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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2015

OR

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

Commission File Number 001-36617

VITAE PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in its Charter)

(215) 461-2000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

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

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

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

As of July 31, 2015, there were 21,851,663 outstanding shares of the registrant’s common stock, $.0001 par value per share.

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VITAE PHARMACEUTICALS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2015

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations for future operations, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “design,” “intend,” “expect,” “could,” “plan,” “potential,” “predict,” “seek,” “should,” “would” or the negative version of these words and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short- and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, assumptions and other important factors, including those described in the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the Securities and Exchange Commission on March 31, 2015. In light of these risks, uncertainties, assumptions and other factors, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward- looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

Forward-looking statements include, but are not limited to, statements about:

·                  the timing and success of preclinical studies and clinical trials conducted by us and our development partners;

·                  our ability to establish and maintain development partnerships;

·                  the scope, progress, expansion, and costs of developing and commercializing our current or future product candidates;

·                  the size and growth of the potential markets for our current or future product candidates and the ability to serve those markets;

·                  our expectations regarding our expenses and revenue, the sufficiency of our cash resources and needs for additional financing;

·                  the ability to obtain and maintain regulatory approval of our product candidates, and the labeling for any approved products;

·                  the rate and degree of market acceptance of any of our current or future product candidates;

·                  our expectations regarding competition;

·                  our anticipated growth strategies;

·                  our ability to attract or retain key personnel;

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

·                  regulatory developments in the United States and foreign countries;

·                  our ability to obtain and maintain intellectual property protection for our structure-based drug discovery platform and our product candidates;

·                  the anticipated trends and challenges in our business and the market in which we operate; and

·                  the use or sufficiency of our existing cash, cash equivalents and marketable securities.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date of this report. Except as required by law, we disclaim any duty to update any of these forward-looking statements after the date of such statements are made, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

Vitae Pharmaceuticals, Inc.

Balance Sheets

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

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Vitae Pharmaceuticals, Inc.

Statements of Operations (Unaudited)

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

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Vitae Pharmaceuticals, Inc.

Statements of Comprehensive Loss (Unaudited)

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

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Vitae Pharmaceuticals, Inc.

Statements of Cash Flows (Unaudited)

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

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Vitae Pharmaceuticals, Inc.

Notes to Financial Statements (Unaudited)

1. Organization

Vitae Pharmaceuticals, Inc. (“Vitae” or the “Company”) is a clinical-stage biotechnology company focused on discovering and developing novel, small molecule drugs for diseases where there are significant unmet medical needs. The Company is developing a robust and growing portfolio of novel product candidates internally generated by Contour®, its proprietary structure-based drug discovery platform. The Company has a portfolio that includes several wholly-owned product candidates ranging from clinical to pre-clinical development, a partnered product candidate in the clinic and the rights to a pre-clinical product candidate that is expected to be returned to the Company in connection with the termination of a collaboration agreement in the second half of 2015.

The Company’s most advanced, wholly-owned product candidate is VTP-43742 for the treatment of autoimmune disorders, which is advancing in Phase 1 clinical development.  The Company has two other wholly-owned product candidates, VTP-38543 for the treatment of atopic dermatitis and VTP-38443 for the treatment of acute coronary syndrome, both of which are in preclinical development. The Company intends to advance and retain rights to these and other programs and product candidates that the Company believes it can develop and commercialize, and to strategically partner where doing so can accelerate the program and generate non-dilutive capital for Vitae.

The Company’s most advanced product candidate is BI187004/VTP-34072 (“BI187004”), which is in a Phase 2 clinical trial for the treatment of type 2 diabetes, and is being developed under a Research Collaboration and License Agreement with Boehringer Ingelheim GmbH (“BI”) that was entered into in October 2007 (the “11β Agreement”).

The Company also has a product candidate, BI 1147560/VTP-36951, in pre-clinical development for the treatment and prevention of Alzheimer’s disease, or Alzheimer’s.  BI 1147560/VTP-36951was being developed exclusively by BI pursuant to a Research Collaboration and License Agreement with BI that was entered into in June 2009 (the “BACE Agreement”).  On July 23, 2015, BI notified the Company that it was terminating the BACE Agreement, effective as of October 21, 2015, for strategic business reasons.  In connection with the termination of the BACE Agreement, the Company expects to receive the rights to the BACE program, including BI 1147560/VTP-36951, which is expected to include, among other rights, certain exclusive rights to develop and commercialize the terminated products for the treatment of Alzheimer’s, diabetes and the other indications covered by the BACE Agreement.  The Company intends to work with BI to effect an orderly transfer of such rights to Vitae and to assess the BACE program to determine appropriate next steps.

The collaborations with BI, including the BACE Agreement, have provided the Company with an aggregate of $158 million in funding as of June 30, 2015, including $30 million from sales of the Company’s equity securities and $128 million in upfront license fees, research funding and success-based milestones.

Vitae is currently pursuing the following strategies: advance its growing portfolio of product candidates, establish late-stage development and commercialization capabilities for certain of the Company’s product candidates in the U.S. and potentially other markets, selectively collaborate with large biotechnology and pharmaceutical companies to maximize the value of the Company’s product candidates, leverage Contour to rapidly discover novel small molecule product candidates for additional validated, difficult-to-drug targets, and continue investing in technology, people and intellectual property.

As of June 30, 2015, the Company had cash, cash equivalents and marketable securities of approximately $80.3 million.  Based on the Company’s current operating plan, which as of now does not include any expenses relating to further development of the BACE program, the Company believes that its existing cash, cash equivalents and marketable securities will be sufficient to fund its projected operating requirements through the end of 2016. The Company intends to assess the BACE program and revise its operating plan accordingly after determining the appropriate next steps. The Company will need to secure additional funding in the future, from one or more equity or debt financings, collaborations, or other sources, in order to carry out all of the Company’s planned research and development activities and further potential development of the BACE program. The future success of the Company is dependent on its ability to develop its product candidates and ultimately upon its ability to attain profitable operations. The Company is subject to a number of risks similar to other life sciences companies, including, but not limited to, successful discovery and development of its drug candidates, raising additional capital, development by its competitors of new technological innovations, protection of proprietary technology and market acceptance of the Company’s products.

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2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and are unaudited. The interim unaudited financial statements have been prepared on the same basis as the financial statements as of and for the year ended December 31, 2014 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (“Annual Report on Form 10-K”). In the opinion of management, the accompanying financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of June 30, 2015 and the results of its operations, comprehensive loss and cash flows for the three and six months ended June 30, 2015 and 2014. The results for the three and six months ended June 30, 2015 are not necessarily indicative of results to be expected for the year ending December 31, 2015, any other interim periods, or any future year or period.  The information contained in the accompanying financial statements and the notes thereto should be read in conjunction with the financial statements and notes thereto as of and for the year ended December 31, 2014 included in the Company’s Annual Report on Form 10-K.

Fair Value of Financial Instruments

At June 30, 2015 and December 31, 2014, the Company’s financial instruments included cash and cash equivalents, restricted cash, marketable securities, accounts payable, and accrued expenses and also included notes payable at December 31, 2014. The carrying amounts reported in the Company’s financial statements for cash and cash equivalents, restricted cash, accounts payable and accrued expenses approximates their respective fair values because of the short-term nature of these instruments. The Company’s short- and long-term marketable securities are carried at fair value based on quoted market prices and other observable inputs. Notes payable approximates fair value because the interest rate was reflective of the rate the Company could obtain on debt with similar terms and conditions. The Company has determined the estimated fair value of financial instruments using available market information and management’s estimates. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts.

