PTC Therapeutics
PTC THERAPEUTICS, INC. (Form: 10-Q, Received: 08/04/2016 17:14:33)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

x       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2016

 

OR

 

o          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to            

 

Commission file number: 001-35969

 

PTC Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

04-3416587

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)

 

100 Corporate Court
South Plainfield, NJ

 

07080

(Address of principal executive offices)

 

(Zip Code)

 

(908) 222-7000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x   No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x

 

Accelerated filer  o

 

 

 

Non-accelerated filer  o
(Do not check if a smaller reporting company)

 

Smaller reporting company  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No  x

 

As of August 1, 2016 there were 34,247,719 shares of Common Stock, $0.001 par value per share, outstanding.

 

 

 



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PART I—FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

 

 

Item 4. Controls and Procedures

 

 

 

PART II—OTHER INFORMATION

 

 

Item 1. Legal Proceedings

 

 

 

Item 1A. Risk Factors

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

Item 6. Exhibits

 

 

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FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form10-Q contains forward looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form10-Q, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” and similar expressions are intended to identify forward looking statements, although not all forward looking statements contain these identifying words.

 

The forward looking statements in this Quarterly Report on Form 10-Q include, among other things, statements about:

 

·                   our ability to resolve the matters set forth in the Refuse to File letter we received from the United States Food and Drug Administration, or FDA, in connection with our New Drug Application, or NDA, for Translarna™ (ataluren) for the treatment of nonsense mutation Duchenne muscular dystrophy, or nmDMD, including whether the appeal we filed with the FDA results in successful reversal of the Refuse to File decision in a timely manner, or ever, and in the event that the Refuse to File decision is reversed, whether such reversal results in a timely or successful review of our NDA, and whether we will be required to perform additional clinical and non-clinical trials or analyses at significant cost and whether such trials, if successful, may enable FDA review of an NDA submission by us and, ultimately, may support approval of Translarna for nmDMD in the U.S.;

 

·                   the timing and outcome of the opinion of the European Medicines Agency’s, or EMA’s, Committee for Medicinal Products for Human Use, or CHMP, with respect to our request for renewal of our marketing authorization of Translarna for the treatment of nmDMD in the European Economic Area, or EEA, which is subject to annual review and renewal by the European Commission following reassessment of the risk-benefit balance of the authorization by the European Medicines Agency, among other things;

 

·                   our ability to design an acceptable new clinical trial in nmDMD with input from the EMA, including with respect to matters of scope, length, and conduct and, if successfully designed, our ability to enroll, fund, and complete such trial;

 

·                   the nature of any conditions or restrictions that may be placed on any renewal of the marketing authorization by the European Commission in the event that the CHMP issues a positive opinion with respect to renewal;

 

·                   our ability to commercialize Translarna in general and, specifically, as a treatment for nmDMD, including the timing of such commercialization and our ability to successfully negotiate adequate pricing and reimbursement processes on a timely basis, or at all, in the countries in which we may obtain regulatory approval;

 

·                   when Translarna will be available to nmDMD patients in England;

 

·                   our ability to obtain additional and maintain existing reimbursed named patient and cohort early access programs for Translarna for the treatment of nmDMD on adequate terms, or at all;

 

·                   our estimates regarding the potential market opportunity for Translarna, including, in general, the size of eligible patient populations and our ability to identify such patients;

 

·                   our regulatory submissions, including with respect to timing and outcome of regulatory review and determinations in connection with our submission with the EMA related to a variation to our marketing authorization to include Translarna as a treatment for nonsense mutation cystic fibrosis, or nmCF, as well as our other submissions with regulatory bodies outside of the EEA;

 

·                   our estimates regarding expenses, future revenues, third party discounts and rebates, capital requirements and needs for additional financing, including our ability to maintain the level of our expenses consistent with our internal budgets and forecasts and to secure additional funds on favorable terms or at all;

 

·                   the timing and conduct of our clinical trials and studies of Translarna for the treatment of nmCF, nmDMD, mucopolysaccharidosis type I, or MPS I, aniridia, and Dravet syndrome/CDKL5, each caused by nonsense mutations, as well as our studies in spinal muscular atrophy and our cancer stem cell program, including statements regarding the timing of initiation, enrollment and completion of the trials and the period during which the results of the trials will become available;

 

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·                   the rate and degree of market acceptance and clinical utility of Translarna;

 

·                   the ability and willingness of patients and healthcare professionals to access Translarna through alternative means if pricing and reimbursement negotiations in the applicable territory do not have a positive outcome, including whether patients in Germany will continue to be able to access Translarna via a reimbursed importation pathway provided under German law and whether such pathway, if utilized, will minimize any access issues for German patients while maintaining a sustainable price;

 

·                   the timing of and our ability to obtain additional marketing authorizations for Translarna and our other product candidates, and the ability of Translarna and our other product candidates to meet existing or future regulatory standards;

 

·                   our ability to maintain the current label under the marketing authorization in the EEA or expand the approved product label of Translarna for the treatment of nmDMD, whether pursuant to our recently initiated Phase 2 study of Translarna for nmDMD in pediatric patients, or otherwise;

 

·                   the timing and scope of our commercial infrastructure expansion, including the growth of our international presence in Europe and in other territories;

 

·                   the potential receipt of revenues from future sales of Translarna and other product candidates, including our ability to earn a profit from sales or licenses of Translarna for the treatment of nmDMD;

 

·                   our sales, marketing and distribution capabilities and strategy, including the ability of our third party manufacturers to manufacture and deliver Translarna in clinically and commercially sufficient quantities and the ability of distributors to process orders in a timely manner and satisfy their other obligations to us;

 

·                   our ability to establish and maintain arrangements for the manufacture of Translarna and our other product candidates that are sufficient to meet clinical trial and commercial launch requirements;

 

·                   our plans to pursue development of Translarna for additional indications other than nmDMD, nmCF, MPS I, aniridia, and Dravet/CDKL5, caused by nonsense mutations;

 

·                   our ability to advance our earlier stage programs, including our cancer stem cell program;

 

·                   our plans to pursue research and development of other product candidates;

 

·                   the potential advantages of Translarna;

 

·                   our intellectual property position;

 

·                   the impact of government laws and regulations;

 

·                   our competitive position; and

 

·                   our expectations with respect to the development and regulatory status of our product candidates and program directed against spinal muscular atrophy in collaboration with F. Hoffmann La Roche Ltd and Hoffmann La Roche Inc., which we refer to collectively as Roche, and the Spinal Muscular Atrophy Foundation, or the SMA Foundation, and our estimates regarding future revenues from achievement of milestones in that program.

 

We may not actually achieve the plans, intentions or expectations disclosed in our forward looking statements, and you should not place undue reliance on our forward looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in Part II, Item 1A. Risk Factors that we believe could cause actual results or events to differ materially from the forward looking statements that we make. Our forward looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

 

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2015 completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward

 

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looking statements whether as a result of new information, future events or otherwise, except as required by applicable law.

 

In this Quarterly Report on Form 10-Q, unless otherwise stated or the context otherwise requires, references to “PTC,” “PTC Therapeutics,” “the Company,” “we,” “us,” “our,” and similar references refer to PTC Therapeutics, Inc. and, where appropriate, its subsidiaries. The trademarks, trade names and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.

 

All website addresses given in this Quarterly Report on Form 10-Q are for information only and are not intended to be an active link or to incorporate any website information into this document.

 

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PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

PTC Therapeutics, Inc.

Consolidated Balance Sheets (unaudited)

In thousands (except per share data)

 

 

 

June 30,
2016

 

December 31,
2015

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

35,658

 

$

58,022

 

Marketable securities

 

237,235

 

280,903

 

Prepaid expenses and other current assets

 

4,776

 

5,930

 

Trade receivables, net

 

19,765

 

11,094

 

Total current assets

 

297,434

 

355,949

 

Fixed assets, net

 

7,601

 

8,974

 

Deposits and other assets

 

528

 

358

 

Total assets

 

$

305,563

 

$

365,281

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

42,183

 

$

45,247

 

Deferred revenue

 

726

 

139

 

Total current liabilities

 

42,909

 

45,386

 

Long-term debt

 

94,936

 

91,848

 

Other long-term liabilities

 

2,094

 

2,046

 

Total liabilities

 

139,939

 

139,280

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $0.001 par value. Authorized 125,000,000 shares; issued and outstanding 34,083,319 shares at June 30, 2016. Authorized 125,000,000 shares; issued and outstanding 33,916,559 shares at December 31, 2015

 

34

 

34

 

Additional paid-in capital

 

837,850

 

820,165

 

Accumulated other comprehensive income (loss)

 

885

 

(1,200

)

Accumulated deficit

 

(673,145

)

(592,998

)

Total stockholders’ equity

 

165,624

 

226,001

 

Total liabilities and stockholders’ equity

 

$

305,563

 

$

365,281

 

 

See accompanying unaudited notes.

 

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PTC Therapeutics, Inc.

Consolidated Statements of Operations (unaudited)

In thousands (except per share data)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Net product revenue

 

$

15,437

 

$

6,161

 

$

34,314

 

$

11,230

 

Collaboration and grant revenue

 

196

 

613

 

214

 

3,026

 

Total revenues

 

15,633

 

6,774

 

34,528

 

14,256

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

28,827

 

28,190

 

60,226

 

56,128

 

Selling, general and administrative

 

23,366

 

17,210

 

49,304

 

34,825

 

Total operating expenses

 

52,193

 

45,400

 

109,530

 

90,953

 

Loss from operations

 

(36,560

)

(38,626

)

(75,002

)

(76,697

)

Interest (expense) income, net

 

(2,060

)

498

 

(4,016

)

1,022

 

Other expense, net

 

(387

)

(88

)

(1,107

)

(456

)

Loss before income tax expense

 

(39,007

)

(38,216

)

(80,125

)

(76,131

)

Income tax benefit (expense)

 

93

 

(145

)

(22

)

(145

)

Net loss attributable to common stockholders

 

$

(38,914

)

$

(38,361

)

$

(80,147

)

$

(76,276

)

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic and diluted (in shares)

 

34,000,333

 

33,600,653

 

33,959,751

 

33,335,674

 

Net loss per share—basic and diluted (in dollars per share)

 

$

(1.14

)

$

(1.14

)

$

(2.36

)

$

(2.29

)

 

See accompanying unaudited notes.

 

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PTC Therapeutics, Inc.

Consolidated Statements of Comprehensive Loss (unaudited)

In thousands

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Net loss

 

$

(38,914

)

$

(38,361

)

$

(80,147

)

$

(76,276

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on marketable securities, net of tax

 

(40

)

(224

)

618

 

(99

)

Foreign currency translation (loss) gain

 

(159

)

465

 

1,467

 

341

 

Comprehensive loss

 

$

(39,113

)

$

(38,120

)

$

(78,062

)

$

(76,034

)

 

See accompanying unaudited notes.

 

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PTC Therapeutics, Inc.

Consolidated Statements of Cash Flows (unaudited)

In thousands

 

 

 

Six months ended June 30,

 

 

 

2016

 

2015

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(80,147

)

$

(76,276

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Depreciation

 

1,664

 

1,319

 

Change in valuation of warrant liability

 

47

 

(72

)

Non-cash interest expense

 

2,941

 

 

Amortization of premiums on investments

 

1,140

 

915

 

Amortization of debt issuance costs

 

147

 

 

Share-based compensation expense

 

17,651

 

18,076

 

Benefit for deferred income taxes

 

(244

)

 

Unrealized foreign currency transaction losses, net

 

963

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Prepaid expenses and other current assets

 

1,163

 

(356

)

Trade receivables, net

 

(8,480

)

(669

)

Deposits and other assets

 

(170

)

258

 

Accounts payable and accrued expenses

 

(3,435

)

(6,039

)

Other long-term liabilities

 

1

 

(46

)

Deferred revenue

 

587

 

(3,354

)

Net cash used in operating activities

 

(66,172

)

(66,244

)

Cash flows from investing activities

 

 

 

 

 

Purchases of fixed assets

 

(275

)

(1,177

)

Purchases of marketable securities

 

(46,256

)

(44,988

)

Sale and redemption of marketable securities

 

89,645

 

83,468

 

Net cash provided by investing activities

 

43,114

 

37,303

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from exercise of options

 

34

 

8,072

 

Net cash provided by financing activities

 

34

 

8,072

 

Effect of exchange rate changes on cash

 

660

 

341

 

Net decrease in cash and cash equivalents

 

(22,364

)

(20,528

)

Cash and cash equivalents, beginning of period

 

58,022

 

49,748

 

Cash and cash equivalents, end of period

 

$

35,658

 

$

29,220

 

Supplemental disclosure of cash information

 

 

 

 

 

Cash paid for interest

 

$

2,263

 

$

 

Cash paid for income taxes

 

$

264

 

$

 

Supplemental disclosures of non-cash information related to investing and financing activities

 

 

 

 

 

Change in unrealized gain (loss) on marketable securities, net of tax

 

$

618

 

$

(99

)

 

See accompanying unaudited notes.

 

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PTC Therapeutics, Inc.

Notes to Consolidated Financial Statements (unaudited)

June 30, 2016

In thousands (except per share data unless otherwise noted)

 

1.                                       The Company

 

PTC Therapeutics, Inc. (the “Company” or “PTC”) was incorporated as a Delaware corporation on March 31, 1998. PTC is a global biopharmaceutical company focused on the discovery, development and commercialization of orally administered, small molecule therapeutics targeting an area of RNA biology referred to as post transcriptional control. Post-transcriptional control processes are the regulatory events that occur in cells during and after a messenger RNA molecule is copied from DNA through the transcription process. PTC has discovered all of its compounds currently under development using its proprietary technologies. PTC plans to continue to develop these compounds both on its own and through selective collaboration arrangements with leading pharmaceutical and biotechnology companies. PTC’s internally discovered pipeline addresses multiple therapeutic areas, including rare disorders and oncology.

 

PTC’s lead product candidate is ataluren, an investigational new drug in the United States, for the treatment of patients with genetic disorders that arise from a type of genetic mutation known as a nonsense mutation. The Company holds worldwide commercialization rights to ataluren for all indications in all territories. The brand name of ataluren is Translarna™.

 

The Company received conditional marketing authorization from the European Commission in August 2014 for Translarna for the treatment of nonsense mutation Duchenne muscular dystrophy, or nmDMD, in ambulatory patients aged five years and older in the 31 member states of the European Economic Area, or EEA. The marketing authorization is subject to annual review and renewal by the European Commission following reassessment by the European Medicines Agency, or EMA, of the risk-benefit balance of the authorization, or the annual EMA reassessment, as well as the Company’s satisfaction of any conditions and obligations that have been or may be placed upon the marketing authorization. The Company has been informed that the annual EMA assessment procedure cannot be completed by mid-year 2016. During 2016, the Company’s revenues have been and are expected to be primarily generated from sales of Translarna for the treatment of nmDMD in countries in the EEA where pricing and reimbursement approval is obtained at acceptable levels and in other territories where the Company is permitted to distribute Translarna under reimbursed early access programs, or EAPs. The Company is subject to a number of risks similar to those of other early stage companies, including dependence on key individuals, the difficulties inherent in the development of commercially usable products, the potential need to obtain additional capital necessary to fund the development of its products, and competition from other companies. As of June 30, 2016, the Company had an accumulated deficit of approximately $673.1 million. The Company has financed its operations to date primarily through the private offering in August 2015 of 3.00% convertible senior notes due 2022 (see Note 9), public offerings of common stock in February 2014 and October 2014, its initial public offering of common stock in June 2013, private placements of its convertible preferred stock, collaborations, bank debt, convertible debt financings, grant funding and clinical trial support from governmental and philanthropic organizations and patient advocacy groups in the disease area addressed by the Company’s product candidates.

 

2.                                       Summary of significant accounting policies

 

The Company’s complete listing of significant accounting policies are described in Note 2 of the notes to the Company’s audited financial statements as of December 31, 2015 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 29, 2016 (2015 Form 10-K).

 

Basis of Presentation

 

The accompanying financial information as of June 30, 2016 and for the three and six months ended June 30, 2016 and 2015 has been prepared by the Company, without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (GAAP) have been condensed or omitted pursuant to such rules and regulations. These interim financial statements should be read in conjunction with the Company’s audited financial statements as of December 31, 2015 and notes thereto included in the 2015 Form 10-K.

 

In the opinion of management, the unaudited financial information as of June 30, 2016 and for the three and six months ended June 30, 2016 and 2015 reflects all adjustments, which are normal recurring adjustments, necessary to present a fair statement of financial position, results of operations and cash flows. The results of operations for the three and six month periods ended June 30, 2016 are not necessarily indicative of the results to be expected for the year ended December 31, 2016 or for any other interim period or for any other future year.

 

Use of estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates in these consolidated financial statements have been made in connection with the calculation of net product sales, certain accruals related to the Company’s research

 

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and development expenses, stock-based compensation, valuation procedures for the convertible notes and the provision for or benefit from income taxes. Actual results could differ from those estimates. Changes in estimates are reflected in reported results in the period in which they become known.

 

Inventories and cost of product revenue

 

In 2014, the Company was notified that the European Commission, or EC, granted marketing authorization for Translarna for the treatment of nmDMD in ambulatory patients aged five years and older. The conditional marketing authorization allows the Company to market Translarna for the treatment of nmDMD in the 31 member states of European Economic Area. The launch in these countries is on a country by country basis. This marketing authorization is subject to annual review and renewal by the EC following reassessment by the European Medicines Agency, or EMA, of the risk benefit balance of the authorization, which the Company refers to as the annual EMA reassessment. In the third quarter of 2015, the EMA approved the annual renewal of the marketing authorization for Translarna for the treatment of nmDMD. The authorization was further conditioned on the Company’s submission of the final report, including additional efficacy and safety data, from ACT DMD and the Company’s ability to implement measures, including pharmacovigilance plans that are detailed in the risk management plan for Translarna that was submitted to EMA. In January 2016, the Company submitted the final ACT DMD report to the EMA. The Company made this submission as a type II variation request that sought to have this initial condition to its marketing authorization removed and a full marketing authorization granted. In February 2016, the Company also submitted a marketing authorization renewal request with the EMA.

 

While the Company has been informed that the renewal assessment procedure cannot be completed by mid-year 2016, it expects that, pursuant to applicable regulations, its current marketing authorization status will remain valid while the annual EMA reassessment is ongoing and until it is concluded with an opinion from the European Commission with respect to renewal of its marketing authorization. Based on its interpretation of applicable regulatory timeframes, the Company believes the annual EMA reassessment could be completed, at the earliest, by the end of 2016.

 

The Company plans to seek to renew the marketing authorization on an annual basis until the Company’s obligations have been fulfilled and the approval is converted from a conditional approval into a full approval. If the Company fails to satisfy such requirements, or if it is determined that the balance of risks and benefits of using Translarna changes materially, the EC could, at the EMA’s recommendation, vary, suspend, withdraw or refuse to renew the marketing authorization for Translarna or require additional clinical trials.

 

There continues to be substantial risk that regulators could suspend or not renew the Company’s marketing authorization in the future. As such, as of the date of this filing, the Company has not capitalized inventory given the near term uncertainty with respect to the long term utilization of Translarna finished product for commercial use. Had the Company capitalized as inventory all of the its Translarna product that is available for commercial sale on hand as of June 30, 2016, the value of that inventory would have been approximately $1.2 million. In addition, had the Company expensed the cost of Translarna product sold as a cost of sales, the gross profit margin would have been greater than 90%, which the Company believes is consistent with the cost of producing small molecule therapeutics for orphan drug diseases in the pharmaceutical industry. The Company will continue to assess the appropriateness of inventory capitalization based on the outcome of applicable regulatory approvals which are expected later this year.

 

Revenue Recognition

 

The Company recognizes revenue when amounts are realized or realizable and earned. Revenue is considered realizable and earned when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the price is fixed or determinable; and (4) collection of the amounts due are reasonably assured.

 

Net Product Sales

 

The Company’s net product sales have consisted solely of sales of Translarna for the treatment of nmDMD in territories outside of the U.S. The Company began recognizing revenue for payments received under the reimbursed EAPs for Translarna in nmDMD patients in select countries in the third quarter of 2014. The Company has now established a pattern of collectability and, since January 2015, the Company recognizes revenue from product sales when there is persuasive evidence that an arrangement exists, title to product and associated risk of loss has passed to the customer, the price is fixed or determinable, collectability is reasonably assured and the Company has no further performance obligations in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 605-15, Revenue Recognition—Products.

 

The Company has recorded revenue on sales where Translarna is available either on a commercial basis or through a reimbursed EAP program. Orders for Translarna are generally received from hospital and retail pharmacies and, in some cases, one of the Company’s third-party partner distributors. The Company’s third-party distributors act as intermediaries between the Company and end users and do not typically stock significant quantities of Translarna. The ultimate payor for Translarna is typically a government authority or institution or a third-party health insurer.

