See accompanying notes to the condensed consolidated financial statements.
See accompanying notes to the condensed consolidated financial statements.
LA JOLLA PHARMACEUTICAL COMPANY
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. Business
La Jolla Pharmaceutical Company (collectively with its wholly-ownedwholly owned subsidiaries, “La Jolla” or the “Company”) is a biopharmaceutical company focused ondedicated to the discovery, development and commercialization of innovative therapies intended to significantlythat improve outcomes in patients suffering from life-threatening diseases. GIAPREZATM (angiotensin II), formerly known as LJPC-501, was for injection is approved by the U.S. Food and Drug Administration (the “FDA”(“FDA”) on December 21, 2017 as a vasoconstrictor indicated to increase blood pressure in adults with septic or other distributive shock. LJPC-0118 (artesunate)
On July 28, 2020, La Jolla completed its acquisition of Tetraphase Pharmaceuticals, Inc. (“Tetraphase”), a biopharmaceutical company focused on commercializing its novel tetracycline, XERAVATM (eravacycline), to treat serious and life-threatening infections, for $43 million in upfront cash plus potential future cash payments of up to $16 million. XERAVA for injection is La Jolla’s investigational producta novel fluorocycline of the tetracycline class of antibacterials that is approved by the FDA for the treatment of severe malaria. LJPC-401 (synthetic human hepcidin), a clinical-stage investigational product, is being developed for the potential treatmentcomplicated intra-abdominal infections (“cIAI”) in patients 18 years of conditions characterized by iron overload, such as hereditary hemochromatosis, beta thalassemia, sickle cell disease, myelodysplastic syndromeage and polycythemia vera.older. See Note 12.
As of June 30, 2020 and December 31, 2019, the Company had $123.4cash and short-term investments of $71.4 million in cash, compared to $172.6and $87.8 million, in cash as of December 31, 2018.respectively. Based on the Company’s current operating plans and projections, the Company expects that its existing cash as of June 30, 2019and short-term investments will be sufficient to fund operations for at least one year from the date this Quarterly Report on Form 10-Q is filed with the U.S. Securities and Exchange Commission (the “SEC”).
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Use of Estimates
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, theycertain information and disclosures required by GAAP for annual financial statements have been omitted. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 20182019 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018,2019, filed with the SEC on March 4, 20192, 2020 (the “Form 10-K”). The accompanying unaudited condensed consolidated financial statements include the accounts of La Jolla Pharmaceutical Company and its wholly-ownedwholly owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation. The unaudited condensed consolidated financial statements contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the condensed consolidated balance sheet as of June 30, 2019, the condensed consolidated statements of operations for the three and six months ended June 30, 2019, the condensed consolidated statement of shareholder’s (deficit) equity for the three and six months ended June 30, 2019 and the condensed consolidated statement of cash flows for the six months ended June 30, 2019.
The preparation of the Company’s unaudited condensed consolidated financial statements requires management to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities in the Company’s unaudited condensed consolidated financial statements and the accompanying notes. Actual results may differ materially from these estimates. Certain amounts previously reported in the financial statements have been reclassified to conform to the current year presentation. Such reclassifications did not affect net loss, shareholders’ (deficit) equity or cash flows. The results of operations for the three and six months ended June 30, 20192020 are not necessarily indicative of the results to be expected for the full year or any future interim periods. The accompanying condensed consolidated balance sheet as of December 31, 20182019 has been derived from the audited consolidated balance sheet as of December 31, 20182019 contained in the Form 10-K.
Summary of Significant Accounting Policies
During the six months ended June 30, 2019,2020, other than the short-term investments policy described below, there have been no changes to the Company’s significant accounting policies as described in the Form 10-K, except as described below.10-K.
Short-term investments
Leases
At lease commencement,Short-term investments are comprised of marketable equity securities that are “available-for-sale,” as such term is defined by the Company records a lease liability based on the presentFinancial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) Topic 320. Marketable equity securities are classified as current assets. Short-term investments are measured at fair value, of lease payments over the expected lease term. The Company calculates the present value of lease payments using the discount rate implicitand unrealized gains and losses are recorded in other income (expense), net in the lease,consolidated statements of operations.
unless that rate cannot be readily determined. In that case, the Company uses its incremental borrowing rate, which is the rate of interest that the Company would have to pay to borrow on a collateralized basis an amount equal to the lease payments over the expected lease term. The Company records a corresponding right-of-use lease asset based on the lease liability, adjusted for any lease incentives received and any initial direct costs paid to the lessor prior to the lease commencement date.
After lease commencement, the Company measures its leases as follows: (i) the lease liability based on the present value of the remaining lease payments using the discount rate determined at lease commencement; and (ii) the right-of-use lease asset based on the remeasured lease liability, adjusted for any unamortized lease incentives received, any unamortized initial direct costs and the cumulative difference between rent expense and amounts paid under the lease agreement. Any lease incentives received and any initial direct costs are amortized on a straight-line basis over the expected lease term. Rent expense is recorded on a straight-line basis over the expected lease term.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrationsconcentration of credit risk consist of cash.cash and accounts receivable. The Company maintains its cash in checking and savings accounts at federally insured financial institutions in excess of federally insured limits.
The Company’s products are distributedDuring the six months ended June 30, 2020, 409 hospitals in the U.S. purchased GIAPREZA. Hospitals purchase our products through a network of specialty and wholesale distributors and select wholesalers (collectively, customers)(“Customers”). The Company does not believe that resell its productsthe loss of one of these distributors would significantly impact the ability to hospitals,distribute GIAPREZA, as the end users.Company expects that sales volume would be absorbed by the remaining distributors. The following table includes the percentage of U.S. net product sales and accounts receivable balances for the Company’s fourthree major customers,Customers, each of which comprised 10% or more of its U.S. net product sales:
|
| | | | | | | | |
| U.S. Net Product Sales | | Accounts Receivable |
| Three Months Ended June 30, 2020 | | Six Months Ended June 30, 2020 | | As of June 30, 2020 |
Customer A | 38 | % | | 38 | % | | 22 | % |
Customer B | 33 | % | | 31 | % | | 41 | % |
Customer C | 25 | % | | 29 | % | | 33 | % |
Total | 96 | % | | 98 | % | | 96 | % |
|
| | | | | | | | |
| Net Product Sales | | Accounts Receivable |
| Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 | | As of June 30, 2019 |
Customer A | 32 | % | | 32 | % | | 31 | % |
Customer B | 28 | % | | 30 | % | | 10 | % |
Customer C | 25 | % | | 28 | % | | 24 | % |
Customer D | 15 | % | | 10 | % | | 35 | % |
Total | 100 | % | | 100 | % | | 100 | % |
Revenue Recognition
The Company has adopted FASB ASC Topic 606—Revenue from Contracts with Customers (“ASC 606”). Under ASC 606, the Company recognizes revenue when its customers obtain control of the Company’s product, which typically occurs on delivery. Revenue is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for those goods. To determine revenue recognition for contracts with customers within the scope of ASC 606, the Company performs the following 5 steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies the relevant performance obligations. There have been no contract assets or liabilities recorded to date relating to product sales.
