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Biohaven Pharmaceutical Holding Co Ltd. SEC Filing Form 10-Q Quartely report 2/2017, submited: 2017-06-16

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Form 10-Q

The SEC form 10-Q is a comprehensive report of a company's performance that must be submitted quarterly by all public companies to the Securities and Exchange Commission. In the 10-Q, firms are required to disclose relevant information regarding their financial position. The form must be submitted on time, and the information should be available to all interested parties.

The 10-Q is due 35 days (it used to be 45 days) after each of the first three fiscal quarters. There is no filing after the fourth quarter because that is when the 10-K is filed.

10-Q 1 a17-13852_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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 March 31, 2017

 

OR

 

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

 

Commission File Number: 001-38080

 


 

Biohaven Pharmaceutical Holding Company Ltd.

(Exact Name of Registrant as Specified in its Charter)

 


 

British Virgin Islands

 

Not applicable

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

c/o Biohaven Pharmaceuticals, Inc.
234 Church Street, New Haven, Connecticut

 

06510

(Address of principal executive offices)

 

(Zip Code)

 

(203) 404-0410

(Registrant’s telephone number, including area code)

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 


 

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 o No x

 

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  o

 

Accelerated filer  o

 

 

 

Non-accelerated filer  x

 

Small reporting company  o

(Do not check if a small reporting company)

 

 

 

 

Emerging growth company  x

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. x

 

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 June 15, 2017, the registrant had 35,748,083 common shares, without par value per share, outstanding.

 

 

 



Table of Contents

 

Table of Contents

 

 

 

Page

 

PART I - FINANCIAL INFORMATION

 

Item 1.

Financial Statements

2

 

Consolidated Balance Sheets as of March 31, 2017 (unaudited) and December 31, 2016

2

 

Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2016 and 2017 (unaudited)

3

 

Consolidated Statement of Convertible Preferred Shares and Shareholders’ Equity (Deficit) as of March 31, 2017 (unaudited)

4

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2017 (unaudited)

5

 

Notes to Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

36

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

49

Item 4.

Controls and Procedures

50

 

PART II - OTHER INFORMATION

 

Item 1.

Legal Proceedings

51

Item 1A.

Risk Factors

51

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

111

Item 6.

Exhibits

112

Signatures

113

Exhibit Index

114

 

1



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

CONSOLIDATED BALANCE SHEETS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash

 

$

52,286

 

$

23,565

 

Restricted cash

 

 

67

 

Prepaid expenses and other current assets

 

883

 

403

 

Total current assets

 

53,169

 

24,035

 

Property and equipment, net

 

43

 

26

 

Deferred offering costs

 

2,399

 

134

 

Equity method investment (Note 5)

 

4,511

 

2,753

 

Restricted cash

 

60

 

60

 

Deferred tax assets

 

9

 

9

 

Total assets

 

$

60,191

 

$

27,017

 

 

 

 

 

 

 

Liabilities, Convertible Preferred Shares and Shareholders’ Equity (Deficit)

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Notes payable, net of discount

 

$

4,489

 

$

4,216

 

Accounts payable

 

4,022

 

746

 

Accrued expenses

 

6,931

 

2,980

 

Total current liabilities

 

15,442

 

7,942

 

Warrant liability

 

1,234

 

780

 

Derivative liability

 

223

 

512

 

Contingent equity liability

 

22,313

 

18,938

 

Notes payable to related parties

 

602

 

595

 

Other long-term liabilities

 

19

 

13

 

Total liabilities

 

39,833

 

28,780

 

Commitments and contingencies (Note 14)

 

 

 

 

 

Series A convertible preferred shares, no par value; 11,242,172 shares authorized as of March 31, 2017 and December 31, 2016; 9,358,560 and 4,948,369 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively; aggregate liquidation preference of $86,951 and $45,976 as of March 31, 2017 and December 31, 2016, respectively

 

73,900

 

43,270

 

Shareholders’ equity (deficit):

 

 

 

 

 

Common shares, no par value; 38,000,000 shares authorized as of March 31, 2017 and December 31, 2016; 13,121,000 and 13,088,500 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively

 

20,296

 

19,944

 

Additional paid-in capital

 

20,371

 

10,479

 

Accumulated deficit

 

(94,209

)

(75,456

)

Total shareholders’ equity (deficit)

 

(53,542

)

(45,033

)

Total liabilities, convertible preferred shares and shareholders’ equity (deficit)

 

$

60,191

 

$

27,017

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

2



Table of Contents

 

BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Research and development

 

$

10,740

 

$

2,370

 

General and administrative

 

3,757

 

613

 

Total operating expenses

 

14,497

 

2,983

 

Loss from operations

 

(14,497

)

(2,983

)

Other income (expense):

 

 

 

 

 

Interest expense

 

(305

)

 

Change in fair value of warrant liability

 

(454

)

 

Change in fair value of derivative liability

 

289

 

(3

)

Change in fair value of contingent equity liability

 

(3,375

)

 

Loss from equity method investment

 

(218

)

 

Total other income (expense), net

 

(4,063

)

(3

)

Loss before provision for income taxes

 

(18,560

)

(2,986

)

Provision for income taxes

 

193

 

 

Net loss and comprehensive loss

 

(18,753

)

(2,986

)

Net loss attributable to non-controlling interests

 

 

35

 

Accretion of beneficial conversion feature on Series A preferred shares

 

(4,000

)

 

Net loss attributable to common shareholders of Biohaven Pharmaceutical Holding Company Ltd.

 

$

(22,753

)

$

(2,951

)

 

 

 

 

 

 

Net loss per share attributable to common shareholders of Biohaven Pharmaceutical Holding Company Ltd.—basic and diluted

 

$

(1.74

)

$

(0.25

)

Weighted average common shares outstanding—basic and diluted

 

13,088,861

 

11,776,429

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



Table of Contents

 

BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

CONSOLIDATED STATEMENT OF CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS’ EQUITY (DEFICIT)

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

 

 

Series A Convertible

 

 

 

 

 

 

Additional

 

 

 

Total

 

 

 

Preferred Shares

 

 

Common Shares

 

Paid-in

 

Accumulated

 

Shareholders’

 

 

 

Shares

 

Amount

 

 

Shares

 

Amount

 

Capital

 

Deficit

 

Equity (Deficit)

 

Balances as of December 31, 2016

 

4,948,369

 

$

43,270

 

 

13,088,500

 

$

19,944

 

$

10,479

 

$

(75,456

)

$

(45,033

)

Issuance of Series A preferred shares, net offering costs of $1,364

 

4,305,182

 

38,636

 

 

 

 

 

 

 

Issuance of Series A preferred shares as payment of offering costs

 

105,009

 

 

 

 

 

 

 

 

Beneficial conversion feature on Series A preferred shares

 

 

(12,006

)

 

 

 

12,006

 

 

12,006

 

Accretion of beneficial conversion feature on Series A preferred shares

 

 

4,000

 

 

 

 

(4,000

)

 

(4,000

)

Issuance of common shares as payment for equity investment (Note 5)

 

 

 

 

32,500

 

352

 

 

 

352

 

Share-based compensation expense

 

 

 

 

 

 

1,886

 

 

1,886

 

Net loss

 

 

 

 

 

 

 

(18,753

)

(18,753

)

Balances as of March 31, 2017

 

9,358,560

 

$

73,900

 

 

13,121,000

 

$

20,296

 

$

20,371

 

$

(94,209

)

$

(53,542

)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



Table of Contents

 

BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(18,753

)

$

(2,986

)

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

 

 

 

 

 

Share-based compensation expense

 

1,886

 

687

 

Depreciation expense

 

4

 

1

 

Non-cash interest expense

 

280

 

 

Change in fair value of warrant liability

 

454

 

 

Change in fair value of derivative liability

 

(289

)

3

 

Change in fair value of contingent equity liability

 

3,375

 

 

Loss from equity method investment

 

218

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Prepaid expenses and other current assets

 

(480

)

125

 

Accounts payable

 

2,656

 

63

 

Accrued expenses

 

2,991

 

562

 

Other long-term liabilities

 

6

 

 

Net cash used in operating activities

 

(7,652

)

(1,545

)

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(21

)

 

Purchase of equity method investment

 

(1,624

)

 

Decrease in restricted cash

 

67

 

 

Net cash used in investing activities

 

(1,578

)

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common shares

 

 

3,003

 

Proceeds from issuance of Series A preferred shares

 

40,000

 

 

Payments of offering costs

 

(2,049

)

(23

)

Net cash provided by financing activities

 

37,951

 

2,980

 

Net increase in cash

 

28,721

 

1,435

 

Cash at beginning of period

 

23,565

 

1,460

 

Cash at end of period

 

$

52,286

 

$

2,895

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

25

 

$

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

Deferred offering costs included in accounts payable and accrued expenses

 

$

1,515

 

$

 

Deferred Series A offering costs included in accrued expenses

 

$

65

 

$

 

Beneficial conversion feature on Series A preferred shares

 

$

12,006

 

$

 

Accretion of beneficial conversion feature on Series A preferred shares

 

$

4,000

 

$

 

Issuance of Series A preferred shares as payment of offering costs

 

$

1,242

 

$

 

Issuance of common shares as payment for equity investment

 

$

352

 

$

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5


 


Table of Contents

 

BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

1. Nature of the Business and Basis of Presentation

 

Biohaven Pharmaceutical Holding Company Ltd. (the “Company”) was incorporated in Tortola, British Virgin Islands in September 2013. The Company is a clinical-stage biopharmaceutical company with a portfolio of innovative, late-stage product candidates targeting neurologic diseases, including rare disorders. The Company’s product candidates are small molecules based on two distinct mechanistic platforms—calcitonin gene-related peptide (“CGRP”) receptor antagonists and glutamate modulators—which the Company believes have the potential to significantly alter existing treatment approaches across a diverse set of neurological indications with high unmet need in both large markets and orphan indications. The most advanced product candidate from the Company’s CGRP receptor antagonist platform is rimegepant, which the Company is developing for the acute treatment of migraine and for which it intends to initiate two Phase 3 clinical trials in the second half of 2017. The most advanced product candidate from the Company’s glutamate modulation platform is trigriluzole, which the Company is developing for the treatment of ataxias with an initial focus on spinocerebellar ataxia (“SCA”). The Company has received both orphan drug designation and fast track designation from the U.S. Food and Drug Administration (“FDA”) for trigriluzole in SCA, and the Company began a Phase 2/3 clinical trial in SCA in December 2016. The Company’s second most advanced product candidate from its glutamate modulation platform is BHV-0223, which the Company is developing for the treatment of amyotrophic lateral sclerosis (“ALS”), a neurodegenerative disease that affects nerve cells in the brain and spinal cord. The Company has received orphan drug designation from the FDA for BHV-0223 in ALS.

 

The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations and the ability to secure additional capital to fund operations. Product candidates currently under development will require significant additional research and development efforts, including preclinical and clinical testing and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance-reporting capabilities. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

 

The Company has historically outsourced all of the research and clinical development for its programs under a master services agreement (the “MSA”) with Biohaven Pharmaceuticals, Inc. (“BPI”). BPI was incorporated in the state of Delaware in July 2013. The three founders of BPI, each of whom beneficially owned one-third of the equity of BPI prior to the Company’s acquisition of BPI on December 31, 2016 (see Note 15), are shareholders of the Company and also serve as the Company’s Chairman of the board of directors, Chief Executive Officer, and Chief Medical Officer, respectively (see Note 15). BPI is a contract research organization (“CRO”) whose only customer is the Company. Since its incorporation, substantially all of the operations of BPI have been performed in service to the Company under the terms of the MSA, and substantially all of the funding for the operations of BPI was provided by the Company. The Company has determined that (i) it has the authority to direct the activities of BPI that most significantly impact the economics of the entity and (ii) the equity at risk in BPI is insufficient to finance its operations. As a result, the Company is deemed to have had a variable interest in BPI, and BPI is deemed to be a variable interest entity (“VIE”) of which the Company is the primary beneficiary. Accordingly, since the date of the Company’s incorporation in September 2013, the Company has consolidated the results of BPI. Upon original consolidation, the Company applied purchase accounting by recording the fair values of BPI’s assets acquired and liabilities assumed, which were determined to be zero because BPI had not yet commenced any operations. For the three months ended March 2016, 100% of the equity in BPI was reflected as a net loss attributable to non-

 

6



Table of Contents

 

BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

controlling interest on the consolidated statement of operations and comprehensive loss. On December 31, 2016, the Company acquired 100% of the issued and outstanding shares of BPI (see Note 16), and as a result, for periods subsequent to the acquisition, the Company no longer reports any non-controlling interest related to BPI.

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (‘‘GAAP’’) and include the accounts of the Company and its subsidiaries after elimination of all significant intercompany accounts and transactions.

 

Stock Split

 

In October 2016, the Company effected a 500-for-one stock split of its issued and outstanding common shares. Accordingly, all share and per share amounts for all periods presented in the accompanying consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this stock split.

 

Initial Public Offering

 

On May 3, 2017, the Company’s registration statement on Form S-1 relating to its initial public offering of its common shares (the “IPO”) was declared effective by the Securities and Exchange Commission (“SEC”). The IPO closed on May 9, 2017 and the Company issued and sold 9,900,000 common shares at a public offering price of $17.00 per share (see note 17) for net proceeds of $152,889 after deducting underwriting discounts and commissions of $11,781 and other offering expenses of approximately $3,630. Upon the closing of the IPO, all convertible preferred shares then outstanding converted into an aggregate of 9,358,560 common shares. In addition, on May 9, 2017, the underwriters of the IPO fully exercised their option to purchase additional shares, and on May 11, 2017, the Company issued and sold 1,485,000 additional common shares for additional net proceeds of $23,478 after deducting underwriting discounts and commissions of $1,767. Thus, the aggregate net proceeds to the Company from the IPO, after deducting underwriting discounts and commissions and other offering costs, were $176,367.

 

In connection with the completion of its IPO, the Company issued an additional aggregate of 1,883,523 common shares to BMS and AstraZeneca in satisfaction of obligations to contingently issue equity securities pursuant to the license agreements (see Note 12) for no additional consideration.

 

Also in connection with the completion of its IPO in May 2017, the Company amended its memorandum and articles of association to authorize the issuance of up to 200,000,000 no par value common shares and 10,000,000 no par value undesignated preferred shares.

 

Going Concern

 

In accordance with Accounting Standards Update (“ASU”) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. This evaluation initially does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.  Generally, to be considered probable of being effectively implemented, the plans must have been approved before the date that the financial statements are issued.

 

Through March 31, 2017, the Company has funded its operations primarily with proceeds from sales of preferred and common shares and borrowings under a credit agreement. The Company has incurred recurring losses since its inception, including net losses of $18,753 and $2,986 during the three months ended March 31, 2017 and 2016, respectively. In addition, as of March 31, 2017, the Company had an accumulated deficit of $94,209. The Company expects to continue to generate operating losses for the foreseeable future. As of June 16, 2017, the issuance date of these consolidated financial statements, the Company expects that its cash of $52,286 as of March 31, 2017, together with the $176,367 of net cash proceeds received from the Company’s IPO, will be

 

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Table of Contents

 

BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

sufficient to fund its operating expenses, capital expenditure requirements and debt service payments for at least 15 months from the date of issuance of these consolidated financial statements, and as a result, there is not substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.  The future viability of the Company beyond that point is dependent on its ability to raise additional capital to finance its operations.

 

To execute its business plans, the Company will need substantial funding to support its continuing operations and pursue its growth strategy. Until such time as the Company can generate significant revenue from product sales, if ever, it expects to finance its operations through the sale of public or private equity, debt financings or other capital sources, including collaborations with other companies or other strategic transactions.  The Company may not be able to obtain financing on acceptable terms, or at all. The terms of any financing may adversely affect the holdings or the rights of the Company’s shareholders. If the Company is unable to obtain funding, the Company could be forced to delay, reduce or eliminate some or all of its research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect its business prospects.

 

2.   Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting periods. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, the accrual for research and development expenses and the valuation of common shares, stock options, warrants, derivative instruments and contingent equity instruments. In addition, management’s assessment of the Company’s ability to continue as a going concern involves the estimation of the amount and timing of future cash inflows and outflows. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

 

Unaudited Interim Consolidated Financial Information

 

The accompanying consolidated balance sheet as of March 31, 2017, the consolidated statements of operations and comprehensive loss and of cash flows for the three months ended March 31, 2017 and 2016, and the consolidated statement of convertible preferred shares and shareholders’ equity (deficit) as of March 31, 2017 are unaudited. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of March 31, 2017 and the results of its operations and its cash flows for the three months ended March 31, 2017 and 2016. The financial data and other information disclosed in these consolidated notes related to the three months ended March 31, 2017 and 2016 are unaudited. The results for the three months ended March 31, 2017 are not necessarily indicative of results to be expected for the year ending December 31, 2017, any other interim periods or any future year or period.

 

Restricted Cash

 

As of December 31, 2016, current restricted cash consisted of $67 of cash received from investors as an advance payment for their participation in the second closing of the Company’s sale of Series A preferred shares. The Company closed the second and final tranche of its Series A preferred financing in February 2017.  As a result, there was no current restricted cash as of March 31, 2017.  As of March 31, 2017 and December 31, 2016, the Company’s non-current restricted cash consisted of a $60 certificate of deposit held as a security deposit in connection with the Company’s corporate credit card.

 

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Table of Contents

 

BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

Deferred Offering Costs

 

The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such equity financings are consummated. After consummation of the equity financing, these costs are recorded in shareholders’ equity (deficit) as a reduction of proceeds generated as a result of the offering. Should the planned equity financing be abandoned, the deferred offering costs will be expensed immediately as a charge to operating expenses in the consolidated statement of operations and comprehensive loss. As of March 31, 2017 and December 31, 2016, the Company recorded deferred offering costs relating to its IPO of $2,399 and $134, respectively. The Company’s IPO was completed in May 2017 and these costs were recorded as a reduction to shareholders’ equity.

 

Equity Method Investments

 

Investments in non-public companies in which the Company owns less than a 50% equity interest and where it exercises significant influence over the operating and financial policies of the investee are accounted for using the equity method of accounting. The Company’s proportionate share of the net income or loss of the equity method investment is included in other income (expense), net in the consolidated statement of operations and comprehensive loss and results in a corresponding adjustment to the carrying value of the investment on the consolidated balance sheet. Dividends received reduce the carrying value of the investment. The Company periodically reviews the carrying value of its investment to determine if there has been an other-than-temporary decline in carrying value. A variety of factors are considered when determining if a decline in carrying value is other than temporary, including, among other factors, the financial condition and business prospects of the investee as well as the Company’s intent with regard to the investment.

 

Fair Value Measurements

 

Certain assets of the Company are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

 

·                  Level 1— Quoted prices in active markets for identical assets or liabilities.

·                  Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

·                  Level 3—Unobservable inputs that are supported by little or no market activity that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

 

The Company’s warrant liability, derivative liability and contingent equity liability are carried at fair value, determined according to the fair value hierarchy described above (see Note 3). The carrying values of other current assets, accounts payable, accrued expenses and notes payable under a credit agreement approximate their fair values due to the short-term nature of these assets and liabilities.

 

Research and Development Costs

 

Research and development costs are expensed as incurred. Research and development expenses consist of costs incurred in performing research and development activities, including salaries, share-based compensation and benefits, facilities costs, depreciation, third-party license fees, and external costs of outside vendors engaged to conduct clinical development activities and clinical trials as well as to manufacture clinical trial materials. Non-

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

refundable prepayments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized. Such amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered or the services rendered.

 

Research Contract Costs and Accruals

 

The Company has entered into various research and development-related contracts with companies both inside and outside of the United States. These agreements are cancelable, and related payments are recorded as research and development expenses as incurred. The Company records accruals for estimated ongoing research costs. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the studies or clinical trials, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates. The Company’s historical accrual estimates have not been materially different from the actual costs.

 

Share-Based Compensation

 

The Company measures stock options granted to employees and directors based on the fair value on the date of the grant and recognizes compensation expense of those awards, over the requisite service period, which is generally the vesting period of the respective award. Forfeitures are accounted for as they occur. Generally, the Company issues stock options with only service-based vesting conditions and records the expense for these awards using the straight-line method. The Company has not issued any stock options with performance-based vesting conditions.

 

For share-based awards granted to consultants and non-employees, compensation expense is recognized over the period during which services are rendered by such consultants and non-employees until completed. At the end of each financial reporting period prior to completion of the service, the fair value of these awards is remeasured using the then-current fair value of the Company’s common shares and updated assumption inputs in the Black-Scholes option-pricing model.

 

The Company classifies share-based compensation expense in its consolidated statement of operations and comprehensive loss in the same manner in which the award recipient’s payroll costs are classified or in which the award recipient’s service payments are classified.

 

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. Prior to May 2017, the Company was a private company and, accordingly, lacks company-specific historical and implied volatility information for its shares. Therefore, it estimates its expected share price volatility based on the historical volatility of publicly traded peer companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded share price. The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends on common shares and does not expect to pay any cash dividends in the foreseeable future.

 

Warrant Liability

 

In connection with entering into a credit agreement (see Note 7), the Company agreed to issue warrants to purchase common shares to two of the Company’s directors in connection with a guarantee of its obligations under the agreement (see Note 7). The Company classifies the warrants as a liability on its consolidated balance sheet because each warrant represents a freestanding financial instrument that is not indexed to the Company’s own shares. The warrant liability was initially recorded at fair value upon entering into the credit agreement and is subsequently remeasured to fair

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

value at each reporting date. Changes in the fair value of the warrant liability are recognized as a component of other income (expense), net in the consolidated statement of operations and comprehensive loss. Changes in the fair value of the warrant liability will continue to be recognized until the warrants are exercised, expire or qualify for equity classification.

