prior year. The increase in total research and development expense is due to increased clinical trial costs, external manufacturing fees, toxicology studies and other development related external services associated with on-going development of sebelipase alfa, SBC-103 and our pipeline programs, as well as higher compensation expense from hiring additional staff to move our programs forward. Also contributing to the period-over-period increase in research and development expense was higher facilities and other expenses of $1.2 million. Higher facilities expenses primarily relate to increased depreciation expense related to manufacturing and lab facilities fixed asset additions, as well as higher costs to operate our facilities. For the three months ended March 31, 2014, research and development expense includes $1.5 million of stock-based compensation expense, compared to $0.7 million in the prior year. We expect research and development expense to continue to increase as development activities for sebelipase alfa, SBC-103 and our other pipeline programs continue.

 

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Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended March 31, 2014 and 2013 are summarized as follows (in thousands):

 

		Three Months Ended March 31,
		2014				2013				$ Change				% Change
Compensation and benefits-related		$	3,762			$	2,478			$	1,284				52	%
External and professional services			3,894				2,010				1,884				94
Facilities related and other			434				114				320				281
Stock-based compensation expense			1,714				1,052				662				63
Total selling, general and administrative expense		$	9,804			$	5,654			$	4,150				73	%

Selling, general and administrative expense increased by approximately $4.2 million to $9.8 million for the year ended December 31, 2013 as compared to $5.7 million for the prior year. The increase was primarily due to higher compensation-related expenses and external service costs. Compensation related costs, including stock-based compensation, increased $1.9 million as we continued to expand our resources to support our international organization and commercial preparations. External service costs contributed $1.9 million to the period-over-period increase in expense and were primarily due to increased consulting, accounting, patent and external commercial related costs. We expect selling, general and administrative expense to continue to increase as we continue commercial preparations and support expanded research operations.

Amortization of Developed Technology

Costs recognized for the amortization of developed technology for the three months ended March 31, 2014 and 2013 are summarized as follows (in thousands):

 

		Three Months Ended March 31,
		2014				2013				$ Change				% Change
Amortization of developed technology		$	390			$	699			$	(309	)			(44	)%

We recognized $0.4 million of amortization related to the developed technology associated with the FUZEON royalty stream in the three months ended March 31, 2014, as compared to $0.7 million in the prior year period. Amortization of developed technology is computed using an accelerated method based on the undiscounted actual cash flows received from the FUZEON royalty stream, in proportion to the estimated total undiscounted cash flows from the asset. In conjunction with expected cash flows, our amortization model assumed a larger proportion of expense in the periods immediately following the acquisition of the FUZEON royalty stream, thus the period-over-period decrease.

Interest Income, Net

 

		Three Months Ended March 31,
		2014				2013				$ Change				% Change
Interest income, net		$	75			$	89			$	(14	)			(16	)%

Interest income primarily relates to interest earned on our short-term investment balance. Our investments include U.S. treasury securities and money market funds, with a weighted average maturity of one year or less.

Provision for income taxes

 

		Three Months Ended March 31,
		2014				2013				$ Change				% Change
Provision for income taxes		$	18			$	—			$	18				—	%

Our provision for income taxes is comprised of the taxes currently payable as a result of foreign operations, and totaled less than $0.1 million for the three months ended March 31, 2014. As we are in a full valuation allowance, we do recognize any benefit from U.S. operating losses in our income statement or balance sheet.

 

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Liquidity and Capital Resources

Sources of Liquidity

We have financed our operations to date primarily from the proceeds of the sale of stock, and, to a lesser extent, license and royalty fees, upfront cash payments and research and development funding from collaborators, government grants and licensors. We intend to use our cash, cash equivalents and investments for general corporate purposes, which may include expanding our infrastructure to benefit sebelipase alfa and our platform, commercial preparations, supporting our pre-clinical and clinical studies, supporting the advancement of SBC-103, accelerating our early-stage programs, leveraging our platform technology to initiate multiple new pipeline programs and acquiring new technologies or businesses that are complementary to our current technologies and business focus.

On March 5, 2014, the Company announced the closing of a $211.5 million underwritten public offering of 2.0 million shares of common stock at a price per share of $105.75. The Company received net proceeds of approximately $200.9 million from this offering. In addition to this financing, the Company received aggregate net proceeds of approximately $473.9 million from public equity offerings in fiscal 2013 and 2012.

We do not expect to generate significant revenue from the direct sale of products currently in development for years, if ever. We receive royalties from the sale of FUZEON by Roche, which we expect to decrease over time. A significant portion of our revenues for the foreseeable future will be quarterly royalty payments from Roche based on sales of FUZEON and up-front license payments and funded research and development that we may receive under existing or new collaboration agreements, if any.

As of March 31, 2014, our principal sources of liquidity consisted of cash and cash equivalents and short-term investments of approximately $575.2 million. Our cash equivalents are highly liquid investments with a maturity of three months or less at date of purchase and consist of U.S. treasury bills and amounts held in money market funds.

Cash Flows

The use of our cash flows for operations has primarily consisted of salaries and wages for our employees, facility and facility-related costs for our office, laboratory, and manufacturing facilities, fees paid in connection with preclinical studies, clinical studies, outsourced manufacturing, laboratory supplies, consulting fees and commercial, legal and accounting fees. We expect that costs associated with clinical studies and manufacturing costs as well as commercial costs will increase in future periods as sebelipase alfa advances into further stages of development and our other preclinical candidates move forward in development.

Net cash used in operating activities was $34.0 million for the three months ended March 31, 2014, and was primarily the result of a net loss of $36.4 million, the drivers of which are discussed in further detail in “Results of Operations.” In addition, non-cash items and changes in certain operating assets and liabilities affected operating cash during three months ended March 31, 2014. Non-cash items include depreciation of fixed assets of $1.0 million, amortization of developed technology of $0.4 million, stock-based compensation of $3.2 million, and the amortization of premium on available for sale investments of $0.7 million. Changes in operating assets and liabilities resulted in a net use of cash of $2.9 million, which was primarily the result of increased prepaid expenses, other current assets and other assets of $2.6 million. The increases in prepaid and other assets, as well as accrued expenses and other liabilities were primarily driven by clinical, toxicology and manufacturing activities, the details of which are disclosed in further detail in Note 4, “Supplemental Balance Sheet Information.”

Net cash used in operating activities was $17.2 million for the three months ended March 31, 2013, and was primarily the result of a net loss of $14.5 million. In addition, non-cash items and changes in certain operating assets and liabilities affected operating cash during the first quarter of fiscal 2013. Non-cash items partially offsetting net loss include depreciation of fixed assets of $0.6 million, amortization of developed technology of $0.7 million, stock-based compensation of $1.7 million, and the amortization of discount on available for sale investments of $0.7 million. Changes in operating assets and liabilities resulted in a net use of cash of $6.4 million, which was primarily the result of increased prepaid expenses and other assets of $2.5 million, decreased deferred revenue of $2.9 million and decreased accounts payable and accrued expenses of $1.0 million from December 31, 2012. The increase in prepaid expense and other assets was primarily driven by cash outlays for clinical and manufacturing activities. The decrease in deferred revenue in the period was primarily the result of the recognition of upfront license fees related to the Mitsubishi Tanabe development programs.

We expect to continue to use cash in operations as we continue to seek to advance our pipeline programs through preclinical testing and clinical development. In addition, in the future, we may owe royalties and other contingent payments to our licensors based on the achievement of developmental milestones, product sales, and other specified objectives.

 

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Net cash used in investing activities totaled $79.9 million for the three months ended March 31, 2014, and was primarily a result of the purchase of available-for-sale investments of $167.6 million, partially offset by cash received from the maturity of available for sale investments totaling $90.7 million. Cash flows used for investing activities included $3.2 million for capital expenditure, partially offset by a change in restricted cash related to security deposits on properties of $0.3 million. Capital expenditures primarily relate to leasehold improvements at our production, lab and office locations. Cash used for capital expenditures in the statement of cash flows does not include $1.6 million for amounts that were incurred by our landlord related to the construction of our new Bogart, GA manufacturing facility, where we have been deemed the “accounting owner” based on the applicable lease accounting guidance and $2.7 million for capital expenditures that were accrued but not yet paid.

Net cash used in investing activities totaled $66.1 million in the three months ended March 31, 2013, and was primarily a result of the purchase of available-for-sale investments of $103.8 million, partially offset by cash received from the maturity of available for sale investments totaling $43.0 million. Other uses of cash for investing activities included $2.9 million of restricted cash and $2.4 million for capital expenditures. The restricted cash outlay relates to a short-term letter of credit associated with construction activities at our planned headquarters in Lexington, MA. We anticipate cash spent on capital expenditures will continue to increase as we expand our internal production and development capabilities.

Financing activities provided cash of approximately $204.1 million in the three months ended March 31, 2014, resulting from net cash received from a secondary offering of $200.9 million and proceeds from the exercise of stock options of $3.2 million.

Financing activities provided cash of approximately $113.1 million in the three months ended March 31, 2013, resulting from net cash received from a secondary offering of $111.1 million and proceeds from the exercise of stock options of $2.0 million.

Funding Requirements

We have incurred significant losses since our inception. As of March 31, 2014, we had an accumulated deficit of approximately $290.7 million. Our cash and cash equivalents and investments balance at March 31, 2014 totaled $575.2 million. We expect to use our existing cash and cash equivalents and investments to continue our research and development programs and commercialization activities and to fulfill our planned operating goals. In particular, our currently planned operating and capital requirements include the need for working capital to support our research and development activities for sebelipase alfa, SBC-103 and other preclinical candidates that we are seeking to develop, and to fund our general and administrative and commercial costs and expenses. We expect that we will have sufficient cash and cash equivalents to sustain operations to at least the second half of 2016.

