sage-10q_20160930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

For the quarterly period ended September 30, 2016

OR

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

For the transition period from                      to                     

Commission file number: 001-36544

 

Sage Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

27-4486580

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

215 First Street

Cambridge, Massachusetts 02142

(Address of principal executive office) (Zip Code)

Registrant’s telephone number, including area code: (617) 299-8380

 

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      No  

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      No  

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

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

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

As of November 1, 2016, there were 37,167,174 shares of the registrant’s Common Stock, $0.0001 par value per share, outstanding.

 

 

 

 

 


 

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, or Quarterly Report, contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

 

our plans to develop and commercialize our product candidates in the central nervous system, or CNS, disorders we discuss in this Quarterly Report, and potentially in other indications;

 

our ability, within the expected timeframes, to complete our ongoing non-clinical studies and clinical trials; to announce the results of such studies and trials; to advance our product candidates into additional clinical trials, including pivotal clinical trials; and to successfully complete such clinical trials;

 

our expectations as to the sufficiency of the planned clinical development programs for our product candidates, if  successful, to support  regulatory approval; our plans with respect to filing for regulatory approval for our product candidates, if clinical development is successful; and the potential to obtain such approval and to commercialize any product, if approved;

 

our estimates regarding expenses; use of cash; timing of future cash needs; and capital requirements;

 

the potential for future revenues;

 

our expectations with respect to the availability of supplies of our product candidates, and the expected performance of our third-party manufacturers;

 

our expectations with respect to the performance of our contract research organizations and other third parties whose activities are important to our development and future commercialization efforts;

 

our ability to obtain and maintain intellectual property protection for our proprietary assets and other forms of exclusivity relevant to our business;

 

the estimated number of patients in indications of interest to us; the potential for our product candidates in those indications; the size of the potential markets for our product candidates; and our ability to serve those markets;

 

the anticipated rate and degree of market acceptance of our product candidates for any indication once approved;

 

the level of costs we may incur in connection with our activities, the possible timing and sources of future financings, and our ability to obtain additional financing when needed;

 

the potential for success of competing products that are or become available for the indications that we are pursuing or may in the future pursue;

 

the potential risk of loss of key scientific or management personnel; and

 

other risks and uncertainties, including those listed under Part II, Item 1A, Risk Factors.

Any forward-looking statements in this Quarterly Report reflect our current views with respect to future events and with respect to our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those described under Part II, Item 1A, Risk Factors and elsewhere in this Quarterly Report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

This Quarterly Report contains estimates, projections and other information concerning our industry, the general business environment, and the markets for certain diseases, including estimates regarding the potential size of those markets and the estimated incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties, and actual events, circumstances or numbers, including actual disease prevalence rates and market size, may differ materially from the information reflected in this Quarterly Report. Unless otherwise expressly stated, we obtained this industry, business information, market data, prevalence information and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data, and similar sources, in some cases applying our own assumptions and analysis that may, in the future, not prove to have been accurate.

 

 

2


 

Sage Therapeutics, Inc.

INDEX

 

 

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

4

 

 

Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015

 

4

 

 

Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months ended September 30, 2016 and 2015

 

5

 

 

Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2016 and 2015

 

6

 

 

Notes to Consolidated Financial Statements

 

7

Item 2.

 

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

 

17

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

29

Item 4.

 

Controls and Procedures

 

29

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

30

Item 1A.

 

Risk Factors

 

30

Item 6.

 

Exhibits

 

58

 

 

Signatures

 

59

 

 

3


 

PART I — FINANCIAL INFORMATION

Item 1.

Financial Statements

Sage Therapeutics, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share and per share data)

(Unaudited)

 

 

 

September 30,

2016

 

 

December 31,

2015

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

320,078

 

 

$

186,753

 

Marketable securities

 

 

111,192

 

 

 

 

Prepaid expenses and other current assets

 

 

3,418

 

 

 

1,738

 

Total current assets

 

 

434,688

 

 

 

188,491

 

Property and equipment, net

 

 

1,049

 

 

 

286

 

Restricted cash

 

 

564

 

 

 

39

 

Deferred offering costs

 

 

 

 

 

200

 

Total assets

 

$

436,301

 

 

$

189,016

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,237

 

 

$

5,159

 

Accrued expenses

 

 

17,093

 

 

 

10,148

 

Total current liabilities

 

 

22,330

 

 

 

15,307

 

Other liabilities

 

 

234

 

 

 

14

 

Total liabilities

 

 

22,564

 

 

 

15,321

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value per share; 5,000,000 shares authorized at

   September 30, 2016 and December 31, 2015, respectively; no shares issued or

   outstanding at September 30, 2016 and December 31, 2015, respectively

 

 

 

 

 

 

Common stock, $0.0001 par value per share; 120,000,000 shares authorized at

   September 30, 2016 and December 31, 2015, respectively; 37,165,124 and

   28,823,549 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively

 

 

4

 

 

 

3

 

Additional paid-in capital

 

 

678,194

 

 

 

335,032

 

Accumulated deficit

 

 

(264,426

)

 

 

(161,340

)

Accumulated other comprehensive items

 

 

(35

)

 

 

 

Total stockholders’ equity

 

 

413,737

 

 

 

173,695

 

Total liabilities and stockholders’ equity

 

$

436,301

 

 

$

189,016

 

 

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

 

 

4


 

Sage Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

29,075

 

 

$

17,478

 

 

$

78,752

 

 

$

48,981

 

General and administrative

 

 

8,989

 

 

 

6,604

 

 

 

25,033

 

 

 

17,057

 

Total operating expenses

 

 

38,064

 

 

 

24,082

 

 

 

103,785

 

 

 

66,038

 

Loss from operations

 

 

(38,064

)

 

 

(24,082

)

 

 

(103,785

)

 

 

(66,038

)

Interest income, net

 

 

275

 

 

 

53

 

 

 

717

 

 

 

115

 

Other expense, net

 

 

(7

)

 

 

(6

)

 

 

(18

)

 

 

(10

)

Net loss

 

$

(37,796

)

 

$

(24,035

)

 

$

(103,086

)

 

$

(65,933

)

Net loss per share—basic and diluted

 

$

(1.15

)

 

$

(0.84

)

 

$

(3.20

)

 

$

(2.40

)

Weighted average common shares outstanding—basic and

   diluted

 

 

32,975,897

 

 

 

28,737,743

 

 

 

32,218,204

 

 

 

27,430,275

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(37,796

)

 

$

(24,035

)

 

$

(103,086

)

 

$

(65,933

)

Other comprehensive items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on marketable securities

 

 

(74

)

 

 

 

 

 

(35

)

 

 

 

Total other comprehensive loss

 

 

(74

)

 

 

 

 

 

(35

)

 

 

 

Total comprehensive loss

 

$

(37,870

)

 

$

(24,035

)

 

$

(103,121

)