 

Derivative Liability

 

The Company’s license agreement with Yale University (“Yale”) (see Note 12) provides for a change-of-control payment to Yale upon the occurrence of a change-of-control event, as defined in the agreement, including an IPO. The Company classifies the change-of-control payment obligation as a liability on its consolidated balance sheet because it represents a contingent obligation to pay a variable amount of cash that may be based, in part, on the value of the Company’s own shares. The derivative liability was initially recorded at fair value upon entering into the license agreement and is subsequently remeasured to fair value at each reporting date. Changes in the fair value of the derivative liability are recognized as a component of other income (expense), net in the consolidated statement of operations and comprehensive loss.

 

In April 2017, the agreement with Yale was amended such that if the change-of-control event is an IPO, the change-of-control payment shall be due to Yale on the first trading day when Yale is free to sell its equity interest in the Company and the change-of-control fee shall be reduced by the dollar value of Yale’s equity interest in the Company on the first trading day when Yale is free to sell its equity interest in the Company. Yale’s equity interest in the Company is subject to a lock-up agreement, which generally restricts Yale’s shares from being traded until October 31, 2017 and accordingly, the amount due to Yale in connection with the change-of-control provision of the agreement, if any, will be determined upon expiration of the lock-up period. The Company will continue to remeasure the derivative liability to fair value at each reporting date and will recognize changes in the fair value of the derivative liability until the expiration of the lock-up agreement in October 2017 (see Note 17).

 

Contingent Equity Liability

 

The Company’s license agreements with AstraZeneca and BMS (see Note 12) require the Company to issue shares of capital stock upon the occurrence of specified financing or change-of-control events or development milestones, as defined in the agreements. In each agreement, the class and number of shares to be issued upon a triggering event were not known upon entering into the license agreements; however, the dollar amount of the shares to be issued upon a triggering event is fixed. The Company classifies these contingent obligations to issue shares as a liability on its consolidated balance sheet because each represents an obligation to issue a variable number of shares for a fixed dollar amount. Each contingent equity liability was initially recorded at fair value upon entering into each respective agreement and is subsequently remeasured to fair value at each reporting date. Changes in the fair values of the contingent equity liabilities are recognized as a component of other income (expense), net in the consolidated statement of operations and comprehensive loss. Changes in the fair value of the contingent equity liabilities will continue to be recognized until the occurrence of a respective triggering event.  In May 2017, upon closing of the IPO, the conditions for issuing shares to BMS and AstraZeneca under the terms of the respective license agreements were satisfied, and accordingly, the Company issued 1,345,374 and 538,149 common shares, respectively, to BMS and AstraZeneca.  The contingent equity liabilities were remeasured to fair value in the aggregate amount of $32,020 immediately prior to the completion of the IPO, and upon issuance of the common shares, the contingent equity liabilities were reclassified to shareholders’ equity (see Note 17).

 

Net Loss per Share Attributable to Common Shareholders of Biohaven Pharmaceutical Holding Company Ltd.

 

The Company follows the two-class method when computing net income (loss) per share as the Company has issued shares that meet the definition of participating securities. The two-class method determines net income (loss) per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common shareholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. Net income (loss) per share attributable to common shareholders is calculated based on net income (loss) attributable to Biohaven Pharmaceutical Holding Company Ltd. and excludes net income (loss) attributable to non-controlling interests for relevant periods.

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

Basic net income (loss) per share attributable to common shareholders is computed by dividing the net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) attributable to common shareholders is computed by adjusting net income (loss) attributable to common shareholders to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net income (loss) per share attributable to common shareholders is computed by dividing the diluted net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding for the period, including potential dilutive common shares. For purpose of this calculation, outstanding options, warrants to purchase common shares, convertible preferred shares and contingently issuable equity are considered potential dilutive common shares.

 

The Company’s convertible preferred shares contractually entitle the holders of such shares to participate in dividends but contractually do not require the holders of such shares to participate in losses of the Company. Accordingly, in periods in which the Company reports a net loss attributable to common shareholders, diluted net loss per share attributable to common shareholders is the same as basic net loss per share attributable to common shareholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.

 

Recently Issued Accounting Pronouncements

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805) — Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 finalizes previous proposals regarding shareholder concerns that the definition of a business is applied too broadly. The guidance assists entities with evaluating whether transactions should be accounted for as acquisitions of assets or of businesses. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company is currently evaluating the impact that the adoption of ASU 2017-01 will have on its consolidated financial statements.

 

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory (“ASU 2016-16”), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of ASU 2016-16 will have on its consolidated financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), to address diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of ASU 2016-15 will have on its consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASU 2016-02 (Accounting Standards Codification (“ASC”) Topic 842) supersedes the previous leases standard, ASC 840, Leases. The standard is effective for public entities for annual periods beginning after December 15, 2018 and for interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes existing revenue recognition guidance under GAAP. The standard’s core

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The standard defines a five-step process to achieve this principle, and will require companies to use more judgment and make more estimates than under the current guidance. The Company expects that these judgments and estimates will include identifying performance obligations in the customer contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 such that the standard is effective for public entities for annual periods beginning after December 15, 2017 and for interim periods within those fiscal years. Early adoption of the standard is permitted for annual periods beginning after December 15, 2016. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (“ASU 2016-08”), which further clarifies the implementation guidance on principal versus agent considerations in ASU 2014-09. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, clarifying the implementation guidance on identifying performance obligations and licensing. Specifically, the amendments in this update reduce the cost and complexity of identifying promised goods or services and improve the guidance for determining whether promises are separately identifiable. The amendments in this update also provide implementation guidance on determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”), which clarifies the objective of the collectability criterion, presentation of taxes collected from customers, non-cash consideration, contract modifications at transition, completed contracts at transition and how guidance in ASU 2014-09 is retrospectively applied. ASU 2016-08, ASU 2016-10 and ASU 2016-12 have the same effective dates and transition requirements as ASU 2014-09. The Company is currently evaluating the impact that the adoption that these standards will have on its consolidated financial statements, if and when it generates revenue.

 

3.   Fair Value of Financial Assets and Liabilities

 

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:

 

 

 

Fair Value Measurements as of

 

 

 

March 31, 2017 Using:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Warrant liability

 

$

 

$

 

$

1,234

 

$

1,234

 

Derivative liability

 

 

 

223

 

223

 

Contingent equity liability

 

 

 

22,313

 

22,313

 

 

 

$

 

$

 

$

23,770

 

$

23,770

 

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

 

 

Fair Value Measurements as of

 

 

 

December 31, 2016 Using:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Warrant liability

 

$

 

$

 

$

780

 

$

780

 

Derivative liability

 

 

 

512

 

512

 

Contingent equity liability

 

 

 

18,938

 

18,938

 

 

 

$

 

$

 

$

20,230

 

$

20,230

 

 

During the periods ended March 31, 2017 and December 31, 2016 there were no transfers between Level 1, Level 2 and Level 3.

 

Valuation of Warrant Liability

 

The warrant liability in the table above is composed of the fair value of warrants to purchase common shares that the Company agreed to issue to two of its directors in connection with a guarantee of its obligations under a credit agreement (see Note 7). The fair value of the warrant liability was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The Company utilized a Monte Carlo simulation, which is a statistical method used to generate a defined number of share price paths to develop a reasonable estimate of the range of the future expected share prices, to value the warrant liability. The Monte Carlo simulation incorporated assumptions and estimates to value the warrant liability. Estimates and assumptions impacting the fair value measurement included the estimated probability of adjusting the exercise price of the warrants, the number of shares for which the warrants will be exercisable, the fair value per share of the underlying common shares issuable upon exercise of the warrants, the remaining contractual term of the warrants, the risk-free interest rate, the expected dividend yield, and the expected volatility of the price of the underlying common shares. The Company estimated the fair value per share of its common shares by taking into consideration the most recent arm’s length sale of its common shares or third-party valuation of its common shares as well as additional factors that the Company deemed relevant. The Company historically has been a private company and lacks company-specific historical and implied volatility information of its shares. Therefore, it estimated its expected share volatility based on the historical volatility of publicly traded peer companies for a term equal to the remaining contractual term of the warrants. The risk-free interest rate was determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the remaining contractual term of the warrants. The Company estimated a 0% expected dividend yield based on the fact that the Company has never paid or declared dividends and does not intend to do so in the foreseeable future.

 

Valuation of Derivative Liability

 

The fair value of the derivative liability recognized in connection with the Company’s license agreement with Yale (see Note 12) was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The fair value of the derivative liability was determined using the probability-weighted expected return method (“PWERM”), which considered as inputs the type and probability of occurrence of a change-of-control event, the amount of the payment, the expected timing of a change-of-control event and a risk-adjusted discount rate. In April 2017, the agreement with Yale was amended such that if the change-of-control event is an IPO, the change-of-control payment shall be due to Yale on the first trading day Yale is free to sell its equity interest in the Company and the change-of-control fee shall be reduced by the dollar value of Yale’s equity interest in the Company on the first trading day when Yale is free to sell its equity interest in the Company.  Yale’s equity interest in the Company is subject to a lock-up agreement which generally restricts Yale’s shares from being traded until October 31, 2017, and accordingly, the amount due to Yale in connection with the change-of-control provision of the agreement, if any, will be determined upon expiration of the lock-up period in October 2017.

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

Valuation of Contingent Equity Liability

 

BMS.     The fair value of the contingent equity liability recognized in connection with the Company’s license agreement with BMS (see Note 12) was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The fair value of the contingent equity liability was determined using the PWERM, which considered as inputs the probability of occurrence of events that would trigger the issuance of shares, the expected timing of such events, the value of the contingently issuable equity and a risk-adjusted discount rate. As of December 31, 2016, the assumed probability of occurrence of the event that was most probable of triggering the issuance of shares was 75%, the expected timing of such an event was estimated to be less than one year, the value of the contingently issuable equity was $18,750 and the discount rate was assessed to be 0%. As of March 31, 2017, the assumed probability of occurrence of the event that was most probable of triggering the issuance of shares was 85%, the expected timing of such an event was estimated to be less than one year, the value of the contingently issuable equity was $18,750 and the discount rate was assessed to be 0%. Based on these inputs, the Company determined that the fair value of the contingent equity liability was $14,063 as of December 31, 2016 and $15,938 as of March 31, 2017.

 

AstraZeneca.     The fair value of the contingent equity liability recognized in connection with the Company’s license agreement with AstraZeneca (see Note 12) was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The fair value of the contingent equity liability was determined using the PWERM, which considered as inputs the probability of occurrence of events that would trigger the issuance of shares, the expected timing of such events, the value of the contingently issuable equity and a risk-adjusted discount rate. The contingently issuable equity is issuable in two tranches, each for a fixed dollar amount of $5,000, for a total amount of $10,000. Using the PWERM, the Company assessed the fair value of each tranche of the contingent equity liability separately.

 

In October 2016, upon completion of the Series A First Closing (see Note 9), the first tranche of contingently issuable equity became issuable to AstraZeneca. As a result, the Company issued to AstraZeneca 538,150 Series A preferred shares with an aggregate fair value of $5,000, or $9.2911 per share, in satisfaction of the obligation to issue the first tranche of equity under the agreement. Upon the issuance of the 538,150 Series A preferred shares to AstraZeneca in October 2016, the Company reclassified the carrying value of the first tranche contingent equity liability, equal to the then-current fair value of $5,000, to the carrying value of Series A preferred shares.

 

The shares related to the second tranche become issuable upon the earlier of (i) the initiation of a Phase 2b or equivalent clinical trial of a product candidate based on the licensed patent rights and (ii) any liquidity event, including an IPO, any change of control or any assignment of the Company’s rights or obligations under the license agreement. As of December 31, 2016, the Company determined that the fair value of the second tranche contingent equity liability was $4,875. In determining this fair value, the assumed probability of occurrence of the event that was most probable of triggering the issuance of shares was 65%, the expected timing of such an event was estimated to be less than one year, the value of the contingently issuable equity was $7,500 and the discount rate was assessed to be 0%. As of March 31, 2017, the Company determined that the fair value of the second tranche contingent equity liability was $6,375. In determining this fair value, the assumed probability of occurrence of the event that was most probable of triggering the issuance of shares was 85%, the expected timing of such an event was estimated to be less than three months, the value of the contingently issuable equity was $7,500 and the discount rate was assessed to be 0%.

 

The following table provides a roll forward of the aggregate fair values of the Company’s warrant liability, derivative liability and contingent equity liability, for which fair value is determined by Level 3 inputs:

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

 

 

Warrant

 

Derivative

 

Contingent

 

 

 

Liability

 

Liability

 

Equity Liability

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

$

780

 

$

512

 

$

18,938

 

Change in fair value

 

454

 

(289

)

3,375

 

Balance at March 31, 2017

 

$

1,234

 

$

223

 

$

22,313

 

 

In connection with the closing of the IPO in May 2017, the conditions for issuing shares in connection with the contingent equity liabilities were satisfied, and accordingly, the Company issued 1,345,374 and 538,149 common shares, respectively, to BMS and AstraZeneca.  The contingent equity liabilities were adjusted to fair value immediately prior to the completion of the IPO, and upon issuance of the common shares, the contingent equity liabilities were reclassified to equity (see Note 17).

 

Beneficial Conversion Feature

 

In connection with the second tranche closing of Series A preferred shares on February 17, 2017, the Company determined that the conversion option associated with the shares sold met the definition of a beneficial conversion feature (“BCF”) as the fair value of the underlying common shares exceeded the adjusted conversion price.  The BCF was recognized at its fair value of $12,006 as a reduction to the carrying value of the Series A preferred shares and a corresponding adjustment to additional paid-in capital.  The fair value was determined using Level 3 inputs, equal to the product of the number of shares sold in the second tranche closing multiplied by the difference between the adjusted conversion price and the per share value of common shares at the commitment date (see Note 9).

 

4.   Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consisted of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Prepaid clinical trial costs

 

$

860

 

$

388

 

Other

 

23

 

15

 

 

 

$

883

 

$

403

 

 

5.   Equity Method Investment

 

On August 29, 2016, the Company executed a stock purchase agreement with Kleo Pharmaceuticals, Inc. (“Kleo”), a privately held Delaware corporation, to purchase 3,000,000 shares of Kleo’s common stock at an initial closing, with a commitment to purchase an aggregate of 5,500,000 additional shares of common stock, in each case at a share price of $1.00 per share (the “Kleo SPA”). Kleo is a development-stage biopharmaceutical company focused on advancing the field of immunotherapy by developing small molecules that emulate biologics. Under the terms of the Kleo SPA, the Company purchased 3,000,000 shares upon the initial closing on August 31, 2016, and the remaining 5,500,000 shares are to be purchased in four equal tranches of 1,375,000 shares beginning six months from the initial closing and then every three months thereafter. In March 2017, the Company completed the first tranche purchase of 1,375,000 shares for cash consideration of $1,375.

 

In connection with the Kleo SPA, the Company agreed to purchase an additional 500,000 shares of Kleo common stock from an officer and stockholder of Kleo. On March 30, 2017, the Company completed the purchase of these shares. The consideration paid for these shares consisted of a cash payment of $250 and the Company’s issuance of 32,500 common shares with a fair value of $10.82 per share on the date of issuance, or $352.

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

The Company has a variable interest in Kleo through its equity investment. Kleo is a variable interest entity due to the equity investment at risk being insufficient to finance its activities. An assessment of whether or not the Company has the power to direct activities that most significantly impact Kleo’s economic performance and to identify the party that obtains the majority of the benefits of the investment was performed as of March 31, 2017 and December 31, 2016, and will be performed as of each subsequent reporting date. After each of these assessments, the Company concluded that the activities that most significantly impact Kleo’s economic performance are the ability to direct the research activities, the ability to select vendors to perform the research, the ability to maintain research staff and the ability to raise additional funds. Based on the outcome of these assessments, the Company concluded that consolidation of Kleo is not appropriate, and has therefore accounted for the investment under the equity method.

 

The Company’s purchase of 3,000,000 shares of Kleo’s common stock during the year ended December 31, 2016 and the additional 1,875,000 shares of Kleo’s common stock during the three months ended March 31, 2017 represented an 18.6% and a 27.9% interest in the outstanding shares of Kleo as of December 31, 2016 and March 31, 2017, respectively. In connection with the initial investment, the Company also received the right to designate two of the five members of Kleo’s board of directors. The Company accounts for its investment in Kleo under the equity method of accounting. The Company has recorded its investments in Kleo to date based on the costs of those investments, as adjusted for the Company’s proportional share of Kleo’s net income or loss in each period. The difference between the cost of the Company’s investments in Kleo and its proportionate share of the net assets of Kleo was allocated to goodwill and indefinite-lived intangible assets. The Company will record future adjustments to the carrying value of its investment at each reporting date equal to its proportionate share of Kleo’s net income or loss for the corresponding period. The Company recorded other expense and a corresponding reduction in the carrying value of its investment in Kleo of $218 for its proportionate share of Kleo’s net loss for the three months ended March 31, 2017.

 

The carrying value of the Company’s investment in Kleo was $4,511 and $2,753 as of March 31, 2017 and December 31, 2016, respectively, and is reported as equity method investment on the consolidated balance sheet. The carrying value of the investment represents the Company’s maximum loss exposure as of March 31, 2017.

 

The following table provides a roll forward of the carrying value of the Company’s equity method investment:

 

 

 

Carrying Value

 

 

 

 

 

Balance at December 31, 2016

 

$

2,753

 

Purchases of Kleo common stock

 

1,976

 

Loss recognized in connection with equity method investment

 

(218

)

Balance at March 31, 2017

 

$

4,511

 

 

Summarized financial information for Kleo was as follows:

 

 

 

March 31,

 

December 31,

 

 

 

2017

 

2016

 

Current assets

 

$

4,243

 

$

4,269

 

Total assets

 

$

4,657

 

$

4,317

 

Current liabilities

 

$

601

 

$

413

 

Total liabilities

 

$

1,600

 

$

656

 

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31, 2017

 

 

 

 

 

Revenue

 

$

 

Loss from Operations

 

$

(1,174

)

Net loss

 

$

(1,169

)

 

6.   Accrued Expenses

 

Accrued expenses consisted of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Accrued employee compensation and benefits

 

$

311

 

$

27

 

Accrued clinical trial costs

 

4,639

 

2,204

 

Accrued professional fees

 

1,689

 

516

 

Accrued income taxes

 

292

 

99

 

Other

 

 

134

 

 

 

$

6,931

 

$

2,980

 

 

7.   Notes Payable

 

Credit Agreement

 

On August 30, 2016, the Company entered into a one-year credit agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”) providing for a term loan in the principal amount of $5,000 (the “Loan”) and borrowed the full $5,000 available under the Credit Agreement. Borrowings under the Credit Agreement bear interest at a rate equal to monthly LIBOR plus 1.50% per annum, and the Credit Agreement requires monthly, interest-only payments beginning on September 30, 2016 and continuing through August 30, 2017 (the “Maturity Date”), when all amounts of unpaid principal and interest become due. The monthly LIBOR rate is reset each month (“LIBOR Period”). As of March 31, 2017, the interest rate applicable to the Loan was 2.48% per annum. In the event of a default, the interest rate applicable is equal to the monthly LIBOR rate then in effect, increased by 4.0% per annum. The Company’s obligations under the Credit Agreement are guaranteed by an outside director and shareholder of the Company (the “Guarantor”). A second outside director and shareholder of the Company entered into an agreement with the Guarantor under which the second director agreed to reimburse the Guarantor for one-half of any guaranty obligations that the Guarantor pays to Wells Fargo.

 

The Credit Agreement also provides that the Company may voluntarily prepay the Loan at any time; however, if the Company elects to prepay the Loan or the Loan otherwise is accelerated and becomes payable prior to the Maturity Date, the Company will pay a prepayment premium, which will be the additional interest that would have accrued if the Loan remained outstanding through the end of the current monthly LIBOR Period. The Credit Agreement contains affirmative and negative covenants, but does not contain any financial covenants.

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

There were no principal payments due or paid under the Credit Agreement during the three months ended March 31, 2017.

 

In connection with entering into the Credit Agreement on August 30, 2016, the Company agreed to issue warrants to purchase $1,000 of common shares to each of the Guarantor and Co-Guarantor. The number of common shares issuable upon exercise of each warrant is determined by dividing $1,000 by the price per share paid by investors in the Series A First Closing (see Note 9). On January 26, 2017, the Company issued the warrants to the Guarantor and Co-Guarantor (see Note 8).

 

The Company determined that the obligation to issue the warrants represented a liability that was considered outstanding for accounting purposes on August 30, 2016, the date of the Credit Agreement (see Note 8). The fair value of the warrant liability upon issuance represented a premium paid for the guaranty of the Loan, and, accordingly, the Company recorded the issuance-date fair value of the warrant liability of $934 as a debt discount and as a warrant liability in the Company’s consolidated balance sheet. In addition, the Company paid an arrangement fee of $150 to the lender and incurred legal costs of $47, both of which were recorded as a debt discount. The debt discount is reflected as a reduction of the carrying value of the notes payable on the Company’s consolidated balance sheet and is being amortized to interest expense over the term of the note using the effective interest method.