Deferred Offering Costs

Generally, deferred offering costs consist of legal, accounting, and printing fees incurred in connection with offerings of the Company’s equity securities, and are capitalized when incurred. In connection with the Company’s January 2015 underwritten public offering of common stock, deferred offering costs totaling $0.2 million were recognized in the balance sheet as of December 31, 2014.

Preferred Stock Warrants

Prior to the Company’s initial public offering (“IPO”) in September 2014, the Company’s preferred stock warrants were recognized in the balance sheet as liabilities in accordance with the guidance for accounting for certain financial instruments with characteristics of both liabilities and equity as the warrants entitled the holder to purchase preferred stock that was considered contingently redeemable. The fair value of the preferred stock warrant liability was re-measured at the end of each reporting period, and any changes in fair value were recognized in the Statements of Operations as other income or expense. Upon the closing of the IPO, the preferred stock warrants were, in accordance with their terms, automatically converted into warrants to purchase common stock, which resulted in the reclassification of the preferred stock warrant liability to additional paid-in capital and gain or loss recognition for changes in fair value was discontinued.

Net Income Per Common Share

Prior to the Company’s IPO in September 2014, the Company used the two-class method to compute net income per common share because the Company had outstanding securities, other than common stock, that contractually entitle the holders to participate in dividends and earnings of the Company. The two-class method requires earnings available to common stockholders for the period, after an allocation of earnings to participating securities, to be allocated between common and participating securities based upon their respective rights to receive distributed and undistributed earnings. Each series of the Company’s convertible preferred stock were entitled to receive annual non-cumulative dividends that ranged from $0.60 - $1.66 per share, payable prior and in preference to dividends paid to holders of common stock when and if declared by the Company’s board of directors. In the event a dividend was paid on common stock, holders of preferred stock were entitled to a proportionate share of any such dividend as if they were holders of common shares (on an as-if converted basis).

For periods with net income prior to the IPO, net income per common share information is computed using the two-class method. Under the two-class method, basic net income per common share is computed by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Basic net income attributable to common stockholders is computed by an adjustment to subtract from net income the portion of current year earnings that the preferred stockholders would have been entitled to receive pursuant to their dividend rights had all of the year’s earnings been

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distributed. No such adjustment to earnings is made during periods with a net loss, as the holders of the convertible preferred shares had no obligation to fund losses.

Diluted net income per common share is computed by using the weighted-average number of shares of common stock outstanding, plus, for periods with net income attributable to common stock, the dilutive effects of stock options, restricted stock units, and warrants. Potential dilutive shares consist of incremental common stock issuable upon the exercise of stock options and warrants. Basic and dilutive computations are the same in periods with net losses attributable to common stockholders as the dilutive effects of stock options, restricted stock units and warrants would be antidilutive.

Significant Accounting Policies

The Company’s significant accounting policies are disclosed in the audited financial statements for the year ended December 31, 2014 included in the Company’s Annual Report on Form 10-K. Since the date of those financial statements, there have been no changes to the Company’s significant accounting policies.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. ASU 2014-09 will supersede and replace nearly all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods therein. The Company is evaluating ASU 2014-09 and has not yet determined what, if any, effect ASU 2014-09 will have on its results of operations or financial condition.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern. ASU 2014-15 requires management of all entities to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued, and to make certain disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the entity’s ability to continue as a going concern. ASU 2014-15 is effective for the Company for annual reporting periods beginning in 2016 and for interim reporting periods starting in the first quarter of 2017. The Company is currently evaluating the impact of the adoption of ASU 2014-15 on its financial statements.

3. Net (Loss) Income Per Common Share

The following table sets forth the computation of basic and diluted net income loss per common share for the periods indicated:

The following outstanding securities at June 30, 2015 and 2014 have been excluded from the computation of diluted weighted shares outstanding, as their effects on net loss per share would have been anti-dilutive:

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4. Accrued Expenses

At June 30, 2015 and December 31, 2014, accrued expenses consisted of the following:

5. Fair Value Measurements

The Company measures certain assets and liabilities at fair value in accordance with Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (the exit price) in an orderly transaction between market participants at the measurement date. The guidance in ASC 820 outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. In determining fair value, the Company maximizes the use of quoted prices and observable inputs. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. The fair value hierarchy is broken down into three levels based on the source of inputs as follows:

·                  Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.

·                  Level 2—Valuations based on observable inputs and quoted prices in active markets for similar assets and liabilities.

·                  Level 3—Valuations based on inputs that are unobservable and models that are significant to the overall fair value measurement.

The Company’s Level 1 assets included money market funds and certificates of deposit (“CD”). Level 2 assets included U.S. government agency securities and corporate debt securities. The following fair value hierarchy tables present information about each major category of financial assets measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014:

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6. Investments

Marketable Securities

Marketable securities consisted of the following as of June 30, 2015 and December 31, 2014:

As of June 30, 2015, the Company’s marketable securities had the following maturities:

7. Notes Payable

Silicon Valley Bank and Oxford Finance LLC.—2011 Credit Facility

In December 2011, the Company entered into a $15 million senior secured credit facility with Silicon Valley Bank and Oxford Finance LLC. (together, the “Lenders”) and drew-down all funds at that time. In connection with the credit facility, the Company issued to the Lenders 10-year warrants to purchase an aggregate of 29,889 shares of Series D preferred stock with an exercise price of $27.60 per share. The Series D preferred stock warrants were immediately converted into warrants to purchase common stock upon the closing of the Company’s IPO. Upon issuance, the estimated fair value of the preferred stock warrants was $680,625 determined using the Black-Scholes option pricing model and was recorded as a debt discount, which subsequently accreted to interest expense over the term of the loan.

On February 27, 2015, the Company repaid the outstanding balance of the 2011 credit facility. The total payoff was $4,342,855, which included prepayment and other additional fees of $84,453. The Company had $20,852 of deferred financing fees and $101,373 of unamortized debt discount as of the payoff date. The debt repayment was accounted for as an extinguishment as per ASC 470-50, Debt: Modifications and Extinguishments, and a loss on extinguishment of debt totaling $206,678 was recorded in the six months ended June 30, 2015, consisting of the unamortized deferred financing, unamortized debt discount and prepayment and other additional fees.

8. Stockholders’ Equity

Common Stock

On September 29, 2014, the Company closed its IPO, in which it issued and sold 6,875,000 shares of common stock at a price of $8.00 per share, for aggregate gross proceeds of $55.0 million. On October 27, 2014, the underwriters of the Company’s IPO exercised in full their over-allotment option and the Company issued and sold an additional 1,031,250 shares of common stock at the IPO price of $8.00 per share, for aggregate gross proceeds of $8.3 million. Total net proceeds for the IPO, including the underwriters’ exercise of their over-allotment option, was $56.4 million, after deducting underwriting discounts and commissions and other offering expenses.

On January 28, 2015, the Company issued and sold a total of 3,450,000 shares of its common stock at $11.90 per share in an underwritten public offering, including 450,000 shares of common stock sold pursuant to the exercise in full of the underwriters’ option to purchase additional shares. Net proceeds from the offering, including the sale of the additional shares, was approximately $38.0 million, after deducting underwriting discounts and commissions and other offering expenses.

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Preferred Stock

In connection with the IPO, the Company filed an Amended and Restated Certificate of Incorporation that established the preferred stock the Company was authorized to issue. As of June 30, 2015, the Company had authorized 15,000,000 shares of preferred stock at $0.0001 par value. There were no shares of preferred stock issued or outstanding as of June 30, 2015.