 

$

(65,933

)

 

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

 

 

5


 

Sage Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(103,086

)

 

$

(65,933

)

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

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

12,927

 

 

 

11,154

 

Non-cash licensing and consulting fees

 

 

 

 

 

1,211

 

Premium on marketable securities

 

 

(663

)

 

 

 

Amortization of premium on marketable securities

 

 

87

 

 

 

 

Depreciation

 

 

199

 

 

 

83

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(1,680

)

 

 

(1,548

)

Accounts payable

 

 

116

 

 

 

808

 

Accrued expenses and other liabilities

 

 

7,198

 

 

 

1,661

 

Net cash used in operating activities

 

 

(84,902

)

 

 

(52,564

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Proceeds from sales of marketable securities

 

 

7,999

 

 

 

 

Purchases of marketable securities

 

 

(118,650

)

 

 

 

Purchases of property and equipment

 

 

(901

)

 

 

(160

)

Increase in restricted cash

 

 

(525

)

 

 

 

Net cash used in investing activities

 

 

(112,077

)

 

 

(160

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from stock option exercises and employee stock purchase plan issuances

 

 

728

 

 

 

663

 

Payments of offering costs

 

 

(599

)

 

 

(548

)

Proceeds from public offerings of common stock, net of commissions and underwriting

   discounts

 

 

330,175

 

 

 

129,720

 

Net cash provided by financing activities

 

 

330,304

 

 

 

129,835

 

Net increase in cash and cash equivalents

 

 

133,325

 

 

 

77,111

 

Cash and cash equivalents at beginning of period

 

 

186,753

 

 

 

127,766

 

Cash and cash equivalents at end of period

 

$

320,078

 

 

$

204,877

 

Supplemental disclosure of non-cash financing activities

 

 

 

 

 

 

 

 

Public offering costs included in accounts payable or accrued expenses

 

$

 

 

$

4

 

Purchases of property and equipment included in accounts payable or accrued expenses

 

$

106

 

 

$

 

 

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

 

 

6


 

SAGE THERAPEUTICS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

1. Nature of Operations

Sage Therapeutics, Inc. (“Sage” or the “Company”) is a clinical-stage biopharmaceutical company committed to developing and commercializing novel medicines to treat life-altering central nervous system (“CNS”) disorders, where there are inadequate or no approved existing therapies. The Company is targeting CNS indications where patient populations are easily identified, clinical endpoints are well-defined, and development pathways are feasible.

The Company was incorporated under the laws of the State of Delaware on April 16, 2010, and commenced operations on January 19, 2011 as Sterogen Biopharma, Inc. On September 13, 2011, the Company changed its name to Sage Therapeutics, Inc. under its Second Amended and Restated Certificate of Incorporation.

The Company is subject to risks and uncertainties common to companies in the biotech industry, including, but not limited to, the risks associated with developing product candidates at each stage of non-clinical and clinical development; the challenges associated with gaining regulatory approval of such product candidates; the risks associated with commercializing pharmaceutical products, if it is able to obtain regulatory approval; the potential for development by third parties of new technological innovations that may compete with the Company’s products; the dependence on key personnel; the challenges of protecting proprietary technology; the need to comply with government regulations; the high costs of drug development; and the uncertainty of being able to secure additional capital when needed to fund operations.

The Company has incurred losses and negative cash flows from operations since its inception. As of September 30, 2016, the Company had an accumulated deficit of $264.4 million. From its inception through September 30, 2016, the Company received net proceeds of $643.3 million from the sales of redeemable convertible preferred stock, the issuance of convertible notes, and the proceeds from its initial public offering (“IPO”) in July 2014 and follow-on underwritten public offerings in April 2015, January 2016 and September 2016. Based on its current operating plans, the Company believes its cash, cash equivalents and marketable securities of $431.3 million as of September 30, 2016 will be sufficient to fund its anticipated level of operations and capital expenditures into the second quarter of 2018.

 

 

2. Summary of Significant Accounting Policies

Basis of Presentation

The unaudited interim consolidated financial statements of the Company included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from this report, as is permitted by such rules and regulations. Accordingly, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2015.

The unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of September 30, 2016, its results of operations and comprehensive loss for the three and nine months ended September 30, 2016 and 2015, and its cash flows for the nine months ended September 30, 2016 and 2015. The condensed consolidated balance sheet at December 31, 2015 was derived from audited financial statements, but does not contain all of the footnote disclosures from the annual financial statements. The results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results for the year ending December 31, 2016, or for any future period.

Principles of Consolidation

The unaudited interim consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries as disclosed in Note 2, Summary of Significant Accounting Policies, within the “Notes to Consolidated Financial Statements” accompanying its Annual Report on Form 10-K for the fiscal year ended December 31, 2015. Intercompany accounts and transactions have been eliminated.

7


 

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Marketable securities

Marketable securities consist of investments with original maturities greater than ninety days. The Company considers its investment portfolio of investments to be available-for-sale. Accordingly, these investments are recorded at fair value, which is based on quoted market prices. Unrealized gains and losses are reported as a component of accumulated other comprehensive items in stockholders’ equity. Realized gains and losses and declines in value judged to be other than temporary are included as a component of other expense, net, based on the specific identification method. When determining whether a decline in value is other than temporary, the Company considers various factors, including whether the Company has the intent to sell the security, and whether it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis.

Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

 

Level 1

 

 

Quoted market prices in active markets for identical assets or liabilities.

 

 

 

 

 

Level 2

 

 

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

 

 

 

 

Level 3

 

 

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The Company’s cash equivalents and marketable securities at September 30, 2016 and December 31, 2015 were carried at fair value, determined according to the fair value hierarchy; see Footnote 3, Fair Value Measurements.

The carrying amounts reflected in the unaudited condensed consolidated balance sheets for accounts payable and accrued expenses approximate their fair values due to their short-term maturities at September 30, 2016 and December 31, 2015, respectively.

Deferred Offering Costs

The Company capitalizes certain legal, accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such financings are consummated. After consummation of the follow-on public offerings of common stock in January 2016 and April 2015, $0.6 million and $0.6 million, respectively, of these costs were recorded in stockholders’ equity as a reduction of additional paid-in capital generated as a result of the offering.

Restricted Cash

A deposit of $0.5 million was restricted from withdrawal as of September 30, 2016. The restriction is related to securing the facility lease in May 2016, under which the Company rented 19,805 square feet of additional office space in a separate multi-tenant building beginning in September 2016.  The lease for the additional space will expire in February 2022.  The restriction expires in 2022, in accordance with the operating lease agreement. This balance is included in restricted cash on the accompanying unaudited condensed consolidated balance sheets.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. The guidance is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and

8


 

uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. The guidance becomes effective for the Company in the year ending December 31, 2018, and the Company could early adopt the standard for the year ending December 31, 2017. The Company is currently assessing the method of adoption and is in the process of evaluating the impact that this new accounting guidance will have on its consolidated financial statements and footnote disclosures, although it does not currently have any revenue.

