Item 1. FINANCIAL STATEMENTS
INTERCEPT PHARMACEUTICALS,
INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except per share data)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
105,216
|
|
|
$
|
32,742
|
|
Investment securities, available-for-sale
|
|
|
674,743
|
|
|
|
595,313
|
|
Prepaid expenses and other current assets
|
|
|
14,622
|
|
|
|
13,638
|
|
Total current assets
|
|
|
794,581
|
|
|
|
641,693
|
|
Fixed assets, net
|
|
|
11,865
|
|
|
|
10,047
|
|
Security deposits
|
|
|
5,821
|
|
|
|
4,018
|
|
Total assets
|
|
$
|
812,267
|
|
|
$
|
655,758
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other liabilities
|
|
$
|
46,854
|
|
|
$
|
45,591
|
|
Short-term interest payable
|
|
|
3,738
|
|
|
|
-
|
|
Short-term portion of deferred revenue
|
|
|
3,935
|
|
|
|
1,782
|
|
Total current liabilities
|
|
|
54,527
|
|
|
|
47,373
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
337,898
|
|
|
|
-
|
|
Long-term portion of deferred revenue
|
|
|
4,899
|
|
|
|
6,236
|
|
Total liabilities
|
|
|
397,324
|
|
|
|
53,609
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock par value $0.001 per share; 45,000,000 and 35,000,000 shares authorized; 24,790,952 and 24,391,430 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively.
|
|
|
25
|
|
|
|
24
|
|
Additional paid-in capital
|
|
|
1,406,260
|
|
|
|
1,300,008
|
|
Accumulated other comprehensive loss, net
|
|
|
(2,924
|
)
|
|
|
(2,253
|
)
|
Accumulated deficit
|
|
|
(988,418
|
)
|
|
|
(695,630
|
)
|
Total stockholders’ equity
|
|
|
414,943
|
|
|
|
602,149
|
|
Total liabilities and stockholders’ equity
|
|
$
|
812,267
|
|
|
$
|
655,758
|
|
See accompanying notes
to the condensed consolidated financial statements.
INTERCEPT
PHARMACEUTICALS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue, net
|
|
$
|
4,732
|
|
|
$
|
-
|
|
|
$
|
4,807
|
|
|
$
|
-
|
|
Licensing revenue
|
|
|
445
|
|
|
|
445
|
|
|
|
6,336
|
|
|
|
2,336
|
|
Total revenue
|
|
|
5,177
|
|
|
|
445
|
|
|
|
11,143
|
|
|
|
2,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
43,838
|
|
|
|
27,487
|
|
|
|
122,592
|
|
|
|
83,747
|
|
Selling, general and administrative
|
|
|
44,375
|
|
|
|
24,742
|
|
|
|
177,082
|
|
|
|
58,854
|
|
Total operating expenses
|
|
|
88,213
|
|
|
|
52,229
|
|
|
|
299,674
|
|
|
|
142,601
|
|
Operating loss
|
|
|
(83,036
|
)
|
|
|
(51,784
|
)
|
|
|
(288,531
|
)
|
|
|
(140,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(7,065
|
)
|
|
|
-
|
|
|
|
(7,065
|
)
|
|
|
-
|
|
Other income, net
|
|
|
1,286
|
|
|
|
889
|
|
|
|
2,807
|
|
|
|
2,090
|
|
|
|
|
(5,779
|
)
|
|
|
889
|
|
|
|
(4,258
|
)
|
|
|
2,090
|
|
Net loss
|
|
$
|
(88,815
|
)
|
|
$
|
(50,895
|
)
|
|
$
|
(292,789
|
)
|
|
$
|
(138,175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common and potential common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(3.59
|
)
|
|
$
|
(2.10
|
)
|
|
$
|
(11.90
|
)
|
|
$
|
(5.89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and potential common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
24,738
|
|
|
|
24,215
|
|
|
|
24,614
|
|
|
|
23,472
|
|
See accompanying notes to the condensed
consolidated financial statements
.
INTERCEPT PHARMACEUTICALS,
INC.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
(In thousands)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(88,815
|
)
|
|
$
|
(50,895
|
)
|
|
$
|
(292,789
|
)
|
|
$
|
(138,175
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses arising during the period
|
|
|
(1,073
|
)
|
|
|
(25
|
)
|
|
|
966
|
|
|
|
(707
|
)
|
Reclassification for recognized gains (losses) on marketable investment securities during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
(52
|
)
|
|
|
2
|
|
Net unrealized losses on marketable investment securities
|
|
$
|
(1,073
|
)
|
|
$
|
(25
|
)
|
|
$
|
914
|
|
|
$
|
(705
|
)
|
Foreign currency translation adjustments
|
|
|
(691
|
)
|
|
|
(690
|
)
|
|
|
(1,585
|
)
|
|
|
(514
|
)
|
Comprehensive loss
|
|
$
|
(90,579
|
)
|
|
$
|
(51,610
|
)
|
|
$
|
(293,460
|
)
|
|
$
|
(139,394
|
)
|
See accompanying notes to the condensed
consolidated financial statements
.
INTERCEPT PHARMACEUTICALS,
INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(292,789
|
)
|
|
$
|
(138,175
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
27,041
|
|
|
|
22,038
|
|
Depreciation
|
|
|
2,187
|
|
|
|
1,059
|
|
Realized gain on investments
|
|
|
52
|
|
|
|
-
|
|
Amortization of deferred financing costs
|
|
|
326
|
|
|
|
-
|
|
Accretion of debt discount
|
|
|
3,001
|
|
|
|
-
|
|
Amortization of investment premium
|
|
|
3,736
|
|
|
|
4,517
|
|
Changes in operating assets:
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
(984
|
)
|
|
|
(727
|
)
|
Security deposits
|
|
|
(1,803
|
)
|
|
|
(1,532
|
)
|
Changes in operating liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other current liabilities
|
|
|
1,699
|
|
|
|
16,942
|
|
Interest payable
|
|
|
3,738
|
|
|
|
-
|
|
Deferred revenue
|
|
|
817
|
|
|
|
(1,336
|
)
|
Net cash used in operating activities
|
|
|
(252,979
|
)
|
|
|
(97,214
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of investment securities
|
|
|
(443,323
|
)
|
|
|
(559,928
|
)
|
Sales of investment securities
|
|
|
361,019
|
|
|
|
151,053
|
|
Purchases of equipment, leasehold improvements, and furniture and fixtures
|
|
|
(4,005
|
)
|
|
|
(5,414
|
)
|
Net cash used in investing activities
|
|
|
(86,309
|
)
|
|
|
(414,289
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of stock offerings, net of issuance costs
|
|
|
-
|
|
|
|
558,756
|
|
Payments for capped call transactions and associated costs
|
|
|
(38,364
|
)
|
|
|
-
|
|
Proceeds from issuance of Convertible Notes, net of issuance costs
|
|
|
447,715
|
|
|
|
-
|
|
Proceeds from exercise of options
|
|
|
4,429
|
|
|
|
5,595
|
|
Net cash provided by financing activities
|
|
|
413,780
|
|
|
|
564,351
|
|
Effect of exchange rate changes
|
|
|
(2,018
|
)
|
|
|
(514
|
)
|
Net increase in cash and cash equivalents
|
|
|
72,474
|
|
|
|
52,334
|
|
Cash and cash equivalents – beginning of period
|
|
|
32,742
|
|
|
|
20,023
|
|
Cash and cash equivalents – end of period
|
|
$
|
105,216
|
|
|
$
|
72,357
|
|
See accompanying notes to the condensed
consolidated financial statements.
INTERCEPT PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Intercept Pharmaceuticals, Inc. (“Intercept”
or the “Company”) is a biopharmaceutical company focused on the development and commercialization of novel therapeutics
to treat non-viral, progressive liver diseases, including primary biliary cholangitis (“PBC”), nonalcoholic steatohepatitis
(“NASH”), primary sclerosing cholangitis (“PSC”) and biliary atresia. Founded in 2002 in New York, Intercept
now has operations in the United States, Europe and Canada.
Basis of Presentation
The Company’s financial statements
have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
All intercompany accounts and transactions have been eliminated. Certain information that
is normally required by U.S. GAAP has been condensed or omitted in accordance with rules and regulations of the Securities and
Exchange Commission (“SEC”). Operating results for the three and nine months ended September 30, 2016 are not necessarily
indicative of the results that may be expected for any future period or for the year ending December 31, 2016.
These
unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial
statements and the notes thereto for the year ended December 31, 2015, included in the Company’s 2015 Annual Report on Form
10-K filed with the SEC.
Use of
Estimates
The preparation of these financial statements
in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets,
liabilities, expenses, revenues and related disclosures. Significant estimates include: clinical trial accruals, revenues and share-based
compensation expense. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions
that it believes to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions.
|
2.
|
Summary of Significant Accounting Policies
|
The Company’s significant accounting
policies are described in Note 3 to the Consolidated Financial Statements included in
the
Company’s 2015 Annual Report on Form 10-K filed with the SEC
.
Revenue Recognition
Product Revenue, Net
Revenue is recognized when the four basic
criteria of revenue recognition are met: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred or services
have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. When the revenue recognition
criteria are not met, we defer the recognition of revenue by recording deferred revenue on the balance sheet until such time that
all criteria are met.
Beginning in June 2016, subsequent to the
U.S. Food and Drug Administration (“FDA”) approval of Ocaliva
®
(obeticholic acid or “OCA”)
for the treatment of PBC, the Company sells Ocaliva in the United States principally to a limited number of specialty pharmacies
which dispense the product directly to patients. The specialty pharmacies are referred to as the Company’s customers.
The Company provides the right of return
to its customers for unopened product for a limited time before and after its expiration date. Given the Company’s limited
sales history for Ocaliva and the inherent uncertainties in estimating product returns, the Company has determined that the shipments
of Ocaliva made to its customers thus far do not meet the criteria for revenue recognition at the time of shipment. Accordingly,
the Company recognizes revenue when the product is sold through by its customers, provided all other revenue recognition criteria
are met. The Company invoices its customers upon shipment of Ocaliva to them and records accounts receivable, with a corresponding
liability for deferred revenue equal to the gross invoice price. The Company then recognizes revenue when Ocaliva is sold through
as specialty pharmacies dispense product directly to the patients.