 

The Company recognized interest expense of $298 during the three months ended March 31, 2017.  The Company recognized $273 related to the accretion of the debt discount during the three months ended March 31, 2017. As of March 31, 2017, the unamortized debt discount was $511.

 

Notes Payable to Related Parties

 

On December 31, 2016, the Company entered into stock purchase agreements with each of the stockholders of BPI, acquiring 100% of the issued and outstanding shares of BPI for aggregate purchase consideration of $595. The Company funded the acquisition through the issuance of promissory notes to each of the former stockholders of BPI. The former stockholders of BPI are shareholders of the Company and also serve as the Company’s Chairman of the board of directors, Chief Executive Officer, and Chief Medical Officer, respectively. As of March 31, 2017, the notes were payable in five annual payments, the first four of which are interest only, with the final payment to include the principal balance outstanding plus any accrued and unpaid interest. The notes bear interest at a rate of 4.5% per annum and mature on December 31, 2021. The notes became immediately due and payable upon specified events, including immediately prior to the consummation of an initial public offering of the Company’s common shares or upon the occurrence of a change of control of the Company. There are no affirmative, negative or financial covenants associated with the notes.

 

 

 

In connection with the closing of the Company’s IPO in May 2017, the notes were paid in full, including principal of $595, and accrued and unpaid interest of $9 (see Note 17).

 

8.   Warrants

 

ALS Biopharma Warrants

 

On August 10, 2015, as partial consideration issued in connection with a license agreement with ALS Biopharma LLC (“ALS Biopharma”) (see Note 12), the Company issued to ALS Biopharma a warrant to purchase 275,000 common shares at an exercise price of $5.60 per share. The warrant was immediately exercisable upon issuance and expires 10 years from the issuance date. The warrant was classified as equity and recorded at its fair value on the date of issuance.

 

On August 10, 2015, in connection with the same license agreement, the Company issued to ALS Biopharma a warrant to purchase 325,000 common shares at an exercise price of $5.60 per share. The warrant became exercisable upon the Company’s filing of an investigational new drug application (“IND”) for a patented product under the license agreement, and expires 10 years from the issuance date. On May 31, 2016, the Company filed an IND for a

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

patented product under the license agreement. The warrant was classified as equity and recorded at its fair value on May 31, 2016.

 

Guarantor and Co-Guarantor Warrants

 

The Company agreed to issue warrants to purchase $1,000 of common shares to each of the Guarantor and Co-Guarantor of the Credit Agreement (see Note 7), who are members of the Company’s board of directors (see Note 15). The number of common shares issuable upon exercise of each warrant is determined by dividing $1,000 by the price per share paid by investors in the Series A First Closing (see Note 9). On January 26, 2017, the Company issued the warrants to the Guarantor and Co-Guarantor, pursuant to which each director received a warrant to purchase 107,500 common shares at an exercise price of $9.2911 per share. The warrants were immediately exercisable and expire upon the earlier to occur of (i) the fifth anniversary of the issuance date of the warrants and (ii) the second anniversary of the Company’s IPO.

 

As of December 31, 2016, the Company determined that the obligation to issue the warrants represented a liability that was considered outstanding for accounting purposes on August 30, 2016, the date the Company entered into the Credit Agreement. The Company classified the warrants as a liability on its consolidated balance sheet because each warrant represents a freestanding financial instrument that is not indexed to the Company’s own shares. As of March 31, 2017, the Company continued to classify these warrants as a liability on the consolidated balance sheet because the warrants contain anti-dilution price protection provisions through January 26, 2018. As a result, changes in the fair value of the warrant liability will continue to be recognized as a component of other income (expense), net until the earliest of (i) the exercise of the warrants, (ii) the expiration of the warrants or (iii) January 26, 2018. The warrant liability was initially recorded at fair value upon entering into the Credit Agreement and is subsequently remeasured to fair value at each reporting date. Changes in the fair value of the warrant liability are recognized as a component of other income (expense), net in the Company’s consolidated statement of operations and comprehensive loss.

 

The fair value of the warrant liability was determined to be $934 on the date of issuance. The Company remeasured the liability as of March 31, 2017 and December 31, 2016 and determined that the fair value of the warrant liability was $1,234 and $780, respectively. The Company recorded a gain of $454 recorded within other income (expense), net in the consolidated statements of operations for the three months ended March 31, 2017.

 

9.   Convertible Preferred Shares

 

As of March 31, 2017, the Company’s memorandum and articles of association, as amended and restated, authorized the Company to issue 11,242,172 Series A preferred shares. The holders of Series A preferred shares have liquidation rights in the event of a deemed liquidation that, in certain situations, is not solely within the control of the Company. Therefore, the Series A preferred shares are classified outside of shareholders’ equity (deficit).

 

In October 2016, the Company issued and sold an aggregate of 4,305,209 Series A preferred shares, at an issuance price of $9.2911 per share, for proceeds of $37,295, net of offering costs of $2,705 (the “Series A First Closing”). The $2,705 of offering costs consisted of $1,730 payable in cash and 105,010 shares of the Company’s Series A preferred shares valued at $975, or $9.2911 per share, which were issued directly to the two placement agents involved in the Series A financing. The preferred share purchase agreement provided for the issuance of additional Series A preferred shares in a second and final tranche (the “Series A Second Closing”). Also, in October 2016, the Company issued to AstraZeneca 538,150 Series A preferred shares with an aggregate fair value of $5,000, or $9.2911 per share, in satisfaction of the obligation to issue the first tranche of contingently issuable equity under the Company’s license agreement with AstraZeneca (see Note 12).

 

In February 2017, the Company completed the Series A Second Closing through the issuance and sale of an aggregate of 4,305,182 Series A preferred shares at an issuance price of $9.2911 per share for cash proceeds of

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

$38,636, net of offering costs of $2,606. The $2,606 of offering costs for the second tranche consisted of $1,364 payable in cash and 105,009 shares of the Company’s Series A preferred shares valued at $1,242, or $11.83 per share, which were issued directly to the two placement agents involved in the Series A financing.  The conversion option associated with the Series A preferred shares sold in the second closing met the definition of a BCF as the fair value of the underlying common shares of $9.85 per share exceeded the stated conversion price of $9.2911 (or $7.0613, as adjusted, as described below under Conversion).  Upon the sale and issuance of the Series A preferred shares, $2,406 of the BCF was immediately accreted, as this represented the difference between the stated conversion price and per share value of the common shares.  The remaining portion of the BCF is being amortized using the effective interest method over the period from the date of issuance to the date of the earliest possible conversion, October 1, 2017.  For the three months ended March 31, 2017, the Company recorded accretion of the BCF of $4,000.

 

In May 2017, upon the completion of the Company’s IPO, all of the outstanding Series A preferred shares were automatically converted into an aggregate of 9,358,560 common shares pursuant to the related agreements (see Note 17).  Upon conversion of the Series A preferred shares, the remaining unamortized BCF was reclassified to additional paid-in capital as a deemed dividend (see Note 17).

 

The holders of the Series A preferred shares had the following rights and preferences prior to the conversion to common shares:

 

Voting

 

The holders of Series A preferred shares were entitled to vote, together with the holders of common shares, on all matters submitted to shareholders for a vote. The holders of Series A preferred shares were entitled to the number of votes equal to the number of common shares into which their Series A preferred shares could convert.

 

Conversion

 

Each Series A preferred share was convertible into common shares at the option of the shareholder at any time after the date of issuance. In addition, pursuant to the Company’s memorandum and articles of association, as amended and restated, each Series A preferred share would be automatically converted into common shares, at the applicable conversion ratio then in effect, upon the earlier of (i) a firm commitment public offering with proceeds to the Company of at least $50,000, before deducting underwriting discounts and commissions or (ii) the date specified by the vote or written consent of the holders of a majority of the then outstanding Series A preferred shares.

 

The conversion ratio of Series A preferred shares was determined by dividing the Original Issue Price by the Conversion Price. The Original Issue Price of the Series A preferred shares was $9.2911 per share. The Conversion Price of the Series A preferred shares was $9.2911 per share, subject to appropriate adjustment in the event of any stock split, stock dividend, combination or other similar recapitalization and other adjustments as set forth in the Company’s memorandum and articles of association, as amended and restated. On the date of issuance, each Series A preferred share was convertible into one common share. In the event that any Series A preferred share investor did not participate in the second and final tranche of the Series A preferred financing, that investor’s shares would have been convertible into common shares at a ratio of one common share for every 1,000 Series A preferred shares. In addition, if the Company decided not to move forward with a Phase 3 clinical trial on its product candidate, rimegepant, or if the Company failed to initiate a Phase 3 clinical trial prior to October 1, 2017, the Conversion Price of the Series A preferred shares would have been reduced to $7.0613 per share.

 

Dividends

 

The holders of Series A preferred shares were entitled to receive dividends in preference to any dividend on common shares at the rate of 8.0% per year of the Original Issue Price. Dividends accrued daily and compounded annually, whether or not declared, would be payable when, as and if declared by the board or directors of the Company and were noncumulative. The Company was not permitted to declare, pay or set aside any dividends on shares of any other class or series of capital stock of the Company unless the holders of Series A preferred shares then outstanding first received, or simultaneously received, dividends on each outstanding Series A preferred share.

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

Accruing dividends, whether or not declared, were payable upon any liquidation event. Declared but unpaid dividends would have been payable upon the conversion of the Series A preferred shares into common shares.

 

Liquidation

 

In the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company or a Deemed Liquidation Event (as described below), the holders of Series A preferred shares then outstanding were entitled to receive, in preference to holders of common shares, an amount equal to the greater of (i) the Original Issue Price per share, plus all dividends declared but unpaid on such shares or (ii) the amount such holders would have received had all of their Series A preferred shares been converted into common shares immediately prior to such liquidation event. If upon any such liquidation event, the assets of the Company available for distribution were insufficient to permit payment in full to the holders of Series A preferred shares, the proceeds would be ratably distributed among the holders of Series A preferred shares in proportion to the respective amounts that they would have received if they were paid in full.

 

After payments have been made in full to the holders of Series A preferred shares, the remaining assets of the Company available for distribution would be distributed among the holders of common shares ratably in proportion to the number of shares held by each such holder.

 

Unless a majority of the holders of the then outstanding Series A preferred shares elected otherwise, a Deemed Liquidation Event would include a merger or consolidation (other than one in which shareholders of the Company own a majority by voting power of the outstanding shares of the surviving or acquiring corporation) or a sale, lease, transfer, exclusive license or other disposition of all or substantially all of the assets of the Company.

 

Redemption

 

The Company’s memorandum and articles of association, as amended and restated, did not provide redemption rights to the holders of Series A preferred shares.

 

10.   Common Shares

 

As of December 31, 2016 and March 31, 2017, the Company’s memorandum and articles of association, as amended and restated, authorized the Company to issue 38,000,000 no par value common shares.

 

Each common share entitles the holder to one vote on all matters submitted to a vote of the Company’s shareholders. Common shareholders are entitled to receive dividends, as may be declared by the board of directors, if any. Through March 31, 2017, no dividends had been declared.

 

In February 2016, the Company issued 429,000 common shares at an issuance price of $7.00 per share for proceeds of $2,980, net of issuance costs of $23.

 

In May 2016 and July 2016, the Company issued an aggregate of 1,090,500 common shares at an issuance price of $7.70 per share for proceeds of $8,299, net of issuance costs of $97.

 

In July 2016, concurrently with the issuance of the Company’s common shares to Connecticut Innovations Incorporated (“CII”), the Company and CII entered into a put agreement (the “Put Agreement”). The Put Agreement grants CII the right to sell (the “Put Option”) to the Company all or any part of CII’s warrant rights (if any), shares (if any) or notes (if any). The Put Option becomes exercisable upon the Company’s breach of the covenant to maintain a presence in Connecticut, as defined in the Put Agreement. Upon CII’s exercise of the Put Option, the Company would be obligated to purchase CII’s shares for a price that is the greater of (i) the current market price of such share and (ii) the original purchase price of such share. The right to put the shares will terminate at such time that the shares may be sold (i) pursuant to an effective registration statement under the Securities Act of 1933 (the

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

“Securities Act”), (ii) pursuant to Rule 144 promulgated under the Securities Act, but in each case, only after the termination of any applicable “lock-up” restrictions and, in the case of (ii), only if the common shares are then listed for trading on a national securities exchange. The fair value of the Put Option was determined to be $0 upon execution of the Put Agreement and as of March 31, 2017 because the ability to maintain a presence in Connecticut is within the Company’s control.

 

In April 2017, the Company effected an increase in the number of authorized common shares from 38,000,000 shares to 50,000,000 shares (see Note 17).

 

On May 3, 2017, the Company’s registration statement on Form S-1 relating to the IPO was declared effective by the SEC.  The IPO closed on May 9, 2017 and the Company issued and sold 9,900,000 common shares at a public offering price of $17.00 per share for net proceeds of $152,889 after deducting underwriting discounts and commissions of $11,781 and other offering expenses of approximately $3,630. Upon the closing of the IPO, all convertible preferred shares then outstanding converted into an aggregate of 9,358,560 common shares. In addition, on May 9, 2017, the underwriters of the IPO fully exercised their option to purchase additional shares, and on May 11, 2017, the Company issued and sold 1,485,000 additional common shares for additional net proceeds of $23,478 after deducting underwriting discounts and commissions of $1,767.  Thus, the aggregate net proceeds to the Company from the IPO, after deducting underwriting discounts and commissions and offering expenses, were $176,367.

 

In connection with the completion of its IPO, the Company issued an additional aggregate of 1,883,523 common shares to BMS and AstraZeneca in satisfaction of obligations to contingently issue equity securities pursuant to the license agreements (see Note 12), for no additional consideration.

 

Also in connection with the completion of its IPO in May 2017, the Company amended its memorandum and articles of association to authorize the issuance of up to 200,000,000 no par value common shares and 10,000,000 no par value undesignated preferred shares.

 

11.   Share-Based Compensation

 

2014 Equity Incentive Plan

 

The Company’s 2014 Equity Incentive Plan, as amended, (the “2014 Plan”) provides for the Company to sell or issue common shares or restricted common shares, or to grant incentive stock options or nonqualified stock options for the purchase of common shares, to employees, members of the board of directors and consultants of the Company. The 2014 Plan is administered by the board of directors, or at the discretion of the board of directors, by a committee of the board. The exercise prices, vesting and other restrictions are determined at the discretion of the board of directors, or their committee if so delegated, except that the exercise price per share of stock options may not be less than 100% of the fair market value of the common share on the date of grant and the term of stock option may not be greater than ten years.

 

The total number of common shares that may be issued under the 2014 Plan was 4,000,000 shares as of December 31, 2016. In January 2017, the Company effected an increase, effective October 28, 2016, in the number of common shares reserved for issuance under the 2014 Plan from 4,000,000 to 4,899,230 shares. The total number of common shares that may be issued under the 2014 Plan was 4,899,230 shares as of March 31, 2017. As of March 31, 2017 and December 31, 2016, 553,886 and 1,034,805 shares remained available for future grant under the 2014 Plan, respectively.

 

Vesting periods are determined at the discretion of the board of directors. Stock options granted to employees and directors typically vest over three years. Stock options granted to non-employees typically vest over three years. The Company measures and records the value of these options over the period of time services are provided and, as such, unvested portions are subject to remeasurement at subsequent reporting periods.

 

During the three months ended March 31, 2017, the Company granted options to purchase 422,382 common shares to employees and directors, and there were no options granted during the three months ended March 31, 2016. The Company recorded share-based compensation expense for options granted to employees and directors of $1,153 and $432 during the three months ended March 31, 2017 and 2016, respectively.

 

During the three months ended March 31, 2017, the Company granted options to purchase 58,537 common shares to non-employees, and there were no options granted during the three months ended March 31, 2016. The Company recorded share-based compensation expense for options granted to non-employees of $733 and $255 during the three months ended March 31, 2017 and 2016, respectively.

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

In May 2017, the Company’s shareholders approved the 2017 Equity Incentive Plan (the “2017 Plan”). The 2017 Plan became effective on May 3, 2017 in connection with the Company’s IPO. Upon the effectiveness of the 2017 Plan, no further grants will be made under the 2014 Plan (see Note 17).

 

Stock Option Valuation

 

The assumptions that the Company used to determine the grant-date fair value of stock options granted to employees and directors under the 2014 Plan during the three months ended March 31, 2017 were as follows, presented on a weighted average basis, noting there were no stock options granted to employees and directors during the three months ended March 31, 2016:

 

 

 

Three Months Ended
March 31, 2017

 

Risk-free interest rate

 

1.96

%

Expected term (in years)

 

5.51

 

Expected volatility

 

70.46

%

Expected dividend yield

 

0

%

Exercise price

 

$

9.38

 

Fair value of common share

 

$

8.68

 

 

The assumptions that the Company used to determine the grant-date fair value of stock options granted to non-employees under the 2014 Plan during the three months ended March 31, 2017 were as follows, presented on a weighted average basis, noting there were no stock options granted to non-employees during the three months ended March 31, 2016:

 

 

 

Three Months Ended
March 31, 2017

 

Risk-free interest rate

 

2.45

%

Expected term (in years)

 

10.0

 

Expected volatility

 

69.98

%

Expected dividend yield

 

0

%

Exercise price

 

$

9.29

 

Fair value of common share

 

$

8.68

 

 

24



Table of Contents

 

BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

Stock Options

 

Stock option activity under the 2014 Plan is summarized as follows:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

Number of

 

Exercise

 

Contractual

 

Intrinsic

 

 

 

Shares

 

Price

 

Term

 

Value

 

 

 

 

 

 

 

(in years)

 

 

 

Outstanding as of December 31, 2016

 

3,864,425

 

$

3.61

 

9.21

 

$

15,991

 

Granted

 

480,919

 

9.37

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

Outstanding as of March 31, 2017

 

4,345,344

 

$

4.24

 

$

9.18

 

$

28,578

 

Options exercisable as of March 31, 2017

 

2,442,114

 

$

3.02

 

$

8.17

 

$

19,051

 

Options unvested as of March 31, 2017

 

1,903,230

 

$

5.81

 

$

8.82

 

$

9,527

 

 

The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common shares for those stock options that had exercise prices lower than the fair value of the Company’s common shares. There have been no exercises as of March 31, 2017.

 

The weighted average grant-date fair value per share of stock options granted for the three months ended March 31, 2017 was $5.57.  There were no stock options granted during the three months ended March 31, 2016.

 

The total fair value of options vested for the three months ended March 31, 2017 and 2016 was $1,034 and $0, respectively.

 

Share-Based Compensation

 

Share-based compensation expense was classified in the consolidated statements of operations and comprehensive loss as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Research and development expenses

 

$

999

 

$

335

 

General and administrative expenses

 

887

 

352

 

 

 

$

1,886

 

$

687

 

 

As of March 31, 2017, total unrecognized compensation cost related to the unvested share-based awards was $7,685, which is expected to be recognized over a weighted average period of 2.01 years.

 

2017 Employee Share Purchase Plan

 

In May 2017, the Company’s shareholders approved the 2017 Employee Share Purchase Plan (the “2017 ESPP”).  The 2017 ESPP became effective on May 3, 2017 in connection with the Company’s IPO (see Note 17).

 

12.  License Agreements

 

Yale Agreement

 

In September 2013, the Company entered into an exclusive license agreement with Yale (the “Yale Agreement”) to obtain a license to certain patent rights for the commercial development, manufacture, distribution, use and sale of products and processes resulting from the development of those patent rights, related to the use of riluzole in treating various neurological conditions, such as general anxiety disorder, post-traumatic stress disorder and depression. As part of the consideration for this license, the Company issued Yale 250,000 common shares and granted Yale the right to purchase up to 10% of the securities issued in specified future equity offerings by the Company. In the event that Yale’s fully diluted ownership position following the closing of the Company’s first two

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

financings with institutional investors resulting in an investment of at least $3,500 fell below 1% of the Company’s fully diluted common shares outstanding, the Company would be required to issue to Yale an additional number of shares of common shares such that Yale’s ownership position is restored to no less than 1%. The obligation to contingently issue equity to Yale was determined to be a liability, which was accounted for at fair value and remeasured at each reporting date. The fair value of the obligation at inception of the Yale Agreement was $0 based on the Company’s assessment that the probability of issuing additional shares that would reduce Yale’s ownership percentage below 1% was remote. The fair value of the liability remained at $0 through the completion of the Company’s common share issuances in January 2014 and July 2015, at which time the contingent obligation terminated, as Yale’s ownership position remained above 1%.

 

The Yale Agreement provides for a change-of-control payment to Yale upon the occurrence of a change-of-control event, as defined in the agreement, including an IPO. Upon the occurrence of a change-of-control event, the Company is obligated to pay to Yale the lesser of (i) 5% of the dollar value of all initial and future potential consideration paid or payable by the acquirer and (ii) $1,500. If the change-of-control event is as an IPO, the amount the Company will be obligated to pay to Yale will be reduced by the value of Yale’s equity investment in the Company on the first day that Yale is free to sell its equity interest. The Company classifies the change-of-control payment obligation as a liability on its consolidated balance sheet because it represents a contingent obligation to pay a variable amount of cash that may be based, in part, on the value of the Company’s own shares. The issuance-date fair value of the derivative liability was recognized as research and development expense in the consolidated statement of operations and comprehensive loss upon entering into the agreement with Yale. The derivative liability is remeasured to fair value at each reporting date. Changes in the fair value of the derivative liability are recognized as a component of other income (expense), net in the consolidated statement of operations and comprehensive loss. In April 2017, the agreement with Yale was amended such that if the change-of-control event is an IPO, the change-of-control payment shall be due to Yale on the first trading day when Yale is free to sell its equity interest in the Company and the change-of-control fee shall be reduced by the dollar value of Yale’s equity interest in the Company on the first trading day when Yale is free to sell its equity interest in the Company.  Yale’s equity interest in the Company is subject to a lock-up agreement which generally restricts Yale’s shares from being traded until October 31, 2017, and accordingly, the amount due to Yale in connection with the change-of-control provision of the agreement, if any, will be determined upon expiration of the lock-up period. The Company will continue to remeasure the derivative liability to fair value at each reporting date and will recognize changes in the fair value of the derivative liability until the expiration of the lock-up in October 2017 (see Note 17).