In August 2014, the FASB issued Accounting Standards Update, or ASU, 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40). The guidance addresses management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. The standard will be effective for the year ending December 31, 2016. Early adoption is permitted. The Company does not expect that the adoption of this new guidance will have a material impact on its footnote disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842), 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 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 similarly to existing guidance for operating leases today. ASC 842 supersedes the previous leases standard, ASC 840 Leases. The standard will be effective on January 1, 2019, with early adoption permitted. The Company is in the process of evaluating the impact that this new guidance will have on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The standard involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The standard will be effective on January 1, 2017. The Company is in the process of evaluating the impact that this new guidance will have on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard changes the impairment model for most financial assets and certain other instruments. Under the standard, entities holding financial assets and net investment in leases that are not accounted for at fair value through net income are to be presented at the net amount expected to be collected. An allowance for credit losses will be a valuation account that will be deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. The standard will be effective on January 1, 2020. The Company is in the process of evaluating the impact that this new guidance will have on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The standard reduces the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard will be effective on January 1, 2018. The Company is in the process of evaluating the impact that this new guidance will have on its consolidated financial statements.

 

 

3. Fair Value Measurements

The Company’s cash equivalents are generally classified within Level 1 of the fair value hierarchy.  The Company’s investments in marketable securities are classified within Level 2 of the fair value hierarchy.

The fair values of the Company’s marketable securities are generally based on prices obtained from independent pricing sources.  Consistent with the fair value hierarchy described above, securities with validated quotes from pricing services are generally reflected within Level 2, as they are primarily based on observable pricing for similar assets or other market observable inputs.  Typical inputs used by these pricing services include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers or estimates of cash flow, prepayment spreads and default rates.

9


 

The following tables summarize the Company’s money market funds and marketable securities as of September 30, 2016 and December 31, 2015:

 

 

 

September 30, 2016

 

 

 

Total

 

 

Quoted

Prices in

Active

Markets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

 

(in thousands)

 

Money market funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

320,078

 

 

$

320,078

 

 

$

 

 

$

 

Total money market funds

 

 

320,078

 

 

 

320,078

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

 

 

24,050

 

 

 

 

 

 

24,050

 

 

 

 

Corporate bonds

 

 

64,672

 

 

 

 

 

 

64,672

 

 

 

 

Commercial paper

 

 

22,470

 

 

 

 

 

 

22,470

 

 

 

 

Total marketable securities

 

 

111,192

 

 

 

 

 

 

111,192

 

 

 

 

Total money market funds and marketable securities

 

$

431,270

 

 

$

320,078

 

 

$

111,192

 

 

$

 

 

 

 

December 31, 2015

 

 

 

Total

 

 

Quoted

Prices in

Active

Markets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

 

(in thousands)

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

186,753

 

 

$

186,753

 

 

$

 

 

$

 

Total cash and cash equivalents

 

$

186,753

 

 

$

186,753

 

 

$

 

 

$

 

 

During the three and nine months ended September 30, 2016 and 2015, there were no transfers among the Level 1, Level 2 and Level 3 categories.

Marketable Securities

The following table summarizes the Company’s marketable securities as of September 30, 2016:

 

 

 

September 30, 2016

 

 

 

Amortized Cost

 

 

Gross Unrealized

Gains

 

 

Gross Unrealized

Losses

 

 

Fair Value

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities (due within 1 year)

 

$

24,037

 

 

$

13

 

 

$

 

 

$

24,050

 

Corporate bonds (due within 1 year)

 

 

64,720

 

 

 

4

 

 

 

(52

)

 

 

64,672

 

Commercial paper (due within 1 year)

 

 

22,470

 

 

 

 

 

 

 

 

 

22,470

 

 

 

$

111,227

 

 

$

17

 

 

$

(52

)

 

$

111,192

 

 

There have been no impairments of the Company’s assets measured and carried at fair value during the three and nine months ended September 30, 2016 and 2015. The Company held no marketable securities as of December 31, 2015.

 

 

10


 

4. Accrued Expenses

Accrued expenses consist of the following:

 

 

 

September 30, 2016

 

 

December 31, 2015

 

 

 

(in thousands)

 

Development costs

 

$

12,840

 

 

$

6,466

 

Employee-related expenses

 

 

3,010

 

 

 

2,718

 

Professional services

 

 

1,225

 

 

 

935

 

Other accrued expenses

 

 

18

 

 

 

29

 

 

 

$

17,093

 

 

$

10,148

 

 

 

5. Commitments and contingencies

Operating Leases

The Company rents 22,067 square feet of office space in a multi-tenant building under an operating lease that will expire in February 2022.

In May 2016, the Company entered into a separate lease under which, beginning on September 1, 2016, the Company rents 19,805 square feet of additional office space in a separate multi-tenant building.  The lease for the additional space will also expire in February 2022.

CyDex License Agreement

In September 2015, the Company and CyDex Pharmaceuticals, Inc. (“CyDex”) amended and restated their existing commercial license agreement. Under the terms of the commercial license agreement as amended and restated, CyDex has granted to the Company an exclusive license to CyDex’s Captisol drug formulation technology and related intellectual property for the manufacture of pharmaceutical products incorporating the Company’s compounds known as SAGE-547 and SAGE-689, and the development and commercialization of the resulting products in the treatment, prevention or diagnosis of any disease or symptom in humans or animals other than (i) the ocular treatment of any disease or condition with a formulation, including a hormone; (ii) topical ocular treatment of inflammatory conditions; (iii) treatment and prophylaxis of fungal infections in humans; and (iv) any ocular treatment for retinal degeneration.

As consideration for the inclusion of SAGE-689 in the license granted by CyDex, the Company paid to CyDex $0.1 million, which was recorded as research and development expense for the three months ended September 30, 2015 in connection with the execution of the amended and restated license agreement.

The Company is obligated to make milestone payments under the amended and restated license agreement with CyDex based on the achievement of clinical development and regulatory milestones in the amount of up to $0.8 million in clinical milestones and up to $3.8 million in regulatory milestones for each of the first two fields with respect to SAGE-547; up to $1.3 million in clinical milestones and up to $8.5 million in regulatory milestones for each of the third and fourth fields with respect to SAGE-547; and up to $0.8 million in clinical milestones and up to $1.8 million in regulatory milestones for one field with respect to SAGE-689.

In March 2015, a clinical development milestone was met for the SAGE-547 program under the license agreement with CyDex, and accordingly, the Company recorded research and development expense for the three months ended March 31, 2015 of $0.3 million.

In April 2015, an additional clinical development milestone was met for the SAGE-547 program under the license agreement with CyDex, and accordingly, the Company recorded research and development expense for the three months ended June 30, 2015 of $0.5 million.