Treasury Stock

In connection with cashless employee stock option exercises for the six months ended June 30, 2015, employees tendered 211 shares of common stock with a fair value of $2,324 to the Company as consideration for the exercise price. Treasury stock is recorded using the cost method. Treasury stock retirements are recorded by deducting the par value from common stock and charging the remaining excess of cost over par to accumulated deficit.

Warrants

Series D preferred stock warrants were immediately converted into common stock warrants upon the closing of the Company’s IPO. As of June 30, 2015, the Company had warrants outstanding for the purchase of 45,468 shares of common stock at exercise prices ranging from $20.70 - $27.60. The following table summarizes the warrants outstanding and exercisable as of June 30, 2015:

Shares Reserved for Future Issuance

At June 30, 2015, the Company has reserved the following shares of common stock for issuance:

9. Employee Compensation Plans

In July 2014, the Company’s Board of Directors approved the 2014 Stock Plan (the “2014 Plan”) and reserved to be authorized for issuance under the 2014 Plan the sum of (1) 1,782,500 shares of the Company’s common stock, (2) the number of shares of the Company’s common stock reserved under the Predecessor Plans (as defined below) that are not issued or subject to outstanding awards under the Predecessor Plans as of the closing of the Company’s IPO and (3) any shares of the Company’s common stock which are subject to outstanding options under the Predecessor Plans as of the closing of the Company’s IPO that subsequently expire or lapse unexercised or are subsequently forfeited to or repurchased by the Company, provided that the shares reserved under clauses (2) and (3) above shall include no more than 1,070,687 shares of the Company’s common stock. Under the 2014 Plan, options to purchase common stock, restricted stock and restricted stock units may be granted to the Company’s employees, nonemployee directors, and consultants providing services to the Company. The aggregate number of shares of the Company’s common stock reserved for issuance under the 2014 Plan shall automatically be increased on the first business day of each of the Company’s fiscal years by a number equal to the smallest of (i) 4% of the total number of shares of the Company’s common stock actually issued and outstanding on the last business day of the prior fiscal year (excluding any rights to purchase shares of the Company’s common stock that may be outstanding, such as options or warrants), (ii) 1,426,000 shares of the Company’s common stock or (iii) a number of shares of Common Stock determined by the Company’s board of directors. As of January 1, 2015, the number of shares of common stock that may be issued under the 2014 Plan was automatically increased by 721,076 shares. As of June 30, 2015, there are 2,291,068 shares available for grant without restriction.

The Company has three additional share-based compensation plans pursuant to which outstanding awards have been made, but from which no further awards can or will be made: (i) the 2001 Stock Plan (the “2001 Plan”); (ii) the 2004 Stock Plan (the “2004 Plan”); and the 2013 Stock Plan (the “2013 Plan”, and collectively with the 2001 Plan and the 2004 Plan, the “Predecessor Plans”).

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The cost of stock-based compensation awards are determined based on the grant-date fair value, net of the effects of estimated forfeitures of the awards, and is recognized into expense over the award’s service period. Stock-based compensation expense for the three and six months ended June 30, 2015 and 2014 was recognized as follows:

Stock Options

All options granted under the Plans were granted with exercise prices equal to or above the fair market value of the Company’s common stock on the date of grant. Options granted under the Plans vest over a time period or based on performance milestones established at the sole discretion of the Company’s board of directors or its compensation committee. Vesting for time-based options generally occurs over a period of not greater than four years. All stock options expire no later than ten years from the grant date. Under the terms of the Plans, employees may use shares to exercise a portion of these options. Shares tendered for this purpose are valued at the fair market value as of the date the options are exercised.

The following table summarizes stock option activity under the Plans from January 1, 2015 through June 30, 2015:

The Company granted 303,559 performance-based stock options to employees in March 2011. These performance options have a 10-year life and exercise prices equal to the fair value of the Company’s stock at the grant date. Vesting of no more than 60% of these performance options is dependent on (i) meeting certain performance conditions, which relate to the Company’s research and development progress, which were established by the Company’s board of directors and (ii) the passage of time subsequent to the achievement of such performance conditions. Vesting of no more than 40% of these performance options is dependent on (i) meeting certain performance conditions, which relate to a deemed liquidation of the Company, an IPO or consummation of a strategic transaction, which were established by the Company’s board of directors and (ii) the passage of time subsequent to the achievement of such performance conditions. The Company’s board of directors determines if the performance conditions have been met. Stock-based compensation expense for these options is recorded when management estimates that the vesting of these options is probable based on the status of the Company’s research and development programs and other relevant factors. As of June 30, 2015, the vesting of 110,701 performance-based stock options had been deemed probable and stock-based compensation expense is recorded ratably over the service period associated with each performance condition. Any change in these estimates will result in a cumulative adjustment in the period in which the estimate is changed, so that as of the end of a period, the cumulative compensation expense recognized for an award or grant equals the amount that would be recognized on a straight-line basis as if the current estimates had been utilized since the beginning of the service period.

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The Company uses the Black-Scholes valuation model to estimate the fair value of stock options at the grant date. The Black-Scholes valuation model requires the Company to make certain estimates and assumptions, including assumptions related to the expected price volatility of the Company’s stock, the period during which the options will be outstanding, the rate of return on risk- free investments, and the expected dividend yield for the Company’s stock.

The fair values of stock options granted were calculated using the following weighted-average assumptions:

The weighted average fair value of options granted during the six months ended June 30, 2015 and 2014 was $9.83 and $3.74 per share, respectively.

The weighted-average valuation assumptions for all stock-based awards were determined as follows:

·                  Weighted-average risk-free interest rate: The Company bases the risk-free interest rate on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected option term.

·                  Expected term of options: The expected term of options represents the period of time options are expected to be outstanding. The expected term of the options granted is derived using the “simplified” method, as prescribed by the SEC Staff Accounting Bulletin No. 107, Share-Based Payment.

·                  Expected stock price volatility: The expected volatility is based on historical stock price volatilities of similar entities within the Company’s industry over the period that is commensurate with the expected term of the option.

·                  Expected dividend yield: The estimate for annual dividends is $0.00, because the Company has not historically paid, and does not expect for the foreseeable future to pay, a dividend.

The total cash received from employees as a result of employee stock option exercises during the six months ended June 30, 2015 and 2014 was $263,430 and $38,268 respectively.

As of June 30, 2015, excluding performance-based stock options that have not been deemed probable, the aggregate unrecognized stock-based compensation expense related to unvested options granted under the Stock Plans that were expected to vest was $5,346,134. That expense is expected to be recognized as follows:

The aggregate estimated fair value of options for which the satisfaction of the related-performance conditions have not been deemed probable was $827,860 as of June 30, 2015.

Restricted Stock Units (“RSU”)

During 2013, the Company awarded a performance-based RSU covering 391,304 shares of common stock from the 2013 Plan. An RSU award entitles the holder to receive shares of the Company’s common stock as the award vests. Vesting of the performance-based RSU was contingent upon the achievement of pre-determined performance-based milestones, as determined by the Company’s board of directors or its compensation committee. During the year ended December 31, 2014, it was determined that the performance-based milestones on the RSU were met and the award was fully vested.

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Under settlement procedures applicable to the performance-based RSU, which was held by the Company’s chief executive officer, the Company was required to deliver the underlying 391,304 shares on March 13, 2015. On the settlement date, the Company net settled the award by delivering approximately 220,148 shares of its common stock to its chief executive officer and withholding approximately 171,156 shares of common stock to satisfy income taxes at the applicable minimum statutory rate. In connection with the net settlement, the Company remitted the $1,910,101 tax liability on behalf of its chief executive officer to the relevant tax authorities in cash.