Revenue from product sales is recorded at the transaction price, net of estimates for variable consideration consisting of chargebacks, discounts, returns and administrative fees. Variable consideration is estimated using the expected-value amount method, which is the sum of probability-weighted amounts in a range of possible consideration amounts. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results vary materially from the Company’s estimates, the Company will adjust these estimates, which will affect revenue from product sales and earnings in the period such estimates are adjusted. These items include:
Chargebacks—Chargebacks are discounts the Company provides to distributors in the event that the sales prices to end users are below the distributors’ acquisition price. This may occur due to a direct contract with a health system, a group purchasing organization (“GPO”) agreement or a sale to a government facility. Chargebacks are estimated based on known chargeback rates and recorded as a reduction of revenue on delivery to the Company’s customers.
Discounts—The Company offers customers various forms of incentives and consideration, including prompt-pay and other discounts. The Company estimates discounts primarily based on contractual terms. These discounts are recorded as a reduction of revenue on delivery to the Company’s customers.
Returns—The Company offers customers a limited right of return, generally for damaged or expired product. The Company estimates returns based on an internal analysis, which includes actual experience. The estimates for returns are recorded as a reduction of revenue on delivery to the Company’s customers.
Administrative Fees—The Company pays administrative fees to GPOs for services and access to data. Additionally, the Company pays an Industrial Funding Fee as part of the U.S. General Services Administration’s Federal Supply Schedules program. These fees are based on contracted terms and are paid after the quarter in which the product was purchased by the applicable GPO or government agency.
The Company will continue to assess its estimates of variable consideration as it accumulates additional historical data and will adjust these estimates accordingly.
Recent Accounting Pronouncements
Management has considered all recent accounting pronouncements and has concluded that there are no recently issued accounting pronouncements that may have a material effect on the Company’s results of operations, financial condition or cash flows based on current information.
3. Net Loss per Share
Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period, without consideration of potential common shares. Diluted net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding plus potential common shares. Convertible preferred stock, stock options and warrants are considered potential common shares and are included in the calculation of diluted net loss per share using the treasury stock method when their effect is dilutive. Potential common shares are excluded from the calculation of diluted net loss per share when their effect is anti-dilutive. As of June 30, 20192020 and 2018,2019, there were 10.2 million and 14.0 million shares and 14.2 million shares, respectively, of potential common shares, whichrespectively, that were excluded from the calculation of diluted net loss per share because their effect was anti-dilutive.
Recent Accounting Pronouncements
In June 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2018-07, Stock Compensation (Topic 718): Improvements to Nonemployee Share-based Payment Accounting (“ASU 2018-07”). The standard expands the scope of Accounting Standards Codification (“ASC”) Topic 718 to include share-based payment awards granted to nonemployees in exchange for goods and services. ASU 2018-07 is effective for annual and interim reporting periods beginning after December 15, 2018.
In the first quarter 2019, the Company adopted ASU 2018-07. Prior to the adoption of ASU 2018-07, share-based payments awards granted to nonemployees were measured at fair value on their grant date, subject to periodic remeasurement, and share-based compensation expense was recognized on a straight-line basis over their vesting terms. After the adoption of ASU 2018-07, the fair value of share-based payment awards granted to nonemployees is not required to be remeasured periodically and share-based compensation expense will continue to be recorded on a straight-line basis over their vesting period, consistent with share-based payment awards granted to employees. As a result of the adoption of ASU 2018-07, the
Company remeasured all of its outstanding nonemployee share-based payment awards at fair value and recognized a cumulative-effect adjustment of $0.2 million to accumulated deficit as of January 1, 2019.
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). This guidance requires lessees to recognize operating leases with a term greater than one year on the balance sheet as a right-of-use asset and corresponding lease liability. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018. Although ASU 2016-02 is required to be adopted at the earliest period presented using a modified retrospective approach, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”), which allows for an alternative transition method of adoption by recognizing a cumulative-effect adjustment, if any, to the opening balance of retained earnings in the period of adoption.
The Company adopted ASU 2016-02 on January 1, 2019 utilizing the alternative transition method allowed under ASU 2018-11. As a result, the Company recorded a lease liability and right-of-use lease asset of $31.8 million and $16.8 million, respectively, on its balance sheet as of January 1, 2019. The lease liability represents the present value of the remaining lease payments of the Company’s corporate headquarters lease (see Note 4), discounted using the Company’s incremental borrowing rate as of January 1, 2019. The corresponding right-of-use lease asset is recorded based on the lease liability, adjusted for the unamortized lease incentives received and the cumulative difference between rent expense and amounts paid under the corporate headquarters lease. The adoption of ASU 2016-02 did not have a material impact on either the statement of operations or statement of cash flows for the three and six months ended June 30, 2019.
3.4. Balance Sheet Details
Restricted Cash
Restricted cash as of June 30, 20192020 and December 31, 20182019 represents a standby letter of credit for the Company’s building lease in lieu of a security deposit during the term of such lease (see Note 4)6). There is a requirement to maintain $0.9$0.6 million of cash collateral in an account pledged as security for such letter of credit.
Inventory, Net
Inventory, net consisted of the following (in thousands):
|
| | | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
Work-in-process | | $ | 1,801 |
| | $ | 1,505 |
|
Finished goods | | 1,319 |
| | 706 |
|
Total inventory, net | | $ | 3,120 |
| | $ | 2,211 |
|
|
| | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
Work-in-process | | $ | 1,607 |
| | $ | 1,907 |
|
Finished goods | | 361 |
| | 113 |
|
Total inventory, net | | $ | 1,968 |
| | $ | 2,020 |
|
As of June 30, 20192020 and December 31, 2018,2019, total inventory is recorded net of $0.8inventory reserves of $0.2 million of inventory reserves.and $0.1 million, respectively.
Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands): |
| | | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
Leasehold improvements | | $ | 14,504 |
| | $ | 14,504 |
|
Furniture and fixtures | | 2,549 |
| | 2,598 |
|
Computer hardware | | 1,296 |
| | 1,296 |
|
Software | | 733 |
| | 733 |
|
Lab equipment | | — |
| | 9,665 |
|
Total property and equipment, gross | | 19,082 |
| | 28,796 |
|
Accumulated depreciation and amortization | | (6,255 | ) | | (10,407 | ) |
Total property and equipment, net | | $ | 12,827 |
| | $ | 18,389 |
|
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
|
| | | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
Accrued interest expense | | $ | 3,530 |
| | $ | 2,692 |
|
Accrued manufacturing costs | | 1,369 |
| | 1,339 |
|
Accrued clinical study costs | | 815 |
| | 3,496 |
|
Accrued other | | 1,058 |
| | 1,785 |
|
Total accrued expenses | | $ | 6,772 |
| | $ | 9,312 |
|
|
| | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
Accrued clinical study costs | | $ | 3,317 |
| | $ | 2,430 |
|
Accrued interest expense | | 3,148 |
| | 2,260 |
|
Accrued manufacturing costs | | 1,890 |
| | 1,823 |
|
Accrued other | | 1,992 |
| | 1,972 |
|
Total accrued expenses | | $ | 10,347 |
| | $ | 8,485 |
|
4. Leases
On December 29, 2016, the Company entered into an agreement with BMR-Axiom LP to lease office and laboratory space as its corporate headquarters located at 4550 Towne Centre Court, San Diego, California (the “Lease”) for a period of 10
years commencing on October 30, 2017. The Company has an option to extend the Lease for an additional 5 years at the end of the initial term.