The Company recognized net sales of Ocaliva
for the three and nine months ended September 30, 2016 of $4.7 million and $4.8 million, respectively. The Company also recorded
$2.2 million in deferred revenues recorded in short-term portion of deferred revenue on its balance sheet, which represents product
shipped to distributors, but not sold through as of September 30, 2016.
The Company has written contracts with
each of its customers and delivery occurs when the customer receives Ocaliva. The Company evaluates the creditworthiness of each
of its customers to determine whether collection is reasonably assured. In order to conclude that the price is fixed and determinable,
the Company must be able to (i) calculate its gross product revenues from the sales to its customers and (ii) reasonably estimate
its net product revenues. The Company calculates gross product revenues based on the wholesale acquisition cost that the Company
charges its customers for Ocaliva. The Company estimates its net product revenues by deducting from its gross product revenues
(i) trade allowances, such as invoice discounts for prompt payment and customer fees, (ii) estimated government rebates and discounts
related to Medicare, Medicaid and other government programs, and (iii) estimated costs of incentives offered to certain indirect
customers including patients.
Trade Allowances
The Company provides invoice discounts
on Ocaliva sales to certain of its customers for prompt payment and records these discounts as a reduction to gross product revenues.
These discounts are based on contractual terms.
Rebates and Discounts
The Company contracts with Centers for
Medicare & Medicaid Services (“CMS”) and other government agencies to make Ocaliva available to eligible patients.
As a result, the Company estimates any rebates and discounts and deducts these estimated amounts from its gross product revenues
at the time the revenues are recognized. The Company’s estimates of rebates and discounts are based on the government mandated
discounts, which are statutorily-defined and applicable to these government funded programs. These estimates are recorded in accrued
liabilities on the condensed consolidated balance sheet.
Other Incentives
Other incentives that the Company offers
to indirect customers include co-pay assistance cards provided by the Company for PBC patients whom reside in states that permit
co-pay assistance programs. The Company’s co-pay assistance program is intended to reduce each participating patient’s
portion of the financial responsibility for Ocaliva purchase price to a specified dollar amount. The Company estimates each period
the amount of co-pay assistance provided to eligible patients based on the terms of the program when product is dispensed by the
specialty pharmacies to the patients. These estimates are based on redemption information provided by third party claims processing
organizations and are recorded in accrued liabilities on the condensed consolidated balance sheet.
Convertible Senior Notes
The Company’s 3.25% convertible senior
notes due 2023 (the “Convertible Notes”) are accounted for in accordance with Financial Accounting Standards Board
("FASB") Accounting Standards Codification (“ASC”) 470, formerly FSP APB 14-1, Accounting for Convertible
Debt Instruments That May be Settled in Cash upon Conversion (Including Partial Cash Settlement). ASC Subtopic 470-20 requires
the issuer of convertible debt that may be settled in shares or cash upon conversion at the issuer's option, such as these notes,
to account for the liability (debt) and equity (conversion option) components separately. The value assigned to the debt component
is the estimated fair value, as of the issuance date, of a similar debt instrument without the conversion option. The amount of
the equity component (and resulting debt discount) is calculated by deducting the fair value of the liability component from the
principal amount of the convertible debt instrument. The resulting debt discount is amortized as additional non-cash interest expense
over the expected life of the notes utilizing the effective interest method. Although ASC 470 has no impact on the Company’s
actual past or future cash flows, it requires the Company to record non-cash interest expense as the debt discount is amortized.
For additional information, see Note 6 – Long-Term Debt.
|
3.
|
Significant Agreements
|
Sumitomo Dainippon Pharma Co, Ltd. (Sumitomo Dainippon)
In March 2011, the Company entered into
an exclusive license agreement with Sumitomo Dainippon to research, develop and commercialize OCA as a therapeutic for the treatment
of PBC, and NASH in Japan and China (excluding Taiwan). Under the terms of the license agreement, the Company received an up-front
payment from Sumitomo Dainippon of $15.0 million and may be eligible to receive additional milestone payments of up to an aggregate
of approximately $30.0 million in development milestones based on the initiation or completion of clinical trials, $70.0 million
in regulatory approval milestones and $200.0 million in sales milestones. The regulatory approval milestones include $15.0 million
for receiving marketing approval of OCA for NASH in Japan, $10.0 million for receiving marketing approval of OCA for NASH in China,
and $5.0 million for receiving marketing approval of OCA for PBC in the United States, which was achieved upon the FDA approval
of Ocaliva for the treatment of PBC in May 2016. As of September 30, 2016, the Company had achieved $6.3 million of the development
milestones under its collaboration agreement with Sumitomo Dainippon. The sales milestones are based on aggregate sales amounts
of OCA in the Sumitomo Dainippon territory and include $5.0 million for achieving net sales of $50.0 million, $10.0 million for
achieving net sales of $100.0 million, $20.0 million for achieving net sales of $200.0 million, $40.0 million for achieving net
sales of $400.0 million and $120.0 million for achieving net sales of $1.2 billion. The Company has determined that each potential
future development, regulatory and sales milestone is substantive. In May 2014, Sumitomo Dainippon exercised its option under the
license agreement to add Korea as part of its licensed territories and paid the Company a $1.0 million up-front fee. Sumitomo Dainippon
has the option to add several other Asian countries to its territory to pursue OCA for additional indications. Sumitomo Dainippon
will be responsible for the costs of developing and commercializing OCA in its territories. Sumitomo Dainippon is also required
to make royalty payments ranging from the tens to the twenties in percent based on net sales of OCA products in the Sumitomo Dainippon
territory.
The Company evaluated the license agreement
with Sumitomo Dainippon and determined that it is a revenue arrangement with multiple deliverables, or performance obligations.
The Company’s substantive performance obligations under this license include an exclusive license to its technology, technical
and scientific support to the development plan and participation on a joint steering committee. The Company determined that these
performance obligations represent a single unit of accounting, since, initially, the license does not have stand-alone value to
Sumitomo Dainippon without the Company’s technical expertise and steering committee participation during the development
of OCA. This development period is currently estimated as continuing through June 2020 and, as such, the up-front payment and payments
made in respect of the Korea option are being recognized ratably over this period. During the three months ended September 30,
2016 and 2015, the Company recorded licensing revenue of approximately $0.4 million, respectively, and during the nine months ended
September 30, 2016 and 2015, the Company recorded revenue of approximately $6.3 million and $2.3 million, respectively.
Leases
In January 2016, Intercept Pharma Europe
Ltd. (“IPEL”), a wholly owned subsidiary of the Company, entered into an underlease with Performing Right Society,
Ltd., for additional office space in the King’s Cross area of London, United Kingdom. The Company is the guarantor to the
underlease. The underlease provides IPEL with an additional 8,549 square feet of space. The lease term is anticipated to end in
May 2024. The annual rent is approximately £726,665, payable quarterly. IPEL is also required to pay value added tax (“VAT”)
on the rent. IPEL will be responsible for a portion of the insurance, certain service charges and taxes for the building based
on the floor area rented by them. As security for the underlease, IPEL has provided the landlord with a rent deposit in an amount
equal to twelve months’ rent, plus applicable VAT. The underlease is subject to an “upwards only” open market
rent review of the market rent with review to take place in June 2019.
In February 2016, the Company entered into
a sublease with Restoration Hardware, Inc. for additional office space in New York City. The sublease provides the Company with
an additional 10,785 square feet of space. The lease term is anticipated to end in February 2021. The annual rent is approximately
$1.0 million payable monthly. The Company is also responsible for its proportionate share of increases in operating expenses beginning
January 2017 as well as its proportionate share of increases in real estate taxes over the average of the 2015/2016 and 2016/2017
fiscal years. As security for the sublease, the Company delivered a letter of credit in the amount of approximately $0.3 million
in favor of the sublandlord.
On July 19, 2016, the Company entered into
an amendment to its lease agreement with Irvine Eastgate Office II LLC for additional office space in San Diego, California. The
amendment provides the Company with an additional 11,177 square feet of space. The lease term is anticipated to end in September
2019. The rent for the first year will be approximately $254,832 and will gradually increase every twelve months throughout the
lease term for the additional space. The Company will be responsible for a portion of the insurance, certain service charges and
taxes for the building based on the floor area rented by the Company. The landlord provided the Company with an allowance of approximately
$22,354 for improvements to the office space. Pursuant to the terms of the amendment, the Company provided the landlord with
an additional letter of credit for $26,679.
Security for these leases is included on
the condensed consolidated balance sheets in “Security Deposits.”
Commercial Supply Agreement
On August 12, 2016, IPEL and PharmaZell GMBH
(“PharmaZell”), entered into a commercial manufacturing and supply agreement. Pursuant to the agreement, PharmaZell
has agreed to manufacture and supply to IPEL and IPEL has agreed to purchase from PharmaZell a certain percentage of IPEL’s
commercial requirements of active pharmaceutical ingredient (“API”) for use in Ocaliva. In addition, subject to certain
regulatory events, IPEL has agreed to purchase a specified minimum quantity of API for delivery in 2017 and 2018. Subject to IPEL’s
purchase obligations, IPEL has the right to enter into arrangements with one or more alternate sources for the commercial supply
of API. The agreement provides for pricing for API structured on a tiered basis, with the price reduced as the volume of API ordered
increases. The agreement has an initial term that runs through December 31, 2020, and is subject to two-year automatic renewal
terms, unless either party provides notice of non-renewal at least 12 months prior to the end of the initial term or then-current
renewal term. IPEL may terminate the agreement immediately with written notice upon the occurrence of certain regulatory events,
or PharmaZell’s failure to meet certain quality standards, applicable laws or specified delivery obligations. Each party
also has the right to terminate the agreement immediately upon written notice for other customary reasons such as material
breach and bankruptcy. The agreement contains provisions relating to compliance by PharmaZell with current Good Manufacturing Practices
and applicable laws, indemnification, confidentiality, intellectual property, dispute resolution and other customary matters for
an agreement of this kind. Certain provisions of the agreement are subject to a quality agreement previously entered into by the
parties. The Company has agreed to guarantee IPEL’s financial obligations under the agreement.
Financial instruments that potentially
subject the Company to concentrations of credit risk consist of marketable investment securities. The Company's portfolio of marketable
investment securities is subject to concentration limits set within the Company's investment policy that help the Company believes
will limit its credit exposure.