Our ability to finance our operations into the future and to generate revenues will depend heavily on our ability to obtain favorable results in the ongoing clinical trials of sebelipase alfa and to successfully develop and commercialize sebelipase alfa. We expect that our sources of cash flows from operations for the foreseeable future will be quarterly royalty payments from Roche based on sales of FUZEON and additional collaboration revenues, if any. Net sales of FUZEON by Roche are generally expected to continue to decline in the future.

We may not be able to successfully enter into any new corporate collaborations. As a result, we cannot assure that we will attain any further funding from collaborations or licensing arrangements.

There are a number of factors that may adversely affect our planned future capital requirements and accelerate our need for additional financing, many of which are beyond our control, including the following:

 

•

unanticipated costs in our research and development programs;

 

•

the timing, receipt and amount of payments, if any, from current and potential future collaborators;

 

•

the timing and amount of payments due to licensors of patent rights and technology used in our drug candidates; and

 

•

unplanned costs to prepare, file, prosecute, maintain and enforce patent claims and other patent-related costs, including costs related to litigation and contested proceedings, and technology license fees.

We may seek additional funding through debt or equity financings. The fundraising environment for life science companies, in general, is highly volatile. Due to this and various other factors, additional funding may not be available on acceptable terms, if at all. In addition, the terms of any financing may be dilutive or otherwise adversely affect other rights of our stockholders. We also may seek additional funds through arrangements with collaborators, licensees or other third parties. These arrangements would generally require us to relinquish or encumber rights to some of our technologies or drug candidates, and we may not be able to enter into such arrangements on acceptable terms, if at all. If we are unable to obtain additional funding on a timely basis, whether through sales of debt or equity or through third-party collaboration or license arrangements, we may be required to curtail or terminate some or all of our development programs, including some or all of our drug candidates

 

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Contractual Obligations and Requirements

As of March 31, 2014, our contractual obligations consisted primarily of operating leases for our headquarters and other facilities, contractual purchase obligations and to a lesser extent, minimum contractual payments on licensed technology.

Headquarters Lease

In the first quarter of 2014, we entered into a lease amendment to expand our currently leased corporate headquarters by 29,316 rentable square feet. We anticipate that we will occupy the expanded space in June 2014 upon the completion of landlord building modifications. The initial rent for the additional space will be $22.50 per square foot plus certain operating expenses and taxes. We will have the right to occupy the entire additional space upon the completion of the building modifications, but will pay rent on only 9,524 square feet for the first two months and on 19,048 for the following eight months, before paying rent on the full 29,316 rentable square feet thereafter. The total combined leased space, including the additional space, will consist of 80,872 square feet. The initial term of the amendment begins upon us occupying the additional space, through December 2019, concurrent with the original lease.

There have been no other significant changes to our contractual obligations and requirements during the three months ended March 31, 2014, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2013, which was filed with the SEC on March 3, 2014.

Off-Balance Sheet Arrangements

As of March 31, 2014, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Critical Accounting Policies and Estimates

In preparing our Financial Statements in accordance with accounting principles generally accepted in the U.S. and pursuant to the rules and regulations promulgated by the SEC, we make assumptions, judgments and estimates that can have a significant impact on our net income/loss and affect the reported amounts of certain assets, liabilities, revenue and expenses, and related disclosures. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates. We also discuss our critical accounting policies and estimates with the Audit Committee of our Board of Directors.

We believe that the assumptions, judgments and estimates involved in the revenue recognition, research and development expense, amortization of intangible assets, and income taxes have the greatest impact on our Financial Statements, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.

There have been no significant changes to our critical accounting policies and estimates during the three months ended March 31, 2014, as compared to the critical accounting policies and estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2013, which was filed with the SEC on March  3, 2014.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our market risks during the three months ended March 31, 2014 have not materially changed from those discussed in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of our Annual Report on Form 10-K for the year ended December 31, 2013, which was filed with the SEC on March 3, 2014.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the SEC and to process, summarize and disclose this information within the time periods specified in the rules and forms of the SEC. Based on the evaluation of our disclosure controls and

 

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procedures (as defined in the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), Rules 13a-15(e) and 15d-15(e)) as of March 31, 2014, our Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures are effective to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions.

There has been no change in our internal control over financial reporting that occurred during the three months ended March 31, 2014 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.

None.

Item 1A. Risk Factors.

RISK FACTORS

Investing in our securities involves risk. Prior to making a decision about investing in our securities, you should carefully consider the specific risk factors discussed below and all of the other information contained or incorporated by reference in this report. The risks and uncertainties we have described are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our operations. If any of these risks were to occur, our business, financial condition or results of operations would likely suffer. In that event, the trading price of our common stock could decline, and you could lose all or part of your investment.

Risks Related to the Development and Commercialization of Product Candidates

We are largely dependent on the success of sebelipase alfa. All of our product candidates, including sebelipase alfa, are still in development. Preclinical and clinical trials of our product candidates may not be successful.

Our business prospects are largely dependent upon the successful development and commercialization of sebelipase alfa. We have completed enrollment in our global ARISE clinical trial, a randomized, double-blind, placebo-controlled Phase 3 trial of sebelipase alfa in children and adults with LAL Deficiency, and our Phase 2/3 trial in infants with LAL Deficiency. We are planning to enroll patients in two additional open label clinical trials in patients with LAL Deficiency, one in a broader patient population with LAL Deficiency, including children and adults, and another targeting infants with the rapidly progressive disease. In addition, we may initiate other clinical trials. Before we can commercialize product candidates, including sebelipase alfa, we need to:

 

•

conduct substantial research and development;

 

•

undertake preclinical and clinical testing and other costly and time consuming measures;

 

•

scale-up and transfer manufacturing processes while maintaining consistent product quality; and

 

•

pursue and obtain marketing and manufacturing approvals and, in some jurisdictions, pricing and reimbursement approvals.

This process involves a high degree of risk and takes many years. Our product development efforts with respect to a product candidate may fail for many reasons, including:

 

•

failure of the product candidate in preclinical studies;

 

•

failure to obtain, or delays in obtaining, the required regulatory approvals to initiate clinical studies for the product candidate;

 

•

failure of later trials to confirm positive results from earlier preclinical studies or clinical trials;

 

•

delays or difficulty enrolling patients in clinical trials, particularly for disease indications with small patient populations;

 

•

failure to identify a sufficient number of patients who meet the clinical trial enrollment criteria and/or who would support commercial launch and subsequent commercialization efforts;

 

•

patients exhibiting adverse reactions to the product candidate or indications of other safety concerns;

 

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insufficient clinical trial data to support the safety, effectiveness or superiority of the product candidate;

 

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inability to manufacture sufficient quantities of the product candidate for development or commercialization activities in a timely and cost-efficient manner, if at all;

 

•

inability to produce, or sufficiently test, comparable or consistent drug materials derived from different manufacturing facilities operated by us or from processes run by third party manufacturers which could impact our ability or timing with respect to receiving regulatory approval for our product candidates;

 

•

failure to obtain, or delays in obtaining, the required regulatory approvals for the product candidate, the facilities or the processes used to manufacture the product candidate; or

 

•

changes in the regulatory or pricing and reimbursement environments could make development of a new product or further development of an existing product for a new indication no longer desirable.

Few research and development projects result in commercial products, and success in preclinical studies or early clinical trials often is not replicated in later studies.

We may decide to abandon development of a product candidate or service at any time, or we may be required to expend considerable resources repeating clinical trials or conducting additional trials, either of which would increase costs of development and delay any revenue from those programs. In addition, a regulatory authority may deny or delay an approval because it is not satisfied with the design, conduct, or results of clinical trials or due to its assessment of the data we supply.

We have neither obtained marketing approval, nor commercialized any of our current product candidates.

We have neither obtained marketing approval nor commercialized any of our current product candidates and do not expect to receive marketing approval or generate revenue from the direct sale of an approved product, including sebelipase alfa, for an indefinite period, if ever. We have only limited clinical experience from our sebelipase alfa studies even though we have completed enrollment in the ARISE trial and the Phase 2/3 open-label trial in infants with LAL Deficiency. We are planning to enroll patients in two other open label clinical trials, one targeting infants with the LAL Deficiency and another for a broader patient population with LAL Deficiency, including children and adults, and may initiate additional clinical trials. We are also conducting preclinical studies with other product candidates, including SBC-103, for various other indications. Our limited experience might prevent us from successfully designing or implementing a clinical trial for any of these indications. We may not be able to demonstrate that our product candidates meet the appropriate standards for regulatory approval, including because we may be unsuccessful in convincing regulatory authorities of the adequacy of the design of our trials or the sufficiency of the data generated from our clinical and other studies. If we are not successful in conducting and managing our preclinical development activities or clinical trials or obtaining regulatory approvals, we might not be able to commercialize our lead programs, or might be significantly delayed in doing so, which will materially harm our business.

If our preclinical or clinical studies do not produce positive results, or are delayed or if serious side effects are identified during drug development, we may experience delays, incur additional costs and ultimately be unable to commercialize our product candidates.