The Company provided a standby letter of credit for $0.9 million in lieu of a security deposit. This amount will decrease to $0.6 million after year two of the lease term and decrease to $0.3 million after year 5 of the lease term. The annual rent under the Lease is subject to escalation during the term. In addition to rent, the Lease requires the Company to pay certain taxes, insurance and operating costs relating to the leased premises. The Lease contains customary default provisions, representations, warranties and covenants. The Lease is classified as an operating lease.
Future minimum lease payments under the Lease as of June 30, 2019 are as follows (in thousands):
|
| | | |
2019 | $ | 1,982 |
|
2020 | 4,058 |
|
2021 | 4,174 |
|
2022 | 4,294 |
|
2023 | 4,417 |
|
Thereafter | 18,134 |
|
Total future minimum lease payments | 37,059 |
|
Less: discount | (6,523 | ) |
Total lease liability | $ | 30,536 |
|
The Company recorded a lease liability and right-of-use lease asset for the Lease based on the present value of lease payments over the expected lease term, discounted using the Company’s incremental borrowing rate. The option to extend the Lease was not recognized as a part of the Company’s lease liability or right-of-use lease asset. Lease expense for each of the three and six months ended June 30, 2019 and 2018 was $0.7 million and $1.4 million, respectively. Amortization for the right-of-use lease asset was $0.3 million and $0.6 million for the three and six months ended June 30, 2019, respectively.
5. Deferred Royalty Obligation
OnIn May 10, 2018, the Company closed a $125.0 million royalty financing agreement (the “Royalty Agreement”) with HealthCare Royalty Partners (“HCR”). Under the terms of the Royalty Agreement, the Company received $125.0 million in exchange for tiered royalty payments on worldwide net product sales of GIAPREZA. HCR is entitled to receive quarterly royalties on worldwide net product sales of GIAPREZA beginning April 1, 2018. Quarterly payments to HCR under the Royalty Agreement start at a maximum royalty rate, with step-downs based on the achievement of annual net product sales thresholds. Through December 31, 2021, the royalty rate will be a maximum of 10%. Starting January 1, 2022, the maximum royalty rate may increase by 4% if an agreed-upon, cumulative net product sales threshold has not been met, and, starting January 1, 2024, the maximum royalty rate may increase by an additional 4% if a different agreed-upon, cumulative net product sales threshold has not been met. The Royalty Agreement is subject to maximum aggregate royalty payments to HCR of 180% of the $125.0 million received by the Company, at which time the payment obligations under the$225.0 million. The Royalty Agreement would expire.expires upon the first to occur of January 1, 2031 or when the maximum aggregate royalty payments have been made. The Royalty Agreement was entered into by the Company’s wholly-ownedwholly owned subsidiary, La Jolla Pharma, LLC, and HCR has no recourse under the Royalty Agreement against La Jolla Pharmaceutical Company or any assets other than GIAPREZA.
On receipt of the $125.0 million payment from HCR, the Company recorded a deferred royalty obligation of $125.0 million, net of issuance costs of $0.7 million. For the three months ended June 30, 20192020 and 2018,2019, the Company recognized interest expense, including amortization of the obligation discount, of $2.8$2.5 million and $1.7$2.8 million, respectively. For the six months ended June 30, 20192020 and 2018,2019, the Company recognized interest expense, including amortization of the obligation discount, of $5.5$4.9 million and $1.7$5.5 million, respectively. The carrying value of the deferred royalty obligation as of June 30, 20192020 was $124.4 million, net of unamortized obligation discount of $0.6 million, and was classified as noncurrent. The related accrued interest expense liability was $11.4$18.8 million and $6.8$15.5 million as of June 30, 20192020 and December 31, 2018,2019, respectively, of which $8.3$15.3 million and $4.5$12.8 million was classified as other noncurrent liabilities, respectively. During the three and six months ended June 30, 2019,2020, the Company made royalty payments to HCR of $0.4$0.8 million and $0.9$1.5 million, respectively, and, as of June 30, 2019,2020, the Company recorded royalty obligations payable of $0.6 million in accrued expenses. The deferred royalty obligation is classified as Level 3 in the ASC 820-10, three-tier fair value hierarchy, and its carrying value approximates fair value.
InUnder the event of certain material breachesterms of the Royalty Agreement, La Jolla Pharma, LLC has certain obligations, including the obligation to use commercially reasonable and diligent efforts to commercialize GIAPREZA. If La Jolla Pharma, LLC is held to not have met these obligations, HCR would have the right to terminate the Royalty Agreement and demand payment from La Jolla Pharma, LLC of an amount equal to either $125.0 million or $225.0 million (depending on which obligation La Jolla Pharma, LLC is held to not have met), minus aggregate royalties already paid to HCR. In the event that La Jolla Pharma, LLC fails to timely pay such amount if and when due, HCR or $225.0 million, minus aggregate royalties paidwould have the right to HCR, dependingforeclose on the type of breach.GIAPREZA-related assets. The Company concluded that certain of these contract provisions that could result in an acceleration of amounts due under the Royalty Agreement are
embedded derivatives that require bifurcation from the deferred royalty obligation and fair value recognition. The Company determined the fair value of each derivative by assessing the probability of each event occurring, as well as the potential repayment amounts and timing of such repayments that would result under various scenarios. As a result of this assessment, the Company determined that the fair value of the embedded derivatives is immaterial as of June 30, 2020 and December 31, 2019. Each reporting period, the Company estimates the fair value of the embedded derivatives until the features lapse and/or the termination of the Royalty Agreement. Any change in the fair value of the embedded derivatives will be recorded as either a gain or loss on the consolidated statements of operations.
6. Shareholders’ (Deficit) EquityCommitments and Contingencies
Lease Commitments
On December 29, 2016, the Company entered into an agreement with BMR-Axiom LP (the “Landlord”) to lease office and laboratory space as its corporate headquarters located at 4550 Towne Centre Court, San Diego, California (the “Lease”) for a period of 10 years commencing on October 30, 2017 (the “Initial Lease Term”). The Company has an option to extend the Lease for an additional 5 years at the end of the Initial Lease Term.