 

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The Company records revenue net of estimated third party discounts and rebates. Allowances are recorded as a reduction of revenue at the time revenues from product sales are recognized. These allowances are adjusted to reflect known changes in factors and may impact such allowances in the quarter those changes are known.

 

Collaboration and Grant Revenue

 

The terms of these agreements typically include payments to the Company of one or more of the following: nonrefundable, upfront license fees; milestone payments; research funding and royalties on future product sales. In addition, the Company generates service revenue through agreements that generally provide for fees for research and development services and may include additional payments upon achievement of specified events.

 

The Company evaluates all contingent consideration earned, such as a milestone payment, using the criteria as provided by the Financial Accounting Standards Board (FASB), guidance on the milestone method of revenue recognition. At the inception of a collaboration arrangement, the Company evaluates if a milestone payment is substantive. The criteria requires that (1) the Company determines if the milestone is commensurate with either its performance to achieve the milestone or the enhancement of value resulting from our activities to achieve the milestone; (2) the milestone be related to past performance; and (3) the milestone be reasonable relative to all deliverable and payment terms of the collaboration arrangement. If these criteria are met then the contingent milestones can be considered a substantive milestone and will be recognized as revenue in the period that the milestone is achieved. The Company recognizes royalties as earned in accordance with the terms of various research and collaboration agreements. If not substantive, the contingent consideration is allocated to the existing units of accounting based on relative selling price and recognized following the same basis previously established for the associated unit of accounting.

 

The Company recognizes revenue for reimbursements of research and development costs under collaboration agreements as the services are performed. The Company records these reimbursements as revenue and not as a reduction of research and development expenses as the Company has the risks and rewards as the principal in the research and development activities.

 

Recently issued accounting standards

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. ASU No. 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current GAAP and replace it with a principle-based approach for determining revenue recognition. ASU No. 2014-09 includes the required steps to achieve the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU will also require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. With the issuance of ASU No. 2015-14 in August 2015, the FASB deferred the effective date of the revenue recognition guidance to reporting periods beginning after December 15, 2017. Early adoption of the standard is permitted but not before the original effective date, which was for reporting periods beginning after December 15, 2016. With the issuance of ASU No. 2016-08 in March 2016 and ASU No. 2016-10 in April 2016, the FASB further amended guidance on recording revenue on a gross versus a net basis and on identifying performance obligations and licensing, respectively.  The Company expects to adopt this guidance when effective and continues to evaluate the effect that the updated standard, as well as additional amendments, may have on its consolidated financial statements and accompanying notes.

 

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, which defines management’s responsibility to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures if there is substantial doubt about its ability to continue as a going concern. The pronouncement is effective for annual reporting periods ending after December 15, 2016 with early adoption permitted. The adoption of this guidance is not expected to have a significant impact on the Company’s financial statements.

 

In April 2015, the FASB issued ASU No. 2015-03, “Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs topic of the Codification”. This standard provides a simplified presentation of debt issuance costs and requires that debt issuance costs related to a recognized debt liability to be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The standard is effective for public companies for annual periods beginning after December 15, 2015. The Company adopted the guidance on January 1, 2016 on a retrospective basis and reclassed $2.8 million from “Deposits and other assets” to “Long-term debt” on the balance sheet as of December 31, 2015. The Company’s unamortized debt issuance cost at June 30, 2016 was $2.6 million which is included within “Long-term debt” on the consolidated balance sheet.

 

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”. This standard requires all deferred tax assets and liabilities to be classified as non-current on the balance sheet instead of separating deferred taxes into current and non-current amounts. In addition, valuation allowance allocations between current and non-current deferred tax assets are no longer required because those allowances also will be classified as non-current. This standard is effective for public companies for annual periods beginning after December 15, 2016. Earlier application is permitted as of the beginning of an interim or annual reporting period. The Company’s deferred tax assets is provided with full valuation allowance as of June 30, 2016. As such, the Company does not expect that this standard will have a significant impact upon adoption.

 

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. This standard enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The new guidance affects all

 

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reporting organizations (whether public or private) that hold financial assets or owe financial liabilities. ASU 2016-01 is effective for years beginning after December 15, 2017, including interim periods within those fiscal years. The Company expects to adopt this guidance when effective and is currently assessing what effect the adoption of ASU No. 2016-01 will have on its consolidated financial statements and accompanying notes.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. This standard will require organizations that lease assets with lease terms of more than 12 months to recognize assets and liabilities for the rights and obligations created by those leases on their balance sheets. The ASU will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company expects to adopt this guidance when effective and is currently assessing what effect the adoption of ASU No. 2016-02 will have on its consolidated financial statements and accompanying notes.

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. This standard requires the recognition of all income tax effects of awards in the income statement when the awards vest or are settled, with Additional Paid in Capital (APIC) pools to be eliminated. In addition, the standard  will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation as well as allowing companies to elect whether to account for forfeitures of share-based payments by recognizing forfeitures of awards as they occur or estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. This standard is effective for public companies for fiscal years beginning after December 15, 2016 and interim periods within those years, with early adoption permitted but only if all of the guidance is adopted in the same period. The Company expects to adopt this guidance when effective and is currently assessing what effect the adoption of ASU No. 2016-09 will have on its consolidated financial statements and accompanying notes.

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. This standard requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. This standard is effective for public companies who are SEC filers for fiscal years beginning after December 15, 2019, including interim periods within those years. The Company expects to adopt this guidance when effective and is assessing what effect the adoption of ASU 2016-13 will have on its consolidated financial statements and accompanying notes.

 

3.                                       Fair value of financial instruments and marketable securities

 

The Company follows the fair value measurement rules, which provides guidance on the use of fair value in accounting and disclosure for assets and liabilities when such accounting and disclosure is called for by other accounting literature. These rules establish a fair value hierarchy for inputs to be used to measure fair value of financial assets and liabilities. This hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels: Level 1 (highest priority), Level 2, and Level 3 (lowest priority).

 

·                   Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the balance sheet date.

 

·                   Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

 

·                   Level 3—Inputs are unobservable and reflect the Company’s assumptions as to what market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available.

 

Cash equivalents and investments are reflected in the accompanying financial statements at fair value. The carrying amount of grant and collaboration receivables, accounts payable and accrued expenses, and debt approximates fair value due to the short-term nature of those instruments.

 

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Fair value of certain marketable securities is based upon market prices using quoted prices in active markets for identical assets quoted on the last day of the period. In establishing the estimated fair value of the remaining investments, the Company used the fair value as determined by its investment advisors using observable inputs other than quoted prices.

 

The Company reviews its investments on a periodic basis for other-than-temporary impairments. This review is subjective, as it requires management to evaluate whether an event or change in circumstances has occurred in that period that may have a significant adverse effect on the fair value of the investment.

 

The following represents the fair value using the hierarchy described above for the Company’s financial assets and liabilities that are required to be measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015:

 

 

 

June 30, 2016

 

 

 

Total

 

Quoted prices
in active
markets for
identical assets
(level 1)

 

Significant
other
observable
inputs
(level 2)

 

Significant
unobservable
inputs
(level 3)

 

Marketable securities

 

$

237,235

 

$

 

$

237,235

 

$

 

Warrant liability

 

$

1

 

$

 

$

 

$

1

 

Stock appreciation rights liability

 

$

140

 

$

 

$

 

$

140

 

 

 

 

December 31, 2015

 

 

 

Total

 

Quoted prices
in active
markets for
identical assets
(level 1)

 

Significant
other
observable
inputs
(level 2)

 

Significant
unobservable
inputs
(level 3)

 

Marketable securities

 

$

280,903

 

$

 

$

280,903

 

$

 

Warrant Liability

 

$

48

 

$

 

$

 

$

48

 

Stock appreciation rights liability

 

$

 

$

 

$

 

$

 

 

No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the periods ended June 30, 2016 and December 31, 2015.

 

The following is a summary of marketable securities accounted for as available-for-sale securities at June 30, 2016 and December 31, 2015:

 

 

 

June 30, 2016

 

 

 

Amortized

 

Gross Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

Commercial paper

 

$

11,969

 

$

21

 

$

 

$

11,990

 

Corporate debt securities

 

210,640

 

274

 

(26

)

210,888

 

Government obligations

 

14,353

 

4

 

 

14,357

 

 

 

$

236,962

 

$

299

 

$

(26

)

$

237,235

 

 

 

 

December 31, 2015

 

 

 

Amortized

 

Gross Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

Commercial paper

 

$

26,877

 

$

80

 

$

 

$

26,957

 

Corporate debt securities

 

226,959

 

 

(640

)

226,319

 

Government obligations

 

27,656

 

3

 

(32

)

27,627

 

 

 

$

281,492

 

$

83

 

$

(672

)

$

280,903

 

 

At June 30, 2016 and December 31, 2015, the Company held securities with an unrealized loss position that were not considered to be other-than-temporarily impaired as the Company has the ability to hold such investments until recovery of their fair value. Unrealized gains and losses are reported as a component of accumulated other comprehensive (loss) income in stockholders’ equity. As of June 30, 2016 and December 31, 2015, the Company did not have any realized gains/losses from the sale of marketable securities.

 

Marketable securities on the balance sheet at June 30, 2016 and December 31, 2015 mature as follows:

 

 

 

June 30, 2016

 

 

 

Less Than
12 Months

 

More Than
12 Months

 

Commercial paper

 

$

11,990

 

$

 

Corporate debt securities

 

159,714

 

51,174

 

Government obligations

 

14,357

 

 

Total Marketable securities

 

$

186,061

 

$

51,174

 

 

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December 31, 2015

 

 

 

Less Than
12 Months

 

More Than
12 Months

 

Commercial paper

 

$

26,957

 

$

 

Corporate debt securities

 

140,831

 

85,488

 

Government obligations

 

18,994

 

8,633

 

Total Marketable securities

 

$

186,782

 

$

94,121

 

 

The Company classifies all of its securities as current as they are all available for sale and are available for current operations.

 

Level 3 valuation

 

The warrant liability is classified in Other long-term liabilities on the Company’s consolidated balance sheets. The warrant liability is marked-to-market each reporting period with the change in fair value recorded as a gain or loss within Other expense, net, on the Company’s consolidated statements of operations until the warrants are exercised, expire or other facts and circumstances lead the warrant liability to be reclassified as an equity instrument. The fair value of the warrant liability is determined at each reporting period by utilizing the Black-Scholes option pricing model.

 

The stock appreciation rights (SARs) liability is classified in Other long-term liabilities on the Company’s consolidated balance sheets. The SARs liability is marked-to-market each reporting period with the change in fair value recorded as compensation expense on the Company’s consolidated statements of operations until the SARS vest. The fair value of the SARs liability is determined at each reporting period by utilizing the Black-Scholes option pricing model.

 

The table presented below is a summary of changes in the fair value of the Company’s Level 3 valuations for the warrant liability and SARs liability for the period ended June 30, 2016:

 

 

 

Level 3 liabilities

 

 

 

Warrants

 

SARs

 

Beginning balance as of December 31, 2015

 

$

48

 

$

 

Change in fair value

 

(47

)

140

 

Ending balance as of June 30, 2016

 

$

1

 

$

140

 

 

Fair value of the warrant liability is estimated using an option-pricing model, which includes variables such as the expected volatility based on guideline public companies, the stock fair value, and the estimated time to a liquidity event. The significant assumptions used in preparing the option pricing model for valuing the Company’s warrants as of June 30, 2016 include (i) volatility (75%—77%), (ii) risk free interest rate (0.45%—0.71%), (iii) strike price ($128.00-$2,520.00), (iv) fair value of common stock ($7.02), and (v) expected life (0.96—3.23 years). The significant assumptions used in preparing the option pricing model for valuing the Company’s warrants as of December 31, 2015 include (i) volatility (62%-70%), (ii) risk free interest rate (0.86%—1.54%), (iii) strike price ($128.00—$2,520.00), (iv) fair value of common stock ($32.40), and (v) expected life (1.50—3.70 years).

 

Fair value of the SARs liability is estimated using an option-pricing model, which includes variables such as the expected volatility based on guideline public companies, the stock fair value, and the estimated time to a liquidity event. The significant assumptions used in preparing the option pricing model for valuing the Company’s SARs as of June 30, 2016 include (i) volatility (70%), (ii) risk free interest rate (0.36%—0.86%), (iii) strike price ($6.76-$30.86), (iv) fair value of common stock ($7.02), and (v) expected life (0.52—3.52 years).

 

4.                                       Other comprehensive income (loss) and accumulated other comprehensive items

 

Other comprehensive income (loss) includes changes in equity that are excluded from net income (loss), such as unrealized gains and losses on marketable securities.

 

The following tables summarize other comprehensive income (loss) and the changes in accumulated other comprehensive items for the three and six months ended June 30, 2016:

 

 

 

Unrealized
Gains/(Losses)
On
Marketable
Securities, net
of tax

 

Foreign
Currency
Translation

 

Total
Accumulated
Other
Comprehensive
Items

 

Balance at March 31, 2016

 

$

69

 

$

1,015

 

$

1,084

 

Other comprehensive loss before reclassifications

 

(40

)

(159

)

(199

)

Amounts reclassified from other comprehensive items

 

 

 

 

Other comprehensive loss

 

(40

)

(159

)

(199

)

Balance at June 30, 2016

 

$

29

 

$

856

 

$

885

 

 

 

 

Unrealized
Gains/(Losses)
On
Marketable
Securities, net
of tax

 

Foreign
Currency
Translation

 

Total
Accumulated
Other
Comprehensive
Items

 

Balance at December 31, 2015

 

$

(589

)

$

(611

)

$

(1,200

)

Other comprehensive income before reclassifications

 

618

 

1,467

 

2,085

 

Amounts reclassified from other comprehensive items

 

 

 

 

Other comprehensive income

 

618

 

1,467

 

2,085

 

Balance at June 30, 2016

 

$

29

 

$

856

 

$

885

 

 

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5.                                       Accounts payable and accrued expenses

 

Accounts payable and accrued expenses at June 30, 2016 and December 31, 2015 consist of the following:

 

 

 

June 30,
2016

 

December 31,
2015

 

Employee compensation, benefits, and related accruals

 

$

4,688

 

$

11,187

 

Consulting and contracted research

 

12,846

 

13,753

 

Professional fees

 

1,638

 

2,523

 

Accounts payable

 

16,800

 

11,940

 

Accrued severance

 

995

 

 

Other

 

5,216

 

5,844

 

 

 

$

42,183

 

$

45,247

 

 

6.                                       Warrants

 

All of the Company’s outstanding warrants were classified as liabilities as of June 30, 2016 and December 31, 2015 because they contained non-standard antidilution provisions.

 

The following is a summary of the Company’s outstanding warrants as of June 30, 2016 and December 31, 2015:

 

 

 

Warrant
shares

 

Exercise
price

 

Expiration

 

Common stock

 

6,250

 

$

128.00

 

2017

 

Common stock

 

7,030

 

$

128.00

 

2019

 

Common stock

 

130

 

$

2,520.00

 

2019

 

 

7.                                       Net loss per share

 

Basic earnings per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Diluted earnings per share is computed by dividing net income (loss) by the weighted-average number of common shares plus the effect of dilutive potential common shares outstanding during the period.

 

The following tables set forth the computation of basic and diluted net loss per share:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Numerator

 

 

 

 

 

 

 

 

 

Net loss

 

$

(38,914

)

$

(38,361

)

$

(80,147

)

$

(76,276

)

Denominator

 

 

 

 

 

 

 

 

 

Denominator for basic and diluted net loss per share

 

34,000,333

 

33,600,653

 

33,959,751

 

33,335,674

 

Net loss per share:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(1.14

)*

$

(1.14

)*

$

(2.36

)*

$

(2.29

)*

 


*In the three and six months ended June 30, 2016 and 2015, the Company experienced a net loss and therefore did not report any dilutive share impact.

 

The following table shows historical dilutive common share equivalents outstanding, which are not included in the above historical calculation, as the effect of their inclusion is anti-dilutive during each period.

 

 

 

As of June 30,

 

 

 

2016

 

2015

 

Stock Options

 

5,969,382

 

4,663,852

 

Unvested restricted stock awards and units

 

274,490

 

353,135

 

Total

 

6,243,872

 

5,016,987

 

 

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8.                                       Stock award plan

 

On March 5, 2013, the Company’s Board of Directors approved the 2013 Stock Incentive Plan, which provides for the granting of stock option awards, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards in the aggregate of 739,937 shares of common stock. On March 5, 2013, the Board approved a grant of 735,324 shares of restricted stock and 4,613 stock options. There are no additional shares available for issuance under this plan.

 

In May 2013, the Company’s Board of Directors and stockholders increased by 2,500,000 the number of shares authorized under the 2009 Equity and Long Term Incentive Plan, which provides for the granting of stock option awards, restricted stock awards, and other stock-based and cash-based awards.

 

In May 2013, the Company’s Board of Directors and stockholders approved the 2013 Long Term Incentive Plan, which became effective upon the closing of the Company’s IPO.  The 2013 Long Term Incentive Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock awards and other stock-based awards. The number of shares of common stock reserved for issuance under the 2013 Long Term Incentive Plan is the sum of (1)  122,296 shares of common stock available for issuance under the Company’s 2009 Equity and Long Term Incentive Plan and 2013 Stock Incentive Plan, (2) the number of shares (up to 3,040,444 shares) equal to the sum of the number of shares of common stock subject to outstanding awards under the Company’s 1998 Employee, Director and Consultant Stock Option Plan, 2009 Equity and Long Term Incentive Plan and 2013 Stock Incentive Plan that expire, terminate or are otherwise surrendered, cancelled, forfeited or repurchased by the Company at their original issuance price pursuant to a contractual repurchase right plus (3) an annual increase, to be added on the first day of each fiscal year until the expiration of the 2013 Long Term Incentive Plan, equal to the lowest of 2,500,000 shares of common stock, 4% of the number of shares of common stock outstanding on the first day of the fiscal year and an amount determined by the Company’s Board of Directors. As of June 30, 2016, awards for 326,101 shares of common stock are available for issuance.

 

From January 1, 2016 through June 30, 2016, the Company issued a total of 1,403,045 stock options to various employees.  Of those, 93,100 were inducement grants for non-statutory stock options. The inducement grant awards were made pursuant to the NASDAQ inducement grant exception as a material component of our new hires’ employment compensation and not under the 2013 Long Term Incentive Plan.

 

A summary of stock option activity is as follows:

 

 

 

Number of
options

 

Weighted-
average
exercise
price

 

Weighted-
average
remaining
contractual
term

 

Aggregate
intrinsic
value

 

 

 

 

 

 

 

 

 

(in
thousands)

 

Outstanding at December 31, 2015

 

4,826,477

 

$

37.20

 

 

 

 

 

Granted

 

1,403,045

 

$

29.06

 

 

 

 

 

Exercised

 

(3,125

)

$

10.85

 

 

 

 

 

Forfeited/Cancelled

 

(257,015

)

$

47.36

 

 

 

 

 

Outstanding at June 30, 2016

 

5,969,382

 

$

35.02

 

8.21 years

 

$

6

 

Vested or Expected to vest at June 30, 2016

 

3,361,980

 

$

35.89

 

8.66 years

 

$

5

 

Exercisable at June 30, 2016

 

2,357,502

 

$

33.60

 

7.50 years

 

$

 

 

The fair value of grants made in the six months ended June 30, 2016 was contemporaneously estimated on the date of grant using the following assumptions:

 

 

 

Six months
ended June
30, 2016

 

Risk-free interest rate

 

1.31% —2.24%

 

Expected volatility

 

67%—71%

 

Expected term

 

5.05– 10.00 years

 

 

The Company assumed no expected dividends for all grants. The weighted average grant date fair value of options granted during the six month period ended June 30, 2016 was $17.98 per share.

 

The Company uses the “simplified method” to determine the expected term of options. Under this method, the expected term represents the average of the vesting period and the contractual term. The expected volatility of share options was estimated based on a historical volatility analysis of peers that were similar to the Company with respect to industry, stage of life cycle, size, and financial leverage. The risk-free rate of the option is based on U.S. Government Securities Treasury Constant Maturities yields at the date of grant for a term similar to the expected term of the option.

 

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Restricted Stock Awards —Restricted stock awards are granted subject to certain restrictions, including in some cases service or time conditions (restricted stock). The grant-date fair value of restricted stock awards, which has been determined based upon the market value of the Company’s shares on the grant date, is expensed over the vesting period.

 

Restricted Stock Units —Restricted stock units are granted subject to certain restrictions, including in some cases service or time conditions (restricted stock). The grant-date fair value of restricted stock units, which has been determined based upon the market value of the Company’s shares on the grant date, is expensed over the vesting period.

