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 financial statements and related notes appearing elsewhere in this Quarterly
Report on Form 10-Q.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains
“forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize
or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements.
The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities
Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are often identified by the use of words such
as, but not limited to, “can,” “may,” “will,” “should,” “could,” “would,”
“expects,” “plans,” “continues,” “anticipates,” “intends,” “seeks,”
“targets,” “believes,” “estimates,” “projects,” “predicts,” “potential”
and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs
and assumptions of our management based on information currently available to them. Such forward-looking statements are subject
to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ
materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” in Part I,
Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016, and any updates to those risk factors included
in Part II, Item 1A of this Quarterly Report on Form 10-Q. Furthermore, such forward-looking statements speak only as of the date
of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events
or circumstances after the date of such statements.
Overview
We are a clinical stage biopharmaceutical company
with an emphasis on identifying the genetic drivers of disease and applying this understanding to the pursuit of differentiated
novel therapies for pediatric onset, life-altering diseases, including rare and orphan diseases. We look to find treatments for
genetically defined diseases for which there are limited therapeutic options currently available, with a primary focus on pediatric
patients. This strategy begins with identifying and genetically validating a therapeutic target and using genomic medicine to guide
product development. The strategy also involves identifying and acquiring otherwise abandoned or overlooked drug candidates and
matching targets and mechanisms of action to novel genetic discoveries.
We have partnered with the Center for Applied
Genomics, or CAG, at The Children’s Hospital of Philadelphia, or CHOP, to implement a genomic medicine driven approach to
drug development. CAG’s assets include a fully automated biorepository containing specimens from more than 75,000 pediatric
patients and 150,000 relatives of those patients. The sample is highly enriched for rare and orphan diseases and the large majority
of patients have been genotyped. Their phenotypes are recorded in a modern electronic health record that is linked to the genomics
database. The patients in the database have consented to anonymized use of their data for research and follow up contact if needed.
CAG continues to discover important and novel
genetic biomarkers by both genome-wide association studies and exome sequencing and analysis of affected individuals and their
family members. Such markers not only identify patients with the disease but frequently point to the cause of the disease and suggest
targets and feasible intervention strategies that include protein or peptide therapy, monoclonal antibodies, drugs or gene therapy.
By working initially in pediatric populations of specific diseases, we can minimize the confounding environmental factors seen
in older patients. In addition, the availability of robust genetic biomarkers allows us to design trials that focus on a highly-enriched
patient population that is more likely to respond to targeted therapies and further enhance the likelihood of clinical and regulatory
success. We believe this will allow us to implement more efficient and shorter clinical development programs, that will lead to
higher value medicines that can address critical needs in patients suffering from rare and orphan diseases.
AEVI-001 (mGluR+ ADHD and 22q Deletion Syndrome)
Our lead program, AEVI-001, is an oral, non-stimulant
glutamatergic neuromodulator which completed a Phase 2/3 trial (SAGA) in adolescent Attention Deficit Hyperactivity Disorder, ADHD,
patients with specific mutations in their mGluR gene network, which we refer to as mGluR+ ADHD, in the first quarter of 2017. Although
AEVI-001 did not meet the primary endpoint of reduction on the ADHD rating scale (ADHD-RS) compared to placebo, the drug did demonstrate
statistically significant and clinically meaningful improvement compared to placebo in a pre-specified responder analysis of ADHD-RS
improvement of 30% or more [ADHD-RS reduction of 17.6, p < .005]. In a second pre-specified responder analysis of Clinical Global
Impression of Improvement scale (CGI-I), a key secondary endpoint, AEVI-001 demonstrated a statistically significant and clinically
meaningful improvement compared to placebo [57% of patients treated with AEVI-001 achieved a score of much improved or very much
improved compared to 33% on placebo, p=0.0155]. Additionally, the safety analysis demonstrated that AEVI-001 was tolerated all
doses, and the majority of adverse events were generally mild to moderate in severity. There were no serious adverse events.
Subsequent analysis of responder data from
a subset of gnomically identified patients in the SAGA trial have since identified nine genes that are predictive of clinically
meaningful and statistically significant response on the ADHD-RS scale. These genes include certain glutamate metabotropic receptors
and neurodevelopmental genes that are found in approximately 10% of pediatric ADHD patients. We intend to initiate a Phase 2 study
in this nine gene subpopulation (mGluR+ Genetic Subset) in ADHD in the second half of 2017 following discussion with the FDA.
One of the neurodevelopmental genes, contactin-4
(CNTN4), previously identified as being important in Autism Spectrum Disorder (ASD), was highly enriched in the responder population
(43%) and represents approximately 5% of pediatric ADHD patients. The CNTN4 mutation phenotype is relatively severe, with an increased
prevalence of emotional dysregulation, which includes issues related to anger control, risk taking, and inappropriate movements
and sounds. All CNTN4 mutation positive patients on treatment (n=6) had clinically meaningful and statistically significant response
to therapy with AEVI-001 [ADHD-RS reduction of 20.8, p=0.03].
