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, 2015, 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 genomic medicine. The National Human Genome Research Institute of the National Institute of Health
defines “genomic medicine” as “an emerging medical discipline that involves using genomic information about an
individual as part of their clinical care (e.g., for diagnostic or therapeutic decision-making) and the health outcomes and policy
implications of that clinical use.” Genomic medicine is currently being studied in the fields of oncology, pharmacology,
rare and undiagnosed diseases, autoimmune disorders and infectious disease.
We have partnered with the Center for Applied
Genomics, or CAG, at The Children’s Hospital of Philadelphia, or CHOP, to implement a genomics-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 of their relatives. 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 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, confounding environmental factors seen in
older patients are minimized.
Our therapeutic strategy is to work closely
with our collaborators at CAG to identify populations of need with well-characterized, novel, genetically-defined targets. We then
designate an actionable therapeutic development approach based upon the target, the biology and human pathophysiology, and the
clinical and regulatory pathways. The collaboration affords us with unique and proprietary insight into these diseases and allows
us to better select therapeutic approaches, including the appropriateness of applying our TARGT
TM
gene therapy technology.
This, in turn, allows us to rapidly identify appropriate potential therapeutics that have already been tested in patients but were
not advanced due to either lack of efficacy in a different patient population or for strategic reasons. We believe there are hundreds
of such therapeutics potentially available for development. Many of these have remaining composition of matter patent life and
many would be eligible for regulatory exclusivity based on first registration (up to 12 years for biologics), as well as orphan
drug and additional pediatric exclusivity. Because these potential therapeutics have already been tested in patients and have significant
regulatory safety data generated, the time and cost to file an investigational new drug application in the United States or investigational
medicinal product dossier in Europe and initiate additional clinical trials, should be substantially reduced.
In addition, the availability of robust
genetic biomarkers allows trial designs to focus on highly enriched patient populations that are more likely to respond to targeted
therapies. This can allow smaller, more focused and less expensive clinical trials. Likewise, highly targeted drugs that are less
likely to exhibit off-target effects can be used when available. This could enhance the likelihood of clinical and regulatory success,
and potentially requires smaller, easier-to-enroll clinical trials. In some cases it may be possible to advance from discovery
to the clinic in less than two years, and to achieve proof of concept in as little as three years. Furthermore, such highly targeted
therapies in specifically targeted diseases should allow the creation of higher value medicines that can address critical needs
in patients suffering from rare and orphan diseases. The solid genetic foundation underlying these disease targets along with highly
targeted therapies may also allow rapid label expansion into adjacent populations.
Our initial program arising out of our genomic
medicine strategy is the development candidate NFC-1 (MDGN-001). Through our acquisition of neuroFix, LLC, or neuroFix, in September
2015, we acquired the rights to develop NFC-1, as well as the rights to certain data derived from a clinical trial and other studies
of NFC-1. NFC-1 is a first-in-class, non-stimulant metabotropic glutamate receptor, or mGluR, neuromodulator that is being developed
for the treatment of mGluR network mutation positive Attention Deficit Hyperactivity Disorder, or ADHD, as well as neuropsychiatric
symptoms resulting from a related rare genetic disorder, 22q11.2 Deletion Syndrome. We intend to develop NFC-1 for the treatment
of mGluR network mutation positive ADHD, or mGluR+ ADHD, and certain other neurological and neuropsychological indications. A Phase
2/3 trial for mGLuR+ ADHD is currently enrolling patients. A Phase 1b trial for the treatment of the psychiatric symptoms of 22q11.2
Deletion Syndrome is now recruiting and is expected to begin enrolling patients in the fourth quarter of 2016. A Phase 1b clinical
trial of NFC-1 in adolescents with ADHD and disruptions in the mGluR gene network was completed in 2015, demonstrating the safety
of NFC-1 and signaling potential efficacy in the adolescents treated.
