UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

Washington D.C. 20549

 

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FORM 10-Q

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(Mark One)

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

 

For the quarterly period ended March 31, 2014.

 

OR

 

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

 

For the transition period from                         to                         .

 

Commission File Number 001-34641

 

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FURIEX PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)  

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Delaware	27-1197863
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
3900 Paramount Parkway, Suite 150 Morrisville, North Carolina	27560
(Address of principal executive offices)	(Zip Code)

  

Registrant's telephone number, including area code: (919) 456-7800

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

 

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

 

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

 

Large accelerated filer		☐		Accelerated filer		☒
Non-accelerated filer		☐   (Do not check if a smaller reporting company)		Smaller reporting company		☐

 

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

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 10,805,611 shares of common stock, par value $0.001 per share, as of April 30, 2014. 

 

  

  INDEX

 

	Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the Three Months Ended March 31, 2013 and 2014 (unaudited)	3
Consolidated Balance Sheets as of December 31, 2013 and March 31, 2014 (unaudited)	4
Consolidated Statement of Shareholders' Equity for the Three Months Ended March 31, 2014 (unaudited)	5
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2014 (unaudited)	6
Notes to Consolidated Financial Statements (unaudited)	7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3. Quantitative and Qualitative Disclosures about Market Risk	24
Item 4. Controls and Procedures	24
Part II. OTHER INFORMATION
Item 6. Exhibits	25
Signatures	26

  

    

Part I. FINANCIAL INFORMATION

 

Item  1.     Financial Statements

 

FURIEX PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)

 

		Three Months Ended March 31,
		2013				2014
Revenue:
Milestones		$	30,000			$	—
Royalties			9,325				6,422
Total revenue			39,325				6,422
Research and development expenses			25,363				14,279
Selling, general and administrative expenses			3,873				3,554
Depreciation and amortization			22				8
Total operating expenses			29,258				17,841
Operating income (loss)			10,067				(11,419	)
Interest expense			1,100				1,627
Other income, net			90				1
Income (loss) before provision for income taxes			9,057				(13,045	)
Less provision for income taxes			91				6
Net income (loss)		$	8,966			$	(13,051	)
Net income (loss) per basic share		$	0.89			$	(1.25	)
Net income (loss) per diluted share		$	0.82			$	(1.25	)
Weighted-average shares used to compute net income (loss) per basic share			10,036				10,442
Dilutive effect of stock options			838				—
Weighted-average shares used to compute net income (loss) per diluted share			10,874				10,442

 

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

 

 

FURIEX PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except share data)

 

		December 31, 2013				March 31, 2014
Assets
Current assets:
Cash and cash equivalents		$	29,153			$	22,902
Accounts receivable, net			8,178				6,422
Prepaid expenses			415				251
Total current assets			37,746				29,575
Property and equipment, net			87				79
Deferred financing costs, net			1,493				1,347
Goodwill			49,116				49,116
Total assets		$	88,442			$	80,117
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	7,072			$	7,139
Accrued expenses			5,302				4,550
Current portion of long-term debt, third party			10,080				14,280
Current portion of long-term debt, related party			500				1,000
Total current liabilities			22,954				26,969
Long-term debt, third party, net			31,920				27,720
Long-term debt, related party, net			14,500				14,000
Other long-term liabilities			627				726
Total liabilities			70,001				69,415
Commitments and contingencies (Note 4)
Common stock, $0.001 par value, 40,000,000 shares authorized; 10,459,233 and 10,805,611 shares issued and outstanding, respectively			10				11
Preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued or outstanding			—				—
Paid-in capital			175,094				180,405
Accumulated deficit			(156,663	)			(169,714	)
Total shareholders’ equity			18,441				10,702
Total liabilities and shareholders’ equity		$	88,442			$	80,117

 

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

 

 

FURIEX PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

(unaudited)

(in thousands)

 

		Common Stock
		Shares				Par value				Paid-in capital				Accumulated deficit				Total
Balance at December 31, 2013			10,459			$	10			$	175,094			$	(156,663	)		$	18,441
Exercise of common stock options			250				1				2,914				—				2,915
Issuance of restricted stock, net of forfeitures			97				—				—				—				—
Share based compensation expense			—				—				2,397				—				2,397
Net loss			—				—				—				(13,051	)			(13,051	)
Balance at March 31, 2014			10,806			$	11			$	180,405			$	(169,714	)		$	10,702

 

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

 

 

FURIEX PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

		Three Months Ended March 31,
		2013				2014
Cash flows from operating activities:
Net income (loss)		$	8,966			$	(13,051	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation			22				8
Amortization of deferred financing costs			38				146
Share based compensation expense			2,463				2,397
Changes in operating assets and liabilities:
Accounts receivable, net			(3,369	)			1,756
Prepaid expenses			82				164
Accounts payable			(505	)			67
Accrued expenses			1,777				(752	)
Other long-term liabilities			68				99
Net cash provided by (used in) operating activities			9,542				(9,166	)
Cash flows from investing activities:
Purchases of property and equipment			(2	)			—
Net cash used in investing activities			(2	)			—
Cash flows from financing activities:
Proceeds from issuance of common stock			1,163				2,915
Net cash provided by financing activities			1,163				2,915
Net increase (decrease) in cash and cash equivalents			10,703				(6,251	)
Cash and cash equivalents, beginning of the period			25,718				29,153
Cash and cash equivalents, end of the period		$	36,421			$	22,902
Supplemental Disclosure of Cash Flow Information:
Interest paid		$	1,000			$	1,535

 

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

 

 

FURIEX PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. Summary of Operations and Significant Accounting Policies

 

Organization and Business Description

 

Furiex Pharmaceuticals, Inc., a Delaware corporation (“Furiex” or the “Company”), is a drug development company that continues the compound partnering business started by Pharmaceutical Product Development, Inc. (“PPD”) in 1998. On June 14, 2010, PPD effected the spin-off of Furiex through a tax-free, pro-rata dividend distribution of all of the shares of the Company to PPD shareholders. The goal of the Company is to in-license compounds from, or form strategic alliances with, pharmaceutical and biotechnology companies to share the risks and rewards of developing therapeutics. The Company's operations are headquartered in Morrisville, North Carolina.

 

The significant accounting policies followed by the Company in this Quarterly Report on Form 10-Q are consistent with the accounting policies followed for annual financial reporting. The Company prepared these unaudited consolidated financial statements in accordance with the Securities and Exchange Commission's Rule 10-01 of Regulation S-X and, in management's opinion, has included all adjustments of a normal recurring nature necessary for a fair presentation. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.

 

The Company has incurred losses and negative cash flows from operations since the spin-off and expects to continue to incur operating losses until revenues from all sources reach a level sufficient to support its on-going operations. The Company’s liquidity will largely be determined by its ability to raise capital from debt, equity, or other forms of financing, by the success of its products already being commercialized by collaborators, by key development and regulatory events that might impact its ability to out-license its development compounds, by its ability to enter into new collaborations and their terms, and by expenses associated with operations including research and development and potential commercialization efforts.

 

The Company’s liquidity over the next 12 months could be materially affected by, among other things: its ability to raise additional funds through debt, equity or other financing alternatives; costs related to its development and potential commercialization efforts; regulatory approval and commercialization of its compound candidates, which could affect selling, general and administrative expenses and milestone and royalty receipts; changes in regulatory compliance requirements; reliance on existing collaborators and potential need to enter into additional collaborative arrangements; and other factors. Depending upon the success and timing of potential new collaborations or potential commercialization efforts and receipt of various milestone payments and royalties, it might be necessary to do one or more of the following in the next 12 months: (a) raise additional capital through equity or debt financings or from other sources; (b) reduce spending on research and development and/or commercialization of eluxadoline; or (c) restructure the Company's operations. The Company currently receives on-going revenue from royalties on sales of Nesina^® and related combination products, as well as Priligy^®.