The following table summarizes the Company’s
cash, cash equivalents and investments as of September 30, 2016 and December 31, 2015:
|
|
As of September 30, 2016
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair Value
|
|
|
|
|
|
|
Gains
|
|
|
Losses
|
|
|
|
|
|
|
(In thousands)
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and money market funds
|
|
$
|
105,219
|
|
|
$
|
-
|
|
|
$
|
(3
|
)
|
|
$
|
105,216
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
|
32,323
|
|
|
|
3
|
|
|
|
(4
|
)
|
|
|
32,322
|
|
Commercial paper
|
|
|
70,074
|
|
|
|
-
|
|
|
|
(142
|
)
|
|
|
69,932
|
|
Corporate debt securities
|
|
|
573,331
|
|
|
|
69
|
|
|
|
(911
|
)
|
|
|
572,489
|
|
Total investments
|
|
|
675,728
|
|
|
|
72
|
|
|
|
(1,057
|
)
|
|
|
674,743
|
|
Total cash, cash equivalents and investments
|
|
$
|
780,947
|
|
|
$
|
72
|
|
|
$
|
(1,060
|
)
|
|
$
|
779,959
|
|
|
|
As of December 31, 2015
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair Value
|
|
|
|
|
|
|
Gains
|
|
|
Losses
|
|
|
|
|
|
|
(In thousands)
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and money market funds
|
|
$
|
32,742
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
32,742
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
1,993
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
1,990
|
|
U.S. government and agency securities
|
|
|
65,854
|
|
|
|
1
|
|
|
|
(182
|
)
|
|
|
65,673
|
|
Corporate debt securities
|
|
|
529,368
|
|
|
|
2
|
|
|
|
(1,720
|
)
|
|
|
527,650
|
|
Total investments
|
|
|
597,215
|
|
|
|
3
|
|
|
|
(1,905
|
)
|
|
|
595,313
|
|
Total cash, cash equivalents and investments
|
|
$
|
629,957
|
|
|
$
|
3
|
|
|
$
|
(1,905
|
)
|
|
$
|
628,055
|
|
As of September 30, 2016, there were no marketable
securities in a continuous unrealized loss position for more than twelve months.
|
5.
|
Fair Value Measurements
|
The carrying amounts of the Company’s
receivables and payables approximate their fair value due to their short maturities.
Accounting principles provide guidance for
using fair value to measure assets and liabilities. The guidance includes a three level hierarchy of valuation techniques used
to measure fair value, defined as follows:
|
·
|
Level 1 - The fair value of an asset or liability is based on unadjusted quoted prices in active markets for identical assets
or liabilities.
|
|
·
|
Level 2 - The fair value of an asset or liability is based on information derived from either an active market quoted price,
which may require further adjustment based on the attributes of the financial asset or liability being measured, or an inactive
market transaction.
|
|
·
|
Level 3 - The fair value of an asset or liability is primarily based on internally derived assumptions surrounding the timing
and amount of expected cash flows for the financial instrument. Therefore, these assumptions are unobservable in either an active
or inactive market.
|
The Company considers an active market as
one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information
on an ongoing basis. Conversely, the Company views an inactive market as one in which there are few transactions for the asset
or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. When
appropriate, non-performance risk, or that of a counterparty, is considered in determining the fair values of liabilities and assets,
respectively.
The Company’s cash deposits and money
market funds are classified within Level 1 of the fair value hierarchy because they are valued using bank balances or quoted market
prices. Investments are classified as Level 2 instruments based on market pricing or other observable inputs. None of the Company’s
investments are classified within Level 3 of the fair value hierarchy.
Financial assets and liabilities,
carried at fair value are classified in the tables below in one of the three categories described above:
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(In thousands)
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
39,356
|
|
|
$
|
39,356
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
|
32,322
|
|
|
|
-
|
|
|
|
32,322
|
|
|
|
-
|
|
Commercial paper
|
|
|
69,932
|
|
|
|
-
|
|
|
|
69,932
|
|
|
$
|
-
|
|
Corporate debt securities
|
|
|
572,489
|
|
|
|
-
|
|
|
|
572,489
|
|
|
|
-
|
|
Total financial assets:
|
|
$
|
714,099
|
|
|
$
|
39,356
|
|
|
$
|
674,743
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
4,826
|
|
|
$
|
4,826
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
1,990
|
|
|
|
-
|
|
|
|
1,990
|
|
|
|
-
|
|
Corporate debt securities
|
|
|
527,650
|
|
|
|
-
|
|
|
|
527,650
|
|
|
|
-
|
|
U.S. government and agency securities
|
|
|
65,673
|
|
|
|
-
|
|
|
|
65,673
|
|
|
|
-
|
|
Total financial assets
|
|
$
|
600,139
|
|
|
$
|
4,826
|
|
|
$
|
595,313
|
|
|
$
|
-
|
|
The estimated fair value of marketable
debt securities (commercial paper, corporate debt securities and U.S. government and agency securities), by contractual maturity,
are as follows:
|
|
Fair Value as of
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
(In thousands)
|
|
Due in one year or less
|
|
$
|
415,106
|
|
|
$
|
343,758
|
|
Due after 1 year through 2 years
|
|
|
259,637
|
|
|
|
251,555
|
|
Total investments in debt securities
|
|
$
|
674,743
|
|
|
$
|
595,313
|
|
Actual maturities may differ from contractual
maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties.
Debt, net of discounts and deferred financing
costs, consists of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Long-term debt
|
|
$
|
337,898
|
|
|
$
|
-
|
|
Less current portion
|
|
|
-
|
|
|
|
-
|
|
Long-term debt outstanding
|
|
$
|
337,898
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
On July 6, 2016, the Company issued $460.0
million aggregate principal amount of the Convertible Notes. The Company received net proceeds of $447.7 million after deducting
underwriting discounts and estimated offering expenses of approximately $12.3 million. The Company used approximately $38.4 million
of the net proceeds from the offering to fund the payment of the cost of the capped call transactions that were entered into in
connection with the issuance of the Convertible Notes.
The Convertible Notes are senior unsecured
obligations of the Company. Interest is payable semi-annually on January 1 and July 1 of each year, beginning on January 1, 2017.
The Convertible Notes mature on July 1, 2023, unless earlier repurchased, redeemed or converted. The Convertible Notes are convertible
at the option of holders, under certain circumstances and during certain periods, into cash, shares of the Company’s common
stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. The initial conversion
rate of the Convertible Notes is 5.0358 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes,
which is equivalent to an initial conversion price of approximately $198.58 per share of the Company’s common stock. The
conversion rate is subject to adjustment upon the occurrence of certain events. The Company may redeem for cash all or part of
the Convertible Notes, at its option, on or after July 6, 2021, under certain circumstances at a redemption price equal to 100%
of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption
date.
The capped call transactions are expected
generally to reduce the potential dilution upon conversion of the Convertible Notes in the event that the market price per share
of the Company’s common stock, as measured under the terms of the capped call transactions, is greater than the strike price
of the capped call transactions, which initially corresponds to the conversion price of the Convertible Notes, and is subject to
anti-dilution adjustments generally similar to those applicable to the conversion rate of the Convertible Notes. The cap price
of the capped call transactions is initially $262.2725 per share, and is subject to certain adjustments under the terms of the
capped call transactions. If, however, the market price per share of the Company’s common stock, as measured under the terms
of the capped call transactions, exceeds the cap price of the capped call transactions, there would nevertheless be dilution upon
conversion of the Convertible Notes to the extent that such market price exceeds the cap price of the capped call transactions.
In accordance with ASC Subtopic 470-20,
the Company used an effective interest rate of 8.4% to determine the liability component of the Convertible Notes. This resulted
in the recognition of $334.6 million as the liability component of the Convertible Notes and the recognition of the residual $113.1
million as the debt discount with a corresponding increase to additional paid-in capital for the equity component of the Convertible
Notes.
Interest
expense was $7.1 million for the three and nine months ended September 30, 2016 related to the Convertible Notes. Accrued interest
on the Convertible Notes was approximately $3.7 million as of September 30, 2016. The Company recorded debt issuance costs of $12.3
million, which are being amortized using the effective interest method. As of September 30, 2016, $12.0 million of debt issuance
costs are recorded on the unaudited condensed consolidated balance sheet in Long-Term Debt, in accordance with ASU 2015-03. As
of September 30, 2016, the Company had outstanding borrowings of $460.0 million related to the Convertible Notes.
For the nine months ended September 30,
2016 and 2015, no income tax expense or benefit was recognized. The Company’s deferred tax assets are comprised primarily
of net operating loss carryforwards (“NOLs”). The Company maintains a full valuation allowance on its deferred tax
assets since it has not yet achieved sustained profitable operations. As a result, the Company has not recorded any income tax
benefit since its inception.
As of September 30, 2016 and December 31,
2015, the Company had NOLs for U.S. federal income tax purposes of $507.7 million and $454.4 million, respectively, which expire
between 2024 and 2036. The Company also has certain state and foreign NOLs in varying amounts depending on the different state
and foreign tax laws. The U.S. federal NOLs include approximately $167.5 million and $151.0 million, respectively, of excess tax
benefits related to stock-based payments that are not recognized as a deferred tax asset. The benefit of these deductions will
be recognized through additional paid-in capital at the time the tax deduction results in a reduction of current taxes payable.
The Company’s ability to utilize
its NOLs may be limited under Section 382 of the Internal Revenue Code due to previous ownership changes. Although the Company
believes that these ownership changes have not resulted in material limitations on its ability to use these NOLs, its ability to
utilize these NOLs may be limited due to future ownership changes or for other reasons. Additionally, tax laws limit the time during
which NOLs and certain other tax attributes may be utilized against future taxes. As a result, the Company may not be able to take
full advantage of its carryforwards for federal, state, and foreign tax purposes.
Common Stock
As of September 30, 2016 and December 31,
2015, the Company had 45,000,000 and 35,000,000, respectively, authorized shares of common stock, $0.001 par value per share. At
the 2016 annual meeting of stockholders held on July 19, 2016, the Company’s stockholders approved an amendment to the Company’s
restated certificate of incorporation, as amended, to increase the number of authorized shares of common stock from 35,000,000
shares to 45,000,000 shares.
In February 2015, the Company completed a
public offering of 1,150,000 shares of its common stock pursuant to a registration statement on Form S-3. After underwriting discounts
and commissions and offering expenses, the Company received net proceeds of approximately $191.6 million.
In April 2015, the Company completed a public
offering of 1,330,865 shares of its common stock pursuant to a registration statement on Form S-3. After underwriting discounts
and commissions and offering expenses, the Company received net proceeds of approximately $367.1 million.