In August 2016, an additional clinical development milestone was met for the SAGE-547 program under the license agreement with CyDex, and accordingly, the Company recorded research and development expense for the three and nine months ended September 30, 2016 of $0.3 million. 

11


 

Washington University License Agreement

In November 2013, the Company entered into a license agreement with Washington University whereby the Company was granted exclusive, worldwide rights to develop and commercialize a novel set of neuroactive steroids developed by Washington University. In exchange for development and commercialization rights, the Company paid an upfront, non-refundable payment of $50,000 and is required to pay an annual license maintenance fee of $15,000 on each subsequent anniversary date, until the first Phase 2 clinical trial for a licensed product is initiated. The Company is obligated to make milestone payments to Washington University based on achievement of clinical development and regulatory milestones of up to $0.7 million and $0.5 million, respectively. Additionally, the Company fulfilled its obligation to issue to Washington University 47,619 shares of common stock on December 13, 2013. The fair value of these shares of $0.1 million was recorded as research and development expense in 2013.

The Company is obligated to pay royalties to Washington University at rates in the low single digits on net sales of licensed products covered under patent rights and royalties at rates in the low single digits on net sales of licensed products not covered under patent rights. Additionally, the Company has the right to sublicense and is required to make payments at varying percentages of sublicensing revenue received, initially in the mid-teens and descending to the mid-single digits over time.

In September 2015, a regulatory milestone was met for one of the programs.  Accordingly, the Company recorded research and development expenses and made a cash payment of $50,000.

For the three and nine months ended September 30, 2016, the Company did not record any expense or make any milestone payments under the license agreement with Washington University.

University of California License Agreements

In October 2013, the Company entered into a non-exclusive license agreement with The Regents of the University of California whereby the Company was granted a non-exclusive license to certain clinical data and clinical material for use in the development and commercialization of biopharmaceutical products in the licensed field, including status epilepticus and post-partum depression. In May 2014, the license agreement was amended to add the treatment of essential tremor to the licensed field of use, materials and milestone fee provisions of the agreement. The Company paid to The Regents of the University of California clinical development milestones of up to $0.1 million and will be required to pay royalties of less than 1% on net sales for a period of fifteen years following the sale of the first product. The license will terminate on the earlier to occur of (i) 27 years after the effective date or (ii) 15 years after the last-derived product is first commercially sold.

During the three months ended March 31, 2015, one clinical development milestone was met. Accordingly, the Company recorded research and development expenses and made a cash payment totaling $0.1 million.

During the three months ended June 30, 2015, an additional clinical development milestone was met. Accordingly, the Company recorded research and development expenses for the three months ended June 30, 2015 totaling $25,000. In June 2015, the Company entered into an exclusive license agreement with The Regents of the University of California whereby the Company was granted an exclusive license to certain patent rights related to the use of allopregnanolone to treat various diseases. In exchange for such license, the Company paid an upfront payment of $50,000 and will make payments of $15,000 for annual maintenance fees until the calendar year following the first sale, if any, of a licensed product. The Company is obligated to make milestone payments following the achievement of specified regulatory and sales milestones of up to $0.7 million and $2.0 million in the aggregate, respectively. Following the first sale, if any, of a licensed product, the Company is obligated to pay royalties at a low single digit percentage of net sales, if any, of licensed products, subject to specified minimum annual royalty amounts. Unless terminated by operation of law or by acts of the parties under the terms of the agreement, the license agreement will terminate when the last-to-expire patents or last-to-be abandoned patent applications expire, whichever is later.

For the three and nine months ended September 30, 2016, the Company did not record any expense or make any milestone or royalty payments under either license agreement with The Regents of the University of California.

Consulting Agreement

In January 2014, the Company entered into a consulting agreement with a nonemployee advisor whereby the Company is obligated to make cash payments of up to $2.0 million and to issue up to 126,984 shares of common stock upon attainment of certain clinical development and regulatory milestones.

12


 

In March 2015, the second clinical development milestone for one of the programs included in the consulting agreement was met. Accordingly, the Company recorded research and development expense for the three months ended March 31, 2015 of $0.6 million, comprised of $0.2 million in cash and $0.4 million related to the issuance of 7,936 shares of the Company’s common stock, related to the achievement of this milestone.

In April 2015, the third clinical development milestone for one of the programs included in the consulting agreement was met. Accordingly, the Company recorded research and development expense for the three months ended June 30, 2015 of $1.1 million, comprised of $0.3 million in cash and $0.8 million related to the issuance of 15,873 shares of the Company’s common stock, related to the achievement of this milestone.

For the three and nine months ended September 30, 2016, the Company did not record any expense or make any milestone payments under the consulting agreement with the nonemployee advisor.

 

 

6. Sale of Equity Securities

On January 12, 2016, the Company completed the sale of 3,157,894 shares of its common stock at a price to the public of $47.50 per share, resulting in net proceeds to the Company of $140.4 million after deducting underwriting discounts and commissions and offering expenses paid by the Company.

On September 14, 2016, the Company completed the sale of 5,062,892 shares of its common stock at a price to the public of $39.75 per share, resulting in net proceeds to the Company of $189.2 million after deducting underwriting discounts and commissions paid by the Company.

 

 

7. Stock-Based Compensation

Stock Option Plans

On July 2, 2014, the Company’s stockholders approved the 2014 Stock Option and Incentive Plan (the “2014 Stock Option Plan”), which became effective upon the completion of the IPO. The 2014 Stock Option Plan provides for the grant of restricted stock awards, incentive stock options and non-statutory stock options. The 2014 Stock Option Plan replaced the Company’s 2011 Stock Option and Grant Plan (the “2011 Stock Option Plan”). The Company will no longer grant stock options or other awards under the 2011 Stock Option Plan. Any options or awards outstanding under the 2011 Stock Option Plan remained outstanding and effective. As of September 30, 2016, the total number of shares reserved under all equity plans for outstanding grants was 4,061,280, and the Company had 885,723 shares available for future issuance under such plans.

The 2014 Stock Option Plan provides for an annual increase, to be added on the first day of each fiscal year, by up to 4% of the Company’s issued and outstanding shares of common stock on the immediately preceding December 31. On January 1, 2016, 1,154,653 shares of common stock, representing 4% of the Company’s issued and outstanding shares of common stock as of December 31, 2015, were added to the 2014 Stock Option Plan.

Terms of restricted stock awards and stock option agreements, including vesting requirements, are determined by the Board of Directors or the Compensation Committee of the Board of Directors, subject to the provisions of the applicable stock option plan. Options and restricted stock awards granted by the Company that are not performance-based, generally vest based on the continued service of the grantee with the Company during a specified period following the grant. These awards, when granted to employees, generally vest ratably over four years, with a 25% cliff vesting at the one year anniversary. All awards expire in ten years.