 

The following table summarizes information on the Company’s restricted stock awards and units:

 

 

 

Restricted Stock Awards and Units

 

 

 

Number of
Shares

 

Weighted
Average
Grant
Date Fair
Value

 

January 1, 2016

 

344,335

 

$

10.85

 

Granted

 

141,185

 

$

30.86

 

Vested

 

(163,635

)

$

10.85

 

Forfeited

 

(47,395

)

$

18.19

 

Unvested at June 30, 2016

 

274,490

 

$

19.86

 

 

The Company recorded share-based compensation expense in the statement of operations related to incentive stock options, nonstatutory stock options, restricted stock awards and restricted stock units as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

4,087

 

$

3,957

 

$

8,415

 

$

8,624

 

Selling, general and administrative

 

4,649

 

4,371

 

9,236

 

9,452

 

Total

 

$

8,736

 

$

8,328

 

$

17,651

 

$

18,076

 

 

Stock Appreciation Rights —Stock appreciation rights (SARs) entitle the holder to receive, upon exercise, an amount of Common Stock or cash (or a combination thereof) determined by reference to appreciation, from and after the date of grant, in the Fair Market Value of a share of Common Stock over the measurement price based on the exercise date.

 

In May 2016, a total of 897,290 SARs were granted to non-executive employees (the 2016 SARs). The 2016 SARs will vest annually in equal installments over four years and will be settled in cash on each vest date, requiring the Company to remeasure the SARs at each reporting period until vesting occurs. For the period ending June 30, 2016, the Company recorded $0.1 million in compensation expense related to the 2016 SARs.

 

As of June 30, 2016 there was approximately $78.2 million of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the 2009 Equity and Long Term Incentive Plan , the 2013 Long Term Incentive Plan and equity awards made pursuant to the NASDAQ inducement grant exception for new hires. This cost is expected to be recognized as share-based compensation expense over the weighted average remaining service period of approximately 2.56 years.

 

9.                                       Convertible Senior Notes

 

In August 2015, the Company issued, at par value, $150.0 million aggregate principal amount of 3.0% convertible senior notes due 2022 (the Convertible Notes). The Convertible Notes bear cash interest at a rate of 3.0% per year, payable semi-annually on February  15 and August 15 of each year, beginning on February 15, 2016. The Convertible Notes will mature on August 15, 2022, unless earlier repurchased or converted. The net proceeds to the Company from the offering were $145.4 million after deducting the initial purchasers’ discounts and commissions and the offering expenses payable by the Company.

 

The Convertible Notes are governed by an indenture (the Convertible Notes Indenture) with U.S Bank National Association as trustee (the Convertible Notes Trustee).

 

Holders may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding February 15, 2022 only under the following circumstances:

 

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·                   during any calendar quarter commencing on or after September 30, 2015 (and only during such calendar quarter), if the last reported sale price of the Company’s 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;

 

·                   during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price (as defined in the Convertible Notes 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 the Company’s common stock and the conversion rate on each such trading day;

 

·                   during any period after the Company has issued notice of redemption until the close of business on the scheduled trading day immediately preceding the relevant redemption date; or

 

·                   upon the occurrence of specified corporate events

 

On or after February 15, 2022, until the close of business on the business day immediately preceding the maturity date, holders may convert their Convertible Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay cash up to the aggregate principal amount of the Convertible Notes to be converted and deliver shares of its common stock in respect of the remainder, if any, of its conversion obligation in excess of the aggregate principal amount of Convertible Notes being converted.

 

The conversion rate for the Convertible Notes was initially, and remains, 17.7487 shares of the Company’s common stock per $1,000 principal amount of the Convertible Notes, which is equivalent to an initial conversion price of approximately $56.34 per share of the Company’s common stock.

 

The Company may not redeem the Convertible Notes prior to August 20, 2018. The Company may redeem for cash all or any portion of the Convertible Notes, at its option, on or after August 20, 2018 if the last reported sale price of its common stock has been at least 130% of the conversion price then in effect on the last trading day of, and for at least 19 other trading days (whether or not consecutive) during, any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides 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, which means that the Company is not required to redeem or retire the Convertible Notes periodically.

 

If the Company undergoes a “fundamental change” (as defined in the Indenture governing the Convertible Notes Indenture), subject to certain conditions, holders of the Convertible Notes may require the Company to repurchase for cash all or part of their Convertible Notes at a 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 Indenture contains customary events of default with respect to the Convertible Notes, including that upon certain events of default (including the Company’s failure to make any payment of principal or interest on the Convertible Notes when due and payable) occurring and continuing, the Convertible Notes Trustee by notice to the Company, or the holders of at least 25% in principal amount of the outstanding Convertible Notes by notice to the Company and the Convertible Notes Trustee, may, and the Convertible Notes Trustee at the request of such holders (subject to the provisions of the Convertible Notes Indenture) shall, 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 the Company 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.

 

The Company accounts for the Convertible Notes as a liability and equity component where the carrying value of the liability component will be valued based on a similar instrument. In accounting for the issuance of the Convertible Notes, the Company separated the Convertible Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Convertible Notes as a whole. The excess of the principal amount of the liability component over its carrying amount, referred to as the debt discount, is amortized to interest expense over the seven-year term of the Convertible Notes. The equity component is not re-measured as long as it continues to meet the conditions for equity classification.

 

In accounting for the transaction costs related to the issuance of the Convertible Notes, the Company allocated the total costs incurred to the liability and equity components of the Convertible Notes based on their relative values. Transaction costs attributable to the liability component are amortized to interest expense over the seven-year term of the Convertible Notes, and transaction costs attributable

 

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to the equity component are netted with the equity components in stockholders’ equity. Additionally, the Company initially recorded a net deferred tax liability of $22.3 million in connection with the Notes.

 

The Convertible Notes consist of the following:

 

Liability component

 

June 30, 2016

 

December 31, 2015

 

Principal

 

$

150,000

 

$

150,000

 

Less: Debt issuance costs

 

(2,613

)

(2,760

)

Less: Debt discount, net(1)

 

(52,451

)

(55,392

)

Net carrying amount

 

$

94,936

 

$

91,848

 

 


(1) Included in the consolidated balance sheets within convertible senior notes (due 2022) and amortized to interest expense over the remaining life of the Convertible Notes using the effective interest rate method.

 

The fair value of the Convertible Notes was approximately $71.3 million as of June 30, 2016. The Company estimates the fair value of its Convertible Notes utilizing market quotations for debt that have quoted prices in active markets. As of June 30, 2016, the remaining contractual life of the Convertible Notes is approximately 6.1 years.

 

The following table sets forth total interest expense recognized related to the Convertible Notes:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Contractual interest expense

 

$

1,125

 

$

 

$

2,241

 

$

 

Amortization of debt issuance costs

 

75

 

 

147

 

 

Amortization of debt discount

 

1,495

 

 

2,941

 

 

Total

 

$

2,695

 

$

 

$

5,329

 

$

 

Effective interest rate of the liability component

 

11

%

 

11

%

 

 

10.                                Restructuring

 

In March 2016, the Company commenced implementation of a reorganization of its operations intended to improve efficiency and better align the Company’s costs and employment structure with its strategic plans. The Company completed its reorganization in June 2016 and recorded a one-time charge of $2.5 million for the six month period ended June 30, 2016. The total $2.5 million in one-time charges is related to work-force reduction, recorded in research and development and selling, general and administrative expenses in the accompanying statement of operations.

 

 

 

Balance as of
March 31,
2016

 

Expenses,
net

 

Cash

 

Balance as of
June 30, 2016

 

2016 workforce reduction

 

$

1,903

 

$

548

 

$

(1,456

)

$

995

 

 

11.                                Commitments and contingencies

 

Under various agreements, the Company will be required to pay royalties and milestone payments upon the successful development and commercialization of products. The Company has entered into funding agreements with The Wellcome Trust Limited (Wellcome Trust) for the research and development of small molecule compounds. To the extent that the Company develops and commercializes program intellectual property on a for-profit basis, it may become obligated to pay to Wellcome Trust development and regulatory milestone payments of up to an aggregate of $68.9 million and single-digit royalties on sales of any research program product. The Company’s obligation to pay such royalties would continue on a country-by-country basis until the longer of the expiration of the last patent in the program intellectual property in such country covering the research program product and the expiration of market exclusivity of such product in such country. The Company’s first such milestone payment of $0.8 million payable to Wellcome Trust occurred in the second quarter of 2016.

 

The Company has also entered into a collaboration agreement with the SMA Foundation. The Company may become obligated to pay the SMA Foundation single- digit royalties on worldwide net product sales of any collaboration product that we successfully develop and subsequently commercialize or, if we outlicense rights to a collaboration product, a specified percentage of certain payments we receive from our licensee. The Company is not obligated to make such payments unless and until annual sales of a collaboration product exceed a designated threshold. The Company’s obligation to make such payments would end upon our payment to the SMA Foundation of a specified amount.

 

The Company has employment agreements with certain employees which require the funding of a specific level of payments, if certain events, such as a change in control or termination without cause, occur.

 

12.                                Subsequent events

 

The Company has evaluated all subsequent events and transactions through the filing date. There were no material events that impacted the unaudited consolidated financial statements or disclosures.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion of our financial condition and results of operations should be read in conjunction with our 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 Part II, Item 1A. (Risk Factors) of this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements.

 

Our Company

 

We are a global biopharmaceutical company focused on the discovery, development and commercialization of orally administered, small molecule therapeutics targeting an area of RNA biology we refer to as post-transcriptional control. We have discovered all of our compounds currently under development using our proprietary technologies. We plan to continue to develop these compounds both on our own and through selective collaboration arrangements with leading pharmaceutical and biotechnology companies. Our internally discovered pipeline addresses multiple therapeutic areas, including rare disorders and oncology.

 

During the quarter ended June 30, 2016, we recognized $15.4 million in sales of Translarna™ (ataluren), our lead product, for the treatment of nonsense mutation Duchenne muscular dystrophy, or nmDMD. Translarna is currently available in over 20 countries on a commercial basis or through a reimbursed early access program, or EAP. Translarna is an investigational new drug in the United States, or U.S. We hold worldwide commercialization rights to Translarna for all indications in all territories.

 

Corporate Updates

 

Regulatory, clinical and marketing authorization matters for Translarna in nonsense mutation Duchenne muscular dystrophy

 

United States . We recently filed a formal appeal of the Refuse to File letter issued on February 22, 2016 by the U.S. Food and Drug Administration, or FDA, for our New Drug Application, or NDA, for Translarna for the treatment of nmDMD. The appeal was submitted in accordance with the formal dispute resolution process that exists within the FDA’s Center for Drug Evaluation and Research.

 

The formal dispute resolution process exists to encourage open, prompt discussion of scientific and procedural disputes that arise during the drug development, new drug review, and post-marketing oversight processes of the FDA. We expect discussions on the refusal of the FDA’s Division of Neurological Products, or DNP, to review Translarna’s NDA to be escalated to the next level of FDA management via this process. Within the dispute resolution process, we are willing to consider multiple paths to advance a potential FDA approval, including the possibility of conducting an additional clinical trial in connection with an accelerated approval.

 

There is substantial risk, notwithstanding any dialogue we have had or any further dialogue we may be able to initiate with the FDA, including pursuant to the formal dispute resolution process, that the agency will continue to disagree with our interpretation of the results of ACT DMD and the totality of clinical data from our trials and we may be required to perform additional clinical and non-clinical trials or complete additional analyses in order to enable FDA review of an NDA submission. Any such requirement for additional trials prior to approval, or otherwise, would result in significant additional costs and would most likely result in our inability to sell Translarna in the United States for a significant period of time, if ever.

 

For important information with respect to risks related to our ability to obtain marketing authorization for Translarna for the treatment of nmDMD in the U.S., see “Item 1A. Risk Factors,” including the risk factor titled, “There is substantial risk that we will not be successful in our appeal of the Refuse to File letter we received from the FDA regarding our NDA for Translarna for the treatment of nmDMD and, by determining to pursue the formal dispute resolution process with the FDA, we have postponed other available strategic pathways which may have proven to be more effective. If there are delays in obtaining regulatory approval in the United States, we will not be able to commercialize Translarna for nmDMD in that territory and our ability to generate revenue will be materially impaired.”

 

European Economic Area . We received marketing authorization from the European Commission in August 2014 for Translarna for the treatment of nmDMD in ambulatory patients aged five years and older in the 31 member states of the European Economic Area, or EEA. The marketing authorization is subject to annual review and renewal by the European Commission following reassessment by the European Medicines Agency, or EMA, of the risk-benefit balance of the authorization, which we refer to as the annual EMA reassessment, as well as our satisfaction of other conditions and obligations placed upon the marketing authorization.

 

In fulfillment of an initial condition to our marketing authorization, in January 2016 we submitted the final clinical study report from our Phase 3 ACT DMD trial to the EMA. We made this submission as a type II variation request that sought to have this initial condition to our marketing authorization removed and a full marketing authorization granted. In February 2016, we also submitted a marketing

 

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authorization renewal request with the EMA.

 

Over the last several months, we have been engaged in constructive discussions with the EMA’s Committee for Medicinal Products for Human Use, or CHMP, regarding the continuation of our marketing authorization, including participation in a Scientific Advisory Group, or SAG, meeting and an oral explanation meeting with the CHMP, during the second quarter of 2016.

 

During the discussion at this CHMP meeting, it was determined that although the primary endpoint was not achieved in ACT DMD, the results of analyses suggested that the risk-benefit ratio of Translarna for the treatment of nmDMD remains positive, but there were still uncertainties about efficacy that needed to be addressed. In forming this conclusion, it was noted that Translarna has already received marketing authorization on an annual basis from the European Commission for the treatment of nmDMD and that there is severe unmet medical need for nmDMD treatment.

 

The CHMP has agreed to our proposal to submit a draft clinical trial protocol for further discussion, which includes seeking scientific advice from the EMA. We also recently received an additional request for supplemental information from the CHMP, including a request classified as a major objection that directs us to submit an adequate proposal for a clinical trial which will be able to demonstrate in a nmDMD patient population a robust and clinically meaningful effect of Translarna which confirms the positive risk-benefit ratio of Translarna and addresses outstanding uncertainties.  The CHMP has noted that this trial must be deemed feasible in the post-authorization setting. In addition, the CHMP expressed an interest for further confirmation of the primary pharmacology of Translarna as part of this request. Generally speaking, a failure to adequately address a major objection would preclude a recommendation for renewal of a marketing authorization.

 

The CHMP’s requests for supplementary information also included a number of other concerns, which do not rise to the level of major objections, including those related to risks associated with treatment. For example, as previously disclosed, changes in blood pressure and lipid profile were observed in a proportion of the Translarna-treated patients in ACT DMD. While the CHMP notes in its assessment report that the safety profile of Translarna could be considered acceptable, it further notes that Translarna is intended to be used chronically in boys with nmDMD who typically already have compromised cardiac function and are also being treated with corticosteroids that generally leads to increased blood pressure and lipid changes. As a result, we have been asked to discuss these topics in our Risk Management Plan and to propose relevant pharmacovigilance activities to collect further data regarding potential long term cardiovascular risks. The current warnings and precautions section of our approved Summary of Product Characteristics, or product label for Translarna, already notes that lipid levels and blood pressure should be monitored on a regular basis.

 

We are in the process of preparing our responses to the EMA’s additional requests for supplementary information. We expect that, in connection with our proposal for a new clinical trial, we will obtain scientific advice from the Scientific Advice Working Party, or SAWP, and the SAG. The SAWP is a standing working party established by the CHMP with the sole remit of providing scientific advice and protocol assistance. The SAG is convened at the request of the CHMP to provide independent recommendations on scientific or technical matters relating to products under evaluation by the CHMP, or on any other scientific issue relevant to the work of the CHMP. We have not yet engaged in discussions with either the SAWP or SAG with respect to the design of a new clinical trial for Translarna in nmDMD.

 

We have been informed that the renewal assessment procedure cannot be completed by mid-year 2016, but we expect that, pursuant to applicable regulations and as confirmed in writing by the European Commission, our current marketing authorization status will remain valid while the annual EMA reassessment is ongoing and until it is concluded with an opinion from the European Commission with respect to renewal of our marketing authorization. Based on our interpretation of applicable regulatory timeframes, we believe the annual EMA reassessment could be completed, at the earliest, by the end of 2016.

 

While the EMA has not formally declined our type II variation request for full approval of our marketing authorization, we believe that it is unlikely that the EMA will recommend in favor of issuing us a marketing authorization that is not subject to an ongoing annual renewal requirement. We believe that if the CHMP determines to issue a positive opinion in favor of renewing our annual marketing authorization, such renewal, and any subsequent annual renewals, will be coupled with an obligation to conduct an agreed upon new clinical trial of Translarna for the treatment of nmDMD, designed with the scientific advice of the EMA. The EMA may also impose other new conditions to our marketing authorization, and may make other recommendations, including new label restrictions or the withdrawal of the marketing authorization. In addition, the EMA could determine that the balance of risks and benefits of using Translarna for the treatment of nmDMD has changed materially or that we have not or are unable to comply with any conditions that have been or may be placed on the marketing authorization. In such an event, the European Commission could, at the EMA’s recommendation, vary, suspend, withdraw or refuse to renew the marketing authorization for Translarna. If our marketing authorization in the EEA is not renewed, or our product label is materially restricted, we would lose all, or a significant portion of, our ability to generate revenue from product sales, whether pursuant to a commercial or an EAP program and throughout all territories.

 

For additional information regarding the risks related to the renewal of our marketing authorization in the EEA, see the risk factor under “Risks Related to Regulatory Approval of our Product and our Product Candidates” titled, “ Our marketing authorization in the EEA

 

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requires annual renewal by the European Commission, which, as of the date of this filing, has not been granted, and there is substantial risk that the EMA will not determine that the risk-benefit balance of Translarna supports renewal of our marketing authorization, on the current label, or at all, and, even if the European Commission grants renewal of our marketing authorization, such renewal will likely be conditioned upon the results of a not yet designed trial for Translarna for the treatment of nmDMD, which will likely result in significant expense and uncertainty for us.  If we are not able to obtain renewal of our marketing authorization, we will not be able to continue to commercialize Translarna for nmDMD and our ability to generate revenue will be materially impaired.

 

Phase 2 Pediatric Study . As part of our ongoing commitments under our marketing authorization in the EEA and to support the potential expansion of Translarna’s label to younger patients, we initiated a Phase 2 pediatric clinical study of Translarna for the treatment of nmDMD in patients two to five years of age in June 2016. This Phase 2, open-label, multiple-dose study will evaluate the safety and pharmacokinetics of Translarna in pediatric patients.

 

Other territories . In March 2016, we withdrew our New Drug Submission, or NDS, with Health Canada for Translarna for nmDMD. We plan to resubmit the NDS with the results of the ACT DMD trial, however in light of the regulatory developments discussed above in the U.S. and EEA, we may determine to refile our NDS later than the second half of 2016. Many territories outside of the EEA reference and depend on the determinations by the EMA when considering the grant of a marketing authorization. While Translarna received marketing authorization for the treatment of nmDMD in Israel in August 2015 and South Korea in December 2015, maintenance of marketing authorization in these countries will depend on the renewal and approval by the EMA for Translarna in the EEA. In the event that the EMA determines not to renew or otherwise modifies or withdraws our marketing authorization in the EEA, we may not be able to maintain our marketing authorizations in these other territories.

 

Early Access Programs . We have been making Translarna for the treatment of nmDMD available through reimbursed early access programs, or EAP programs, in selected countries where funded named patient or cohort programs exist, both within the EEA and in other territories. All of these programs are supported by the EMA’s assessment of Translarna and our marketing authorization in the EEA. As of today, Translarna is available under EAP or similar styled programs in Argentina, Brazil, Canada, Colombia, Cyprus, France, Greece, Israel, Italy, Portugal, Scotland, Spain, Sweden, Switzerland, and Turkey.

 

Commercial and market access matters for Translarna in nonsense mutation Duchenne muscular dystrophy

 

The biopharmaceutical industry, including PTC, has experienced significant pressure on pricing for pharmaceuticals and orphan drug pricing is also drawing significant attention. Government authorities and other third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Prices at which we or our customers seek reimbursement for our products can be subject to challenge, reduction or denial by the government and other payers. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. In addition, the price that is approved by local governmental authorities pursuant to commercial pricing and reimbursement processes may be significantly lower than the price charged for purchases of product in that country pursuant to a reimbursed early access program.