Stock-Based Compensation
The 2012 Equity Incentive Plan (“2012
Plan”) became effective upon the pricing of the Initial Public Offering in October 2012. At the same time, the 2003 Stock
Incentive Plan (“2003 Plan”) was terminated and 555,843 shares available under the 2003 Plan were added to the 2012
Plan.
The estimated fair value of the options
that have been granted under the 2003 and 2012 Plans is determined utilizing the Black-Scholes option-pricing model at the date
of grant. The fair value of restricted stock units (“RSUs”) and restricted stock awards (“RSAs”) that have
been granted under the 2012 Plan is determined utilizing the closing stock price on the date of grant.
The following table summarizes stock option
activity during the nine months ended September 30, 2016:
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
|
(In thousands)
|
|
|
|
|
Outstanding, December 31, 2015
|
|
|
1,348
|
|
|
$
|
108.49
|
|
Granted
|
|
|
465
|
|
|
$
|
112.52
|
|
Exercised
|
|
|
(164
|
)
|
|
$
|
27.39
|
|
Expired
|
|
|
(4
|
)
|
|
$
|
138.48
|
|
Forfeited
|
|
|
(51
|
)
|
|
$
|
141.23
|
|
Outstanding, September 30, 2016
|
|
|
1,594
|
|
|
$
|
116.87
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2016
|
|
|
749
|
|
|
$
|
85.63
|
|
The following table summarizes the aggregate
RSU and RSA activity during the nine months ended September 30, 2016:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Number of
|
|
|
Average Fair
|
|
|
Aggregate
|
|
|
|
Awards
|
|
|
Value
|
|
|
Intrinsic Value
|
|
|
|
(In thousands)
|
|
|
|
|
|
(In thousands)
|
|
Non-vested shares outstanding, December 31, 2015
|
|
|
193
|
|
|
$
|
183.19
|
|
|
$
|
28,849
|
|
Granted
|
|
|
292
|
|
|
$
|
116.08
|
|
|
$
|
48,060
|
|
Exercised
|
|
|
(73
|
)
|
|
$
|
159.10
|
|
|
$
|
(12,015
|
)
|
Forfeited
|
|
|
(24
|
)
|
|
$
|
167.60
|
|
|
$
|
(3,950
|
)
|
Non-vested shares outstanding, September 30, 2016
|
|
|
388
|
|
|
$
|
138.22
|
|
|
$
|
63,861
|
|
As of September 30, 2016, there was $47.1
million of unrecognized compensation expense related to unvested RSUs and RSAs, which is expected to be recognized over a weighted
average period of 2.69 years.
The following table presents the historical
computation of basic and diluted net loss per share:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands, except per share amounts)
|
|
Historical net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(88,815
|
)
|
|
$
|
(50,895
|
)
|
|
$
|
(292,789
|
)
|
|
$
|
(138,175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in calculating net loss per share - basic and diluted
|
|
|
24,738
|
|
|
|
24,215
|
|
|
|
24,614
|
|
|
|
23,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(3.59
|
)
|
|
$
|
(2.10
|
)
|
|
$
|
(11.90
|
)
|
|
$
|
(5.89
|
)
|
The following potentially dilutive securities
have been excluded from the computations of diluted weighted average shares outstanding:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Options
|
|
|
1,594
|
|
|
|
1,203
|
|
|
|
1,594
|
|
|
|
1,203
|
|
Restricted stock units
|
|
|
388
|
|
|
|
25
|
|
|
|
388
|
|
|
|
25
|
|
Total
|
|
|
1,982
|
|
|
|
1,228
|
|
|
|
1,982
|
|
|
|
1,228
|
|
|
10.
|
Recent Accounting Pronouncements
.
|
In February 2016, the FASB issued ASU
2016-02,
Leases
(“ASU 2016-2”)
which supersedes Topic 840, Leases. ASU 2016-02 requires lessees
to recognize a right-of-use asset and a lease liability on their balance sheets for all the leases with terms greater than twelve
months. Based on certain criteria, leases will be classified as either financing or operating, with classification affecting the
pattern of expense recognition in the income statement. For leases with a term of twelve months or less, a lessee is permitted
to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee
makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term.
ASU 2016-2 is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early
adoption permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest
period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical
expedients primarily focused on leases that commenced before the effective date of Topic 842, including continuing to account
for leases that commence before the effective date in accordance with previous guidance, unless the lease is modified. The Company
is evaluating the impact of the adoption of the standard on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
Improvements
to Employee Share-Based Payment Accounting,
which is intended to improve the accounting for share-based payment transactions
as part of the FASB’s simplification initiative. The ASU changes certain aspects of the accounting for share-based payment
award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of
cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid
on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The ASU is effective for fiscal
years beginning after December 15, 2016, and interim periods within those years for public business entities. The Company is evaluating
the impact of the adoption of the standard on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue
from Contracts with Customers
("ASU 2014-09"). ASU 2014-09 supersedes the revenue recognition requirements
of FASB ASC Topic 605,
Revenue Recognition
and most industry-specific guidance throughout the ASC, resulting
in the creation of FASB ASC Topic 606,
Revenue from Contracts with Customers
. ASU 2014-09 requires entities to recognize
revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled to in exchange for those goods or services. This ASU provides alternative methods of
adoption. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers, Deferral of the Effective
Date
("ASU 2015-14"). ASU 2015-14 defers the effective date of ASU 2014-09 by one year to December 15, 2017
for fiscal years, and interim periods within those years, beginning after that date and permits early adoption of the standard,
but not before the original effective date for fiscal years beginning after December 15, 2016. In March 2016, the FASB issued
ASU 2016-08,
Revenue from Contracts with Customers, Principal versus Agent Considerations
(Reporting Revenue
Gross versus Net) ("ASU 2016-08") clarifying the implementation guidance on principal versus agent considerations. Specifically,
an entity is required to determine whether the nature of a promise is to provide the specified good or service itself (that is,
the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the
entity is an agent). The determination influences the timing and amount of revenue recognition. In April 2016, the FASB issued
ASU 2016-10,
Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing
, clarifying
the implementation guidance on identifying performance obligations and licensing. Specifically, the amendments reduce the cost
and complexity of identifying promised goods or services and improves the guidance for determining whether promises are separately
identifiable. The amendments also provide implementation guidance on determining whether an entity's promise to grant a license
provides a customer with either a right to use the entity's intellectual property (which is satisfied at a point in time) or a
right to access the entity's intellectual property (which is satisfied over time). The effective date and transition requirements
for ASU 2016-08 and ASU 2016-10 are the same as the effective date and transition requirements for ASU 2014-09. The Company is
currently assessing the potential impact of adopting ASU 2014-09, ASU 2016-08 and ASU 2016-10 on its financial statements and
related disclosures.
On February 21, 2014 and February 28, 2014,
purported shareholder class actions, styled
Scot H. Atwood v. Intercept Pharmaceuticals, Inc. et al.
and
George Burton
v. Intercept Pharmaceuticals, Inc. et al.
, respectively, were filed in the United States District Court for the Southern District
of New York, naming the Company and certain of its officers as defendants. These lawsuits were filed by stockholders who claim
to be suing on behalf of anyone who purchased or otherwise acquired the Company’s securities between January 9, 2014 and
January 10, 2014.
The lawsuits alleged that the Company made
material misrepresentations and/or omissions of material fact in its public disclosures during the period from January 9, 2014
to January 10, 2014, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5
promulgated thereunder. The alleged improper disclosures relate to the Company’s January 9, 2014 announcement that the FLINT
trial had been stopped early based on a pre-defined interim efficacy analysis. Specifically, the lawsuits claimed that the January
9, 2014 announcement was misleading because it did not contain information regarding certain lipid abnormalities seen in the FLINT
trial in OCA-treated patients compared to placebo.
On April 22, 2014, two individuals each moved
to consolidate the cases and a lead plaintiff was subsequently appointed by the Court. On June 27, 2014, the lead plaintiff filed
an amended complaint on behalf of the putative class as contemplated by the order of the Court. The lead plaintiff was seeking
unspecified monetary damages on behalf of the putative class and an award of costs and expenses, including attorneys’ fees.
On August 14, 2014, the defendants filed a motion to dismiss the complaint. Oral arguments on the motion to dismiss were held
on February 24, 2015. On March 4, 2015, the defendants’ motion to dismiss was denied by the Court. The defendants answered
the amended complaint on April 13, 2015. On July 15, 2015, the plaintiff moved for class certification and appointment of class
representatives and class counsel. On September 14, 2015, the defendants opposed the plaintiff’s class certification motion.
The plaintiff filed its reply to the defendants’ opposition on October 14, 2015, to which the defendants filed a sur-reply
on November 10, 2015. Oral arguments on the class certification motion were held on January 20, 2016.
On May 2, 2016, the defendants reached
an agreement with the lead plaintiff to seek Court approval of a proposed resolution. The plaintiffs moved for preliminary approval
of the proposed settlement on May 5, 2016. On May 23, 2016, the Court entered an order preliminarily approving the settlement.
The Court ordered that notice be provided to the class and preliminarily approved the proposed settlement, including the payment
of $55.0 million, of which $10.0 million was agreed to be funded by the Company’s insurers. The settlement was paid into
escrow in June 2016, with distribution to the class to occur after the Court had finally approved the settlement and the plan
of allocation of those proceeds. On September 8, 2016, the Court granted final approval of the settlement. The final judgment
and order of the Court included a dismissal of the action with prejudice against all defendants. The defendants do not admit any
liability as part of the settlement.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis
of our financial condition and results of operations should be read together with our unaudited financial statements and the notes
to those financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial
statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for
the year ended December 31, 2015 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission
on February 29, 2016. This discussion contains forward-looking statements that involve significant risks and uncertainties. As
a result of many factors, such as those set forth in Item 1.A. “Risk Factors” of our Annual Report on Form 10-K
and this Quarterly Report on Form 10-Q and any updates to those risk factors contained in our subsequent periodic and current
reports filed with the Securities and Exchange Commission, our actual results may differ materially from those anticipated in
these forward-looking statements.
Overview
We are a biopharmaceutical company focused
on the development and commercialization of novel therapeutics to treat non-viral, progressive liver diseases with high unmet
medical need utilizing our proprietary bile acid chemistry. Our marketed product and clinical product candidates have the potential
to treat orphan and more prevalent liver diseases for which, currently, there are limited therapeutic solutions.
