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Nov. 14, 2019, 4:17 p.m. EST

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 biopharmaceutical company focused on becoming a leader in the

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development and commercialization of treatments for orphan diseases and neurological disorders. The Company's 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 their development and approval. Additionally, CERC-801 and CERC-802 were granted Fast Track Designation ("FTD") from the FDA which helps facilitate and expedite development of each compound. The Company is also in the process of developing one other preclinical orphan 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 currently has one marketed product, Millipred(R), an oral prednisolone indicated across a wide variety of inflammatory conditions and indications.

Recent Developments

Sale of Pediatric Portfolio and Related Commercial Infrastructure to Aytu BioScience

On October 10, 2019, the Company entered into, and subsequently closed on, an asset purchase agreement (the "Aytu Purchase Agreement") with Aytu BioScience, Inc. ("Aytu") to sell the Company's rights, title and interest in, assets relating to its Pediatric Portfolio, namely Aciphex(R) Sprinkle(TM), Cefaclor for Oral Suspension, Karbinal(TM) ER, Flexichamber(TM), Poly-Vi-Flor(R) and Tri-Vi-Flor(TM) (the "Divested Assets" or "Pediatric Portfolio"), as well as the corresponding commercial infrastructure consisting of the right to offer employment to Cerecor's sales force and the assignment of supporting commercial contracts (the "Aytu transaction"). Aytu provided consideration of cash and preferred stock totaling $17 million ($4.5 million in cash and $12.5 million in Aytu preferred stock) and assumed certain of the Company's liabilities, including the Company's payment obligations payable to Deerfield CSF, LLC ("Deerfield") of approximately $15 million and certain other liabilities in excess of approximately $11 million. In addition, Aytu assumed future contractual obligations under existing license agreements associated with the Divested Assets. The transaction closed on November 1, 2019.

Upon closing of the transaction, Cerecor terminated all sales force personnel, which included both those that Aytu offered employment, as well as any remaining sales force personnel. Cerecor expects to incur severance charges and legal costs in the fourth quarter as a result of the transaction. James Harrell, Cerecor's former Executive Vice President of Marketing and Investor Relations, was promoted to Chief Commercial Officer upon close of the Aytu transaction. Additionally, Cerecor retained all rights to Millipred(R). As part of a transition services agreement the Company entered into with Aytu, Aytu will manage the commercial operations of Millipred(R) until the Company establishes an independent commercial infrastructure for the product.

The Company believes the consideration received as part of the Aytu transaction, paired with the extinguishment of the debt obligation and future obligations under the license agreements associated with the Pediatric Portfolio, will help the Company fund its portfolio of pipeline assets focusing on long-term value drivers, which include the near-term development of our CERC-800 series of assets and the advancement and expansion of the CERC-301 program.

Recent Financing

During the third quarter of 2019, the Company entered into a securities purchase agreement with Armistice, pursuant to which the Company sold 1,200,000 shares of the Company's common stock for a purchase price of $3.132 per share. Net proceeds of this securities purchase agreement were approximately $3.7 million.

Research and Development Update

Orphan Pipeline Update

In July 2019, the Company announced that the FDA granted FTD for CERC-802, an ultra-pure, oral formulation of D-mannose currently in development for the treatment of Mannose-Phosphate Isomerase Deficiency, also known as MPI-CDG or CDG-1b. FTD 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 FTD provision is to help facilitate and expedite development of drugs to treat serious and life-threatening conditions where an unmet medical need exists. Sponsors of drugs that receive FTD have the opportunity for more frequent interactions with the FDA review team throughout the development program. These can include meetings to discuss study design, data required to support approval, or other aspects of the clinical program. Additionally, products

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that have been granted FTD may be eligible for priority review of a NDA and the FDA may consider reviewing portions of an NDA before the sponsor submits the complete application (known as a rolling review).

In October 2019, the Company completed dosing healthy volunteers in a Phase 1 Safety Study of CERC-802. The single-center, US-based safety, tolerability and pharmacokinetic study was an open-label, randomized, single-dose, 4-way crossover study in 16 healthy adult volunteers. Pharmacokinetic ("PK") data is expected in early 2020

All three CERC-800 programs have been granted RPDD and ODD by the FDA and CERC-801 and CERC-802 have received FTD by the FDA. There are numerous benefits associated with receipt of ODD, which include seven-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). RPDD provides eligibility for receipt of a PRV upon approval of an NDA. The PRV, which may be sold and ownership may be transferred an unlimited amount of times, can be used to obtain priority review for a subsequent new drug application or biologics license application. Cerecor has previously held pre-IND meetings with the FDA and plans to leverage data from the CDG FIRST Trial, existing clinical and nonclinical data from published literature and sponsor-initiated studies to accelerate development and time to approval of all three compounds under the 505(b)(2) pathway.