 

Principles of Consolidation

 

The Company prepared the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, or GAAP, and they include the accounts of Furiex Pharmaceuticals, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates in Preparation of the Financial Statements

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Earnings Per Share

 

The Company calculates net income (loss) per basic share by dividing net income (loss) by the weighted-average number of shares outstanding during the reporting period. The Company calculates net income (loss) per diluted share by dividing net income (loss) by the weighted-average number of shares outstanding during the reporting period plus the effects of any dilutive common stock-based awards. All potentially dilutive securities relate to stock options and restricted stock awards issued as part of the Company's share-based compensation plan. For the three-month period ended March 31, 2013 there were no potentially dilutive securities excluded from the calculation of diluted income per share because of their anti-dilutive effect. 

 

 

FURIEX PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

In addition, the Company did not include the excess tax benefit that would be created upon the assumed exercises of certain share-based payment awards in the calculation of diluted income per share for the three-month period ended March 31, 2013, based upon its assessment of whether it is more likely than not that some or all of the excess tax benefits computed in the current reporting period will be realized. The calculation of net loss per diluted share for the three-month period ended March 31, 2014 is the same as net loss per basic share because the inclusion of any potentially dilutive securities would be anti-dilutive. Potentially dilutive securities totaling approximately 1,293,000 for the three-month period ended March 31, 2014 were excluded from the calculation of diluted loss per share because of their anti-dilutive effect. 

 

Comprehensive Income (Loss)

 

There are no items of comprehensive income (loss) other than net income (loss) for any periods presented. 

 

Revenue Recognition

 

The Company generates revenue in the form of upfront payments, development and regulatory milestone payments, royalties, and launch-based and sales-based milestone payments in connection with the out-license or sale of products. The receipt of future milestone payments and royalties depends on the success of the Company's compound development and the Company's collaborators' success in developing and commercializing compounds. Upfront payments are generally paid within a short period of time following the execution of an out-license or collaboration agreement. Development and regulatory milestone payments are typically one-time payments to the Company triggered by the collaborator's achievement of specified development and regulatory events such as the commencement of Phase III trials or regulatory submission approval. Royalties are payments received by the Company based on net product sales of a collaborator. Launch-based milestone payments are one-time payments to the Company triggered when a collaborator first introduces for sale an out-licensed product in a new geographical region. Sales-based milestone payments are typically one-time payments to the Company triggered when aggregate net sales of product by a collaborator for a specified period (for example, an annual period) reach an agreed upon threshold amount. The Company recognizes upfront payments, development and regulatory milestone payments, royalty payments, and launch-based and sales-based milestone payments from its collaborators when the event that triggers the obligation of payment has occurred, there is no further obligation on the Company's part in connection with the payment and collection is reasonably assured.

 

The Company assesses each collaboration agreement it enters into for potential indicators associated with agent and principal considerations for each related cash payment and receipt. Based on the terms of the underlying agreement and the determination of which party to the transaction is the primary obligor, the Company records the underlying activities that are associated with contractual payments within the consolidated statements of operations and consolidated balance sheets on a net or gross basis, accordingly.

 

Concentration of Credit Risk

 

The Company's collaborators, which are its current sources of revenue, are primarily pharmaceutical companies. A concentration of credit risk with respect to revenue exists due to the small number of collaborators. Three collaborators accounted for all of the Company's revenue for the three-month periods ended March 31, 2013 and 2014. The first collaborator accounted for $33.8 million and $5.7 million of total revenue for the three-month periods ended March 31, 2013 and 2014, respectively. The second collaborator accounted for $0.2 million and $0.1 million of total revenue for the three-month periods ended March 31, 2013 and 2014, respectively. The third collaborator accounted for $5.4 million and $0.6 million of total revenue for the three-month periods ended March 31, 2013 and 2014, respectively.

 

The December 31, 2013 and March 31, 2014 balance of accounts receivable relates to royalty receivables related to Nesina and its combination products and Priligy based on net product sales and activities by the Company's collaborators. The first, second and third collaborator accounted for $7.5 million, $0.1 million and $0.6 million, respectively, of the accounts receivable balance as of December 31, 2013. The first, second and third collaborator accounted for $5.7 million, $0.1 million and $0.6 million, respectively, of the accounts receivable balance as of March 31, 2014.

 

Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist primarily of cash, cash equivalents and accounts receivable. All of the Company's cash is held in deposit accounts at a major financial institution, which management assesses to be of high credit quality. The Company’s money market fund investments (categorized as cash and cash equivalents) are with what the Company believes are high quality issuers. The Company has not experienced any losses in such accounts.

 

 

FURIEX PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Research and Development Expenses

 

Research and development costs consist primarily of costs associated with pre-clinical studies, non-clinical studies and the clinical trials of the Company's compounds, development materials, labor and related benefit charges associated with personnel performing research and development work, supplies associated with this work and consulting services. Research and development costs include clinical research services, pre-clinical testing, non-clinical testing and clinical drug manufacturing provided by third parties, the direct cost of the Company's personnel managing the programs and upfront and milestone payments to the Company's collaborators. The Company accrues certain costs related to clinical studies, including investigative site payments, based on estimates of the services performed and efforts expended. If the actual timing of the performance of services or the level of effort varies from its estimate, the Company adjusts the accrual accordingly. The Company charges research and development costs to operations as incurred and discloses them in the consolidated statements of operations.

 

Income Taxes

 

The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the year, plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial reporting and tax basis of the Company's assets and liabilities. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax attributes are expected to be recovered or paid, and are adjusted for changes in tax rates and tax laws when enacted.

 

Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The assessment of whether or not a valuation allowance is required often requires significant judgment, including the long-range forecast of future taxable income and the evaluation of tax planning initiatives. Adjustments to the deferred tax valuation allowances are made to earnings in the period when such assessments are made. Due to the historical losses from the Company's operations, a full valuation allowance on deferred tax assets has been recorded.

  

Share-Based Compensation

 

The Company recognizes compensation expense using a fair-value based method related to stock options, restricted stock awards and other share-based compensation. The expense is measured based on the grant date fair value of the awards that are expected to vest and is recorded over the applicable requisite service period. In the absence of an observable market price for a share-based award, the fair value is based upon a valuation methodology that takes into consideration various factors, including the exercise price of the award, the expected term of the award, the current price of the underlying shares, the expected volatility of the underlying share price based on peer companies, the expected dividends on the underlying shares and the risk-free interest rate.

 

Goodwill

 

The Company records as goodwill the excess of the purchase price of a business acquired over the fair value of net tangible assets and identifiable intangible assets at the date of the acquisition. The Company evaluates goodwill for impairment on an annual basis each October 1 or more frequently if events or changes in circumstances indicate that goodwill might be impaired. Any impairment could have a material adverse effect on the Company's financial condition and results of operations.

 

 

FURIEX PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of unrestricted cash accounts and money market funds that hold short-term U.S. Treasury securities that are not subject to withdrawal restrictions or penalties. The Company considers all cash on deposit and money market accounts with original maturities of three months or less at time of purchase to be cash and cash equivalents.

 

Under the Second Amended and Restated Loan and Security Agreement with Midcap Funding III, LLC, Midcap Funding V, LLC and Silicon Valley Bank, the Company is required to maintain its primary deposit and investment accounts with Silicon Valley Bank, consisting of at least 50% of the Company's total cash and cash equivalents balance. As of March 31, 2014, the Company was in compliance with its obligations under the Second Amended Agreement.

  

Fair Value of Financial Instruments

 

Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants based on assumptions that market participants would use in pricing an asset or liability. As a basis for classifying such assumptions, a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value, is applied as follows: (Level 1) observable inputs such as quoted prices in active markets for identical assets or liabilities; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) significant unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. There were no transfers between such levels for the year ended December 31, 2013 or the three-month period ended March 31, 2014. 

 

The Company's cash and cash equivalents represent cash accounts and money market funds that invest in short-term U.S. Treasury securities with insignificant rates of return, are considered Level 1 investments and valued using readily available market prices. The carrying amounts reflected in the Company's consolidated balance sheets for cash, accounts receivable, prepaid expenses, accounts payable, and accrued expenses approximate fair value due to their short-term maturities.

  

2. Goodwill

 

The Company reviews goodwill for impairment annually on October 1 and whenever events or changes in circumstances indicate that the carrying amount of goodwill might not be recoverable. There were no additions to goodwill for the year ended December 31, 2013 or the three-month period ended March 31, 2014.

