(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q and the information incorporated herein by reference contain forward-looking statements that involve a number of risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements can be identified by the use of forward-looking words such as "believes," "expects," "may," "will," "plans," "intends," "estimates," "could," "should," "would," "continue," "seeks," "aims," "projects," "predicts," "pro forma," "anticipates," "potential" or other similar words (including their use in the negative), or by discussions of future matters such as the development of product candidates or products, technology enhancements, possible changes in legislation, and other statements that are not historical. Although our forward-looking statements reflect the good faith judgment of our management, these statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from results and outcomes discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those below and elsewhere in this Quarterly Report on Form 10-Q, particularly in Part II - Item 1A, "Risk Factors," as well as in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 18, 2019, as amended on April 23, 2019 and in our other filings with the SEC. Statements made herein are as of the date of the filing of this Quarterly Report on Form 10-Q with the SEC and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and related notes for the year ended December 31, 2018 appearing in our Annual Report on Form 10-K filed with the SEC on March 18, 2019, as amended on April 23, 2019.
Cerecor Inc. (the "Company" or "Cerecor") is a fully integrated biopharmaceutical company with commercial operations and research and development capabilities. The Company is building a pipeline of innovative therapies in neurology, pediatric healthcare, and orphan rare diseases. The Company's neurology pipeline is led by CERC-301, which recently received positive interim results from the Phase I safety study of Neurogenic Orthostatic Hypotension ("nOH"). The Company is also developing 2 other neurological compounds, one of which is in preclinical testing and the other is in clinical ready stage. The Company's pediatric orphan rare disease pipeline is led by CERC-801, CERC-802, and CERC-803. All 3 of these compounds are therapies for inherited metabolic disorders known as Congenital Disorders of Glycosylation ("CDGs") by means of substrate replacement therapy. The U.S. Food and Drug Administration ("FDA") has granted Rare Pediatric Disease designation ("RPDD") and Orphan Drug Designation ("ODD") to all 3 compounds. Under the FDA's Rare Pediatric Disease Priority Review Voucher ("PRV") program, upon the approval of a new drug application ("NDA") for the treatment of a rare pediatric disease, the sponsor of such application would be eligible for a PRV that can be used to obtain priority review for a subsequent new drug application or biologics license application. The PRV may be sold or transferred an unlimited number of times. The Company plans to leverage the 505(b)(2) NDA pathway for all 3 compounds to accelerate development and approval. The Company is also in the process of developing 1 other preclinical pediatric orphan rare disease compound.
The Company also has a diverse portfolio of marketed products. Our marketed products are led by our prescribed dietary supplements and prescribed drugs. Our prescribed dietary supplements include Poly-Vi-Flor and Tri-Vi-Flor, which are prescription vitamin and fluoride supplements used in infants and children to treat or prevent deficiency of essential vitamins and fluoride. The Company also markets a number of prescription drugs that treat a range of pediatric diseases, disorders and conditions. Cerecor's prescription drugs include Millipred(R), Ulesfia(R), Karbinal(TM) ER, AcipHex(R) Sprinkle(TM), and Cefaclor for Oral Suspension. Finally, the Company has 1 marketed medical device, Flexichamber(TM).
Executive Leadership Changes
In April 2019, the Company announced changes to its executive leadership team. Effective April 15, 2019, Dr. Simon Pedder, Ph.D., was appointed Executive Chairman of the Board. Additionally, Patrick Crutcher was promoted to Chief Strategy Officer. Peter Greenleaf resigned from his position as Chief Executive Officer role and remains on the Board of Directors.
Research and Development Updates
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In April 2019, the Company received positive interim results from the Phase 1 study of CERC-301 for the treatment of Neurogenic Orthostatic Hypotension in Parkinson's disease patients. All doses showed clinically meaningful increases in blood pressure over placebo, within the six-hour post-dose timepoints. The purpose of the Phase 1 study is to evaluate the single-dose safety, tolerability and pharmacokinetics of CERC-301 in the relevant patient population, as well as explore the effects on blood pressure in nOH patients during an orthostatic challenge at escalating dose levels. The interim results demonstrate a rapid, robust increase in systolic blood pressure (SBP) from baseline to six hours. This early and sustained effect could differentiate CERC-301 from existing nOH treatments. Additionally, all doses tested were safe and well tolerated with no serious adverse events reported. Additionally, in early 2019, a patent was issued for CERC-301, which provides Cerecor with intellectual property rights to CERC-301 until 2035
The FDA granted ODD to CERC-801, CERC-802, and CERC-803 in early 2019. There are numerous benefits associated with receipt of ODD, which include 7-year marketing exclusivity (upon approval) in the United States, tax credits (up to 25% of clinical development costs) and waiver of Prescription Drug User Fee Act application fees (filing fees). Additionally, CERC-801, CERC-802, and CERC-803 were granted RPDD in 2018. RPDD provides eligibility for receipt of a PRV upon approval of an NDA.