The Company provided a standby letter of credit for $0.9 million in lieu of a security deposit. This amount decreased to $0.6 million after year two of the Initial Lease Term and will decrease to $0.3 million after year 5 of the Initial Lease Term. As of June 30, 2020, $0.6 million of cash was pledged as collateral for such letter of credit and recorded as restricted cash. The annual rent under the Lease is subject to escalation during the term. In addition to rent, the Lease requires the Company to pay certain taxes, insurance and operating costs relating to the leased premises. The Lease contains customary default provisions, representations, warranties and covenants. The Lease is classified as an operating lease.
Future minimum lease payments under the Lease as of June 30, 2020 are as follows (in thousands): |
| | | |
2020 | $ | 2,039 |
|
2021 | 4,174 |
|
2022 | 4,294 |
|
2023 | 4,417 |
|
2024 | 4,544 |
|
Thereafter | 13,590 |
|
Total future minimum lease payments | 33,058 |
|
Less: discount | (5,168 | ) |
Total lease liability | $ | 27,890 |
|
The Company recorded a lease liability for the Lease based on the present value of the Lease payments over the Initial Lease Term, discounted using the Company’s incremental borrowing rate. The Company recorded a corresponding right-of-use lease asset based on the lease liability, adjusted for incentives received prior to the Lease commencement date. The option to extend the Initial Lease Term was not recognized as a part of either the Company’s lease liability or right-of-use lease asset. Lease expense was $0.7 million and $1.4 million for the three and six months ended June 30, 2020, respectively, and for the same periods in 2019. Amortization for the right-of-use lease asset was $0.4 million and $0.7 million for the three and six months ended June 30, 2020,respectively, and was $0.3 million and $0.6 million for the three and six months ended June 30, 2019, respectively.
Contingencies
2018 Common Stock Offering
In March 2018,From time to time, the Company offeredmay become subject to claims and sold 3,910,000litigation arising in the ordinary course of business. The Company is not a party to any material legal proceedings, nor is it aware of any material pending or threatened litigation.
7. Shareholders’ Equity
Preferred Stock
As of June 30, 2020 and December 31, 2019, 3,906 shares of Series C-12 Convertible Preferred Stock (“Series C-12 Preferred”) were issued, outstanding and convertible into 6,735,378 shares of common stock in an underwritten public offering at a price of $29.50 per share for gross proceeds of approximately $115.3 million. The Company received proceeds of approximately $109.8 million, net of approximately $5.5 million in underwriting commissions, discounts and other issuance costs.
Preferred Stock
stock. In January 2019, the Company issued 782,031 shares of common stock upon the conversion of 2,737 shares of Series F Convertible Preferred Stock. As of June 30, 2020 and December 31, 2019, there were no shares of Series F Convertible Preferred Stock issued and outstanding.
Warrants
In March 2018, the Company issued 43,056 shares of common stock in a cashless exercise of 83,013 warrants to a third-party warrant holder. As of June 30, 2020 and December 31, 2019, the Company had outstanding warrants to purchase 10,000 shares of common stock. The Company did not recognize share-based compensation expense for these outstanding warrants for the three and six months ended June 30, 2020 and 2019.
7.8. Equity Incentive Plans
2013 Equity Incentive Plan
A total of 8,100,0009,600,000 shares of common stock have been reserved for issuance under the La Jolla Pharmaceutical Company 2013 Equity Incentive Plan (the “2013 Equity Plan”). As of June 30, 2019, 681,5212020, 5,940,653 shares of common stock remained available for future grants under the 2013 Equity Plan.
2018 Employee Stock Purchase Plan
A total of 750,000 shares of common stock have been reserved for issuance under the La Jolla Pharmaceutical Company 2018 Employee Stock Purchase Plan (the “ESPP”). As of June 30, 2019, 633,7712020, 499,805 shares of common stock remained available for future grants under the ESPP.
Equity Awards
The activity related to equity awards, which are comprised of stock options and inducement grants, during the six months ended June 30, 20192020 is summarized as follows: |
| | | | | | | | | | | | |
| Equity Awards | | Weighted- average Exercise Price per Share | | Weighted- average Remaining Contractual Term | | Aggregate Intrinsic Value |
Outstanding at December 31, 2019 | 5,616,840 |
| | $ | 19.50 |
| | | | |
Granted | 806,923 |
| | $ | 5.27 |
| | | | |
Exercised | (94,219 | ) | | $ | 6.42 |
| | | | |
Cancelled/forfeited | (2,883,533 | ) | | $ | 19.43 |
| | | | |
Outstanding at June 30, 2020 | 3,446,011 |
| | $ | 16.59 |
| | 5.87 years | | $ | 35,037 |
|
Exercisable at June 30, 2020 | 2,144,609 |
| | $ | 20.84 |
| | 4.27 years | | $ | — |
|
|
| | | | | | |
| Equity Awards | | Weighted- average Exercise Price per Share |
Outstanding at December 31, 2018 | 6,466,214 |
| | $ | 23.26 |
|
Granted(1) | 1,923,030 |
| | $ | 6.33 |
|
Cancelled/forfeited | (1,184,101 | ) | | $ | 20.84 |
|
Outstanding at June 30, 2019 | 7,205,143 |
| | $ | 19.14 |
|
(1) In March 2019, the Company issued a stock option grant to the Company’s recently appointed Chief Commercial Officer to purchase 80,000 shares of common stock at an exercise price equal to the fair market value of the Company’s common stock on the grant date. The grant was
awarded as an inducement grant outside of the 2013 Equity Plan. On the first anniversary of the grant date, 25% of the underlying shares become exercisable with the remaining shares vesting on a monthly basis over the subsequent three years, subject to continued service during that time.
Share-based Compensation Expense
The classification of share-based compensation expense is summarized as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Research and development | $ | 964 |
| | $ | 3,960 |
| | $ | 2,527 |
| | $ | 7,893 |
|
Selling, general and administrative | 626 |
| | 2,361 |
| | 1,470 |
| | 5,210 |
|
Total share-based compensation expense | $ | 1,590 |
| | $ | 6,321 |
| | $ | 3,997 |
| | $ | 13,103 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Research and development | $ | 3,960 |
| | $ | 5,701 |
| | $ | 7,893 |
| | $ | 11,097 |
|
Selling, general and administrative | 2,361 |
| | 4,143 |
| | 5,210 |
| | 8,149 |
|
Total share-based compensation expense | $ | 6,321 |
| | $ | 9,844 |
| | $ | 13,103 |
| | $ | 19,246 |
|
As of June 30, 2019,2020, total unrecognized share-based compensation expense related to unvested equity awards was $49.9$8.6 million, which areis expected to be recognized over a weighted-average period of 2.62.2 years. As of June 30, 2019,2020, there was no unrecognized share-based compensation expense related to shares of common stock issued under the ESPP.
8.9. Other Income—Related Party
The Company has a non-voting profits interest in a related party, which provides the Company with the potential to receive a portion of the future distributions of profits, if any. Investment funds affiliated with the Chairman of the Company’s board of directors have a controlling interest in the related party. During the six months ended June 30, 2020, the Company received distributions of $4.1 million in connection with this profits interest.