 

During the three months ended March 31, 2017 and 2016, the Company recorded other expense of $289 and $3, respectively, for the change in the fair value of the derivative liability. The fair value of the derivative liability was $223 and $512 as of March 31, 2017 and December 31, 2016, respectively.

 

In addition, the Company agreed to pay Yale up to $2,000 upon the achievement of specified regulatory milestones and annual royalty payments of a low single-digit percentage based on net sales of products from the licensed patents, subject to a minimum amount of up to $1,000 per year. If the Company grants any sublicense rights under the Yale Agreement, it must pay Yale a low single-digit percentage of sublicense income that it receives.

 

The Yale Agreement also requires the Company to meet certain due diligence requirements based upon specified milestones. The Company can elect to extend the deadline for its compliance with the due diligence requirements by a maximum of one year upon the payment to Yale of up to $150. The Company is also required to reimburse Yale for any fees that Yale incurs related to the filing, prosecution, defending and maintenance of patent rights licensed under the Yale Agreement. In the event that the Company fails to make any payments, commits a material breach, fails to maintain adequate insurance or challenges the patent rights of Yale, Yale can terminate the Yale Agreement. The Company can terminate the Yale Agreement (i) upon 90 days’ notice to Yale, (ii) if Yale commits a material breach of the Yale Agreement or (iii) as to a specific country if there are no valid patent rights in such country. The Yale Agreement expires on a country-by-country basis upon the later of the date on which the last patent rights expire in such country or ten years from the date of the first sale of a product incorporating the licensed patents.

 

The Company recorded research and development expenses of $3 during the three months ended March 31, 2017, for reimbursement of patent fees in connection with the Yale Agreement.

 

MGH Agreement

 

In September 2014, the Company entered into a license agreement (the “MGH Agreement”) with The General Hospital Corporation d/b/a Massachusetts General Hospital (“MGH”), pursuant to which MGH granted the

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

Company a license to certain patent rights for the commercial development, manufacture, distribution and use of any products or processes resulting from development of those patent rights, related to treating depression with a combination of ketamine and scopolamine. The Company is also obligated to pay MGH annual license maintenance fees of between $30 and $50, beginning in 2017, future milestone payments of up to $750 upon the achievement of specified clinical and regulatory milestones and up to $2,500 upon the achievement of specified commercial milestones. The Company has also agreed to pay MGH royalties of a low single-digit percentage based on net sales of products licensed under the agreement. If the Company receives revenue from sublicensing any of its rights under the agreement, the Company is also obligated to pay a portion of that revenue to MGH.

 

The MGH Agreement also requires the Company to meet certain due diligence requirements based upon specified milestones. The Company can elect to extend the deadline for its compliance with the due diligence requirements by a maximum of one year by making payments to MGH of up to $300 in the aggregate. The Company is required to reimburse MGH for any fees that MGH incurs related to the filing, prosecution, defending, and maintenance of patent rights licensed under the agreement. The MGH Agreement expires upon expiration of the patent rights under the MGH Agreement, unless earlier terminated by either party.

 

The Company did not recognize any research and development expense associated with the MGH Agreement during the three months ended March 31, 2017 and 2016.

 

ALS Biopharma Agreement

 

In August 2015, the Company entered into an agreement (the “ALS Biopharma Agreement”) with ALS Biopharma and Fox Chase Chemical Diversity Center Inc. (“FCCDC”), pursuant to which ALS Biopharma and FCCDC assigned the Company their worldwide patent rights to a family of over 300 prodrugs of glutamate modulating agents, including trigriluzole, as well as other innovative technologies. Under the ALS Biopharma Agreement, the Company is obligated to use commercially reasonable efforts to commercialize and develop markets for the patent products. The Company is obligated to pay $3,000 upon the achievement of specified regulatory milestones with respect to the first licensed product and $1,000 upon the achievement of specified regulatory milestones with respect to subsequently developed products, as well as royalty payments of a low single-digit percentage based on net sales of products licensed under the agreement, payable on a quarterly basis.

 

In connection with the ALS Biopharma Agreement, the Company also issued to ALS Biopharma (i) 50,000 common shares; (ii) an immediately exercisable warrant to purchase 275,000 common shares at an exercise price of $5.60 per share; and (iii) a warrant to purchase 325,000 common shares at an exercise price of $5.60 per share, which warrant would become exercisable upon the Company’s achievement of a specified regulatory milestone (see Note 8). The ALS Biopharma Agreement terminates on a country-by-country basis as the last patent rights expire in each such country. If the Company abandons its development, research, licensing or sale of all products covered by one or more claims of any patent or patent application assigned under the ALS Biopharma Agreement, or if the Company ceases operations, it has agreed to reassign the applicable patent rights back to ALS Biopharma.

 

The Company recorded research and development expenses of $0 and $375 during the three months ended March 31, 2017 and 2016, respectively, as a result of the ALS Biopharma Agreement, which amounts consist of the fair value of the shares and warrants upon their issuance to ALS Biopharma.

 

Rutgers Agreement

 

In June 2016, the Company entered into an exclusive license agreement (the “Rutgers Agreement”) with Rutgers, The State University of New Jersey (“Rutgers”), licensing several patents and patent applications related to the use of riluzole to treat various cancers. Under the Rutgers Agreement, the Company is required to pay Rutgers annual license maintenance fees in the aggregate of $75 for the first five years following execution of the agreement, then $25 per year thereafter until the first commercial sale of a licensed product, at which point the Company will pay Rutgers minimum annual royalties totaling in the low six-digits. The Company is also obligated to pay Rutgers up to $825 in the aggregate upon the achievement of specified clinical and regulatory milestones. The Company also

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

agreed to pay Rutgers royalties of a low single-digit percentage of net sales of licensed products sold by the Company, its affiliates or its sublicensees, subject to a minimum amount of up to $100 per year. If the Company grants any sublicense rights under the Rutgers Agreement, the Company must pay Rutgers a low double-digit percentage of sublicense income it receives.

 

Under the Rutgers Agreement, in the event that the Company experiences a change of control or sale of substantially all of its assets prior to the initiation of a Phase 3 clinical trial related to products licensed under the agreement, and such change of control or sale results in a full liquidation of the Company, the Company will be obligated to pay Rutgers a change-of-control fee equal to 0.3% of the total value of the transaction, but not less than $100. The Company determined that the change-of-control payment should be accounted for as a liability because it represents a contingent obligation to pay a variable amount of cash that may be based, in part, on the value of the Company’s own shares. The fair value of the obligation upon execution of the Rutgers Agreement was $0 based on the Company’s assessment that the probability of a change-in-control event occurring prior to the initiation of a Phase 3 clinical trial related to products licensed under the agreement was remote. The fair value of the liability remained at $0 through March 31, 2017.

 

The Rutgers Agreement also requires the Company to meet certain due diligence requirements based upon specified milestones. The Company can elect to extend the deadline for its compliance with the due diligence requirements by a maximum of one year upon payments to Rutgers of up to $500 in the aggregate. Under the Rutgers Agreement, the Company is required to reimburse Rutgers for any fees that Rutgers incurs related to the filing, prosecution, defending, and maintenance of patent rights licensed under the agreement. The Rutgers Agreement expires upon expiration of the patent rights under the agreement or ten years from the date of first commercial sale of a licensed product, whichever is later, unless terminated by either party.

 

The Company recorded no research and development expense during the three months ended March 31, 2017 related to the Rutgers Agreement.

 

BMS Agreement

 

In July 2016, the Company entered into an exclusive, worldwide license agreement (the “BMS Agreement”) with BMS for the development and commercialization rights to rimegepant and BHV-3500, as well as other CGRP-related intellectual property. In exchange for these rights, the Company agreed to pay BMS initial payments, milestone payments and royalties on net sales of licensed products under the agreement.

 

The Company is obligated to make milestone payments to BMS upon the achievement of specified development and commercialization milestones. The development milestone payments due under the agreement depend on the licensed product being developed. With respect to rimegepant, the Company is obligated to pay up to $127,500 in the aggregate upon the achievement of the development milestones. For any product other than rimegepant, the Company is obligated to pay up to $74,500 in the aggregate upon the achievement of the development milestones. In addition, the Company is obligated to pay up to $150,000 for each licensed product upon the achievement of commercial milestones. If the Company receives revenue from sublicensing any of its rights under the agreement, it is also obligated to pay a portion of that revenue to BMS. The Company is also obligated to make tiered royalty payments to BMS based on annual worldwide net sales, with percentages in the low to mid teens.

 

Under the BMS Agreement, the Company is obligated to use commercially reasonable efforts to develop licensed products and to commercialize at least one licensed product using the patent rights licensed from BMS and is solely responsible for all development, regulatory and commercial activities and costs. The Company is also required to reimburse BMS for any fees that BMS incurs related to the filing, prosecution, defending, and maintenance of patent rights licensed under the BMS Agreement. Under the BMS Agreement, BMS transferred to the Company manufactured licensed products, including certain materials that will be used by the Company to conduct clinical trials.

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

The BMS Agreement will terminate on a licensed product-by-licensed product and country-by-country basis upon the expiration of the royalty term with respect to each licensed product in each country. BMS has the right to terminate the agreement upon the Company’s insolvency or bankruptcy, the Company’s uncured material breach of the agreement, including the failure to meet its development and commercialization obligations, or if the Company challenges any of BMS’s patent rights. The Company has the right to terminate the BMS Agreement if BMS materially breaches the agreement or if, after the Company provides notice, it chooses not to move forward with development and commercialization in a specific country.

 

The BMS Agreement required the Company to complete a financing transaction with gross proceeds of at least $30,000, of which a minimum of $22,000 was to be from investment in equity prior to October 17, 2016, unless extended by mutual agreement of the Company and BMS. The BMS Agreement was amended, effective October 14, 2016, to extend the deadline for completing the financing transaction to October 31, 2016, on which date the Series A First Closing was completed (see Note 9).

 

Under the BMS Agreement, the Company also agreed to issue BMS common shares in the amount of $12,500, which shares are contingently issuable upon the earliest to occur of (i) the initiation of a Phase 3 trial for the first licensed compound to reach such milestone, (ii) the Company’s IPO or (iii) an event resulting in the change of control of the Company. Under the terms of the BMS Agreement, if the qualifying financing transaction involves the issuance of preferred shares, BMS is entitled to receive preferred shares instead of common shares, at its option. BMS also had the right to purchase up to 8%, on a fully diluted basis, of shares issued in a qualifying financing transaction (as defined in the BMS Agreement) on the same terms and rights as all other investors involved in the financing. The number of shares issuable to BMS under the agreement will be determined by dividing $12,500 by a price per share equal to the lower of (i) the price per share paid by investors in the Series A First Closing, or $9.2911 (see Note 9), or (ii) the price per share paid by investors in any subsequent financing event that occurs prior to the events specified above.

 

The obligation to contingently issue equity to BMS is classified as a liability on the consolidated balance sheet because it represents an obligation to issue a variable number of shares for a fixed dollar amount. Upon entering into the BMS Agreement, the issuance-date fair value of the contingent equity liability was recognized as research and development expense in the consolidated statement of operations and comprehensive loss. The Company remeasured the fair value of the contingent equity liability as of March 31, 2017 and recognized expense of $1,875 for the increase in the fair value of the liability to $15,938. Changes in the fair value of the contingent equity liability are recognized as a component of other income (expense), net in the consolidated statement of operations and comprehensive loss. Changes in the fair value of the contingent equity liability continued to be recognized until the occurrence of a triggering event, which occurred in May 2017 with the completion of the IPO.

 

In May 2017, in connection with the completion of its IPO, the Company issued 1,345,374 common shares to BMS in satisfaction of its obligation to contingently issue equity securities pursuant to the license agreement (see Note 17) and remeasured the contingent equity liability to fair value.

 

The Company recorded no research and development expense related to the BMS Agreement during the three months ended March 31, 2017.

 

AstraZeneca Agreement

 

In October 2016, the Company entered into an exclusive license agreement (the “AstraZeneca Agreement”) with AstraZeneca, pursuant to which AstraZeneca granted the Company a license to certain patent rights for the commercial development, manufacture, distribution and use of any products or processes resulting from development of those patent rights, including BHV-5000 and BHV-5500. In exchange for these rights, the Company agreed to pay AstraZeneca an upfront payment, milestone payments and royalties on net sales of licensed products under the agreement. The regulatory milestones due under the agreement depend on the indication of the licensed product being developed as well as the territory where regulatory approval is obtained. Development milestones due under the agreement with respect to Rett syndrome total up to $30,000, and, for any indication other than Rett syndrome, total up to $60,000. Commercial milestones are based on net sales of all products licensed under the

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

agreement and total up to $120,000. The Company has also agreed to pay tiered royalties based on net sales of all products licensed under the agreement of mid single-digit to low double-digit percentages. If the Company receives revenue from sublicensing any of its rights under the AstraZeneca Agreement, the Company is also obligated to pay a portion of that revenue to AstraZeneca. The Company is also required to reimburse AstraZeneca for any fees that AstraZeneca incurs related to the filing, prosecution, defending, and maintenance of patent rights licensed under the AstraZeneca Agreement.

 

The AstraZeneca Agreement expires upon the expiration of the patent rights under the agreement, unless earlier terminated by either party, or on a country-by-country basis ten years after the first commercial sale.

 

As part of the consideration under the AstraZeneca Agreement, the Company agreed to issue to AstraZeneca common shares in the amount of $10,000 if the Company completed a qualifying equity financing resulting in proceeds of at least $30,000 prior to December 29, 2016. Under the terms of the AstraZeneca Agreement, if the qualifying financing transaction involved the issuance of preferred shares, AstraZeneca would be entitled to receive preferred shares instead of common shares, at its option. The number of shares issued would be determined based on the price per share paid by investors in the qualifying financing transaction. Upon the occurrence of the qualifying financing transaction, 50% of the shares would be issuable upon the closing of the transaction (the “First Tranche”) and the other 50% would become issuable upon the earlier of (i) the initiation of a Phase 2b or equivalent clinical trial of a product candidate based on the licensed patent rights or (ii) any liquidity event, including an IPO of the Company, any change of control of the Company or any assignment of the Company’s rights and obligations under the AstraZeneca Agreement (the “Second Tranche”). The number of shares issuable to AstraZeneca in each of the First Tranche and the Second Tranche is determined by dividing $5,000 by the price per share paid by investors in the Company’s Series A First Closing, or $9.2911 (see Note 9). In addition, AstraZeneca had the right to purchase up to 8%, on a fully diluted basis, of shares issued in such qualifying financing transaction, on the same terms and rights as all other investors involved in the financing.

 

In October 2016, upon completion of the Series A First Closing (see Note 9), the contingency associated with the First Tranche of contingently issuable equity related to the occurrence of a qualified financing was satisfied. As a result, the Company issued to AstraZeneca 538,150 Series A preferred shares with an aggregate fair value of $5,000, or $9.2911 per share. Upon issuance of the 538,150 Series A preferred shares to AstraZeneca, the Company reclassified the contingent equity liability associated with the First Tranche of $5,000 to the carrying value of Series A preferred shares.

 

As of March 31, 2017, the Company determined that the fair value of the contingent equity liability associated with the Second Tranche was $6,375, which resulted in the recognition of other expense of $1,500 during the three months ended March 31, 2017. Changes in the fair value of the contingent equity liability is recognized as a component of other income (expense), net in the consolidated statement of operations and comprehensive loss. Changes in the fair value of the contingent equity liability continued to be recognized until the occurrence of a triggering event, which occurred in May 2017 with the completion of the IPO.

 

In May 2017, in connection with the completion of its IPO, the Company issued 538,149 common shares to AstraZeneca in satisfaction of its obligation to contingently issue the Second Tranche of equity securities pursuant to the license agreement (see Note 17) and remeasured the contingent equity liability to fair value.

 

The Company recorded no research and development expense related to the AstraZeneca Agreement for the three months ended March 31, 2017.

 

Agreement with Catalent

 

In March 2015, the Company entered into a development and license agreement with Catalent U.K. Swindon Zydis Limited (“Catalent”) pursuant to which the Company obtained license rights to the Zydis technology in BHV-0223. BHV-0223 was developed under this agreement, and Catalent has manufactured BHV-0223 for clinical testing. Upon entering the agreement, the Company is obligated to pay Catalent up to $1,575 upon the achievement

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

of specified regulatory and commercial milestones. The Company is also obligated to make royalty payments of a low single-digit percentage based on net sales of products licensed under the agreement.

 

Under the agreement, the Company is responsible for conducting clinical trials and for preparing and filing regulatory submissions. The Company has the right to sublicense its rights under the Catalent agreement subject to Catalent’s prior written consent. Catalent has the right to enforce the patents covering the Zydis Technology and to defend any allegation that a formulation using Zydis technology, such as BHV-0223, infringes a third party’s patent.

 

The development and license agreement terminates on a country-by-country basis upon the later of (i) 10 years after the launch of the most recently launched product in such country and (ii) the expiration of the last valid claim covering each product in such country, unless earlier voluntarily terminated by the Company. The agreement automatically extends for one-year terms unless either party gives advance notice of intent to terminate. In addition, Catalent may terminate the agreement either in its entirety or terminate the exclusive nature of the agreement on a country-by-country basis if the Company fails to meet specified development timelines, which it may extend in certain circumstances.

 

The Company recorded no research and development expense related to the Catalent agreement during the three months ended March 31, 2017 and 2016.

 

13.   Net Loss per Share

 

Net Loss per Share Attributable to Common Shareholders of Biohaven Pharmaceutical Holding Company Ltd.

 

Basic and diluted net loss per share attributable to common shareholders of Biohaven Pharmaceutical Holding Company Ltd. was calculated as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

Net loss

 

$

(18,753

)

$

(2,986

)

Net loss attributable to non-controlling interests

 

 

35

 

Accretion of beneficial conversion feature on Series A preferred shares

 

(4,000

)

 

Net loss attributable to common shareholders of Biohaven Pharmaceutical Holding Company Ltd.

 

$

(22,753

)

$

(2,951

)

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Weighted average common shares outstanding—basic and diluted

 

13,088,861

 

11,776,429

 

 

 

 

 

 

 

Net loss per share attributable to common shareholders of Biohaven Pharmaceutical Holding Company Ltd.—basic and diluted

 

$

(1.74

)

$

(0.25

)

 

The Company’s potential dilutive securities, which include stock options and warrants to purchase common shares, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common shareholders of Biohaven Pharmaceutical Holding Company Ltd. is the same. The Company excluded the following potential common shares, presented based on

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

amounts outstanding at each period end, from the computation of diluted net loss per share attributable to common shareholders for the periods indicated because including them would have had an anti-dilutive effect:

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Options to purchase common shares

 

4,345,344

 

3,247,500

 

Warrants to purchase common shares

 

815,000

 

275,000

 

 

 

5,160,344

 

3,522,500

 

 

The Company has agreed under its agreements with AstraZeneca and BMS to issue common shares upon the achievement of specified milestones or upon the occurrence of specified events (see Note 12). Because the necessary conditions for issuance of the shares had not been met as of March 31, 2017, the Company excluded these shares from the table above and from the calculation of diluted net loss per share for the three months ended March 31, 2017.

 

14.   Commitments and Contingencies

 

Lease Agreement

 

In December 2016, the Company entered into an assignment agreement to assume an operating lease for its office space in New Haven, Connecticut. The lease agreement expires in October 2018, and the Company has the option to extend the term through October 2021. During the three months ended March 31, 2017, the Company recorded rent expense of $16. The agreement requires future minimum lease payments for the years ending December 31, 2017 (remaining nine months) and 2018 of $30 and $35, respectively.

 

License Agreements

 

The Company has entered into license agreements with various parties under which it is obligated to make contingent and non-contingent payments (see Note 12).

 

Research Commitments

 

The Company has entered into agreements with several CROs to provide services in connection with its preclinical studies and clinical trials. As of March 31, 2017, the Company had committed to minimum payments under these arrangements totaling $12,473.

 

Indemnification Agreements

 

In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. The Company’s amended and restated memorandum and articles of association also provide for indemnification of directors and officers in specific circumstances. To date, the Company has not incurred any material costs as a result of such indemnification provisions. The Company does not believe that the outcome of any claims under indemnification arrangements will have a material effect on its financial position, results of operations or cash flows, and it has not accrued any liabilities related to such obligations in its consolidated financial statements as of March 31, 2017 or December 31, 2016.

 

Legal Proceedings

 

The Company is not a party to any litigation and does not have contingency reserves established for any litigation liabilities.