 

As of the October 1, 2013 annual impairment test, the Company used the qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying value before applying the two-step goodwill impairment model. Based on the review as of October 1, 2013, the Company determined that its sole reporting unit's fair value was, more likely than not, greater than its carrying value. As such the quantitative two-step goodwill impairment model was not utilized.

 

The fair value of goodwill could be materially impacted by future adverse changes such as future declines in operating results, a decline in the valuation of pharmaceutical and biotechnology company stocks, including the valuation of the Company's common stock, a slowdown in the worldwide economy or the pharmaceutical and biotechnology industry, failure to meet the performance projections included in forecasted operating results, or the delay or abandonment of any research and development programs.

 

There are no accumulated impairment losses related to the Company’s recorded goodwill balance as of December 31, 2013 or March 31, 2014.

 

 

FURIEX PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

3. Share-Based Compensation

 

The Company has adopted an equity incentive plan, the Furiex Pharmaceuticals, Inc. 2010 Stock Plan, as amended (the “Plan”). The Company is authorized to issue a total of 2,178,641 shares under the Plan. The Plan is intended to provide incentives to employees, directors and consultants through the issuance of common stock-based awards, including restricted stock, stock options, stock appreciation rights and other equity-based awards. The plan is administered by a committee designated by its board of directors.

 

The Company recognizes compensation expense using a fair-value based method related to stock options and other share-based compensation. The expense is measured based on the grant date fair value of the awards that are expected to vest and is recorded over the applicable requisite service period on a straight-line basis.

 

During the three-month periods ended March 31, 2013 and 2014, there were no common stock options granted to employees, directors or consultants under the Plan. All options are granted with an exercise price equal to the fair value of the Company's common stock on the grant date. The fair value of the Company's common stock on the grant date is equal to the most recent NASDAQ closing price of the Company's stock. The weighted-average grant date fair value per share is determined using the Black-Scholes option-pricing method. Expected option lives are based on the simplified method and volatilities used in fair valuation calculations are based on a benchmark of peer companies with similar expected lives.

 

The amount of stock compensation expense related to consultant option grants, classified in selling, general and administrative expenses within the consolidated statements of operations, is marked to market at the end of each financial reporting period using the Black-Scholes option-pricing method and the period-end closing stock price, until such options vest. For the three-month periods ended March 31, 2013 and 2014, amounts reflected in the consolidated statements of operations related to consultant stock compensation expense, including the mark-to-market adjustment, were $1.5 million and $1.0 million, respectively. These non-employee grants relate to a consulting agreement executed with the Company’s founding Chairman, Dr. Fred Eshelman. The terms of this consulting agreement provided for a grant of stock options to purchase shares of the Company’s common stock equal to 2.0% of the Company’s common stock outstanding immediately after the completion of the spin-off, and additional stock options for an additional 1.0% on or about the second anniversary of the spin-off.

 

As of March 31, 2014, the Company had options outstanding to purchase an aggregate of approximately 1,060,000 shares of its common stock.

 

During the three-month period ended March 31, 2013, the Company did not grant any restricted stock awards. During the three-month period ended March 31, 2014 the Company granted 112,770 restricted stock awards to employees and directors. The restrictions on these awards lapse after a period of approximately one year in the case of annual director grants, or 50% on each of the first and second anniversary of grant in the case of employees. Each share of the Company’s restricted stock will become fully vested and all restrictions will lapse at the effective time of the merger, as described in Note 5.

  

Share-based compensation expense recognized for Company employees, directors and consultants under the Plan included in the statements of operations for the three-month periods ended March 31, 2013 and 2014 was approximately $2.5 million and $2.4 million, respectively.

 

4. Commitments and Contingencies

 

The Company is involved in compound development and commercialization collaborations. As of March 31, 2014, the Company's four main collaborations were with Janssen Pharmaceutica, NV, or Janssen (an affiliate of Johnson & Johnson), related to JNJ-Q2 and eluxadoline (historically referred to by the Company as MuDelta) and the product Priligy (dapoxetine), and Alza Corporation, or Alza, related to the product Priligy. The Company also has out-license agreements with Berlin-Chemie AG (Menarini Group), or Menarini, related to the product Priligy and Takeda Pharmaceuticals Company Limited, or Takeda, related to the trelagliptin compound, Nesina (alogliptin), and alogliptin-related combination products. The Company has no on-going commitments under the out-license agreements.

 

As of March 31, 2014, the Company had two collaborations that involve potential future expenditures. The first is its collaboration with Alza and Janssen for Priligy. 

 

 

FURIEX PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

On May 14, 2012, the Company and its wholly-owned subsidiary Genupro, LLC (“Genupro”) entered into a license and asset transfer agreement with Alza and Janssen, whereby Alza and Janssen transferred to the Company worldwide rights for Priligy. To facilitate a uniform transition, Janssen agreed to continue to manufacture and manage certain clinical and regulatory activities with respect to Priligy for a pre-defined period after the closing date of the agreement. This transaction became effective on July 30, 2012. The Company must pay Janssen fees related to Priligy sales and distribution activities that Janssen will perform for the Company during the transition period pursuant to a sales services agreement. Priligy will continue to be made available to patients under the sales service agreement until the marketing authorizations are transferred, at which time commercialization of the product will transition to the Company or its licensee. The term of the license and asset transfer agreement will expire on the latest of the completion of the transition of the product rights to the Company, the expiration of its last payment obligation to Janssen, or the expiration of the last-to-expire ancillary agreement.

 

The Company's collaboration with Alza and Janssen for Priligy, as described above, is associated with an out-license agreement under which the Company is eligible to receive additional payments. On May 14, 2012, Genupro entered into a license agreement with Menarini by which the Company licensed to Menarini exclusive rights to commercialize Priligy in Europe, most of Asia, Africa, Latin America and the Middle East. This transaction became effective on July 30, 2012. The Company retained full development and commercialization rights in the U.S., Japan and Canada. Menarini will assume responsibility for commercialization activities in the licensed territories.

 

Under this agreement, the Company is eligible to receive up to $40.0 million in sales-based milestones, plus tiered royalties ranging from the mid-teens to mid-twenties in percentage terms. The term of the license agreement (and the period during which Menarini must pay the Company royalties in a particular country for a particular product) will end, on a country-by-country basis, upon the latest of (i) the expiration of a valid relevant patent claim in that country, (ii) the expiration of marketing and data exclusivity in that country, or (iii) a third party’s market entry of an approved product in that country containing dapoxetine for use, on an as needed basis, for premature ejaculation. 

 

The Company originally acquired patents for Priligy from Eli Lilly and Company, or Lilly, and is obligated to pay Lilly a royalty of 5% on annual sales in excess of $800.0 million. In addition, under the terms of the license agreement with Menarini, Menarini will pay the portion of the royalties owed to Lilly in each country where Menarini is licensed to sell Priligy, where Lilly is eligible for payments, and where the Company is no longer eligible for payments from Menarini. The term of the license agreement with Lilly (and the period during which the Company or Menarini must pay Lilly royalties in a particular country) will end, on a country-by-country basis, upon the later of (i) the last to expire valid patent claim licensed to Lilly in that country, (ii) the expiration of data exclusivity in that country, or (iii) the tenth anniversary of the first date of sale of Priligy in that country.

 

The second collaboration involving future expenditures is associated with the two compounds in-licensed from Janssen: JNJ-Q2 and eluxadoline. The Company has full exclusive license rights to develop and commercialize JNJ-Q2 and eluxadoline under its existing development and license agreements with Janssen.

 

The Company may be obligated to pay Janssen up to $50.0 million in regulatory milestone payments for the JNJ-Q2 compound, up to $45.0 million in regulatory milestone payments for the eluxadoline compound, and, if approved for marketing, for both the JNJ-Q2 and eluxadoline compounds, individually, up to $75.0 million in sales-based milestone payments and sales-based royalties increasing from the mid- to upper-single digit percentages as sales volume increases. Royalties would be paid for a period of ten years after the first commercial sale or, if later, the expiration of the last valid patent claim or the expiration of patent exclusivity.

 

The Company currently maintains insurance for risks associated with the operation of its business. These policies provide coverage for a variety of potential losses, including loss or damage to property, bodily injury, general commercial liability and product liability.