Before obtaining regulatory approval for the sale of our product candidates, we must conduct, at our own expense, extensive preclinical tests to demonstrate the safety of our product candidates in animals, and clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Preclinical and clinical testing is expensive, difficult to design and implement and can take many years to complete. A failure of one or more preclinical studies or clinical trials can occur at any stage of testing. We may experience numerous events during, or as a result of, preclinical testing and the clinical trial process, including for potential new indications, which could delay or prevent our receipt of regulatory approval for, or the commercialization of, our product candidates, including:

 

•

our preclinical tests or clinical trials may produce negative or inconclusive results, and we may decide or regulators may require, us to conduct additional preclinical testing prior to initiating clinical trials, or to suspend ongoing studies;

 

•

we may decide, or regulators may require us, to change the design of clinical trials in ways that may slow their progress, delay the initiation of clinical trials, or we may abandon projects that we expect to be promising;

 

•

a regulatory authority or institutional review board may not authorize us to commence a clinical trial or conduct a clinical trial at a prospective trial site;

 

•

conditions imposed on us by the FDA or any non-U.S. regulatory authority regarding the scope or design of our clinical trials may require us to resubmit our clinical trial protocols to these authorities or to institutional review boards or ethics committees for re-review due to changes in the regulatory environment;

 

•

the number of patients required for clinical trials may be larger than we anticipate or are able to enroll, or participants may drop out of, or not qualify for, clinical trials at a higher rate than we anticipate;

 

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•

our third-party contractors or clinical investigators may fail to comply with regulatory requirements or fail to meet their contractual obligations to us in a timely manner or at all;

 

•

we might have to suspend or terminate one or more of our clinical trials if we, a regulatory authority or an institutional review board or ethics committee determine that the participants are being exposed to unacceptable health risks;

 

•

a regulatory authority or institutional review board or ethics committee may require that we hold, suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements;

 

•

a regulatory authority may require that we conduct additional clinical research to provide additional information regarding the efficacy or safety of sebelipase alfa;

 

•

the cost of our clinical trials may be greater than we anticipate;

 

•

the supply or quality of our product candidates or other materials necessary to conduct our clinical trials may be insufficient or inadequate or we may not be able to reach agreements on acceptable terms with prospective contract manufacturing organizations;

 

•

we may not be able to reach agreements on acceptable terms with prospective clinical research organizations;

 

•

if approved, we may not be able to reach agreements on acceptable terms with commercial distributors; or

 

•

the effects of our product candidates may not be the desired effects, may include undesirable side effects, or the product candidates may have other unexpected characteristics.

We may obtain approval for indications that are not as broad as intended or entirely different than those indications for which we sought approval. For example, even if we meet the pre-specified primary and secondary endpoints in the ARISE clinical trial for children and adults, potential regulatory approval could be limited to the treatment of LAL Deficiency only in infants, and that would represent a small portion of the total LAL Deficiency patient population. If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate or are unable to successfully complete our clinical trials or other testing or if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:

 

•

be delayed in obtaining, or may not be able to obtain, marketing approval for one or more of our product candidates;

 

•

incur substantial additional costs in conducting such additional clinical trials or other testing;

 

•

obtain regulatory approval for only a narrower indication or an indication that might be otherwise qualified or constrained; or

 

•

have the product removed from the market after obtaining marketing approval.

Our product development costs will also increase if we experience delays in testing or approvals. We do not know whether any preclinical tests or clinical trials will be initiated as planned, will need to be restructured or will be completed on schedule, if at all. Due to the limited term of a patent, significant preclinical or clinical trial delays could also shorten the period of time from marketing approval to patent expiration, during which we may benefit from patent protection of our product candidates. Such delays could allow our competitors to bring products to market before we do and impair our ability to commercialize our products or product candidates.

We may find it difficult to enroll patients in our clinical trials.

Although we have completed enrollment in our ARISE clinical trial and our Phase 2/3 trial in infants with LAL Deficiency, we are currently planning to enroll patients in two additional open label clinical trials in patients with LAL Deficiency, one in a broader patient population, including children and adults, and another one targeting infants with the rapidly progressive disease. Potential patients for our product candidates, including sebelipase alfa, may not be adequately diagnosed or identified with the diseases being targeted by our product candidates. Sebelipase alfa is being developed to treat LAL Deficiency, which is very rare. Studies by investigators who screened various populations for a common mutation that causes LAL Deficiency indicate a prevalence range of 1:40,000 to 1:300,000 for LAL Deficiency in children and adults. There is no prevalent population for infants with LAL Deficiency, since these infants almost never survive beyond the first year of life. We may not be able to initiate or continue clinical trials if we are unable to locate a sufficient number of eligible patients to participate in the clinical trials required by the FDA or other non-U.S. regulatory agencies. In addition, the process of finding and diagnosing patients may prove costly. Our inability to enroll a sufficient number of patients for any of our current or future clinical trials would result in significant delays or may require us to abandon one or more clinical trials altogether.

 

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The results of our clinical trials may not prove sufficient to obtain regulatory approval of our product candidates, and subsequent trials may fail to replicate promising data seen in earlier preclinical studies and clinical trials.

The data presented from our clinical trials with sebelipase alfa in infants and adults with LAL Deficiency are consistent with preclinical findings and the known mechanism of action for LAL. We have completed enrollment in our ARISE clinical trial and our Phase 2/3 trial in infants with LAL Deficiency. In addition, we are planning to enroll patients with LAL Deficiency in two additional open label clinical trials, one in a broader patient population, including children and adults, and another one targeting infants with rapidly progressive disease. We also have other product candidates, including SBC-103, that are in various stages of preclinical development and we have plans to, or may, initiate clinical studies with these candidates.

However, promising results in our preclinical studies or clinical trials may not be replicated in ongoing and future studies or trials, and final data analysis may differ from interim data analysis. Even if our ongoing and additional trials of sebelipase alfa are conducted and completed as planned, the results may not meet the primary or secondary endpoints, or otherwise not prove sufficient to obtain regulatory approval or result in a restricted product label that could negatively impact commercialization. Success in preclinical testing does not ensure success in clinical trials, and success in early stage clinical trials does not ensure success in later clinical trials. This can be due to a variety of reasons, including variations in patient populations, or the inability of certain patients to complete all assessments required by the clinical trial protocol, adjustments to clinical trial protocols or designs as compared to earlier testing or trials, variations in the data that could produce inconclusive or uninterpretable results, or the use of additional trial sites or investigators. Phase 3 clinical trials often fail to replicate encouraging results seen in preclinical studies and early clinical trials. In addition, clinical trial data are subject to differing interpretations, and regulatory agencies may not concur with our analysis of clinical trial data or its implications, which may result in delays in the regulatory approval process. Ongoing and future studies, including for new indications, may, for example, indicate safety concerns that regulatory authorities view as unacceptable. Final data analysis of our completed, ongoing and future clinical trials may fail to demonstrate that our product candidates are sufficiently safe and effective for pursued or new indications. Any such failure could cause us to abandon a product candidate, substantially delay development of other product candidates, or require substantial expenditures to conduct additional trials. Both preclinical and clinical data are often susceptible to varying interpretations that may delay, limit or prevent initiation of clinical studies, regulatory approvals or commercialization. Any delay in, or termination of, our clinical trials would delay our obtaining regulatory approval of the affected product candidate and, consequently, our ability to commercialize that product candidate and potentially our other product candidates. Development and commercialization of therapies for rare diseases requires expenditure of significant funds with no assurance of success.

A regulatory authority may deny or delay approval of our product candidates, including sebelipase alfa, because it is not satisfied with the structure or conduct of our clinical trials or due to its assessment of the data we supply, or may determine to approve our product candidates for use in narrow patient populations.

A regulatory authority may not agree with the design or endpoints of our clinical trials. We sought advice from EMA for our sebelipase alfa development plan, including the ARISE clinical trial design and EMA was supportive of our plan in principle. We did not seek a special protocol assessment with the FDA and do not have agreement with the FDA regarding the design or primary endpoint utilized in the ARISE clinical trial. Accordingly, we believe that we will need to demonstrate efficacy based on a totality of evidence including success on multiple endpoints in our clinical studies to support a favorable risk-benefit profile and provide substantial evidence of efficacy of sebelipase alfa for the treatment of LAL Deficiency, including data from the ARISE clinical trial, the Phase 2/3 open-label trial in infants with LAL Deficiency, as well as from the natural history studies for LAL Deficiency. Based on FDA feedback, it will be essential to link the primary endpoint for the ARISE clinical trial, alanine aminotransferase (ALT) normalization, to other evidence of clinical benefit. We also will need to provide evidence to FDA demonstrating that ALT normalization, alone or in combination with other endpoints, is reasonably likely to predict clinical benefit. If we are unable to do so, even if we meet the pre-specified primary and secondary endpoints in the ARISE clinical trial, potential regulatory approval could be limited to a small subset of the total LAL Deficiency patient population, unless and until we successfully complete additional clinical trials, if ever. In addition, regulatory authorities may not believe that we have provided sufficient safety data or adequately demonstrated clinical benefit in the patient population studied in the clinical trial. Clinical data is subject to varied interpretations, and regulatory authorities may disagree with our assessments of data. In any such case, a regulatory authority could insist that we provide additional data or conduct additional clinical studies, which could substantially delay or even prevent commercialization efforts, particularly if we are required to conduct additional pre-approval clinical studies. A positive opinion by the Committee for Medicinal Products for Human Use (CHMP) is required for EMA approval and requires agreement among a majority of CHMP members, each of whom may have differing opinions on the strength of the evidence we may provide.

Priority review for our drug product candidates, if obtained, may not actually lead to a faster review process.