 

In some countries, such as France and Germany, EAP and commercial sales of a product can begin while pricing and reimbursement rates are under discussion with the applicable government health authorities. In the event that the negotiated price of the product is lower than the amount reimbursed for sales made prior to the conclusion of price negotiations, the company may become obligated to repay such excess amount to the applicable government health program. In certain countries, we record revenue net of estimated government and other third party discounts and rebates which will be finalized in the future. Allowances are recorded as a reduction of gross revenue at the time revenues from product sales are recognized. Our allowances may be adjusted over time to reflect known changes in factors which may impact revenue recognition in any given quarter.

 

Each country, including each member state of the EEA, has its own pricing and reimbursement regulations and many countries have other regulations related to the marketing and sale of pharmaceutical products in the applicable country. The pricing and reimbursement process varies from country to country and can take over 18 months from initiation to completion. As a result, our commercial launch will continue to be on a country-by-country basis. We generally will not be able to commence commercial sales of Translarna for the treatment of nmDMD pursuant to our marketing authorization in the EEA in any particular member state of the EEA until we conclude the applicable pricing and reimbursement negotiations and comply with any licensing, employment or related regulatory requirements in that country.

 

In July 2016, the National Institute for Health and Care Excellence, or NICE, issued final guidance recommending Translarna for nmDMD patients within the EMA-approval label when used in connection with a five-year managed access agreement. The managed access agreement has been entered into by us, NICE and National Health Services England, or NHS England as well as the NorthStar clinical network and the patient organisations Muscular Dystrophy UK and Action Duchenne. The managed access agreement establishes the clinical and commercial details surrounding the use of Translarna, including the terms and conditions of a confidential financial arrangement and the collection of further data on the efficacy of Translarna for the treatment of nmDMD over a five-year

 

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period with NICE guidance to be reviewed again at the end of that period, before future funding decisions are taken. As part of the managed access agreement, the usual three-month funding period under local regulation was waived by NHS England and Translarna is available to nmDMD patients in England. We have been engaged in market access discussions with NHS England and NICE since 2014.

 

In addition to England, final commercial reference pricing for Translarna is currently available in Austria, Czech Republic, Denmark, Hungary, Norway, and Slovakia. While we have submitted pricing and reimbursement dossiers with respect to Translarna for the treatment of nmDMD in other key EEA countries, we have not concluded pricing and reimbursement discussions in any of these key countries on terms that are acceptable to us. For example, during the first quarter of 2016, we were unable to achieve an acceptable agreement on pricing and reimbursement terms with the German Federal Association of the Statutory Health Insurances in the arbitration phase of the market access process in Germany. As a result, we determined to delist Translarna from the German pharmacy ordering system, effective April 1, 2016. It is our understanding that the majority of applicable patients and healthcare professionals in Germany have begun to access Translarna through a reimbursed importation pathway possible under German law. For any sales made directly in Germany from local pharmacies since December 2015, we are required to reimburse German payors the difference between the commercial price of Translarna in Germany and the price established by the German arbitration board. Any sales made to German patients via the reimbursed importation pathway are not subject to this arbitration price.

 

We expect that net product sales will fluctuate quarter-over-quarter. In some countries, including Brazil, orders for named patient sales are for multiple months of therapy which can lead to an unevenness in orders. Other factors may also contribute to fluctuations in quarterly net product sales including Translarna’s availability in any particular territory, government actions, economic pressures, political unrest and other factors. Net product sales in general are impacted by many factors such as the timing of decisions by regulatory authorities, in particular the FDA and the EMA with respect to our ability to market or sell Translarna for the treatment of nmDMD, and our ability to successfully negotiate favorable pricing and reimbursement processes on a timely basis in the countries in which we have or may obtain regulatory approval, including the United States, EEA and other territories.

 

For important information regarding risks to our business arising as a result matters relating to pharmaceutical pricing and reimbursement see “Item 1A. Risk Factors,” including the risk factor titled “ Our initial commercial launch of Translarna has begun in, and is expected to continue to take place in, countries that tend to impose strict price controls, which may adversely affect our revenues, if any. Failure to obtain and maintain acceptable pricing and reimbursement terms for Translarna in the European Economic Area and other jurisdictions would prevent us from marketing our products in such regions .”

 

Prevalence estimates for rare diseases are typically provided in ranges due to the uncertainties associated with the methodologies used to derive estimates such as epidemiology assumptions. It can take many years of experience in rare disease market places before prevalence becomes well characterized. PTC is launching the first therapy specifically aimed at DMD patients and in particular DMD patients with nonsense mutation. Our experience to date suggests that there may be up to 7,000 nmDMD patients globally and that approximately 40% of such patients are qualified for treatment under our current product label in the EEA. Country specific epidemiology will continue to be refined and characterized over the coming years and we have determined that we are not able to provide or confirm prior prevalence estimates on a country or regional basis at this time. Our estimates of both the number of people who have DMD caused by a nonsense mutation, as well as the subset of people with nmDMD who are ambulatory and at least five years old, are based on our beliefs and estimates derived from a variety of sources and may prove to be incorrect. Prevalence estimates vary given some degree of variation in the incidence of live male births, the incidence of DMD, the incidence nonsense mutations and other factors.

 

Translarna™ for nonsense mutation cystic fibrosis

 

We anticipate top-line results from our global, confirmatory Phase 3 clinical trial of Translarna for the treatment of cystic fibrosis caused by nonsense mutations, or nmCF, in early 2017. We refer to this trial as ACT CF.

 

During the third quarter of 2015, we submitted to the EMA a type II variation to our marketing authorization of Translarna in the EEA for the treatment of nmDMD, described above, to request approval of Translarna for the treatment of nmCF. Our variation submission was primarily based on the data from our prior Phase 3 clinical trial in nmCF completed in 2011, including a post-hoc analysis of the results. We believe that the collective data from our prior Phase 3 trial, including retrospective and subgroup analyses that we have performed, provide strong support for concluding that Translarna was active and showed clinically meaningful improvements over placebo; however, the primary efficacy endpoint in the intent to treat, or ITT, population did not achieve statistical significance.

 

At its December 2015 meeting, the CHMP discussed the safety and efficacy of Translarna in nmCF patients as a whole and in a subgroup of patients without concomitant treatment with inhaled aminoglycosides and Translarna’s potential for renal and urinary toxicity. At the meeting the CHMP adopted a request for supplementary information with respect to our variation submission and we have submitted our initial response. During the second quarter of 2016, we received additional requests for supplemental information from the CHMP with respect to our type II variation request, including requests characterized as major objections related to the efficacy and safety of

 

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Translarna for the treatment of nmCF. We are in the process of preparing our response to the CHMP’s requests.

 

Approval of the variation to our marketing authorization will depend on the EMA’s assessment of the relative benefits and risks of approval. If we are unable to demonstrate the required relative risk-benefit profile, there is substantial risk that the EMA will not grant us a variation approving Translarna for the treatment of nmCF. Based on recent interactions with the CHMP, we believe that the results from our ongoing ACT CF trial may be required prior to any grant of marketing authorization and we no longer expect a recommendation from the CHMP with respect to our type II variation submission in 2016.

 

Even if the variation is approved, we expect that the EMA will require us, as a post approval measure, to provide comprehensive clinical data from ACT CF to the EMA. In addition, such variation, if granted, will be subject to annual review and renewal by the European Commission following reassessment by the EMA of the risk-benefit balance of the authorization, unless and until we are granted full marketing authorization for our primary marketing authorization in the EEA for Translarna for the treatment of nmDMD.

 

Translarna™ for additional indications

 

Based on its understood mechanism of action, we believe Translarna may have benefit in the treatment of patients with any genetic disorder that arises as a result of a nonsense mutation. We are pursuing proof of concept studies for Translarna in additional indications, including mucopolysaccharidosis type I caused by nonsense mutation, or nmMPS I, nonsense mutation aniridia, and nonsense mutation Dravet syndrome/CDKL5.

 

Spinal muscular atrophy program

 

Two compounds are currently in clinical development within the SMA program, RG7800 and RG7916. A Phase 1 study for RG7916 in healthy volunteers to investigate the safety, tolerability, pharmacokinetics and pharmacodynamics has been completed. Preliminary results indicate that RG7916 was well tolerated and treatment resulted in increases of full length SMN2 mRNA. A clinical study of RG7916 in SMA patients is expected to begin in 2016. RG7800 is the subject of a Phase 2 randomized, double blind, placebo controlled trial called Moonfish in adult and pediatric patients with SMA. Dosing in the Moonfish trial was suspended in April 2015 and the trial was placed on clinical hold to investigate a non-clinical safety finding observed in a longer term animal study. We and our collaboration partners expect to utilize data from completed and ongoing studies to continue to compare the profiles of the RG7800 and RG7916 compounds to determine the best path forward for our SMA program.

 

Cancer stem cell program

 

A Phase 1 first-in-human, dose-escalation safety and pharmacokinetic open-label clinical study for our product candidate, PTC596, in advanced cancer patients with solid tumors initiated in April 2015 and is ongoing.

 

Funding

 

Since 2015, our revenues have been primarily generated from sales of Translarna for the treatment of nmDMD in territories where we are permitted to distribute Translarna under our early access programs, or EAPs, and in countries in the EEA where we were able to obtain acceptable pricing and reimbursement terms.

 

To date, we have financed our operations primarily through our offering of 3.00% convertible senior notes due August 15, 2022, or the Convertible Notes offering, our public offerings of common stock in February 2014 and in October 2014, our initial public offering of common stock in June 2013, private placements of our preferred stock, collaborations, bank debt and convertible debt financings and grants and clinical trial support from governmental and philanthropic organizations and patient advocacy groups in the disease areas addressed by our product candidates.

 

As of June 30, 2016, we had an accumulated deficit of $673.1 million. We had a net loss of $80.1 million and $76.3 million for the six months ended June 30, 2016 and 2015, respectively.

 

Our ongoing ability to generate revenue is almost entirely dependent upon our ability to maintain our marketing authorization in the EEA for Translarna for the treatment of nmDMD in ambulatory patients aged five years and older. We expect to incur significant costs in connection with our efforts to maintain our marketing authorization. If our marketing authorization is not renewed, or our product label is materially restricted, we would lose all, or a significant portion of, our ability to generate revenue from product sales, whether pursuant to a commercial or an EAP program and throughout all territories.

 

In addition, in connection with our ongoing dialogue with the EMA with respect to the renewal of our marketing authorization in the EEA, the CHMP has agreed to our proposal to submit for further discussion a draft clinical trial protocol regarding a new trial evaluating

 

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Translarna in nmDMD patients, which will include input from the EMA in the form of scientific advice. Designing, enrolling, conducting and completing a clinical trial is a time-consuming, expensive and uncertain process that takes years to complete, and we expect that we will incur material ongoing costs related to the development of such a trial in the short-term, as well as the implementation of the trial in the longer term.

 

We also recently initiated a formal dispute resolution with the FDA, seeking to reverse the FDA’s Refuse to File decision with respect to our NDA for Translarna for the treatment of nmDMD and we may incur significant costs in connection with our efforts to resolve the matters set forth in the Refuse to File letter.

 

We anticipate that our expenses will further increase in connection with the expansion of our global infrastructure as we continue to establish an international presence and commercialize Translarna for the treatment of nmDMD, including sales and marketing, legal and regulatory, distribution and manufacturing and administrative and employee-based expenses. In addition to the foregoing, we expect to continue to incur significant costs in connection with our ongoing confirmatory Phase 3 ACT CF clinical trial and open label extension clinical trials of Translarna for the treatment of nmDMD and nmCF as well as our Phase 2 proof-of-concept studies for nmMPS I, nonsense mutation aniridia and nonsense mutation Dravet syndrome/CDKL5. We also expect to incur ongoing research and development expenses for our other product candidates, including our ongoing Phase 1 clinical study under our cancer stem cell program. In addition, we may incur substantial costs in connection with our efforts to advance our regulatory submissions, including our submission with the EMA that seeks to include Translarna for the treatment of nmCF. We have begun seeking and intend to continue to seek marketing authorization for Translarna for the treatment of nmDMD in territories outside of the EEA and we may also seek marketing authorization for Translarna for other indications. These efforts may significantly impact the timing and extent of our commercialization expenses.

 

With respect to our outstanding Convertible Notes, cash interest payments are payable on a semi-annual basis in arrears, which will require total funding of $4.5 million annually. Furthermore, as a result of our initial public offering in June 2013, we have incurred and expect to continue to incur additional costs associated with operating as a public company. These costs include significant legal, accounting, investor relations and other expenses that we did not incur as a private company. Additionally, we could be forced to expend significant resources in the defense of the pending securities class action lawsuits brought against us and certain of our executives, as described under Part II, Item 1. Legal Proceedings in this Quarterly Report on Form 10-Q. See also, “ The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for purchasers of our common stock and lawsuits against us and our officers and directors ” under Part II, Item 1A. Risk Factors - Risks Related to Our Common Stock.

 

We will need to generate significant revenues to achieve and sustain profitability, and we may never do so. Accordingly, we may need to obtain substantial additional funding in connection with our continuing operations. Adequate additional financing may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or our commercialization efforts.

 

Financial operations overview

 

To date, our net product sales have consisted solely of sales of Translarna for the treatment of nmDMD in territories outside of the U.S. Our process for recognizing revenue is described below under “Critical accounting policies and significant judgments and estimates—Revenue recognition”.

 

Roche and the SMA Foundation Collaboration.   In November 2011, we entered into a license and collaboration agreement, or licensing agreement, with Roche and the SMA Foundation pursuant to which we are collaborating with Roche and the SMA Foundation to further develop and commercialize compounds identified under our spinal muscular atrophy program with the SMA Foundation. The research component of this agreement terminated effective December 31, 2014. The licensing agreement included a $30 million upfront payment made in 2011 which was recognized on a deferred basis over the research term, and the potential for up to $460 million in milestone payments and royalties on net sales.

 

In August 2013, we announced the selection of a development candidate. The achievement of this milestone triggered a $10.0 million payment to us from Roche, which we recorded as collaboration revenue for the year ended December 31, 2013.

 

In January 2014, we initiated a Phase 1 clinical program, which triggered a $7.5 million milestone payment to us from Roche which we recorded as collaboration revenue for the year ended December 31, 2014.

 

In November 2014, we announced that our joint development program in Spinal Muscular Atrophy (SMA) with Roche and the SMA Foundation (SMAF) has started a Phase 2 study in adult and pediatric patients. The achievement of this milestone triggered a $10.0 million payment to us from Roche which we recorded as collaboration revenue for the year ended December 31, 2014.

 

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Grant revenue.   From time to time, we receive grant funding from various institutions and governmental bodies. The grants are typically for early discovery research, and generally such grant programs last from two to five years.

 

Research and development expense

 

Research and development expenses consist of the costs associated with our research activities, as well as the costs associated with our drug discovery efforts, conducting preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings. Our research and development expenses consist of:

 

·                   external research and development expenses incurred under agreements with third-party contract research organizations and investigative sites, third-party manufacturing organizations and consultants;

 

·                   employee-related expenses, which include salaries and benefits, including share-based compensation, for the personnel involved in our drug discovery and development activities; and

 

·                   facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, IT, human resources and other support functions, depreciation of leasehold improvements and equipment, and laboratory and other supplies.

 

We use our employee and infrastructure resources across multiple research projects, including our drug development programs. We track expenses related to our clinical programs and certain preclinical programs on a per project basis.

 

We expect our research and development expenses to increase in connection with our ongoing activities, particularly as we continue our confirmatory Phase 3 ACT CF trial and open label extension clinical trials of Translarna for the treatment of nmDMD and nmCF, our Phase 2 proof-of-concept study of Translarna in nmMPS I, nonsense mutation aniridia, and nonsense mutation Dravet syndrome/CDKL5, and our Phase 1 clinical study for PTC596 under our cancer stem cell program. The timing and amount of these expenses will depend upon the outcome of these ongoing clinical trials and the costs associated with our planned clinical trials. The timing and amount of these expenses will also depend on the costs associated with potential future clinical trials of our product candidates and the related expansion of our research and development organization, regulatory requirements, advancement of our preclinical programs and product candidate manufacturing costs.

 

The following tables provide research and development expense for our most advanced principal product development programs, for the three and six months ended June 30, 2016 and June 30, 2015.

 

 

 

Three months
June 30,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Translarna (nmDMD, nmCF, nmMPS I, aniridia and Dravet)

 

$

22,056

 

$

17,465

 

Antibacterial

 

4

 

2,499

 

Cancer stem cell

 

1,691

 

1,612

 

Next generation nonsense readthrough

 

1,680

 

2,028

 

Other research and preclinical

 

3,396

 

4,586

 

Total research and development

 

$

28,827

 

$

28,190

 

 

 

 

Six months
June 30,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Translarna (nmDMD, nmCF, nmMPS I, aniridia and Dravet)

 

$

44,206

 

$

30,309

 

Antibacterial

 

163

 

4,051

 

Cancer stem cell

 

3,640

 

2,430

 

Next generation nonsense readthrough

 

3,526

 

3,016

 

Other research and preclinical

 

8,691

 

16,322

 

Total research and development

 

$

60,226

 

$

56,128

 

 

The successful development of our product and product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

 

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·                   the costs, timing and outcome of our efforts to resolve the matters set forth in the Refuse to File letter we received from the FDA in connection with our NDA for Translarna for the treatment of nmDMD;

 

·                   the costs, timing and outcome of the annual EMA assessment related to renewal of our marketing authorization in the EEA for Translarna for the treatment of nmDMD, including whether the EMA determines that the risk-benefit balance of Translarna supports renewal of our marketing authorization in the EEA, on the current approved label, or at all and the design of any acceptable new clinical trial in nmDMD we may be able to develop with input from the EMA, if any;

 

·                   the scope, rate of progress and expense of our clinical trials and other research and development activities;

 

·                   the potential benefits of our product and product candidate over other therapies;

 

·                   our ability to market, commercialize and achieve market acceptance for any of our product candidates that we are developing or may develop in the future, including our ability to negotiate pricing and reimbursement terms acceptable to us and to obtain or maintain marketing authorizations we have or may receive from our product and product candidates;

 

·                   clinical trial results;

 

·                   the terms and timing of regulatory approvals; and

 

·                   the expense of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights.

 

A change in the outcome of any of these variables with respect to the development of Translarna or any other product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the EMA or FDA or other regulatory authority were to require us to conduct clinical trials beyond those which we currently anticipate will be required for the completion of clinical development of Translarna or any other product candidate or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

 

Selling, general and administrative expense

 

Selling, general and administrative expenses consist primarily of salaries and other related costs for personnel, including share-based compensation expenses, in our executive, legal, business development, finance, accounting, information technology and human resource functions. Other selling, general and administrative expenses include facility-related costs not otherwise included in research and development expense; advertising and promotional expenses; costs associated with industry and trade shows; and professional fees for legal services, including patent-related expenses, accounting services, miscellaneous selling costs and finishing costs incurred to direct product to commercial use.

 

We expect that selling, general and administrative expenses will increase in future periods as a result of our continued efforts to establish an expanded international presence in Europe and other territories and our continued efforts to commercialize Translarna for the treatment of nmDMD, including increased payroll, expanded infrastructure, commercial operations, increased consulting, legal, accounting and investor relations expenses.

 

Interest (expense) income, net

 

Interest (expense) income, net consists of interest income earned on investments and interest expense from the Convertible Notes outstanding.

 

Critical accounting policies and significant judgments and estimates

 

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. Actual results may differ from these estimates under different assumptions or conditions.

 

Revenue recognition

 

We recognize revenue when amounts are realized or realizable and earned. Revenue is considered realizable and earned when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the price is fixed or determinable; and (4) collection of the amounts due are reasonably assured.

 

Net Product Sales

 

To date, our net product sales have consisted solely of sales of Translarna for the treatment of nmDMD in territories outside of the U.S. We began recognizing revenue for payments received under the reimbursed EAPs for Translarna in nmDMD patients in select countries in the third quarter of 2014. We have now established a pattern of collectability and, since January 2015, we recognize revenue from

 

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product sales when there is persuasive evidence that an arrangement exists, title to product and associated risk of loss has passed to the customer, the price is fixed or determinable, collectability is reasonably assured and we have no further performance obligations in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 605-15, Revenue Recognition—Products.

 

We have recorded revenue on sales where Translarna is available either on a commercial basis or through a reimbursed EAP program. Orders for Translarna are generally received from hospital and retail pharmacies and, in some cases, one of our third-party partner distributors. Our third-party distributors act as intermediaries between us and end users and do not typically stock significant quantities of Translarna. The ultimate payor for Translarna is typically a government authority or institution or a third-party health insurer. Prior to January 1, 2015, we generally recognized revenue for these reimbursed EAP programs once the product was shipped on behalf of the government authority or institution on a cash basis if all other revenue recognition criteria had been met. Beginning in the first quarter of 2015, we are recognizing revenue for Translarna as product is shipped, as we have established a pattern of collectability.