During the nine months ended September 30, 2016 and 2015, the Company granted 74,039 and 497,100 options, respectively, to employees to purchase shares of common stock that contain performance-based vesting criteria, primarily related to the achievement of certain clinical and regulatory development milestones related to product candidates. Recognition of stock-based compensation expense associated with these performance-based stock options commences when the performance condition is considered probable of achievement, using management’s best estimates. During the three months ended June 30, 2015, the achievement of one milestone was considered probable and that milestone was achieved during the three months ended September 30, 2015. The estimated quantity of awards expected to vest was recognized by determining the cumulative expense as of June 30, 2015 and the remaining expense was recognized over the estimated service period. This milestone represents 35% of the performance-based option grants that were made during 2015. During the three and nine months ended September 30, 2015, the Company recognized stock-based compensation expense related to this milestone of $1.4 million and $4.8 million, respectively.  three and nine months ended September 30, 2016  

The achievement of the remaining milestones was deemed to be not probable as of September 30, 2016 and therefore no expense has been recognized related to these awards for the three and nine months ended September 30, 2016.

13


 

Stock-based compensation expense recognized during the three and nine months ended September 30, 2016 and 2015 was as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Research and development

 

$

2,530

 

 

$

1,472

 

 

$

6,179

 

 

$

4,293

 

General and administrative

 

$

2,218

 

 

 

2,935

 

 

$

6,748

 

 

 

6,861

 

 

 

$

4,748

 

 

$

4,407

 

 

$

12,927

 

 

$

11,154

 

 

For stock option awards, the fair value is estimated at the grant date using the Black-Scholes option-pricing model, taking into account the terms and conditions upon which options are granted. The fair value of the options is amortized on a straight-line basis for awards to employees and on a graded basis for awards to non-employees over the requisite service period of the awards. The weighted average grant date fair value per share relating to outstanding stock options granted under the Company’s stock option plans during the nine months ended September 30, 2016 and 2015 was $23.32 and $33.44, respectively.

The fair value of each option granted to employees and nonemployee directors during the three and nine months ended September 30, 2016 and 2015, under the Company’s stock option plans has been calculated on the date of grant using the following weighted average assumptions:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Expected dividend yield

 

 

0

%

 

 

0

%

 

 

0

%

 

 

0

%

Expected volatility

 

 

80.19

%

 

 

86.59

%

 

 

80.12

%

 

 

91.03

%

Risk free interest rate

 

 

1.25

%

 

 

1.80

%

 

 

1.38

%

 

 

1.57

%

Expected term

 

6.03 years

 

 

6.08 years

 

 

6.05 years

 

 

6.03 years

 

 

Expected dividend yield: The Company has not paid, and does not anticipate paying, any dividends in the foreseeable future.

Risk-free interest rate: The Company determined the risk-free interest rate by using a weighted average equivalent to the expected term based on the U.S. Treasury yield curve in effect as of the date of grant.

Expected volatility: The Company does not have sufficient history to support a calculation of volatility using only its historical data. The Company uses a weighted-average volatility considering the Company’s own volatility since the IPO in July 2014 and the volatilities of a peer group of comparable companies for time periods prior to the IPO.

Expected term (in years): Expected term represents the period that the Company’s stock option grants are expected to be outstanding. As the Company has only been publicly traded since July 2014, there is not sufficient historical term data to calculate the expected term of the options. Therefore, the Company elected to utilize the “simplified” method to estimate the expected term of options granted to employees. Under this approach, the weighted average expected life is presumed to be the average of the vesting term and the contractual term of the option.

Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from estimates. The Company estimates forfeitures based on historical termination behavior. For the nine months ended September 30, 2016 and 2015, forfeiture rates of 11.2% and 10.0%, respectively, were applied.

For options granted to nonemployees, the expected life of the option used is ten years, which is the contractual term of each option. All other assumptions used to calculate the grant date fair value are generally consistent with the assumptions used for options granted to employees.

14


 

The table below summarizes activity related to stock options:

 

 

 

Shares

 

 

Weighted

Average Exercise

Price

 

 

Weighted Average

Remaining Life

(in years)

 

 

Aggregate

Intrinsic Value

(in thousands)

 

Outstanding as of December 31, 2015

 

 

3,002,809

 

 

$

26.67

 

 

 

8.67

 

 

$

96,479

 

Granted

 

 

1,213,068

 

 

 

33.68

 

 

 

 

 

 

 

 

 

Exercised

 

 

(69,822

)

 

 

4.52

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(84,775

)

 

 

46.47

 

 

 

 

 

 

 

 

 

Outstanding as of September 30, 2016

 

 

4,061,280

 

 

 

28.74

 

 

 

8.39

 

 

$

76,947

 

Vested and expected to vest as of September 30, 2016

 

 

3,327,569

 

 

 

27.53

 

 

 

8.33

 

 

$

67,698

 

Exercisable as of September 30, 2016

 

 

1,363,896

 

 

 

21.87

 

 

 

7.73

 

 

$

35,845

 

 

At September 30, 2016, the Company had unrecognized stock-based compensation expense related to its unvested service-based stock option awards of $40.0 million, which is expected to be recognized over the remaining weighted average vesting period of 2.79 years. The total fair value of shares vested for the nine months ended September 30, 2016 and 2015 was $14.9 million and $7.3 million, respectively. In addition, the Company has 429,815 outstanding unvested stock options that vest upon the achievement of certain performance criteria. Total unrecognized stock-based compensation expense related to those awards was $8.5 million at September 30, 2016.

The intrinsic value of stock options exercised during the nine months ended September 30, 2016 and 2015 was $2.6 million and $28.2 million, respectively.

Restricted Stock Awards

During the year ended December 31, 2013, the Company granted restricted stock awards to certain officers, employees, directors, and consultants of the Company. During the three months ended September 30, 2016 and 2015, the Company recorded $4,000 and $0.1 million, respectively, of stock-based compensation expense related to its restricted stock. During the nine months ended September 30, 2016 and 2015, the Company recorded $35,000 and $0.2 million, respectively, of stock-based compensation expense related to its restricted stock. The table below summarizes activity relating to restricted stock:

 

 

 

Shares

 

Outstanding as of December 31, 2015

 

 

42,781

 

Issued

 

 

 

Vested

 

 

(40,468

)

Forfeited

 

 

 

Repurchased

 

 

 

Outstanding as of September 30, 2016

 

 

2,313

 

 

At September 30, 2016, the Company had unrecognized stock-based compensation expense related to its unvested restricted stock awards of $1,000 which is expected to be recognized over the remaining weighted average vesting period of 0.13 years.

During the nine months ended September 30, 2016 and 2015, no shares of restricted stock were issued.

Unvested shares are subject to repurchase by the Company, at the issuance price, upon the termination of the employee at the sole discretion of the Company. No shares were repurchased during the nine months ended September 30, 2016 and 2015.