Employee Stock Purchase Plan

In July 2014, the Company established an Employee Stock Purchase Plan (the “Purchase Plan”). Under the Company’s Purchase Plan, eligible employees can purchase common stock through accumulated payroll deductions at such times as are established by the administrator. The Purchase Plan is administered by the compensation committee of the Company’s board of directors. Under the Purchase Plan, eligible employees may purchase stock at 85% of the lower of the fair market value of a share of our common stock on the first day of an offering period or on the purchase date. Eligible employees may contribute up to 15% of their eligible compensation. A participant may purchase a maximum of 2,100 shares of common stock per purchase period. Under the Purchase Plan, a participant may not accrue rights to purchase more than $25,000 worth of our common stock for each calendar year in which such right is outstanding

As of the first business day of each fiscal year of the Company during the term of the Purchase Plan, the aggregate number of shares that may be issued under the Purchase Plan shall automatically increase by a number equal to the least of (i) 1% of the total number of shares of the Company’s common stock actually issued and outstanding on the last business day of the prior fiscal year (excluding any rights to purchase shares of the Company’s common stock that may be outstanding, such as options or warrants), (ii) 356,500 shares of the Company’s common stock, or (iii) a number of shares of the Company’s common stock determined by the Company’s board of directors. As of January 1, 2015, the number of shares of common stock that may be issued under the Purchase Plan was automatically increased by 180,269 shares, increasing the number of shares of common stock available for issuance under the Purchase Plan to 430,269 shares.

Effective February 1, 2015, employees who elected to participate in the Purchase Plan commenced payroll withholdings that accumulate during the offering period that ends on October 31, 2015, at which time shares of the Company’s common stock will be purchased at 85% of the lower of the fair market value of our common shares on January 30 or October 30, 2015. In accordance with the guidance in ASC 718-50, the ability to purchase shares of the Company’s common stock at the lower of the offering date price or the purchase date price represents an option and, therefore, the Purchase Plan is a compensatory plan under this guidance. Accordingly, stock-based compensation cost is determined based on the option’s grant-date fair value and is recognized over the requisite service period of the option. The Company has estimated the option’s fair value to be $5.43 using the Black-Scholes valuation model and recognized stock-based compensation expense of $51,347 and $85,891 in the three and six months ended June 30, 2015, respectively.

10. Collaborative Research Agreements

Boehringer Ingelheim

11β HSD1 Inhibitors

In October 2007, the Company entered into the 11β Agreement with BI pursuant to which BI is responsible for the development and commercialization of 11β HSD1 inhibitors for certain indications, including type 2 diabetes.

The funded research period under the 11β Agreement for which the Company was required to provide research services ended in December 2009. In 2014, the Company received a $6.0 million milestone payment from BI as a result of the first patient having been dosed in the Phase 2 clinical trial which commenced in July 2014. The Company has earned $43 million in development milestones since the inception of the 11β Agreement and is eligible to receive up to $272 million in additional milestone payments based on the achievement of pre-specified events, including up to $42 million in development milestones, up to $105 million in regulatory milestones and up to $125 million in commercialization milestones. The preceding milestones are payable upon the first occurrence of any product to meet the contractual requirements. The Company is also eligible to receive 50% of the aforementioned milestone payments for any subsequent products and for any additional indications of a product to achieve those milestones.

The Company has the right, subject to the approval of the joint steering committee established pursuant to the 11β Agreement, to develop and commercialize certain 11β HSD1 inhibitors for indications other than those considered part of metabolic syndrome or reduction of cardiovascular events.

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Beta-site Amyloid Precursor Protein-cleaving Enzyme 1 (BACE) Inhibitors

In June 2009, the Company entered into the BACE Agreement with BI pursuant to which BI was responsible for the development and commercialization of BACE inhibitors for the treatment of Alzheimer’s disease and other forms of dementia.

Under the BACE Agreement, the Company was obligated to provide 12 full-time-equivalent employees (FTE’s) per month for a period of 36 months to provide research services. Under the terms of the BACE Agreement, the Company received an upfront, license fee of $15 million. This payment was initially recorded to deferred revenue. In addition, under the BACE Agreement, BI was required to make payments for each quarter during the 36-month funded research period of $1,020,000 for a total of $12,240,000. The license fee and the research collaboration fee were being recognized as revenue over the 36-month funded research period commencing June 2009 and continuing through June 2012, which was determined to be the Company’s period of substantial involvement under the BACE Agreement. In April 2012, the initial research term was extended for an additional year through June 2013 and BI paid the Company an additional $2,960,000 for the research contributions over the 12 month extension period ($740,000 per quarter). During the extension period the Company was obligated to provide eight FTE’s per month.

In December 2012, the Company amended the BACE Agreement to expand the core indication definition to include certain other indications, including diabetes and metabolic syndrome. Under the terms of the amendment, Vitae received an upfront fee of $4 million. In accordance with the amendment, the Company was obligated to provide 12 months of research services commencing June 2013 with such services to be completed no later than June 30, 2014. Revenue relating to the upfront payment was recognized over the period in which future research contributions were delivered through June 30, 2014 including $1.0 million and $2.0 million that was recognized in the three and six months ended June 30, 2014, respectively.

The Company has earned $29 million in development milestones since the inception of the BACE Agreement.  On July 23, 2015, BI notified the Company that it was terminating the BACE Agreement, effective as of October 21, 2015, for strategic business reasons.  In connection with the termination of the BACE Agreement, the Company expects to receive the rights to the BACE programs, including BI 1147560/VTP-36951, which is expected to include, among other rights, certain exclusive rights to develop and commercialize the terminated products for the treatment of Alzheimer’s, diabetes and the other indications covered by the BACE Agreement.  The Company intends to work with BI to effect an orderly transfer of the BACE program to Vitae.  Under the BACE Agreement, no material payments are required to be made by or to the Company in connection with the termination of the agreement.

11. Income Taxes

For the three and six months ended June 30, 2015 and 2014, the Company did not record a current or deferred income tax expense or benefit. The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Based on the Company’s history of operating losses, the Company has concluded that it is not more likely than not that the benefit of its deferred tax assets will be realized. Accordingly, the Company has provided a full valuation allowance for deferred tax assets as of June 30, 2015 and December 31, 2014.

12. Related Party Transactions

A member of the Company’s Board is a partner/founder of a law firm that provided various legal services to the Company. The Company has incurred costs of $59,561 and $487,097 for the three months ended June 30, 2015 and 2014, respectively, and $293,006 and $591,097 for the six months ended June 30, 2015 and 2014, respectively.

Additionally, $5,500 and $128,755 was due to the related party as of June 30, 2015 and December 31, 2014, respectively. BI, the Company’s collaborative research partner (Note 10), is also an affiliate of a stockholder of the Company.

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

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks, uncertainties and assumptions. You should read the “Risk Factors” and “Information Regarding Forward-Looking Statements” sections of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a clinical-stage biotechnology company focused on discovering and developing novel, small molecule drugs for diseases with significant unmet medical needs. We are developing a growing portfolio of novel product candidates internally generated by Contour®, our proprietary structure-based drug discovery platform. Our portfolio includes several wholly-owned product candidates ranging from clinical to pre-clinical development, a partnered product candidate in the clinic and the rights to a pre-clinical product candidate that is expected to be returned to us in connection with the termination of a collaboration agreement in the second half of 2015:

·                  Our most advanced, wholly-owned product candidate is VTP-43742 for the treatment of autoimmune disorders, which is advancing in Phase 1 clinical development.  We have two other wholly-owned product candidates, VTP-38543 for the treatment of atopic dermatitis and VTP-38443 for the treatment of acute coronary syndrome, both of which are in preclinical development. We intend to advance and retain rights to these and other programs and product candidates that we believe we can develop and commercialize, and to strategically partner where doing so can accelerate the program and generate non-dilutive capital for Vitae.