Neurological Pipeline Update

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. The results demonstrated that CERC-301 produces a rapid, robust and sustained improvement in systolic blood pressure ("SBP") upon standing in Parkinson's patients suffering from nOH in all doses studied. As part of the study, a single 20 mg dose of CERC-301, which was the highest dose tested, achieved clinically meaningful improvements over baseline and placebo with a maximum improvement of 29.1 mmHg upon standing throughout the 6-hour study period. The Company believes this data may support a single daily dose and has the potential to be used in a broader OH patient population.

In October 2019, the Company enrolled its first patient in a Phase 1 Proof-of-Concept Trial investigating the safety, tolerability and effects on blood pressure in patients with orthostatic hypotension associated with diabetes ("DOH"). This study is a randomized, double-blind, placebo-controlled, two-way cross-over trial over two 24-hour in-clinic visits. At each visit, subjects will receive a single 20 mg dose of CERC-301 or placebo then undergo a series of orthostatic challenge tests over the 24 hour in-clinic period. Patients will also complete an OH symptomatic assessment following each orthostatic challenge. Safety, tolerability and pharmacokinetic ("PK") data will also be collected. As part of the routine laboratory tests, particular interest will be paid to the patient's plasma glucose levels over the course of the study.

The following chart summarizes upcoming research & development milestones over the next 12 to 18 months:

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[[Image Removed: rdmilestone10q32019.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, complimentary differentiated preclinical and clinical stage pipeline assets;

Developing go-to-market strategy in preparation to quickly and effectively market, launch, and distribute each of our assets that receive marketing approval; 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: pipeline10q32019.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. Under the Assignment Agreement, Armistice paid the Company an upfront payment of $0.1 million. The Company recognized the payment as license and other revenue for the three and nine months ended September 30, 2019. The Assignment Agreement also provides for: (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 was recorded as a license obligation on the balance sheet as of June 30, 2019. The decrease of this license obligation to $0 as of September 30, 2019 resulted in an offset of research and development expense of $1.3 million for the three and nine months ended September 30, 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

Expectations of Results of Operations related to Aytu Transaction

In connection with the Aytu transaction, which was entered into and subsequently closed in the fourth quarter of 2019, the Company expects significant reductions in subsequent periods to the following: net product revenue, cost of product sales, sales and marketing expense, amortization expense and interest expense. However, the results of operations for the three and nine months ended September 30, 2019, as discussed below, do not factor in such expectations because the transaction was entered into and subsequently closed in the fourth quarter of 2019.

Comparison of the Three Months Ended September 30, 2019 and 2018

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The following table summarizes our revenue for the three months ended September 30, 2019 and 2018:







                                            Three Months Ended September 30,
                                                    2019                      2018
                                                     (in thousands)
        Product revenue, net        $           5,513                       $ 4,075
        License and other revenue                 100                             -
                                    $           5,613                       $ 4,075
        


Product Revenue, net

Net product revenue increased $1.4 million for the three months ended September 30, 2019 as compared to the same period in 2018. The increase was due to a more favorable product mix and unit growth during the current period.

License and Other Revenue

In August 2019, the Company assigned and transferred its rights, title, interest, and obligations with respect to CERC-611 to ES Therapeutics in exchange for initial gross proceeds of $0.1 million, which was recognized as license and other revenue for the three months ended September 30, 2019. Under the Assigned Agreement, the Company is also eligible for the following potential milestone payments: (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. There was no license and other revenue for the three months ended September 30, 2018.

Cost of Product Sales

Cost of product sales was $1.4 million for the three months ended September 30, 2019, as compared to $3.1 million for the three months ended September 30, 2018, which represents a $1.7 million decrease. For the three months ended September 30, 2018, the Company recognized $1.7 million in cost of product sales related to the post-acquisition minimum obligations pursuant to the Lachlan Agreement, net of indemnity receivable. Prior to the third quarter of 2018, the Company had not recognized any post-acquisition minimum obligations related to the Lachlan Agreement because the Company previously believed a market change had occurred thus not contractually requiring the Company to pay such minimum obligations. In October 2018, the Company received an interim ruling related to the market change dispute in which it interpreted to mean that a market change had not occurred and therefore the minimum purchase obligation and minimum royalty provisions of the contract were active and due for any prior periods as well as going forward for any future periods. Accordingly, during the three months ended September 30, 2018, the Company recognized $1.7 million in cost of product sales related to the post-acquisition minimum obligations. During the second quarter of 2019, the Company entered into a settlement agreement that fully released all current and future liabilities related to the Lachlan Agreement. Accordingly, no cost of products sales was recognized for the three months ended September 30, 2019 related to the minimum obligations pursuant to the Lachlan Agreement, thus driving the $1.7 million decrease from the same period in 2018.