In the future, we may request priority review from the FDA and/or accelerated assessment from EMA for sebelipase alfa and our other drug product candidates; however, the FDA or EMA may not grant it. Without priority review, the FDA review timeline for first cycle review could be longer than 12 months, at which time FDA may decline to approve the application or issue a complete response letter requiring additional data to be submitted. A determination of acceptance for priority review is made after a complete

 

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BLA is accepted for filing, based on criteria defined by FDA. A lengthier review process will delay revenue from the sale of products and will increase the capital necessary to fund these product development programs. In addition, sebelipase alfa received Fast Track Designation by the FDA, and Breakthrough Therapy designation by the FDA for LAL Deficiency presenting in infants; however, the practical implications of Fast Track and Breakthrough Therapy designation cannot be determined at this time and may not lead to a faster review or approval. The review timelines to reach a CHMP opinion and EMA action will also depend on how efficiently we respond to questions which stop the clock during the review.

Our product candidates, including sebelipase alfa, if approved by any regulatory authorities could be subject to labeling and other restrictions, and we will be subject to ongoing regulatory obligations, oversight and continued regulatory review, which may result in significant additional expense.

Any regulatory approvals that we obtain for our product candidates will be subject to limitations on the approved indicated uses or patient population for which the product may be recommended for use or marketed, or to the conditions of approval, including a risk evaluation and mitigation strategy or post-marketing commitments, requirements, or follow-up measures. In addition, if the FDA, EMA or other regulatory authorities approve a product candidate, the manufacturing processes, labeling, packaging, distribution, storage, adverse event reporting, dispensation, distribution, advertising, promotion and recordkeeping for the product will be subject to extensive and ongoing regulatory requirements. These requirements will include submissions of safety and other post-marketing information and reports, ongoing maintenance of product registration, as well as continued compliance with cGMPs, GCPs (good clinical practices), and GLPs. If we do not comply with the applicable regulations and requirements, the range of possible sanctions includes issuance of adverse publicity, product recalls or seizures, fines, total or partial suspensions of production and/or distribution, suspension of marketing applications, and enforcement actions, including injunctions and civil or criminal prosecution. The FDA and comparable international regulatory agencies can withdraw a product’s approval under some circumstances, such as the failure to comply with regulatory requirements or unexpected safety issues.

Regulatory approvals could also contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials and extraordinary requirements for surveillance to monitor the safety and efficacy of the drug product. Post-marketing studies and/or post-market surveillance may suggest that a product causes undesirable side effects which present an increased risk to the patient. If data we collect from post-marketing studies suggest that one of our approved products may present a risk to safety, the regulatory authorities could withdraw our product approval, suspend production or place other labeling or marketing restrictions on our products. If regulatory sanctions are applied or if regulatory approval is delayed or withdrawn, the value of our Company and our operating results will be adversely affected.

If the market opportunities for our product candidates are smaller than we believe they are, our revenues may be adversely affected and our business may suffer.

We focus our research and product development on treatments for rare diseases. Our projections of both the number of people who have these diseases, as well as the subset of people with these diseases who have the potential to benefit from treatment with our product candidates, are based on estimates. In addition, the awareness of LAL Deficiency among treating health care providers is low. Currently, most reported estimates of the prevalence of these diseases are based on studies of small subsets of the population of specific geographic areas, which are then extrapolated to estimate the prevalence of the diseases in the broader world population. For example, studies estimate the prevalence of LAL Deficiency in children and adults to be between 1:40,000 and 1:300,000. In addition, there is no prevalent population for infants with LAL Deficiency, since these infants almost never survive beyond the first year of life. These estimates may prove to be incorrect and new studies may change the estimated prevalence of these diseases. If the estimates are incorrect, and the prevalence rate is lower than we anticipate, our commercial business may suffer.

The commercial success of any product candidate that we may develop, including sebelipase alfa, will depend upon the degree of market acceptance by physicians, patients, third party payors and others in the medical community.

Any future product that we may bring to the market, including sebelipase alfa, may not gain market acceptance by physicians, patients, third party payors and others in the medical community. If our products do not achieve an adequate level of acceptance, we may not generate significant product revenue and may not become profitable. The degree of market acceptance of these product candidates, if approved for commercial sale, will depend on a number of factors, including:

 

•

the prevalence and severity of any side effects of the product, including any limitations or warnings contained in a product’s approved labeling;

 

•

the perception of clinical benefit, safety, and potential advantages over alternative treatments;

 

•

relative convenience and ease of administration;

 

•

the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;

 

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the strength of marketing and distribution support and timing of market introduction of competitive products;

 

•

publicity concerning our products or competing products and treatments; and

 

•

sufficient third party insurance coverage or reimbursement in the countries or geographies where patients live.

Even if a potential product displays a favorable efficacy and safety profile in preclinical and clinical trials, market acceptance of the product will not be known until after it is launched. Our efforts to educate the medical community and third party payors on the benefits of the product candidates may require significant resources and may never be successful. Such efforts to educate the marketplace may require more resources than are required by the conventional technologies marketed by our competitors.

Uncertainties relating to third-party reimbursement and health care reform measures could limit payments or reimbursements for future products that we may develop could materially adversely affect our business.

In the U.S. and elsewhere, sales of prescription drugs depend in part on the consumers’ ability to obtain reimbursement for the cost of the drugs from third-party payors, such as private and government insurance programs. Third-party payors are increasingly challenging the prices charged for medical products and services, including those related to rare diseases, in an effort to promote cost containment measures and alternative health care delivery systems. Our prospects for achieving profitability will depend heavily upon the availability of adequate reimbursement for the use of our approved product candidates from governmental and other third party payors, both in the U.S. and in other markets. Reimbursement by a third party payor may depend upon a number of factors, including the third party payor’s determination that use of a product is:

 

•

a covered benefit under its health plan;

 

•

safe, effective and medically necessary;

 

•

appropriate for the specific patient;

 

•

cost-effective; and

 

•

neither experimental nor investigational.

Obtaining reimbursement approval for a product from each governmental or other third party payor is a time consuming and costly process that could require us to provide supporting scientific, clinical and cost effectiveness data for the use of our products to each payor. We may not be able to provide data sufficient to gain acceptance with respect to reimbursement or might need to conduct post-marketing studies in order to demonstrate the cost-effectiveness of any future products to such payors’ satisfaction. Such studies might require us to commit a significant amount of management time and financial and other resources. Even when a payor determines that a product is eligible for reimbursement, the payor may impose coverage limitations that preclude payment for some uses that are approved by the FDA or non-U.S. regulatory authorities. In addition, there is a risk that full reimbursement may not be available for high priced products. Moreover, eligibility for coverage does not imply that any product will be reimbursed in all cases or at a rate that allows us to make a profit or even cover our costs. Interim payments for new products, if applicable, may also not be sufficient to cover costs and may not be made permanent.

Even if we obtain regulatory approval for our product candidates, if we are unable to successfully develop internal and external commercialization capabilities, we will be unable to successfully commercialize them.

We currently have limited internal capabilities for the commercialization of any product candidates that may be approved. In order to commercialize a product if approved, we must develop our internal sales, marketing, contracting and reimbursement capabilities. We will need to commit significant time and financial and managerial resources to develop a medical affairs team, and a marketing and sales force with technical expertise and with supporting distribution capabilities.

Factors that may inhibit our efforts to develop our commercialization capabilities include:

 

•

our inability to recruit and retain adequate numbers of effective medical and commercial personnel or manage a potential substantial increase in our number of full-time employees in a short period;

 

•

our inability to train sales personnel, who may have limited experience with us or our future products, to deliver a consistent message regarding and be effective in convincing physicians to prescribe our future products;

 

•

our inability to equip medical and sales personnel with effective materials, including medical and sales literature to help them educate physicians and other healthcare providers regarding applicable rare diseases and our future products; and

 

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unforeseen costs and expenses associated with creating and sustaining an independent sales and marketing organization.

 

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If we are not successful in building a medical affairs and sales and marketing infrastructure, we will have difficulty commercializing any future products, which would adversely affect our business and financial condition.

In addition, we plan to rely on third parties to help distribute our future products to patients. We expect that we will need to contract with third-party logistics companies to warehouse and distribute any approved products, and coordinate prescription intake and distribution, reimbursement adjudication, patient financial support, and ongoing compliance support. This distribution network will require significant coordination with our sales and marketing and finance organizations. If we are unable to effectively establish and manage the distribution process, the commercial launch and sales of any future products we may commercialize, will be delayed or severely compromised and our results of operations may be harmed.

We expect to rely heavily on orphan drug exclusivity for sebelipase alfa and SBC-103. A competitor may receive orphan drug marketing authorization prior to us for the same indication for which we are seeking approval.

Approval of sebelipase alfa and SBC-103 as orphan drugs would grant us seven years of marketing exclusivity under the Federal Food, Drug, and Cosmetic Act, and up to 10 years of marketing exclusivity in Europe. While the orphan drug designation for sebelipase alfa and SBC-103 will provide market exclusivity in the U.S., Europe and Japan, we will not be able to exclude other companies from manufacturing and/or selling drugs using the same active ingredient for the same indication beyond that timeframe. Furthermore, the marketing exclusivity in Europe can be reduced from 10 years to six years if the initial designation criteria have significantly changed since the market authorization of the orphan drug or orphan exclusivity may be revoked if we cannot reliably supply the market. Even if we have orphan drug designation for a particular drug indication, we cannot guarantee that another company also with orphan drug designation will not receive marketing authorization for the same indication before we do. If that were to happen, our applications for that indication may not be approved until the competing company’s period of exclusivity has expired. Also, we cannot guarantee that another company with orphan drug designation will not receive marketing authorization for the same indication at the same time we do. In this case, both companies would receive market exclusivity, which could have a material adverse effect on sales in that market. Even if we are the first to obtain marketing authorization for an orphan drug indication, there are circumstances under which a competing product may be approved for the same indication during the seven-year period of marketing exclusivity in the U.S., such as if the later product is shown to be clinically superior to our product, or if the later product is a different drug than sebelipase alfa or SBC-103. Further, the seven-year marketing exclusivity in the U.S. would not prevent competitors from obtaining approval of the same compound for other indications or the use of other types of drugs for the same use as the orphan drug.