·                  We have a product candidate, BI187004/VTP-34072 (BI187004), that is in a Phase 2 clinical trial for the treatment of type 2 diabetes, and is being developed exclusively by Boehringer Ingelheim GmbH(BI) pursuant to a research collaboration and license agreement with BI (the 11β Agreement).

·                  We also have a product candidate, BI 1147560/VTP-36951, in pre-clinical development for the treatment and prevention of Alzheimer’s disease (Alzheimer’s).  BI 1147560/VTP-36951 was being developed exclusively by BI pursuant to a research collaboration and license agreement with BI (the BACE Agreement).  On July 23, 2015, BI notified us that it was terminating the BACE Agreement, effective as of October 21, 2015, for strategic business reasons.  In connection with the termination of the BACE Agreement, we expect to receive the rights to the BACE program, including BI 1147560/VTP-36951, which is expected to include, among other rights, certain exclusive rights to develop and commercialize the terminated products for the treatment of Alzheimer’s, diabetes and the other indications covered by the BACE Agreement.  We intend to work with BI to effect an orderly transfer of the BACE program to Vitae. Under the BACE Agreement, no material payments are required to be made by or to Vitae in connection with the termination of the agreement. We plan to assess the BACE program to determine the appropriate next steps and provide an update on our plans for the BACE program in the second half of 2015.

We are a structure-based drug discovery company, and we have leveraged our expertise and ability to create a growing portfolio of novel, potent and selective product candidates. Our goal is to leverage this leadership in structure-based drug discovery to deliver first- or best-in-class small molecule drugs to patients in diseases with significant unmet medical needs. The key elements of our business strategy are to:

·                  advance our growing portfolio of product candidates;

·                  establish late-stage development and commercialization capabilities for certain of our product candidates in the United States and potentially other markets;

·                  selectively collaborate with large biotechnology and pharmaceutical companies to maximize the value of our product candidates;

·                  leverage Contour to rapidly discover novel small molecule product candidates for additional validated, difficult-to-drug targets; and

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·                  continue investing in technology, people and intellectual property.

We believe these strategies provide us with multiple, sustainable-growth opportunities.

We were incorporated in May 2001 and commenced principal operations during 2002. Since that time, we have been principally engaged in the discovery and development of novel product candidates. Prior to our initial public offering, or IPO, in September 2014, we had funded our operations principally with $132.7 million of capital in the form of license fees, milestone payments and research and development funding from our strategic partners and $120.1 million from the sale of convertible preferred stock, including $40.0 million of equity sales to our strategic partners, including BI. We have also funded our operations through credit facilities, equipment lease financings, federal grants and investment income. Through the issuance and sale of 7,906,250 shares of our common stock in our IPO, we raised $56.4 million, after deducting underwriting discounts and commissions and other offering expenses.

On January 28, 2015, we issued and sold a total of 3,450,000 shares of our common stock at $11.90 per share in an underwritten public offering, including 450,000 shares of common stock sold pursuant to the exercise in full of the underwriters’ option to purchase additional shares.  Net proceeds from the offering, including the sale of the additional shares, was approximately $38.0 million, after deducting underwriting discounts and commissions and other offering expenses.

For the six months ended June 30, 2015 and 2014, we had net losses of $19.5 million and $10.0 million, respectively. As of June 30, 2015, we had an accumulated deficit of $149.4 million. We have devoted substantially all of our capital resources to the research and development of our product candidates. Since our inception in 2001, we have had no revenues from product sales. We expect to incur significant expenses and operating losses for the foreseeable future as we advance our product candidates from discovery through preclinical development and clinical trials, and to eventually seek regulatory approval and pursue commercialization. Furthermore, we have incurred and expect to continue to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company.

Based on our current business plan, which as of now does not include any expenses relating to further development of the BACE program, we believe that our existing cash, cash equivalents and marketable securities of approximately $80.3 million as of June 30, 2015, will be sufficient to fund our currently anticipated operating expenses and capital expenditure requirements through the end of 2016. We intend to assess the BACE program and revise our operating plan accordingly after determining the appropriate next steps. We will need to secure additional funding in the future in order to carry out all of our planned research and development activities. We will seek to fund our operations through the sale of equity, debt financings or other capital sources, including potential collaborations or partnerships with other companies or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates.

Recent Highlights

Since March 31, 2015, we experienced the following:

Research and Development Activities:

Pipeline Updates:

·                  VTP-43742 (RORγt) — In June 2015, we initiated a Phase 1 single ascending dose clinical trial of VTP-43742, our first-in-class RORyt product candidate for the treatment of autoimmune disorders. This trial will assess the safety, tolerability, pharmacokinetics and pharmacodynamics of VTP-43742 in approximately 56 healthy human volunteers over several cohorts, with results expected in the second half of 2015. We also intend to initiate an overlapping Phase 1 multiple ascending dose, proof-of-concept clinical trial of VTP-43742 in the third quarter of 2015, which will be a double-blind, placebo-controlled trial of approximately 48 healthy volunteers and approximately 60 patients with moderate to severe psoriasis. Top-line clinical efficacy results from the proof-of-concept trial are expected by the end of 2015.

·                  VTP-38543 (LXRβ) — We continued to advance VTP-38543, our first-in-class product candidate for the treatment of atopic dermatitis. We plan to initiate a Phase 1 clinical trial in the second half of 2015. Phase 1 efficacy proof-of-concept results are expected in 2016.

Partnered Programs:

·                  BI187004 (11β) — In June 2015, we announced top-line clinical efficacy results from the metformin arm of an ongoing Phase 2 proof-of-concept clinical trial of BI187004 in the treatment of overweight type 2 diabetic patients. Primary efficacy data (fasting plasma glucose) from the metformin arm did not meet Boehringer Ingelheim’s (BI) predefined endpoint criteria. Data from the placebo controlled monotherapy arm of the trial, which is still ongoing, are expected to be reported later this year. Together, these data sets will be used by BI to determine appropriate next steps for BI187004.

·                  We recently announced the end of the research collaboration and license agreement for beta secretase (BACE) inhibitors. Termination of the agreement by BI for strategic business reasons will be effective October 21, 2015. In connection with the termination of the agreement, we expect to receive the rights to the BACE program, including BI 1147560/VTP36951. Under the BACE agreement, no material payments are required to be made by or to us in connection with the termination of the agreement. We plan to assess the program and revise our operating plan accordingly after determining the appropriate next steps. We plan to provide an update on our plans for the BACE program in the second half of 2015.

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Financial Developments:

·                  Reported net operating expenses of $10.0 million in the second quarter of 2015, and cash, cash equivalents and marketable securities of $80.3 million as of June 30, 2015.

Product Portfolio

We have developed and utilized Contour, a computational structure-based drug discovery platform, to design and optimize compounds across a range of therapeutic targets and disease areas. The following table summarizes key information about our most advanced product candidates as of June 30, 2015:

VTP-43742 (RORγt)

We discovered and are developing VTP 43742, an orally active small molecule inhibitor of RORγt activity, which is wholly owned by us, for the treatment of a variety of autoimmune disorders. Autoimmune disorders comprise a large number of diseases in which the body mounts an inappropriate immunological response against normal human tissues. These disorders include; psoriasis, psoriatic arthritis, ankylosing spondylitis, rheumatoid arthritis and multiple sclerosis, as well as numerous orphan indications. We commenced discovery efforts for this program in the fourth quarter of 2012 and selected VTP-43742 as a product candidate in the first quarter of 2014. We initiated a single ascending dose Phase 1 clinical trial in the second quarter of 2015. This single ascending dose trial will assess the safety, tolerability, pharmacokinetics, pharmacodynamics of VTP-43742 in approximately 56 healthy human volunteers, with results from the study expected in the second half of 2015. We plan to initiate an overlapping Phase 1 multiple ascending dose, proof-of-concept trial in the third quarter of 2015, which will be a double-blind, placebo controlled trial of approximately 48 healthy volunteers and approximately 60 patients with moderate to severe psoriasis. We expect to have top-line clinical efficacy results from the proof of concept  trial by the end of 2015. In addition to the Phase 1 trials, we plan to conduct multiple Phase 2 studies in 2016, including a Phase 2 clinical trial for a large market indication and a Phase 2 proof-of-concept clinical trial for a rare disease or orphan indication. In addition to VTP-43742, we are progressing backup compounds in our RORγt program.