 

We record revenue net of estimated third party discounts and rebates. Allowances are recorded as a reduction of revenue at the time revenues from product sales are recognized. Allowances for government and other third-party rebates and discounts are established or estimated at the time of delivery. These allowances are adjusted to reflect known changes in factors and may impact such allowances in the quarter those changes are known.

 

We expect that net product sales will fluctuate quarter-over-quarter. In some countries, including Brazil, orders for named patient sales are for multiple months of therapy which can lead to an unevenness in orders. Other factors may also contribute to fluctuations in quarterly net product sales including Translarna’s availability in any particular territory, government actions, economic pressures, political unrest and other factors. Net product sales are impacted by factors, such as the timing of decisions by regulatory authorities, in particular the FDA and the EMA with respect to our ability to market or sell Translarna for the treatment of nmDMD, and our ability to successfully negotiate favorable pricing and reimbursement processes on a timely basis in the countries in which we have or may obtain regulatory approval, including the United States, EEA and other territories.

 

Collaboration and Grant Revenue

 

The terms of collaboration agreements typically include payments of one or more of the following: nonrefundable, upfront license fees; milestone payments; research funding; and royalties on future product sales. In addition, if applicable, we generate service revenue through collaboration and grant agreements that provide for fees for research and development services or additional payments upon achievement of specified events.

 

We evaluate all contingent consideration earned, such as a milestone payment, using the criteria as provided by the Financial Accounting Standards Board, or FASB, guidance on the milestone method of revenue recognition. At the inception of a collaboration arrangement, we evaluate if milestone payments are substantive. The criteria requires that (1) we determine if the milestone is commensurate with either its performance to achieve the milestone or the enhancement of value resulting from our activities to achieve the milestone; (2) the milestone be related to past performance; and (3) the milestone be reasonable relative to all deliverable and payment terms of the collaboration arrangement. If these criteria are met then the contingent milestones can be considered as substantive milestones and will be recognized as revenue in the period that the milestone is achieved. We recognize royalties as earned in accordance with the terms of various research and collaboration agreements. If not substantive, the contingent consideration is allocated to the existing units of accounting based on relative selling price and recognized following the same basis previously established for the associated unit of accounting.

 

We recognize reimbursements for research and development costs under collaboration agreements as revenue as the services are performed. We record these reimbursements as revenue and not as a reduction of research and development expenses as we have the risks and rewards as the principal in the research and development activities.

 

Our principal obligation under our grant agreements is to conduct the internal or external research in the specific field funded by the grant. We determine, through the grant’s normal research process, which research and development projects to pursue. We recognize grant revenues as the research activities are performed. If the grant includes an upfront payment, we defer the amount and recognize it as revenue as the expenditures are incurred.

 

Inventories and Cost of Product Revenues

 

In 2014, we were notified that the European Commission granted marketing authorization for Translarna for the treatment of nmDMD in ambulatory patients aged five years and older. The conditional marketing authorization allows us to market Translarna for the treatment of nmDMD in the 31 member states of European Economic Area. Our launch in these countries is on a country by country basis. This marketing authorization is subject to annual review and renewal by the European Commission following reassessment by

 

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the European Medicines Agency, or EMA, of the risk benefit balance of the authorization, which we refer to as the annual EMA reassessment. In the third quarter of 2015, the EMA approved the annual renewal of the marketing authorization for Translarna for the treatment of nmDMD. The authorization was further conditioned on our submission of the final report, including additional efficacy and safety data, from ACT DMD and our ability to implement measures, including pharmacovigilance plans that are detailed in the risk management plan for Translarna that was submitted to EMA. In January 2016, we submitted the final ACT DMD report to the EMA. We made this submission as a type II variation request that sought to have this initial condition to our marketing authorization removed and a full marketing authorization granted. In February 2016, we also submitted a marketing authorization renewal request with the EMA.

 

While we have been informed that the renewal assessment procedure cannot be completed by mid-year 2016, we expect that, pursuant to applicable regulations, our current marketing authorization status will remain valid while the annual EMA reassessment is ongoing and until it is concluded with an opinion from the European Commission with respect to renewal of our marketing authorization. Based on our interpretation of applicable regulatory timeframes, we believe the annual EMA reassessment could be completed, at the earliest, by the end of 2016.

 

We plan to seek to renew the marketing authorization on an annual basis until our obligations have been fulfilled and the approval is converted from a conditional approval into a full approval. If we fail to satisfy such requirements, or if it is determined that the balance of risks and benefits of using Translarna changes materially, the European Commission could, at the EMA’s recommendation, vary, suspend, withdraw or refuse to renew the marketing authorization for Translarna or require additional clinical trials.

 

There continues to be substantial risk that regulators could suspend or not renew our marketing authorization in the future. As such, as of the date of this filing, we have not capitalized inventory given the near term uncertainty with respect to the long term utilization of Translarna finished product for commercial use. Had we capitalized as inventory all of our Translarna product that is available for commercial sale on hand as of June 30, 2016, the value of that inventory would have been approximately $1.2 million. In addition, had we expensed the cost of Translarna product sold as a cost of sales, our gross profit margin would have been greater than 90%, which we believe is consistent with the cost of producing small molecule therapeutics for orphan drug diseases in the pharmaceutical industry. We will continue to assess the appropriateness of inventory capitalization based on the outcome of applicable regulatory approvals which are expected later this year.

 

Accrued expenses

 

As part of the process of preparing our financial statements, we are required to estimate accrued expenses. This process involves communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. Examples of estimated accrued expenses include:

 

·                   fees paid to contract research organizations in connection with preclinical and toxicology studies and clinical trials;

 

·                   fees paid to investigative sites in connection with clinical trials;

 

·                   fees paid to contract manufacturers in connection with the production of clinical trial materials; and

 

·                   professional service fees.

 

Share-based compensation

 

We expect to grant additional stock options that will result in additional share-based compensation expense. We measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. For service type awards, share-based compensation expense is recognized on a straight-line basis over the period during which the employee is required to provide service in exchange for the entire award. For awards that vest or begin vesting upon achievement of a performance condition, we estimate the likelihood of satisfaction of the performance condition and recognize compensation expense when achievement of the performance condition is deemed probable using an accelerated attribution model.

 

From January 1, 2016 through June 30, 2016, we issued a total of 1,403,045 stock options to various employees. Of those, 93,100 were non-statutory stock option inducement grants made pursuant to the NASDAQ inducement grant exception as a material component of our new hires’ employment compensation. All other stock option grants were made under our 2013 Long Term Incentive Plan.

 

The fair value of options is calculated using the Black-Scholes option pricing model to determine the fair value of stock options on the

 

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date of grant based on key assumptions, such as expected volatility and expected term. As a new public company, we do not have sufficient history to estimate the volatility of our common stock price or the expected life of the options. We calculate expected volatility based on reported data for similar publicly traded companies for which historical information is available and will continue to do so until the historical volatility of our common stock is sufficient to measure expected volatility for future option grants.

 

The fair value of grants made in the six months ended June 30, 2016 was contemporaneously estimated on the date of grant using the following assumptions:

 

 

 

2016

 

Risk-free interest rate

 

1.31% —2.24%

 

Expected volatility

 

67%—71%

 

Expected term

 

5.05– 10.00 years

 

 

We assumed no expected dividends for all grants. The weighted average grant date fair value of options granted during the six month period ended June 30, 2016 was $17.98 per share.

 

We use the “simplified method” to determine the expected term of options. Under this method, the expected term represents the average of the vesting period and the contractual term. The expected volatility of share options was estimated based on a historical volatility analysis of peers that were similar to us with respect to industry, stage of life cycle, size, and financial leverage. The risk-free rate of the option is based on U.S. Government Securities Treasury Constant Maturities yields at the date of grant for a term similar to the expected term of the option.

 

Restricted Stock Awards —Restricted stock awards are granted subject to certain restrictions, including service conditions. The grant-date fair value of restricted stock awards, which has been determined based upon the market value of our common stock on the grant date, is expensed over the vesting period.

 

Restricted Stock Units —Restricted stock units are granted subject to certain restrictions, including in some cases service or time conditions (restricted stock). The grant-date fair value of restricted stock units, which has been determined based upon the market value of the Company’s shares on the grant date, is expensed over the vesting period.

 

The following table summarizes information on our restricted stock awards and units:

 

 

 

Restricted Stock Awards and Units

 

 

 

Number of
Shares

 

Weighted
Average
Grant
Date Fair
Value

 

January 1, 2016

 

344,335

 

$

10.85

 

Granted

 

141,185

 

$

30.86

 

Vested

 

(163,635

)

$

10.85

 

Forfeited

 

(47,395

)

$

18.19

 

Unvested at June 30, 2016

 

274,490

 

$

19.86

 

 

The Company recorded share-based compensation expense in the statement of operations related to incentive stock options, nonstatutory stock options, restricted stock awards and restricted stock units as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

4,087

 

$

3,957

 

$

8,415

 

$

8,624

 

Selling, general and administrative

 

4,649

 

4,371

 

9,236

 

9,452

 

Total

 

$

8,736

 

$

8,328

 

$

17,651

 

$

18,076

 

 

Stock Appreciation Rights —Stock appreciation rights (SARs) entitle the holder to receive, upon exercise, an amount of Common Stock or cash (or a combination thereof) determined by reference to appreciation, from and after the date of grant, in the fair market value of a share of common stock over the measurement price based on the exercise date.

 

In May 2016, a total of 897,290 SARs were granted to non-executive employees (the 2016 SARs). The 2016 SARs will vest annually in equal installments over four years and will be settled in cash on each vest date, requiring the Company to remeasure the SARs at each

 

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reporting period until vesting occurs. For the period ending June 30, 2016, the Company recorded $0.1 million in compensation expense related to the 2016 SARs.

 

As of June 30, 2016 there was approximately $78.2 million of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the 2009 Equity and Long Term Incentive Plan, the 2013 Long Term Incentive Plan and equity awards made pursuant to the NASDAQ inducement grant exception for new hires. This cost is expected to be recognized as share-based compensation expense over the weighted average remaining service period of approximately 2.56 years.

 

Results of operations

 

Three months ended June 30, 2016 compared to three months ended June 30, 2015

 

The following table summarizes revenues and selected expense and other income data for the three months ended June 30, 2016 and 2015.

 

 

 

Three months ended
June 30,

 

Change
2016 vs.

 

(in thousands)

 

2016

 

2015

 

2015

 

Net product revenue

 

$

15,437

 

$

6,161

 

$

9,276

 

Collaboration and grant revenue

 

196

 

613

 

(417

)

Research and development expense

 

28,827

 

28,190

 

637

 

Selling, general and administrative expense

 

23,366

 

17,210

 

6,156

 

Interest (expense) income, net

 

(2,060

)

498

 

(2,558

)

 

Net product revenues. Net product revenues were $15.4 million for the three months ended June 30, 2016, an increase of $9.3 million, or 150% from $6.2 million for the three months ended June 30, 2015 due to the expanded commercial launch of Translarna. We have recorded revenue on sales where Translarna is available either on a commercial basis or through a reimbursed EAP program and typically paid for by a government authority or institution. Since January 1, 2015, we have recognized revenue for Translarna as product is shipped, given we have established a pattern of collectability.

 

Collaboration and grant revenues. Collaboration and grant revenues were $0.2 million for the three months ended June 30, 2016, a decrease of $0.4 million, or 68%, from $0.6 million for the three months ended June 30, 2015. The decrease was primarily due to the recognition of deferred revenue from collaboration milestone payments in the 2015 period.

 

Research and development expense. Research and development expense was $28.8 million for the three months ended June 30, 2016, an increase of $0.6 million, or 2%, from $28.2 million for the three months ended June 30, 2015. The increase resulted primarily from an increase in consulting expenses associated with our ongoing clinical trials.

 

Selling, general and administrative expense. Selling, general and administrative expense was $23.4 million for the three months ended June 30, 2016, an increase of $6.2 million, or 36%, from $17.2 million for the three months ended June 30, 2015. The increase resulted primarily from additional costs associated with commercial activities in support of the expanded commercial launch of Translarna across Europe and other regions.

 

Interest (expense) income, net.  Interest expense, net was $2.1 million for the three months ended June 30, 2016, an increase in expense of $2.6 million, from interest income of $0.5 million for the three months ended June 30, 2015.  The increase in interest expense was primarily due to current year interest expense recorded from the Convertible Notes partially offset by interest income from investments.

 

Income tax benefit (expense). Income tax benefit was $0.1 million for the three months ended June 30, 2016 and income tax expense was $0.1 million for the three months ended June 30, 2015. We are subject to income taxes in the United States, although currently not a tax payer, and various foreign jurisdictions, and our foreign tax liabilities are largely dependent upon the distribution of pre-tax earnings among these different jurisdictions.

 

The income tax benefit for the three months ended June 30, 2016 differed from the amounts computed by applying the U.S. federal income tax rate of 34% to loss before tax expense as a result of the favorable amount of profit mix in foreign jurisdictions which have lower tax rates, as well as by having a full valuation allowance in jurisdictions where we have net operating losses. We review the expected annual effective income tax rate and make changes on a quarterly basis as necessary based on certain factors such as changes in forecasted annual operating income, changes to the actual and permanent book-to-tax differences, and changes resulting from the impact of tax law changes.

 

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Six months ended June 30, 2016 compared to six months ended June 30, 2015

 

The following table summarizes revenues and selected expense and other income data for the six months ended June 30, 2016 and 2015.

 

 

 

Six months ended
June 30,

 

Change
2016 vs.

 

(in thousands)

 

2016

 

2015

 

2015

 

Net product revenue

 

$

34,314

 

$

11,230

 

$

23,084

 

Collaboration and grant revenue

 

214

 

3,026

 

(2,812

)

Research and development expense

 

60,226

 

56,128

 

4,098

 

Selling, general and administrative expense

 

49,304

 

34,825

 

14,479

 

Interest (expense) income, net

 

(4,016

)

1,022

 

(5,038

)

 

Net product revenues. Net product revenues were $34.3 million for the six months ended June 30, 2016, an increase of $23.1 million, or 206%, from $11.2 million for the six months ended June 30, 2015 due to the expanded commercial launch of Translarna. We have recorded revenue on sales where Translarna is available either on a commercial basis or through a reimbursed EAP program and typically paid for by a government authority or institution. Since January 1, 2015, we have recognized revenue for Translarna as product is shipped, given we have established a pattern of collectability.

 

Collaboration and grant revenues. Collaboration and grant revenues were $0.2 million for the six months ended June 30, 2016, a decrease of $2.8 million, or 93%, from $3.0 million for the six months ended June 30, 2015. The decrease was primarily due to the recognition of deferred revenue from Roche’s collaboration milestone payments to us in the 2015 period.

 

Research and development expense. Research and development expense was $60.2 million for the six months ended June 30, 2016, an increase of $4.1 million, or 7%, from $56.1 million for the six months ended June 30, 2015. The increase resulted primarily from an increase in clinical trial related expenses associated with our ongoing clinical trials, supply chain activities in support of the expanded commercial launch of Translarna and increased expenses in connection with our expanding clinical-stage pipeline.

 

Selling, general and administrative expense. Selling, general and administrative expense was $49.3 million for the six months ended June 30, 2016, an increase of $14.5 million, or 42%, from $34.8 million for the six months ended June 30, 2015. The increase resulted primarily from additional costs associated with commercial activities in support of the expanded commercial launch of Translarna across Europe and other regions.

 

Interest (expense) income, net.  Interest expense, net was $4.0 million for the six months ended June 30, 2016, an increase in expense of $5.0 million from interest income of $1.0 million for the six months ended June 30, 2015.  The increase in interest expense was primarily due to current year interest expense recorded from the Convertible Notes partially offset by interest income from investments.

 

Income tax benefit (expense). Income tax expense was $0.02 million for the six months ended June 30, 2016 and $0.1 million for the six months ended June 30, 2015. We are subject to income taxes in the United States, although currently not a tax payer, and various foreign jurisdictions, and our foreign tax liabilities are largely dependent upon the distribution of pre-tax earnings among these different jurisdictions.

 

The income tax expense for the six months ended June 30, 2016 differed from the amounts computed by applying the U.S. federal income tax rate of 34% to loss before tax expense as a result of the favorable amount of profit mix in foreign jurisdictions which have lower tax rates, as well as by having a full valuation allowance in jurisdictions where we have net operating losses. We review the expected annual effective income tax rate and make changes on a quarterly basis as necessary based on certain factors such as changes in forecasted annual operating income, changes to the actual and permanent book-to-tax differences, and changes resulting from the impact of tax law changes.

 

Liquidity and capital resources

 

Sources of liquidity

 

Since inception, we have incurred significant operating losses.

 

As a growing commercial-stage biopharmaceutical company, we are engaging in significant commercialization efforts for Translarna for nmDMD while also devoting a substantial portion of our efforts on research and development programs related to Translarna and our other product candidates. Our ongoing ability to generate revenue is almost entirely dependent upon our ability to maintain our marketing authorization in the EEA for Translarna for the treatment of nmDMD in ambulatory patients aged five years and older. During

 

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2016, we expect that our revenues will be primarily generated from sales of Translarna in territories where we are permitted to distribute Translarna under our EAP programs, and those countries, in particular in the EEA, where we are able to obtain pricing and reimbursement approval at acceptable levels.

 

We have historically financed our operations primarily through the issuance and sale of our common stock in public offerings, the private placements of our preferred stock, collaborations, bank debt, convertible debt financings and grants and clinical trial support from governmental and philanthropic organizations and patient advocacy groups in the disease areas addressed by our product candidates. We expect to continue to incur significant expenses and operating losses for at least the next several years. The net losses we incur may fluctuate significantly from quarter to quarter.

 

In August 2015, we closed a private offering of $150 million in aggregate principal amount of 3.00% convertible senior notes due 2022, or the Convertible Notes, including the exercise by the initial purchasers of an option to purchase an additional $25 million in aggregate principal amount of the Convertible Notes. The Convertible Notes bear cash interest payable on February 15 and August 15 of each year, beginning on February 15, 2016. The Convertible Notes are senior unsecured obligations of ours and will mature on August 15, 2022, unless earlier converted, redeemed or repurchased in accordance with their terms prior to such date. We received net proceeds from the offering of approximately $145.4 million, after deducting the initial purchasers’ discounts and commissions and the estimated offering expenses payable by us.

 

Cash flows

 

As of June 30, 2016, we had cash, cash equivalents and marketable securities of $272.9 million.

 

The following table provides information regarding our cash flows and our capital expenditures for the periods indicated.

 

 

 

Six months ended
June 30,

 

(in thousands)

 

2016

 

2015

 

Cash provided by (used in):

 

 

 

 

 

Operating activities

 

$

(66,172

)

$

(66,244

)

Investing activities

 

43,114

 

37,303

 

Financing activities

 

34

 

8,072

 

 

Net cash used in operating activities was $66.2 million for the six months ended June 30, 2016 and $66.2 million for the six months ended June 30, 2015. The net cash used in operating activities primarily relates to supporting clinical development and commercial activities.

 

Net cash provided by investing activities was $43.1 million for the six months ended June 30, 2016 and net cash used in investing activities was $37.3 million for the six months ended June 30, 2015.  Cash provided by investing activities was related to the sale and redemption of marketable securities to fund operations.

 

Net cash provided by financing activities for the six months ended June 30, 2016 and June 30, 2015 was attributable to the exercise of options.

 

Funding requirements

 

We expect to incur significant costs in connection with our efforts to maintain our marketing authorization for Translarna for the treatment of nmDMD in the EEA, including in connection with our design and potential enrollment and execution of a new clinical trial in nmDMD. We also may incur significant costs in connection with our efforts to resolve the matters set forth in the Refuse to File letter we received from the FDA with respect to our NDA for Translarna for the treatment of nmDMD, including pursuant to our recently initiated formal dispute resolution with the FDA, which seeks to reverse the FDA’s Refuse to File decision. We anticipate that our expenses will further increase in connection with the expansion of our global infrastructure as we continue to establish an international presence and commercialize Translarna for the treatment of nmDMD, including sales and marketing, legal and regulatory, distribution and manufacturing, and administrative and employee-based expenses.

 

In addition to the foregoing, we expect to continue to incur significant costs in connection with our ongoing confirmatory Phase 3 ACT CF trial and open label extension clinical trials of Translarna for the treatment of nmDMD and nmCF as well as our Phase 2 proof-of-concept studies for nmMPS I, nonsense mutation aniridia and nonsense mutation Dravet syndrome/CDKL5. We also expect to incur ongoing research and development expenses for our other product candidates, including our ongoing Phase 1 clinical study under our cancer stem cell program. In addition, we may incur substantial costs in connection with our efforts to advance our regulatory

 

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submissions, including our submission with the EMA that seeks to include Translarna for the treatment of nmCF. We have begun seeking and intend to continue to seek marketing authorization for Translarna for the treatment of nmDMD in territories outside of the EEA and we may also seek marketing authorization for Translarna for other indications. These efforts may significantly impact the timing and extent of our commercialization expenses.