We face significant competition from other pharmaceutical and biotechnology companies. Our operating results will suffer if we fail to compete effectively.

The pharmaceutical and biotechnology industries are intensely competitive and subject to rapid and significant technological change. Our competitors include organizations such as major multinational pharmaceutical companies, established biotechnology companies and specialty pharmaceutical and generic drug companies. Many competitors have greater financial and other resources than we have, such as larger research and development staff, more extensive marketing, distribution, sales and manufacturing organizations and experience, more extensive clinical trial and regulatory experience, expertise in prosecution of intellectual property rights and access to development resources like personnel and technology. As a result, these companies may develop or improve existing technologies that make our manufacturing technology or product candidates obsolete or they may obtain regulatory approval more rapidly than we are able to and may be more effective in selling and marketing their products.

We are subject to regulations regarding the manufacturing of therapeutic proteins and, if we are unable to comply, or if we or any third party provider fails to provide sufficient quantities of material, we may experience delays and incur additional costs.

We and our third party suppliers are subject to ongoing periodic unannounced inspections by the FDA, corresponding state agencies or non-U.S. regulatory authorities to ensure strict compliance with cGMPs and other government regulations and corresponding foreign standards. The cGMP requirements govern manufacturing, quality control and documentation policies and procedures. Complying with cGMP and non-U.S. regulatory requirements will require that we expend time, money, and effort in production, recordkeeping, and quality control to assure that the product candidate or product meets applicable specifications and other requirements. We and our contract manufacturers and testing laboratories must also pass pre-approval inspections prior to regulatory approvals. Failure to pass a pre-approval inspection might significantly delay regulatory approval of our product candidates. If we or our contract manufacturers or testing laboratories fail to comply with these requirements, we would be subject to possible regulatory action and might be limited in the jurisdictions in which we are permitted to sell our products. As a result, our business, financial condition, and results of operations might be materially harmed.

We currently manufacture the therapeutic protein product candidates that we are developing, using both internal resources and external contract manufacturers; however, we have limited experience in manufacturing or procuring products in commercial quantities and our manufacturing system has never been utilized to produce a product approved by regulatory authorities for commercial use. We may not be able to manufacture enough product to conduct clinical trials or for later commercialization at an acceptable cost or at all. We may not be able to produce, or sufficiently test comparable drug materials derived from different

 

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manufacturing facilities operating by us or from processes run by our third party manufacturing partners, which could impact our ability or timing with respect to receiving regulatory approval for our product candidates. In addition, a number of other factors could cause production interruptions at our facilities or the facilities of our third-party providers, including equipment malfunctions, facility contamination, labor problems, raw material shortages or contamination, natural disasters, disruption in utility services, terrorist activities, human error or disruptions in the operations of our suppliers.

Our product candidates are biologics and are very difficult to manufacture. We employ multiple steps to attempt to control the manufacturing processes. Problems with these manufacturing processes, even minor deviations from the normal process, could result in product defects or manufacturing failures that result in lot failures, product recalls, product liability claims and insufficient material for clinical trials. Certain of the raw materials required in the manufacturing and the formulation of our product candidates are derived from biological sources, including egg white and human serum albumin. Such raw materials are difficult to procure and may be subject to contamination or recall. Also, some countries in which we may operate could restrict the use of certain biologically derived substances in the manufacture of drugs. A material shortage, contamination, recall, or restriction on the use of certain biologically derived substances in the manufacture of our products could adversely impact or disrupt manufacturing or could result in a withdrawal of our product candidates.

Our current and anticipated future reliance on a limited number of third parties to complete the manufacturing process for our products exposes us to certain risks.

We currently rely on third parties to complete the manufacturing process, including purifying, finishing and filling our products. Our anticipated future reliance on a limited number of third-party manufacturers exposes us to the following risks:

 

•

We might be unable to identify manufacturers on acceptable terms or at all because the number of potential manufacturers is limited and the FDA and other regulatory authorities must approve any replacement contractor. This approval would generally require new testing and compliance inspections. In addition, a new manufacturer would have to be educated in, or develop substantially equivalent processes for, production of our products prior to receipt of FDA approval, if any.

 

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Our third-party manufacturers might be unable to formulate and manufacture the relevant drugs in the volume and of the quality required to meet our clinical and commercial needs, if any.

 

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Our third-party contract manufacturers might not perform as agreed or might not remain in the contract manufacturing business for the time required to supply possible clinical trials or to successfully produce, store and distribute our products.

 

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Drug manufacturers are subject to ongoing periodic unannounced inspections by regulatory authorities, corresponding state agencies and non-U.S. regulatory authorities to ensure strict compliance with cGMP, and other government regulations and corresponding foreign standards. We do not have complete control over third-party manufacturers’ compliance with these regulations and standards.

 

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If any third-party manufacturer makes improvements in the manufacturing process for the relevant products, we might not own, or might have to share, the intellectual property rights to the innovation with our licensors.

 

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We might compete with other companies for access to these manufacturers’ facilities and might be subject to manufacturing delays if the manufacturers give other clients higher priority than us.

Each of these risks could delay our clinical trials or the approval, if any, of our product candidates by the FDA or the commercialization of our product candidates and could result in higher costs or deprive us of potential product revenues. As a result, our business, financial condition, and results of operations might be materially harmed.

If we do not achieve our projected development and commercialization goals in the time frames we expect and announce, the credibility of our management and our organizational competence may be adversely affected.

For planning purposes, we estimate the timing of the accomplishment of various scientific, preclinical, clinical, regulatory, market launch and commercialization goals, which we sometimes refer to as milestones. These milestones may include the commencement or completion of scientific, preclinical and clinical studies, the submission of regulatory filings and eventual product launch.

From time to time, we may publicly announce the estimated timing of some of these milestones. All of these milestones will be based on a variety of assumptions. The actual timing of these milestones can vary dramatically compared to our estimates, in many cases for reasons beyond our control. For example, clinical trials may be delayed due to factors such as regulatory agency approval, institutional review board approvals, qualification of clinical sites, scheduling conflicts with participating clinicians and clinical institutions and the rate of patient enrollment. In most circumstances, we rely on academic institutions, major medical institutions, governmental research organizations (U.S. or internationally based), clinical research organizations or contract manufacturing organizations to conduct, supervise or monitor some or all aspects of clinical trials involving our product candidates. We will have limited control over the timing and other aspects of these clinical trials.

 

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If we do not meet the milestones as publicly announced (or as projected by various security analysts who follow us), our stockholders or potential stockholders may lose confidence in our ability to meet overall product development and commercialization goals and, as a result, the price of our common stock may decline.

Risks Related to Intellectual Property

If we infringe the rights of third parties we might have to forgo selling our future products, pay damages, or defend litigation.

If our product candidates, methods, processes, or other technologies infringe the proprietary rights of other parties, we could incur substantial costs and might have to:

 

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obtain rights or licenses from such third parties, which might not be available on commercially reasonable terms, if at all;

 

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abandon an infringing product candidate;

 

•

redesign products or processes to avoid infringement;

 

•

stop using the subject matter claimed in the patents held by others;

 

•

pay damages; and/or

 

•

engage in litigation or administrative proceedings which might be costly whether we win or lose, and which could result in a substantial diversion of financial and management resources.

Any of these events could substantially harm our earnings, financial condition, and operations.

Our business depends on protecting our intellectual property.

We and our licensors are pursuing intellectual property protection for sebelipase alfa and other product candidates in the form of patent applications that have been and will continue to be filed in the U.S. and in other countries; however, there can be no assurance that patents will issue with the scope for which they are originally filed, if at all.

If we and our licensors do not obtain protection for our respective intellectual property rights and our products are not, or are no longer, protected by regulatory exclusivity protection, such as orphan drug protection, our competitors might be able to develop and commercialize competing drugs.

Our success, competitive position, and future revenues, if any, depend in part on our ability and the abilities of our licensors to obtain and maintain patent protection for our products, methods, processes, and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights, and to operate without infringing on the proprietary rights of third parties. We currently hold various issued patents and exclusive licenses to issued patents and own and have exclusive licenses to various patent applications, in each case in the U.S. as well as rights under foreign patents and patent applications. We anticipate filing additional patent applications both in the U.S. and in other countries, as appropriate. However, the patent process is subject to numerous risks and uncertainties, and there can be no assurance that we will be successful in protecting our products by obtaining and defending patents. These risks and uncertainties include the following:

 

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our patent rights might be challenged, invalidated, or circumvented, or otherwise might not provide any competitive advantage;

 

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our competitors, many of which have substantially greater resources than we do and many of which might make significant investments in competing technologies, might seek, or might already have obtained, patents that will limit, interfere with, make obsolete, or eliminate our ability to make, use, and sell our potential products either in the U.S. or in international markets;

 

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governments may adopt regulations requiring compulsory licensing of IP rights, and governments or courts may render decisions enforcing those regulations;

 

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as a matter of public policy regarding worldwide health concerns, there might be significant pressure on the U.S. government and other international governmental bodies to limit the scope of patent protection both inside and outside the U.S. for disease treatments that prove successful; and

 

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countries other than the U.S. might have less restrictive patent laws than the U.S., giving foreign competitors the ability to exploit these laws to create, develop, and market competing products.