10. George Washington University License
In December 2014, the Company entered into a patent license agreement with George Washington University (“GW”), which was amended and restated on March 1, 2016 (the “GW License”) and subsequently assigned to La Jolla Pharma, LLC. Pursuant to the GW License, GW exclusively licensed to the Company certain intellectual property rights relating to GIAPREZA, including the exclusive rights to certain issued patents and patent applications covering GIAPREZA. Under the GW License, the Company is obligated to use commercially reasonable efforts to develop, commercialize, market and sell GIAPREZA. The Company has paid a one-time license initiation fee, annual maintenance fees, an amendment fee, additional payments following the achievement of certain development and regulatory milestones and royalties. As a result of the EC’s approval of GIAPREZA in August 2019, the Company made a milestone payment to GW in the amount of $0.5 million in the first quarter of 2020. The Company is obligated to pay a 6% royalty on net sales of GIAPREZA. The patents and patent applications covered by the GW License are expected to expire between 2029 and 2034, and the obligation to pay royalties under this agreement extends through the last-to-expire patent covering GIAPREZA.
11. Company-wide RealignmentRealignments
On October 18, 2018,December 2, 2019, the Board of Directors of the Company effectedapproved a Company-wide realignment to increase its efficiency and focus on achieving its corporate goals.restructuring plan (the “2019 Realignment”) that reduced the Company’s headcount. The 2019 Realignment did not result in any reductions in headcount in the Company’s commercial organization supporting GIAPREZA. For the year ended December 31, 2018,2019, total expense for these activities was $4.0 million, with $1.6 million included in research and development expense and $2.4 million included in selling, general and administrative expense. Total expense was comprised of $7.7$5.8 million for one-time termination benefits to the affected employees, including severance costs,and health care benefits, offset by a $3.7$0.9 million reversal of non-cash, stock-basedshare-based compensation expense related to forfeited, unvested equity awards. As of March 31, 2019, allJune 30, 2020, the Company had paid $4.8 million of the $5.8 million cash severance costs had been paid. No expense for these activities was recorded duringand health care benefits charges, and the threeremaining $1.0 million of the health care benefits charges were included in accrued payroll and sixrelated expenses.
On May 28, 2020, the Board of Directors of the Company approved a restructuring plan (the “2020 Realignment”) to align its organization with the Company’s sole focus on the commercialization of GIAPREZA. The 2020 Realignment reduced the Company’s headcount. For the three months ended June 30, 2019.2020, total expense was comprised of $4.1 million for one-time termination benefits to the affected employees, including severance and health care benefits, offset by a $0.4 million reversal of non-cash, share-based compensation expense related to forfeited, unvested equity awards. As of June 30, 2020, the Company had paid $0.7 million of the $4.1 million cash severance and health care benefits charges, and the remaining $3.4 million of the cash severance and health care
benefits charges were included in accrued payroll and related expenses. The Company expects to make substantially all of the remaining payments resulting from the 2020 Realignment in the third quarter of 2020.
12. Subsequent Events
Acquisition of Tetraphase Pharmaceuticals, Inc.
On June 24, 2020, La Jolla entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Tetraphase, a biopharmaceutical company focused on commercializing its novel tetracycline XERAVA to treat serious and life‑threatening infections, and TTP Merger Sub, Inc., a wholly owned subsidiary of La Jolla. On July 28, 2020, La Jolla completed its acquisition of Tetraphase for $43 million in upfront cash plus potential future cash payments of up to $16 million pursuant to contingent value rights (“CVRs”). The holders of the CVRs are entitled to receive potential future cash payments of up to $16 million in the aggregate upon the achievement of certain net sales of XERAVA in the U.S. as follows: (i) $2.5 million if 2021 XERAVA U.S. net sales are at least $20 million; (ii) $4.5 million if XERAVA U.S. net sales are at least $35 million during any calendar year ending on or prior to December 31, 2024; and (iii) $9 million if XERAVA U.S. net sales are at least $55 million during any calendar year ending on or prior to December 31, 2024. Following the acquisition, Tetraphase became a wholly owned subsidiary of La Jolla. The acquisition of Tetraphase will be accounted for as a business combination pursuant to FASB ASC Topic 805.
ITEMItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSManagement’s Discussion and Analysis of Financial Condition and Results of Operations
In this report, all references to “we,” “our,” “us,” “La Jolla” and “the Company” refer to La Jolla Pharmaceutical Company, a California corporation, and our subsidiaries, including La Jolla Pharma, LLC, on a consolidated basis.
You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and accompanyingthe related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements and accompanyingthe related notes and other financial information included in our Annual Report on Form 10-K for the year ended December 31, 20182019 filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 4, 20192, 2020 (the “Form 10-K”).
Forward-looking Statements
The forward-lookingThis Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the federal securities laws, and such statements may involve substantial risks and uncertainties. All statements, other than statements of historical facts included in this report involve significant risks, assumptions and uncertainties and a number of factors, both foreseen and unforeseen, which could cause actual resultsQuarterly Report on Form 10-Q, including statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, future expenses, financing needs, plans or intentions relating to differ materially from our current expectations. Forward-looking statements include those that express a plan, belief, expectation, estimation, anticipation, intent, contingency, future development or similar expression. Accordingly, you should not rely on forward-looking statements as predictions of future events. Forward-looking statements include, but are not limited to, statements relating to: our ability to successfully commercialize, market and achieve market acceptance of GIAPREZATM (angiotensin II) and our product candidates; our ability to meet the demand for GIAPREZA in a timely manner; potential market sizes for our products and product candidates, including the market for the treatment of septic or distributive shock; the cost of producing GIAPREZA; unforeseen safety issues from the administration of GIAPREZA and our product candidates in patients; the timing and prospects for approval of GIAPREZA by the European Commission (the “EC”) or other regulatory authorities; and if approved, the anticipated timing for commercial availability of GIAPREZA; the scope of product label(s) and potential market sizes, as well as the broader commercial opportunity for GIAPREZA and our product candidates; the impact of pharmaceutical industry regulation and healthcare legislation in the United States; the success of future development activities; the timing for commencement of preclinical studies and clinical studies; the successful and timely completion of clinical studies; the potential timing and results of the clinical studies; the anticipated timing for regulatory filings and regulatory actions; the potential indications for which the Company’s product candidates may be developed; the anticipated treatment of future clinical data by the U.S. Food and Drug Administration (the “FDA”), EMAacquisitions, business trends and other regulatory authorities, including whether such data will be sufficient for
approval; and the expected duration over which the Company’s cash balances will fund our operations. The outcomes of the events described in these forward-looking statements are subjectinformation referred to the risks, uncertainties and other factors described in theunder this section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “will,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “design,” “estimate,” “predict,” “potential,” “plan,” “anticipate,” “target,” “forecast” or the negative of these terms and similar expressions intended to identify forward-looking statements. Forward-looking statements are not historical facts and reflect our current views with respect to future events. Forward-looking statements are also based on assumptions and are subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements.
