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CORONADO BIOSCIENCES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

August 11, 2014

References in this report to "we," "us," "our," "the Company" and "Coronado" refer to Coronado Biosciences, Inc. and its subsidiaries.

Forward-Looking Statements



You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q. Our condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words "expect," "anticipate," "intend," "believe," "may," "might," or similar language. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our business and financial performance are subject to substantial risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information set forth under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013.

Overview



Since inception, we have been a biopharmaceutical company involved in the development of novel immunotherapy agents for the treatment of autoimmune diseases and cancer, namely CNDO-201 or Trichuris suis ova ("TSO") and CNDO-109, as more fully described below. In addition, we are actively identifying, evaluating and pursuing opportunities to in-license, acquire or invest in pharmaceutical and biotechnology products, technologies and/or companies. The scope of these activities is broad and may from time to time include financing existing or later-acquired products, technologies or companies through partnerships, joint ventures, direct financings, and/or public or private spin-outs. We have begun to diversify our product base while continuing to progress and evaluate the CNDO-201 and CNDO-109 clinical programs.

Our two principal pharmaceutical product candidates currently in clinical development are:

TSO, or CNDO-201, the microscopic eggs of the porcine whipworm, for the treatment of autoimmune diseases, such as Crohn's disease, or CD, ulcerative colitis, or UC, multiple sclerosis, or MS, autism, psoriasis, and type 1 diabetes, or T1D; and CNDO-109, a biologic that activates natural killer, or NK, cells of the immune system to seek and destroy cancer cells, for the treatment of acute myeloid leukemia.



In October 2013, we announced that our TRUST-I study did not meet its primary endpoint of improving response which was driven by a higher-than-expected placebo response rate in patients with CDAI<290. While we are continuing to analyze the trial data, the results of this trial negatively impact the potential for successful development of TSO.

In November 2013, Dr. Falk Pharma GmbH ("Falk"), our development partner, informed us that an independent data monitoring committee had conducted a second interim analysis of data from its Phase 2 clinical for CD known as TRUST-II and recommended that the trial be stopped due to lack of efficacy and noted no safety concerns. Falk adopted the committee's recommendations and discontinued the study.

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We are continuing to evaluate the data from TRUST-I. We will use this analysis, along with the clinical study report of TRUST-II data, other current data on TSO and other factors to determine our future development plans for TSO. Our current focus is on our investigator initiated studies in psoriasis and autism.

In March 2014, we submitted an Investigational New Drug Study to the U.S. Food and Drug Administration for the treatment of autism in 20 pediatric patients. In May 2014, we initiated a Phase 2a clinical trial of TSO for the treatment of 20 pediatric patients with autism spectrum disorder at multiple sites in the United States.

In February 2014, we repaid in full our term loan with Hercules Technology Growth Capital, Inc. (the "Hercules Note") and entered into a new promissory note ("IDB Note") with Israel Discount Bank of New York ("IDB"), under which we can borrow up to $15.0 million. At June 30, 2014, the amount of debt outstanding under the IDB Note was $14.0 million. (See Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements).

In March 2014, we made the decision to abandon our plans to build-out the Woburn, MA manufacturing facility and to close our New York, NY office. As a result, we commenced marketing both facilities for sub-lease. In April 2014, we entered into a sub-lease arrangement for our New York, NY office for the remaining term of the lease. During the six month period ended June 30, 2014, a lease impairment and fixed asset impairment charge related to these facilities of $0.8 million was recorded in our Unaudited Condensed Consolidated Statements of Operations. (See Note 6 of Notes to Unaudited Condensed Consolidated Financial Statements).

In March 2014, we terminated our Sponsored Research Agreement with Freie UniversitÄt Berlin effective June 30, 2014 and recorded a one-time charge of $0.2 million related to the contract termination in our Unaudited Condensed Consolidated Statements of Operations. (See Note 7 of Notes to Unaudited Condensed Consolidated Financial Statements).

On March 17, 2014, we made a $250,000 investment in a third party medical device company developing a laser device to treat migraine headaches. The investment represents a 35% ownership position. We elected the fair value option to record this investment. (See Note 8 of Notes to Unaudited Condensed Consolidated Financial Statements).

Also on March 17, 2014, we provided a $50,000 bridge loan to an emerging specialty pharmaceutical company developing, marketing and distributing Epilepsy drugs. The bridge loan is payable in 90 days, accrues interest at a rate of 8% and is secured by the assets of the company. We recorded this bridge loan in short-term investments in our Unaudited Condensed Consolidated Balance Sheets as of June 30, 2014. As of June 30, 2014, the loan remained outstanding and management believes it continues to be collectable.