 

In the normal course of business, the Company might be a party to various claims and legal proceedings. In connection with the merger described in Note 5, putative shareholder class actions have been filed against the Company. The Company records a reserve for pending and threatened litigation matters when an adverse outcome is probable and the amount of the potential liability is reasonably estimable. Although the ultimate outcome of pending and threatened litigation is currently not determinable and litigation costs can be material, management of the Company, after consultation with legal counsel, does not believe that the resolution of these matters will have a material effect upon the Company’s financial condition, results of operations or cash flows.

 

 

 FURIEX PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

5. Subsequent Events

 

On April 27, 2014, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Forest Laboratories, Inc., a Delaware corporation (“Parent”), and Royal Empress, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Subsidiary”). The Merger Agreement provides for the merger of Merger Subsidiary with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent. Parent and Merger Subsidiary have obtained the consent of Actavis plc pursuant to that certain Agreement and Plan of Merger, dated as of February 17, 2014, by and among Actavis plc, Parent and the other parties thereto.

 

Pursuant to the terms and subject to the conditions of the Merger Agreement, at the effective time of the Merger, each outstanding share of the Company’s common stock (other than (i) shares held by the Company, Parent, Merger Subsidiary, or any wholly owned subsidiary of Parent or of the Company, which will be cancelled without payment, and (ii) shares owned by stockholders who have perfected and not withdrawn a demand for, or lost their right to, appraisal with respect to such shares) will be converted into the right to receive $95.00 in cash, without interest, less any applicable withholding taxes, plus one contractual contingent value right (“CVR”), which represents the right to receive a contingent payment of up to $30.00 in cash per CVR, without interest, less any applicable withholding taxes, upon the occurrence of specified events.

 

In connection with the termination of the Merger Agreement under specified circumstances, including with respect to the Company’s entry into an agreement with respect to a superior proposal and the board of directors of the Company changing its recommendation that stockholders vote in favor of the Merger Agreement, the Company is required to pay to Parent a termination fee equal to $41.0 million. In addition, in the event that the Merger Agreement is terminated under specified circumstances during the pendency of a publicly disclosed third-party proposal to acquire the Company, the Company is required to reimburse Parent for Parent’s fees and expenses incurred in connection with the Merger Agreement up to an aggregate amount of $3.0 million, and, if the Company enters into an agreement for a third party to acquire the Company within 12 months of such termination, to pay to Parent the balance of the $41.0 million termination fee less any such reimbursed expenses.

 

The Company has been notified of putative shareholder class action lawsuits by persons alleging to be shareholders of the Company, individually and on behalf of all others similarly situated, against the Company and each of the directors of the Company, seeking damages in unspecified amounts and injunctive relief. These lawsuits are alleging that the directors breached their fiduciary duties in entering into the Merger Agreement.

 

Additional similar lawsuits might arise. The Company and its board of directors believe these lawsuits are without merit and intend to vigorously defend them.

 

  

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

 

Forward-looking Statements

 

This Form 10-Q includes forward-looking statements. All statements other than statements of historical facts are forward-looking statements, including any projections of milestones, royalties or other financial items, any statements of the plans and objectives of management for future operations, any statements concerning research and development, clinical development timelines, regulatory approvals, commercialization and marketing, proposed new compounds, or licensing or collaborative arrangements, any statements regarding future economic conditions or performance, and any statement of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “believes”, “might”, “will”, “expects”, “plans”, “anticipates”, “estimates”, “potential” or “continue”, or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained in this Form 10-Q are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including the risk factors set forth in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

About Furiex Pharmaceuticals

 

We are a drug development company that collaborates with pharmaceutical and biotechnology companies to increase the value of their drug candidates by applying an accelerated approach to drug development, which we believe expedites research and development decision-making and can shorten drug development timelines. We share the risk with our collaborators by conducting and financing drug development programs, and in exchange, we share the potential rewards, receiving milestone and royalty payments for successful out-licensed drug candidates. This business model has generated a diversified product portfolio and pipeline with multiple therapeutic candidates, including one Phase III-ready asset, one compound in Phase III development, one compound which is with a partner pending regulatory approval in Japan, and four products on the market.

 

The Company's operations are headquartered in Morrisville, North Carolina. Our website address is www.furiex.com. Information on our website is not incorporated herein by reference. We make available free of charge through our website press releases, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after we have electronically filed with, or furnished to, the Securities and Exchange Commission.

 

Our Business Strategy

 

Our strategy is to in-license and develop novel early stage drug candidates that address medical conditions with significant unmet need. We invest in innovative early stage drug candidates whose targets have scientific or clinical validation, and in disease areas that have a relatively straightforward path to regulatory approval. We leverage our extensive drug development expertise to implement efficient and high quality development programs that accelerate time to market. We progress drug candidates to key value inflection points and typically form strategic collaborations with commercial pharmaceutical companies in exchange for milestone payments and royalties. We subject each potential drug candidate we consider to a rigorous review process by our due diligence team, which has expertise in all aspects of drug development, as well as in intellectual property and commercial assessment. This approach has enabled us to build a diversified portfolio of drug candidates and commercialized products that offer value to patients, our investors and collaborators.

 

Our Portfolio

 

We have exclusive license rights to eluxadoline (MuDelta), which is in Phase III development, and to JNJ-Q2, which is Phase III-ready. We also have rights with respect to trelagliptin (SYR-472), which is with a partner pending regulatory approval in Japan, and to four products that are out-licensed and commercialized by collaborators, for which we are eligible to receive worldwide sales-based royalty and sales-based milestone payments. The commercialized products in the alogliptin family (i.e., Nesina and its fixed dose combination products) are currently marketed in Japan, the United States and certain countries in the EU and Asia, and Priligy is currently marketed outside of the United States, we have no further development obligations for any of these products or trelagliptin.

 

 

Compounds in Clinical Development

 

Eluxadoline ¹ (MuDelta) for diarrhea-predominant irritable bowel syndrome

 

Diarrhea-predominant irritable bowel syndrome affects approximately 28 million patients in the United States and the five major European Union countries, and is characterized by chronic abdominal pain and frequent diarrhea. Studies have demonstrated that IBS-d is associated with work absenteeism, high medical costs and low quality of life. We believe the market for prescription treatments for IBS-d is underserved due to the limited number of available treatments and the adverse side effects associated with those treatments.

 

Eluxadoline is a novel, orally active, investigational agent in Phase III development, with combined mu opioid receptor agonist and delta opioid receptor antagonist activity. The compound's dual opioid activity is designed to treat the symptoms of IBS-d, without causing the constipating side effects that occur with mu opioid agonists. Eluxadoline acts locally in the gut and has very low oral bioavailability, thus limiting the potential for systemic side effects, such as sedation. The FDA has granted Fast Track designation to the eluxadoline IBS-d program. Fast Track is a process for facilitating the development and expediting the review of drugs to treat serious diseases and fill unmet medical needs, with the goal of bringing important new drugs to patients earlier. More than 2,500 subjects have received eluxadoline across the Phase I, II and III programs.

 

We acquired exclusive license rights to develop and commercialize eluxadoline under our existing development and license agreement with Janssen Pharmaceutica NV, or Janssen. Under the agreement, Janssen may receive up to $45.0 million in regulatory milestone payments and, if approved for marketing, up to $75.0 million in sales-based milestone payments and sales-based royalties increasing from the mid- to upper-single digit percentages as sales volume increases. Royalties are to be paid for a period of ten years after the first commercial sale or, if later, the expiration of the last valid patent claim or the expiration of patent exclusivity.

 

We completed a large multicenter randomized-double-blind Phase II Proof-of-Concept trial in patients with IBS-d in 2011; the study demonstrated that eluxadoline has a favorable efficacy and safety profile. The results are published in a paper entitled “Eluxadoline Benefits Patients With Irritable Bowel Syndrome With Diarrhea in a Phase 2 Study” (Dove et al. Gastroenterology 2013; 145:329-338).