Anti-LIGHT Monoclonal Antibody
Our second development program to come from
the CHOP collaboration is for the development and potential commercialization of a first-in-class anti-LIGHT monoclonal antibody,
or the Antibody (MDGN-002). In June 2016 we entered into the Development and Option Agreement with KHK. Under the Development and
Option Agreement, we received an exclusive option for exclusive rights to develop and commercialize products containing the Antibody,
or a Licensed Product, and to conduct various development activities with respect to the Antibody, including the conduct of a signal
finding study testing the Antibody in Severe Pediatric Onset Inflammatory Bowel Disease, or the Study. The Study, expected to initiate
in the fourth quarter of 2016, will be conducted under an existing investigational new drug application previously filed with the
United States Food and Drug Administration by KHK and transferred to us pursuant to the Development and Option Agreement.
For a certain period of time after the completion
of the Study, or the Exercise Period, we will have the option, or the Option, to obtain exclusive rights for the development and
commercialization of the Antibody. If we exercise the Option, KHK will have 60 days to select one of two potential development
and commercialization structures: a co-development/co-commercialization arrangement (Plan A) or a licensing arrangement (Plan B).
Terms for both structures have been fully negotiated with the terms for each structure set forth in exhibits to the Development
and Option Agreement.
Co-Development/Co-Commercialization Arrangement
(Plan A)
Under the co-development/co-commercialization
arrangement (Plan A), we will have the exclusive right to develop, manufacture and commercialize the Licensed Products in the Field
in the United States and Canada. We will also be responsible for development and regulatory approval of the first Licensed Product
in the European Union and then transferring such regulatory approval to KHK or its designee. We will be responsible for the manufacture
of the Licensed Products for use by the parties in clinical trials as well as for commercialization in their respective fields
and/or territories, with KHK purchasing the Licensed Products from us.
We will be required to pay KHK an initial
license fee in the low single-digit millions of dollars upon the co-development/co-commercialization arrangement becoming effective.
We may pay KHK up to an additional $18 million upon the achievement of certain regulatory milestones related to the Licensed Products.
The parties will share the anticipated costs of development of the first Licensed Product in the Field in the United States, Canada
and the European Union with the Company responsible for any costs in excess of an agreed cap. The parties will split profits from
our sales of Licensed Products in the United States and Canada equally. KHK will pay us low double-digit royalties for sales of
Licensed Products outside the United States and Canada and outside the Field in the United States and Canada.
Licensing Arrangement (Plan B)
Under the licensing arrangement (Plan B),
we will have the exclusive right to develop, manufacture and commercialize the Licensed Products in the Field in the United States,
Canada and the European Union. We will be responsible for the manufacture of the Licensed Products for use by the parties in clinical
trials as well as for commercialization in their respective fields and/or territories.
We will be required to pay KHK an initial
license fee in the low single-digit millions of dollars upon the licensing arrangement becoming effective. We may pay KHK up to
an additional $28 million upon the achievement of certain regulatory milestones related to the Licensed Products. The parties will
split profits from our sales of Licensed Products in the United States, Canada and the European Union with us being entitled to
approximately 74% of such profits and KHK being entitled to approximately 26% of such profits. KHK will pay us low double-digit
royalties for sales of Licensed Products outside the United States, Canada and the European Union and outside the Field in the
United States, Canada and the European Union. We will be responsible for costs of development of Licensed Products in the United
States, Canada and the European Union. KHK will have the right to purchase the Licensed Products from us.
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 $33.42 million for the nine month period ended September 30, 2016. As of September 30, 2016, we had
stockholders’ equity of approximately $42.83 million. As of September 30, 2016, we had cash and cash equivalents of $47.26
million, which we believe will provide funding for our operations at least through the first 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 NFC-1 (MDGN-001) and the Antibody (MDGN-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 the Antibody (MDGN-002) under the Development and Option Agreement with KHK, advancing the development of
NFC-1 (MDGN-001) and advancing our earlier-stage research and development projects, including a second-generation TARGT system
and the application of TARGT in the central nervous system.
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 Nine Months Ended September
30, 2016 and 2015
Research and Development Expenses
Gross research and development expenses
for the nine months ended September 30, 2016 were $23.42 million increasing from $12.93 million for the same period in 2015 mainly
due to increased sub-contractor costs to advance our clinical activities related to NFC-1 (MDGN-001) program. Net research and
development expenses for the nine months ended September 30, 2016 were $23.22 million, increasing from $11.13 million for the same
period in 2015. The increase in net research and development expenses was due to the increase in gross research and development
expenses as detailed above in addition to a decrease of $1.60 million in the amount of development grants received from the Israeli
Office of the Chief Scientist, or the OCS.