Importantly, these results clarify a path forward
for the continued development of AEVI-001 in ADHD, as well as in other potential neurodevelopmental disorders, including but not
limited to ASD and Pediatric Generalized Anxiety Disorder.
We are completing work on a signal-finding
trial for the treatment of the psychiatric symptoms of 22q Deletion Syndrome (22q DS), with initial data from that study expected
by mid-year 2017. Enrolling patients into the signal-finding study has been challenging, and expect we may only have two patients
enrolled by the time the study is ended. 22q DS is an orphan, severe autism spectrum disorder with significant co-morbidities.
The disease has a prevalence of between 1:2000-1:4000, roughly equivalent with the more recognized Down’s Syndrome.
AEVI-002 (Anti-LIGHT Monoclonal Antibody)
The second program arising out of our genomic
research collaboration with CHOP is the development candidate AEVI-002, a first-in-class anti-LIGHT monoclonal antibody, or the
Antibody, being developed for use in Severe Pediatric Onset Crohn’s disease which has a more aggressive phenotype at younger
ages. The genomic rationale for the use of anti-LIGHT antibody in Crohn’s disease was validated by CAG research showing
the association to a loss of function mutation in decoy receptor 3 (DcR3). The estimated prevalence of the mutation is estimated
at 10-15% of pediatric onset Crohn’s disease cases. An 8-week Phase Ib proof-of-concept study at CHOP will enroll up to
12 patients with the DcR3 mutation and a pediatric onset Crohn’s disease diagnosis, with most subjects being refractory
to treatment with TNF-α inhibitors. The endpoints of the trial will include endoscopic evaluation, Crohn’s Disease
Activity Index ratings and safety.
In June 2016, we entered into a Clinical Development
and Option Agreement, or the Development and Option Agreement, with Kyowa Hakko Kirin Co., Ltd., or KHK, pursuant to which we acquired
certain rights with respect to the development and potential commercialization of the Antibody. Under the Development and Option
Agreement, we received an exclusive option for exclusive rights to develop products containing the Antibody, or an Antibody Licensed
Product, exclusive rights to commercialize Antibody Licensed Product in various countries and to conduct various development activities
with respect to the Antibody Licensed Product, including the conduct of the Study. The terms of the Development and Option Agreement
with KHK are more fully described under the section entitled “Licenses” in Part I, Item 1 of our Annual Report on Form
10-K for the year ended December 31, 2016.
We intend to initiate the signal-finding study
in patients with Severe Pediatric Onset Crohn’s disease, or the Study, in the second quarter of 2017, with initial data expected
in the second half of 2017 at which point we will make a determination on our option
to license exclusive rights to the Antibody for further development.
Financial Operations Overview
We have generated significant losses to date,
and we expect to continue to generate losses as we progress towards the commercialization of our product candidates. We incurred
net losses of approximately $10.92 million for the three month period ended March 31, 2017. As of March 31, 2017, we had stockholders’
equity of approximately $25.08 million. As of March 31, 2017, we had cash and cash equivalents of $29.20 million, which we believe
will provide funding for our operations through the second quarter of 2018. We are unable to predict the extent of any
future losses or when we will become profitable, if at all.
Research and Development Expense
Research and development expense consists of:
(i) internal costs associated with our development activities; (ii) payments we make to third party contract research organizations,
contract manufacturers, clinical trial sites and consultants; (iii) technology and intellectual property license costs; (iv) manufacturing
development costs; (v) personnel related expenses, including salaries, and other related costs, including stock-based compensation
expense, for the personnel involved in product development; (vi) activities related to regulatory filings and the advancement of
our product candidates through preclinical studies and clinical trials; and (vii) facilities and other allocated expenses, which
include direct and allocated expenses for rent, facility maintenance, as well as laboratory and other supplies. All research and
development costs are expensed as incurred.
Conducting a significant amount of development
is central to our business model. Product candidates in later-stage clinical development generally have higher development costs
than those in earlier stages of development, primarily due to the significantly increased size and duration of the clinical trials.
Research and development expenses will likely increase as we advance the development of AEVI-001 and AEVI-002 and look to advance
our earlier-stage research and development projects.
The process of conducting pre-clinical studies
and clinical trials necessary to obtain regulatory approval is costly and time consuming. The probability of success for each product
candidate and clinical trial may be affected by a variety of factors, including, among others, the quality of the product candidate’s
early clinical data, investment in the program, competition, manufacturing capabilities and commercial viability. As a result of
these uncertainties, together with the uncertainty associated with clinical trial enrollments and the risks inherent in the development
process, we are unable to determine the duration and completion costs of current or future clinical stages of our product candidates
or when, or to what extent, we will generate revenues from the commercialization and sale of any of our product candidates. Development
timelines, probability of success and development costs vary widely. We are concurrently focusing on the development and potential
commercialization of AEVI-002 under the Development and Option Agreement with KHK, advancing the development of AEVI-001 and advancing
our earlier-stage research and development projects.
Research and development expenses are shown
net of participation by third parties.
General and Administrative Expense
General and administrative expense consists
primarily of salaries and other related costs, including stock-based compensation expense, for persons serving as our directors
and in our executive, finance and accounting functions. Other general and administrative expense includes facility-related costs
not otherwise included in research and development expense, costs associated with industry and trade shows, and professional fees
for legal services and accounting services.