Our lead product, obeticholic acid, or
OCA, is a bile acid analog, a chemical substance that has a structure based on a naturally occurring human bile acid that selectively
binds to and activates the farnesoid X receptor, or FXR. We believe OCA has broad liver protective properties and may effectively
counter a variety of chronic insults to the liver that cause fibrosis, or scarring, which can eventually lead to cirrhosis, liver
transplant and death.
OCA was approved in the United States in
May 2016 for use in patients with primary biliary cholangitis, or PBC, under the brand name Ocaliva
®
. We commenced
sales and marketing of Ocaliva shortly after receiving marketing approval in the United States, and Ocaliva is now available to
patients primarily through our specialty pharmacy distributors. In October 2016, the Committee for Medicinal Products for Human
Use, or CHMP, of the European Medicines Agency, or EMA, adopted a positive opinion recommending the conditional marketing authorization
of Ocaliva in PBC. Based on the CHMP’s positive recommendation, the final decision of the European Commission on the conditional
marketing authorization of Ocaliva in PBC is expected by the end of 2016. We have also filed for regulatory approval for OCA in
PBC in Canada and plan to file for marketing authorization in other target markets.
OCA is also being developed to treat a variety
of other non-viral progressive liver diseases such as nonalcoholic steatohepatitis, or NASH, primary sclerosing cholangitis, or
PSC, and biliary atresia. We are currently evaluating our future development strategy for OCA in other indications, for our product
candidate INT-767 and for our pre-clinical candidates.
OCA has been tested in five placebo-controlled
clinical trials, including a Phase 3 clinical trial in patients with PBC and two Phase 2 clinical trials in patients with NASH
or a precursor disease to NASH known as nonalcoholic fatty liver disease, or NAFLD. OCA met the primary efficacy endpoint in each
of these trials with statistical significance. In addition, in October 2015, we announced results from a Phase 2 dose ranging
trial of OCA in 200 patients with NASH in Japan conducted by our collaborator, Sumitomo Dainippon Pharma Co., Ltd., or Sumitomo
Dainippon. The results of this trial were mixed and are described in more detail in the “Business” section of our
Annual Report on Form 10-K for the period ended December 31, 2015. Sumitomo Dainippon has informed us that it is exploring the
initiation of its registrational trials for OCA in NASH patients intended to support the registration of this indication in Japan. OCA
has received orphan drug designation in the United States and the European Union for the treatment of PBC and PSC and breakthrough
therapy designation from the U.S. Food and Drug Administration, or FDA, for the treatment of NASH patients with liver fibrosis.
OCA achieved the primary endpoint in a Phase
2b clinical trial for the treatment of NASH, known as the FLINT trial, which was sponsored by the U.S. National Institute of Diabetes
and Digestive and Kidney Diseases, or NIDDK, a part of the National Institutes of Health. The FLINT trial was completed in late
July 2014. We have an ongoing Phase 3 clinical trial in non-cirrhotic NASH patients with liver fibrosis, known as the REGENERATE
trial. REGENERATE includes a pre-planned histology-based interim analysis after 72 weeks of treatment. We are targeting completion
of enrollment of the cohort of patients needed for this analysis in the first half of 2017, with results from the interim analysis
anticipated in 2019. However, based on our current projections for this trial, we will need to continue to increase our enrollment
rate to meet this timetable. We also have an ongoing Phase 2 clinical trial, known as the CONTROL trial, to characterize the lipid
metabolic effects of OCA and cholesterol management effects of concomitant statin administration in NASH patients. We completed
enrollment of the targeted number of patients for our CONTROL trial in October 2016 and expect top-line results in 2017. We continue
to work towards expanding our overall NASH development program with additional trials and studies.
In addition to PBC and NASH, we continue
to invest in research of OCA for additional patient populations with other liver diseases, including Phase 2 trials for PSC and
pediatric patients with biliary atresia, respectively. In September 2016, we completed enrollment of the targeted number of patients
in our Phase 2 AESOP trial in PSC. We expect top-line results from the AESOP trial in 2017. We also have an ongoing Phase 1 trial
in healthy volunteers for INT-767, a dual FXR and TGR5 agonist. We anticipate completing this Phase 1 trial for INT-767 by the
end of 2016. Following analysis of the results, we plan to evaluate next steps for INT-767 in 2017.
Our current patents for OCA are scheduled
to expire at various times through 2033. Our current plan is to commercialize OCA ourselves in the United States and Europe for
the treatment of PBC, NASH and other indications primarily by targeting physicians who specialize in the treatment of liver and
intestinal diseases, including both hepatologists and gastroenterologists. We own worldwide rights to OCA except for Japan, China
and Korea, where we have exclusively licensed OCA to Sumitomo Dainippon along with an option to exclusively license OCA in certain
other Asian countries. We own or have rights to various trademarks, copyrights and trade names used in our business, including
Ocaliva.
Our net loss for the three months ended
September 30, 2016 and 2015 was approximately $88.8 million and $50.9 million, respectively. Our net loss for the nine months
ended September 30, 2016 and 2015 was $292.8 million and $138.2 million, respectively. As of September 30, 2016, we had an accumulated
deficit of approximately $988.4 million. Substantially all our net losses resulted from costs incurred in connection with our
research and development programs and from selling, general and administrative costs associated with our operations.
We expect to continue to incur significant
expenses and increasing operating losses for at least the next several years. We anticipate that our expenses will increase as
we:
|
·
|
continue
to commercialize Ocaliva for PBC in the United States;
|
|
·
|
seek
regulatory approval for and prepare to commercially launch Ocaliva for PBC in other jurisdictions;
|
|
·
|
develop
and seek regulatory approval for OCA in NASH and other indications;
|
|
·
|
add
infrastructure and personnel in the United States and internationally to support our
product development and commercialization efforts; and
|
|
·
|
operate
as a public company.
|
We anticipate that we will need to raise
additional capital to commercialize OCA on a worldwide basis and continue our research and development activities in relation
to OCA and our other pipeline candidates. Until such time, if ever, as we can generate substantial revenue from product sales,
we expect to finance our operating activities through a combination of equity offerings, debt financings, government or other
third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements.
However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at
all. Our failure to raise additional capital or enter into such other arrangements as and when needed would have a negative impact
on our financial condition and our ability to develop our product candidates.
On July 6, 2016, we completed an underwritten
public offering of $460.0 million in aggregate principal amount of 3.25% convertible senior notes due 2023, or Convertible
Notes. After deducting the underwriting discount and estimated offering expenses of approximately $12.3 million, the net proceeds
from the Convertible Notes offering were approximately $447.7 million. We used approximately $38.4 million of the net proceeds
from the offering to fund the payment of the cost of the capped call transactions we entered into in connection with the issuance
of the Convertible Notes. We intend to use the remaining net proceeds from the offering together with our existing cash, cash
equivalents and short-term investments, to fund the ongoing commercialization of Ocaliva in PBC in the United States; our preparation
for and, subject to receipt of marketing approval, potential initiation of the commercial launch of Ocaliva in PBC in certain
European countries as well as certain other target markets across the world; the continued clinical development of OCA in PBC,
NASH and PSC; the advancement of our clinical program for INT-767; and continued advancement of other preclinical pipeline and
research and development programs. We also intend to use the balance of the net proceeds from the offering, if any, for general
corporate purposes, including selling, general and administrative expenses, capital expenditures, working capital and prosecution
and maintenance of our intellectual property.
Our principal executive offices are in New
York, New York. We also have administrative offices in San Diego, California and London, United Kingdom.
Financial Overview
Revenue
We commenced our commercial launch
of Ocaliva for use in PBC in the United States in June 2016. In the future, we expect to generate revenue primarily through product
sales for Ocaliva.
Revenue is recognized when the four basic
criteria of revenue recognition are met: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred or services
have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. When the revenue recognition
criteria are not met, we defer the recognition of revenue by recording deferred revenue until such time that all criteria are
met.
During the three and nine months ended September
30, 2016, we recognized net sales of Ocaliva of $4.7 million and $4.8 million, respectively. Cost of goods sold during each of
the three and nine months ended September 30, 2016 was only reflective of packaging and labeling costs incurred in the respective
period, which was de minimis. We expect cost of goods sold to remain negligible until previously expensed supplies of OCA are
sold. We also recorded $2.2 million in deferred revenues on our balance sheet, which represents product shipped to distributors,
but not sold through as of the end of September 30, 2016.
We also recognize revenue derived from our
collaborative agreements for the development and commercialization of certain of our product candidates. We have entered into
an exclusive licensing agreement with Sumitomo Dainippon for the development of OCA in Japan, China and Korea. Under the terms
of the agreement, we have received up-front payments of $16.0 million, including $1.0 million upon the exercise by Sumitomo Dainippon
of its option to add Korea to its licensed territories, and may be eligible to receive up to approximately $300.0 million in additional
payments for development, regulatory and commercial sales milestones for OCA in the licensed territories. As of September 30,
2016, we have achieved $6.3 million of the development and regulatory milestones.
For accounting purposes, the up-front payments
are recorded as deferred revenue and amortized over time and milestone payments are recognized once earned. We recognized $6.3
million and $2.3 million in license revenue for the nine months ended September 30, 2016 and 2015, respectively. For the nine
months ended September 30, 2016, $1.3 million resulted from the amortization of the up-front payments under the collaboration
agreement and $5.0 million resulted from the regulatory milestone achieved in the period. For the nine months ended September
30, 2015, $1.3 million resulted from the amortization of the up-front payments under the collaboration agreement and $1.0 million
resulted from the development milestone achieved in the period. We anticipate that we will recognize revenue of approximately
$1.8 million per year through 2020, for the amortization of the relevant up-front collaboration payments from Sumitomo Dainippon.