 

15.  Related Party Transactions

 

License Agreement with Yale

 

On September 30, 2013, the Company entered into the Yale Agreement with Yale (see Note 12). Yale is a related party because the Company’s Chief Executive Officer is one of the inventors of the patents that the Company has licensed from Yale and, as such, is entitled to a specified share of the glutamate product-related royalty revenues that may be received by Yale under the Yale Agreement. As partial consideration for the license under the Yale

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

Agreement, on September 30, 2013, the Company issued to Yale 250,000 common shares, representing 5.1% of the Company’s then outstanding equity on a fully diluted basis. The fair value of the shares, totaling $152, was recognized as research and development expense at the time of issuance of the shares. During the three months ended March 31, 2017 and 2016, the Company recognized research and development expense under the Yale Agreement of $0 and $8, respectively. As of March 31, 2017 and December 31, 2016, the Company owed no amounts to Yale.

 

Guarantor and Co-Guarantor Warrants

 

The Guarantor and Co-Guarantor of the Credit Agreement with Wells Fargo are each shareholders and members of the board of directors of the Company. The Company agreed to issue warrants to Guarantor and Co-Guarantor in exchange for their respective guaranties (see Notes 7 and 8). The warrants were issued on January 26, 2017, pursuant to which each director received a warrant to purchase 107,500 common shares at an exercise price of $9.2911 per share.

 

Kleo Pharmaceuticals, Inc.

 

On August 29, 2016, the Company executed a stock purchase agreement with Kleo to purchase 3,000,000 shares of Kleo common stock at a purchase price of $1.00 per share in an initial closing, which was completed on August 31, 2016, and committed to purchase an aggregate 5,500,000 additional shares of Kleo common stock at a purchase price of $1.00 per share (see Note 5). Kleo is a related party because the Company has determined that it exercises significant influence over the operating and financial policies of Kleo. In connection with its investment in Kleo, the Company received the right to designate two members of Kleo’s board of directors, who are the Chairman of the Company’s board of directors and another outside director of the Company. Also, the Chief Executive Officer and controlling stockholder of Kleo is a shareholder of the Company. In addition to the purchases under the stock purchase agreement described above, on August 29, 2016, the Company entered into an agreement with the Chief Executive Officer of Kleo to purchase 500,000 shares of Kleo common stock from him, which purchase was completed in March 2017 (see Note 5). As of March 31, 2017, the Company owned 27.9% of Kleo’s outstanding capital stock. The Company has also entered into a clinical development master services agreement with Kleo to assist Kleo with clinical development. As of March 31, 2017, the Company had not performed any services or received any payments under this agreement.

 

Biohaven Pharmaceuticals, Inc.

 

BPI is a related party because its three founders, each of whom beneficially owned one-third of the equity of BPI prior to the Company’s acquisition of BPI on December 31, 2016 (see Note 16), are shareholders of the Company and also serve as the Company’s Chairman of the board of directors, Chief Executive Officer and Chief Medical Officer, respectively. Since the Company’s incorporation in September 2013, the Company is deemed to have had a variable interest in BPI, and BPI is deemed to have been a VIE, of which the Company is the primary beneficiary. Accordingly, the Company has consolidated the results of BPI since September 2013. All transactions between the Company and BPI have been eliminated in consolidation. On December 31, 2016, the Company acquired 100% of the capital stock of BPI for aggregate purchase consideration of $595 in the form of promissory notes to each of the former stockholders of BPI. In May 2017, the promissory notes were paid in full (see Note 17).

 

16.  Acquisition of Biohaven Pharmaceuticals, Inc.

 

On December 31, 2016, the Company entered into stock purchase agreements with each of the stockholders of BPI, acquiring 100% of the issued and outstanding shares of BPI for aggregate purchase consideration of $595. Prior to the acquisition, the Company was deemed to have had a variable interest in BPI, and BPI was deemed to be a VIE of which the Company was the primary beneficiary. As a result, the Company has consolidated the results of BPI since the Company’s incorporation in September 2013, and, prior to the acquisition of BPI, recognized a non-controlling interest in its consolidated balance sheet representing 100% of the capital stock of BPI not owned by the Company. The three founders of BPI, each of whom beneficially owned one-third of the equity of BPI, also serve as

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

the Company’s Chairman of the board of directors, Chief Executive Officer, and Chief Medical Officer, respectively (see Note 15).

 

The Company funded the acquisition through the issuance of promissory notes to each of the former stockholders of BPI. The notes are payable in five annual payments, the first four of which are interest only, with the final payment to include the principal balance outstanding plus any accrued and unpaid interest. The notes bear interest at a rate of 4.5% per annum and mature on December 31, 2021. The notes would become immediately due and payable upon specified events, including immediately prior to the consummation of the IPO of the Company’s common shares or upon the occurrence of a change of control of the Company. There are no affirmative, negative or financial covenants associated with the notes. In May 2017, in connection with the completion of the IPO, the notes became immediately due and payable, and the Company paid the notes, including principal and unpaid interest, in full (see Note 17).

 

Because the Company consolidated BPI as a VIE prior to the acquisition, the acquisition of all of the capital stock of BPI did not result in a change of control for accounting purposes and was accounted for as an equity transaction. Accordingly, as of the acquisition date, the $86 carrying value of the non-controlling interest on December 31, 2016 was derecognized and the difference between the carrying value of the non-controlling interest of $86 and the purchase price of $595 was recorded as a $509 reduction to additional paid-in capital. There were no changes during the three months ended March 31, 2017.

 

For the three months ended March 31, 2016, the Company recorded a net loss attributable to non-controlling interests of $35 when the Company consolidated BPI as a VIE.

 

17.  Subsequent Events

 

For its unaudited consolidated financial statements as of March 31, 2017, and for the three months then ended, the Company evaluated subsequent events through June 16, 2017, the date on which those financial statements were issued.

 

Increase in Authorized Common Shares

 

On April 21, 2017, the Company effected an increase in the number of authorized common shares from 38,000,000 shares to 50,000,000 shares. Additionally, in connection with the completion of its IPO in May 2017, the Company amended its memorandum and articles of association to authorize the issuance of up to 200,000,000 no par value common shares and 10,000,000 no par value undesignated preferred shares.

 

2017 Equity Incentive Plan

 

In April 2017, the Company’s shareholders approved the 2017 Plan, which became effective on May 3, 2017 in connection with the Company’s IPO. The 2017 Plan provides for the grant of incentive share options, nonstatutory share options, share appreciation rights, restricted share awards, restricted share unit awards, performance-based share awards and other share-based awards. Additionally, the 2017 Plan provides for the grant of performance cash awards. The number of common shares potentially issuable under the 2017 Plan is 7,611,971 shares, which is the sum of (i) 2,712,741 newly reserved shares, (ii) 372 shares which remained available for issuance under the 2014 Plan upon the effectiveness of the 2017 Plan and (iii) the maximum number of common shares subject to outstanding awards under the 2014 Plan that could potentially expire or terminate for any reason prior to exercise or settlement; be forfeited because of the failure to meet a contingency or condition required to vest such shares or otherwise return to the Company; or be reacquired or withheld (or not issued) to satisfy a tax withholding obligation in connection with an award or to satisfy the exercise price of an award. The number of common shares that may be issued under the 2017 Plan may be increased by the Company’s board of directors on January 1 of each year, beginning on January 1, 2018 and continuing through and including January 1, 2027, by a number of common shares determined by the Company’s board of directors in an amount not to exceed 4% of the total number of common shares outstanding on December 31 of the preceding calendar year. The common shares underlying any awards that expire or are otherwise terminated, are settled in cash, are repurchased by the Company, or are reacquired in satisfaction of tax withholding obligations or as consideration for the exercise price of an award under the 2017 Plan will be added back to the common shares available for issuance under the 2017 Plan.

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Amounts in thousands, except share and per share amounts)

 

(Unaudited)

 

2017 Employee Share Purchase Plan

 

In April 2017, the Company’s shareholders approved the 2017 ESPP, which became effective on May 3, 2017 in connection with the Company’s IPO. A total of 339,139 common shares were initially reserved for issuance under this plan. The number of common shares that may be issued under the 2017 ESPP will automatically increase on January 1 of each year, beginning on January 1, 2018 and continuing through and including January 1, 2027, by the least of (i) 600,000 common shares, (ii) 1% of the total number of common shares outstanding on December 31 of the preceding calendar year and (iii) a number of shares determined by the Company’s board of directors.

 

Initial Public Offering

 

On May 3, 2017, the Company’s registration statement on Form S-1 relating to its IPO was declared effective by the SEC. The IPO closed on May 9, 2017 and the Company issued and sold 9,900,000 common shares at a public offering price of $17.00 per share for net proceeds of $152,889 after deducting underwriting discounts and commissions of $11,781 and other offering expenses of approximately $3,630. Upon the closing of the IPO, all convertible preferred shares then outstanding converted into an aggregate of 9,358,560 common shares.  Upon the conversion of the preferred shares, the remaining unamortized portion of the BCF of $8,006 was reclassified to additional paid-in-capital as a deemed dividend. In addition on May 9, 2017, the underwriters of the IPO fully exercised their option to purchase addition shares, and on May 11, 2017, the Company issued and sold 1,485,000 additional common shares for additional net proceeds of $23,478 after deducting underwriting discounts, commissions, and other offering costs. Thus, the aggregate net proceeds to the Company from the IPO, after deducting underwriting discounts and commissions and other offering costs, were $176,367.

 

In connection with the completion of its IPO, the Company issued an additional aggregate of 1,883,523 common shares to BMS and AstraZeneca in satisfaction of the obligation to contingently issue equity securities pursuant to the license agreements (see Note 12) for no additional consideration.  The contingent equity liabilities were adjusted to fair value of $32,020 immediately prior to the completion of the IPO, and upon issuance of the common shares, the contingent equity liabilities were reclassified to equity.

 

Payment of Notes Payable to Related Parties

 

In connection with the closing of the Company’s IPO in May 2017, the notes payable to related parties were paid in full, including principal of $595. Accrued and unpaid interest of $9 was paid in June 2017.

 

Yale Agreement

 

The Yale Agreement provides for a change-of-control payment to Yale upon the occurrence of a change-of-control event, as defined in the agreement, including an IPO.  In April 2017, the agreement with Yale was amended such that if the change-of-control event is an IPO, the change-of-control payment shall be due to Yale on the first trading day when Yale is free to sell its equity interest in the Company and the change-of-control fee shall be reduced by the dollar value of Yale’s equity interest in the Company on the first trading day when Yale is free to sell its equity interest in the Company.  Yale’s equity interest in the Company is subject to a lock-up agreement which generally restricts Yale’s shares from being traded until October 31, 2017, and accordingly, the amount due to Yale in connection with the change-of-control provision of the agreement, if any, will be determined upon expiration of the lock-up period. The Company will continue to remeasure the derivative liability to fair value at each reporting date and will recognize changes in the fair value of the derivative liability until the expiration of the lock-up period in October 2017 (see Note 17).

 

Purchases of Kleo Common Stock

 

In June 2017, the Company purchased 1,375,000 shares of Kleo common stock for cash consideration of $1,375 pursuant to its commitment under the Kleo SPA (see Note 5).

 

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

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes for the year ended December 31, 2016 included in our final prospectus for our initial public offering of our common shares (“IPO”) filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b)(4) on May 5, 2017. Some of the statements contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, constitute forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future events. The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Quarterly Report on Form 10-Q, particularly including those risks identified in Part II-Item 1A “Risk Factors” and our other filings with the SEC.

 

Our actual results and timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking statements. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Statements made herein are as of the date of the filing of this Form 10-Q with the SEC and should not be relied upon as of any subsequent date. Even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking

 

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statements contained in this Quarterly Report on Form 10-Q, they may not be predictive of results or developments in future periods. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

 

We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made.

 

Overview

 

We are a clinical-stage biopharmaceutical company with a portfolio of innovative, late-stage product candidates targeting neurologic diseases, including rare disorders. Our product candidates are small molecules based on two distinct mechanistic platforms—calcitonin gene-related peptide, or CGRP, receptor antagonists and glutamate modulators—which we believe have the potential to significantly alter existing treatment approaches across a diverse set of neurologic indications with high unmet need in both large markets and orphan indications. The most advanced product candidate from our CGRP receptor antagonist platform is rimegepant, an orally available, potent and selective small molecule human CGRP receptor antagonist that we are developing for the acute treatment of migraine. In July 2016, we acquired exclusive, worldwide rights to our CGRP receptor antagonist platform, including rimegepant and another product candidate, BHV-3500, which we are developing for the prevention of chronic and episodic migraine, through a license agreement with Bristol-Myers Squibb Company, or BMS. In the second half of 2017, we intend to initiate two Phase 3 clinical trials of rimegepant and to commence IND-enabling studies to allow us to ultimately pursue clinical trials of BHV-3500.

 

We are developing three product candidates that modulate the body’s glutamate system. Two of these product candidates, trigriluzole and BHV-0223, act as glutamate transporter modulators, while our product candidate BHV-5000 is an antagonist of the glutamate N-methyl-D-aspartate, or NMDA, receptor. We are developing trigriluzole for the treatment of ataxias, with an initial focus on spinocerebellar ataxia, or SCA. We have received both orphan drug designation and fast track designation from the U.S. Food and Drug Administration, or FDA, for trigriluzole for the treatment of SCA and in May 2017 we completed enrollment of patients in a Phase 2/3 clinical trial, for which we expect to report topline results in the first quarter of 2018.

 

We are developing BHV-0223 for the treatment of amyotrophic lateral sclerosis, or ALS. In December 2016, we received orphan drug designation from the FDA for BHV-0223 to treat ALS. In the second half of 2017, we plan to commence a trial comparing the bioequivalence of BHV-0223 and riluzole in healthy volunteers. Depending on the outcome of this bioequivalence study, we plan to submit a new drug application, or NDA, to the FDA and pursue the regulatory approval of BHV-0223 for ALS under Section 505(b)(2) of the U.S. Federal Food, Drug, and Cosmetic Act.

 

We are also developing BHV-5000, an orally available, first-in-class, low-trapping NMDA receptor antagonist, for the treatment of symptoms associated with Rett syndrome, including breathing irregularities. Rett syndrome is a rare and severe genetic neurodevelopmental disorder for which no approved treatments are currently available. We acquired worldwide rights to BHV-5000 under an exclusive license agreement with AstraZeneca AB, or AstraZeneca, in October 2016. We anticipate completing our commercial-grade formulation efforts for BHV-5000 in the third quarter of 2017. We plan to conduct a Phase 1 clinical trial of BHV-5000 to evaluate its pharmacokinetic properties and then in 2018 to commence a single Phase 2/3 clinical trial of BHV-5000 for the treatment of breathing irregularities associated with Rett syndrome that, if successful, we believe could support our application for regulatory approval.

 

Since our inception in September 2013, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, acquiring and developing product candidates and related intellectual property rights, planning for commercialization, and conducting discovery, research and development

 

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activities for our product candidates. We do not have any products approved for sale and have not generated any revenue from product sales. Prior to our IPO in May 2017, we funded our operations primarily with proceeds from the sale of preferred shares and common shares through private placements and borrowings under a credit agreement with a bank. Through March 31, 2017, we had received net cash proceeds of $96.4 million from sales of our preferred shares and common shares through private placements and gross proceeds of $5.0 million from borrowings under the credit agreement.

 

On May 3, 2017, our registration statement on Form S-1 relating to our IPO was declared effective by the SEC.  The IPO closed on May 9, 2017 and we issued and sold 9,900,000 common shares at a public offering price of $17.00 per share, for net proceeds of $152.9 million after deducting underwriting discounts and commissions of $11.8 million and other offering expenses of $3.6 million. Upon the closing of the IPO, convertible preferred shares then outstanding converted into an aggregate of 9,358,560 common shares. 

 

In addition, on May 9, 2017, the underwriters of the IPO fully exercised their option to purchase additional shares, and on May 11, 2017, we issued and sold 1,485,000 additional common shares resulting in additional net proceeds of $23.5 million after deducting offering expenses of $1.8 million.  Thus, the aggregate net proceeds we received from the IPO, after deducting underwriting discounts and commissions and offering expenses, were $176.4 million. In connection with the completion of the IPO, we issued an additional aggregate of 1,883,523 common shares to BMS and AstraZeneca in satisfaction of obligations to contingently issue equity securities pursuant to our license agreements for no additional consideration.

 

Since our inception, we have incurred significant operating losses. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our current product candidates and programs. Our net loss was $18.8 million and $3.0 million for the three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017, we had an accumulated deficit of $94.2 million. We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates. We expect to continue to incur significant expenses for at least the next several years as we advance our product candidates from discovery through preclinical development and clinical trials and seek regulatory approval and pursue commercialization of any approved product candidate. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. In addition, we may incur expenses in connection with the in-license or acquisition of additional product candidates. We also expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company.

 

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the public or private sale of equity, debt financings or other capital sources, including collaborations with other companies or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions.

 

Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

 

As of March 31, 2017, we had cash of $52.3 million. We completed our IPO in May 2017, resulting in net proceeds of $176.4 million. We believe that our existing cash resources, including the net proceeds from our IPO, together with our cash as of March 31, 2017, will enable us to repay our indebtedness and to fund our operating expenses and capital expenditure requirements for at least 15 months from the issuance of the financial Statements. We have based these estimates on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See “—Liquidity and Capital Resources.” Our future viability beyond that point is dependent on our ability to raise additional capital to finance our operations.

 

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Components of Our Results of Operations

 

Revenue

 

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the near future. If our development efforts for our product candidates are successful and result in regulatory approval or additional license agreements with third parties, we may generate revenue in the future from product sales.

 

Operating Expenses

 

Research and Development Expenses

 

Research and development expenses consist primarily of costs incurred in connection with the discovery and development of our product candidates. We expense research and development costs as incurred. These expenses include:

 

·                  expenses incurred under agreements with contract research organizations, or CROs, contract manufacturing organizations, or CMOs, as well as investigative sites and consultants that conduct our clinical trials, preclinical studies and other scientific development services;

 

·                  manufacturing scale-up expenses and the cost of acquiring and manufacturing preclinical and clinical trial materials and commercial materials, including manufacturing validation batches;

 

·                  employee-related expenses, including salaries, related benefits, travel and share-based compensation expense for employees engaged in research and development functions;

 

·                  costs related to compliance with regulatory requirements;

 

·                  facilities costs, depreciation and other expenses, which include rent and utilities; and

 

·                  payments made in cash, equity securities or other forms of consideration under third-party licensing agreements.

 

We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers.

 

Our direct research and development expenses are tracked on a program-by-program basis for our product candidates and consist primarily of external costs, such as fees paid to outside consultants, CROs, CMOs, and central laboratories in connection with our preclinical development, process development, manufacturing and clinical development activities. Our direct research and development expenses by program also include fees incurred under license agreements. We do not allocate employee costs or facility expenses, including depreciation or other indirect costs, to specific programs because these costs are deployed across multiple programs and, as such, are not separately classified. We use internal resources primarily to oversee the research and discovery as well as for managing our preclinical development, process development, manufacturing and clinical development activities. These employees work across multiple programs and, therefore, we do not track their costs by program.

 

The table below summarizes our research and development expenses incurred by program:

 

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Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

2016

 

 

 

(in thousands)

 

BHV-0223

 

$

244

 

$

192

 

Trigriluzole

 

2,582

 

1,460

 

Rimegepant

 

2,961

 

 

BHV-3500

 

1,636

 

 

Research and discovery and unallocated costs

 

3,317

 

718

 

Total research and development expenses

 

$

10,740

 

$

2,370

 

 

Research and development activities are central to our business model. 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. As a result, we expect that our research and development expenses will increase substantially over the next several years as we increase personnel costs, including share-based compensation, commence Phase 3 clinical trials of rimegepant, continue our ongoing Phase 2/3 clinical trial of trigriluzole, conduct other clinical trials and prepare regulatory filings for our product candidates. We also expect to incur additional expenses related to milestone and royalty payments payable to third parties with whom we have entered into license agreements to acquire the rights to our product candidates.

 

The successful development and commercialization of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any of our product candidates or when, if ever, material net cash inflows may commence from any of our product candidates. This uncertainty is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of:

 

·                  the scope, progress, outcome and costs of our preclinical development activities, clinical trials and other research and development activities;

 

·                  establishing an appropriate safety profile with IND-enabling studies;

 

·                  successful patient enrollment in, and the initiation and completion of, clinical trials;

 

·                  the timing, receipt and terms of any marketing approvals from applicable regulatory authorities;

 

·                  establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;

 

·                  development and timely delivery of commercial-grade drug formulations that can be used in our clinical trials and for commercial launch;

 

·                  obtaining, maintaining, defending and enforcing patent claims and other intellectual property rights;

 

·                  significant and changing government regulation;

 

·                  launching commercial sales of our product candidates, if and when approved, whether alone or in collaboration with others; and

 

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·                  maintaining a continued acceptable safety profile of the product candidates following approval.

 

We may never succeed in achieving regulatory approval for any of our product candidates. We may obtain unexpected results from our clinical trials. We may elect to discontinue, delay or modify clinical trials of some product candidates or focus on others. Any changes in the outcome of any of these variables with respect to the development of our product candidates in preclinical and clinical development could mean a significant change in the costs and timing associated with the development of these product candidates. For example, if the FDA or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect or if we experience significant delays in enrollment in any of our planned clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate. Drug commercialization will take several years and millions of dollars in development costs.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of salaries, related benefits, travel expense and share-based compensation expense for personnel in executive, finance and administrative functions. General and administrative expenses also include professional fees for legal, patent, consulting, accounting and audit services.