        Research and Development Expenses
        The following table summarizes our research and development expenses for the
        three months ended September 30, 2019 and 2018:
                                                                         Three Months Ended September 30,
                                                                            2019                    2018
                                                                                  (in thousands)
        Preclinical expenses                                        $            140         $            120
        Clinical expenses                                                        718                      473
        CMC expenses                                                           1,360                       18
        Internal expenses not allocated to programs:
        Salaries, benefits and related costs                                     581                      324
        Stock-based compensation expense                                         176                       31
        Other                                                                 (1,232 )                     82
                                                                    $          1,743         $          1,048
        


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Research and development expenses increased $0.7 million for the three months ended September 30, 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 assets. Chemistry, Manufacturing, and Controls ("CMC") expenses increased $1.3 million for the three months ended September 30, 2019 compared to the same period in 2018 due to additional spending on manufacturing to support clinical development. Clinical expenses increased $0.2 million primarily due to increased activities related to CERC-801, CERC-802, and CERC-803, which were acquired as part of the Ichorion Acquisition in September 2018. Salaries, benefits and related costs increased by $0.3 million compared to the same period in 2018 due to an increase in headcount and salary-related costs needed to maintain and grow our research and development activities as we continue to invest in our pipeline. Additionally, stock-based compensation increased by $0.1 million due to an increase in stock option grants in 2019 driven by an increased headcount, as well as the additional expense related to the annual stock option award that was granted on April 1, 2019.

These increases were partially offset by a $1.3 million reversal of research and development expense previously recorded in the prior year related to the Company's assignment of its license agreement with respect to CERC-611 to ES Therapeutics in the third quarter of 2019. Pursuant to the Assignment Agreement, the Company assigned and transferred its rights, interest and obligations related to the compound, thus releasing the Company's contingent payment of $1.3 million to Lilly upon the first subject dosage of CERC-611 in a multiple ascending dose study, which was previously recorded as a license obligation on the balance sheet as of June 30, 2019. The decrease of the license obligation to $0 as of September 30, 2019 resulted in an offset of research and development expense for the three months ended September 30, 2019.

Acquired In-Process Research and Development Expenses

As part of the asset acquisition of Ichorion in the third quarter of 2018, the Company acquired $18.7 million of in-process research and development ("IPR&D") for three preclinical therapies for inherited metabolic disorders known as CDGs (CERC-801, CERC-802 and CERC-803). The fair value of the IPR&D was immediately recognized as acquired in-process research and development expense as the IPR&D asset has no other alternate use due to the stage of development. There was no acquired in-process research and development expense for the three months ended September 30, 2018.







        General and Administrative Expenses
        The following table summarizes our general and administrative expenses for the
        three months ended September 30, 2019 and 2018:
                                                                    Three Months Ended September 30,
                                                                           2019              2018
                                                                             (in thousands)
        Salaries, benefits and related costs                        $            852     $    1,139
        Legal, consulting and other professional expenses                      1,197           (203 )
        Stock-based compensation expense                                         474            843
        Other                                                                    156            105
                                                                    $          2,679     $    1,884
        


General and administrative expenses were $2.7 million for the three months ended September 30, 2019, which is an increase of $0.8 million compared to the three months ended September 30, 2018. The overall increase was driven by a $1.4 million increase in legal, consulting, and other professional expenses, partially offset by a $0.7 million decrease in stock-based compensation and salaries, benefits and related costs.

For the three months ended September 30, 2018, the Company recognized a $1.0 million reversal of legal expenses due to a purchase price allocation measurement period adjustment identified for TRx acquisition during the third quarter of 2018. As this was specific to purchase price allocation, no such reversal was recognized for the three months ended September 30, 2019, thus driving $1.0 million of the increase in legal, consulting and other professional expense as compared to the same period in 2018. Additionally, for the three months ended September 30, 2019, there was a $0.4 million increase in legal costs related to business development activities during the quarter. Stock-based compensation for the three months ended September 30, 2019 decreased $0.4 million as compared to the same period in 2018 mainly due to $0.3 million of expense recognized for three months ended September 30, 2018 attributable to modifications of awards related to a separated executive during the third quarter of 2018. Finally, salaries, benefits and related costs decreased $0.3 million mainly due to severance benefits paid to a separated executive in the third quarter of 2018, which was not repeated in the third quarter of 2019.

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        Sales and Marketing Expenses
        The following table summarizes our sales and marketing expenses for the three
        months ended September 30, 2019 and 2018:
                                                                         Three Months Ended September 30,
                                                                               2019               2018
                                                                                  (in thousands)
        Salaries, benefits and related costs                            $           1,629     $    1,456
        Logistics, insurance and other commercial operations expenses                 370            338
        Stock-based compensation expense                                              169             70
        Advertising and marketing expense                                             423            415
        Other                                                                          39             32
                                                                        $           2,630     $    2,311
        


Sales and marketing expenses increased $0.3 million for the three months ended September 30, 2019 as compared to the same period in 2018. Salaries, benefits and related costs increased $0.2 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 $0.1 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.







        Amortization Expense
        The following table summarizes our amortization expense for the three months
        ended September 30, 2019 and 2018:
                                                    Three Months Ended September 30,
                                                            2019                      2018
                                                             (in thousands)
        Amortization of intangible assets   $           1,037                       $ 1,065
        . . .
        


Nov 14, 2019

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