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10-Q: CERECOR INC.

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(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.

Overview

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 orphan diseases, neurology and pediatric healthcare. The Company's pediatric orphan disease pipeline is led by CERC-801, CERC-802 and CERC-803. All three compounds are therapies for inborn errors of metabolism, specifically 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 three CERC-800 compounds, thus qualifying the Company to receive a Priority Review Voucher ("PRV") upon approval of a new drug application ("NDA"). 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 three compounds to accelerate development and approval. The Company is also in the process of developing one other preclinical pediatric rare disease compound, CERC-913, for the treatment of mitochondrial DNA Depletion Syndrome. The Company's neurology pipeline is led by CERC-301, a Glutamate NR2B selective, NMDA Receptor antagonist, which Cerecor is currently developing as a novel treatment for orthostatic hypotension ("OH"). The Company is also developing CERC-406, a CNS-targeted COMT inhibitor for Parkinson's Disease.

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(R) and Tri-Vi-Flor(TM) 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), Karbinal(TM) ER, AcipHex(R) Sprinkle(TM) and Cefaclor for Oral Suspension.

Recent Developments

Cerecor Added to Russell 3000(R) Index

The Company was added to the Russell 3000(R) Index effective July 1, 2019. Membership in the Russell 3000(R) Index, which remains in place for one year, means the automatic inclusion of Cerecor's common stock in index funds designed to track stocks included in the Russell 3000(R) Index. FTSE Russell, a leading global index provider, determines membership for its Russell indexes primarily by objective, market-capitalization rankings and style attributes. Russell indexes are widely used by investment managers and institutional investors for index funds and as benchmarks for active investment strategies.

Appointment of Keith Schmidt to Board of Directors

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In June 2019, the Company announced the appointment of Keith Schmidt to its Board of Directors. Mr. Schmidt joined the Cerecor Board as a member of the Audit Committee, the Compensation Committee, and an independent director serving a term ending at the 2019 Annual Meeting. Mr. Schmidt has over 35 years of diverse, cross-functional executive experience in the healthcare industry including experience in new product development and commercialization. The Company believes Mr. Schmidt will provide valuable insights and strategic guidance as it continues to progress current commercial products as well as prepare for commercialization and launch of our pipeline assets.

Research and Development Updates

Neurology Pipeline Assets Updates

In July 2019, the Company announced final positive results from its completed Phase 1 study of CERC-301 for the treatment of Neurogenic Orthostatic Hypotension ("nOH") in Parkinson's disease patients. These final results further strengthen the previously reported interim results announced in April 2019, showing that CERC-301 produces a rapid, robust and sustained improvement in systolic blood pressure (SBP) upon standing in Parkinson's patients suffering from nOH, utilizing the standardized Orthostatic Standing Test (OST). 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 final results reinforce the rapid, robust increase in 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 should provide Cerecor with intellectual property rights to CERC-301 until 2035. The patent covers the crystalline form of CERC�301, as well as a pharmaceutical composition containing the crystalline form of CERC�301. It also covers methods of treating conditions responsive to NR2B antagonists.

Pediatric Rare Disease Pipeline Assets Updates

In July 2019, the Company announced that the FDA accepted the CERC-802 MPI deficiency IND application filing and may proceed with the proposed study. The clinical development program for CERC-802 will commence with a Phase I study in healthy volunteers. The goals of the study will be to assess the single dose tolerability and pharmacokinetics of CERC-802. Cerecor seeks to leverage existing clinical and nonclinical data in conjunction with sponsor-initiated studies, such as this Phase I study and the recently initiated CDG FIRST Trial (discussed in detail below), to accelerate development and approval of CERC-802 via the 505(b)(2) pathway.

In July 2019, the Company announced it has enrolled its first patient into the CDG FIRST trial. The CDG FIRST trial is a multi-center, international, non-interventional, retrospective study that follows general principles of periodic assessment of CDG patients in routine practice. The objectives of the study are to collect natural history and treatment-related data of patients diagnosed with PGM1-CDG, MPI-CDG or SLC35C1-CDG who are either treated with or without D-galactose, D-mannose and L-fucose, respectively, as well as patients with other CDGs who are treated with one of the sugars. Cerecor has three compounds under development for CDGs: CERC-801, D-galactose, to treat Phosphoglucomutase 1 (PGM1) Deficiency; CERC-802, D-mannose, to treat Mannose-Phosphate Isomerase (MPI) Deficiency; and CERC-803, L-fucose, to treat Leukocyte Adhesion Deficiency Type II (LADII) or SLC35C1-CDG. Each indication is an ultra-rare CDG estimated to have less than 1,000 patients in the world.