 

In addition, our expenses will increase if and as we:

 

·                   are required to complete any additional clinical and non-clinical trials or analyses to enable FDA review of an NDA submission by us for Translarna for the treatment of nmDMD;

 

·                   are required to take other steps to obtain or maintain our current or any further marketing authorizations we may receive for Translarna for the treatment of nmDMD, including in the EEA;

 

·                   initiate or continue the research and development of Translarna for additional indications and of our other product candidates;

 

·                   seek to discover and develop additional product candidates;

 

·                   maintain, expand and protect our intellectual property portfolio; and

 

·                   add operational, financial and management information systems and personnel, including personnel to support our product development and commercialization efforts.

 

We believe that our cash flows from product sales, together with existing cash and cash equivalents, including the net proceeds from our offering of the Convertible Notes, public offerings of common stock, marketable securities and research funding that we expect to receive under our collaborations, will be sufficient to fund our operating expenses and capital expenditure requirements for at least the next twelve months. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect.

 

Our future capital requirements will depend on many factors, including:

 

·                   the costs, timing and outcome of the annual EMA assessment related to renewal of our marketing authorization in the EEA for Translarna for the treatment of nmDMD, including whether the EMA determines that the risk-benefit balance of Translarna supports renewal of our marketing authorization in the EEA, on the current approved label, or at all and the design of any acceptable new clinical trial in nmDMD we may be able to develop with input from the EMA, if any, including with respect to matters of scope, length, and conduct;

 

·                   the costs, timing and outcome of our efforts to resolve the matters set forth in the Refuse to File letter we received from the FDA in connection with our NDA for Translarna for the treatment of nmDMD, whether pursuant to the recently initiated formal dispute resolution process, or otherwise, and including whether we will be required to perform additional clinical and non-clinical trials or complete additional analyses at significant cost and whether such trials, if successful, may enable FDA review of a NDA submission and, ultimately, may support approval of Translarna for nmDMD in the U.S;

 

·                   the costs, timing and outcome of regulatory review of our variation submission with the EMA to seek inclusion of Translarna for the treatment of nmCF on our current marketing authorization in the EEA;

 

·                   the progress and results of our confirmatory Phase 3 ACT CF trial and open label extension clinical trials of Translarna for the treatment of nmDMD and nmCF as well as our Phase 2 proof of concept studies for nmMPS I and nonsense mutation aniridia and nonsense mutation Dravet syndrome/CDKL5 and our ongoing Phase 1 clinical study under our cancer stem cell program;

 

·                   the scope, costs and timing of our commercialization activities, including product sales, marketing, legal, regulatory, distribution and manufacturing, for nmDMD and any of our other product candidates that may receive marketing authorization or any additional indications or territories in which we receive authorization to market Translarna;

 

·                   the costs, timing and outcome of regulatory review of our other product candidates and Translarna in other territories or for indications other than nmDMD and nmCF;

 

·                   the timing and scope of growth in our employee base;

 

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·                   the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for Translarna for additional indications and for our other product candidates;

 

·                   the number and development requirements of other product candidates that we pursue;

 

·                   revenue received from commercial sales of Translarna or any of our other product candidates;

 

·                   our ability to successfully negotiate adequate pricing and reimbursement processes on a timely basis, or at all, in the countries in which we may obtain regulatory approval, including the countries in the EEA;

 

·                   our ability to obtain additional and maintain existing reimbursed named patient and cohort EAP programs for Translarna for the treatment of nmDMD on adequate terms, or at all;

 

·                   the ability and willingness of patients and healthcare professionals to access Translarna through alternative means if pricing and reimbursement negotiations in the applicable territory do not have a positive outcome, including whether patients in Germany will continue to be able to access Translarna via a reimbursed importation pathway provided under German law and whether such pathway, if utilized, will minimize any access issues for German patients while maintaining a sustainable price;

 

·                   the costs of preparing, filing and prosecuting patent applications, maintaining, and protecting our intellectual property rights and defending against intellectual property-related claims;

 

·                   the extent to which we acquire or invest in other businesses, products and technologies; and

 

·                   our ability to establish and maintain collaborations, including our collaborations with Roche and the SMA Foundation, and our ability to obtain research funding and achieve milestones under these agreements.

 

With respect to our outstanding Convertible Notes, cash interest payments are payable on a semi-annual basis in arrears, which will require total funding of $4.5 million annually. Furthermore, as a result of our initial public offering in June 2013, we have incurred and expect to continue to incur additional costs associated with operating as a public company. These costs include significant legal, accounting, investor relations and other expenses that we did not incur as a private company. Additionally, we could be forced to expend significant resources in the defense of the pending securities class action lawsuits brought against us and certain of our executives, as described under Part II, Item 1. Legal Proceedings in this Quarterly Report on Form 10-Q.

 

We will need to generate significant revenues to achieve and sustain profitability, and we may never do so. We may need to obtain substantial additional funding in connection with our continuing operations. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs primarily through a combination of equity offerings, debt financings, collaborations, strategic alliances, grants and clinical trial support from governmental and philanthropic organizations and patient advocacy groups in the disease areas addressed by our product and product candidates and marketing, distribution or licensing arrangements. Adequate additional financing may not be available to us on acceptable terms, or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our shareholders ownership interest 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 collaborations, strategic alliances or marketing, distribution 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.

 

If we are unable to raise additional funds through equity or debt financings when needed or on attractive terms, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

 

Off-Balance Sheet Arrangements

 

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under Securities and Exchange Commission rules.

 

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Contractual obligations

 

During the period ended June 30, 2016, there were 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” in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

During the period ended June 30, 2016, there were no material changes in our market risk or how our market risk is managed, compared to those disclosed under the heading “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2016. The term “disclosure controls and procedures”, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2016, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Control over Financial Reporting

 

No change in our internal control over financial reporting occurred during the quarter ended June 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

In March 2016, three purported securities class action lawsuits were commenced in the United States District Court for the District of New Jersey (one each on March 3, 10, and 11), naming as defendants the Company, our Chief Executive Officer, and our Chief Financial Officer, captioned, respectively, as Hong Wang v. PTC Therapeutics, Inc., et al. , No. 16-cv-01224, Kevin Kosin v. PTC Therapeutics, Inc., et al. , No. 16-cv-01383, and Daniel Parker v. PTC Therapeutics, Inc., et al., No. 16-cv-01384. The lawsuits, which have been consolidated, allege violations of Sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934 in connection with allegedly false and misleading statements made by the Company about its business, operations, and prospects as it relates to the NDA for Translarna for the treatment of nmDMD that the Company submitted to the FDA in December 2015. The plaintiffs seek, among other things, compensatory damages for purchasers of the Company’s common stock between May 6, 2014 and February 29, 2016, as well as attorneys’ fees and costs.

 

Item 1A.  Risk Factors

 

The following risk factors and other information included in this Quarterly Report on Form 10-Q should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. Please see page 1 of this Quarterly Report on Form 10-Q for a discussion of some of the forward-looking statements that are qualified by these risk factors. If any of the following risks occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected.

 

Risks Related to Our Financial Position and Need for Additional Capital

 

We have incurred significant losses since our inception. We may never generate profits from operations or maintain profitability and expect to continue to incur significant operating losses and expenses for at least the next several years in connection with our efforts, among

 

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other things, to:

 

·                   maintain our marketing authorization for Translarna (ataluren) for the treatment of nonsense mutation Duchenne muscular dystrophy, or nmDMD, in the European Economic Area, or EEA, which if renewal is granted, we expect will require us to conduct an agreed upon new clinical trial in Translarna for nmDMD;

·                   resolve the matters set forth in the Refuse to File letter we received from the U.S. Food and Drug Administration, or FDA, in connection with our New Drug Application, or NDA, for Translarna for the treatment of nmDMD, in particular pursuant to the recently commenced formal dispute resolution process;

·                   continue expansion of our global operations and execution of our commercial strategy for Translarna in the EEA and other territories; and

·                   obtain broader and additional regulatory approvals for Translarna and advance the development of our product pipeline.

 

Since inception, we have incurred significant operating losses. As of June 30, 2016, we had an accumulated deficit of $673.1 million. We have historically financed our operations primarily through the issuance and sale of our common stock in public offerings, the private placements of our preferred stock, collaborations, bank debt, convertible debt financings, and grants and clinical trial support from governmental and philanthropic organizations and patient advocacy groups in the disease areas addressed by our product and product candidates. We expect to continue to incur significant expenses and operating losses for at least the next several years. The net losses we incur may fluctuate significantly from quarter to quarter.

 

In October 2015, we announced the initial results of ACT DMD, our Phase 3 trial for Translarna™ (ataluren) for the treatment of nmDMD, including that the primary efficacy endpoint in the intent to treat, or ITT, population did not achieve statistical significance. Please review the risk factor under “Risks Related to the Development and Commercialization of our Product and our Product Candidates” titled, “ ACT DMD, our Phase 3 trial for Translarna for the treatment of nmDMD, did not meet its primary efficacy endpoint , and we recently received a Refuse to File letter from the FDA for our NDA submitted with data from this trial, the EMA is questioning the positive risk-benefit balance of Translarna for the treatment of nmDMD based on data from this trial and the CHMP has requested that we submit a proposal for a new clinical trial in nmDMD, and there is substantial risk that regulators in addition to the FDA, such as the EMA or other regulators, will not agree with our interpretation of the results of ACT DMD and the totality of clinical data from our trials in Translarna for the treatment of nmDMD, which would have a material adverse effect on our business, financial performance and results of operations. ” for a review of recent developments that have had, and may continue to have, a material adverse effect on our ability to obtain or maintain marketing authorizations necessary to commercialize Translarna for the treatment of nmDMD in the United States, Europe and other territories, including our receipt of a Refuse to File letter from the FDA with respect to our NDA for Translarna for the treatment of nmDMD, the EMA’s questioning of the risk-benefit balance of Translarna for the treatment of nmDMD and the CHMP’s agreement to our proposal to submit for further discussion a draft clinical trial protocol regarding a new trial evaluating Translarna in nmDMD patients, which will include input from the EMA in the form of scientific advice.

 

Our ability to generate revenue is almost entirely dependent upon our ability to maintain our marketing authorization for Translarna in the EEA for the treatment of nmDMD in ambulatory patients aged five years and older. In order to continue commercial sales and our commercial launch of Translarna we must maintain our marketing authorization. The marketing authorization, initially granted in August 2014, is subject to annual review and renewal by the European Commission following reassessment by the EMA of the risk-benefit balance of the authorization, which we refer to as the annual EMA reassessment, as well as our satisfaction of other conditions and obligations placed upon the marketing authorization. As of the date of this filing, the CHMP has not issued an opinion with respect to the renewal of our marketing authorization and we expect that the marketing authorization renewal assessment procedure will extend until at least the end of 2016. While the EMA has not formally declined our type II variation request for full approval of our marketing authorization, we believe that it is unlikely that the EMA will recommend in favor of issuing us a marketing authorization that is not subject to an ongoing annual renewal requirement. We believe that if the CHMP determines to issue a positive opinion in favor of renewing our annual marketing authorization, such renewal, and any subsequent annual renewals, will be coupled with an obligation to conduct a new agreed upon clinical trial of Translarna for the treatment of nmDMD, designed with the scientific advice of the EMA. Designing, enrolling, conducting and completing a clinical trial is a time-consuming, expensive and uncertain process that takes years to complete, and we expect that we will incur material ongoing costs related to the development of such a trial in the short-term, as well as the implementation of the trial in the longer term. In addition, while the EMA may recommend the renewal of our marketing authorization under the annual EMA reassessment coupled with such obligation, it may also impose other new conditions to our marketing authorization, and may make other recommendations, including new label restrictions or the withdrawal of the marketing authorization. We expect to incur significant costs in connection with our efforts to maintain our marketing authorization in the EEA. If our marketing authorization in the EEA is not renewed, or our product label is materially restricted, we would lose all, or a significant portion of, our ability to generate revenue from product sales, whether pursuant to a commercial or an early access program, or EAP, and throughout all territories.

 

For additional information regarding the risks related to renewal of our marketing authorization in the EEA, see the risk factor under “Risks Related to Regulatory Approval of our Product and our Product Candidates” titled, “ Our marketing authorization in the EEA requires annual renewal by the European Commission, which, as of the date of this filing, has not been granted, and there is substantial risk that the EMA will not determine that the risk-benefit balance of Translarna supports renewal of our marketing authorization, on the current label, or at all, and, even if the European Commission grants renewal of our marketing authorization, such renewal will likely be conditioned upon the results of a not yet designed trial for Translarna for the treatment of nmDMD, which will likely result in significant expense and uncertainty for us. lf we are not able to obtain renewal of our marketing authorization, we will not be able to continue to commercialize Translarna for nmDMD and our ability to generate revenue will be materially impaired.

 

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We recently initiated a formal dispute resolution with the FDA, seeking to reverse the FDA’s Refuse to File decision. We expect that our efforts to resolve the matters set forth in the Refuse to File letter, whether pursuant to this appeal or otherwise, will be time-consuming and may be expensive and there is significant risk that we will not be successful in obtaining FDA review of our NDA for Translarna for nmDMD in a timely fashion, if ever. Even if we are successful in reversing the Refuse to File decision, there is significant risk that we will be unable to obtain FDA approval of Translarna for nmDMD and we may be required to perform additional clinical and non-clinical trials or analyses at significant cost which, if successful, may enable FDA review of an NDA submission by us and, ultimately, may support approval of Translarna for nmDMD in the U.S. An inability to obtain new marketing authorizations for Translarna for nmDMD, including in the United States would have a material adverse effect on our ability to generate revenue from the sales of Translarna for the treatment of nmDMD. For additional information, see the risk factor under “Risks Related to Regulatory Approval of our Product and our Product Candidates” titled, “ There is substantial risk that we will not be successful in our appeal of the Refuse to File letter we received from the FDA regarding our NDA for Translarna for the treatment of nmDMD and, by determining to pursue the formal dispute resolution process with the FDA, we have postponed other available strategic pathways which may have proven to be more effective. If there are delays in obtaining regulatory approval in the United States, we will not be able to commercialize Translarna for nmDMD in that territory and our ability to generate revenue will be materially impaired.”

 

We anticipate that our expenses will further increase in connection with the expansion of our global infrastructure as we continue to establish an international presence and commercialize Translarna for the treatment of nmDMD, including sales and marketing, legal and regulatory, and distribution and manufacturing expenses. In addition, the clinical and regulatory developments noted in this risk factor may exacerbate the risks related to our commercialization efforts set forth under the heading “Risks Related to the Development and Commercialization of our Product and our Product Candidates,” which could increase the costs associated with our commercial activities. For additional information, see also, the risk factor under the heading “Risks Related to the Regulation of our Product and our Product Candidates” titled “ Our initial commercial launch of Translarna has begun in, and is expected to continue to take place in, countries that tend to impose strict price controls, which may adversely affect our revenues, if any. Failure to obtain and maintain acceptable pricing and reimbursement terms for Translarna in the European Economic Area and other jurisdictions would prevent us from marketing our products in such regions.

 

In addition to the foregoing, we expect to continue to incur significant costs in connection with our ongoing confirmatory Phase 3 ACT CF trial and open label extension clinical trials of Translarna for the treatment of nmDMD and nmCF as well as our Phase 2 proof-of-concept studies for nmMPS I, nonsense mutation aniridia and nonsense mutation Dravet syndrome/CDKL5. We also expect to incur ongoing research and development expenses for our other product candidates, including our ongoing Phase 1 clinical study under our cancer stem cell program. In addition, we may incur substantial costs in connection with our efforts to advance our regulatory submissions, including our submission with the EMA that seeks to include Translarna for the treatment of nmCF. We have begun seeking and intend to continue to seek marketing authorization for Translarna for the treatment of nmDMD in territories outside of the EEA and we may also seek marketing authorization for Translarna for other indications. These efforts may significantly impact the timing and extent of our commercialization expenses. With respect to our outstanding 3.00% convertible senior notes due August 15, 2022, or the Convertible Notes, cash interest payments are payable on a semi-annual basis in arrears, which will require total funding of $4.5 million annually.

 

In addition, our expenses will increase if and as we:

 

·                   are required to complete any additional clinical and non-clinical trials or analyses to enable FDA review of an NDA submission by us for Translarna for the treatment of nmDMD;

 

·                   are required to take other steps to obtain or maintain our current or any further marketing authorizations we may receive for Translarna for the treatment of nmDMD, including in the EEA;

 

·                   initiate or continue the research and development of Translarna for additional indications and of our other product candidates;

 

·                   seek to discover and develop additional product candidates;

 

·                   maintain, expand and protect our intellectual property portfolio; and

 

·                   add operational, financial and management information systems and personnel, including personnel to support our product development and commercialization efforts.

 

We also could be forced to expend significant resources in the defense of the pending securities class action lawsuits brought against us and certain of our executives, as described under Part II, Item 1. Legal Proceedings in this Form 10-Q.

 

Our ability to generate profits from operations and become and remain profitable depends on our ability to successfully develop and commercialize drugs that generate significant revenue. This will require us to be successful in a range of challenging activities, including:

 

·                   completing our confirmatory Phase 3 ACT CF clinical trial of Translarna;

 

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·                   maintaining the marketing authorization of Translarna for the treatment of nmDMD in the EEA and satisfying all related conditions and ongoing requirements, including successfully developing and conducting an agreed upon new clinical trial designed with scientific advice from the EMA;

 

·                   advancing our regulatory submissions, including our marketing authorization variation submission with the EMA that seeks to include Translarna for the treatment of nmCF;

 

·                   resolving the matters set forth in the Refuse to File letter we received from the FDA in connection with our NDA for Translarna for the treatment of nmDMD in a timely manner or at all, whether pursuant to the formal dispute resolution process, or otherwise and including, if required, performing additional clinical and non-clinical trials or analyses at significant cost which, if successful, may enable FDA review of an NDA submission by us and, ultimately, may support approval of Translarna for nmDMD in the U.S.;

 

·                   expanding the territories in which we are approved to market Translarna for the treatment of nmDMD;

 

·                   initiating clinical studies of Translarna for the treatment of additional indications, including nmMPS I, nonsense mutation aniridia, and nonsense mutation Dravet syndrome/CDKL5 and successfully advancing our other programs and collaborations, including our cancer stem cell, and SMA programs;

 

·                   establishing a global commercial infrastructure, including the sales, marketing and distribution capabilities to effectively market and sell Translarna in Europe, the United States, and other parts of the world;

 

·                   implementing marketing and distribution relationships with third parties in territories where we do not pursue direct commercialization;

 

·                   negotiating and securing adequate pricing and reimbursement terms for Translarna on a timely basis, or at all, in the countries in which we have and may obtain regulatory approval;

 

·                   negotiating and securing adequate reimbursement from other third-party payors for Translarna;

 

·                   launching commercial sales of Translarna for the treatment of nmDMD in accordance with our estimated timeline;

 

·                   identifying patients eligible for treatment with Translarna;

 

·                   obtaining approval to market Translarna for the treatment of other indications;

 

·                   expanding the approved product label of Translarna for the treatment of nmDMD;

 

·                   protecting our rights to our intellectual property portfolio related to Translarna; and

 

·                   contracting for the manufacture and distribution of commercial quantities of Translarna.

 

We may never succeed in these activities and, even if we do, may never generate revenues that are significant enough to generate profits from operations. Even if we do generate profits from operations, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to generate profits from operations and remain profitable would decrease the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our product offerings or continue our operations. A decline in the value of our company could also cause our stockholders to lose all or part of their investment in our company.

 

We will need substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.

 

As noted in the prior risk factor, we expect to incur significant expenses related to our clinical, regulatory, commercial, legal, research and development, and other business efforts. We believe that our cash flows from product sales, together with existing cash and cash equivalents, including the net proceeds from our Convertible Note offering, public offerings of common stock, marketable securities and research funding that we expect to receive under our collaborations, will be sufficient to fund our operating expenses and capital expenditure requirements for at least the next twelve months. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect.