On April 18, 2014, we paid $243,000 to acquire an option to purchase ("Option") the exclusive rights to a pharmaceutical product owned by a third-party. The Option expires no later than September 30, 2014. We elected the fair value method to account for this Option, which is recorded as a short-term investments in our Unaudited Condensed Consolidated Balance Sheets as of June 30, 2014. (See Note 8 of Notes to Unaudited Condensed Consolidated Financial Statements).

Results of Operations General



To date, we have not generated any revenues from operations and, at June 30, 2014, we had an accumulated deficit of $133.4 million, primarily as a result of research and development expenses, purchase of in-process research and development and general and administrative expenses. While we may in the future generate revenue from a variety of sources, including license fees, milestone payments, research and development payments in connection with strategic partnerships and/or product sales, our product candidates are at an early stage of development and may never be successfully developed or commercialized. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future and there can be no assurance that we will ever generate significant or any revenues.

Research and Development Expenses

Conducting research and development is central to our business, for the three months ended June 30, 2014 and 2013, we incurred $2.4 million and $7.8 million, respectively, of research and development expenses; included in this expenses is noncash, stock-based compensation expense of $0.3 million and $0.6 million, respectively. For the six months ended June 30, 2014 and 2013, we incurred $6.9 million and $13.8 million, respectively, of research and development expenses; included in these expenses is noncash, stock-based compensation expense of $0.6 million and $1.4 million, respectively. Research and development expenses consist primarily of:

employee-related expenses, which include salaries and benefits, and rent expense; 16 noncash stock-based compensation expense; license fees and milestone payments related to in-licensed products and intellectual property; expenses incurred under agreements with CROs, investigative sites and consultants that conduct or provide other services relating to our clinical trials and our preclinical activities; the cost of acquiring clinical trial materials from third-party manufacturers; and costs associated with non-clinical activities, patent filings and regulatory filings.



We expect to continue to incur expenses related to our research and development activities for the foreseeable future as we develop our existing product candidates and new product candidates. Since product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later stage clinical trials, we expect that our research and development expenses may increase in the future. In addition, if our product development efforts are successful, we expect to incur substantial costs to prepare for potential commercialization of any late-stage product candidates and, in the event one or more of these product candidates receive regulatory approval, to fund the launch of the product.

For the three months ended June 30, 2014 and 2013, we incurred $0.6 million and $4.1 million, respectively, and for the six months ended June 30, 2014 and 2013 we incurred $1.9 million and $7.3 million, respectively, on direct, external development costs incurred for our TSO product development program, inclusive of manufacturing rights and development. For the three months ended June 30, 2014 and 2013, we incurred $0.7 million and $0.6 million, respectively, and for the six months ended June 30, 2014 and 2013 we incurred $1.2 million and $0.9 million, respectively, on direct, external development costs incurred for our CNDO-109 product development program.

General and Administrative Expenses

General and administrative expenses consist principally of personnel-related costs, professional fees for legal, consulting, audit and tax services, rent and other general operating expenses not otherwise included in research and development. Noncash, stock-based compensation expense included in general and administrative expense for the three months ended June 30, 2014 and 2013, was $1.2 million and $0.7 million, respectively, and for the six months ended June 30, 2014 and 2013, was $2.0 million and $1.4 million, respectively. We anticipate general and administrative expenses will increase in future periods, reflecting continued and increasing costs associated with:

support of our expanded research and development activities;

support of business development activities; and

an expanding infrastructure and increased professional fees and other costs

associated with the regulatory requirements and increased compliance associated with being a public reporting company.



Comparison of three months ended June 30, 2014 and 2013

For the three months ended June 30, Change ($ in thousands) 2014 2013 $ % Operating expenses: Research and development $ 2,377$ 7,795$ (5,418 ) (70 )% General and administrative 2,386 2,499 (113 ) (5 )% Loss from operations (4,763 ) (10,294 ) 5,531 54 % Interest income 171 109 62 57 % Interest expense (119 ) (485 ) 366 75 % Net loss $ (4,711 )$ (10,670 )$ 5,959 56 % 17



Research and development expenses decreased $5.4 million, or 70%, from $7.8 million in the three months ended June 30, 2013 to $2.4 million in the three months ended June 30, 2014. This decrease was primarily due to a $4.2 million reduction in TSO product development costs and costs related to the wind down of Phase 2 of the TRUST-I trial in the quarter ended June 30, 2014 in comparison to the ramp up of the same trial in the quarter ended June 30, 2013. In addition, personnel costs decreased by $1.2 million, which was primarily comprised of a reduction of $0.4 million in salary expense, $0.4 million in severance and $0.4 million in stock compensation expense. We expect to incur expenses related to our research and development efforts going forward with existing products as well as related to new products.