There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Such risks, uncertainties and other factors are described under “Risk Factors” sections contained in Item 1A of our Form 10-K for the year ended December 31, 2019 and in other reports and registration statements that we file with the SEC. We expressly disclaim any intent to update forward-looking statements.
Introduction
Management’s discussion and analysis of financial condition and results of operations is provided as a supplement to the accompanying unaudited condensed consolidated financial statements and notes, which are includedunder “Risk Factors” in Item 11A of this Quarterly Report on Form 10-Q,10-Q. We caution you that these risks, uncertainties and other factors may not contain all of the risks, uncertainties and other factors that are important to help provide an understanding of our financial condition,you. In addition, we cannot assure you that we will realize the changesresults, benefits or developments that we expect or anticipate or, even if substantially realized, that they will result in our financial condition and our results of operations. Our discussion is organized as follows:
Business Overview. This section provides a general description ofthe consequences or affect us or our business and significant events and transactions that we believe are important in understanding our financial condition and results of operations.
Program Overview. This section provides an overview of GIAPREZA, LJPC-0118 and LJPC-401.
Critical Accounting Policies and Estimates. This section provides a description of the material changes to our significant accounting policies, including the critical accounting policies and estimates, which are summarizedway expected. All forward-looking statements in Note 2 to the accompanying unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q apply only as of the date made and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q.
We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances.Results of Operations. This section provides an analysis of our results of operations presented in the accompanying unaudited condensed consolidated statements of operations by comparing the results for the three and six months ended June 30, 2019 to the results for the three and six months ended June 30, 2018.
Liquidity and Capital Resources. This section provides an analysis of our historical cash flows, as well as our future capital requirements.
Business Overview
La Jolla Pharmaceutical Company is a biopharmaceutical company focused ondedicated to the discovery, development and commercialization of innovative therapies intended to significantlythat improve outcomes in patients suffering from life-threatening diseases. GIAPREZATM (angiotensin II), formerly known as LJPC-501, was for injection is approved by the FDA on December 21, 2017U.S. Food and Drug Administration (“FDA”) as a vasoconstrictor indicated to increase blood pressure in adults with septic or other distributive shock. LJPC-0118 (artesunate)For the three and six months ended June 30, 2020, U.S. net sales of GIAPREZA were $5.8 million and $13.4 million, up 2% and 33%, respectively, from the same periods in 2019.
On July 28, 2020, La Jolla completed its acquisition of Tetraphase Pharmaceuticals, Inc., a biopharmaceutical company focused on commercializing its novel tetracycline, XERAVATM (eravacycline), to treat serious and life-threatening infections, for $43 million in upfront cash plus potential future cash payments of up to $16 million. XERAVA for injection is La Jolla’s investigational producta novel fluorocycline of the tetracycline class of antibacterials that is approved by the FDA for the treatment of severe malaria. LJPC-401 (synthetic human hepcidin)complicated intra-abdominal infections (“cIAI”) in patients 18 years of age and older. For the three and six months ended June 30, 2020, U.S. net sales of XERAVA, which was launched in October 2018, were $1.5 million and $3.2 million, up 88% and 191%, a clinical-stage investigational product, is being developedrespectively, from the same periods in 2019. Complete financial results of Tetraphase for the potential treatmentsix months ended June 30, 2020 will be included in an amended Form 8-K to be filed by La Jolla on or before October 13, 2020. Financial results for periods ending September 30, 2020 and beyond will include Tetraphase’s financial results subsequent to the acquisition closing date of conditions characterized by iron overload, such as hereditary hemochromatosis, beta thalassemia, sickle cell disease, myelodysplastic syndrome and polycythemia vera.July 28, 2020.
Program Overview
Product Portfolio
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| |
a | U.S.: GIAPREZA is a vasoconstrictor to increase blood pressure in adults with septic or other distributive shock. |
| European Union: GIAPREZA is indicated for the treatment of refractory hypotension in adults with septic or other distributive shock who remain hypotensive despite adequate volume restitution and application of catecholamines and other available vasopressor therapies. |
b | U.S.: XERAVA is a novel fluorocycline of the tetracycline class of antibacterials for the treatment of complicated intra-abdominal infections (“cIAI”) in patients 18 years of age and older. European Union: XERAVA is indicated for the treatment of cIAI in adults. |
GIAPREZATM (angiotensin II)
GIAPREZATM (angiotensin II), for injection for intravenous infusion, wasis approved by the FDA on December 21, 2017 as a vasoconstrictor indicated to increase blood pressure in adults with septic or other distributive shock. Angiotensin II is a major bioactive component of the renin-angiotensin-aldosterone system (the “RAAS”). The RAAS is one of three central regulators of blood pressure. In March 2018, we announced the commercial availability of GIAPREZA. GIAPREZA is available in 1 mL single-dose vials, each containing 2.5 mg of angiotensin II (as a sterile liquid) through authorized specialty distributors and select wholesalers.
More than 1 million Americans are affectedapproved by shock on an annual basis, with 1 in 3 patients being treated for shock in the intensive care unit. Distributive shock is the most common type of shock in the inpatient setting with approximately 800,000 distributive shock cases in the U.S. each year. Of these cases, an estimated 90% are septic shock patients. Approximately 300,000 do not achieve adequate blood pressure response with standard-of-care vasopressor therapy (catecholamines and vasopressin). The inability to achieve or maintain adequate blood pressure results in inadequate blood flow to the body’s organs and tissue and is associated with a mortality rate exceeding most acute conditions requiring hospitalization. In the European Union (the “EU”Commission (“EC”), the annual incidence of sepsis in adults is estimated to be more than 500,000, with more than 170,000 progressing to septic shock.
The GIAPREZA clinical development program included a Phase 3 study of GIAPREZA in adult patients with septic or other distributive shock who remained hypotensive despite fluid and vasopressor therapy, known as ATHOS-3 (Angiotensin II for the Treatment of High-Output Shock). In ATHOS-3, patients were randomized in a 1:1 fashion to receive either: (i) GIAPREZA plus standard-of-care vasopressors; or (ii) placebo plus standard-of-care vasopressors. ATHOS-3 completed enrollment of 344 patients in the fourth quarter of 2016. In February 2017, we reported positive top-line results from ATHOS-3, and, in May 2017, the results of ATHOS-3 were published by The New England Journal of Medicine.
The analysis of the primary efficacy endpoint, defined as the percentage of patients achieving a pre-specified target blood pressure response, was highly statistically significant: 23% of the 158 placebo-treated patients had a blood pressure response compared to 70% of the 163 GIAPREZA-treated patients (p<0.00001). In addition, there was a consistent trend toward longer survival over the 28-day study period: 22% reduction in mortality risk through day 28 [hazard ratio=0.78 (0.57-1.07), p=0.12] for GIAPREZA-treated patients.