 

Our future capital requirements will depend on many factors, including:

 

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·                   the costs, timing and outcome of the annual EMA assessment related to renewal of our marketing authorization in the EEA for Translarna for the treatment of nmDMD, including whether the EMA determines that the risk-benefit balance of Translarna supports renewal of our marketing authorization in the EEA, on the current approved label, or at all and the design of any agreed upon new clinical trial in nmDMD we may be able to develop with input from the EMA, if any, including with respect to matters of scope, length, and conduct;

 

·                   the costs, timing and outcome of our efforts to resolve the matters set forth in the Refuse to File letter we received from the FDA in connection with our NDA for Translarna for the treatment of nmDMD, whether pursuant to the recently initiated formal dispute resolution process, or otherwise, and including whether we will be required to perform additional clinical and non-clinical trials or complete additional analyses at significant cost and whether such trials, if successful, may enable FDA review of a NDA submission and, ultimately, may support approval of Translarna for nmDMD in the U.S.;

 

·                   the costs, timing and outcome of regulatory review of our variation submission with the EMA to seek inclusion of Translarna for the treatment of nmCF on our current marketing authorization in the EEA;

 

·                   the progress and results of our confirmatory Phase 3 ACT CF trial and open label extension clinical trials of Translarna for the treatment of nmDMD and nmCF as well as our Phase 2 proof of concept studies for nmMPS I and nonsense mutation aniridia and nonsense mutation Dravet syndrome/CDKL5 and our ongoing Phase 1 clinical study under our cancer stem cell program;

 

·                   the scope, costs and timing of our commercialization activities, including product sales, marketing, legal, regulatory, distribution and manufacturing, for nmDMD and any of our other product candidates that may receive marketing authorization or any additional indications or territories in which we receive authorization to market Translarna;

 

·                   the costs, timing and outcome of regulatory review of our other product candidates and Translarna in other territories or for indications other than nmDMD and nmCF;

 

·                   the timing and scope of growth in our employee base;

 

·                   the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for Translarna for additional indications and for our other product candidates;

 

·                   the number and development requirements of other product candidates that we pursue;

 

·                   revenue received from commercial sales of Translarna or any of our other product candidates;

 

·                   our ability to successfully negotiate adequate pricing and reimbursement processes on a timely basis, or at all, in the countries in which we may obtain regulatory approval, including the countries in the EEA;

 

·                   our ability to obtain additional and maintain existing reimbursed named patient and cohort EAP programs for Translarna for the treatment of nmDMD on adequate terms, or at all;

 

·                   the ability and willingness of patients and healthcare professionals to access Translarna through alternative means if pricing and reimbursement negotiations in the applicable territory do not have a positive outcome, including whether patients in Germany will continue to be able to access Translarna via a reimbursed importation pathway provided under German law and whether such pathway, if utilized, will minimize any access issues for German patients while maintaining a sustainable price;

 

·                   the costs of preparing, filing and prosecuting patent applications, maintaining, and protecting our intellectual property rights and defending against intellectual property-related claims;

 

·                   the extent to which we acquire or invest in other businesses, products and technologies; and

 

·                   our ability to establish and maintain collaborations, including our collaborations with Roche and the SMA Foundation, and our ability to obtain research funding and achieve milestones under these agreements.

 

Conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain regulatory approval and achieve product sales for certain product candidates or indications. In addition, our product candidates, if approved, may not achieve commercial success, including Translarna for the treatment of nmDMD.

 

We are continuing to engage in significant commercialization efforts for Translarna for nmDMD. We commenced our commercial

 

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launch of Translarna in Germany in December 2014 and we expect to commercially launch in other key countries in the EEA in 2016 and in future years, subject to completion of pricing and reimbursement negotiations. In the third quarter of 2014, we began to recognize revenue for payments received under reimbursed EAP programs for Translarna for nmDMD patients in selected countries. In order to continue commercial sales and our commercial launch of Translarna we must maintain our marketing authorization in the EEA. We expect that any commercial revenue generated in the next several years will be derived exclusively from sales of Translarna for the treatment of nmDMD and other indications, if any, that may receive marketing authorization and that commercial sales will generally be limited to countries in the EEA and other territories in which we have obtained marketing authorization and reimbursement approval or are permitted to initiate treatment under reimbursed EAP programs or pursuant to other procedures. Other commercial revenue, if any, would be derived from sales of products that we are not planning to have commercially available for several years, if at all. If our marketing authorization in the EEA is not renewed, or our product label is materially restricted, we would lose all, or a significant portion of, our ability to generate revenue from product sales, whether pursuant to a commercial or an EAP program and throughout all territories.

 

Accordingly, we will need to continue to rely on additional financing in connection with our continuing operations and to achieve our business objectives. In addition, we may seek additional capital due to favorable market conditions or based on strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. Additional financing may not be available to us on acceptable terms or at all. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or our commercialization efforts.

 

Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.

 

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings; debt financings; collaborations; strategic alliances; grants and clinical trial support from governmental and philanthropic organizations and patient advocacy groups in the disease areas addressed by our product candidates; and marketing, distribution or licensing arrangements.

 

To the extent that we raise additional capital through the sale of equity or convertible debt securities, our shareholders’ ownership interest 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 collaborations, strategic alliances or marketing, distribution 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 grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

 

Our limited operating history may make it difficult for our stockholders to evaluate the success of our business to date and to assess our future viability.

 

In the third quarter of 2014 we began to recognize revenue for payments received under reimbursed EAP programs for Translarna for nmDMD patients in selected countries, and we commenced our commercial launch of Translarna in Germany in December 2014. Prior to such time, our operations were limited to organizing and staffing our company, developing and securing our technology, raising capital, undertaking preclinical studies and clinical trials of our product candidates, and preparing for the commercial launch of Translarna for nmDMD in Europe. We are in the process of transitioning from a company with a research and development focus to a company capable of supporting global commercial activities. We may not be successful in such a transition. We have not proven our ability to successfully obtain marketing authorizations to sell our product or product candidates, other than with respect to the marketing authorization granted by the European Commission in August 2014 for Translarna for the treatment of nmDMD, which is subject to annual review and renewal following reassessment of the risk-benefit balance of the authorization by the EMA and satisfaction of any conditions that may be imposed by the EMA, and the marketing authorizations granted in Israel and South Korea (which are largely contingent upon continued EMA approval). In addition, we have not yet demonstrated our ability to complete development of product candidates, manufacture a commercial scale product or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for a successful full scale product commercialization. Consequently, any predictions our stockholders make about our future success or viability may not be as accurate as they could be if we had a longer operating history. In addition, as a new business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors.

 

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Our ability to use our net operating losses and certain other tax attributes may be subject to annual limitations under federal and state tax law that could materially affect our ability to utilize such losses and attributes.

 

If a corporation undergoes an “ownership change” within the meaning of Section 382 of the Internal Revenue Code, or Section 382, the corporation’s ability to utilize any net operating losses, or NOLs, and certain tax credits and other attributes generated before such an ownership change, is limited. We believe that we have in the past experienced ownership changes within the meaning of Section 382 that have resulted in limitations under Section 382 (and similar state provisions) on the use of our NOLs and other tax attributes.

 

Future changes in ownership could result in additional ownership changes within the meaning of Section 382 that could further limit our ability to utilize our NOLs and certain other tax attributes.

 

Changes in our effective income tax rates could adversely affect our results of operations.

 

We are subject to income taxes in the Unites States and various foreign jurisdictions. Taxes will be incurred as income is earned among these different jurisdictions. Various factors may have favorable or unfavorable effects on our effective income tax rate. These factors include, but are not limited to, interpretations of existing tax laws, changes in tax laws and rates, the accounting for stock options and other share-based compensation, changes in accounting standards, future levels of research and development spending, changes in the mix and level of pre-tax earnings by taxing jurisdiction, the outcome of examinations by the U.S. Internal Revenue Service and other jurisdictions, the accuracy of our estimates for unrecognized tax benefits, the realization of deferred tax assets, or by changes to our ownership or capital structure. The impact on our income tax provision resulting from the above-mentioned factors and others may be significant and could adversely affect our results of operations.

 

Risks Related to the Development and Commercialization of our Product and our Product Candidates

 

ACT DMD, our Phase 3 trial for Translarna for the treatment of nmDMD, did not meet its primary efficacy endpoint, and we recently received a Refuse to File letter from the FDA for our NDA submitted with data from this trial, the EMA is questioning the positive risk-benefit balance of Translarna for the treatment of nmDMD based on data from this trial and the CHMP has requested that we submit a proposal for a new clinical trial in nmDMD, and there is substantial risk that regulators in addition to the FDA, such as the EMA or other regulators, will not agree with our interpretation of the results of ACT DMD and the totality of clinical data from our trials in Translarna for the treatment of nmDMD, which would have a material adverse effect on our business, financial performance and results of operations.

 

In October 2015, we announced the initial results of ACT DMD, including that the primary efficacy endpoint in the intent to treat, or ITT, population did not achieve statistical significance. Based on our analyses of the trial data, we believe that the totality of clinical data from ACT DMD and our prior Phase 2b trial support the clinical benefit of Translarna for the treatment of nmDMD.

 

We submitted our analyses of the ACT DMD data and meta-analysis of the combined ACT DMD and Phase 2b subgroup data to the FDA, as part of our NDA. On February 22, 2016, we received a Refuse to File letter from the FDA stating that, in the view of the FDA, both our Phase 2b and Phase 3 ACT DMD trials were negative and do not provide substantial evidence of effectiveness. Additionally, the FDA stated that we had proposed a post-hoc adjustment of ACT DMD that eliminates data from a majority of enrolled patients. In addition, the FDA noted that our NDA does not contain adequate information regarding the abuse potential of Translarna. There is substantial risk that, notwithstanding any dialogue we have had or any further dialogue we may be able to initiate with the agency, including pursuant to the formal dispute resolution process we recently initiated, the FDA will continue to disagree with our interpretation of the results of ACT DMD and the totality of clinical data from our trials. Even if we are successful in reversing the Refuse to File decision, there is significant risk that we will be unable to obtain FDA approval of Translarna for nmDMD and we may be required to perform additional clinical and non-clinical trials or complete additional analyses at significant cost, which, if we are successful in enrolling, funding, and completing, may enable FDA review of an NDA submission. Any such requirement for additional trials would most likely result in our inability to sell Translarna in the United States for a significant period of time, if ever, which would have a material adverse effect on our ability to generate revenue from the sales of Translarna for the treatment of nmDMD. Due to these uncertainties, we are unable to estimate the timing or potential for a launch of Translarna for the treatment of nmDMD in the United States.

 

We also submitted our analyses of the ACT DMD data and meta-analyses of the combined ACT DMD and Phase 2b subgroup data to the EMA, to support continuation of our marketing authorization in the EEA, which is subject to annual review and renewal by the European Commission following reassessment by the EMA of the risk-benefit balance of the authorization. As part of this process, the EMA’s CHMP issued requests for supplementary information, including a request classified as a major objection related to the CHMP’s questioning of the risk-benefit profile of Translarna.

 

We also recently received an additional request for supplemental information from the CHMP, including a request classified as a major objection that directs us to submit an adequate proposal for a clinical trial which will be able to demonstrate in a nmDMD patient population a robust and clinically meaningful effect of Translarna which confirms the positive risk-benefit ratio of Translarna and addresses outstanding uncertainties about efficacy. The CHMP has noted that this trial must be deemed feasible in the post-authorization setting. In addition, the CHMP expressed an interest for further confirmation of the primary pharmacology of Translarna as part of this request. Generally speaking, a failure to adequately address a major objection would preclude a recommendation for renewal of a marketing authorization. Designing, enrolling, conducting and completing a clinical trial is a time-consuming, expensive and uncertain process that takes years to complete, and we expect that we will incur material ongoing costs related to the development of such a trial in the short-term, as well as the implementation of the trial in the longer term.

 

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As of the date of this filing, the CHMP has not issued an opinion with respect to the renewal of our marketing authorization and we expect that the marketing authorization renewal assessment procedure will extend until at least the end of 2016. There is substantial risk that the EMA will not determine that the risk-benefit balance of Translarna supports renewal of our marketing authorization in the EEA, on the current approved label, or at all. If it is determined that the balance of risks and benefits of using Translarna for the treatment of nmDMD has changed materially or that we have not or are unable to comply with any conditions that have been or may be placed on the marketing authorization, the European Commission could, at the EMA’s recommendation, vary, suspend, withdraw or refuse to renew the marketing authorization for Translarna or require additional clinical trials or the imposition of other conditions or restrictions. If our marketing authorization in the EEA is not renewed, or our product label is materially restricted, we would lose all, or a significant portion of, our ability to generate revenue from product sales, whether pursuant to a commercial or an EAP program and throughout all territories.

 

There is substantial risk that other regulators where we have not yet sought marketing authorization will not agree with our interpretation of the results of ACT DMD and the totality of clinical data from our trials in Translarna for the treatment of nmDMD, which would have a material adverse effect on our ability to generate revenue from the sales of Translarna for the treatment of nmDMD in those applicable territories. In addition, we may not be able to maintain or obtain marketing authorizations in areas where such authorizations are contingent upon decisions of the EMA with respect to our marketing authorization in the EEA.

 

An inability to generate revenue from sales of Translarna for the treatment of nmDMD would have a material adverse effect on our business, financial performance and results of operations.

 

For additional information, see “Risk Factors Risks Related to Regulatory Approval of our Product and our Product Candidates” below.

 

We depend heavily on the success of our lead product, Translarna, which we are developing for nmDMD, nmCF, and other indications. All of our other product candidates, including those under our collaboration with Roche and the SMA Foundation, are still in early clinical or preclinical development. If we are unable to execute our commercial strategy for Translarna for the treatment of nmDMD in the European Economic Area, fail to receive regulatory approval in the United States and other territories, fail to obtain renewal of, or satisfy the conditions of our marketing authorization in the European Economic Area, or if we experience significant delays in accomplishing such goals, our business will be materially harmed.

 

We have invested a significant portion of our efforts and financial resources in the development of Translarna for nmDMD and nmCF. Additionally, we are pursuing proof of concept studies for Translarna in additional indications: nmMPS I, nonsense mutation aniridia, and nonsense mutation Dravet syndrome/CDKL5. Our ability to generate product revenues will depend heavily on the successful development and commercialization of Translarna. In August 2014, Translarna was granted marketing authorization in the EEA for the treatment of nmDMD in ambulatory patients aged five years and older, which is subject to annual EMA reassessment and was further conditioned on our submission of the final report, including additional efficacy and safety data, from ACT DMD, which we submitted to the EMA in January 2016. Translarna is still under investigation for the treatment of nmDMD in the United States and has not been approved by the FDA.

 

Please review the foregoing risk factor titled, “ ACT DMD, our Phase 3 trial for Translarna for the treatment of nmDMD, did not meet its primary efficacy endpoint, and we recently received a Refuse to File letter from the FDA for our NDA submitted with data from this trial, the EMA is questioning the positive risk-benefit balance of Translarna for the treatment of nmDMD based on data from this trial and the CHMP has requested that we submit a proposal for a new clinical trial in nmDMD, and there is substantial risk that regulators in addition to the FDA, such as the EMA or other regulators, will not agree with our interpretation of the results of ACT DMD and the totality of clinical data from our trials in Translarna for the treatment of nmDMD, which would have a material adverse effect on our business, financial performance and results of operations ” for a review of recent developments that have had, and may continue to have, a material adverse effect on our ability to commercialize Translarna for the treatment of nmDMD, including our receipt of a Refuse to File letter from the FDA with respect to our NDA for Translarna for the treatment of nmDMD , the EMA’s questioning of the risk-benefit balance of Translarna for the treatment of nmDMD and the CHMP’s agreement to our proposal to submit for further discussion a draft clinical trial protocol regarding a new trial evaluating Translarna in nmDMD patients, which will include input from the EMA in the form of scientific advice.

 

If we do not successfully renew and maintain our marketing authorization and commercialize Translarna in the EEA, or receive regulatory approval in the United States for Translarna for the treatment of nmDMD and subsequently successfully commercialize Translarna in the United States, our ability to generate additional revenue will be jeopardized and, consequently, our business will be materially harmed.

 

The success of Translarna will depend on a number of additional factors, including the following:

 

·                   the design of the clinical trial we have agreed to develop with scientific advice from the EMA and its advisors, including, but not limited to matters of size, duration and scope;

 

·                   whether the EMA and the European Commission determine that the risk-benefit balance of Translarna for the treatment of nmDMD supports renewal of our marketing authorization in the EEA, on the current approved label, or at all, and the

 

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timelines within which such determinations are made;

 

·                   whether, and within what timeframe, we are able to resolve the matters set forth in the Refuse to File letter we received from the FDA in connection with our NDA for Translarna for the treatment of nmDMD, pursuant to the recently initiated formal dispute resolution process, or otherwise, and including whether we will be required to perform additional clinical and non-clinical trials or analyses, the costs of such trials or analyses, and whether such trials or analyses, if successful, may enable FDA review of a NDA submission and, ultimately, may support approval of Translarna for nmDMD in the U.S.;

 

·                   successful completion of our confirmatory Phase 3 ACT CF clinical trial of Translarna;

 

·                   our ability to successfully advance our submitted request for a marketing authorization variation with the EMA to seek inclusion of Translarna for the treatment of nmCF;

 

·                   the successful advancement of Translarna in additional indications, in particular, nmMPS I, nonsense mutation aniridia, and nonsense mutation Dravet syndrome/CDKL5;

 

·                   the establishment of an expanded international commercial infrastructure capable of supporting product sales, marketing and distribution of Translarna;

 

·                   implementing marketing and distribution relationships with third parties in territories where we do not pursue direct commercialization;

 

·                   the continued maintenance of, and satisfaction of the conditions and ongoing requirements under, the marketing authorization of Translarna for the treatment of nmDMD in the EEA;

 

·                   our ability to obtain additional and maintain existing reimbursed named patient and cohort EAP programs for Translarna for the treatment of nmDMD on adequate terms;

 

·                   whether and when we obtain marketing authorization of Translarna in additional territories and for additional or expanded indications;

 

·                   successful negotiation of adequate pricing and reimbursement terms for Translarna on a timely basis, or at all, in the countries which require such negotiation and in which we obtain regulatory approval;

 

·                   the ability and willingness of patients and healthcare professionals to access Translarna through alternative means if pricing and reimbursement negotiations in the applicable territory do not have a positive outcome, including whether patients in Germany will continue to be able to access Translarna via a reimbursed importation pathway provided under German law and whether such pathway, if utilized, will minimize any access issues for German patients while maintaining a sustainable price;

 

·                   the timing and scope of commercial launches of Translarna in nmDMD;

 

·                   our ability to establish and maintain commercial manufacturing arrangements with third party manufacturers;

 

·                   the ability of our third-party manufacturers to successfully produce commercial and clinical supplies of Translarna on a timely basis sufficient to meet the needs of our commercial and clinical activities;

 

·                   successful identification of eligible patients;

 

·                   acceptance of Translarna in nmDMD by patients, the medical community and third-party payors;

 

·                   effectively competing with other therapies;

 

·                   a continued acceptable safety profile of Translarna;

 

·                   obtaining and maintaining patent and trade secret protection and regulatory exclusivity; and

 

·                   protecting our rights in our intellectual property portfolio.

 

If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to continue to commercialize Translarna, which would materially harm our business.

 

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The marketing authorization granted by the European Commission for Translarna for the treatment of nmDMD is subject to the satisfaction of specific conditions and is limited to ambulatory patients aged five years and older located in the European Economic Area, which significantly limits an already small treatable patient population, reduces our commercial opportunities, is subject to annual reassessment of the risk-benefit balance by the EMA and other requirements, and may be varied, suspended or withdrawn by the European Commission if we fail to satisfy those requirements.

 

We have obtained orphan drug designations from the EMA and from the FDA for Translarna for the treatment of nmDMD because the number of patients who could benefit from treatment with Translarna is small. The marketing label approved by the European Commission further limits the currently treatable patient population to ambulatory nmDMD patients aged five years and older who have been identified through genetic testing. Prevalence estimates for rare diseases are typically provided in ranges due to the uncertainties associated with the methodologies used to derive estimates such as epidemiology assumptions. It can take many years of experience in rare disease market places before prevalence becomes well characterized. We are launching the first therapy specifically aimed at DMD patients and in particular DMD patients with a nonsense mutation. Our experience to date suggests that there may be up to 7,000 nmDMD patients globally and that approximately 40% of such patients are qualified for treatment under our current product label in the EEA. Country specific epidemiology will continue to be refined and characterized over the coming years and we have determined that we are not able to provide or confirm prior prevalence estimates on a country or regional basis at this time. Our estimates of both the number of people who have DMD caused by a nonsense mutation, as well as the subset of people with nmDMD who are ambulatory and at least five years old, are based on our beliefs and estimates derived from a variety of sources and may prove to be incorrect. Prevalence estimates vary given some degree of variation in the incidence of live male births, the incidence of DMD, the incidence nonsense mutations and other factors. Information concerning the eligible patient population is generally limited to certain geographies and may not employ definitive measures capable of establishing with precision the actual number of nmDMD patients in such geography. If the market opportunities for Translarna for the treatment of nmDMD are smaller than we believe they are, our business and anticipated revenues will be negatively impacted. Although we intend to seek to expand the approved product label of Translarna for the treatment of nmDMD in the future, the timing of, and our ability to generate, the necessary data or results required to obtain expanded regulatory approval is currently uncertain. Given the small number of patients who have nmDMD, and the smaller number of patients who meet the criteria for treatment under our current marketing authorization, our commercial opportunity is limited. It is critical to the commercial success of Translarna for nmDMD that we successfully identify and treat these patients.