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VTP-38543 (Liver X Receptor Beta (LXRβ) for Atopic Dermatitis)

We have discovered and are developing VTP 38543, an LXRβ selective agonist, as a topical agent for the treatment of atopic dermatitis. Atopic dermatitis is a common inflammatory skin disease in children that also affects a large number of adults. It is characterized by a loss of barrier function of the skin, as well as skin inflammation. In 2012, our discovery efforts were substantially completed, and in 2013, we focused primarily on clinical development, regulatory strategy and formula development. We have selected VTP-38543 as a product candidate for atopic dermatitis and we plan to initiate a Phase 1 clinical trial in the second half of 2015 and to have Phase 1 efficacy proof-of-concept results in 2016.

BI147560/VTP-36951 (B-site Amyloid Precursor Protein-Cleaving Enzyme (BACE) Inhibitors)

BI 1147560/VTP-36951 was being developed for the treatment and prevention of Alzheimer’s disease (Alzheimer’s) exclusively by BI pursuant to the BACE Agreement.  Under the terms of the BACE Agreement, BI was responsible for all clinical and other product development, regulatory, manufacturing and commercialization activities and costs for the BACE program.  On July 23, 2015, BI notified us that it was terminating the BACE Agreement for strategic business reasons effective as of October 21, 2015.  In connection with the termination of the BACE Agreement, we expect to receive the rights to the BACE program, including BI 1147560/VTP-36951, which is expected to include, among other rights, certain exclusive rights to develop and commercialize the terminated products for the treatment of Alzheimer’s, diabetes and the other indications covered by the BACE Agreement.  We intend to work with BI to effect an orderly transfer of the BACE program to Vitae. Under the BACE Agreement, no material payments are required to be made by or to Vitae in connection with the termination of the agreement.

Prior to termination of the BACE Agreement, we were developing VTP-37948/BI 1181181 (BI1181181), in collaboration with BI for Alzheimer’s. However, in February of 2015, BI voluntarily placed BI 1181181 on a temporary clinical hold to further investigate skin reactions observed in some study participants during a Phase 1 multiple rising dose trial. BI had completed its analysis and concluded that skin reactions are burdensome for patients and, therefore, an obstacle for further development of the compound. BI had decided to move forward with the development of BI 1147560/VTP-36951, which was discovered as part of our BACE collaboration. BI had completed all GLP toxicology studies that we believe were necessary prior to first in human trials, and BI expected to start the initial Phase 1 clinical trial of BI 1147560/VTP-36951 by the end of 2015. We plan to assess the BACE program to determine the appropriate next steps and to provide an update on our plans for the program in the second half of 2015.

VTP 38443 (LXRβ for Acute Coronary Syndrome (ACS))

We discovered and are developing VTP-38443, an orally active LXRβ selective agonist which is wholly owned by us, for the treatment of acute coronary syndrome (ACS). VTP-38443 is currently in preclinical development to enable an IND filing in 2016.

BI187004 (11β HSD1)

BI187004, our orally active 11β HSD1 inhibitor, is being developed in collaboration with BI for type 2 diabetes.  Under the terms of the 11β Agreement with BI, BI is responsible for all clinical and other product development, regulatory, manufacturing and commercialization activities and costs for the 11β HSD1 program. For U.S. Food and Drug Administration (FDA) regulatory purposes, we expect the indication for BI187004 will be for the improvement of glycemic control in type 2 diabetes. BI187004 is in a Phase 2 clinical trial for the treatment of type 2 diabetes.  In June 2015, we announced that top-line clinical efficacy results from the metformin arm of an ongoing Phase 2 proof-of-concept clinical trial of BI187004 in the treatment of overweight type 2 diabetic patients did not meet BI’s predefined endpoint criteria. Data from the placebo-controlled monotherapy arm of the study, which is still ongoing, are expected in the second half of 2015.

Strategic Partnerships

11β HSD1 Inhibitors with BI

In October 2007, we entered into a research collaboration and license agreement with BI, which we refer to as the 11β Agreement. Based upon discoveries we made using Contour, we and BI formed a worldwide strategic partnership granting BI exclusive rights to develop and commercialize novel compounds for patients with type 2 diabetes and certain related metabolic disease conditions, such as abnormal blood cholesterol and triglyceride levels, obesity and hypertension, or high blood pressure. The alliance encompasses multiple series of novel, orally available 11β HSD1 inhibitors that were discovered using Contour. We also retained the right, subject to the approval of the joint steering committee established pursuant to the 11β Agreement, to develop 11β HSD1 inhibitors for certain indications outside of the core focus of diabetes and related metabolic conditions. The collaborative research program portion of this strategic partnership began in October 2007 and expired in December 2009.

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Under the 11β Agreement, we have received an aggregate of $65.2 million in non-equity funding as of June 30, 2015, including upfront license fees, research funding and success-based milestone payments. We received an upfront license fee from BI of $15.0 million upon execution of the 11β Agreement. In addition, BI made quarterly payments of $0.8 million during the 27-month collaborative research program period, for a total of $7.2 million. The upfront fee and the research collaboration payments were recognized as revenue over the 27-month funded research program period, from October 2007 through December 2009. Also, as of June 30, 2015, we earned $43.0 million for achieving substantive development milestone payments, including a $6.0 million milestone payment in the third quarter of 2014 from BI as a result of the first patient having been dosed in the Phase 2 clinical trial which commenced in July 2014. In addition, we are eligible to receive up to $272.0 million in additional milestone payments based on the achievement of pre-specified events, including up to $147.0 million in development and regulatory milestone payments and up to $125.0 million in commercialization milestone payments. Pursuant to the 11β Agreement, BI is responsible for all clinical and other product development, regulatory, manufacturing and commercialization activities and costs for the 11β program, including BI187004.

The additional development, regulatory and commercialization milestone payments are payable upon the first occurrence of any product to meet the requirements specified in the 11β Agreement. Any subsequent compound that achieves the same milestone will earn 50% of the initial milestone payment, unless otherwise agreed to by the parties. In addition, second indications for a product covered by the 11β Agreement to achieve the regulatory milestone payments will earn us 50% of the milestone amount. We are also eligible to receive tiered royalties from the high-single digits to the low-double digits. We have the option to participate in funding the Phase 3 clinical trials in exchange for increased royalties. BI’s obligation to pay the royalties continues on a country-by-country and product-by-product basis for the later of 10 years following the first commercial sale of such product in such country or as long as such product is covered by any of the patents licensed to BI under the 11β Agreement or any patents controlled by BI as of the effective date of the 11β Agreement.