In this critically ill patient population: 92% of placebo-treated patients compared to 87% of GIAPREZA-treated patients experienced at least one adverse event, and 22% of placebo-treated patients compared to 14% of GIAPREZA-treated patients discontinued treatment due to an adverse event.
In June 2018, the Marketing Authorisation Application (the “MAA”) for GIAPREZA was validated by the EMA. Validation of the MAA confirms that the submission is complete and starts the EMA’s centralized review process. This followed our announcement in September 2017 in which we reported that the EMA’s Committee for Medicinal Products for Human Use (“CHMP”) issued favorable Scientific Advice regarding the EU regulatory pathway for GIAPREZA.
In June 2019, the EMA’s CHMP adopted a positive opinion for the MAA for GIAPREZA for the treatment of refractory hypotension in adults with septic or other distributive shock. The CHMP’s positive opinion was sentshock who remain hypotensive despite adequate volume restitution and application of catecholamines and other available vasopressor therapies. GIAPREZA mimics the body’s endogenous angiotensin II peptide, which is central to the European Commission,renin-angiotensin-aldosterone system, which hasin turn regulates blood pressure. GIAPREZA is marketed in the authority to approve medicinesU.S. by La Jolla Pharmaceutical Company on behalf of La Jolla Pharma, LLC, its wholly owned subsidiary.
XERAVATM (eravacycline)
XERAVATM (eravacycline) for injection is a novel fluorocycline of the 28 European Union member countries. Approval would also be recognized in Iceland, Norway and Liechtenstein. We expect a final approval decision on the GIAPREZA MAAtetracycline class of antibacterials that is approved by the EC in the third quarter of 2019.
LJPC-0118
LJPC-0118 is an investigational productFDA for the treatment of severe malaria. The active pharmaceutical ingredient in LJPC-0118, artesunate, was demonstrated to be superior to quinine in reducing mortalitycIAI in patients with severe falciparum malaria infection in two randomized, controlled, clinical studies. Severe malaria18 years of age and older. XERAVA is a serious and sometimes fatal disease causedapproved by a parasite that commonly infects a certain type of mosquito, which feeds on humans. Symptoms include, but are not limited to: fever, chills, sweating, hypoglycemia and shock. Severe malaria is often complicated by central nervous system infections that may lead to delirium, which may progress to coma. Infections usually occur a few weeks after being bitten. In 2017, an estimated 219 million cases of malaria occurred worldwide, with an estimated 200 million of these cases occurring in the World Health Organization (the “WHO”) African Region, and, in 2013, the global annual incidence of severe malaria was estimated to be 2 million cases. In 2017, an estimated 435,000 people died from malaria worldwide.
In April 2019, the FDA granted Breakthrough Therapy designation for LJPC-0118. Breakthrough Therapy designation is designed to expedite the development and review of drugs that are intended to treat serious or life-threatening diseases and for which preliminary clinical evidence indicates substantial improvement over available therapies on clinically significant endpoint(s).
In July 2019, the FDA granted Orphan Drug designation for LJPC-0118EC for the treatment of malaria. Orphan Drug designationcIAI in adults. XERAVA is designed to incentivize the development of drugs and biological products that treat rare diseases or conditions affecting fewer than 200,000 patientsmarketed in the U.S. These incentives include: up to seven years of marketing exclusivity if the sponsor is the first to obtain regulatory approval from the FDA; tax credits related to clinical trial expenses; an exemption from the FDA-user fee; and FDA assistance in clinical trial design.
We plan to file a New Drug Application (“NDA”) for LJPC-0118 with the FDA in the fourth quarter of 2019.
LJPC-401
LJPC-401, a clinical-stage investigational product, is our proprietary formulation of synthetic human hepcidin. Hepcidin, an endogenous peptide hormone, is the body’s naturally occurring regulator of iron absorption and distribution. In healthy individuals, hepcidin prevents excessive iron accumulation in vital organs, such as the liver and heart, where it can cause significant damage and even result in death. We are developing LJPC-401 for the potential treatment of iron overload,
which occurs as a result of primary iron overload diseases such as hereditary hemochromatosis (“HH”), or secondary iron overload diseases such as beta thalassemia (“BT”), sickle cell disease (“SCD”), myelodysplastic syndrome (“MDS”) and polycythemia vera.
HH is the most common genetic disease in Caucasians. HH is characterized by a genetic mutation that causes excessive iron absorption and accumulation due to hepcidin deficiency or insensitivity. Hepcidin is the body’s naturally occurring regulator of iron absorption and distribution. Without normal levels of hepcidin, excessive amounts of iron accumulate in the body. Symptoms of the disease include joint pain, abdominal pain, fatigue and weakness. If left untreated, HH can lead to liver cirrhosis, liver cancer, heart disease and/or failure and diabetes.
There are no FDA approved therapies for HH and the current standard treatment for HH is a blood removal procedure known as phlebotomy. Each phlebotomy procedure, which is usually conducted at a hospital, medical office or blood center, typically involves the removal of approximately one pint of blood. The required frequency of procedures varies by patient but often ranges from one to two times per week for an initial period after diagnosis and once every one to three months for life. Since most of the body’s iron is stored in red blood cells, chronic removal of blood can effectively lower iron levels if a phlebotomy regimen is adhered to. However, phlebotomy procedures may cause and may be associated with pain, bruising and scarring at the venous puncture site, joint pain, fatigue and dizziness during and following the procedure and disruption of daily activities. Furthermore, phlebotomy is not appropriate in patients with poor venous access, anemia or heart disease.
BT, SCD and MDS are genetic diseases of blood cells that can cause life-threatening anemia and usually require frequent and life-long blood transfusions. These blood transfusions cause excessive iron accumulation in the body, which is toxic to vital organs, such as the liver and heart. In addition, the underlying anemia causes excessive iron accumulation independent of blood transfusions.
In 2015, the EMA Committee for Orphan Medicinal Products (“COMP”) designated LJPC-401 as an orphan medicinal product for the treatment of beta thalassemia intermedia and major. In 2016, the EMA COMP designated LJPC-401 as an orphan medicinal product for the treatment of SCD.
In September 2016, we reported positive results from a Phase 1 study of LJPC-401 in patients at risk of iron overload suffering from HH, thalassemia and SCD. In this study, single, escalating doses of LJPC-401 were associated with a dose-dependent, statistically significant reduction in serum iron. LJPC-401 was well-tolerated with no dose-limiting toxicities. Injection-site reactions were the most commonly reported adverse event and were all mild or moderate in severity, self-limiting and fully resolved.
In June 2018, two presentations on LJPC-401 were given at the 23rd Congress of the European Hematology Association (the “EHA”). The first was an oral presentation, entitled “A Phase 1, Open-Label Study to Determine the Safety, Tolerability, and Pharmacokinetics of Escalating Doses of LJPC-401 (Synthetic Human Hepcidin) in Patients with Iron Overload.” The second was a poster presentation, entitled “A Phase 1, Placebo-Controlled Study to Determine the Safety, Tolerability, and Pharmacokinetics of Escalating Subcutaneous Doses of LJPC-401 (Synthetic Human Hepcidin) in Healthy Adults.”