Research and Development Expenses
Since our inception, we have focused our
resources on our research and development activities, including conducting preclinical studies and clinical trials, manufacturing
development efforts and activities related to regulatory filings for our product candidates. We recognize research and development
expenses as they are incurred. Beginning in the third quarter of 2016, as a result of the regulatory approval of Ocaliva for the
treatment of PBC, we began to capitalize inventory costs associated with the manufacturing of OCA for commercial use. Our research
and development expenses consist primarily of direct costs, personnel costs and indirect costs such as the following:
Direct costs:
|
·
|
fees
paid to consultants and clinical research organizations, or CROs, including in connection
with our preclinical activities and clinical trials, and other related fees, such as
fees for investigator grants, patient screening, laboratory work, clinical trial database
management, clinical trial material management and statistical compilation and analysis;
|
|
·
|
costs
related to activities associated with acquiring and manufacturing OCA;
|
|
·
|
costs
associated with discovery and early stage research initiatives; and
|
|
·
|
costs
related to compliance with regulatory requirements.
|
Personnel costs:
|
·
|
salaries
and related benefit expenses for personnel in research and development functions; and
|
|
·
|
costs
related to stock-based compensation granted to personnel in research and development
functions.
|
Indirect costs:
|
·
|
rent
and other facilities-related costs;
|
|
·
|
product-related
legal costs; and
|
|
·
|
business
travel and meeting costs.
|
We anticipate that our research and development
expenses will be substantial for the foreseeable future as we continue the development of OCA for the treatment of PBC, NASH and
PSC and other indications and to further advance the development of our other product candidates, subject to the availability
of additional funding.
The table below summarizes our direct research
and development expenses by program for the periods indicated. We do not allocate personnel costs and indirect costs related to
our research and development function to specific product candidates. Those expenses are included in personnel costs and indirect
research and development expense in the table below.
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Direct research and development expense by program:
|
|
|
|
|
|
|
|
|
OCA
|
|
$
|
56,489
|
|
|
$
|
35,710
|
|
Research and discovery initiatives
|
|
|
3,026
|
|
|
|
5,161
|
|
INT-767
|
|
|
4,294
|
|
|
|
4,028
|
|
Total direct research and development expense
|
|
|
63,809
|
|
|
|
44,899
|
|
Personnel costs (1)
|
|
|
50,234
|
|
|
|
33,051
|
|
Indirect research and development expense
|
|
|
8,549
|
|
|
|
5,797
|
|
Total research and development expense
|
|
$
|
122,592
|
|
|
$
|
83,747
|
|
|
(1)
|
Personnel costs, include stock-based compensation expense associated with stock options, restricted
stock units, or RSUs, and restricted stock awards, or RSAs, granted to employees and non-employees of $12.9 million and $13.0
million for the nine months ended September 30, 2016 and 2015, respectively.
|
The successful development of our clinical
and preclinical product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs
of the efforts that will be necessary to complete the remainder of the development of any of our clinical or preclinical product
candidates. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:
|
·
|
the
scope, rate of progress and expense of our ongoing, as well as any additional, clinical
trials and other research and development activities;
|
|
·
|
future
clinical trial results; and
|
|
·
|
the
timing and receipt of any regulatory approvals.
|
A change in the outcome of any of these
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 another regulatory authority were to require us to
conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development
of a product candidate or if we experience significant delays in any of our clinical trials, we could be required to expend significant
additional financial resources and time on the completion of clinical development. We may also face delays in the regulatory review
process.
OCA
Prior to 2016, our research and development
efforts were primarily focused on the development of OCA for PBC as well as the preparation and work required for our New Drug
Application, or NDA, and Marketing Authorizing Application, or MAA, filings with the FDA and EMA and efforts incurred in working
on the regulatory review process. Although we received accelerated approval by the FDA for Ocaliva for the treatment of PBC in
May 2016 and a positive opinion of the CHMP recommending the conditional approval of Ocaliva in PBC in Europe, we are continuing
our Phase 4 COBALT clinical outcomes confirmatory trial and are undergoing our regulatory approval process in Europe and other
jurisdictions. We have also invested with third-party manufacturers for supply chain and product development of OCA to prepare
for the PBC commercial launch in certain European countries and the continuation of our clinical program in NASH, and are working
to secure additional manufacturers as part of our strategy to secure multiple approved suppliers of OCA in the future.
In addition, we are evaluating OCA in non-viral,
progressive liver diseases other than PBC, particularly NASH, PSC and biliary atresia. We have the following trials underway as
part of our OCA development program: our Phase 3 REGENERATE trial in non-cirrhotic NASH patients with liver fibrosis, the Phase
2 CONTROL trial to characterize the lipid metabolic effects of OCA and cholesterol management effects of concomitant statin administration
in NASH patients, the Phase 2 AESOP trial of OCA in patients with PSC and the Phase 2 CARE trial of OCA in patients with biliary
atresia. We continue to work towards expanding our overall NASH development program with additional trials and studies. As a result,
we expect that our expenditures in connection with our NASH, PSC and biliary atresia programs will be substantial in future periods.
INT-767 and INT-777
We intend to continue to develop INT-767
and INT-777 (a selective TGR5 agonist). We currently have an ongoing Phase 1 clinical trial of INT-767 in healthy volunteers that
was initiated in November 2015, which we anticipate completing by the end of 2016. We also intend to conduct additional preclinical
work on INT-777 to further characterize its therapeutic potential and to invest in product development in anticipation of further
clinical trials.
Other than OCA, our product development
programs are at early stages, and successful development of our future product candidates from these programs is highly uncertain
and may not result in approved products. Completion dates and completion costs can vary significantly for each future product
candidate and are difficult to predict. We anticipate to make determinations as to which programs to pursue and how much funding
to allocate to each program on an ongoing basis in response to our ability to maintain or enter into new strategic alliances with
respect to each program or potential product candidate, the scientific and clinical success of each future product candidate,
as well as ongoing assessments as to each future product candidate’s commercial potential. We will need to raise additional
capital and may seek additional strategic alliances in the future in order to advance our various programs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
consist primarily of salaries and related costs for employees in executive and operational functions, including sales and marketing,
finance, information technology, legal and human resources. Other significant selling, general and administrative expenses include
non-cash stock-based compensation expenses, expenses related to our Ocaliva commercialization activities and OCA pre-commercialization
activities, facilities costs, accounting and legal services, information technology and other expenses of operating as a public
company.
Our selling, general and administrative
expenses have increased and will continue to increase due to the commercialization of Ocaliva for PBC in the United States, the
potential commercialization of OCA in PBC internationally and development activities for OCA in indications other than PBC and
other product candidates. We further plan on expanding our operations both in the United States and Europe, which will increase
our selling, general and administration expenses. We believe that these activities will result in increased costs related to the
hiring of significant additional personnel, increased fees for outside consultants, lawyers and accountants, and the addition
of facilities. We have also incurred and will continue to incur increased costs to comply with corporate governance, internal
controls, compliance and similar requirements applicable to public companies with expanding operations and biopharmaceutical companies
seeking to commercialize product candidates.
Results of Operations
Comparison of the Three Months Ended September 30, 2016
and 2015
The following table summarizes our results
of operations for each of the three months ended September 30, 2016 and 2015, together with the changes in those items in dollars:
|
|
Three Months Ended September 30,
|
|
|
Dollar Change
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
(In thousands)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue, net
|
|
$
|
4,732
|
|
|
$
|
-
|
|
|
$
|
4,732
|
|
Licensing revenue
|
|
|
445
|
|
|
|
445
|
|
|
|
-
|
|
Total revenue
|
|
|
5,177
|
|
|
|
445
|
|
|
|
4,732
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
43,838
|
|
|
|
27,487
|
|
|
|
16,351
|
|
Selling, general and administrative
|
|
|
44,375
|
|
|
|
24,742
|
|
|
|
19,633
|
|
Total operating expenses
|
|
|
88,213
|
|
|
|
52,229
|
|
|
|
35,984
|
|
Operating loss
|
|
|
(83,036
|
)
|
|
|
(51,784
|
)
|
|
|
(31,252
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(7,065
|
)
|
|
|
-
|
|
|
|
(7,065
|
)
|
Other income, net
|
|
|
1,286
|
|
|
|
889
|
|
|
|
397
|
|
|
|
|
(5,779
|
)
|
|
|
889
|
|
|
|
(6,668
|
)
|
Net loss
|
|
$
|
(88,815
|
)
|
|
$
|
(50,895
|
)
|
|
$
|
(37,920
|
)
|
Revenues
Product revenue, net was $4.7 million and
$0 for the three months ended September 30, 2016 and 2015, respectively. We commenced our commercial launch in the United States
for Ocaliva in PBC in June 2016. For the three months ended September 30, 2016 and 2015, licensing revenue was $0.4 million, which
resulted from the amortization of the up-front payments under the collaboration agreement with Sumitomo Dainippon.
Research and Development Expenses
Research and development expenses were $43.8
million and $27.5 million for the three months ended September 30, 2016 and 2015, respectively, representing a net increase of
$16.3 million. This net increase in research and development expense primarily reflects:
|
·
|
net increase in OCA research and development activities
of approximately $7.5 million to support our clinical operations; and
|
|
·
|
additional personnel on our research and development team
to manage the increased activities around our OCA program and research and discovery initiatives, resulting in approximately $7.2
million of increased compensation-related costs and approximately $1.6 million of indirect costs.
|
Selling, General and Administrative Expenses
Selling, general and administrative expenses
were $44.4 million and $24.7 million in the three months ended September 30, 2016 and 2015, respectively. The $19.7 million net
increase primarily reflects:
|
·
|
additional
personnel-related costs of approximately $11.6 million to support our commercial and
international initiatives;
|
|
·
|
increased
expenses of approximately $8.1 million in market research, Ocaliva, commercialization
costs, and pre-launch activities.
|
Interest Expense
Interest expense was $7.1 million and $0
for the three months ended September 30, 2016 and 2015, respectively due to the issuance of our Convertible Notes in July 2016.
Other Income, Net
Other income, net was primarily attributable
to interest income earned on cash, cash equivalents and investment securities, which increased compared to the prior year period
as a result of increases in cash and investment balances primarily due to the net proceeds from the issuance of the Convertible
Notes.
Income Taxes
For the three months ended September 30,
2016 and 2015, no income tax expense or benefit was recognized. Our deferred tax assets are comprised primarily of net operating
loss carryforwards. We maintain a full valuation allowance on our deferred tax assets since we have not yet achieved sustained
profitable operations. As a result, we have not recorded any income tax benefit since our inception.