B-site Amyloid Precursor Protein-Cleaving Enzyme Inhibitors with BI

In June 2009, we entered into the BACE Agreement. Based upon discoveries we made using Contour, we and BI formed a worldwide strategic partnership granting BI exclusive rights to develop and commercialize BACE inhibitors for the treatment of certain indications, including Alzheimer’s. The inhibition of BACE, an enzyme involved in the formation of amyloid-β plaques, which are insoluble aggregates made up of amyloid-β protein and which accumulate in the brains of patients with Alzheimer’s, offers the potential to slow or even halt disease progression. Under the terms of the BACE Agreement, BI was to lead development and commercialization of all products for Alzheimer’s to capitalize on its global marketing and sales expertise and was responsible for all clinical and other product development, regulatory, manufacturing and commercialization activities and costs for the BACE program.  On July 23, 2015, BI notified us that it was terminating the BACE Agreement, effective as of October 21, 2015, for strategic business reasons.  In connection with the termination of the BACE Agreement, we expect to receive the rights to the BACE program, including BI 1147560/VTP-36951, which is expected to include, among other rights, certain exclusive rights to develop and commercialize the terminated products for the treatment of Alzheimer’s, diabetes and the other indications covered by the BACE Agreement.  The Company intends to work with BI to effect an orderly transfer of the BACE program to Vitae. Under the BACE Agreement, no material payments are required to be made by or to Vitae in connection with the termination of the agreement.

Under the BACE Agreement, we have received an aggregate of $63.2 million in non-equity funding as of June 30, 2015, including upfront license fees, research funding and success-based milestone payments. During the collaborative research program period, we were obligated to provide twelve full-time equivalent employees or FTEs per month for a period of 36 months to provide research services, and we received an upfront license fee from BI of $15.0 million upon execution of the BACE Agreement. In addition, BI made quarterly payments of approximately $1.0 million during the 36-month collaborative research program period, for a total of $12.2 million. The license fee and the research collaboration payments were recognized as revenue over the 36-month research program period, from June 2009 through June 2012. In April 2012, the initial research program was extended for an additional year through June 2013, and BI made quarterly payments of approximately $0.8 million over the 12-month extension period, for a total of $3.0 million. During this extension period, we were obligated to provide eight FTEs per month. The additional payments totaling $3.0 million were recognized ratably over the extension period through June 2013. The revenue recognition period for the license fee was also extended on a prospective basis through June 2013.

In December 2012, we amended the BACE Agreement to expand the core indication definition to include additional indications, including type 2 diabetes and metabolic syndrome. Under the terms of the amendment, we received a nonrefundable fee of $4.0 million upon execution of the amendment. In accordance with the amendment, we were obligated to provide 12 months of research contributions at BI’s discretion commencing in June 2013. Deferred revenue was recorded upon receipt of the cash payments, and revenue relating to the upfront payment was recognized over the 12-month period in which research contributions were delivered through June 30, 2014. We recorded $1.0 million and $2.0 million in revenues related to the amendment in the three and six months ended June 30, 2014, respectively.

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As of June 30, 2015, we have earned $29.0 million in development milestone payments since the inception of the BACE Agreement.

Financial Operations Overview

Revenue

To date, we have not generated any revenue from product sales. Primarily all of our revenue to date has been derived from license fees, milestone payments and collaborative research and development payments received from our strategic partners.

In the future, we may generate revenue from a combination of product sales, license fees, milestone payments and research and development payments in connection with strategic partnerships, and royalties resulting from the sales of products developed under licenses of our intellectual property. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing and amount of license fees, research and development reimbursements, milestone and other payments received under our strategic partnerships, and the amount and timing of payments that we receive upon the sale of our products, to the extent any of our products are successfully commercialized. We do not expect to generate revenue from product sales for many years, if ever. If we or our strategic partners fail to complete the development of our product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected.

Research and Development Expenses

Research and development expense consists of expenses incurred in connection with the discovery and development of our product candidates. We expense research and development costs as incurred.

These expenses include, but are not limited to:

·                  employee-related expenses, which include salaries, benefits and stock-based compensation;

·                  expenses incurred under agreements with contract research organizations, investigative sites and consultants that conduct our clinical trials and a substantial portion of our preclinical studies;

·                  the cost of acquiring and manufacturing preclinical and clinical trial materials;

·                  outsourced professional scientific services;

·                  laboratory materials and supplies used to support our research activities;

·                  allocated expenses for rent, utilities and other facility-related costs; and

·                  software license fees associated with in-licensed products and technology.

The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of, or the period, if any, in which material net cash inflows may commence from any of our other product candidates. This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials which vary significantly over the life of a project as a result of differences arising during clinical development, including:

·                  the number of clinical sites included in the trials;

·                  the length of time required to enroll suitable patients;

·                  the number of patients that ultimately participate in the trials;

·                  the number of doses patients receive;

·                  the duration of patient follow-up; and

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·                  the results of our clinical trials.

Our expenditures are subject to additional uncertainties, including the terms and timing of regulatory approvals, and the expense of filing, prosecuting, defending and enforcing any patent claims or other intellectual property rights. We may never succeed in achieving regulatory approval for any of our product candidates. We may obtain unexpected results from our clinical trials. We may elect to discontinue, delay or modify clinical trials of some product candidates or focus on others. A change in the outcome of any of the foregoing variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or other regulatory authorities were to require us to conduct clinical trials beyond those which we currently anticipate, or if we experience significant delays in enrollment in any our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development. Drug commercialization will take several years and millions of dollars in development costs.

We track research and development expenses on a program-by-program basis and have allocated common expenses, such as facilities, depreciation, stock-based compensation and other research and development support expenses to each program based on the personnel resources allocated to each program. We generally track these costs as separate programs after it achieves animal-proof-of principle. In addition to our program specific costs, we have discovery costs related primarily to the design, synthesis and assessment of product candidates for new molecular targets and for previous product candidates for which we have decided not to pursue further development. These costs include attempts to replicate literature data, structural biology around the target and, to a limited extent, compound synthesis. Generally, these costs include activities up to and including animal proof-of-concept. In addition, discovery expenses include technology development costs related to Contour. These expenses consist principally of salaries and related costs for personnel engaged in the development and enhancement of the technology.

We expect that the expenses related to our entire pipeline will continue to increase with successful progression of our product candidates, including potentially BI 1147560/VTP-36951, into later stages of development and as we commence new discovery efforts on promising biological targets. However, future research and development costs for any particular program or product candidate are not reasonably certain because such costs are dependent on a number of variables, including successful completion of preclinical and clinical studies, the design and cost of future studies and the amount and timing of discovery efforts committed to back-up compounds.

General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs for personnel in executive, finance, business development, legal and human resources functions. Other general and administrative expenses include facility costs not otherwise included in research and development expenses, patent filing and prosecution costs and professional fees for investor relations, legal, auditing and tax services.

We anticipate that our general and administrative expenses will increase as a result of increased payroll, expanded infrastructure and higher consulting, legal, regulatory and tax-related services associated with maintaining compliance with stock exchange listing and Securities and Exchange Commission (“SEC”) requirements, accounting and investor relations costs, and director and officer insurance premiums associated with being a public company.

Other Income

Other income primarily relates to the revaluation of our preferred stock warrant liability and the sale of Pennsylvania tax credits. Upon the closing of our IPO, the preferred stock warrant liability was reclassified to additional paid-in capital. We performed the final re-measurement of the warrants in connection with completion of the IPO in the third quarter of 2014.

Interest Income, Interest Expense and Loss on Debt Extinguishment

Interest income consists of interest earned on our cash, cash equivalents and marketable securities. The primary objective of our investment policy is capital preservation.

Interest expense consists primarily of interest, amortization of debt discount, and amortization of deferred financing costs associated with our notes payable.