General and administrative expenses decreased $0.1 million, or 5%, from $2.5 million in the three months ended June 30, 2013 to $2.4 million in the three months ended June 30, 2014. This decrease was due to a $0.6 million decrease in personnel costs primarily resulting from the November 2013 termination of certain personnel in connection with the Company's effort to lower operating expenses and realign the organization to work more efficiently. This decrease was partially offset by a $0.5 million increase in stock-based compensation expense due to restricted stock grants made to our Executive Vice Chairman, Strategic Development and the independent members of our board of directors in the first quarter of 2014.

Interest expense in 2014 primarily relates to interest on the IDB Note. The increase in interest income in 2014 compared to the same period last year was primarily due to higher cash balances.

Comparison of six months ended June 30, 2014 and 2013

For the six months ended June 30, Variance ($ in thousands) 2014 2013 $ % Operating expenses: Research and development $ 6,865$ 13,769$ (6,904 ) (50 )% General and administrative 4,481 4,983 (502 ) (10 )% Loss from operations (11,346 ) (18,752 ) 7,406 39 % Interest income 350 185 165 89 % Interest expense (1,085 ) (961 ) (124 ) (13 )% Net loss $ (12,081 )$ (19,528 )$ 7,447 38 %



Research and development expenses decreased $6.9 million, or 50%, from $13.8 million in the six months ended June 30, 2013 to $6.9 million in the six months ended June 30, 2014. This decrease was primarily due to a $5.0 million reduction in TSO product development costs related to the wind down of Phase 2 of the TRUST-I trial and reduced development activities. In addition, personnel costs decreased by $1.8 million which was primarily comprised of reductions of $0.9 million in salary, benefits and bonus expense and $0.9 million in stock-based compensation expense, primarily due to a reduction in the unvested mark-to-market value of our non-employee option grants. In addition, consulting expenses related to manufacturing activities decreased by $0.6 million. These decreases in expense were partially offset by a $0.7 million charge related to the decision to delay manufacturing of TSO in the Woburn, MA facility. We expect to incur expenses related to our research and development efforts going forward with existing products as well as related to new products.

General and administrative expenses decreased $0.5 million, or 10%, from $5.0 million in the six months ended June 30, 2013 to $4.5 million in the six months ended June 30, 2014, largely due to a $1.0 million decrease in personnel costs primarily resulting from the November 2013 termination of certain personnel and a $0.1 million decrease in consulting costs. This decrease was partially offset by a $0.6 million increase in stock-based compensation expense due to restricted stock grants made to our Executive Vice Chairman, Strategic Development and the independent members of our board of directors in the first quarter of 2014.

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Interest expense in 2014 primarily relates to interest on the Hercules Note, which included a prepayment fee of $0.3 million, representing 2% of the outstanding debt and interest on the IDB Note. The increase in interest income in 2014 compared to the same period last year was primarily due to higher cash balances.

Liquidity and Capital Resources

To date, we have funded our operations through the sale of debt and equity securities, aggregating $167.5 million of net proceeds. At June 30, 2014, we had cash and cash equivalents of $75.8 million and restricted cash of $14.0 million securing the IDB Note.

In February 2014, we paid off the Hercules Note and entered into the IDB Note. Early payment of the Hercules Note approximated $14.0 million consisting of principal of $13.2 million, end of term charge of $0.4 million, a prepayment fee of $0.3 million and interest of $0.1 million. Prior to repayment, in January 2014, the Company made a scheduled principal payment of $0.5 million on the Hercules Note.

We may require additional financing to fully develop, and prepare regulatory filings and obtain regulatory approvals for our existing product candidates (and potentially new product candidates), fund operating losses, and, if deemed appropriate, establish or secure through third parties manufacturing for our potential products (and potentially new product candidates), sales and marketing capabilities. We have funded our operations to date primarily through the sale of equity and debt securities. We believe that our current cash is sufficient to fund operations for at least the next twelve months. Our failure to raise capital as and when needed would have a material adverse impact on our financial condition and our ability to pursue our business strategies. We may seek funds through equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing. Adequate additional funding, particularly subsequent to the negative results from our TRUST-I clinical trial, may not be available to us on acceptable terms or at all. If adequate funds are not available to us when needed, we may be required to delay, curtail or eliminate one or more of our research and development programs and, potentially, delay our growth strategy.

Cash Flows for the six months ended June 30, 2014 and 2013


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