2014 Employee Stock Purchase Plan

On July 2, 2014, the Company’s stockholders approved the 2014 Employee Stock Purchase Plan, which had been previously approved by the Board of Directors. A total of 282,000 shares of common stock were initially authorized for issuance under this plan. The 2014 Employee Stock Purchase Plan became effective upon the completion of the IPO. As of September 30, 2016, 14,351 shares have been issued under this plan.

 

 

15


 

8. Net Loss Per Share

Basic and diluted net loss per share was calculated as follows for the three and nine months ended September 30, 2016 and 2015:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Basic net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss (in thousands)

 

$

(37,796

)

 

$

(24,035

)

 

$

(103,086

)

 

$

(65,933

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common stock

   outstanding—basic

 

 

32,975,897

 

 

 

28,737,743

 

 

 

32,218,204

 

 

 

27,430,275

 

Dilutive effect of shares of common stock

   equivalents resulting from common stock

   options

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common stock

   outstanding—diluted

 

 

32,975,897

 

 

 

28,737,743

 

 

 

32,218,204

 

 

 

27,430,275

 

Net loss per share—basic and diluted

 

$

(1.15

)

 

$

(0.84

)

 

$

(3.20

)

 

$

(2.40

)

 

The following common stock equivalents outstanding as of September 30, 2016 and 2015 were excluded from the computation of diluted net loss per share for the periods presented because including them would have been anti-dilutive:

 

 

 

Three and Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

Stock options

 

 

3,631,465

 

 

 

2,510,900

 

Employee stock purchase plan

 

 

4,368

 

 

 

2,803

 

Restricted stock

 

 

2,313

 

 

 

71,319

 

 

 

 

3,638,146

 

 

 

2,585,022

 

 

 

16


 

Item 2.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report, and the Annual Report on Form 10-K for the year ended December 31, 2015, or Annual Report, and the audited financial information and the notes thereto.

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 developments in our business and the industry in which we operate, may differ materially from the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and the developments in our business and the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in future periods. 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.

The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Quarterly Report, including those risks identified under Part II, Item 1A, Risk Factors, and in the Annual Report.

We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such forward-looking statements to reflect any change in our expectations or in events, conditions or circumstances under 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.

Overview

We are a clinical-stage biopharmaceutical company committed to developing and commercializing novel medicines to treat life-altering central nervous system, or CNS, disorders, where there are inadequate or no approved existing therapies. We are targeting CNS indications where patient populations are easily identified, clinical endpoints are well-defined, and development pathways are feasible.

17


 

The following table summarizes the status of our development programs as of the date of this report.

 

 

Our lead product candidate is SAGE-547, a proprietary intravenous, or IV, formulation of allopregnanolone, a naturally occurring neurosteroid that acts as a synaptic and extrasynaptic modulator of the GABAA receptor. GABA is the major inhibitory neurotransmitter in the CNS, and mediates downstream neurologic and bodily function via activation of GABAA receptors. We believe that allosteric modulation of the GABAA receptor has the potential to be well-suited for the treatment of a variety of CNS disorders because it allows for the fine-tuning of neuronal signals rather than complete activation or complete inhibition. SAGE-547 is in Phase 3 clinical development as an adjunctive therapy for the treatment of super-refractory status epilepticus, or SRSE. SRSE is a rare and life-altering condition in which a patient is in a state of continuous seizure called status epilepticus, or SE, and all of the standard treatment regimens normally sufficient to stop the seizure activity have failed. We expect to report top-line results from the global, randomized, double-blind, placebo-controlled Phase 3 trial of SAGE-547 in SRSE in the first half of 2017. If successful, we believe the results of the Phase 3 clinical trial, together with other clinical data obtained from the SAGE-547 clinical program, and results of ongoing non-clinical studies, could form the basis of a New Drug Application, or NDA, submission, for SAGE-547. Based on scientific advice we recently received from the European Medicines Agency, or EMA, we also believe our current Phase 3 program, if successful, will be sufficient to support a marketing authorization application to the EMA seeking approval of SAGE-547 for SRSE in the EU.

We are also developing SAGE-547 for the treatment of post-partum depression, or PPD.  PPD is a distinct and readily identified major depressive disorder affecting a small percentage of women after childbirth, and is characterized by sadness and depressed mood, loss of interest in daily activities, changes in eating and sleeping habits, fatigue and decreased energy, inability to concentrate, and feelings of worthlessness, shame or guilt, which can lead to significant functional impairment. Without sufficient treatment, PPD may inhibit the mother’s ability to perform daily activities and to bond with the baby and other members of the family. PPD also carries an increased risk for suicide in some women.  Onset of moderate-severe symptoms is typically 2-4 weeks after birth. Current standard of care for severe PPD comprises the cautious use of pharmacological therapies. Women with severe PPD may be hospitalized to provide a safe and stable environment for recovery if they have suicidal ideation or attempt, are unable to function and care for themselves, or require monitoring during a change in or trial of a new medication. There are no current approved therapies specifically for PPD.

Naturally occurring allopregnanolone is found at its highest levels in women during the third trimester of pregnancy, returning to normal level generally within 24 hours of giving birth. Data suggest that women with PPD may be unusually sensitive to this rapid decline in allopregnanolone, potentially causing GABAA -system mediated mood disruption. Given these data, we believe that allosteric modulators of the GABAA receptor may have potential in the treatment of PPD.  In July 2016, we announced positive top-

18


 

line results from our multi-center, placebo-controlled, double-blind Phase 2 clinical trial of SAGE-547 for the treatment of severe PPD. Twenty-one patients were enrolled in the trial. Patients were required to have had a major depressive episode that began no earlier than the third trimester and no later than the first four weeks following delivery, and also to be less than six months postpartum at the time of enrollment. Trial participants were also required to have a Hamilton Rating Scale for Depression, or HAM-D, score of 26 or above prior to treatment. In the trial, SAGE-547 achieved the primary endpoint of a significant reduction in the HAM-D compared to placebo at 60 hours (p=0.008). In the trial, there was a greater than 20 point mean reduction in the depression scores of the SAGE-547 group at 60 hours through completion of the trial with a greater than 12 point difference from placebo. The statistically significant difference in treatment effect began at 24 hours (p=0.006) with an effect that was maintained at similar magnitude through to the 30-day follow-up period (p=0.01). Remission from depression, as determined by a HAM-D <7, measured at 60 hours, was seen in 7 of 10 of the SAGE-547 group compared with 1 of 11 in the placebo group. Similarly, at 30 days, 7 of 10 of the SAGE-547 group and 2 of 11 in the placebo group were in remission. SAGE-547 was found to be generally well-tolerated with no serious adverse events reported during the treatment and follow-up periods. The results of this Phase 2 trial replicate and extend the findings of an earlier open-label probe study of SAGE-547 in severe PPD reported in 2015. We have initiated an expansion of this Phase 2 clinical program to study efficacy of SAGE-547 in patients with moderate PPD, and to further study dosing of SAGE-547 in the treatment of severe PPD.   We expect to announce data from these trials in the second half of 2017. On September 6, 2016, we announced that the U.S. Food and Drug Administration, or FDA, granted Breakthrough Therapy designation to SAGE-547 for the treatment of PPD. Breakthrough Therapy designation is intended to expedite the development and review of a drug candidate that is planned for use, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition when preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. The benefits of Breakthrough Therapy designation include more intensive FDA guidance on an efficient drug development program, an organizational commitment involving senior FDA managers, and eligibility for rolling review and priority review. We are in discussions with the FDA on the development pathway for SAGE-547 in PPD.