 

Our Phase III program consisted of two randomized, double-blind, placebo controlled pivotal studies (studies 3001 and 3002), which have been designed to evaluate the efficacy and safety of eluxadoline in patients with IBS-d. The studies completed enrollment in July 2013, and randomized a total of 2,428 subjects; each study had three treatment arms: placebo, 75 mg twice a day and 100 mg twice a day. Both trials have the same overall design and efficacy endpoints capturing both the 12-week FDA endpoint as well as the 26-week European Medicines Agency (EMA) efficacy endpoints. These endpoints have been formally agreed with the FDA and EMA and are aligned respectively with the 2012 FDA guidance and the 2013 EMA draft guidance for clinical trial evaluation of new medicines for irritable bowel syndrome. Efficacy analyses were completed for both studies in late January 2014, but study 3001 is ongoing for the purpose of monitoring safety for a total of 52 weeks. Study 3001 is expected to complete safety monitoring in July 2014.

 

On February 4, 2014, we announced top-line results indicating that the two pivotal Phase III clinical trials (studies 3001 and 3002) evaluating the efficacy and safety of eluxadoline in the treatment of diarrhea-predominant irritable bowel syndrome met both the FDA and the EMA formally agreed-upon primary endpoints of composite response based on simultaneous improvements in stool consistency and abdominal pain. The primary efficacy endpoint was a composite response evaluated over the initial 12 weeks of double-blind treatment for FDA evaluation, and over 26 weeks of double-blind treatment for EMA evaluation. Response rates were compared based on patients who met the daily composite response criteria (improvement in pain and stool consistency) for at least 50% of the days from weeks 1 to 12 and weeks 1 to 26. A patient must have met both of the following criteria on any given day to be a daily responder:

 

●

Daily stool consistency response: Bristol stool score <5, or the absence of a bowel movement; and

●

Daily pain response: worst abdominal pain scores in the past 24 hours improved by ≥30% compared to baseline (average of week prior to randomization).

  

Primary Analysis Study 3002 (intention-to-treat analysis):

 

Patients receiving eluxadoline demonstrated statistically significantly higher responder rates for the following composite primary endpoints:

 

●

For the FDA composite endpoint (response over weeks 1-12), the responder rates were 29.6% for eluxadoline 100 mg, 28.9% for eluxadoline 75 mg and 16.2% for placebo ( p <0.001 both doses); and

 

	●	For the EMA composite endpoint (response over weeks 1-26), the responder rates were 32.7% for 100 mg, 30.4% for 75 mg and 20.2% for placebo ( p < 0.001 both doses).
		1   United States Adopted Names Council (USAN) adopted, International Nonproprietary Names (INN) approval pending.

 

 

Primary Analysis Study 3001 (intention-to-treat analysis):

 

Patients receiving eluxadoline demonstrated statistically significantly higher response rates for the following primary composite endpoints:

 

●

For the FDA composite endpoint (response over weeks 1-12), the responder rates were 25.1% for eluxadoline 100 mg (p =0.004), 23.9% for eluxadoline 75 mg (p =0.014) and 17.1% for placebo; and

 

●

For the EMA composite endpoint (response over weeks 1-26), the responder rates were 29.3% for 100 mg (p <0.001), 23.4% for 75 mg (p =0.112) and 19.0% for placebo.

 

Pooled Phase III Efficacy Analysis: Data pooled from studies 3001 and 3002 for the composite primary endpoints from the two studies demonstrated a differential effect between active and placebo. For the FDA endpoint, the differential effects were 9.5% and 10.3% for 75 and 100 mg respectively. Similarly, for the EMA 26 week endpoint, the differential effects were 7.2% and 11.5% for the 75 and 100 mg respectively. All p values were <0.001.

 

Eluxadoline had a favorable tolerability and safety profile in the trials. The most commonly reported side effects across the two studies were constipation (8.3% for 100 mg eluxadoline, 7.4% for 75 mg eluxadoline vs. 2.4% for placebo) and nausea (7.3% for 100 mg eluxadoline, 7.8% for 75 mg eluxadoline vs. 4.8% placebo). Sporadic elevations of liver enzymes (>3XULN) were seen in both the active and placebo arms, with a difference between active and placebo less than 0.5%, all of which resolved. There were infrequent adjudicated events of mild pancreatitis involving five patients who received eluxadoline (0.3% of those treated with the compound). Three of these subjects reported heavy alcohol consumption, one patient was noted to have biliary sludge, a known risk factor for pancreatitis, and one subject experienced transient sphincter of Oddi spasm, which is a known opiate class effect associated with pancreatitis.

 

We have completed a series of Phase I ADME (absorption, distribution, metabolism, elimination) studies for eluxadoline. Based on these results, we do not anticipate any significant changes in the target product profile. We have also completed a QT study, which evaluated the effect of eluxadoline on cardiac electrical conduction, and obtained a favorable result of no increase in the QT interval at the doses tested. We completed a study in hepatically impaired patients which showed increased levels in this population, and may result in labeling cautions around use of eluxadoline in severe hepatic impairment. We have recently completed a nasal insufflation abuse liability study in opiate users that was requested by the FDA, and which was presented at The American College of Neuropsychopharmacology meeting in December 2013. Top-line results showed that: (1) eluxadoline was not liked any more than placebo and was liked significantly less than oxycodone (the positive control); and (2) eluxadoline was significantly disliked compared with both oxycodone and placebo. We also completed an oral abuse study for eluxadoline. Top-line study results indicate that as with the prior nasal study, there is low potential for abuse liability via the oral route.

 

We believe that the program is on track for New Drug Application submission by the end of the third quarter of 2014.

 

Recent events: 

 

An abstract with Phase III trial results for eluxadoline was accepted for a late breaker presentation at the Digestive Diseases Week scientific meeting. The presentation, entitled “Eluxadoline for the Treatment of Diarrhea-Predominant Irritable Bowel Syndrome: Results of 2 Randomized, Double-blind, Placebo-Controlled Phase III Clinical Trials of Efficacy and Safety” was given by Dr. Anthony Lembo, Associate Professor, Harvard Medical School (Beth Israel Deaconess Medical Center) on May 6, 2014.

  

JNJ-Q2 for skin and lung infections

 

Community-acquired bacterial pneumonia, or CABP, and acute bacterial skin and skin structure infections, or ABSSSI, are important public-health concerns due to increasing drug resistance of established antibiotics to causative pathogens. Due to the emerging resistance to established antibiotics, there is a large unmet need for antibiotics such as JNJ-Q2 that cover a broad range of pathogens, including resistant Staphylococcus (“Staph”) and Streptococcus (“Strep”). Bacterial infections are a major cause of morbidity and mortality. Global microbiological surveillance suggests that approximately 40% of Staph infections in the U.S., Latin America and Asia Pacific are methicillin-resistant Staphylococcus “Staph” aureus, or MRSA.

 

 

JNJ-Q2 is a novel, broad-spectrum fluoroquinolone antibiotic that is Phase III-ready for two indications: ABSSSI and CABP. JNJ-Q2 has a low propensity to cause drug-resistance in vitro and has potent activity against two important drug-resistant pathogens: MRSA and drug-resistant Streptococcus pneumonia. In addition, JNJ-Q2 is highly active against other common and difficult to treat bacteria, including those that are gram-positive, atypical and anaerobic, as well as some gram negative bacteria. This broad bactericidal spectrum gives JNJ-Q2 an advantage over many other antibiotics, which do not reliably treat polymicrobial skin and wound infections or such a wide variety of respiratory pathogens. JNJ-Q2 is active against resistant pathogens that might be used in bioterrorism and also against drug-resistant gonorrhea. It can be dosed both intravenously and orally, differentiating it from many other MRSA treatments that are only dosed intravenously.

 

We acquired exclusive license rights to develop and commercialize JNJ-Q2 under our existing development and license agreement with Janssen. Under the agreement, Janssen may receive up to $50.0 million in regulatory milestone payments, and if approved for marketing, up to $75.0 million in sales-based milestone payments and sales-based royalties increasing from the mid- to upper-single digit percentages as sales volume increases. Royalties would be paid for a period of ten years after the first commercial sale or, if later, the expiration of the last valid patent claim or the expiration of patent exclusivity.

 

In February 2013, the FDA granted JNJ-Q2 a Qualified Infectious Disease Product and Fast Track designation. These designations should enable us and/or any future collaborator with respect to the compound to benefit from certain incentives for the development of new antibiotics, including priority review and additional five-year market exclusivity, as provided under the Generating Antibiotic Incentives Now (GAIN) Act, which is incorporated within the FDA Safety and Innovation Act of 2012.