In early 2019, the Company received a may proceed letter related to an Investigational New Drug ("IND") application previously submitted to the FDA for CERC-801. Additionally, the FDA designated Fast Track Designation for CERC-801. Fast Track Designation is granted to drugs being developed for the treatment of serious or life-threatening diseases or conditions where there is an unmet medical need. The purpose of the Fast Track Designation provision is to help facilitate development and expedite the review of drugs to treat serious and life-threatening conditions so that an approved product can reach the market expeditiously.
Furthermore, in April 2019, the Company announced positive Phase 1 safety data for CERC-801 in healthy volunteers. The single-center, US-based safety, tolerability and pharmacokinetic study was an open-label, randomized, single-dose, four-way crossover study in 16 healthy adult volunteers. CERC-801 was shown to be safe and well-tolerated at the studied doses, with no serious adverse events. CERC�801 related adverse events were mild and transient. Cerecor seeks to leverage existing clinical and nonclinical data in conjunction with sponsor-initiated studies, such as this Phase 1 study, to accelerate development and approval of CERC-801 via the 505(b)(2) pathway.
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During the first quarter of 2019, the Company closed on an underwritten public offering of common stock for 1,818,182 shares of common stock of the Company, at a price to the public of $5.50 per share ("public price"). Armistice Capital Master Fund Ltd. ("Armistice"), our largest stockholder, participated in the offering by purchasing 363,637 shares of common stock of the Company from the underwriter at the public price. Cerecor director Steven J. Boyd is Armistice's Chief Investment Officer. The gross proceeds to the Company, before deducting underwriting discounts and commissions and offering expenses, were approximately $10.0 million. The net proceeds were approximately $9.0 million.
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Our strategy for increasing shareholder value includes:
Advancing our pipeline of compounds through development and to regulatory approval;
Pursuing targeted, differentiated preclinical and clinical stage product candidates;
Acquiring or licensing rights to clinically meaningful and differentiated products that are already on the market for pediatric use or in late-stage development for pediatric indications; and
Growing sales of the existing commercial products in our portfolio, including by identifying and investing in growth opportunities such as new indications and new geographic markets.
Product Pipeline Assets
The following table summarizes key information about our product candidates and further detail regarding each product candidate follows:
Results of Operations Comparison of the Three Months Ended March 31, 2019 and 2018 The following table summarizes our revenue for the three months ended March 31, 2019 and 2018 Three Months Ended March 31, 2019 2018 (in thousands) Product revenue, net $ 5,411 $ 4,260 Sales force revenue $ - $ 223
Product revenue, net
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Net product revenue increased $1.2 million for the three months ended March 31, 2019 as compared to the same period in 2018. The increase was due to favorable product mix and unit growth driven by the sales force expansion as well as due to a full quarter of sales of products that were acquired during the prior year quarter.
Sales force revenue
As part of the acquisition of TRx in November 2017, the Company acquired a sales and marketing agreement with Pharmaceutical Associates, Inc. ("PAI") under which the Company received a monthly marketing fee to promote, market and sell certain products on behalf of PAI. The Company was also entitled to a share of PAI's profits. For the three months ended March 31, 2018, sales force revenue was $0.2 million. The PAI contract was canceled during the second quarter of 2018 and therefore there is no sales force revenue for the three months ended March 31, 2019.
Cost of product sales
Cost of product sales was $1.9 million for the three months ended March 31, 2019, compared to $0.9 million for the three months ended March 31, 2018. The increase of $1.0 million for the three months ended March 31, 2019 compared to the same period in 2018 is driven by the increase in net product revenue as well as Lachlan Pharmaceuticals' minimum purchase and royalty obligations that arose during the third quarter of 2018 as further discussed in Note 13 to the accompanying unaudited financial statements appearing above.
Research and Development Expenses The following table summarizes our research and development expenses for the three months ended March 31, 2019 and 2018: Three Months Ended March 31, 2019 2018 (in thousands) Preclinical expenses $ 879 $ 887 Clinical expenses 1,590 341 CMC expenses 435 107 Internal expenses not allocated to programs: Salaries, benefits and related costs 435 240 Stock-based compensation expense 57 11 Other 5 64 $ 3,401 $ 1,650
Research and development expenses increased $1.8 million for the three months ended March 31, 2019 compared to the same period in 2018. The overall increase is driven by an increase in research and development activities during the current year as the Company continues to develop its pipeline of assets. Clinical expenses increased $1.2 million primarily due to increased activities related to the CERC-301 clinical study in nOH during the first quarter of 2019 and activities related to CERC-801, CERC-802, and CERC-803, which were acquired as part of the Ichorion Acquisition in September 2018. Chemistry, Manufacturing, and Controls ("CMC") expenses increased $0.3 million for the three months ended March 31, 2019 compared to the same period in 2018 due to additional spending on manufacturing to support clinical development. Salaries, benefits, and related costs increased by $0.2 million compared to the same period in 2018 due to an increase in headcount and salary-related costs.