 

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research activities and development of our product candidates. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance, director and officer insurance costs as well as investor and public relations expenses associated with being a public company. We anticipate the additional costs for these services will increase our general and administrative expenses by approximately $1.5 million to $2.0 million on an annual basis. Additionally, if and when we believe a regulatory approval of a product candidate appears likely, we anticipate an increase in payroll and expense as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of our product candidate.

 

Other Income (Expense)

 

Interest Expense

 

Interest expense consists of interest on outstanding borrowings under our credit agreement with Wells Fargo Bank, National Association, or Wells Fargo, entered into in August 2016 at the applicable interest rate as well as amortization of the debt discount relating to that loan. Interest expense also includes interest on our notes payable to related parties, which we issued in December 2016 in connection with our acquisition of Biohaven Pharmaceuticals, Inc., or BPI, at the applicable interest rate. Upon the closing of the IPO, we paid principal and interest aggregating $0.6 million under the notes payable to related parties.

 

Change in Fair Value of Warrant Liability

 

In connection with entering into our credit agreement with Wells Fargo, we agreed to issue warrants to purchase our common shares to two of our directors in connection with a guarantee of our obligations under the agreement. We classify the warrants as a liability on our consolidated balance sheet that we remeasure to fair value at each reporting date, and we recognize changes in the fair value of the warrant liability as a component of other income (expense), net in our consolidated statement of operations and comprehensive loss. We will continue to recognize changes in the fair value of the warrant liability until the warrants are exercised, expire or qualify for equity classification.

 

Change in Fair Value of Derivative Liability

 

Our license agreement with Yale University, or Yale, provides for a change-of-control payment to Yale upon the occurrence of a change-of-control event, as defined in the agreement, including an initial public offering. We

 

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classify the change-of-control payment obligation as a liability on our consolidated balance sheet that we remeasure to fair value at each reporting date, and we recognize changes in the fair value of the derivative liability as a component of other income (expense), net in our consolidated statement of operations and comprehensive loss. In April 2017, the agreement with Yale was amended such that if the change-of-control event is an IPO, the change-of-control payment shall be due to Yale on the first trading day when Yale is free to sell its equity interest in the Company and the change-of-control fee shall be reduced by the dollar value of Yale’s equity interest in the Company on the first trading day when Yale is free to sell its equity interest in the Company. Yale’s equity interest in the Company is subject to a lock-up, which generally restricts Yale’s shares from being traded until October 31, 2017 and accordingly, the amount due to Yale in connection with the change-of-control provision of the agreement, if any, will be determined upon expiration of the lock-up period. The Company will continue to remeasure the derivative liability to fair value at each reporting date and will recognize changes in the fair value of the derivative liability until the expiration of the lock-up agreement in October 2017.

 

Change in Fair Value of Contingent Equity Liability

 

Our license agreements with BMS and AstraZeneca require us to issue shares of capital stock upon the occurrence of specified financing or change-of-control events or development milestones, as defined in the agreements. We classify these contingent obligations to issue shares as liabilities on our consolidated balance sheet that we remeasure to fair value at each reporting date, and we recognize changes in the fair values of the contingent equity liabilities as a component of other income (expense), net in our consolidated statement of operations and comprehensive loss. We continued to recognize changes in the fair values of the contingent equity liabilities until the occurrence of a respective triggering event.   Upon the closing of the IPO in May 2017, the conditions for issuing shares to BMS and AstraZeneca under the terms of the respective license agreements were satisfied, and accordingly, we issued 1,345,374 and 538,149 common shares, respectively, to BMS and AstraZeneca valued at $22.9 million and $9.1 million, respectively.  The contingent equity liabilities were adjusted to fair value immediately prior to the completion of the IPO, and upon issuance of the common shares, the contingent equity liabilities were reclassified to equity.

 

Loss from Equity Method Investment

 

In August 2016, we executed a stock purchase agreement with Kleo Pharmaceuticals, Inc., a privately-held Delaware Corporation, or Kleo, to purchase shares of Kleo’s common stock at an initial closing, with a commitment to purchase an aggregate of 5,500,000 additional shares of common stock in four tranches over a 15-month period through December 2017. As of March 31, 2017, and December 31, 2016, we owned approximately 27.9% and 18.6%, respectively, of the outstanding shares of Kleo. We account for our investment in Kleo under the equity method of accounting. As a result, our proportionate share of Kleo’s net income or loss each reporting period is included in other income (expense), net in our consolidated statement of operations and comprehensive loss and results in a corresponding adjustment to the carrying value of the equity method investment on our consolidated balance sheet.

 

Provision for Income Taxes

 

As a company incorporated in the British Virgin Islands, or BVI, we are principally subject to taxation in the BVI. Under the current laws of the BVI, tax on a company’s income is assessed at a zero percent tax rate. As a result, we have not recorded any income tax benefits from our losses incurred in the BVI during each reporting period, and no net operating loss carryforwards will be available to us for those losses.

 

In addition, in each reporting period, our tax provision includes the effects of consolidating the results of operations of BPI, either through December 30, 2016 as a variable interest entity or as of and subsequent to December 31, 2016 as our wholly owned subsidiary. BPI is subject to taxation in the United States. For the three months ended March 31, 2016, we recorded no tax benefits for the losses incurred by BPI due to BPI’s history of cumulative losses through that date and recorded a full valuation allowance against BPI’s deferred tax assets, which consisted primarily of its U.S. net operating loss carryforwards for the three months ended March 31, 2016.

 

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As of December 31, 2016, we fully utilized BPI’s remaining U.S. net operating loss carryforwards due to BPI’s profitability in that period and we recorded a full release of the valuation allowance, which was a nominal amount. As a result, we recorded an income tax provision of $0.2 million for the three months ended March 31, 2017 due to taxable income associated with the BPI entity.

 

Net Income (Loss) Attributable to Non-Controlling Interests

 

From our inception through December 30, 2016, we consolidated the results of BPI as a variable interest entity. Although we did not have an ownership interest in BPI through that date, we determined that BPI was a variable interest entity, of which we were the primary beneficiary.

 

Net income (loss) attributable to non-controlling interests in our consolidated statement of operations and comprehensive loss through December 30, 2016 consisted of the portion of the net income or loss of BPI that was not allocated to us. Changes in the amount of net income (loss) attributable to non-controlling interests were directly impacted by changes in the net income or loss of BPI. On December 31, 2016, we acquired 100% of the issued and outstanding shares of BPI. As a result, for the three months ended March 31, 2017 and for periods thereafter, we no longer report any non-controlling interests related to BPI.

 

Results of Operations

 

Comparison of the Three Months Ended March 31, 2017 and 2016

 

The following table summarizes our results of operations for the three months ended March 31, 2017 and 2016:

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

 

 

 

 

2017

 

2016

 

Change

 

 

 

(in thousands)

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

$

10,740

 

$

2,370

 

$

8,370

 

General and administrative

 

3,757

 

613

 

3,144

 

Total operating expenses

 

14,497

 

2,983

 

11,514

 

Loss from operations

 

(14,497

)

(2,983

)

(11,514

)

Other income (expense):

 

 

 

 

 

 

 

Interest expense

 

(305

)

 

(305

)

Change in fair value of warrant liability

 

(454

)

 

(454

)

Change in fair value of derivative liability

 

289

 

(3

)

292

 

Change in fair value of contingent equity liability

 

(3,375

)

 

(3,375

)

Loss from equity method investment

 

(218

)

 

(218

)

Total other income (expense), net

 

(4,063

)

(3

)

(4,060

)

Loss before provision for income taxes

 

(18,560

)

(2,986

)

(15,574

)

Provision for income taxes

 

193

 

 

193

 

Net loss and comprehensive loss

 

(18,753

)

(2,986

)

(15,767

)

Net loss attributable to non-controlling interests

 

 

35

 

(35

)

Accretion of beneficial conversion feature on Series A preferred shares

 

(4,000

)

 

 

(4,000

)

Net loss attributable to common shareholders of Biohaven Pharmaceutical Holding Company Ltd.

 

$

(22,753

)

$

(2,951

)

$

(19,802

)

 

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Research and Development Expenses

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

 

 

 

 

2017

 

2016

 

Change

 

 

 

(in thousands)

 

Direct research and development expenses by program:

 

 

 

 

 

 

 

BHV-0223

 

$

244

 

$

192

 

$

52

 

Trigriluzole

 

2,582

 

1,460

 

1,122

 

Rimegepant

 

2,961

 

 

2,961

 

BHV-3500

 

1,636

 

 

1,636

 

Research and discovery and unallocated costs:

 

 

 

 

 

 

 

Personnel related (including share-based compensation)

 

1,877

 

639

 

1,238

 

Other

 

1,440

 

79

 

1,361

 

Total research and development expenses

 

$

10,740

 

$

2,370

 

$

8,370

 

 

Research and development expenses were $10.7 million for the three months ended March 31, 2017, compared to $2.4 million for the three months ended March 31, 2016. The increase of $8.4 million was primarily due to increases of $3.0 million in direct costs for our rimegepant program, $1.6 million in direct costs for our BHV-3500 program, $1.1 million in spending related to our trigriluzole program in which we commenced patient enrollment in the fourth quarter of 2016 and $2.6 million in research and discovery and unallocated costs.

 

The increase in direct costs for our rimegepant and BHV-3500 programs was primarily a result of our acquiring certain intellectual property rights pursuant to a license agreement executed with BMS in July 2016. The increase in direct costs for our trigriluzole program primarily related to the purchase of clinical trial supplies and clinical trial support in preparation for the Phase 2/3 clinical trial.

 

The increase in research and discovery and unallocated costs was primarily due to an increase of $1.2 million in personnel-related costs, including share-based compensation, as a result of hiring additional personnel in our research and development department. Personnel-related costs for the three months ended March 31, 2017 and 2016 included share-based compensation expense of $1.0 million and $0.3 million, respectively.  The increase in other unallocated costs was primarily due to research and development consultants that support activities across multiple drug candidate programs as well as the purchase of supplies used across all drug candidate programs.

 

General and Administrative Expenses

 

General and administrative expenses were $3.8 million for the three months ended March 31, 2017, compared to $0.6 million for the three months ended March 31, 2016. The increase of $3.2 million was primarily due to increases of $0.9 million in personnel-related costs, including share-based compensation due to hiring of additional personnel in our general and administrative functions, $2.1 million in professional fees related to the preparation, audit and review of our financial statements as well as ongoing business operations and $0.1 million in facility-related costs. Personnel-related costs for the three months ended March 31, 2017 and 2016 included share-based compensation expense of $0.9 million and $0.4 million, respectively.

 

Other Income (Expense), Net

 

Other income (expense), net was a net expense of $4.1 million for the three months ended March 31, 2017, compared to $3,000 for the three months ended March 31, 2016. The increase of $4.1 million in net expense was primarily due to an increase of $3.4 million in the fair value of the contingent equity liability associated with our license agreements with BMS and AstraZeneca, an increase of $0.5 million in the change of the fair value of the

 

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warrant liability of the warrants associated with our Wells Fargo credit agreement, an increase of $0.2 million of loss from equity method investment and an increase in interest expense of $0.3 million due to interest on borrowings under our Credit Agreement with Wells Fargo that we entered into in August 2016. These increases in other expense were partially offset by a decrease of $0.3 million in the change in the fair value of the derivative liability associated with our license agreement with Yale.

 

Provision for Income Taxes

 

We recorded a provision for income taxes of $0.2 million for the three months ended March 31, 2017, compared to no provision for income taxes for the three months ended March 31, 2016. We recorded a tax provision for the three months ended March 31, 2017 for the U.S. federal and state income taxes of BPI’s profitable operations in the United States during that period and due to the fact that, as of December 31, 2016, we fully utilized BPI’s remaining U.S. net operating loss carryforwards.

 

Liquidity and Capital Resources

 

Since our inception, we have not generated any revenue and have incurred significant operating losses and negative cash flows from our operations. Prior to the completion of our IPO in May 2017, we funded our operations primarily with proceeds from the sale of preferred shares and common shares through private placements and borrowings under our credit agreement with Wells Fargo. Through March 31, 2017, we had received net cash proceeds of $96.4 million from sales of our preferred shares and common shares and gross proceeds of $5.0 million from borrowings under the credit agreement. As of March 31, 2017, we had cash of $52.3 million.

 

On May 3, 2017, our registration statement on Form S-1 relating to our IPO was declared effective by the SEC. The IPO closed on May 9, 2017 and we issued and sold 9,900,000 common shares at a public offering price of $17.00 per share, resulting in net proceeds of $152.9 million after deducting underwriting discounts and commissions and other offering expenses. In addition, on May 9, 2017, the underwriters of our IPO fully exercised their option to purchase additional shares, and on May 11, 2017, we issued and sold an additional 1,485,000 common shares, resulting in additional net proceeds to us of $23.5 million, after deducting underwriting discounts and commissions and other offering expenses. Thus, the aggregate net proceeds we received from the IPO, after deducting underwriting discounts and commissions and offering expenses, were $176.4 million.

 

Upon the closing of the IPO, we paid principal and interest aggregating $0.6 million due under the notes payable to related parties.

 

Cash in excess of immediate requirements is invested primarily in non-interest-bearing accounts with a view to liquidity and capital preservation.

 

Cash Flows

 

The following table summarizes our cash flows for each of the periods presented:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

2016

 

 

 

(in thousands)

 

Net cash used in operating activities

 

$

(7,652

)

$

(1,545

)

Net cash used in investing activities

 

(1,578

)

 

Net cash provided by financing activities

 

37,951

 

2,980

 

Net increase in cash

 

$

28,721

 

$

1,435

 

 

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Operating Activities

 

During the three months ended March 31, 2017, operating activities used $7.7 million of cash, resulting from our net loss of $18.8 million, partially offset by non-cash charges of $5.9 million and net cash provided by changes in our operating assets and liabilities of $5.2 million. Net cash provided by changes in our operating assets and liabilities for the three months ended March 31, 2017 consisted primarily of a $3.0 million increase in accrued expenses and a $2.7 million increase in accounts payable. The increases in accrued expenses and accounts payable were primarily due to increases in clinical trial costs and professional fees associated with the preparation, audit and review of our financial statements.

 

During the three months ended March 31, 2016, operating activities used $1.5 million of cash, resulting from our net loss of $3.0 million, partially offset by non-cash charges of $0.7 million and net cash provided by changes in our operating assets and liabilities of $0.8 million. Net cash provided by changes in our operating assets and liabilities for the three months ended March 31, 2016 consisted primarily of a $0.6 million increase in accrued expenses, a $0.1 million increase in accounts payable and a $0.1 million decrease in prepaid expenses and other current assets.  The increase in accrued expenses and accounts payable was due to our increased level of operating activities and the timing of vendor invoicing and payments.

 

Investing Activities

 

During the three months ended March 31, 2017, we used $1.6 million of cash in investing activities, primarily consisting of our investment in Kleo.

 

During the three months ended March 31, 2016, we did not use any cash in investing activities.

 

Financing Activities

 

During the three months ended March 31, 2017, net cash provided by financing activities was $38.0 million, primarily consisting of net proceeds of $38.6 million from our issuance of Series A preferred shares, partially offset by $0.7 million of payments of offering costs associated with our IPO.

 

During the three months ended March 31, 2016, net cash provided by financing activities was $3.0 million, primarily consisting of net proceeds from our issuance of common shares.

 

Credit Agreement

 

On August 30, 2016, we entered into a one-year credit agreement with Wells Fargo providing for a term loan in the principal amount of $5.0 million, or the Credit Agreement, and we borrowed the full $5.0 million available. Our obligations under the Credit Agreement are guaranteed by a member of our board of directors, who is also a shareholder. A second member of our board of directors and shareholder entered into a separate agreement with the loan guarantor to serve as a secondary guarantor for 50% of the loan balance. In connection with their guaranties of the loan, we issued to each of these two directors an immediately exercisable warrant to purchase 107,500 common shares at an exercise price of $9.2911 per share. Borrowings under the Credit Agreement bear interest at a variable rate equal to monthly LIBOR, which was 0.98% as of March 31, 2017, plus 1.50% per annum. In the event of a default, the interest rate applicable is equal to the monthly LIBOR rate then in effect, increased by 4.0% per annum. The Credit Agreement requires monthly, interest-only payments through the maturity date of August 30, 2017, at which date all remaining amounts will be due and payable. The Credit Agreement contains affirmative and negative covenants, but does not contain any financial covenants.

 

Notes Payable to Related Parties

 

On December 31, 2016, we entered into stock purchase agreements with each of the stockholders of BPI, acquiring 100% of the issued and outstanding shares of BPI for aggregate purchase consideration of $0.6 million. We funded the acquisition through the issuance of promissory notes to each of the former stockholders of BPI. The three former beneficial stockholders of BPI are shareholders of our company and currently serve as our chief executive officer, our chief medical officer and the chairman of our board of directors, respectively. The notes were originally payable in

 

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five annual payments, the first four of which were interest only, with the final payment to include the principal balance outstanding plus any accrued and unpaid interest. The notes bore interest at a rate of 4.5% per annum and were scheduled to mature on December 31, 2021. The notes would become immediately due and payable upon specified events, including immediately prior to the consummation of our IPO or upon the occurrence of a change of control of our company. There were no affirmative, negative or financial covenants associated with the notes.

 

Upon the closing of the IPO, we paid principal and interest aggregating $0.6 million due under the notes payable to related parties.

 

Funding Requirements

 

We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities and clinical trials of our product candidates. In addition, as a result of our IPO, we expect to incur additional costs associated with operating as a public company. Our expenses will also increase as we:

 

·                  initiate our two planned Phase 3 clinical trials of rimegepant, conduct our ongoing Phase 2/3 potentially pivotal trial of trigriluzole and complete our planned bioequivalence study for BHV-0223;

 

·                  initiate other supporting studies required for regulatory approval of our product candidates, including long-term safety studies, drug-drug interaction studies, preclinical toxicology and carcinogenicity studies;

 

·                  support formulation efforts of BHV-5000 and initiate our planned Phase 1 clinical trial for that product candidate;

 

·                  initiate formulation and clinical development for BHV-3500;

 

·                  complete commercial-grade formulation work and stability testing for all our programs;

 

·                  seek regulatory approvals for any product candidates that successfully complete clinical trials;

 

·                  establish a sales, marketing and distribution infrastructure in anticipation of commercializing any product candidates for which we may obtain marketing approval and intend to commercialize on our own or jointly;

 

·                  hire additional clinical, medical, and development personnel;

 

·                  expand our infrastructure and facilities to accommodate our growing employee base;

 

·                  begin to operate as a public company;

 

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

 

·                  acquire or in-license other product candidates and technologies.

 

We believe that the net proceeds from our IPO in May 2017, together with our existing cash as of March 31, 2017, will enable us to repay our indebtedness and to fund our operating expenses and capital expenditure requirements for at least the next 15 months, including the completion of our ongoing Phase 2/3 clinical trial of trigriluzole. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. We expect that we will require additional capital to commercialize rimegepant, if we receive regulatory approval, and to pursue in-licenses or acquisitions of other product candidates. If we receive regulatory approval for rimegepant, trigriluzole or our other product candidates, we expect to incur significant

 

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commercialization expenses related to product manufacturing, sales, marketing and distribution, depending on where we choose to commercialize.

 

Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical product candidates, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on and could increase significantly as a result of many factors, including:

 

·                  the scope, progress, results and costs of researching and developing our product candidates, and conducting preclinical studies and clinical trials;

 

·                  the costs, timing and outcome of regulatory review of our product candidates;

 

·                  the costs of future activities, including product sales, medical affairs, marketing, manufacturing and distribution, for any of our product candidates for which we receive marketing approval;

 

·                  the revenue, if any, received from commercial sale of our products, should any of our product candidates receive marketing approval;

 

·                  the costs and timing of hiring new employees to support our continued growth;

 

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

 

·                  the extent to which we acquire or in-license other product candidates and technologies;

 

·                  the costs of manufacturing commercial-grade product and necessary inventory to support commercial launch;

 

·                  the costs associated with in-licensing additional products candidates to augment our current pipeline; and

 

·                  the timing, receipt and amount of sales of, or milestone payments related to or royalties on, our current or future product candidates, if any.

 

Until such time, if ever, that we can generate product revenue sufficient to achieve profitability, we expect to finance our cash needs through a combination of public and private equity offerings, debt financings, other third-party funding, strategic alliances, licensing arrangements or marketing and distribution arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing shareholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing shareholders. Debt financing and preferred equity 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 other third-party funding, strategic alliances, licensing arrangements or marketing and distribution arrangements, 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 products or product candidates that we would otherwise prefer to develop and market ourselves.

 

We will also incur costs as a public company that we have not previously incurred or have previously incurred at lower rates, including but not limited to, increased costs and expenses for fees to members of our board of directors, increased personnel costs, increased directors and officers insurance premiums, audit and legal fees, investor relations fees and expenses for compliance with reporting requirements under the Exchange Act and rules implemented by the SEC and the New York Stock Exchange.

 

Contractual Obligations and Commitments

 

The disclosure of our contractual obligations and commitments is set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations and Commitments” in our final prospectus filed with the SEC on May 5, 2017. See Note 14 to our consolidated financial statements included in Item 1, “Consolidated Unaudited Financial Statements,” of this Quarterly Report on Form 10-Q for a discussion of obligations and commitments.