In addition, the U.S. Patent and Trademark Office (USPTO) and patent offices in other jurisdictions have often required that patent applications concerning pharmaceutical and/or biotechnology-related inventions be limited or narrowed substantially to cover only the specific innovations exemplified in the patent application, thereby limiting the scope of protection against competitive challenges. Thus, even if we or our licensors are able to obtain patents, the patents might be substantially narrower than anticipated.

 

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Patent and other intellectual property protection is crucial to the success of our business and prospects, and there is a risk that such protections will prove inadequate. Our business and prospects might be materially harmed if these protections prove insufficient.

On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to United States patent law, including provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The USPTO has issued regulations and procedures to govern administration of the Leahy-Smith Act, but many of the substantive changes to patent law associated with the Leahy-Smith Act have only recently become effective. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.

We rely on trade secret protections through confidentiality agreements with our employees and third parties, and the breach of these agreements could adversely affect our business and prospects.

We rely on trade secrets, which we seek to protect, in part, through confidentiality and non-disclosure agreements with our employees, collaborators, suppliers, and other parties. There can be no assurance that these agreements will not be breached, that we would have adequate remedies for any such breach, or that our trade secrets will not otherwise become known to or independently developed by our competitors. We might be involved from time to time in litigation to determine the enforceability, scope, and validity of our proprietary rights. Any such litigation could result in substantial cost and divert management’s attention from operations. If any of these events occurs, or we otherwise lose protection for our trade secrets or proprietary know-how, the value of this information may be greatly reduced.

We are dependent on certain license relationships.

We have licensed technology that is related to our proprietary expression technology from the University of Georgia, University of Minnesota and Pangenix. In addition, we obtained exclusive worldwide rights to multiple patents and patent applications relating to the use of LAL for the treatment of LAL Deficiency and atherosclerosis from Shire and Cincinnati Children’s Hospital Research Foundation. We might enter into additional licenses in the future. Licenses to which we are a party contain, and we expect that any future licenses will contain, provisions requiring up-front, milestone, and royalty payments to licensors and other conditions to maintaining the license rights. If we fail to comply with our obligations under any such license, the applicable licensor may have the right to terminate the license on relatively short notice and as a result, we may not be able to commercialize drug candidates or technologies that were covered by the applicable license. Also, the milestone and other payments associated with these licenses will make it less profitable for us to develop our drug candidates.

Risks Related to our Business Operations and Industry

If we are unable to retain and recruit qualified scientists and advisors, or if any of our key executives, key employees or key consultants discontinues his or her employment or consulting relationship with us, it may delay our development efforts or otherwise harm our business.

The loss of any of our key executives, employees or key consultants could impede the achievement of our research and development objectives. Furthermore, recruiting and retaining qualified scientific personnel to perform research and development work in the future is critical to our success. We may be unable to attract and retain personnel on acceptable terms given the competition among biotechnology, biopharmaceutical, and health care companies, universities, and non-profit research institutions for experienced scientists and other disciplines. Competition for employees may impact our ability to recruit and retain qualified personnel in the future. Certain of our officers, directors, scientific advisors, and/or consultants or certain of the officers, directors, scientific advisors, and/or consultants hereafter appointed may from time to time serve as officers, directors, scientific advisors, and/or consultants of other biopharmaceutical or biotechnology companies. We do not maintain “key man” insurance policies on any of our officers or employees. We currently have employment contracts with our Chief Executive Officer, Sanj K. Patel, and other executive officers which provide for certain severance benefits. Consistent with our current employment policies, all of our employees are employed “at will” and, therefore, each employee may leave our employment at any time. If we are unable to retain our existing employees, including qualified scientific personnel, and attract additional qualified candidates, our business and results of operations could be adversely affected. We are not aware of any key personnel who intend to retire or otherwise leave us in the near future.

If we fail to manage projected growth, our results and operations may be adversely affected.

With our growth and preparation for a potential commercial launch of sebelipase alfa for the treatment of LAL Deficiency and the continued progress of our preclinical-stage programs, we will be required to retain existing and add required new qualified and experienced personnel in the commercial, regulatory, manufacturing, quality, program management, clinical and medical areas over the next several years. Also, as our preclinical pipeline diversifies through internal discoveries, or the acquisition or in-licensing of new molecules, we will need to hire additional scientists to supplement our existing scientific expertise over the next several years.

 

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Our staff, financial resources, systems, procedures or controls may be inadequate to support our expanding operations and our management may be unable to take advantage of future market opportunities or manage successfully our relationships with third parties if we are unable to adequately manage our anticipated growth and the integration of new personnel.

We may pursue rapid expansion of our workforce or diversify our business strategy through mergers, acquisitions, licensing arrangements or other contractual arrangements with third parties which may require substantial resources and substantial amounts of time from members of our senior management and involve numerous risks.

We may spend substantial resources to hire additional employees or pursue acquisitions of new technologies or businesses that we would expect to be complementary to our current technologies or business focus through mergers, acquisitions, licensing arrangements or other contractual arrangements with third parties. Acquisitions of technologies, companies or product rights involve numerous risks, including potential difficulties in the integration of acquired operations such as retaining key employees of an acquired business, integrating research and development programs, not meeting financial objectives, increased costs, undisclosed liabilities not covered by insurance or terms of acquisition, and diversion of management’s attention and resources in connection with an acquisition. No assurance can be given as to our success in identifying, executing, and integrating acquisitions in the future.

Our operations are subject to the economic, political, legal and business conditions in the countries in which we do business, and our failure to operate successfully or adapt to changes in these conditions could cause our operations to be limited or disrupted.

We have expanded our operations outside of the United States and expect to continue to do so in the future. Our current operations in foreign countries subject us to certain risks that could cause our operations to be limited or disrupted, including volatility in international economies, inflation, political instability, difficulties enforcing contractual and intellectual property rights, changes in laws, regulations or enforcement practices with respect to our business, compliance with tax, employment and labor laws, costs and difficulties in recruiting and retaining qualified managers and employees to manage and operate the business in local jurisdictions and costs and difficulties in managing and monitoring international operations.

We are exposed to product liability and preclinical and clinical liability risks which could place a substantial financial burden upon us, should we be sued, if we do not have adequate liability insurance or general insurance coverage for such a claim.

Our business exposes us to potential product liability and other liability risks that are inherent in the testing, manufacturing and marketing of products like ours. Foreign regulations or clinical sites may require us, as sponsor, to be liable for medical outcomes even if an adverse event is not directly related to our product candidate. In addition, the use in our clinical trials of pharmaceutical formulations and products that our potential collaborators may develop and the subsequent sale of these formulations or products by us or our potential collaborators may cause us to bear a portion or all of the product liability risks. As is common for companies sponsoring such clinical testing, we carry product liability insurance. This insurance may in some instances may be insufficient to offset a negative judgment or settlement payment. As a result, a successful liability claim or series of claims brought against us could have a material adverse effect on our business, financial condition and results of operations.

Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of patients, our suppliers, and business partners, and personally identifiable information. The secure maintenance of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, disrupt our operations, and damage our reputation which could adversely affect our business.

We may be subject, directly or indirectly, to healthcare fraud and abuse laws, false claims laws, and health information privacy and security laws. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties and it could affect our ability to develop, market and sell our potential products.

If we obtain FDA approval for any of our product candidates and commercialize those products in the United States, our operations may be directly, or indirectly through our customers, subject to various federal and state fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute, the federal False Claims Act, and physician sunshine laws and regulations.

 

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These laws may impact, among other things, our proposed sales, marketing, and education programs. In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:

 

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federal healthcare program anti-kickback law, which prohibits, among other things, persons from soliciting, receiving or providing remuneration, directly or indirectly, to induce either the referral of an individual for a healthcare item or service, or the purchasing or ordering of an item or service, for which payment may be made under a federal healthcare program such as Medicare or Medicaid;

 

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federal false claims law, which prohibits, among other things, individuals or entities from knowingly presenting or causing to be presented, claims for payment by government funded programs such as Medicare or Medicaid that are false or fraudulent, and which may apply to us by virtue of statements and representations made to customers or third parties;

 

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the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) and the Health Information Technology and Clinical Health (HITECH) Act, which prohibit executing a scheme to defraud healthcare programs; impose requirements relating to the privacy, security, and transmission of individually identifiable health information; and require notification to affected individuals and regulatory authorities of certain breaches of security of individually identifiable health information;

 

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the federal physician sunshine requirements under the health care reform laws requires manufacturers of drugs, devices, biologics, and medical supplies to report annually to the U.S. Department of Health and Human Services information related to payments and other transfers of value to physicians, other healthcare providers, and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members and applicable group purchasing organizations; and

 

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state laws comparable to each of the above federal laws, such as, for example, anti-kickback and false claims laws applicable to commercial insurers and other non-federal payors, requirements for mandatory corporate regulatory compliance programs, and laws relating to patient data privacy and security.

Similar strict restrictions are imposed on the promotion and marketing of drug products in the EU and other countries. Violations of the rules governing the promotion of drug products in the EU could be penalized by administrative measures, fines and imprisonment.

Interactions between pharmaceutical companies and physicians are also governed by strict laws, regulations, industry self-regulation codes of conduct and physicians’ codes of professional conduct in the individual EU member states. The provision of any inducements to physicians to prescribe, recommend, endorse, order, purchase, supply, use or administer a drug product is prohibited. A number of EU member states have introduced additional rules requiring pharmaceutical companies to publicly disclose their interactions with physicians and to obtain approval from employers, professional organizations and/or competent authorities before entering into agreements with physicians. Violations of these rules could lead to the imposition of fines or imprisonment.