General and Administrative Expenses
The following table summarizes our general and administrative expenses for the three months ended March 31, 2019 and 2018:
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Three Months Ended March 31, 2019 2018 (in thousands) Salaries, benefits, and related costs $ 1,230 $ 617 Legal, consulting, and other professional expenses 887 1,986 Stock-based compensation expense 469 207 Other 131 109 $ 2,717 $ 2,919
General and administrative expenses decreased $0.2 million for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. The overall decrease was driven by a $1.1 million decrease in legal, consulting, and other professional expenses, partially offset by a $0.6 million increase in salaries, benefits, and related costs and a $0.3 million increase in stock-based compensation expense.
Legal, consulting, and other professional expenses decreased $1.1 million as compared to the same period in 2018 mainly due to a substantial decrease in consulting fees. The consulting costs incurred in the prior year were related to the integration of the acquisitions of TRx and Avadel's pediatric products. The Company has since increased corporate headcount and therefore utilizes less consulting services to meet accounting and reporting requirements. Additionally, $0.4 million of litigation fees incurred in the three months ended March 31, 2018 relate to arbitration and legal costs related to Lachlan Pharmaceuticals (explained further in Note 13 to the accompanying unaudited financial statements appearing above). Under the terms of the TRx Purchase Agreement, the former TRx owners are required to indemnify the Company for 100% of all pre-acquisition losses related this arbitration, including legal costs, and possible minimum payments in excess of $1.0 million. The $1.0 million threshold was met in the third quarter of 2018 and therefore the minimal legal costs related to Lachlan Pharmaceuticals incurred in the three months ended March 31, 2019 were offset by a corresponding receivable instead of general and administrative expenses. Salaries, benefits, and related costs increased by $0.6 million due to an increase in headcount and salary-related costs. Stock-based compensation expense increased for the three months ended March 31, 2019 as compared to the same period in 2018 due to equity awards granted to a senior executive who joined the Company in late March 2018. Due to the timing of the grant, minimal expense was recognized for the three months ended March 31, 2018, however a full quarter of expense was recognized for the three months ended March 31, 2019.
Sales and Marketing Expenses The following table summarizes our sales and marketing expenses for the three months ended March 31, 2019 and 2018: Three Months Ended March 31, 2019 2018 (in thousands) Salaries, benefits, and related costs $ 1,838 $ 952 Logistics, insurance, and other commercial operations expenses 339 91 Stock-based compensation expense 70 24 Advertising and marketing expense 815 177 Other 47 280 $ 3,109 $ 1,524
Sales and marketing expenses increased $1.6 million for the three months ended March 31, 2019 as compared to the same period in 2018. Salaries, benefits and related costs increased $0.9 million as a result of increasing sales and sales support personnel needed to maintain and grow our commercial sales activities in connection with the acquisition of TRx and Avadel's pediatric products. Logistics, insurance, and other commercial operations expenses increased largely due to an increase of FDA fees incurred for the three months ended March 31, 2019. Advertising and marketing expenses increased $0.6 million due to an increased focus on advertising and marketing initiatives during the current quarter to support the portfolio of pediatric drugs.
The following table summarizes our amortization expense for the three months ended March 31, 2019 and 2018:
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Three Months Ended March 31, 2019 2018
Amortization expense relates to the acquisition of intangible assets as part of the acquisition of TRx in November 2017 and Avadel's pediatric products in February 2018.
Change in fair value of contingent consideration
The Company recognized a loss on the change in fair value of contingent consideration of $0.2 million for the three months ended March 31, 2019 as compared to a loss of $0.3 million for the same period in 2018. The contingent consideration is related to the potential for future payment of consideration that is contingent upon the achievement of operation and commercial milestones and royalty payments on future product sales as part of the Company's acquisitions of Avadel's pediatric products and TRx. The fair value of contingent consideration was determined at the acquisition date. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is remeasured at the current fair value with changes recorded in operating expenses in the condensed consolidated statement of operations.