Comparison of the Nine Months Ended September 30, 2016
and 2015
The following table summarizes
our results of operations for each of the nine months ended September 30, 2016 and 2015, together with the changes in those items
in dollars:
|
|
Nine Months Ended September 30,
|
|
|
Dollar Change
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
(In thousands)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue, net
|
|
$
|
4,807
|
|
|
$
|
-
|
|
|
$
|
4,807
|
|
Licensing revenue
|
|
|
6,336
|
|
|
|
2,336
|
|
|
|
4,000
|
|
Total revenue
|
|
|
11,143
|
|
|
|
2,336
|
|
|
|
8,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
122,592
|
|
|
|
83,747
|
|
|
|
38,845
|
|
Selling, general and administrative
|
|
|
177,082
|
|
|
|
58,854
|
|
|
|
118,228
|
|
Total operating expenses
|
|
|
299,674
|
|
|
|
142,601
|
|
|
|
157,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(288,531
|
)
|
|
|
(140,265
|
)
|
|
|
(148,266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(7,065
|
)
|
|
|
-
|
|
|
|
(7,065
|
)
|
Other income, net
|
|
|
2,807
|
|
|
|
2,090
|
|
|
|
717
|
|
|
|
|
(4,258
|
)
|
|
|
2,090
|
|
|
|
(6,348
|
)
|
Net loss
|
|
$
|
(292,789
|
)
|
|
$
|
(138,175
|
)
|
|
$
|
(154,614
|
)
|
Licensing and Product Revenue
Product revenue, net was $4.8 million and
$0 for the nine months ended September 30, 2016 and 2015, respectively. We commenced our commercial launch of Ocaliva
in PBC in the United States in June 2016. Licensing revenue was $6.3 million and $2.3 million for the nine months ended September
30, 2016 and 2015, respectively. For the nine months ended September 30, 2016, $1.3 million resulted from the amortization of
the up-front payments under the collaboration agreement with Sumitomo Dainippon and $5.0 million resulted from a regulatory milestone
achieved in the period. For the nine months ended September 30, 2015, $1.3 million resulted from the amortization of the up-front
payments under the collaboration agreement with Sumitomo Dainippon and $1.0 million resulted from a development milestone achieved
in the period.
Research and Development Expenses
Research and development expenses were $122.6
million and $83.7 million for the nine months ended September 30, 2016 and 2015, respectively, representing a net increase of
$38.9 million. This net increase in research and development expense primarily reflects:
|
·
|
increased
expenses of approximately $18.6 million attributable to the expansion of OCA research
and development; and
|
|
·
|
additional
personnel on our research and development team to manage the increased activities around
our OCA program and research and discover initiatives, resulting in an increase of approximately
$17.2 million in compensation-related costs and approximately $2.6 million of indirect
costs.
|
Selling, General and Administrative Expenses
Selling, general and administrative expenses
were $177.1 million and $58.9 million in the nine months ended September 30, 2016 and 2015, respectively. The $118.2 million net
increase primarily reflects:
|
·
|
a
one-time expense of approximately $45.0 million attributable to the settlement of the
purported securities class action lawsuit, which reflects a settlement amount of $55.0
million of which $10.0 million was paid by our insurance carriers;
|
|
·
|
increased personnel-related costs of approximately $31.3 million to support our increased corporate initiatives and commercialization
activities;
|
|
·
|
increased expenses of approximately $21.4 million in market research and other pre-launch activities;
|
|
·
|
increased expenses of approximately $12.0 million for corporate initiatives to prepare for commercialization and to support
future growth; and
|
|
·
|
increased operating costs such as facilities and technology-related expenses of approximately $5.9 million.
|
Interest Expense
Interest expense was $7.1 million
and $0 for the nine months ended September 30, 2016 and 2015, respectively, due to the issuance of our Convertible Notes in July
2016.
Other Income, Net
Other income, net was primarily
attributable to interest income earned on cash, cash equivalents and investment securities, which increased compared to the prior
year period as a result of increases in cash and investment balances.
Income Taxes
For the nine months ended September
30, 2016 and 2015, no income tax expense or benefit was recognized. Our deferred tax assets are comprised primarily of net operating
loss carryforwards. We maintain a full valuation allowance on our deferred tax assets since we have not yet achieved sustained
profitable operations. As a result, we have not recorded any income tax benefit since our inception.
Liquidity and Capital Resources
Sources of Liquidity
As of September 30, 2016, we had an accumulated
deficit of $988.4 million. We anticipate that we will continue to incur losses for at least the next several years. We expect that
our research and development and selling, general and administrative expenses will continue to increase and, as a result, we will
need additional capital to fund our operations, which we may seek to obtain through a combination of equity offerings, debt financings,
government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances
and licensing arrangements.
We have funded our operations primarily
through the sale of common stock, preferred stock, convertible notes and warrants and payments received under our collaboration
agreements totaling approximately $1.4 billion (net of issuance costs of $46.0 million), including $29.7 million in net proceeds
from our Series C financing in August 2012, $78.7 million in net proceeds from our initial public offering in October 2012, $61.2
million in net proceeds from our follow-on public offering in June 2013, $183.5 million in net proceeds from a follow-on public
offering in April 2014, $191.6 million in net proceeds from a follow-on public offering in February 2015, $367.1 million in net
proceeds from the follow-on offering in April 2015, $447.7 million in net proceeds from the issuance of the Convertible Notes and
the receipt of $17.4 million in up-front payments and milestones under our licensing and collaboration agreements with Sumitomo
Dainippon and Servier. As of September 30, 2016, we had cash, cash equivalents and investment securities of $780.0 million.
We commenced our commercial launch of Ocaliva
for use in PBC in the United States in June 2016. In the future, we expect to generate revenue primarily through product sales
for Ocaliva.
Cash Flows
The following table sets forth the significant sources and uses
of cash for the periods set forth below:
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(252,979
|
)
|
|
$
|
(97,214
|
)
|
Investing activities
|
|
|
(86,309
|
)
|
|
|
(414,289
|
)
|
Financing activities
|
|
|
413,780
|
|
|
|
564,351
|
|
Operating Activities.
The increase
in our net cash used in operating activities of approximately $155.8 million during the nine months ended September 30, 2016 as
compared to the same period last year was primarily a result of increased activities in our business requiring more capital. Net
cash used in operating activities of $253.0 million during the nine months ended September 30, 2016 was primarily a result of our
$292.8 million net loss, offset by the add-back of non-cash items of $36.3 million and a net increase in operating assets and liabilities
of $3.5 million. Net cash used in operating activities of $97.2 million during the nine months ended September 30, 2015 was primarily
a result of our $138.2 million net loss, offset by the add-back of non-cash items of $27.6 million and a net increase in operating
assets and liabilities of $13.4 million.
Investing Activities
. Net
cash used in investing activities for the nine months ended September 30, 2016 was $86.3 million as compared to net cash used in
investing activities for the nine months ended September 30, 2015 of $414.3 million. This net decrease in cash used in investing
activities of approximately $328.0 million is primarily attributed to an increase in sales of investment securities and a decrease
in investment purchases.
Financing Activities
. Net cash provided
by financing activities for the nine months ended September 30, 2016 were $413.8 million compared to $564.4 million for the comparable
period in 2015. This net decrease in cash provided by financing activities of approximately $150.6 million was primarily the result
of more net funds received through the completion of the February 2015 and April 2015 offerings in the nine months ended September
30, 2015 as compared to the proceeds received through the Convertible Notes issued during the nine months ended September 30, 2016,
partially offset by the payments for the capped call transaction as described below.
Convertible Senior Notes and Capped Call Transactions
On July 6, 2016, we completed an underwritten
public offering of $460.0 million in aggregate principal amount of 3.25% convertible senior notes due 2023 or the Convertible
Notes. After deducting the underwriting discounts and estimated offering expenses of approximately $12.3 million, the net proceeds
from the Convertible Notes offering were approximately $447.7 million. In connection with the offering, we entered into an indenture,
as supplemented by the First Supplemental Indenture relating to the Convertible Notes, or collectively the Indenture, with U.S.
Bank National Association, a national banking association, as trustee governing the Convertible Notes. The Convertible Notes bear
interest at a rate of 3.25% per annum, payable semi-annually on January 1 and July 1 of each year, beginning on January 1, 2017.
The Convertible Notes mature on July 1, 2023, unless earlier repurchased, redeemed or converted. Holders may convert the Convertible
Notes at their option at any time prior to the close of business on the business day immediately preceding January 1, 2023 only
under the following circumstances: (1) during any calendar quarter (and only during such calendar quarter) commencing after the
calendar quarter ending on September 30, 2016, if the last reported sale price of our common stock for at least 20 trading days
(whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding
calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business
day period after any five consecutive trading day period, or the measurement period, in which the trading price (as defined in
the Indenture) per $1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than 98%
of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (3) if we
call any or all of the Convertible Notes for redemption, at any time prior to the close of business on the scheduled trading day
immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On or after January 1, 2023
until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their
Convertible Notes at any time, regardless of the foregoing circumstances. Upon conversion, we will pay or deliver, as the case
may be, cash, shares of our common stock (and cash in lieu of any fractional shares) or a combination of cash and shares of our
common stock, at our election. The conversion rate will initially be 5.0358 shares of our common stock per $1,000 principal amount
of Convertible Notes (equivalent to an initial conversion price of approximately $198.58 per share of common stock). The conversion
rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following
certain corporate events that occur prior to the maturity date, we will increase the conversion rate for a holder who elects to
convert its Convertible Notes in connection with such a corporate event in certain circumstances.
We may not redeem the Convertible Notes
prior to July 6, 2021. We may redeem for cash all or any portion of the Convertible Notes, at our option, on or after July 6, 2021,
if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least
20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such
period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a
redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest
to, but excluding, the redemption date. No sinking fund is provided for the Convertible Notes.
If we undergo a fundamental change, holders
may require us to repurchase for cash all or any portion of their convertible notes at a fundamental change repurchase price equal
to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding,
the fundamental change repurchase date.
The Convertible Notes are our senior unsecured
obligations and rank senior in right of payment to our future indebtedness that is expressly subordinated in right of payment to
the Convertible Notes; equal in right of payment to our future unsecured indebtedness that is not so subordinated; effectively
junior in right of payment to our future secured indebtedness to the extent of the value of the assets securing such indebtedness;
and structurally subordinated to all existing and future indebtedness and other liabilities (including trade payables) incurred
by our subsidiaries.
The Indenture contains customary events
of default with respect to the Convertible Notes, including that upon certain events of default occurring and continuing, the trustee
by notice to us, or the holders of at least 25% in principal amount of the outstanding Convertible Notes by notice to us, may (subject
to the provisions of the Indenture) declare 100% of the principal of and accrued and unpaid interest, if any, on all the Convertible
Notes to be due and payable. In case of certain events of bankruptcy, insolvency or reorganization involving us or a significant
subsidiary, 100% of the principal of and accrued and unpaid interest on the Convertible Notes will automatically become due and
payable. Upon such a declaration of acceleration, such principal and accrued and unpaid interest, if any, will be due and payable
immediately.