All three CERC-800 programs have been granted RPDD and ODD by the FDA and CERC-801 has received Fast-Track Designation ("FTD") by the FDA. There are numerous benefits associated with receipt of ODD, which include 7-year marketing exclusivity (upon approval) in the United States, 10-year marketing exclusivity

The following chart summarizes upcoming research & development milestones over the next twelve to eighteen months:

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[[Image Removed: rdupcomingmilestonechart8119.jpg]] Our Strategy

Our strategy for increasing shareholder value includes:

Advancing our pipeline of compounds through development and to regulatory approval;

Acquiring or licensing rights to 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;

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; and

Opportunistically out-licensing rights to indications or geographies.

Product Pipeline Assets

The following table summarizes key information about our product candidates and further detail regarding each product candidate follows:

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[[Image Removed: productpipelineassetchart811.jpg]]

On August 8, 2019, the Company entered into an assignment of license agreement (the "Assignment Agreement") with ES Therapeutics, LLC ("ES Therapeutics"), a wholly-owned subsidiary of Armistice, a significant stockholder of the Company. Pursuant to the Assignment Agreement, the Company assigned and transferred its rights, title, interest, and obligations with respect to CERC-611 to ES Therapeutics. The Company initially licensed the compound from Eli Lilly Company ("Lilly") in September 2016. The Assignment Agreement provides that Armistice will pay the Company an upfront payment of $0.1 million, which is due within 30 days of the effective date of the Assignment Agreement. The Assignment Agreement also contains: (a) a $7.5 million milestone payment to the Company upon cumulative net sales of licensed products reaching $750.0 million; and (b) a $12.5 million milestone payment to the Company upon cumulative net sales of licensed products reaching $1.3 billion. The Assignment Agreement also releases the Company of obligations related to CERC-611, including the $1.3 million contingent payment to Lilly upon the first subject dosage of CERC-611 in a multiple ascending dose study, which is recorded as a license obligation on the balance sheet as of June 30, 2019. The release of this license obligation will result in an offset of research and development expense in the amount of the contingent payment during the third quarter of 2019. The Assignment Agreement also releases the Company from additional potential future payments due to Lilly upon achievement of certain development and commercialization milestones, including the first commercial sale, and milestone payments and royalty on net sales upon commercialization of the compound.







        Results of Operations
        Comparison of the Three Months Ended June 30, 2019 and 2018
        The following table summarizes our revenue for the three months ended June 30,
        2019 and 2018:
                                      Three Months Ended June 30,
                                            2019                  2018
                                            (in thousands)
        Product revenue, net   $         4,449                  $ 4,711
        Sales force revenue    $             -                  $    74
                               $         4,449                  $ 4,785
        


Product Revenue, net

Net product revenue decreased $0.3 million for the three months ended June 30, 2019 as compared to the same period in 2018. The decrease was due to a less favorable product mix and lower sales volume during the current period.

Sales Force Revenue

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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 June 30, 2018, sales force revenue was $0.1 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 June 30, 2019.

Cost of Product Sales

Cost of product sales was $(0.1) million for the three months ended June 30, 2019, as compared to $1.4 million for the three months ended June 30, 2018. The decrease of $1.5 million for the current period as compared to the same period in 2018 was attributable to the net $1.6 million reversal to cost of product sales recorded for the three months ended June 30, 2019 related the Lachlan Settlement Agreement the Company entered into on May 22, 2019. Pursuant to the Settlement, the Company made a $2.3 million cash payment for a full release of all current and future liabilities related to the Lachlan Agreement as of June 30, 2019. As a result, the Company reversed the $8.7 million liability for the minimum obligations and $0.4 million royalty payable (both related to the Ulesfia product) in accrued liabilities as of June 30, 2019. The Settlement also released the former TRx owners of their requirement to indemnify the Company for the pre-acquisition Ulesfia losses. Thus, the Company reversed the $5.2 million indemnity receivable in other receivables related to the pre-acquisition Ulesfia losses as of June 30, 2019. The Settlement resulted in a net reversal of $1.6 million to cost of product sales for the three months ended June 30, 2019.

The decrease related to the Lachlan Settlement Agreement is partially offset by the write down of Flexichamber inventory as of June 30, 2019 to $0 which resulted in a $0.2 million charge to cost of product sales for the period.