Laws, including those governing promotion, marketing and anti-kickback provisions, industry regulations and professional codes of conduct are often strictly enforced. Increasing regulatory scrutiny of the promotional activities of pharmaceutical companies has been observed in a number of EU member states. We are also subject to the FCPA, the U.K. Bribery Act, and other anti-corruption laws and regulations pertaining to our efforts in this area. For example, the Bribery Act in the United Kingdom entered into force in July 2011 applies to any company incorporated in or “carrying on business” in the United Kingdom, regardless of the country in which the alleged bribery activity occurs and even if the inappropriate activity is undertaken by our international distribution partners.

Our success will depend in part on relationships with third parties. Any adverse changes in these relationships could adversely affect our business, financial condition, or results of operations.

Our success will be dependent on our ability to maintain and renew business relationships with third parties and to establish new business relationships. There can be no assurance that our management will be able to maintain such business relationships, or enter into or maintain new business contracts and other business relationships, on acceptable terms, if at all. The failure to maintain important business relationships could have a material adverse effect on our business, financial condition, or results of operations.

Our charter documents and indemnification agreements require us to indemnify our directors and officers to the fullest extent permitted by law, which may obligate us to make substantial payments and to incur significant insurance-related expenses.

Our charter documents require us to indemnify our directors and officers to the fullest extent permitted by law. This could require us, with some legally prescribed exceptions, to indemnify our directors and officers against any and all expenses, judgments, penalties, fines, and amounts reasonably paid in defense or settlement of an action, suit, or proceeding brought against any of them by reason of the fact that he or she is or was our director or officer. In addition, expenses incurred by a director or officer in defending any such action, suit, or proceeding must be paid by us in advance of the final disposition of that action, suit or proceeding if we receive an undertaking by the director or officer to repay us if it is ultimately determined that he or she is not entitled to be

 

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indemnified. We have also entered into indemnification agreements with each of our directors and officers. In furtherance of these indemnification obligations, we maintain directors’ and officers’ insurance in the amount of $30,000,000. For future renewals, if we are able to retain coverage, we may be required to pay a higher premium for our directors’ and officers’ insurance than in the past and/or the amount of its insurance coverage may be decreased.

Risks Related to FUZEON Revenue

We derive a significant portion of our income from royalties on sales of FUZEON. If FUZEON sales continue to decline, our business could suffer.

Royalties on sales of FUZEON are currently a significant source of revenue for us. FUZEON competes with numerous existing therapies for the treatment of HIV. From 2010 through 2013, overall FUZEON net sales reported by Roche have shown a general declining trend, from $88.4 million in 2010 to $45.8 million in 2013. We cannot predict if or when sales levels for FUZEON will stabilize.

Uncertainties relating to third-party reimbursement and health care reform measures could limit payments or reimbursements for FUZEON, which could adversely affect our business.

Currently, because of the high cost of the treatment of HIV, many state legislatures are reassessing reimbursement policies for this therapy. If third-party payor reimbursements for FUZEON are limited or reduced, our results of operations will be adversely affected. In addition, emphasis in the U.S. on the reduction of the overall costs of health care through managed care has increased and will continue to increase the pressure to reduce the prices of pharmaceutical products.

The wholesale acquisition cost of a one-year supply of FUZEON in the U.S. is approximately $35,135. A high drug price could also negatively affect patients’ ability to receive reimbursement coverage for FUZEON from third-party payors, such as private or government insurance programs. If Roche is unable to obtain and maintain reimbursement from a significant number of third-party payors, it would have a material adverse effect on our business, financial condition and results of operations.

Currently, FUZEON is covered by Medicaid in all 50 states in the U.S. In addition, the AIDS Drug Assistance Programs in all 50 states and a majority of private insurers provide some amount of access to FUZEON. However, there are reimbursement challenges remaining. Some of the payors require patients to meet minimum medical requirements, such as maintaining certain cell levels associated with HIV, to receive reimbursement. Other payors limit the number of patients to which they will provide reimbursement for FUZEON, and other payors may require co-payments by the patient in order to receive reimbursement for FUZEON that are significantly higher than those required for other anti-HIV drugs.

Several major pharmaceutical companies have offered to sell their anti-HIV drugs at or below cost to certain countries in Africa and Least Developed Countries (as defined by the United Nations), which could adversely affect the reimbursement climate of, and the prices that may be charged for, HIV medications in the U.S. and the rest of the world. Third-party payors could exert pressure for price reductions in the U.S. and the rest of the world based on these lower costs offered in Africa and Least Developed Countries. This price pressure could limit the price that Roche would be able to charge for FUZEON, thereby adversely affecting our results of operations

If the sale of FUZEON infringes the proprietary rights of third parties, we may need to obtain licenses, pay damages or defend litigation.

If the sale of FUZEON infringes the proprietary rights of third parties, we could incur substantial costs and may have to:

 

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obtain licenses, which might not be available on commercially reasonable terms, if at all;

 

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pay damages; and/or

 

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engage in litigation or administrative proceedings which might be costly whether we win or lose, and which could result in a substantial diversion of financial and management resources.

Any of these events could substantially harm our earnings, financial condition, and operations.

On November 20, 2007, Novartis Vaccines and Diagnostics, Inc. (Novartis) filed a lawsuit against us and Roche and certain of its affiliated entities, alleging infringement of Novartis’s U.S. Patent No. 7,285,271 (the 271 Patent), related to the manufacture, sale and offer for sale of FUZEON. On September 23, 2010, we entered into a settlement agreement (the Settlement Agreement) with Roche and Novartis settling the lawsuit and the lawsuit was dismissed with prejudice from the Eastern District of North Carolina on September 28, 2010. Under the terms of the Settlement Agreement, we, in collaboration with Roche, have the right to continue to sell FUZEON under a license to the ‘271 Patent in exchange for the payment of royalties to Novartis on net sales of FUZEON. We will share responsibility for payment of these royalties equally with Roche.

 

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We rely on Roche to timely deliver important financial information relating to sales of FUZEON. In the event that this information is inaccurate, incomplete, or not timely, we will not be able to meet our financial reporting obligations as required by the SEC.

Under the Amended and Restated Agreement by and between Roche and Trimeris, effective as of January 1, 2011 (the Roche License Agreement), Roche has exclusive control over the flow of information relating to sales of FUZEON that we require to meet our SEC reporting obligations. Roche is required under the Roche License Agreement to provide us with timely and accurate financial data related to sales of FUZEON so that we may meet our reporting requirements under federal securities laws. In the event that Roche fails to provide us with timely and accurate information, we may incur significant liability with respect to the federal securities laws, our disclosure controls and procedures under the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) may be inadequate, and we may be forced to restate our financial statements, any of which could adversely affect the market price of our common stock.

Risks Relating to Our Financial Position and Capital Requirements

We may be unable to raise the substantial additional capital that we will need to further develop and commercialize our products.

As is typical of biotechnology companies at our stage of development, our operations consume substantial amounts of cash and we will need substantial additional funds to further develop and commercialize our products.

While we will need to seek additional funding, we may not be able to obtain financing on acceptable terms, or at all. In addition, the terms of our financings may be dilutive to, or otherwise adversely affect, holders of our common stock. We may also seek additional funds through arrangements with collaborators or other third parties. These arrangements would generally require us to relinquish rights to some of our technologies, product candidates or products, and we may not be able to enter into such agreements, on acceptable terms, if at all. If we are unable to obtain additional funding on a timely basis, we may be required to curtail or terminate some or all of our development programs, including some or all of our product candidates.

We have incurred significant losses since our inception and anticipate that we will continue to incur losses for the foreseeable future. We are a company with limited historical revenues, which makes it difficult to assess our future viability.

We are a clinical-stage biopharmaceutical company. Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. We expect our expenses to increase in connection with our efforts to seek approval for and commercialize sebelipase alfa and our research and development of our other product candidates, including but not limited to, SBC-103. As a result, we expect to continue to incur significant research and development and other expenses related to our ongoing operations for the foreseeable future. If any of our product candidates fail in clinical trials or do not gain regulatory approval, or if any of our product candidates, if approved, fail to achieve market acceptance, we may never become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital.

Our ability to utilize Trimeris’ net operating loss and tax credit carryforwards in the future is subject to substantial limitations and may be further limited as a result of the Reverse Merger.

Federal and state income tax laws impose restrictions on the utilization of net operating loss (“NOL”) and tax credit carryforwards in the event that an “ownership change” occurs for tax purposes, as defined by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). In general, an ownership change occurs when stockholders owning 5% or more of a “loss corporation” (a corporation entitled to use NOL or other loss carryforwards) have increased their aggregate ownership of stock in such corporation by more than 50 percentage points during any three-year period. If an “ownership change” occurs, Section 382 of the Code imposes an annual limitation on the amount of post-ownership change taxable income that may be offset with pre-ownership change NOLs of the loss corporation experiencing the ownership change. The annual limitation is calculated by multiplying the loss corporation’s value immediately before the ownership change by the greater of the long-term tax-exempt rate determined by the IRS in the month of the ownership change or the two preceding months. This annual limitation may be adjusted to reflect any unused annual limitation for prior years and certain recognized built-in gains and losses for the year. Section 383 of the Code also imposes a limitation on the amount of tax liability in any post-ownership change year that can be reduced by the loss corporation’s pre-ownership change tax credit carryforwards.