 

We have forecasted minimal expenditures for this compound in 2014.

  

Marketed Products

 

Nesina^® (alogliptin) for Type-2 diabetes

 

Type-2 diabetes is the most common form of diabetes and has reached worldwide epidemic proportions. The global healthcare expenditures to treat and prevent diabetes and its complications were estimated at $471.0 billion in 2012. By 2030, this number is projected to exceed $595.0 billion. In addition to diet and exercise, diabetic patients often require multiple medicines to help manage their condition.

 

Nesina is the trade name for alogliptin and is marketed by Takeda Pharmaceuticals Company Limited, or Takeda. Nesina is a highly selective, orally-active dipeptidyl peptidase-4, or DPP-4, inhibitor that slows the inactivation of hormones known as incretins (glucagon-like peptide-1 and glucose-dependent insulinotropic peptide), which play a major role in regulating blood sugar levels. Approximately 9,000 patients with Type-2 diabetes have been treated with Nesina in 14 randomized, double-blind, controlled clinical trials. Pivotal trials demonstrated that Nesina was well-tolerated when given as a single daily dose and it significantly improved glycemic control in Type-2 diabetes patients without raising the incidence of hypoglycemia. Additionally, Nesina has been shown to enhance glycemic control when used in combination with other commonly prescribed diabetes drugs. 

 

Nesina has been marketed in Japan since 2010, in the United States since mid-2013 and in certain countries in Europe (Vipidia™) since early 2014. It is also being marketed as a fixed-dose combination with Actos® in Japan (Liovel®), the United States (Oseni®) and certain countries in Europe (Incresync™), and as a fixed dose combination with metformin in the United States (Kazano®) and certain countries in Europe (Vipdomet™). Oseni is the only marketed fixed-dose combination of a DPP4-inhibitor and a thiazolidinedione (i.e., Actos). Alogliptin monotherapy is also approved and marketed in the People’s Republic of China and Australia.

 

Takeda completed two large randomized clinical studies in 2013, which provide rigorous data supporting the long-term safety and efficacy of alogliptin. Results from the ENDURE study, which were presented at the 2013 Scientific Sessions of the American Diabetes Association (Del Prato, S. et al. 2013), demonstrated that alogliptin (25 mg) in addition to metformin offered superior durability of glycemic control at two years with notably fewer hypoglycemic episodes and no negative impact on weight compared to a sulphonylurea (glipizide).  Furthermore, when given in combination with metformin, significantly more patients treated with alogliptin achieve target hemoglobin A1C of ≤ 7% versus with glipizide in combination with metformin. Also, in 2013, Takeda published the results of the EXAMINE study in the New England Journal of Medicine (N Engl J Med 2013; 369:1327-1335). The EXAMINE study, which compared alogliptin to standard of care, is the first cardiovascular outcomes study of patients with Type-2 diabetes who are at high-risk for major adverse cardiac events (MACE) due to a recent history of acute coronary syndrome. These data demonstrate that alogliptin does not increase cardiovascular risk in Type-2 diabetes patients at high-risk for MACE compared with placebo, when added to usual therapy. The trial met its primary objective of demonstrating non-inferiority of cardiovascular risk based on a primary composite endpoint of cardiovascular death, nonfatal myocardial infarction and nonfatal stroke. Rates of hypoglycemia, malignancy, pancreatitis, serum aminotransferase elevations and of serious adverse events were similar for the alogliptin and placebo groups.

 

 

We have no further financial obligations under our agreement with Takeda. Under this agreement, we will be entitled to receive up to $33.0 million in sales-based milestone payments plus royalty payments on worldwide sales of Nesina and alogliptin combination products at royalty rates of 7% to 12% in the U.S., 4% to 8% in Europe and Japan and 3% to 7% in regions other than the United States, Europe or Japan. Royalty payments are subject to a reduction of up to 0.5% for a portion of payments by Takeda to a licensor for intellectual property related to Nesina (except in Japan, where there is currently no intellectual property that would cause such a reduction). Royalties are to be paid for the longer of ten years following the first commercial sale or two years following the expiration of the last to expire patent. Royalties for sales of Nesina combination products are based on an agreed-upon percent of product sales in the U.S. and on the proportion of Nesina's average sales price compared to that of the combination product in territories outside of the U.S.

 

Recent events: 

 

On March 29, 2014, Takeda presented sub-analyses from the global EXAMINE study in a poster session at the American College of Cardiology’s scientific meetings in Washington, DC. These sub-analyses specifically demonstrated no effect on rates of cardiovascular mortality, no increase in sudden cardiac death and similar rates of hospitalization with heart failure. Furthermore, alogliptin neither induced new onset heart failure nor worsened heart failure outcomes in patients with a history of heart failure.

 

Alogliptin has recently been launched in South Korea, Mexico and Austria.

 

Priligy^® (dapoxetine) for premature ejaculation

 

Premature ejaculation is a common type of sexual dysfunction. It is associated with lower sexual satisfaction in both men and their female partners, and can negatively impact a man’s quality of life and interpersonal relationships. The reported percentage of men affected with premature ejaculation, or PE, at some point during their lives ranges from 4% to 30%, depending on the methodology and criteria used.

 

Priligy is the trade name for dapoxetine, a drug in tablet form that is the first and only oral medicine that is specifically indicated for the “on-demand” treatment of PE. It is a unique, short-acting, selective serotonin reuptake inhibitor, or SSRI, designed to be taken only when needed, one to three hours before sexual intercourse, rather than daily. It is the first oral medication to be approved for this condition. Priligy is approved in over 60 countries and currently marketed in over 30 countries in Europe, Asia-Pacific and Latin America.

 

Priligy has been studied in over 12,000 patients in clinical trials, including five randomized, placebo-controlled Phase III clinical trials involving more than 6,000 men with PE. Data from these randomized trials, as well as from a large post-marketing safety study (Mirone et al. European Urology, Aug 2103) have demonstrated favorable safety and benefit-risk profiles for Priligy.

 

In May 2012, we entered into a license agreement with Berlin-Chemie AG (Menarini Group), or Menarini, to commercialize Priligy in Europe, most of Asia, Africa, Latin America and the Middle East. This transaction became effective on July 30, 2012. We retain full development and commercialization rights in the U.S., Japan and Canada. We currently do not plan to develop Priligy in the United States because we do not believe that there is a clear regulatory path to NDA registration. We will continue to monitor the FDA’s position on clinical development for this indication, and re-assess our strategy should circumstances change.

 

As of December 2013, we have received the $20.0 million in launch and regulatory milestones we were eligible to receive under our license agreement with Menarini. We remain eligible for up to $40.0 million in sales-based milestones, plus tiered royalties ranging from the mid-teens to mid-twenties in percentage terms.

  

We originally acquired patents for Priligy from Eli Lilly and Company, or Lilly, and are obligated to pay Lilly a royalty of 5.0% on annual sales in excess of $800.0 million. Under the terms of the license agreement with Menarini, Menarini will pay the portion of the royalties owed to Lilly in each country where Menarini is licensed to sell Priligy, where Lilly is eligible for payments, and where we are no longer eligible for payments from Menarini.

 

 

Compound in Clinical Development by Collaborator

 

Trelagliptin for Type-2 diabetes

 

Trelagliptin (SYR-472) is part of the DPP-4 inhibitor portfolio that Takeda purchased from PPD and Syrrx in 2005. Trelagliptin has the same mechanism of action as alogliptin. However, in contrast to alogliptin, which is a once-daily oral therapy, trelagliptin is a once-weekly oral agent. Currently, all available DPP-4 inhibitors are dosed once-daily. A once-weekly treatment, such as trelagliptin, should provide patients with a convenient therapeutic alternative, and has the potential to improve treatment compliance.

 

Takeda has completed Phase III studies in Japan for treatment of Type-2 diabetes. In early March 2014, Takeda announced that it had submitted an NDA to the Japanese Ministry of Health, Labour and Welfare for trelagliptin succinate for the treatment for Type-2 diabetes. If trelagliptin is approved, we would be eligible to receive sales-based royalty payments and sales-based milestone payments based on global product sales at the same rates as for Nesina, as described above.