Non-recurring research and development expenses
of $8.17 million for the nine months ended September 30, 2015 were related to the neuroFix acquisition, which was accounted for
as a purchase of an asset in accordance with ASC 805 and thus recorded as expense.
General and Administrative Expenses
General and administrative expenses for
the nine months ended September 30, 2016 were $10.18 million, decreasing from $10.83 million for the same period in 2015 primarily
due to a decrease in stock-based compensation expenses related to options granted to directors, which was offset in part by severance
benefits recorded upon the termination of an officer.
Financial Income and Expenses
Financial income for the nine months ended
September 30, 2016 and 2015 was de minimis.
Financial expenses for the nine months ended
September 30, 2016 were de minimis, decreasing from $1.43 million for the same period in 2015. The $1.43 million of financial expenses
in 2015 was mainly due to an increase in the valuation of our warrant liability. All warrants requiring revaluation were exercised
in 2015, thus eliminating such liability in 2016.
Results of Operations for the Three Months Ended September
30, 2016 and 2015
Research and Development Expenses
Gross and net research and development expenses
for the three months ended September 30, 2016 were $7.73 million and $7.53 million, respectively, increasing from $4.57 million
and $4.20 million, respectively, for the same period in 2015 mainly due to increased sub-contractor costs to advance our clinical
activities related to the NFC-1 (MDGN-001) program.
Non-recurring research and development expenses
of $8.17 million for the three months ended September 30, 2015 were related to the neuroFix acquisition, which was accounted for
as a purchase of an asset in accordance with ASC 805 and thus recorded to expense.
General and Administrative Expenses
General and administrative expenses for
the three months ended September 30, 2016 were $3.04 million, increasing slightly from $3.0 million for the same period in 2015.
Financial Income and Expenses
Financial income for the three months ended
September 30, 2016 and 2015 was de minimis.
Financial expenses for the three months
ended September 30, 2016 were de minimis, decreasing from $1.19 million for the same period in 2015. The $1.19 million of financial
expenses in 2015 was mainly due to an increase in the valuation of our warrant liability. All warrants requiring revaluation were
exercised in 2015, thus eliminating such liability in 2016.
Liquidity and Capital Resources
Sources of Liquidity
We have financed our operations primarily
through a combination of equity issues, debt issues and grants from the OCS and other third parties.
We received $13.97 million from inception
through September 30, 2016 from the OCS in development grants, $0.41 million of which was received during the nine months ended
September 30, 2016.
In June 2016, we completed a registered
public offering of 3,835,261 shares of common stock, which includes 195,261 shares sold pursuant to the partial exercise of the
underwriters’ over-allotment option, at a price to the public of $5.50 per share. The net proceeds from this offering to
us were approximately $19.56 million, after deducting underwriting discounts and commissions and offering expenses of $1.54 million.
Cash Flows
We had cash and cash equivalents of $47.26
million at September 30, 2016 and $53.06 million at December 31, 2015. The decrease in our cash balance during the nine months
ended September 30, 2016 was primarily related to an increase in cash used in operating activities during the nine months ended
September 30, 2016, which was offset by the net proceeds of the registered public offering of common stock during the period of
$19.56 million.
Net cash used in operating activities of
$25.27 million for the nine months ended September 30, 2016 and $16.88 million for the nine months ended September 30, 2015 primarily
reflected our cash expenses for our operations.
Net cash used in investing activities relates
to our purchases of property and equipment.
Net cash provided by financing activities
during the nine months ended September 30, 2016 was $19.72 million, primarily the result of net proceeds of the registered public
offering of $19.57 million. Net cash provided by financing activities of $1.34 million during the nine months ended September 30,
2015 was the result of the exercise of options and warrants.
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 believe that cash on hand, including the net
proceeds we received from our public offerings of common stock in the fourth quarter of 2015 and the second quarter of 2016, will
be sufficient to enable us to fund our operating expenses and capital expenditure requirements at least through the first 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 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 nine months ended September 30, 2016 and 2015, 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 expected term 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 term assumptions as more historical
data for our common stock becomes available. We currently estimate that we will experience 8% forfeitures for those options currently
outstanding.
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, 2015.