 

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Critical Accounting Policies and Significant Judgments and Estimates

 

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are 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. We evaluate our estimates and assumptions on an ongoing basis.

 

Our actual results may differ from these estimates under different assumptions or conditions. During the three months ended March 31, 2017, there were no material changes to our critical accounting policies. Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Critical Accounting Policies and Significant Judgments and Estimates” in our final prospectus dated May 3, 2017 for the IPO, which was filed with the SEC on May 5, 2017 and the notes to the consolidated financial statements included in Item 1, “Consolidated Unaudited Financial Statements,” of this Quarterly Report on Form 10-Q. We believe that of our critical accounting policies, the following accounting policies involve the most judgment and complexity:

 

·                  accrued research and development expenses;

 

·                  share-based compensation;

 

·                  determination of the fair value of common shares;

 

·                  valuation of warrant liability;

 

·                  valuation of derivative liability; and

 

·                  valuation of contingent equity liability.

 

Accordingly, we believe the policies set forth above are critical to fully understanding and evaluating our financial condition and results of operations. If actual results or events differ materially from the estimates, judgments and assumptions used by us in applying these policies, our reported financial condition and results of operations could be materially affected.

 

Emerging Growth Company Status

 

The Jumpstart Our Business Startups Act of 2012 permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have irrevocably elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies.

 

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 in the rules and regulations of the SEC.

 

Recently Issued Accounting Pronouncements

 

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our consolidated financial statements appearing at the beginning of this Quarterly Report on Form 10-Q.

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risks

 

Interest Rate Risk

 

The market risk inherent in our financial instruments and in our financial position represents the potential loss arising from adverse changes in interest rates. As of March 31, 2017 and December 31, 2016, we had cash of $52.3 million and $23.6 million, respectively. As of March 31, 2017, we generally held our cash in non interest-bearing money market accounts. Our primary exposure to market risk at that point in time was interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Due to the short-term maturities of our cash equivalents and the low risk profile of our investments at March 31, 2017, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our cash equivalents.

 

Prior to the completion of our IPO in May 2017, we adopted an investment policy related to the use of the net proceeds from the sale of our common shares in our IPO, pursuant to which we plan to hold such net proceeds in non-interest bearing accounts, with the goal of capital preservation and liquidity so that such funds are readily available to fund our operations.

 

As of March 31, 2017, we had $5.0 million of borrowings outstanding under the Credit Agreement. Amounts outstanding under the Credit Agreement bear interest at a variable rate equal to monthly LIBOR, which was 0.98% as of March 31, 2017, plus a margin of 1.50%. An immediate 10% change in monthly LIBOR rates would not have had a material impact on our debt-related obligations, financial position or results of operations. In addition, given

 

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the short-term nature of the Credit Agreement, which matures in August 2017, we do not believe our exposure to interest rate risk is significant.

 

Our notes payable to related parties outstanding as of March 31, 2017 bore interest at fixed interest rates and, therefore, did not expose us to interest rate risk. Upon the closing of the IPO, we paid principal and interest aggregating $0.6 million due under the notes payable to related parties.

 

We do not engage in any hedging activities against changes in interest rates. We do not have any foreign currency or other derivative financial instruments.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

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 (the “Exchange Act”), refers to controls and procedures 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 SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to a company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

 

In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.

 

Based on the evaluation of our disclosure controls and procedures as of March 31, 2017, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2017, our disclosure controls and procedures were not effective at the reasonable assurance level as a result of the material weaknesses discussed below. Notwithstanding these material weaknesses, our management has concluded that the financial statements included elsewhere in this Quarterly Report present fairly, in all material respects, our financial position, results of operations and cash flows in conformity with generally accepted accounting principles (“GAAP”).

 

In connection with the preparation of our financial results for the years ended December 31, 2014 and 2015, our management concluded that, as of December 31, 2015, our internal control over financial reporting was not effective as a result of material weaknesses in our control over financial reporting. The material weaknesses remained unremediated as of December 31, 2016 and March 31, 2017. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. The material weaknesses identified in our internal control over financial reporting included the following:

 

We did not design or maintain an effective control environment commensurate with our financial reporting requirements.  We lacked a sufficient number of trained professionals with an appropriate level of accounting knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately.  This material weakness contributed to the following material weakness:

 

·                  We did not design and maintain formal accounting policies, procedures and controls to achieve complete, accurate and timely financial accounting, reporting and disclosures, including controls over the preparation and review of account reconciliations and journal entries. Additionally, we did not design and maintain controls over the appropriate classification and presentation of accounts and disclosures in the financial statements.

 

·                  We did not design and maintain formal accounting policies, processes and controls to analyze, account for and disclose complex transactions. Specifically, we did not design and maintain controls to analyze, account for and disclose complex licensing agreements, income taxes, variable interest

 

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entities, debt arrangements, equity method investments, share-based compensation arrangements, derivative liabilities, warrants to purchase common shares and contingently issuable equity.

 

·                  We did not design and maintain controls over our supervision and review of the completeness and accuracy of third-party vendors’ computations supporting our common share valuations.

 

·                  We did not design and maintain controls over the operating effectiveness of information technology, or IT, general controls for information systems that are relevant to the preparation of our financial statements.  Specifically, we did not design and maintain effective controls over program change management; user access, including segregation of duties; or computer operations.

 

Changes in Internal Controls over Financial Reporting

 

During the three months ended March 31, 2017, we hired a corporate controller to begin to address the above-referenced material weaknesses.

 

Except as described above, there has been no change in our internal control over financial reporting during the three months ended March 31, 2017 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

 

From time to time, we may be subject to litigation and claims arising in the ordinary course of business. We are not currently a party to any material legal proceedings and we are not aware of any pending or threatened legal proceeding against us that we believe could have a material adverse effect on our business, operating results, cash flows or financial condition.

 

Item 1A. Risk Factors

 

You should carefully consider the risks described below, as well as general economic and business risks and the other information in this Quarterly Report on Form 10-Q. The occurrence of any of the events or circumstances described below or other adverse events could have a material adverse effect on our business, results of operations and financial condition and could cause the trading price of our common stock to decline. Additional risks or uncertainties not presently known to us or that we currently deem immaterial may also harm our business.

 

Risks Related to Our Financial Position and Need for Additional Capital

 

We have a limited operating history and have never generated any product revenues, which may make it difficult to evaluate the success of our business to date and to assess our future viability.

 

We were incorporated in 2013, and our operations to date have been largely focused on organizing and staffing our company, raising capital and in-licensing the rights to, and advancing the development of, our product candidates, including conducting preclinical studies and clinical trials. We have not yet demonstrated an ability to successfully complete later-stage clinical trials, obtain marketing approvals, manufacture products on a commercial scale, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful commercialization. Consequently, predictions about our future success or viability may not be as accurate as they could be if we had a longer operating history or a history of successfully developing and commercializing products.

 

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We expect our financial condition and operating results to continue to fluctuate from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. We will need to eventually transition from a company with a research and development focus to a company capable of undertaking commercial activities. We may encounter unforeseen expenses, difficulties, complications and delays, and may not be successful in such a transition.

 

We have incurred significant operating losses since inception and anticipate that we will continue to incur substantial operating losses for the foreseeable future and may never achieve or maintain profitability.

 

Since our inception, we have incurred significant operating losses. Our net loss was $18.8 million and $63.5 million for the three months ended March 31, 2017 and the year ended December 31, 2016, respectively. As of March 31, 2017, we had an accumulated deficit of $94.2 million. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. None of our product candidates have been approved for marketing in the United States, or in any other jurisdiction, and may never receive such approval. It could be several years, if ever, before we have a commercialized product that generates significant revenues. As a result, we are uncertain when or if we will achieve profitability and, if so, whether we will be able to sustain it. The net losses we incur may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase substantially as we:

 

·                  continue the development of our product candidates, including the initiation of two Phase 3 clinical trials and a long-term safety study of rimegepant for the acute treatment of migraine, the completion of our ongoing Phase 2/3 clinical trial of trigriluzole for the treatment of spinocerebellar ataxia, or SCA, and the initiation and conduct of additional clinical trials and preclinical studies for our other product candidates for various neurological indications;

 

·                  make required milestone and royalty payments under the license agreements by which we acquired some of the rights to our product candidates;

 

·                  initiate preclinical studies and clinical trials for any additional indications for our current product candidates and any future product candidates that we may pursue;

 

·                  continue to build our portfolio of product candidates through the acquisition or in-license of additional product candidates or technologies;

 

·                  continue to develop, maintain, expand and protect our intellectual property portfolio;

 

·                  pursue regulatory approvals for our current and future product candidates that successfully complete clinical trials;

 

·                  ultimately establish a sales, marketing and distribution infrastructure to commercialize any product candidate for which we may obtain marketing approval;

 

·                  hire additional clinical, regulatory, scientific and accounting personnel; and

 

·                  incur additional legal, accounting and other expenses in operating as a public company.

 

To become and remain profitable, we must develop and eventually commercialize one or more product candidates with significant market potential. This will require us to be successful in a range of challenging activities, including completing clinical trials of our product candidates, developing commercial scale manufacturing processes, obtaining marketing approval, manufacturing, marketing and selling any current and future product candidates for which we may obtain marketing approval, and satisfying any post-marketing requirements. We are only in the preliminary stages of most of these activities and, in some cases, have not yet commenced certain of these activities.

 

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We may never succeed in any or all of these activities and, even if we do, we may never generate sufficient revenue to achieve profitability.

 

Because of the numerous risks and uncertainties associated with product development, we are unable to accurately predict the timing or amount of expenses or when, or if, we will obtain marketing approval to commercialize any of our product candidates. If we are required by the U.S. Food and Drug Administration, or FDA, or other regulatory authorities such as the European Medicines Agency, or EMA, to perform studies and trials in addition to those currently expected, or if there are any delays in the development, or in the completion of any planned or future preclinical studies or clinical trials of our current or future product candidates, our expenses could increase and profitability could be further delayed.

 

Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, maintain our research and development efforts, expand our business or continue our operations. A decline in the value of our company also could cause you to lose all or part of your investment.

 

We will need substantial additional funding to pursue our business objectives. If we are unable to raise capital when needed or on terms favorable to us, we could be forced to curtail our planned operations and the pursuit of our growth strategy.

 

Identifying potential product candidates and conducting preclinical studies 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. We expect our expenses to increase in connection with our ongoing activities, particularly as we continue to develop our product candidates. Our expenses could increase beyond our current expectations if the FDA requires us to perform clinical trials and other studies in addition to those that we currently anticipate. For example, in our trigriluzole clinical program, we recently enrolled the first patient in our Phase 2/3 clinical trial of trigriluzole for the treatment of SCA, and, given the small number of SCA patients, we believe that, if successful, this Phase 2/3 clinical trial will be the only pivotal trial necessary to support regulatory approval. Likewise, due to the small number of patients with Rett syndrome, we believe that BHV-5000 will require only a single pivotal trial. However, the FDA ordinarily requires two well-controlled clinical trials prior to marketing approval of a product candidate. If the FDA requires us to conduct additional clinical trials of trigriluzole or BHV-5000, we would incur substantial additional, unanticipated expenses in order to obtain regulatory approval of those product candidates.

 

In addition, our product candidates, if approved, may not achieve commercial success. Our revenue, if any, will be derived from sales of products that we do not expect to be commercially available for a number of years, if at all. Additionally, if we obtain marketing approval for our product candidates, we expect to incur significant expenses related to manufacturing, marketing, sales and distribution. Furthermore, we expect to incur additional costs associated with operating as a public company.

 

As of March 31, 2017, we had cash of $52.3 million, and in May 2017, we received an additional $176.4 million in net proceeds from the sale of our common shares in our IPO. We expect that our existing cash, including the net proceeds from our IPO, will enable us to repay our indebtedness and to fund our operating expenses and capital expenditure requirements through October 2018. This estimate is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we expect. Changes may occur beyond our control that would cause us to consume our available capital before that time, including changes in and progress of our development activities and changes in regulation. Our future capital requirements will depend on many factors, including:

 

·                  the scope, progress, results and costs of our ongoing and planned preclinical studies and clinical trials for our product candidates;

 

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·                  the timing and amount of milestone and royalty payments we are required to make under our license agreements;

 

·                  the extent to which we in-license or acquire other product candidates and technologies;

 

·                  the number and development requirements of other product candidates that we may pursue, and other indications for our current product candidates that we may pursue;

 

·                  the costs, timing and outcome of regulatory review of our product candidates;

 

·                  the costs and timing of future commercialization activities, including drug manufacturing, marketing, sales and distribution, for any of our product candidates for which we receive marketing approval;

 

·                  the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;

 

·                  our ability to establish strategic collaborations for the development or commercialization of some of our product candidates; and

 

·                  the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims brought by third parties against us.

 

We will require additional capital to complete our planned clinical development programs for our current product candidates to seek regulatory approval. If we receive regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, sales, marketing and distribution. Any additional capital raising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize our current and future product candidates, if approved.

 

In addition, we cannot guarantee that future financing will be available on a timely basis, in sufficient amounts or on terms acceptable to us, if at all. Moreover, the terms of any financing may adversely affect the holdings or the rights of our shareholders and the issuance of additional securities by us, whether equity or debt, or the market perception that such issuances are likely to occur, could cause the market price of our common shares to decline. As a result, we may not be able to access the capital markets as frequently as comparable U.S. companies. See “—Our status as a British Virgin Islands, or BVI, business company means that our shareholders enjoy certain rights that may limit our flexibility to raise capital, issue dividends and otherwise manage ongoing capital needs” for additional information related to our ability to timely raise capital. If we are unable to obtain funding on a timely basis on acceptable terms, we may be required to significantly curtail, delay or discontinue one or more of our research or development programs or the commercialization of any product candidates, if approved, or be unable to expand our operations or otherwise capitalize on our business opportunities, as desired.

 

Our independent registered public accounting firm has included an explanatory paragraph relating to our ability to continue as a going concern in its report on our most recent audited financial statements.

 

Our report from our independent registered public accounting firm for the year ended December 31, 2016 includes an explanatory paragraph stating that our recurring losses from operations since inception and required additional funding to finance our operations raise substantial doubt about our ability to continue as a going concern. If we are unable to obtain sufficient funding, our business, prospects, financial condition and results of operations will be materially and adversely affected and we may be unable to continue as a going concern. If we are unable to continue

 

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as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our audited financial statements, and it is likely that investors will lose all or a part of their investment. If we seek additional financing to fund our business activities in the future and there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding to us on commercially reasonable terms or at all.

 

We are subject to significant obligations, including to potentially make significant payments under the license agreements by which we acquired the rights to several of our product candidates.

 

In July 2016, we acquired the rights to rimegepant and another product candidate, BHV-3500, pursuant to a license agreement with Bristol-Myers Squibb Company, or BMS, and in October 2016, we acquired the rights to BHV-5000 pursuant to a license agreement with AstraZeneca AB, or AstraZeneca. We are subject to significant obligations under these agreements, including payment obligations upon achievement of specified milestones and royalties on product sales, as well as other material obligations. We may be obligated to pay BMS up to $127.5 million in development milestones for rimegepant or a derivative thereof, up to $74.5 million in development milestones for any licensed product other than rimegepant, and up to $150.0 million in commercial milestones for each licensed product. We may also be obligated to pay AstraZeneca up to $30.0 million in development milestones for licensed products for the treatment of Rett syndrome, up to $60.0 million in development milestones for licensed products for indications other than Rett syndrome, and up to $120.0 million in commercial milestones. We are also obligated to pay fixed royalties based on net sales of rimegepant, BHV-3500 and BHV-5000, or any other product that is a licensed product under those agreements. If these payments become due under the terms of our license agreements with BMS and AstraZeneca, we may not have sufficient funds available to meet our obligations and our development efforts may be materially harmed.

 

In addition, our license agreements with BMS and AstraZeneca obligate us to use commercially reasonable efforts to develop and commercialize product candidates, to provide BMS and AstraZeneca with development reports documenting our progress, and to provide them with data from certain clinical trials. In addition, such license agreements provide BMS and AstraZeneca with rights of first negotiation, triggered by their receipt of a summary of certain top-line data from certain of our clinical trials, to regain the respective rights we have in-licensed from them. If either BMS or AstraZeneca exercises their right of first negotiation, we will be required to negotiate in good faith with BMS or AstraZeneca, as the case may be, for a specified period of time before we can enter into negotiations with third parties to sublicense these rights. BMS’s and AstraZeneca’s rights of first negotiation may adversely impact or delay our ability to enter into collaborations with third parties for the development of these compounds. Our license agreement with BMS further provides that any sublicense, other than to an affiliate or a third-party manufacturer, requires BMS’ prior written consent, not to be unreasonably withheld or delayed. Our license agreement with AstraZeneca further provides that, except with respect to wholly owned subsidiaries, we cannot assign the agreement without their consent, even in the event of a change of control. This could adversely impact or delay our ability to effect certain transactions.

 

Moreover, under our agreement with BMS, until 2023, neither we nor our affiliates may, ourselves or through or in collaboration with a third party, engage directly or indirectly in the clinical development or commercialization of competitive compounds related to the CGRP-based mechanism of action of the licensed products. In the event that we are or become non-compliant with this provision due to licensing, collaboration or acquisition activity, we must either divest ourselves of the competitive compound within a certain period of time or negotiate with BMS to have the competitive compound included as a licensed product under our agreement with BMS. The failure to so divest or reach terms with BMS may result in the termination of our license with BMS. These prohibitions could adversely impact or delay our ability to effect certain transactions, such as our ability to acquire or be acquired by a third party.

 

Raising additional capital may cause dilution to our shareholders, restrict our operations or require us to relinquish rights to our intellectual property or future revenue streams.

 

Until such time as we can generate substantial product revenue, if ever, we expect to finance our operations through a combination of equity offerings, debt financings and license and development agreements in connection with any

 

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future collaborations. We do not have any committed external source of funds. In the event we seek additional funds, we may raise additional capital through the sale of equity or convertible debt securities. In such an event, our existing shareholders may experience substantial dilution, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of the holders of our common shares. Debt financing, if available, could result in increased fixed payment obligations and may involve agreements that include restrictive covenants, such as limitations on our ability to incur additional debt, make capital expenditures, acquire, sell or license intellectual property rights or declare dividends, and other operating restrictions that could hurt our ability to conduct our business.

 

Further, if we raise additional capital through collaborations, strategic alliances, or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our intellectual property future revenue streams, research programs or product candidates, or grant licenses on terms that may not be favorable to us.

 

Risks Related to the Development of Our Product Candidates

 

We depend entirely on the success of a limited number of product candidates, which are in clinical development and none of which have completed a pivotal trial. If we do not obtain regulatory approval for and successfully commercialize one or more of our product candidates or we experience significant delays in doing so, we may never become profitable.

 

We do not have any products that have received regulatory approval and may never be able to develop marketable product candidates. We expect that a substantial portion of our efforts and expenses over the next few years will be devoted to the development of our product candidates; specifically, the commencement of two Phase 3 trials of rimegepant, the conducting of our ongoing Phase 2/3 trial of trigriluzole, and other preclinical and clinical activities related to BHV-0223, BHV-5000 and BHV-3500. As a result, our business currently depends heavily on the successful development, regulatory approval and, if approved, commercialization of these product candidates. We cannot be certain that our product candidates will receive regulatory approval or will be successfully commercialized even if they receive regulatory approval. The research, testing, manufacturing, safety, efficacy, labeling, approval, sale, marketing and distribution of our product candidates are, and will remain, subject to comprehensive regulation by the FDA and similar foreign regulatory authorities. Before obtaining regulatory approvals for the commercial sale of any product candidate, we must demonstrate through pre-clinical studies and clinical trials that the product candidate is safe and effective for use in each target indication. Drug development is a long, expensive and uncertain process, and delay or failure can occur at any stage of any of our clinical trials. Failure to obtain regulatory approval for our product candidates in the United States will prevent us from commercializing and marketing our product candidates. The success of our product candidates will depend on several additional factors, including:

 

·                  completing clinical trials that demonstrate their efficacy and safety;

 

·                  receiving marketing approvals from applicable regulatory authorities;

 

·                  completing any post-marketing studies required by applicable regulatory authorities;

 

·                  establishing commercial manufacturing capabilities;

 

·                  launching commercial sales, marketing and distribution operations;

 

·                  the prevalence and severity of adverse events experienced with our product candidates;

 

·                  acceptance of our product candidates by patients, the medical community and third-party payors;

 

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·                  a continued acceptable safety profile following approval;

 

·                  obtaining and maintaining healthcare coverage and adequate reimbursement for our product candidates;

 

·                  competing effectively with other therapies, including with respect to the sales and marketing of our product candidates, if approved; and

 

·                  qualifying for, maintaining, enforcing and defending our intellectual property rights and claims.

 

Many of these factors are beyond our control, including the time needed to adequately complete clinical testing, the regulatory submission process, potential threats to our intellectual property rights and changes in the competitive landscape. It is possible that none of our product candidates will ever obtain regulatory approval, even if we expend substantial time and resources seeking such approval. 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 successfully complete clinical trials, obtain regulatory approval or, if approved, commercialize our product candidates, which would materially harm our business, financial condition and results of operations.

 

Clinical trials are very expensive, time-consuming and difficult to design and implement and involve uncertain outcomes. Furthermore, results of earlier preclinical studies and clinical trials may not be predictive of results of future preclinical studies or clinical trials.