 

    

Overview

 

Our business to date has consisted solely of compound development and collaborative activities. Accordingly, we operate in one reportable business segment. Our revenues consist primarily of milestone and royalty payments from collaborators. For the three-month period ended March 31, 2013, our total revenue of $39.3 million consisted of a $25.0 million regulatory milestone from Takeda related to Nesina, a $5.0 million launch-based milestone payment from Menarini related to Priligy and $9.3 million of royalty revenue from the sale of Nesina and related combination products, as well as Priligy, by our collaborators. For the three-month period ended March 31, 2014, our total revenue of $6.4 million consisted of royalty revenue from the sale of Nesina and related combination products, as well as Priligy.

 

We incurred research and development expenses of $25.4 million and $14.3 million for the three-month periods ended March 31, 2013 and 2014, respectively. Our current research and development expenses are primarily related to the continued development of eluxadoline. We expense all research and development costs for our compounds and external collaborations as incurred.

 

For the three-month period ended March 31, 2013 we reported net income of $9.0 million. For the three-month period ended March 31, 2014 we reported a net loss of $13.1 million. Although we generated net income in the prior year first quarter, we have historically generated losses and there can be no assurances that we will generate income in future periods. We expect to continue to incur net losses unless revenues from all sources reach a level sufficient to support our on-going operations.

 

Our business is subject to various risks and uncertainties. See “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013 for information on these risks and uncertainties.

 

We have prepared the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, or GAAP, and they include the accounts of Furiex Pharmaceuticals, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Three Months Ended March 31, 2013 versus Three Months Ended March 31, 2014

 

The following table sets forth amounts from our consolidated financial statements for the three-month period ended March 31, 2013 compared to the three-month period ended March 31, 2014.

 

		Three Months Ended March 31,
(in thousands)		2013				2014
Revenue:
Milestones		$	30,000			$	—
Royalties			9,325				6,422
Total revenue			39,325				6,422
Research and development expenses			25,363				14,279
Selling, general and administrative expenses			3,873				3,554
Depreciation and amortization			22				8
Total operating expenses			29,258				17,841
Operating income (loss)			10,067				(11,419	)
Interest expense			1,100				1,627
Other income, net			90				1
Income (loss) before provision for income taxes			9,057				(13,045	)
Less provision for income taxes			91				6
Net income (loss)		$	8,966			$	(13,051	)

 

Revenue. Total revenue decreased $32.9 million to $6.4 million in the first quarter of 2014 from the first quarter of 2013. This decrease was due to a $25.0 million regulatory milestone from Takeda with respect to the FDA approval of three new alogliptin-related products in January 2013 and a $5.0 million milestone from Menarini upon the launch of Priligy in France in March 2013. Royalty revenue of $6.4 million for the first quarter of 2014 related to the sale of Nesina and related combination products in Japan and the United States, and of Priligy in various countries outside the United States. The decrease in royalty revenue from the first quarter of 2013 related to lower net sales of Nesina in Japan for the three-month period ended March 31, 2014, in addition to a negative impact from the Yen/Dollar exchange rate.

  

 

Expenses. Research and development, or R&D, expenses decreased $11.1 million to $14.3 million in the first quarter of 2014 from the first quarter of 2013. The decrease in R&D expense was due primarily to the completion of the efficacy analyses for both eluxadoline Phase III studies in late January 2014.

   

The following table sets forth amounts from our consolidated statements of operations for R&D expenses along with the dollar amount of the changes for the three-month period ended March 31, 2013 compared to the three-month period ended March 31, 2014.

 

		Three Months Ended March 31,
(in thousands)		2013				2014				$ Inc (Dec)
R&D expense by project:
Eluxadoline (MuDelta)		$	24,598			$	13,149			$	(11,449	)
JNJ-Q2			6				6				—
Other R&D expense			759				1,124				365
Total R&D expense		$	25,363			$	14,279			$	(11,084	)

 

R&D expenses will likely fluctuate significantly from period to period for a variety of reasons, including the number of compounds under development, the stages of development and changes in development plans. The primary driver of the level of R&D expense during the current year was related to Phase III costs associated with the continued development of eluxadoline. The level and variability of quarterly R&D costs relate to the timing of specific activities associated with the on-going clinical trials.

 

Our forecasted total research and development expenses are expected to run between $21.0 million and $26.0 million for the remainder of 2014, comprised almost entirely of Phase III study costs, manufacturing costs, preparatory work in anticipation of the NDA submission for eluxadoline and a $10.0 million regulatory milestone to Janssen due upon acceptance of the NDA filing by the FDA.

  

Selling, general and administrative, or SG&A expenses, decreased $0.3 million to $3.6 million in the first quarter of 2014 from the first quarter of 2013. The decrease in SG&A expenses was due primarily to decreases in non-cash stock compensation expense of $1.0 million related to employee and consultant options, including the mark-to-market adjustment for non-vested consultant options, partially offset by additional restricted stock awards issued to employees and directors during 2013 and the first quarter of 2014.

 

Interest expense increased $0.5 million to $1.6 million in the first quarter of 2014 from the first quarter of 2013. The increase in interest expense was due to increased borrowings under the second amended loan agreement with Midcap Funding and Silicon Valley Bank in September 2013, in addition to a new $15.0 million loan with a related party as of September 2013.

 

Results of Operations. Net loss of $13.1 million in the first quarter of 2014 represents an approximate $22.0 million change from net income of $9.0 million in the first quarter of 2013. This change in our operating results resulted primarily from the $32.9 million decrease in revenue offset by the $11.1 million decrease in R&D expense, as described above.

  

  

Liquidity and Capital Resources

 

As of March 31, 2014, we had $22.9 million of cash and cash equivalents. In addition, we had $6.4 million of accounts receivable, $11.7 million of accounts payable and accrued expenses and $15.3 million of short-term debt. The primary source of our current cash and cash equivalents has been from upfront, milestone and royalty payments received and proceeds from our credit facility and related party loan described below.

  

On August 18, 2011, we entered into a loan agreement with Midcap Funding III, LLC and Silicon Valley Bank. This initial borrowing in the amount of $10.0 million had a fixed interest rate of 10.25% per annum and was initially due August 1, 2015. On August 2, 2012, we entered into an amended loan agreement with Midcap Funding III, LLC, Midcap Funding RE Holdings, LLC and Silicon Valley Bank for an additional $30.0 million. This new agreement amended the prior agreement by resetting the maturity date to August 2, 2016 for a total amount of $40.0 million, bearing interest at a fixed rate of 10.00%. On September 30, 2013, we entered into a second amended loan agreement with Midcap Funding III, LLC, Midcap Funding V, LLC and Silicon Valley Bank which reset the outside maturity date to October 1, 2018, deferred payment of principal until May 2014, and increased the total amount of the loan to $42.0 million. This borrowing bears interest at a fixed rate of 10.00%. Interest accrues daily and is payable on the first day of the following month, in arrears. As part of this second amended agreement, we are required to maintain our primary deposit and investment accounts with Silicon Valley Bank, consisting of at least 50% of our total cash and cash equivalents balance.

 

On September 30, 2013, we entered into a loan agreement with Fredric N. Eshelman, the Company’s chairman of the board and then a 27.5% stockholder. This $15.0 million borrowing bears interest at a fixed rate of 9.00%. Interest accrues daily and is payable on the first day of the following month, in arrears. This loan becomes due and payable on the earlier of January 1, 2019 or 91 days after the Midcap Funding LLC / Silicon Valley Bank loan has been paid in full. Principal payments of $166,667 on the Eshelman Loan Agreement begin on October 1, 2014, and continue on a monthly basis thereafter through and including the maturity date.