        Research and Development Expenses
        The following table summarizes our research and development expenses for the
        three months ended June 30, 2019 and 2018:
                                                                      Three Months Ended June 30,
                                                                          2019              2018
                                                                             (in thousands)
        Preclinical expenses                                        $           667     $      396
        Clinical expenses                                                     1,691            351
        CMC expenses                                                            755             33
        Internal expenses not allocated to programs:
        Salaries, benefits and related costs                                    474            236
        Stock-based compensation expense                                        121             20
        Other                                                                     5             47
                                                                    $         3,713     $    1,083
        


Research and development expenses increased $2.6 million for the three months ended June 30, 2019 compared to the same period in 2018. Clinical expenses increased $1.3 million primarily due to increased activities related to the CERC-301 clinical study in nOH during the second 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 $0.7 million for the three months ended June 30, 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 June 30, 2019 and 2018:

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                                                                      Three Months Ended June 30,
                                                                          2019              2018
                                                                             (in thousands)
        Salaries, benefits and related costs                        $         1,226     $      836
        Legal, consulting and other professional expenses                       774          1,543
        Stock-based compensation expense                                        196            549
        Other                                                                   186            114
                                                                    $         2,382     $    3,042
        


General and administrative expenses were $2.4 million for the three months ended June 30, 2019, which is a decrease of $0.7 million compared to the three months ended June 30, 2018. The overall decrease was driven by a $0.8 million decrease in legal, consulting, and other professional expenses, $0.4 million decrease in stock-based compensation, partially offset by a $0.4 million increase in salaries, benefits and related costs.

Legal, consulting and other professional expenses decreased $0.8 million 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 June 30, 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, prior to entering into the Lachlan Settlement Agreement in the second quarter of 2019, the former TRx owners were 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. Stock-based compensation expense decreased $0.4 million for the three months ended June 30, 2019 as compared to the same period in 2018 due to the reversal of the full expense recognized to-date of $0.5 million related to the former CEO's unvested market-based options that were forfeited during the quarter, partially offset by expense recognized for stock options granted to executives in the period and expense recognized related to the Company's annual stock option award. These decreases were partially offset by a $0.4 million increase to salaries, benefits and related costs due to an increase in headcount and salary-related costs.







        Sales and Marketing Expenses
        The following table summarizes our sales and marketing expenses for the three
        months ended June 30, 2019 and 2018:
                                                                          Three Months Ended June 30,
                                                                              2019              2018
                                                                                 (in thousands)
        Salaries, benefits and related costs                            $         1,803     $    1,424
        Logistics, insurance and other commercial operations expenses               344            417
        Stock-based compensation expense                                            210             39
        Advertising and marketing expense                                           488            136
        Other                                                                        92             26
                                                                        $         2,937     $    2,042
        


Sales and marketing expenses increased $0.9 million for the three months ended June 30, 2019 as compared to the same period in 2018. Salaries, benefits and related costs increased $0.4 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. Specifically, during the third quarter of 2018, the Company initiated an expansion of the sales force, which was largely completed in the first quarter of 2019. Stock-based compensation expense increased $0.2 million due to an increase in stock option grants during second half of 2018 driven by the sales force expansion as well as the additional expense related to the annual stock option award that was granted on April 1, 2019. Advertising and marketing expenses increased $0.4 million due to an increased focus on advertising and marketing initiatives during the current quarter to support the portfolio of pediatric drugs.

Amortization Expense

The following table summarizes our amortization expense for the three months ended June 30, 2019 and 2018:

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Three Months Ended June 30, 2019 2018

(in thousands)

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.

Impairment of Intangible Assets

The following table summarizes our expense related to impairment of intangible assets for the three months ended June 30, 2019 and 2018:

Three Months Ended June 30, 2019 2018

(in thousands)

The Company recorded expense related to impairment of intangible assets of $1.4 million for the three months ended June 30, 2019 due to the impairment of the Flexichamber intangible asset. During the second quarter of 2019, the Company made a strategic decision to eliminate sales force efforts related to selling Flexichamber. As a result of this decision, paired with significant deviations from forecasted sales, management identified an impairment indicator for Flexichamber during the second quarter of 2019. Accordingly, the Company performed a test for recoverability and concluded that the sum of its estimated future undiscounted cash flows was less than its carrying value of $1.4 million. Management then measured the impairment loss by calculating the excess of the carrying amount of Flexichamber over its fair value. Management determined that due to the absence of future material cash flows that the fair value was $0. Accordingly, a full impairment was recognized in the amount of $1.4 million for the three months ended June 30, 2019.

The Company recorded impairment of intangible asset expense of $1.7 million for the three months ended June 30, 2018 due to the impairment of the PAI sales and marketing agreement intangible asset upon termination of the corresponding agreement.

Change in Fair Value of Contingent Consideration

The following table summarizes our change in fair value of contingent consideration for the three months ended June 30, 2019 and 2018:

Three Months Ended June 30, 2019 2018

(in thousands)

The Company recognized a gain on the change in fair value of contingent consideration of $1.0 million for the three months ended June 30, 2019 as compared to an immaterial loss for the same period in 2018. The contingent consideration was 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.

The gain recognized in the current period is largely related to the Company . . .

Aug 08, 2019

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