In connection with the pricing of the Convertible
Notes, we entered into privately-negotiated capped call transactions with Royal Bank of Canada, or RBC, UBS AG, London Branch,
or UBS, and Credit Suisse Capital LLC, or Credit Suisse. The aggregate cost of the capped call transactions entered into in connection
with the pricing of the notes was approximately $33.4 million. We and RBC, UBS and Credit Suisse entered into additional capped
call transactions on July 1, 2016 in connection with the underwriters’ exercise of their over-allotment option in full at
an aggregate cost of approximately $5.0 million. The capped call transactions are generally expected to reduce the potential dilution
upon conversion of the Convertible Notes in the event that the market price per share of our common stock, as measured under the
terms of the capped call transactions, is greater than the strike price of the capped call transactions, which initially corresponds
to the conversion price of the Convertible Notes, and is subject to anti-dilution adjustments generally similar to those applicable
to the conversion rate of the Convertible Notes. The cap price of the capped call transactions will initially be $262.27 per share,
and is subject to certain adjustments under the terms of the capped call transactions. If, however, the market price per share
of our common stock, as measured under the terms of the capped call transactions, exceeds the cap price of the capped call transactions,
there would nevertheless be dilution upon conversion of the Convertible Notes to the extent that such market price exceeds the
cap price of the capped call transactions.
Future Funding Requirements
To date, we have not generated significant
product sales revenues. While we have commenced our commercial launch of Ocaliva for use in PBC in the United States in June 2016,
we cannot predict the period, if any, in which material net cash inflows from sales of OCA or our other product candidates may
commence. We expect our expenses to increase in connection with our ongoing development activities, particularly as we continue
the research, development and clinical trials of, and seek regulatory approval for, our product candidates.
We have incurred and expect to incur additional
costs associated with our plans to further expand our operations in the United States, Europe and in certain other countries. In
addition, subject to obtaining regulatory approval of any of our product candidates, we expect to incur significant commercialization
expenses for product sales, marketing, manufacturing and distribution. As part of our longer term strategy, we also anticipate
incurring significant expenses in connection with our planned increase in our product development, scientific, commercial and administrative
personnel and expansion of our infrastructure and abroad. We anticipate that we will need substantial additional funding in connection
with our continuing operations.
As of September 30, 2016, we had $780.0
million in cash, cash equivalents and investment securities. We currently project adjusted operating expenses of $320.0 million
to $340.0 million for the fiscal year ending December 31, 2016, excluding the $45.0 million net expense for the settlement of the
purported securities class action lawsuit, stock-based compensation and other non-cash items. We previously projected adjusted
operating expenses in the lower end of the range of $360.0 million to $400.0 million for the fiscal year ending December 31, 2016.
The decrease from our previous projection is due to lower than expected clinical trial costs and lower expenses due to the delayed
timing in raw material purchases to manufacture of OCA for research and development purposes. Adjusted operating expenses are planned
to support the continued clinical development program of OCA for PBC, NASH and PSC, increased OCA manufacturing activities for
research and development purposes, the continued development of INT-767 and other preclinical pipeline programs, as well as pre-commercialization
and commercialization activities.
Adjusted operating expense is a financial
measure not calculated in accordance with U.S. generally accepted accounting principles, or GAAP. Other than the $45.0 million
net expense for the class action lawsuit settlement, which is a one-time expense, we anticipate that stock-based compensation expense
will represent the most significant non-cash item that is excluded in adjusted operating expenses as compared to operating expenses
under GAAP. See “Non-GAAP Financial Measures” for more information.
Due to the many variables inherent to the
development and commercialization of novel therapies and our rapid growth and expansion, we currently cannot accurately and precisely
predict the duration beyond mid-2018 over which we expect our cash and cash equivalents to be sufficient to fund our operating
expenses and capital expenditure requirements. However, we currently believe that our cash and cash equivalents will be sufficient
for us to:
|
·
|
continue the initial commercialization of Ocaliva for PBC in the United States;
|
|
·
|
prepare for and, if we obtain marketing approval on a timely basis, initiate the commercial launch of Ocaliva in PBC in certain
European countries as well as certain other target markets across the world, but not commercially launch Ocaliva in PBC in other
countries across the world;
|
|
·
|
continue and expand our clinical development programs for OCA in PBC, NASH and PSC, such as continuing, but not completing,
our planned Phase 3 clinical program for OCA in NASH, including the REGENERATE trial, a potential Phase 3 program for OCA in PSC,
and our confirmatory clinical outcomes trials of OCA in PBC including COBALT; and
|
|
·
|
advance the continued development of INT-767, including the completion of the ongoing Phase 1 clinical trial, and our preclinical
compounds, but not completing the clinical or preclinical development needed to obtain regulatory approval, for and commercialize
INT-767 or our preclinical compounds.
|
Accordingly, we will continue to require
substantial additional capital in connection with our continuing operations, including continuing our commercialization plans and
our research and development activities and building our global infrastructure to support these activities.
The amount and timing of our future requirements
will depend on many factors including:
|
·
|
the rate of progress and cost of our continued commercialization activities for Ocaliva in PBC in the United States;
|
|
·
|
the receipt of the final decision of the European Commission on the conditional marketing authorization of Ocaliva in PBC in
the European Union based on the positive recommendation of the CHMP;
|
|
·
|
the degree of effort and time needed to prepare for and initiate the commercial launches of Ocaliva in PBC outside of the United
States if we receive marketing authorization;
|
|
·
|
the progress, costs, results of and timing of our clinical development programs for OCA in PBC, NASH and other indications,
such as the sufficiency of the REGENERATE trial to be accepted as the sole pivotal trial for marketing approval or the acceptability
of a surrogate endpoint for accelerated approval of OCA for the treatment of NASH and the post-marketing trials such as COBALT
that we are required to conduct as a condition to our marketing authorizations for Ocaliva in PBC;
|
|
·
|
the outcome, costs and timing of seeking and obtaining FDA, EMA and any other regulatory approvals;
|
|
·
|
the expansion of our research and development activities and the product candidates that we pursue, including INT-767 which
is in a Phase 1 trial in healthy volunteers, and our product candidates in preclinical development such as INT-777;
|
|
·
|
the significant expansion of our operations, personnel and the size of our company and our need to continue to expand in the
longer term;
|
|
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the costs associated with securing and establishing manufacturing capabilities and procuring the materials necessary for our
product candidates;
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market acceptance of our product candidates, which may be affected by the reimbursement that our products receive from payors;
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the costs of acquiring, licensing or investing in businesses, products, product candidates and technologies;
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our ability to maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing
of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense
and enforcement of any patents or other intellectual property rights;
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the effect of competing technological and market developments; and
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other cash needs that may arise as we continue to operate our business.
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We have no committed external sources of
funding. Until such time, if ever, as we can generate substantial revenue from product sales, we expect to finance our cash needs
through a combination of equity offerings, debt financings, government or other third-party funding, marketing and distribution
arrangements and other collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital
through the sale of equity or convertible debt securities, the ownership interests of our common stockholders will be diluted,
and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders.
Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through
government or other third-party funding, marketing and distribution arrangements or other collaborations, strategic alliances or
licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams,
research programs or product candidates or to grant licenses on terms that may not be favorable to us.
Contractual Obligations and Commitments
Other than as described below, there have
been no material changes to our contractual obligations and commitments outside the ordinary course of business from those disclosed
under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Contractual
Obligations and Commitments” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February
29, 2016.
On July 6, 2016, we completed an underwritten
public offering of $460.0 million in aggregate principal amount of 3.25% convertible senior notes due 2023. In connection
with the pricing of the Convertible Notes, we entered into privately-negotiated capped call transactions with RBC, UBS and Credit
Suisse. See “—Liquidity and Capital Resources—Convertible Senior Notes and Capped Call Transactions” above.
On July 19, 2016, we entered into an amendment
to our lease agreement with Irvine Eastgate Office II LLC for additional office space in San Diego, California. The amendment provides
us with an additional 11,177 square feet of space. The lease term is anticipated to end in September 2019. The rent for the first
year will be approximately $254,832 and will gradually increase every twelve months throughout the lease term for the additional
space. We will be responsible for a portion of the insurance, certain service charges and taxes for the building based on the floor
area rented by us. The landlord provided us with an allowance of approximately $22,354 for improvements to the office space. Pursuant
to the terms of the amendment, we provided the landlord with an additional letter of credit for $26,679.
On August 12, 2016, Intercept Pharma Europe
Ltd., or IPEL, our wholly-owned subsidiary, and PharmaZell GMBH, or PharmaZell, entered into a commercial manufacturing and supply
agreement. Pursuant to the agreement, PharmaZell has agreed to manufacture and supply to IPEL and IPEL has agreed to purchase from
PharmaZell a certain percentage of IPEL’s commercial requirements of active pharmaceutical ingredient, or API, for use in
Ocaliva. In addition, subject to certain regulatory events, IPEL has agreed to purchase a specified minimum quantity of API for
delivery in 2017 and 2018. Subject to IPEL’s purchase obligations, IPEL has the right to enter into arrangements with one
or more alternate sources for the commercial supply of API. The agreement provides for pricing for API structured on a tiered basis,
with the price reduced as the volume of API ordered increases. The agreement has an initial term that runs from until December
31, 2020, and is subject to two-year automatic renewal terms, unless either party provides notice of non-renewal at least 12 months
prior to the end of the initial term or then-current renewal term. IPEL may terminate the agreement immediately with written notice
upon the occurrence of certain regulatory events, or PharmaZell’s failure to meet certain quality standards, applicable laws
or specified delivery obligations. Each party also has the right to terminate the agreement immediately upon written notice for
other customary reasons such as material breach and bankruptcy. The agreement contains provisions relating to compliance by
PharmaZell with current Good Manufacturing Practices and applicable laws, indemnification, confidentiality, intellectual property,
dispute resolution and other customary matters for an agreement of this kind. Certain provisions of the agreement are subject to
a quality agreement previously entered into by the parties. We have agreed to guarantee IPEL’s financial obligations under
the agreement.
Off-Balance Sheet Arrangements
As of September 30, 2016, we did not have
any off-balance sheet arrangements as defined under the rules of the Securities and Exchange Commission.