 

We have incurred losses and negative cash flows from operations since the spin-off and expect to continue to incur operating losses until revenues from all sources reach a level sufficient to support our on-going operations. As previously publicly disclosed, in April 2014 we entered into a definitive agreement to be acquired by Forest Labs, which we expect, subject to various closing conditions, should close in the second or third quarter of 2014. This agreement contains covenants restricting our business operations prior to closing or the agreement’s termination, including limitations on our ability to raise additional capital other than up to $25.0 million of additional debt, which could constrain our liquidity. The remainder of this liquidity disclosure primarily addresses our liquidity as an independent entity. We believe our existing cash balance and anticipated revenue from our collaborators for marketed products are sufficient to fund ongoing essential operations into 2015. However, if we choose to advance eluxadoline through the FDA registration process, which would trigger a $10.0 million milestone payment to Janssen upon acceptance of the NDA filing by the FDA, and prepare to commercialize eluxadoline without a partner, we would need to raise additional capital through the issuance of debt, equity or other financing alternatives before the fourth quarter of 2014.

  

Our liquidity over the next 12 months could be materially affected by, among other things: our ability to raise additional funds through debt, equity, or other financing alternatives; costs related to our development and potential commercialization efforts; regulatory approval and commercialization of our compound candidates, which could affect selling, general and administrative expenses, milestone and royalty receipts; changes in regulatory compliance requirements; reliance on existing collaborators and potential need to enter into additional collaborative arrangements; or other factors described under the risk factors set forth in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013. Depending upon the success and timing of potential new collaborations or commercialization efforts and receipt of various milestone payments and royalties, it might be necessary to do one or more of the following in the next 12 months: (a) raise additional capital through equity or debt financings or from other sources; (b) reduce spending on research and development and/or commercialization of eluxadoline; or (c) restructure the Company's operations.

 

The timing and amount of any future expenses, trial completion dates and revenues related to our compounds are subject to significant uncertainty. We do not know if we will be successful in developing any of our compounds. The timing and amount of our research and development expenses will depend upon the costs associated with the present and potential future clinical trials and non-clinical studies of our compounds, any related expansion of our research and development organization, changes in regulatory requirements and manufacturing costs. There are numerous risks and uncertainties associated with the duration and cost of clinical trials and regulatory reviews, which vary significantly over the life of a program as a result of events arising during clinical development. For example, if the FDA, or another regulatory authority, were to require us or one of our collaborators to conduct clinical trials beyond those we currently anticipate to complete clinical development of a compound, or if we experience significant delays in enrollment in any of our clinical trials, we would be required to expend significant additional financial resources and time on the completion of clinical development. The timing and amount of revenues, if any, are dependent upon the success of the clinical trials as well as the commercial success of these products in the marketplace, all of which are subject to a variety of risks and uncertainties, including the ability to obtain reimbursement approval for our products and our ability to defend or enforce our patents related to Priligy.

 

  

Our future capital requirements will depend on numerous factors, including, among others: the cost and expense of continuing the research and development activities of our existing compounds; new collaborative agreements that we might enter into in the future; progress of compounds in clinical trials as it relates to the cost of development and the receipt of future milestone payments, if any; the ability of us or our licensees and collaborators to obtain regulatory approval and successfully manufacture and market collaboration products; the continued or additional support by our collaborators or other third parties of research and development efforts and clinical trials; time required to gain regulatory approvals; the demand for our potential products, if and when approved; potential acquisitions of technology, compounds or businesses by us; and the costs of defending or prosecuting any patent opposition or litigation necessary to protect our proprietary technologies. In order to develop and obtain regulatory approval for and commercialize our potential compounds we might raise additional funds through equity or debt financings or from other sources, collaborative arrangements, the use of sponsored research efforts or other means. However, additional financing might not be available on acceptable terms, if at all, and such financing might only be available on terms dilutive or otherwise detrimental to our stockholders or our business.

 

For the three-month period ended March 31, 2014, net cash used in our operating activities was $9.2 million compared to net cash provided by operating activities of $9.5 million for the same period in 2013. The transition to net cash used in operating activities relates primarily to the decreased revenue associated with milestone and royalty payments from our collaborators, partially offset by the decrease in research and development expenditures previously described.

  

There were no significant investing activities for the three-month periods ended March 31, 2014 and 2013, respectively.

  

For the three-month period ended March 31, 2014 and 2013, our financing activities provided $2.9 million and $1.2 million in cash from the issuance of common stock related to stock option exercises during the period.

 

Contractual Obligations

 

In connection with the termination of the Merger Agreement under specified circumstances, including with respect to the Company’s entry into an agreement with respect to a superior proposal and the board of directors of the Company changing its recommendation that stockholders vote in favor of the Merger Agreement, the Company is required to pay to Parent a termination fee equal to $41.0 million. In addition, in the event that the Merger Agreement is terminated under specified circumstances during the pendency of a publicly disclosed third-party proposal to acquire the Company, the Company is required to reimburse Parent for Parent’s fees and expenses incurred in connection with the Merger Agreement up to an aggregate amount of $3.0 million, and, if the Company enters into an agreement for a third party to acquire the Company within 12 months of such termination, to pay to Parent the balance of the $41.0 million termination fee less any such reimbursed expenses. Other than the potential fees related to the Merger Agreement, there have been no significant changes to the Contractual Obligation table included in our Annual Report on Form 10-K for the year ended December 31, 2013.

  

Off-balance Sheet Arrangements

 

We have no off-balance sheet arrangements except for operating leases entered into in the normal course of business.

 

Critical Accounting Policies and the Use of Estimates

 

There have been no significant changes to our critical accounting policies or the use of estimates described in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

 

Item 3.          Quantitative and Qualitative Disclosures about Market Risk

 

Under our current investment policies, we invest our cash and cash equivalents in money market funds that invest in short-term U.S. Treasury securities with insignificant rates of return. Due to the short-term nature of our investments, we do not believe that a decrease in market rates would have a significant negative impact on the value of our cash and cash equivalents.

 

Item 4.          Controls and Procedures

 

Disclosure Controls and Procedures

 

Disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are designed only to provide reasonable assurance that information to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our President (our principal executive officer) and Chief Financial Officer (our principal financial and accounting officer), of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our President and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to provide the reasonable assurance discussed above.

 

Internal Control Over Financial Reporting

 

No change to our internal control over financial reporting occurred during the first quarter of 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

 

On May 1, 2014, a putative shareholder class action lawsuit relating to the merger was filed against us, our board of directors, Royal Empress, Inc. and Forest Laboratories, Inc. in the Court of Chancery of the State of Delaware, styled Steven Kollman, Individually and On Behalf of All Others Similarly Situated v. Furiex Pharmaceuticals, Inc. et al., Transaction ID 55377253, Case No. 9599, alleging that members of our board of directors breached their fiduciary duties in connection with the transaction and that Furiex and Forest Laboratories aided and abetted the alleged breaches of fiduciary duties.  On May 2, 2014, a second putative shareholder class action lawsuit relating to the merger was filed against us, our board of directors, Royal Empress, Inc. and Forest Laboratories, Inc. in the Court of Chancery of the State of Delaware, styled Donald Powell, On Behalf of himself and All Others Similarly Situated v. Furiex Pharmaceuticals, Inc. et al., Transaction ID 55382992, Case No. 9603, alleging that members of our board of directors breached their fiduciary duties in connection with the transaction and that Furiex, Forest Laboratories and their merger sub Royal Empress, Inc. aided and abetted the alleged breaches of fiduciary duties.  Both complaints seek class certification, injunctive relief to prevent closing of the proposed transaction, unspecified damages, attorneys’ fees, experts’ fees, and other costs.

 

Additional similar lawsuits might be filed.  The Company and its board of directors believe that both of these lawsuits are without merit and intend to vigorously defend against the claims asserted therein, but we are unable to predict the outcome or reasonably estimate a range of possible loss at this early stage of the proceedings. 

 

Item 6.          Exhibits

 

The following is a list of exhibits filed as part of this Report on Form 10-Q.

 

Exhibit Number	Description
31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	Financial information from the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2014 formatted in eXtensible Business Reporting Language (XBRL)

  

  

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

				FURIEX PHARMACEUTICALS, INC.
Date: May 9, 2014				By:		/ s /    June S. Almenoff
				Name:		June S. Almenoff
				Title:		President and Chief Medical Officer
						(Principal Executive Officer)
				By:		/ s /    Sailash I. Patel
				Name:		Sailash I. Patel
				Title:		Chief Financial Officer and Vice President Strategic Development
						(Principal Financial Officer)

 

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