On November 2, 2011, we completed the merger transaction between Trimeris, Inc., a Delaware corporation (Trimeris), and Synageva BioPharma Corp., a privately held Delaware corporation (Private Syangeva), pursuant to which Private Synageva became a wholly-owned subsidiary of Trimeris and Trimeris changed its name to Synageva BioPharma Corp. (the Reverse Merger) which resulted in an “ownership change” of Trimeris. Trimeris previously experienced an “ownership change” in 2008. Accordingly, our ability to utilize Trimeris’ NOL and tax credit carryforwards may be substantially limited. These limitations could, in turn, result in increased future tax payments for us, which could have a material adverse effect on our business, financial condition

 

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Our ability to use net operating loss carry forwards to reduce future tax payments may be limited if there is a change in ownership of Synageva, or if taxable income does not reach sufficient levels.

As of December 31, 2013, we had $158.1 million of U.S. federal net operating loss carryforwards (NOL’s), available to reduce taxable income in future years. A portion of these NOL’s are currently subject to an annual limitation under Section 382 of the Code (section 382). We believe it is more likely than not that we will use the majority of net operating losses. However, the ability to use net operating loss carryforwards will be dependent on our ability to generate taxable income. The net operating loss carryforwards may expire before we generate sufficient taxable income.

Our ability to utilize the NOL’s may be further limited if we undergo an ownership change, as defined in section 382. This ownership change could be triggered by substantial changes in the ownership of our outstanding stock, which are generally outside of our control. An ownership change would exist if the stockholders, or group of stockholders, who own or have owned, directly or indirectly, 5% or more of the value of our stock, or are otherwise treated as 5% stockholders under section 382 and the regulations promulgated there under, increase their aggregate percentage ownership of our stock by more than 50 percentage points over the lowest percentage of our stock owned by these stockholders at any time during the testing period, which is generally the three-year period preceding the potential ownership change. In the event of an ownership change, section 382 imposes an annual limitation on the amount of post-ownership change taxable income a corporation may offset with pre-ownership change NOL’s. The limitation imposed by section 382 for any post-change year would be determined by multiplying the value of our stock immediately before the ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate. Any unused annual limitation may be carried over to later years, and the limitation may under certain circumstances be increased by built-in gains which may be present with respect to assets held by us at the time of the ownership change that are recognized in the five-year period after the ownership change. Our use of NOL’s arising after the date of an ownership change would not be affected.

We may have exposure to additional tax liabilities which could have a material impact on our results of operations and financial position.

As a result of our international operations, we are subject to income taxes, as well as non-income based taxes, in both the United States and various foreign jurisdictions. Significant judgment is required in determining our worldwide tax liabilities. Although we believe our estimates are reasonable, the ultimate outcome with respect to the taxes we owe may differ from the amounts recorded in our financial statements. If the Internal Revenue Service, or other taxing authority, disagrees with the positions we take, we could have additional tax liability, and this could have a material impact on our results of operations and financial position. In addition, the United States government and other governments are considering and may adopt tax reform measures that significantly increase our worldwide tax liabilities which could materially harm our business, financial condition and results of operations.

Our management is required to devote substantial time to comply with public company regulations.

As a public company, we incur significant legal, accounting and other expenses. Sarbanes-Oxley and rules implemented by the SEC and the NASDAQ Global Select Market impose various requirements on public companies, including those related to corporate governance practices. Our management and other personnel will need to devote substantial time to these requirements.

Sarbanes-Oxley requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, we are required to perform system and process evaluation and testing of our internal controls over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of Sarbanes-Oxley (Section 404). We will incur substantial accounting and related expenses to comply with Section 404. We may need to hire additional accounting and financial staff to satisfy the ongoing requirements of Section 404. Moreover, if we are not able to comply with the requirements of Section 404, or if we or our independent registered public accounting firm identifies deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the NASDAQ Global Select Market, the SEC, or other regulatory authorities.

Changes in the estimated performance periods of our collaboration arrangements may negatively impact current period revenue.

We account for our collaboration arrangements under the proportional performance method, whereby the amount of revenue recognized in the current period is based on our performance compared to the total estimate to complete the project. If our estimates to complete change in future periods, our collaboration revenue may be reduced and could potentially be negative.

 

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Risks Related to Ownership of Our Common Stock

The market price and trading volume of our common stock may be volatile.

The market price of our common stock could fluctuate significantly for many reasons, including the following factors:

 

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announcements of clinical or regulatory developments or technological innovations by us or our competitors;

 

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changes in our relationship with our licensors and other strategic partners;

 

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our quarterly operating results;

 

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declines in sales of FUZEON;

 

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developments in patent or other technology ownership rights;

 

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public concern regarding the safety of our products;

 

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additional funds may not be available on terms that are favorable to us and, in the case of equity financings, may result in dilution to our stock holders;

 

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government regulation of drug pricing; and

 

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general changes in the economy, the financial markets or the pharmaceutical or biotechnology industries.

Additional factors beyond our control may also have an impact on the price of our stock. For example, to the extent that other large companies within our industry experience declines in their stock price, our stock price may decline as well. In addition, when the market price of a company’s common stock drops significantly, stockholders often institute securities class action lawsuits against the company. A lawsuit against us could cause us to incur substantial costs and could divert the time and attention of our management and other resources.

Future sales of substantial amounts of our common stock, or the perception that such sales could occur, could adversely affect the market price of our common stock.

Future sales into the public market of substantial amounts of our common stock, or securities convertible or exchangeable into shares of our common stock, including shares of our common stock issued upon exercise of options and warrants, or perceptions that such sales could occur, could adversely affect the market price of our common stock and our ability to raise capital in the future.

Ownership of our common stock is highly concentrated, and it may prevent you and other stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause our stock price to decline.

Our executive officers and directors, together with their respective affiliates, beneficially own and control a significant portion of our common stock. Accordingly, these executive officers, directors and their affiliates, acting individually or as a group, have substantial influence over the outcome of a corporate action requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. These stockholders may also exert influence in delaying or preventing a change in control, even if such change in control would benefit our other stockholders. In addition, the significant concentration of stock ownership may adversely affect the market value of our common stock due to investors’ perception that conflicts of interest may exist or arise.

Anti-takeover provisions in our charter and bylaws may prevent or frustrate attempts by stockholders to change the board of directors or current management and could make a third-party acquisition of us difficult.

Our certificate of incorporation and bylaws contain provisions that may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock.

We have never declared or paid dividends on our common stock and do not anticipate paying dividends in the foreseeable future.

Our business requires significant funding, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future.

 

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We have broad discretion in how we use our resources, and we may not use our cash and investments effectively or in ways with which you agree.

Our management has broad discretion as to the application of our resources. Our stockholders may not agree with the manner in which our management chooses to allocate and spend our cash, cash equivalents and investments. Moreover, our management may use our resources for corporate purposes that may not increase the market price of our common stock.

Item 5. Other Information.

In connection with the March equity offering, on May 1, 2014, the Company entered into an amendment (the Amendment) to the Amended and Restated Registration Rights Agreement dated April 1, 2009, between the Company and the investors signatory thereto, as amended through the date hereof. The Amendment eliminates the prohibition against the Company granting investors new information or registration rights.

Also related to the March equity offering, on May 1, 2014, the Company entered into a new Registration Rights Agreement (the Registration Rights Agreement) with certain investors, including our director, Thomas Tisch, and certain entities affiliated with our directors Felix Baker, Stephen Biggar and Thomas Tisch. The Registration Rights Agreement provides that, among other things, within 10 business days of signing the agreement, the Company will file a final prospectus to its existing registration statement covering the resale of the Registrable Securities (as defined therein) of each investor party thereto.

 

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Item 6. Exhibits.

 

10.1		First Amendment to Lease, by and between the Company and The Trustees of Hayden Office Trust (the “Landlord”), which amends the Lease, by and between the Company and the Landlord, dated January 15, 2013.
10.2		Registration Rights Agreements, dated May 1, 2014, between the Company and the investors signatory to the agreement.
10.3		Amendment to Amended and Restated Information and Registration Rights Agreement, dated May 1, 2014, between the Company and the investors signatory to the agreement.
31.1		Certification of Chief Executive Officer pursuant to Rules 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.1		Certification of Chief Executive Officer pursuant to Rules 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2		Certification of Chief Financial Officer pursuant to Rules 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This Certification accompanies this report and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed for purposes of §18 of the Securities Exchange Act of 1934, as amended.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase
101.LAB		XBRL Taxonomy Extension Labels Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Link Document

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

				Synageva BioPharma Corp.
Date: May 1, 2014				By:		/s/ Sanj K. Patel
						Sanj K. Patel
						President and Chief Executive Officer (Principal Executive Officer)
Date: May 1, 2014				By:		/s/ Carsten Boess
						Carsten Boess
						Chief Financial Officer (Principal Financial Officer)

 

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Exhibit Index

 

10.1		First Amendment to Lease, by and between the Company and The Trustees of Hayden Office Trust (the “Landlord”), which amends the Lease, by and between the Company and the Landlord, dated January 15, 2013.
10.2		Registration Rights Agreements, dated May 1, 2014, between the Company and the investors who are signatories to the agreement.
10.3		Amendment to Amended and Restated Information and Registration Rights Agreement, dated May 1, 2014, between the Company and the investors who are signatories to the agreement.
31.1		Certification of Chief Executive Officer pursuant to Rules 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.1		Certification of Chief Executive Officer pursuant to Rules 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2		Certification of Chief Financial Officer pursuant to Rules 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This Certification accompanies this report and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed for purposes of §18 of the Securities Exchange Act of 1934, as amended.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase
101.LAB		XBRL Taxonomy Extension Labels Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Link Document

 

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