 

The risk of failure for our product candidates is high. It is impossible to predict when or if any of our product candidates will prove effective or safe in humans or will receive regulatory approval. To obtain the requisite regulatory approvals to market and sell any of our product candidates, we must demonstrate through extensive preclinical studies and clinical trials that our product candidates are safe and effective in humans for use in each target indication. Clinical testing is expensive and can take many years to complete, and the outcome is inherently uncertain. Failure can occur at any time during the clinical trial process.

 

In addition, the results of preclinical studies and earlier clinical trials may not be predictive of the results of later-stage preclinical studies or clinical trials. The results generated to date in preclinical studies or clinical trials for our product candidates do not ensure that later preclinical studies or clinical trials will demonstrate similar results. Further, we have limited clinical data for each of our product candidates and have not completed Phase 3 clinical trials for any of our product candidates. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical and earlier stage clinical trials. For example, the favorable results of the Phase 2b trial of rimegepant may not be predictive of similar results in subsequent trials. In particular, we are developing a new dosage form of rimegepant for use in our planned Phase 3 clinical trials of rimegepant. We cannot be certain that we will observe the same results in our Phase 3 trials with the new dosage form as we did in the Phase 2b clinical trial of rimegepant. In later-stage clinical trials, we will likely be subject to more rigorous statistical analyses than in completed earlier stage clinical trials. A number of companies in the biopharmaceutical industry have suffered significant setbacks in later-stage clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials, and we cannot be certain that we will not face similar setbacks. 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 approval of their products.

 

In some instances, there can be significant variability in safety or efficacy results between different clinical trials of the same product candidate due to numerous factors, including changes in clinical trial procedures set forth in protocols, differences in the size and type of the patient populations, adherence to the dosing regimen and other clinical trial protocols, and the rate of dropout among clinical trial participants. If we fail to produce positive results in our planned pre-clinical studies or clinical trials of any of our product candidates, the development timeline and regulatory approval and commercialization prospects for our product candidates, and, correspondingly, our business and financial prospects, would be materially adversely affected.

 

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We have limited experience in drug discovery and drug development, and we have never had a drug approved.

 

Because we in-licensed rimegepant and BHV-3500 from BMS and BHV-5000 from AstraZeneca, we were not involved in and had no control over the preclinical and clinical development of these product candidates prior to entering into these in-license agreements. In addition, we are relying on BMS and AstraZeneca to have conducted such research and development in accordance with the applicable protocol, legal, regulatory and scientific standards, having accurately reported the results of all clinical trials conducted prior to our acquisition of the applicable product candidate, and having correctly collected and interpreted the data from these studies and trials. To the extent any of these has not occurred, our expected development time and costs may be increased, which could adversely affect our prospects for marketing approval of, and receiving any future revenue from, these product candidates.

 

Clinical trials may be delayed, suspended or terminated for many reasons, which will increase our expenses and delay the time it takes to develop our product candidates.

 

We may experience delays in our ongoing or future preclinical studies or clinical trials, and we do not know whether future preclinical studies or clinical trials will begin on time, need to be redesigned, enroll an adequate number of patients on time or be completed on schedule, if at all. The commencement and completion of clinical trials for our clinical product candidates may be delayed, suspended or terminated as a result of many factors, including:

 

·                  the FDA disagreeing as to the design, protocol or implementation of our clinical trials;

 

·                  the delay or refusal of regulators or institutional review boards, or IRBs, to authorize us to commence a clinical trial at a prospective trial site;

 

·                  changes in regulatory requirements, policies and guidelines;

 

·                  delays or failure to reach agreement on acceptable terms with prospective clinical research organizations, or CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

·                  delays in patient enrollment and variability in the number and types of patients available for clinical trials;

 

·                  the inability to enroll a sufficient number of patients in trials, particularly in orphan indications, to observe statistically significant treatment effects in the trial;

 

·                  having clinical sites deviate from the trial protocol or dropping out of a trial;

 

·                  negative or inconclusive results from ongoing preclinical studies or clinical trials, which may require us to conduct additional preclinical studies or clinical trials or to abandon projects that we expect to be promising;

 

·                  safety or tolerability concerns that could cause us to suspend or terminate a trial if we find that the participants are being exposed to unacceptable health risks;

 

·                  reports from pre-clinical or clinical testing of other similar therapies that raise safety or efficacy concerns;

 

·                  regulators or IRBs requiring that we or our investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or safety concerns, among others;

 

·                  lower than anticipated retention rates of patients and volunteers in clinical trials;

 

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·                  our CROs or clinical trial sites failing to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all, deviating from the protocol or dropping out of a trial;

 

·                  delays relating to adding new clinical trial sites;

 

·                  difficulty in maintaining contact with patients after treatment, resulting in incomplete data;

 

·                  delays in establishing the appropriate dosage levels;

 

·                  the quality or stability of the product candidate falling below acceptable standards;

 

·                  the inability to produce or obtain sufficient quantities of the product candidate to commence or complete clinical trials; and

 

·                  exceeding budgeted costs due to difficulty in accurately predicting costs associated with clinical trials.

 

We could also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs or Ethics Committees of the institutions at which such trials are being conducted, by the Data Safety Monitoring Board for such trial or by the FDA or other regulatory authorities. Such authorities may suspend or terminate a clinical trial due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements, including the FDA’s current Good Clinical Practice, or GCP, regulations, or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial.

 

We will need to take a variety of steps before commencing our two planned Phase 3 clinical trials and 12-month safety study of rimegepant and our planned clinical trials of BHV-0223 and BHV-5000. With respect to rimegepant, we had an end of Phase 2 meeting with the FDA in March 2017 at which we reviewed the Phase 2b clinical trial data with the FDA and presented our overall plan for our planned Phase 3 clinical trials and safety study and our proposed path to registration. At the meeting, we agreed to submit our trial protocols to the FDA prior to the commencement of our Phase 3 trials. The FDA could disagree with the proposed design of our planned Phase 3 clinical trials and safety study and could require, in any trial or all trials, a larger number of patients or a longer course of treatment than our current expectations. If the FDA takes such positions, the costs of our planned Phase 3 clinical trials and safety study of rimegepant could increase significantly and the potential commercialization of rimegepant could be delayed. The FDA also may require that we conduct additional clinical, nonclinical or manufacturing validation studies and submit such data before it will consider a NDA.

 

In addition, prior to commencing our two planned Phase 3 clinical trials, we will have to obtain sufficient clinical supply of rimegepant and complete a study to compare the pharmacokinetics for a new formulation of rimegepant with the prior formulation. We cannot be certain that the results observed in our Phase 2b clinical trial will be replicated with the new formulation.

 

In order to commence our planned clinical trials of BHV-0223 and BHV-5000, we will have to complete development of a commercial-grade formulation and obtain sufficient clinical supply of both product candidates.

 

If we experience delays in the commencement or completion of any clinical trial of our product candidates, or if any of our clinical trials are terminated, the commercial prospects of our product candidates may be harmed, and our ability to generate product revenue from sales of any of these product candidates will be delayed or not realized at all.

 

We do not know whether any of our preclinical studies or clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Any delays in completing our clinical trials will increase our

 

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costs, slow down our product candidate development and approval process and jeopardize our ability to commence product sales and generate revenue from product sales. Any of these occurrences may significantly harm our business, financial condition and prospects. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates. Significant preclinical study or clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do and impair our ability to successfully commercialize our product candidates.

 

The regulatory approval process of the FDA and comparable foreign jurisdictions is lengthy, time-consuming and unpredictable.

 

Our future success is dependent upon our ability to successfully develop, obtain regulatory approval for and then successfully commercialize one or more of our product candidates. The time required to obtain approval by the FDA is unpredictable but typically takes many years following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval is generally uncertain, may change during the course of a product candidate’s clinical development and may vary among jurisdictions. We have not obtained regulatory approval for any product candidate and it is possible that none of our existing product candidates or any product candidates we may seek to develop in the future will ever obtain regulatory approval. Neither we nor any future collaborator is permitted to market any of our product candidates in the United States or abroad until we receive regulatory approval of a New Drug Application, or NDA, from the FDA or approval from the EMA or other applicable foreign regulatory agency.

 

Prior to obtaining approval to commercialize a product candidate in any jurisdiction, we must demonstrate to the satisfaction of the FDA, EMA or any comparable foreign regulatory agency, that such product candidates are safe and effective for their intended uses. Results from preclinical studies and clinical trials can be interpreted in different ways. The FDA, EMA or any comparable foreign regulatory agency can delay, limit or deny approval of our product candidates or require us to conduct additional preclinical or clinical testing or abandon a program for many reasons, including:

 

·                  the FDA, EMA or the applicable foreign regulatory agency’s disagreement with the number, design, conduct or implementation of our preclinical studies and clinical trials;

 

·                  negative or ambiguous results from our clinical trials or results that may not meet the level of statistical significance required by the FDA, EMA or any comparable foreign regulatory agency for approval;

 

·                  serious and unexpected drug-related side effects experienced by participants in our clinical trials or by individuals using drugs similar to our product candidates;

 

·                  our inability to demonstrate to the satisfaction of the FDA, EMA or the applicable foreign regulatory agency that our product candidates are safe and effective for their proposed indications;

 

·                  the FDA’s, EMA’s or the applicable foreign regulatory agency’s disagreement with the interpretation of data from preclinical studies or clinical trials;

 

·                  actions by the CROs that we retain to conduct our preclinical studies and clinical trials, which are outside of our control and that materially adversely impact our preclinical studies and clinical trials;

 

·                  the FDA’s, EMA’s or other applicable foreign regulatory agencies’ disagreement with the interpretation of data from preclinical studies or clinical trials;

 

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·                  our inability to demonstrate the clinical and other benefits of our product candidates outweigh any safety or other perceived risks;

 

·                  the FDA’s, EMA’s or the applicable foreign regulatory agency’s requirement for additional preclinical studies or clinical trials;

 

·                  the FDA’s, EMA’s or the applicable foreign regulatory agency’s disagreement regarding the formulation, labeling or the specifications of our product candidates;

 

·                  the FDA’s, EMA’s or the applicable foreign regulatory agency’s failure to approve the manufacturing processes or facilities of third-party manufacturers with which we contract; or

 

·                  the potential for approval policies or regulations of the FDA, EMA or the applicable foreign regulatory agencies to significantly change in a manner rendering our clinical data insufficient for approval.

 

For example, with respect to our ongoing Phase 2/3 clinical trial for trigriluzole for the treatment of SCA, the FDA has stated that elements of the SARA (i.e., gait, stance, sitting and speech disturbance) appear capable of reflecting a clinically meaningful benefit for patients depending on how the scoring of these items is defined. If the scoring categories are based on clinically important distinctions, use of these items as a primary endpoint in studies intended to support approval could be appropriate. However, the FDA has stated its concern that our use of the SARA scale, as currently constructed, as a primary endpoint is not appropriate in this trial. No drug has been approved for the treatment of SCA and, therefore, a clear regulatory pathway for approval has not previously been established. Although we selected the SARA scale, which is a validated scale that has been used in a third-party clinical trial for the treatment of hereditary ataxias (including SCA), as the primary outcome measure for the trial based on advice of an advisory panel of ataxia experts, we plan to continue to interact with the FDA to discuss its concerns and consider incorporating any feedback in our analysis of the clinical trial data that we collect and measure with the SARA. Because we have already begun our Phase 2/3 clinical trial and the FDA has not suggested an alternative scale that it believes would be acceptable to assess clinical benefit in SCA, we have limited options to incorporate an alternate scale that has been validated and is accepted by the field’s experts as measuring clinically meaningful changes. As such, we cannot guarantee that the FDA or any future advisory committee will be satisfied with our approach using the SARA. We cannot guarantee that any regulatory agency or future advisory committee would interpret a successful outcome using the SARA as our primary measure in the same fashion that we would.

 

Any of our current or future product candidates could take a significantly longer time to gain regulatory approval than expected or may never gain regulatory approval. This could delay or eliminate any potential product revenue by delaying or terminating the potential commercialization of our product candidates.

 

Of the large number of drugs in development, only a small percentage successfully complete the FDA or foreign regulatory approval processes and are commercialized. The lengthy approval process as well as the unpredictability of future clinical trial results may result in our failing to obtain regulatory approval to market our product candidates, which would significantly harm our business, financial condition, results of operations and prospects.

 

FDA guidance regarding the approval of drugs for the treatment of acute migraine has recently changed. No drug has been approved under the new guidance, and it is not certain how such guidance will be interpreted and applied by the FDA. We intend to seek advice and guidance from the FDA including, at a minimum, requesting a pre-NDA meeting with the FDA prior to the submission of an NDA for any of our product candidates. If the feedback we receive is different from what we currently anticipate, this could delay the development and regulatory approval process for these product candidates.

 

We generally plan to seek regulatory approval to commercialize our product candidates in the United States, the European Union and other key global markets. To obtain regulatory approval in other countries, we must comply

 

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with numerous and varying regulatory requirements of such other countries regarding safety, efficacy, chemistry, manufacturing and controls, clinical trials, commercial sales, pricing and distribution of our product candidates. Even if we are successful in obtaining approval in one jurisdiction, we cannot ensure that we will obtain approval in any other jurisdiction. Failure to obtain approval in one jurisdiction may negatively impact our ability to obtain approval elsewhere. Failure to obtain marketing authorization for our product candidates will result in our being unable to market and sell such products. If we fail to obtain approval in any jurisdiction, the geographic market for our product candidates could be limited. Similarly, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates or may grant approvals for more limited patient populations than requested.

 

Even if we eventually complete clinical testing and receive approval of an NDA or foreign marketing application for our product candidates, the FDA or the applicable foreign regulatory agency may grant approval contingent on the performance of costly additional clinical trials, including Phase 4 clinical trials or the implementation of a Risk Evaluation and Mitigation Strategy, or REMS, which may be required to ensure safe use of the drug after approval. Any delay in obtaining, or inability to obtain, applicable regulatory approval would delay or prevent commercialization of that product candidate and would adversely impact our business and prospects.

 

Our product candidates may fail to demonstrate safety and efficacy in clinical trials, or may cause serious adverse or unacceptable side effects that could prevent or delay regulatory approval and commercialization, limit the commercial profile of an approved label, increase our costs, necessitate the abandonment or limitation of the development of some of our product candidates or result in significant negative consequences following marketing approval, if any.

 

Before obtaining regulatory approvals for the commercial sale of our product candidates, we must demonstrate through lengthy, complex and expensive preclinical testing and clinical trials that our product candidates are both safe and effective for use in each target indication, and failures can occur at any stage of testing. Clinical trials often fail to demonstrate efficacy or safety of the product candidate studied for the target indication.

 

For example, in its Phase 2b clinical trial, rimegepant dosed at 75 mg showed statistically significant improvement as compared to placebo on all four key migraine symptoms—pain, nausea, photophobia, phonophobia—which are inherently subjective endpoints that are difficult to measure. Patients in the trial were provided with an electronic data capturing device, or an electronic subject diary, which they used to record and rank their assessments of pain, nausea, photophobia and phonophobia at specified time points after they had taken the study medication following the occurrence of a moderate to severe migraine headache. The measurements from the trial were based on subjective patient feedback as recorded on their electronic subject diary, which can be influenced by factors outside of our control, and can vary widely from day to day for a particular patient, and from patient to patient and site to site within a clinical study. The placebo effect also tends to have a more significant impact on clinical trials involving subjective measures such as pain.

 

Moreover, undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label, the limitation of commercial potential or the delay or denial of regulatory approval by the FDA. Results of our clinical trials could reveal a high and unacceptable severity and prevalence of side effects or unexpected characteristics. Accordingly, we may need to abandon their development or limit development to certain uses or sub-populations in which such side effects are less prevalent, less severe or more acceptable from a risk-benefit perspective. Prior to any regulatory approval of rimegepant, we would need to complete a 12-month safety study as well as longer-term nonclinical toxicology and carcinogenicity studies. If any of these studies identify safety issues, we may need to complete additional studies, or abandon development of rimegepant. Many compounds that initially showed promise in preclinical or early-stage testing have later been found to cause side effects that restricted their use and prevented further development of the compound in the tested indication.

 

In animal studies, at very high doses, rimegepant was observed to have a negative effect on the liver. We observed elevated liver enzymes in one patient that received very high doses of rimegepant in a drug-drug interaction study.

 

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In the completed Phase 2b trial of rimegepant conducted by BMS, one patient dosed with rimegepant experienced an asymptomatic and mild increase in certain hepatic enzymes, which are a type of liver enzyme measured in a liver function test to detect damage and inflammation to the liver. Even though no patient treated with rimegepant in the Phase 2b trial had liver enzyme elevation that exceeded the level that is considered by the FDA to be a potentially meaningful indicator of severe drug-induced liver injury, we cannot guarantee that these safety and tolerability results will be replicated in our Phase 3 trials, and it is possible that rimegepant may be observed to cause unacceptable levels of adverse effects or serious adverse effects.

 

In addition, at our end of Phase 2 meeting, the FDA stated its desire to see a safety study in which patients received daily or near-daily dosing of rimegepant for at least three months. This desire stems from the FDA’s concern about a potential liver signal with the class of CGRP antagonists. The FDA stated that any risk of liver injury has to be very low and that exposure with the drug has to be sufficient to cap the risk of liver injury at a level acceptable for the migraine population. We believe the design of our long-term safety study may adequately address this concern by providing for the enrollment of approximately 600 patients who experience eight or more migraine days per month, who will, in the study, be allowed to use rimegepant on a daily basis, which we believe will generate safety data with respect to long-term, frequent use of rimegepant. However, the FDA may determine that our trial design or the data we collect is insufficient to address their concerns, in which case we could be required to conduct additional trials.

 

Occurrence of serious treatment-related side effects could impede subject recruitment and clinical trial enrollment or the ability of enrolled patients to complete the trial, require us to halt the clinical trial, and prevent receipt of regulatory approval from the FDA. They could also adversely affect physician or patient acceptance of our product candidates or result in potential product liability claims. Any of these occurrences may harm our business, financial condition and prospects significantly.

 

If any of our product candidates receives marketing approval and we, or others, later discover that the drug is less effective than previously believed or causes undesirable side effects that were not previously identified, our ability to market the drug could be compromised.

 

Clinical trials of our product candidates are conducted in carefully defined subsets of patients who have agreed to enter into clinical trials. Consequently, it is possible that our clinical trials may indicate an apparent positive effect of a product candidate that is greater than the actual positive effect, if any, or alternatively fail to identify undesirable side effects. If one or more of our product candidates receives regulatory approval, and we, or others, later discover that they are less effective than previously believed, or cause undesirable side effects, a number of potentially significant negative consequences could result, including:

 

·                  withdrawal or limitation by regulatory authorities of approvals of such product;

 

·                  seizure of the product by regulatory authorities;

 

·                  recall of the product;

 

·                  restrictions on the marketing of the product or the manufacturing process for any component thereof;

 

·                  requirement by regulatory authorities of additional warnings on the label, such as a “black box” warning or contraindication;

 

·                  requirement that we implement a REMS or create a medication guide outlining the risks of such side effects for distribution to patients;

 

·                  commitment to expensive additional safety studies prior to approval or post-marketing studies required by regulatory authorities of such product;

 

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·                  commitment to expensive post-marketing studies as a prerequisite of approval by regulatory authorities of such product;

 

·                  the product may become less competitive;

 

·                  initiation of regulatory investigations and government enforcement actions;

 

·                  initiation of legal action against us to hold us liable for harm caused to patients; and

 

·                  harm to our reputation and resulting harm to physician or patient acceptance of our products.

 

Any of these events could prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved, and could significantly harm our business, financial condition, and results of operations.

 

Our clinical drug development program may not uncover all possible adverse events that patients who use our products may experience. The number of subjects exposed to treatment and the average exposure time in the clinical development program may be inadequate to detect rare adverse events, or chance findings, that may only be detected once our products are administered to more patients and for greater periods of time.

 

Clinical trials by their nature utilize a sample of the potential patient population. However, with a limited number of subjects and limited duration of exposure, rare and severe side effects of our product candidates may only be uncovered when a significantly larger number of patients are exposed to the product.

 

Although we have monitored the subjects in our studies for certain safety concerns and we have not seen evidence of significant safety concerns in our clinical trials, patients treated with our product candidates, if approved, may experience adverse reactions. If safety problems occur or are identified after one of our products reaches the market, the FDA or comparable foreign regulatory authorities may require that we amend the labeling of our product, recall our product, or even withdraw approval for our product. Serious adverse events deemed to be caused by our product candidates, either before or after receipt of marketing approval, could have a material adverse effect on the development of our drug candidates and our business as a whole.

 

We depend on enrollment of patients in our clinical trials for our product candidates. If we are unable to enroll patients in our clinical trials, our research and development efforts could be adversely affected.

 

Identifying and qualifying patients to participate in clinical trials of our product candidates is critical to our success. Successful and timely completion of clinical trials will require that we enroll a sufficient number of patients who remain in the study until its conclusion. If we are unable to enroll a sufficient number of patients in our clinical trials, our timelines for recruiting patients, conducting clinical trials and obtaining regulatory approval of potential products may be delayed. These delays could result in increased costs, delays in advancing our product development, delays in testing the effectiveness of our technology or termination of our clinical trials altogether.

 

We cannot predict how successful we will be at enrolling patients in future clinical trials. Patient enrollment is affected by other factors including:

 

·                  the eligibility criteria for the trial in question;

 

·                  the perceived risks and benefits of the product candi