Results of Operations for the Three Months Ended March 31,
2017 and 2016
Research and Development Expenses
Research and development expenses for the three
months ended March 31, 2017 were $7.95 million increasing from $6.95 million for the same period in 2016 mainly due to increased
cost associated with the clinical advancement of AEVI-001 and AEVI-002.
General and Administrative Expenses
General and administrative expenses for the
three months ended March 31, 2017 were $2.99 million, decreasing from $4.19 million for the same period in 2016 primarily due to
severance benefits recorded in 2016 related to the termination of an officer of the Company.
Financial Income and Expenses
Financial income and expense for the three months
ended March 31, 2017 and 2016 were de minimis.
Liquidity and Capital Resources
Sources of Liquidity
We have financed our operations primarily through
issuance of equity.
Cash Flows
We had cash and cash equivalents of $29.20 million
at March 31, 2017 and $39.84 million at December 31, 2016. The decrease in our cash balance during the three months ended March
31, 2017 was primarily related to advancement of our AEVI-001 program.
Net cash used in operating activities of $10.65
million for the three months ended March 31, 2017 and $9.11 million for the three months ended March 31, 2016 primarily reflected
our cash expenses for our operations.
Net cash used in investing activities for the
three months ended March 31, 2016 relates to our purchases of property and equipment.
Net cash provided by financing activities for
the three months ended March 31, 2017 relates to the exercise of options.
Funding Requirements
Our future capital requirements will depend
on a number of factors, including our success in targeting rare and orphan disease candidates, the timing and outcome of clinical
trials and regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing patent
claims and other intellectual property rights, the acquisition of licenses to new products or compounds, the status of competitive
products, the availability of financing, and our success in developing markets for our product candidates.
Without taking into account any revenue we
may receive as a result of licensing or other commercialization agreements we may enter into, we believe that cash on hand will
be sufficient to enable us to fund our operating expenses and capital expenditure requirements through the second quarter
of 2018. We have based this estimate on assumptions that may prove to be wrong, and we could use our available resources
sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development
and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and
operating expenditures associated with our current and anticipated clinical trials.
We do not anticipate that we will
generate revenue from the sale of products for several years or more given the uncertainty of drug development. In the
absence of additional funding or adequate funding from licensing or commercialization agreements, we expect our continuing
operating losses to result in decreases in our cash balances. Absent significant corporate collaboration and licensing
arrangements, we will need to finance our future cash needs through public or private equity offerings or debt financings. We
do not currently have any commitments for future external funding. We may need to raise additional funds more quickly if one
or more of our assumptions prove to be incorrect or if we choose to expand our product development efforts more rapidly than
we presently anticipate, and we may decide to raise additional funds even before we need them if the conditions for raising
capital are favorable. We may seek to encourage holders of our warrants to exercise, sell additional equity or debt
securities or obtain a bank credit facility. The sale of additional equity or debt securities, if convertible, could result
in dilution to our stockholders. The incurrence of indebtedness would result in increased fixed obligations and could also
result in covenants that would restrict our operations.
Our plans include seeking additional investments
and commercial agreements to continue our operations. However, there is no assurance that we will be successful in our efforts
to raise the necessary capital and/or reach such commercial agreements to continue our planned research and development activities.
Critical Accounting Policies
Our management’s discussion and analysis
of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate
these estimates and judgments, including those described below. We base our estimates on our historical experience and on various
other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results
and experiences may differ materially from these estimates.
While our significant accounting policies are
more fully described in Note 2 to our financial statements included elsewhere in this Quarterly Report on Form 10-Q, we believe
that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial
results and affect the more significant judgments and estimates that we use in the preparation of our financial statements.
Stock-Based Compensation
We account for stock options granted to employees
and directors according to the Accounting Standards Codification No. 718 (ASC 718) “Compensation – Stock Compensation.”
Under ASC 718, stock-based compensation cost is measured at grant date, based on the estimated fair value of the award, and is
recognized as an expense over the requisite service period on a straight-line basis.
For the purpose of valuing options granted to
our employees and directors during the three months ended March 31, 2017 and 2016, we used the Binomial options pricing model.
To determine the risk-free interest rate, we utilized the U.S. Treasury yield curve in effect at the time of grant with a term
consistent with the contractual life of our awards. We estimated the expected life of the options granted based on anticipated
exercises in the future periods assuming the success of our business model as currently forecast. The expected dividend yield reflects
our current and expected future policy for dividends on our common stock. The expected stock price volatility for our stock options
was calculated by examining historical volatilities for publicly traded industry peers as we do not have sufficient trading history
for our common stock. We will continue to analyze the expected stock price volatility and expected life assumptions as more historical
data for our common stock becomes available. After adoption of ASU 2016-09 in the first quarter of 2017, we recognize forfeitures
as they occur.
Off-Balance Sheet Arrangements
There have been no material changes to the discussion
of off-balance sheet arrangements included in our Annual Report on Form 10-K for the year ended December 31, 2016.