Our most advanced next-generation product candidate is SAGE-217, a novel neuroactive steroid that is a positive allosteric modulator of GABAA receptors. Like SAGE-547, SAGE-217 targets synaptic and extrasynaptic GABAA receptors. In the second quarter of 2016, we announced positive top-line results of a Phase 1 clinical program of SAGE-217. In the trial, SAGE-217 was found to be generally well-tolerated with no serious adverse events reported during the treatment and follow-up periods. Assessment of electrical activity in the brain using an electroencephalogram, or EEG, showed clear evidence of target engagement (GABAA receptor modulation) starting at the lowest dose tested (15 mg). The observed EEG effect was sustained throughout the 7-day dosing period without diminution. Rates of moderate to deep sedation defined by a structured rating scale (MOAA/S < 3) were comparable to placebo until the maximum tolerated dose (MTD) was reached, in both the single and multiple ascending dose phases of the trial. The presence of sedation was associated with maximum drug exposure. In July 2016, Sage announced that safety, tolerability and pharmacokinetics of SAGE-217 were also studied in a small open-label Phase 1 cohort of essential tremor patients (n=6). While not designed to demonstrate efficacy, preliminary data show that single doses of SAGE-217 resulted in a similar reduction in tremor symptoms as achieved with a single 12 hour infusion of SAGE-547 in our previous placebo-controlled probe study (n=25). Given the results of the Phase 1 trial and the results of the proof-of-concept Phase 2 clinical trials of SAGE-547 in PPD and essential tremor, we plan to commence Phase 2 clinical trials of SAGE-217, initially in essential tremor and PPD prior to the end of 2016. Given the potential role of GABAA receptor modulation in reducing tremors, we are also planning to initiate a proof-of-concept Phase 2 clinical trial of SAGE-217 in the treatment of Parkinson’s disease prior to the end of 2016. We also plan to initiate a proof-of-concept Phase 2 clinical trial using SAGE-217 in major depressive disorder, or MDD, prior to the end of 2016. In 2017, we plan to evaluate the data read-outs from various SAGE-217 clinical trials to determine which indications to pursue in further development.  While SAGE-547 is an IV infusion intended for acute administration, SAGE-217 is currently being studied as an oral solution. We are in the process of developing a solid dosage formulation of SAGE-217 intended for chronic use.

 

We also have a portfolio of other novel compounds that target the GABAA receptors, including SAGE-105, SAGE-324 and SAGE-689. We plan to prioritize advancement of an oral novel GABA candidate, such as SAGE-105 or SAGE-324, into investigational new drug application, or IND-enabling studies for development in GABA-related indications, such as orphan epilepsies.  SAGE-689, a novel positive allosteric modulator of GABAA receptors, is in non-clinical development. Phase 1 clinical development of SAGE-689 remains delayed given requests from the FDA for additional non-clinical study data. We continue to evaluate next steps in the development of SAGE-689.  There is no guarantee that we will be able to successfully address the FDA’s questions. 

We are also studying novel compounds that target the NMDA receptor, a critical excitatory receptor system in the brain implicated in a broad range of CNS disorders. The first product candidate selected for development from this program is SAGE-718, an oxysterol-based NMDA positive allosteric modulator. We have begun non-clinical studies of SAGE-718, with an initial development focus on two rare conditions, Smith-Lemli-Opitz Syndrome and Anti-NMDA Receptor Encephalitis. Beyond these conditions, we believe measuring levels of anti-NMDA antibodies or decreased levels of cerebrosterol, a naturally occurring oxysterol, may represent biomarkers to identify, for future study, broader patient populations characterized by cognitive dysfunction

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and neuropsychiatric symptoms resulting from NMDA receptor dysfunction or hypofunction. Examples of these potential areas for future evaluation include certain types, aspects or subpopulations of a number of diseases such as depression, Alzheimer’s disease, attention deficit hyperactivity disorder, schizophrenia, Huntington’s disease, and neuropathic pain.

We expect to continue our focus on allosteric modulation of the GABAA and NMDA receptor systems in the brain. The GABAA and NMDA receptor systems are broadly accepted as impacting many psychiatric and neurological disorders, spanning disorders of mood, seizure, cognition, anxiety, sleep, pain, epilepsy, and movement disorders, among others. We believe that we will have the opportunity to develop molecules from our internal portfolio with the goal of addressing a number of these disorders in the future. Our ability to identify and develop such novel CNS therapies is enabled by our proprietary chemistry platform that is centered on a scaffold of chemically-modified endogenous neuroactive steroid compounds. We believe our know-how around the chemistry and activity of allosteric modulators allows us to efficiently design molecules with different characteristics by enabling us to control important properties such as half-life, brain penetration and the types of receptors with which our compounds interact with the goal of developing product candidates that have the potential to bind with targets in the brain with more precision, increased tolerability, and fewer off-target side effects than either current CNS therapies or previous therapies which have failed in development.

Sage was founded in 2010, based on leading research in the areas of brain function and neuroactive steroids, to explore novel approaches to treatment of CNS disorders. Since our inception, we have continued to expand our know-how related to CNS therapeutics through our research and development programs, and to pursue intellectual property protection with respect to our proprietary chemistry platform. In addition, we have assembled a strong management team that together has been a part of the successful discovery, development and commercialization of more than 20 marketed CNS therapies.

We have not generated any revenue to date. We have incurred net losses in each year since our inception, and we have an accumulated deficit of $264.4 million as of September 30, 2016. Our net losses were $103.1 million for the nine months ended September 30, 2016 and $94.5 million for the year ended December 31, 2015. These losses have resulted principally from costs incurred in connection with research and development activities and general and administrative costs associated with our operations. We expect to incur significant expenses and increasing operating losses for the foreseeable future.