 

There is substantial risk that the EMA will not determine that the risk-benefit balance of Translarna supports renewal of our marketing authorization in the EEA, on the current approved label, or at all. In addition, we believe that if the EMA’s CHMP does determine to issue a positive opinion in favor of renewing our annual marketing authorization, such renewal, and any subsequent annual renewals, will be coupled with an obligation to conduct an agreed upon new clinical trial of Translarna for the treatment of nmDMD, designed with the scientific advice of the EMA. The CHMP has noted that this trial must be deemed feasible in the post-authorization setting. Enrolling a new clinical trial to evaluate Translarna for the treatment of nmDMD may further reduce the number of patients available for reimbursed treatment. If the EMA determines that the balance of risks and benefits of using Translarna for the treatment of nmDMD has changed materially or that we have not or are unable to comply with any conditions that have been or may be placed on the marketing authorization, the European Commission could, at the EMA’s recommendation, vary, suspend, withdraw or refuse to renew the marketing authorization for Translarna or require additional clinical trials or the imposition of other conditions or restrictions. If our marketing authorization in the EEA is not renewed, or our product label is materially restricted, we would lose all, or a significant portion of, our ability to generate revenue from product sales, whether pursuant to a commercial or an EAP program.

 

See “Risks Related to Regulatory Approval of our Product and our Product Candidates” below for further detail regarding conditional marketing authorizations in the EEA.

 

If clinical trials of our product or product candidates, such as our confirmatory Phase 3 clinical trials of Translarna, fail to demonstrate safety and efficacy to the satisfaction of the EMA, the FDA or other regulators, or do not otherwise produce favorable results, we may experience delays in completing, or ultimately be unable to complete, the development and commercialization of Translarna or any other product candidate.

 

In connection with seeking marketing authorization from regulatory authorities for the sale of any product candidate, we must complete preclinical development and then conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more clinical trials can occur at any stage of testing. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing authorization of their products.

 

The primary efficacy endpoint in the intent to treat, or ITT, population did not achieve statistical significance in the Phase 2b (completed in 2009) or Phase 3 ACT DMD (completed in 2015) clinical trials of Translarna for the treatment of nmDMD. Please review the foregoing risk factor titled, “ ACT DMD, our Phase 3 trial for Translarna for the treatment of nmDMD, did not meet its primary efficacy endpoint, and we recently received a Refuse to File letter from the FDA for our NDA submitted with data from this trial, the EMA is questioning the positive risk-benefit balance of Translarna for the treatment of nmDMD based on data from this trial and the CHMP has requested that we submit a proposal for a new clinical trial in nmDMD, and there is substantial risk that regulators in addition to the FDA, such as the EMA or other regulators, will not agree with our interpretation of the results of ACT DMD and the totality of

 

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clinical data from our trials in Translarna for the treatment of nmDMD, which would have a material adverse effect on our business, financial performance and results of operations ” for a review of recent developments that have had, and may continue to have, a material adverse effect on our ability to commercialize Translarna for the treatment of nmDMD, including our receipt of a Refuse to File letter from the FDA with respect to our NDA for Translarna for the treatment of nmDMD, the EMA’s questioning of the risk-benefit balance of Translarna for the treatment of nmDMD and the CHMP’s agreement to our proposal to submit for further discussion a draft clinical trial protocol regarding a new trial evaluating Translarna in nmDMD patients, which will include input from the EMA in the form of scientific advice.

 

If the FDA, the EMA and other regulators do not agree with our interpretation of the results of the clinical data from our trials (including ACT DMD and related analyses) or otherwise view the results of these trials as favorable; if we are required to conduct additional clinical trials or other testing of Translarna or any other product candidate that we develop beyond those that we contemplate; if we are unable to successfully complete our clinical trials or other testing; if the results of these trials or tests are not positive or are only modestly positive; or if there are safety concerns, we may:

 

·                   be unable to successfully maintain or renew our current marketing authorization in the EEA for Translarna for the treatment of nmDMD, which is subject to annual review and renewal following reassessment of the risk-benefit balance of the authorization by the EMA;

 

·                   be delayed in obtaining additional marketing authorizations for Translarna for the treatment of nmDMD, for Translarna for the treatment of other indications or for our other product candidates;

 

·                   not obtain additional marketing authorizations at all;

 

·                   obtain approval for indications or patient populations that are not as broad as intended or desired;

 

·                   obtain approval with labeling that includes significant use or distribution restrictions or safety warnings, including boxed warnings;

 

·                   be subject to additional post-marketing testing requirements or restrictions;

 

·                   have the product removed from markets after obtaining applicable marketing authorizations; or

 

·                   not be permitted to sell Translarna under some or any reimbursed EAP programs.

 

If we or our collaborators experience any of a number of possible unforeseen events in connection with clinical trials related to our product or product candidates, including those under our collaboration with Roche and the SMA Foundation, potential marketing authorization or commercialization of our product or product candidates could be delayed or prevented.

 

We or our collaborators may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability to receive marketing authorization or commercialize our product or product candidates, including:

 

·                   clinical trials of our product or product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs;

 

·                   the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate or participants may drop out of these clinical trials at a higher rate than we anticipate;

 

·                   we may be unable to enroll a sufficient number of patients in our trials to ensure adequate statistical power to detect any statistically significant treatment effects;

 

·                   our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;

 

·                   regulators, institutional review boards or independent ethics committees may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site or may require us to submit additional data, conduct additional studies or amend our IND or comparable application prior to commencing a clinical trial;

 

·                   we may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;

 

·                   we may have to suspend or terminate clinical trials of our product or product candidates for various reasons, including a

 

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finding that the participants are being exposed to unacceptable health risks;

 

·                   regulators, institutional review boards or independent ethics committees may require that we or our investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable health risks;

 

·                   the cost of clinical trials of our product or product candidates may be greater than we anticipate;

 

·                   the supply or quality of our product or product candidates or other materials necessary to conduct clinical trials of our product or product candidates may be insufficient or inadequate; or

 

·                   our product or product candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators, regulators, institutional review boards or independent ethics committees to suspend or terminate the trials.

 

For example, in the first half of 2015, dosing in the Phase 2 Moonfish study under our SMA collaboration was suspended and the study was placed on clinical hold to investigate an eye finding in a 39-week study in cynomolgus monkeys, which showed at exposures above those explored in SMA patients and healthy volunteers. In January 2016, a Phase 1 study in healthy volunteers was initiated to investigate the safety, tolerability, pharmacokinetics and pharmacodynamics of an additional product candidate under the SMA collaboration. While we and our collaboration partners intend to compare the profiles of each of these development compounds to determine the best path forward for the SMA program, this development has resulted in unanticipated delays in the advancement of the SMA program. In addition, we and our collaboration partners may need to perform additional studies, conduct further analyses, narrow the scope of the study, or take other actions to continue to advance the SMA program and the re-initiation of the Phase 2 Moonfish study may be delayed, abandoned or not allowed.

 

In addition, based on pre-clinical safety signals observed during the third quarter of 2015, we are no longer advancing PTC672 under our antibacterial program. Our product development costs will increase if we experience delays in testing or marketing authorizations. We do not know whether any preclinical tests or clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant preclinical or clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product or product candidates, allow our competitors to bring products to market before we do, or impair our ability to successfully commercialize our product or product candidates, and so may harm our business and results of operations.

 

Our conclusions regarding the activity and potential efficacy of Translarna in nmDMD are primarily based on retrospective, subgroup and meta-analyses of the results of our Phase 2b and ACT DMD clinical trials of Translarna for the treatment of nmDMD. In addition, our conclusions regarding the activity and potential efficacy of Translarna in nmCF are primarily based on retrospective analyses of the results of our completed Phase 3 clinical trial of Translarna for nmCF. Other than with respect to certain of our meta-analyses, results of our analyses are expressed as nominal p-values, which are generally considered less reliable indicators of efficacy than adjusted p-values. In addition, retrospective analyses are generally considered less reliable than pre-specified analyses.

 

After determining that we did not achieve the primary efficacy endpoint with the pre-specified level of statistical significance in our completed ACT DMD and Phase 2b clinical trials of Translarna for the treatment of nmDMD, we performed subgroup, retrospective, and meta-analyses that we believe demonstrate that Translarna provides a meaningful clinical benefit for the treatment of nmDMD. In addition, after determining that the primary efficacy endpoint did not achieve statistical significance in ACT DMD or our Phase 2b clinical trial of Translarna for the treatment of nmDMD and in our completed Phase 3 clinical trial of Translarna for nmCF, we performed retrospective and subgroup analyses that we believe provide strong support for concluding that Translarna was active and showed clinically meaningful improvements over placebo in these trials.

 

Although we believe that these additional analyses of the results of these trials were warranted, a retrospective analysis performed after unblinding trial results can result in the introduction of bias if the analysis is inappropriately tailored or influenced by knowledge of the data and actual results.

 

Some of our favorable statistical data from these trials also are based on nominal p-values that reflect only one particular comparison when more than one comparison is possible. A p-value is called nominal if it is the result of one particular comparison prior to any pre-specified multiplicity adjustment, such as when two active treatments are compared to placebo or when two or more subgroups are analyzed. For example, while the p-values for change from baseline at week 48 in the 6-minute walk test, or 6MWT, which we also refer to as 6-minute walk distance, or 6MWD, and each secondary end point timed function test in the pre-specified subgroup of ACT DMD patients with a baseline 300-400 meter 6MWD had p-values of less than 0.05, due to the sequential testing method, these p-values are considered nominal.

 

Typically, a trial result is statistically significant if the chance of it occurring when the treatment is like placebo is less than one in 20, resulting in a p-value of less than 0.05. Nominal p-values cannot be compared to the typical significance level (p-value less than 0.05) to determine statistical significance without being adjusted for the testing of multiple dose groups, end points or analyses of subgroups.

 

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Because of these limitations, regulatory authorities typically give greater weight to results from pre-specified analyses and adjusted p-values and less weight to results from post-hoc, retrospective analyses and nominal p-values.

 

On February 22, 2016, we received a Refuse to File letter from the FDA stating that, in the view of the FDA, both the Phase 2b and Phase 3 ACT DMD trials were negative and do not provide substantial evidence of effectiveness and that our NDA does not contain adequate information regarding the abuse potential of Translarna. Additionally, the FDA stated that we had proposed a post-hoc adjustment of ACT DMD that eliminates data from a majority of enrolled patients. Our reliance on nominal p-values for some of our statistical data and our use of retrospective analyses had a negative impact on the FDA’s view of our interpretation of the results of our Phase 2b trial, ACT DMD and the totality of data from our clinical trials. There is substantial risk that, notwithstanding any further dialogue we may be able to initiate with the agency, whether pursuant to our recently initiated formal dispute resolution process or otherwise, the FDA will continue to disagree with our interpretation of our trial results and we may be required to perform additional clinical and non-clinical trials or complete additional analyses at significant cost, which, if successful, may enable FDA review of an NDA submission.

 

Our reliance on nominal p-values for some of our statistical data and our use of retrospective analyses has also had a negative impact on the EMA’s evaluation of our applications for continued marketing authorization for Translarna for the treatment of nmDMD, including delays in timing of the CHMP’s opinion with respect to the annual renewal of our marketing authorization and could negatively impact regulatory determinations by regulators in other territories. In connection with our ongoing dialogue with the EMA with respect to the renewal of our marketing authorization, the CHMP has agreed to our proposal to submit for further discussion a draft clinical trial protocol regarding a new trial evaluating Translarna in nmDMD patients, which will include input from the EMA in the form of scientific advice. There is substantial risk that the EMA will not determine that the risk-benefit balance of Translarna supports renewal of our marketing authorization in the EEA, on the current approved label, or at all. If the EMA determines that the balance of risks and benefits of using Translarna for the treatment of nmDMD has changed materially or that we have not or are unable to comply with any conditions that have been or may be placed on the marketing authorization, the European Commission could, at the EMA’s recommendation, vary, suspend, withdraw or refuse to renew the marketing authorization for Translarna.

 

With respect to our nmCF program, our use of retrospective and subgroup analyses diminishes the likelihood that the EMA will approve our request of a variation to our marketing authorization for Translarna to include Translarna for nmCF on a conditional basis and, even if we successfully complete ACT CF, could negatively impact the evaluation by the EMA and the FDA of our anticipated applications for full marketing authorization for Translarna for nmCF.

 

If any of these events were to occur, they would negatively impact our anticipated revenue from Translarna and would materially harm our business, financial results and results of operations.

 

The results of ACT DMD and, even if successfully completed, the results of ACT CF, may not be sufficient for approval of Translarna for the applicable indication.

 

The primary efficacy endpoint in the intent to treat, or ITT, population did not achieve statistical significance in the Phase 2b (completed in 2009) or Phase 3 ACT DMD (completed in 2015) clinical trials of Translarna for the treatment of nmDMD. Please review the foregoing risk factor titled, “ ACT DMD, our Phase 3 trial for Translarna for the treatment of nmDMD, did not meet its primary efficacy endpoint, and we recently received a Refuse to File letter from the FDA for our NDA submitted with data from this trial, the EMA is questioning the positive risk-benefit balance of Translarna for the treatment of nmDMD based on data from this trial and the CHMP has requested that we submit a proposal for a new clinical trial in nmDMD, and there is substantial risk that regulators in addition to the FDA, such as the EMA or other regulators, will not agree with our interpretation of the results of ACT DMD and the totality of clinical data from our trials in Translarna for the treatment of nmDMD, which would have a material adverse effect on our business, financial performance and results of operations ” for a review of recent developments that have had, and may continue to have, a material adverse effect on our ability to obtain or maintain marketing authorizations necessary to commercialize Translarna for the treatment of nmDMD in the United States, Europe and other territories, including our receipt of a Refuse to File letter from the FDA with respect to our NDA for Translarna for the treatment of nmDMD, the EMA’s questioning of the risk-benefit balance of Translarna for the treatment of nmDMD and the CHMP’s agreement to our proposal to submit for further discussion a draft clinical trial protocol regarding a new trial evaluating Translarna in nmDMD patients, which will include input from the EMA in the form of scientific advice.

 

Further, it is possible that, once completed and even if successful, the EMA or the FDA may not consider the results of ACT CF to be sufficient for approval of Translarna for such indication. The FDA typically requires two adequate and well-controlled pivotal clinical trials to support marketing authorization of a product candidate for a particular indication. The EMA or the FDA could determine that the results of our trials are not sufficiently robust, are subject to confounding factors or are not adequately supported by other trial endpoints. In addition, although we have had discussions with the FDA regarding ACT CF, the FDA may not consider our proposed trial design acceptable. For example, in 2012, the FDA indicated that in its view the data from our completed Phase 3 clinical trial and other data from our development program in cystic fibrosis do not by themselves support an NDA submission and, consequently, the FDA informed us that additional clinical data would be required to establish the evidence necessary to support eventual filing of an NDA for the use of Translarna to treat nmCF.

 

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We had additional interactions with the FDA in 2013 regarding the clinical development design which would have the potential to support an NDA, but we did not achieve a consensus between the EMA and FDA views. While we have incorporated feedback from the FDA into our ACT CF trial design, we believe that certain key recommendations from the FDA are not appropriate. Two of the key recommendations that we are in disagreement with are the designation of FEV 1 , CF pulmonary exacerbations, and body mass index as three co-primary endpoints for the trial and a suggested three-year trial duration. FEV 1  is the primary endpoint in ACT CF, with CF pulmonary exacerbations and body mass index as secondary endpoints, which is consistent with other clinical trials currently ongoing in cystic fibrosis and our earlier discussions with the FDA. Additionally, we believe that extending the study duration to three years would result in a number of complications that would ultimately limit the robustness of the data and conclusions that could be drawn from the results. Based on these interactions, we nonetheless initiated ACT CF in the first half of 2014 consistent with feedback from the EMA on our trial design. If the FDA does not consider our trial designs acceptable, we may need to conduct more than one confirmatory clinical trial and our ability to receive marketing authorization for this indication could be delayed or prevented.

 

Because we are developing our product and our product candidates for the treatment of diseases in which there is little clinical experience and, in some cases, using new endpoints or methodologies, there is increased risk that the outcome of our clinical trials will not be favorable.

 

There are no marketed therapies approved to treat the underlying cause of nmDMD or nmCF. In addition, there has been limited historical clinical trial experience generally for the development of drugs to treat either of these diseases. As a result, the design and conduct of clinical trials for these diseases, particularly for drugs to address the underlying nonsense mutations causing these diseases in some subsets of patients, is subject to increased risk.

 

Prior to the Phase 2b clinical trial of Translarna for nmDMD, there was no precedent of an established trial design to evaluate the efficacy of Translarna in nmDMD over a 48 week duration. In addition, clinical understanding of the methodologies used to analyze the resulting data were also limited. The study design and enrollment criteria for ACT DMD were based on available natural history data of the disease, including third party data and results from our Phase 2b clinical trial. An evolving understanding in the DMD community has led to a greater appreciation of the optimal window for the 6MWT in assessing physical function. We believe that this factor may have led to the primary efficacy endpoint in the intent to treat population not achieving statistical significance in ACT DMD.

 

With regard to nmCF, we believe that we now understand subgroup effects that we observed in our completed Phase 3 clinical trial and that we have designed our confirmatory Phase 3 ACT CF clinical trial of Translarna to take these effects into account. However, we may nonetheless experience unknown complications with ACT CF. As a result, we may not achieve the pre-specified endpoint with statistical significance in ACT CF, which would make approval of Translarna for this indication significantly more difficult to obtain.

 

We are faced with similar challenges in connection with the design of our Phase 2 proof-of-concept studies of Translarna in nmMPS I, nonsense mutation aniridia, and nonsense mutation Dravet syndrome/CDKL5 because there is also limited historical clinical trial experience for the development of drugs to treat the underlying cause of these disorders.

 

For example, with respect to nmMPS I, while clinical trials of enzyme replacement therapies conducted by third party sponsors have provided some insight into the disorder, enzyme replacement therapies do not sufficiently address the central nervous system, skeletal or cardiac symptoms associated with the disorder. In addition, our own pre-clinical and early stage clinical trials targeting nmMPS I have been limited in duration and, as a result, it is substantially uncertain whether our clinical design will optimize the duration or level of dosing or that we will be able to demonstrate a statistically significant biochemical or clinical effect in the primary or secondary pre-specified endpoints selected for the study.

 

If we experience delays or difficulties in the enrollment of patients in our clinical trials, our receipt of necessary regulatory approvals could be delayed or prevented.

 

We may not be able to initiate or continue clinical trials for our product candidates, including our confirmatory Phase 3 ACT CF clinical trial of Translarna or our Phase 2 proof-of-concept studies of Translarna in nmMPS I, nonsense mutation aniridia, or nonsense mutation Dravet syndrome/CDKL5, if we are unable to locate and enroll a sufficient number of eligible patients to participate in these trials. Patient enrollment will also be a critical factor as we seek scientific advice from the EMA with respect to our proposal to submit for further discussion a draft clinical trial protocol regarding a new trial evaluating Translarna in nmDMD patients. Each of these indications are characterized by relatively small patient populations, which could result in slow enrollment of clinical trial participants. In addition, our competitors have ongoing clinical trials for product candidates that could be competitive with our product candidates. As a result, potential clinical trial sites may elect to dedicate their limited resources to participation in our competitors’ clinical trials and not ours, and patients who would otherwise be eligible for our clinical trials may instead enroll in clinical trials of our competitors’ product candidates.

 

Patient enrollment is affected by other factors including:

 

·                   severity of the disease under investigation;

 

·                   eligibility criteria for the study in question;

 

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·                   perceived risks and benefits of the product candidate under study;

 

·                   efforts to facilitate timely enrollment in clinical trials;

 

·                   patient referral practices of physicians;

 

·                   the ability to monitor patients adequately during and after treatment; and

 

·                   proximity and availability of clinical trial sites for prospective patients.

 

Enrollment delays in our clinical trials may result in increased development costs for our product candidates. Our inability to enroll a sufficient number of patients in our Phase 2 proof-of-concept studies of Translarna in nmMPS I, nonsense mutation aniridia, and nonsense mutation Dravet syndrome/CDKL5 or any of our other clinical trials would result in significant delays or may require us to abandon one or more clinical trials altogether.