Other expense, net
The following table summarizes our other expense, net for the three months ended March 31, 2019 and 2018:
Three Months Ended March 31, December 31, 2019 2018 (in thousands) Change in fair value of warrant liability and unit purchase option liability $ (48 ) $ (23 ) Other (expense) income, net (9 ) 19 Interest expense, net (208 ) (100 ) $ (265 ) $ (104 )
Other expense, net increased $0.2 million for the three months ended March 31, 2019 as compared to the same period in 2018, which was primarily driven by a $0.1 million increase in interest expense. The interest expense recognized relates to interest for the Deerfield Obligation, as defined below, assumed as part of the acquisition of Avadel's pediatric products, which took place on February 16, 2018. Due to the timing of the acquisition, approximately 1.5 months of interest was incurred for the three months ended March 31, 2018 as compared to a full quarter in the current year.
Income tax expense
The provision for income taxes was $0.2 million for the three months ended March 31, 2019 and includes estimated cash taxes and additionally, discrete to the quarter, interest and penalties on the outstanding taxes payable to the IRS and various state authorities.
Liquidity, Capital Resources and Expenditure Requirements
In order to meet its cash flow needs, the Company applies a disciplined decision-making methodology as it evaluates the optimal allocation of the Company's resources between investing in the Company's current commercial product line, the Company's development portfolio and acquisitions, or in-licensing of new assets. For the three months ended March 31, 2019, Cerecor generated a net loss of $7.5 million and negative cash flow from operations of $3.1 million. As of March 31, 2019, Cerecor had an accumulated deficit of $105.7 million and a balance of $16.1 million in cash and cash equivalents. During the first quarter of 2019, the Company closed an underwritten public offering of common stock for 1,818,182 shares of common stock of the Company, at a price to the public of $5.50 per share ("public price"). Armistice, our largest stockholder, participated in the offering by purchasing 363,637 shares of common stock of the Company from the underwriter at the public price. Cerecor director Steven J. Boyd is Armistice's Chief Investment Officer. The net proceeds of the offering were approximately $9.0 million (see "Common Stock Offering" in Note 9 below for description of the transaction).
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The Company plans to use cash and the anticipated cash flows from the Company's existing product sales to offset costs related to its neurology programs, pediatric rare disease programs, business development, costs associated with its organizational infrastructure, and debt principal and interest payments. Cerecor expects to continue to incur significant expenses and operating losses for the immediate future as it continues to invest in the Company's pipeline assets. Our ability to achieve and maintain profitability in the future is dependent on, among other things, the development, regulatory approval, and commercialization of our new product candidates and achieving a level of revenues from our existing product sales adequate to support our cost structure, which includes significant investment in our pipeline assets.
The Company believes it will require additional financing to continue to execute its clinical development strategy and fund future operations. The Company plans to meet its capital requirements through operating cash flows from product sales and some combination of equity or debt financings, collaborations, out-licensing arrangements, strategic alliances, federal and private grants, marketing, distribution, or licensing arrangements or the sale of current or future assets. If the Company is not able to secure adequate additional funding, the Company may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, or suspend or curtail planned programs. If the Company raises additional funds through collaborations, strategic alliances, or licensing arrangements with third parties, the Company may have to relinquish valuable rights to our technologies, future revenue streams, research programs, or product candidates.
Our plan to aggressively develop our pipeline will require substantial cash inflows in excess of what the Company expects our current commercial operations to generate. However, the Company expects that our existing cash and cash equivalents, together with anticipated revenue, will enable us to fund our operating expenses, capital expenditure requirements, and other non-operating cash payments, such as fixed quarterly payments on our outstanding debt balances, through at least May 2020.
Uses of Liquidity
The Company uses cash and the anticipated positive net cash flows from the Company's existing product sales to fund research and development expenses related to its neurology and pediatric rare disease pipelines, business development, costs associated with its organizational infrastructure, and debt principal and interest payments.
Ichorion Asset Acquisition
On September 24, 2018, the Company entered into a merger agreement in which we acquired Ichorion Therapeutics, Inc. The consideration for the Ichorion acquisition at closing consisted of 5.8 million shares of the Company's Common Stock, par value $0.001 per share, as adjusted for estimated working capital. The shares are subject to a lockup through December 31, 2019. Consideration for the Merger included certain development milestones worth up to an additional $15 million, payable either in shares of Company common stock or in cash, at the election of the Company. There will be future cash outflow for research and development costs associated with the development of the assets acquired as part of the Ichorion acquisition (CERC-801, CERC-802, CERC-803 and CERC-913).
Deerfield Debt Obligation
In relation to the Company's acquisition of Avadel's pediatric products on February 16, 2018, the Company assumed an obligation that Avadel had to Deerfield (the "Deerfield Obligation"). Beginning in July 2018 through October . . .
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