LJPC-401 is currently the subject of two clinical studies, LJ401-HH01 in patients with HH and LJ401-BT01 in patients with BT.
LJ401-HH01
In December 2017, we announced the initiation of LJ401-HH01, a Phase 2 clinical study of LJPC‑401 in patients with HH. LJ401-HH01 is a multinational, multicenter, randomized, placebo-controlled, double-blind, Phase 2 study designed to evaluate the safety and efficacy of LJPC-401 as a treatment for HH. The primary efficacy endpoint of the study is the change in transferrin saturation (“TSAT”)Tetraphase Pharmaceuticals, Inc., a standard measurementwholly owned subsidiary of iron levels in the body and oneLa Jolla.
Components of the two key measurements used to detect iron overload, from baseline to end of treatment (16 weeks). Secondary efficacy endpoints include the requirement for and frequency of phlebotomy procedures during the study.
In June 2019, we announced positive results from the pre-specified interim analysis of LJ401-HH01. The interim analysis of efficacy included 26 patients who had reached the end of the 16-week treatment period (the efficacy population: 12 LJPC-401-treated patients; 14 placebo-treated patients), and the interim analysis of safety included 60 randomized patients (the safety population: 29 LJPC-401-treated patients; 31 placebo-treated patients). Results from the pre-specified interim analysis include following:
The change in TSAT from baseline to the end of treatment was statistically significant: LJPC‑401‑treated patients had a mean reduction in TSAT of 42% compared to placebo-treated patients who had a mean reduction of 6% (p<0.0001).
The requirement for and frequency of phlebotomy procedures was statistically significant: LJPC-401-treated patients had 0.06 phlebotomies per month compared to placebo-treated patients who had 0.41 phlebotomies per month (p=0.003). There were 3 phlebotomies in 2 LJPC-401-treated patients and 24 phlebotomies in 9 placebo-treated patients.
LJPC-401 was well tolerated. The most frequent treatment-emergent adverse events (“TEAEs”) were injection site reactions (“ISRs”), which occurred in 79% of LJPC‑401-treated patients compared to 6% of placebo-treated patients. The ISRs were all mild or moderate in severity, and no ISRs resulted in treatment discontinuation. As of the interim analysis, there were no serious TEAEs reported.
We expect to announce top-line results of LJ401-HH01 in the fourth quarter of 2019.
LJ401-BT01
In September 2016, we announced that we reached agreement with the EMA on the design of a pivotal study of LJPC-401 for the treatment of BT patients suffering from iron overload, a major unmet need in an orphan patient population. In December 2017, we announced the initiation of LJ401-BT01, a pivotal, multinational, multicenter, randomized, controlled study that is designed to evaluate the safety and efficacy of LJPC-401 as a treatment for BT patients who, despite chelation therapy, have cardiac iron levels above normal. The primary efficacy endpoint of this study is the change in iron content in the heart after 6 months, as measured by cardiac magnetic resonance imaging (“MRI”). If this study is successful, we would anticipate filing an MAA for LJPC-401 in the EU.
We expect to announce top-line results of LJ401-BT01 in mid-2020.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.
There have been no material changes to the critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed on March 4, 2019, except for the leases policy disclosed in Note 2 to the accompanying unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements
Recent accounting pronouncements are disclosed in Note 2 to the accompanying unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.
Our Results of Operations
The following table summarizes our results of operations for each of the periods below (in thousands):
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Net product sales | $ | 5,703 |
| | $ | 1,593 |
| | $ | 10,098 |
| | $ | 2,402 |
| $ | 5,805 |
| | $ | 5,703 |
| | $ | 102 |
| | $ | 13,396 |
| | $ | 10,098 |
| | $ | 3,298 |
|
Cost of product sales | (551 | ) | | (129 | ) | | (1,051 | ) | | (187 | ) | (808 | ) | | (551 | ) | | (257 | ) | | (1,524 | ) | | (1,051 | ) | | (473 | ) |
Research and development expense | (22,043 | ) | | (30,867 | ) | | (43,287 | ) | | (59,296 | ) | (8,781 | ) | | (22,043 | ) | | 13,262 |
| | (17,964 | ) | | (43,287 | ) | | 25,323 |
|
Selling, general and administrative expense | (11,323 | ) | | (22,164 | ) | | (23,643 | ) | | (45,180 | ) | (8,677 | ) | | (11,323 | ) | | 2,646 |
| | (16,829 | ) | | (23,643 | ) | | 6,814 |
|
Other expense, net | (2,202 | ) | | (1,211 | ) | | (4,218 | ) | | (1,045 | ) | |
Other income (expense), net | | (3,131 | ) | | (2,202 | ) | | (929 | ) | | (1,262 | ) | | (4,218 | ) | | 2,956 |
|
Net loss | $ | (30,416 | ) | | $ | (52,778 | ) | | $ | (62,101 | ) | | $ | (103,306 | ) | $ | (15,592 | ) | | $ | (30,416 | ) | | $ | 14,824 |
| | $ | (24,183 | ) | | $ | (62,101 | ) | | $ | 37,918 |
|
In May 2018, we closed a $125.0 million royalty financing agreement (the “Royalty Agreement”) with HealthCare Royalty Partners (“HCR”). Under the terms of the Royalty Agreement, we received $125.0 million in exchange for tiered royalty payments on worldwide net product sales of GIAPREZA. HCR is entitled to receive quarterly royalties on worldwide net product sales of GIAPREZA beginning April 1, 2018. Quarterly payments to HCR under the Royalty Agreement start at a
maximum royalty rate, with step-downs based on the achievement of annual net product sales thresholds. Through December 31, 2021, the royalty rate will be a maximum of 10%. Starting January 1, 2022, the maximum royalty rate may increase by 4% if an agreed-upon, cumulative net product sales threshold has not been met, and, starting January 1, 2024, the maximum royalty rate may increase by an additional 4% if a different agreed-upon, cumulative net product sales threshold has not been met. The Royalty Agreement is subject to maximum aggregate royalty payments to HCR of 180% of the $125.0 million received by us, at which time the payment obligations under the$225.0 million. The Royalty Agreement would expire.expires upon the first to occur of January 1, 2031 or when the maximum aggregate royalty payments have been made. The Royalty Agreement was entered into by our wholly owned subsidiary, La Jolla Pharma, LLC, and HCR has no recourse under the Royalty Agreement against usLa Jolla Pharmaceutical Company or any assets other than GIAPREZA.
We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in our financial condition, expenses, results of operations, liquidity, capital expenditures or capital resources.
We are a smaller reporting company, as defined by Rule 12b-2 under the Securities and Exchange Act of 1934 and in Item 10(f)(1) of Regulation S-K, and are not required to provide the information under this item.