Loss on debt extinguishment consists of prepayment and other additional fees and the write-offs of unamortized debt discount and unamortized deferred financing costs as of the date of our loan payoff.

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Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. In accordance with GAAP, we base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We define our critical accounting policies as those accounting principles generally accepted in the United States that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations as well as the specific manner in which we apply those principles. While our significant accounting policies are more fully described in detail in Note 2 to our financial statements appearing elsewhere in this Quarterly Report on Form 10-Q, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

Our revenues are generated primarily through collaborative arrangements which generally contain multiple elements, or deliverables, including licenses and research and development activities to be performed by us on behalf of the licensee. Payments to us under these arrangements typically include one or more of the following: (1) nonrefundable, upfront license fees, (2) funding of discovery research efforts on a full time equivalent,  (FTE), basis, (3) reimbursement of research, development and intellectual property costs, (4) milestone payments, and (5) royalties on future product sales.

We account for revenue arrangements with multiple deliverables entered into prior to January 1, 2011 in accordance with Accounting Standard Codification (ASC) Topic 605-25, Revenue Recognition: Multiple-Element Arrangements. The multiple-deliverable items are divided into separate units of accounting if certain criteria are met, including whether the delivered item has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. We allocate the consideration we receive among the separate units of accounting based on their respective fair value, and apply the applicable revenue recognition criteria to each of the separate units. Where an item in a revenue arrangement with multiple deliverables does not constitute a separate unit of accounting and for which delivery has not occurred, we defer revenue until the delivery of the item is completed.

Effective January 1, 2011, we adopted, on a prospective basis, Accounting Standards Update (ASU) 2009-13, Multiple-Deliverable Revenue Arrangements, which amends ASC 605-25 and also adopted ASU 2010-17, Revenue Recognition—Milestone Method. Our collaborations with BI were entered into prior to the adoption of this guidance. The BACE Agreement amendment entered into December 2012 was accounted for under ASC 2009-13.

In accordance with ASU 2009-13, we will consider whether the deliverables under the arrangement represent separate units of accounting. In determining the units of accounting, we will evaluate certain criteria, including whether the deliverables have stand-alone value. The consideration received will be allocated to the separate units of accounting using the relative selling price method, and the applicable revenue recognition criteria will be applied to each of the separate units.

We determine the estimated selling price for agreement deliverables using the following hierarchy: (1) vendor-specific objective evidence, (VSOE), (2) third-party evidence, (TPE) or (3) best estimate of selling price if neither VSOE nor TPE is available. Determining the best estimate of selling price for a deliverable requires significant judgment and consideration of various factors, including market conditions, items contemplated during agreement negotiation as well as internally developed net present value models.

We typically receive upfront, nonrefundable payments when licensing our intellectual property. For intellectual property licenses that do not have stand-alone value from the other deliverables to be provided, revenue is recognized over the contractual or estimated performance period, which is typically the term of the research and development obligations. The periods over which revenue should be recognized are subject to estimates by us and may change over the course of the research and development agreement. Such a change could have a material impact on the amount of revenue we record in future periods.

Payments or reimbursements resulting from our research and development efforts are recognized as the services are performed and are presented on a gross basis so long as there is persuasive evidence of an arrangement, the fee is fixed or

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determinable, and collection of the related receivable is reasonably assured. Amounts received prior to satisfying the above revenue recognition criteria are recorded as deferred revenue.

In accordance with ASU 2010-17, we will recognize revenue from milestone payments when: (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement; and (ii) we do not have ongoing performance obligations related to the achievement of the milestone earned. Milestone payments are considered substantive if all of the following conditions are met: the milestone payment (a) is commensurate with either our performance to achieve the milestone or the enhancement of the value of the delivered item or items as a result of a specific outcome resulting from our performance to achieve the milestone, (b) relates solely to past performance and (c) is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement. We have concluded that the clinical and development and regulatory milestones pursuant to our research and development arrangements are substantive.

Royalty revenue will be recognized when earned. We have not earned any royalty revenues to date.

Accrued Clinical and Preclinical Expenses

As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued clinical expenses include:

·                  fees paid to vendors in connection with the preclinical development activities;

·                  fees paid to contract manufacturers in connection with the production of preclinical and clinical trial materials;

·                  fees paid to contract research organizations in connection with clinical studies; and

·                  fees paid to investigative sites in connection with clinical studies.

We base our expenses related to preclinical and clinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and contract research organizations that conduct and manage clinical studies on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period.

Stock-Based Compensation

We account for stock-based compensation expense in accordance with the provisions of ASC 718, Compensation—Stock Compensation, which addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of or may be settled by the issuance of the enterprise’s equity instruments. ASC 718 requires that we measure the cost of equity-based service awards based on the grant-date fair value of the award, net of estimated forfeitures, and recognize the cost of such awards over the period during which the employee is required to provide service in exchange for the award (the vesting period) on a straight-line basis.

We issue both performance-based stock options and performance-based restricted stock units (RSUs). Stock-based compensation expense is recognized beginning when it is deemed probable that the performance-based goal will be met, as determined by our board of directors.

We expect to continue to grant stock options, and potentially other forms of equity awards, in the future, and to the extent that we do, our actual stock-based compensation expense recognized in future periods will likely increase.

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Determining Fair Value of Stock-Based Awards

Determining the amount of share-based compensation to be recorded requires us to develop estimates of the fair value of stock options as of their grant date. Calculating the fair value of share-based awards requires that we make highly subjective assumptions. The fair value of each stock-based award is calculated using the Black-Scholes option pricing model. Use of this valuation methodology requires that we make assumptions as to the volatility of our common stock, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield. Prior to our IPO, there was no public market for the trading of our common stock. Due to this fact and a lack of company specific historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. We selected companies from the biopharmaceutical industry with similar characteristics to us, including those in the early stage of product development and with a therapeutic focus.

To calculate the expected term of stock option grants to employees, we use the simplified method as prescribed by the SEC Staff Accounting Bulletin No. 107, Share-Based Payment, as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term of stock options granted to employees. We utilize a dividend yield of zero based on the fact that we have never paid cash dividends and have no current intention to pay cash dividends. The risk-free interest rate used for each grant is based on the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected life.

We have historically granted stock options at exercise prices not less than the fair market value of our common stock. Prior to our IPO, in the absence of a public trading market for our common stock, our board of directors was required to estimate the fair value of our common stock at each option grant date. The board of directors, in making its independent determination, utilized a number of different sources. We used methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, considering numerous objective and subjective factors to determine common stock fair market value at each option grant date, including third party valuations of the common stock, external market conditions affecting the life sciences industry sector, the prices at which we sold shares of convertible preferred stock, the superior rights and preferences of securities senior to our common stock at the time of each grant, our results of operations and financial position, the status of our research and development efforts, our stage of development and business strategy and the likelihood of achieving a liquidity event such as an initial public offering or sale of our company.

The fair value of options granted were calculated using the following weighted-average assumptions in the Black-Scholes option pricing model for the six months ended June 30, 2015 and 2014:

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The cost of each stock-based compensation award is determined based on the grant-date fair value, net of the effects of estimated forfeitures of the awards, and is recognized into expense over the award’s service period. Stock-based compensation expense for the six months ended June 30, 2015 and 2014 was recognized as follows:

Income Taxes

For the three and six months ended June 30, 2015 and 2014, we did not record a current or deferred income tax expense or benefit. We have evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Based on our history of operating losses, we have concluded that it is not more likely than not that the benefit of our deferred tax assets will be realized. Accordingly, we have provided a full valuation allowance for deferred tax assets as of June 30, 2015 and December 31, 2014.

Results of Operations

Comparison of three months ended June 30, 2015 and 2014