We expect that our expenses will increase substantially in connection with our ongoing activities, as we:

 

advance clinical development of SAGE-547, including completing the Phase 3 clinical trial for SAGE-547 in SRSE, expanding the Phase 2 clinical program for SAGE-547 in PPD,  and conducting additional clinical trials and non-clinical studies of SAGE-547 required for regulatory approval in SRSE and PPD;

 

advance clinical development of SAGE-217, including initiating and conducting planned Phase 2 clinical trials of SAGE-217 in essential tremor and PPD, a proof-of-concept Phase 2 clinical trial in Parkinson’s disease, and a  proof-of-concept Phase 2 trial of SAGE-217 in MDD;

 

conduct further non-clinical studies of SAGE-689;

 

continue to advance SAGE-718, our early-stage novel allosteric modulator for NMDA, in non-clinical studies; and prioritize advancement of a novel GABA candidate, such as SAGE-105 or SAGE-324, into IND-enabling studies for development in other GABA-related indications, such as orphan epilepsies;

 

continue our research and development efforts to evaluate the potential for our existing product candidates in the treatment of additional indications, and the identification of new drug candidates in the treatment of CNS disorders;

 

advancing regulatory activities focused on a potential filing of an NDA and MAA for SAGE-547 in SRSE; advancing regulatory activities with respect to SAGE-547 in PPD; and initial preparations for a potential future commercial launch;

 

seek regulatory approvals for our product candidates that successfully complete clinical development;

 

add personnel, including personnel to support our product development and future commercialization efforts, and incur increases in stock compensation expense related to existing and new personnel with respect to both time-based and performance-based awards;

 

add operational, financial and management information systems; and

 

maintain, leverage and expand our intellectual property portfolio.

As a result, we will, in the future, need additional financing to support our continuing operations. Until such time that we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity or debt financings or other sources, which may include collaborations with third parties. Arrangements with collaborators or others may require us to relinquish rights to certain of our technologies or product candidates. In addition, we may

20


 

never successfully complete development of any of our product candidates; obtain adequate patent protection or other exclusivity for our product candidates; obtain necessary regulatory approval for our product candidates; or achieve commercial viability for any approved product. Adequate additional financing may not be available to us on acceptable terms, or at all. Our inability to raise capital as and when needed would have a negative impact on our financial condition and on our ability to pursue our business strategy. We will need to generate significant revenue to achieve profitability, and we may never do so.

We expect that our existing cash, cash equivalents and marketable securities as of September 30, 2016 will enable us to fund our operating expenses and capital expenditure requirements, based on our current operating plan, into the second quarter of 2018. See “—Liquidity and Capital Resources”.

Financial Operations Overview

Revenue

We have not generated any revenue from product sales since our inception, and do not expect to generate any revenue from the sale of products in the near future. If our developmental efforts result in clinical success and regulatory approval or collaboration agreements with third parties for our product candidates, we may generate revenue from those product candidates.

Operating Expenses

Our operating expenses since inception have consisted primarily of costs associated with research and development activities and general and administrative activities.

Research and Development Expenses

Research and development expenses, which consist primarily of costs associated with our product research and development efforts, are expensed as incurred. Research and development expenses consist primarily of:

 

personnel costs, including salaries, benefits, stock-based compensation and travel expenses, for employees engaged in research and development functions;

 

expenses incurred under agreements with contract research organizations, or CROs, and sites that conduct our non-clinical studies and clinical trials;

 

expenses associated with manufacturing materials for use in clinical trials and developing external manufacturing capabilities;

 

costs of outside consultants engaged in research and development activities, including their fees, stock-based compensation and travel expenses;

 

other expenses related to our non-clinical studies and clinical trials and expenses related to our regulatory activities; and

 

payments made under our third-party license agreements.

Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and our clinical sites.

We have been developing our product candidates and focusing on other research and development programs, including exploratory efforts to identify new compounds, target validation for identified compounds and lead optimization for our earlier-validated programs. Our direct research and development expenses are tracked on a program-by-program basis, and consist primarily of external costs, such as fees paid to investigators, central laboratories, CROs and contract manufacturing organizations, or CMOs, in connection with our non-clinical studies and clinical trials; third-party license fees related to our product candidates; and fees paid to outside consultants who perform work on our programs. We do not allocate employee-related costs and other indirect costs to specific research and development programs because these costs are deployed across multiple product programs under research and development and, as such, are separately classified as unallocated research and development expenses.

Research and development activities are central to our business. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will continue to increase in the foreseeable future as we continue or initiate clinical trials and non-clinical studies for certain product candidates, and pursue later stages of clinical development of our product candidates.

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We cannot determine with certainty the duration and costs of the current or future clinical trials of our product candidates or if, when, or to what extent we will generate revenue from the commercialization and sale of any of our product candidates, if approved for marketing and sale. The duration, costs, and timing of clinical trials and development of our product candidates will depend on a variety of factors, including:

 

the scope, size, rate of progress, and expense of our ongoing as well as any additional clinical trials, non-clinical studies,  and other research and development activities;

 

future clinical trial and non-clinical study results;

 

decisions by regulatory authorities related to our product candidates;

 

uncertainties in clinical trial enrollment rate or design;

 

significant and changing government regulation; and

 

the receipt and timing of any regulatory approvals, if any.

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

General and Administrative Expenses

General and administrative expenses consist primarily of personnel costs, consisting of salaries, benefits, stock-based compensation and travel expenses of our executive, finance, business, commercial, corporate development and other administrative functions. General and administrative expenses also include expenses incurred under agreements with third parties relating to evaluation, planning and preparation for a potential commercial launch; facilities and other related expenses, including rent, depreciation, maintenance of facilities, insurance and supplies; and professional fees for audit, tax and legal services, including legal expenses to pursue patent protection of our intellectual property.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support the expected growth in our business and the potential commercialization of our product candidates. We also anticipate increased expenses associated with general operations, including costs related to audit, tax and legal services, director and officer insurance premiums, and investor relations costs. Additionally, we anticipate an increase in payroll and related expenses as we continue to build our organizational capabilities, expand our operations, and prepare for possible future commercial operations, including sales and marketing of our product candidates, if approved.

Results of Operations

Comparison of Three Months Ended September 30, 2016 and 2015

The following table summarizes our results of operations for the three months ended September 30, 2016 and 2015:

 

 

 

Three Months

Ended September 30,

 

 

Increase

 

 

 

2016

 

 

2015

 

 

(Decrease)

 

 

 

(in thousands)

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

29,075

 

 

$

17,478

 

 

$

11,597

 

General and administrative

 

 

8,989

 

 

 

6,604

 

 

 

2,385

 

Total operating expenses

 

$

38,064

 

 

$

24,082

 

 

$

13,982

 

Loss from operations

 

 

(38,064

)

 

 

(24,082

)

 

 

(13,982

)

Interest income, net

 

 

275

 

 

 

53

 

 

 

222

 

Other income, net

 

 

(7

)

 

 

(6

)

 

 

(1

)

Net loss

 

$

(37,796

)

 

$

(24,035

)

 

$

(13,761

)

 

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Research and development expenses

 

 

 

Three Months

Ended September 30,

 

 

Increase

 

 

 

2016

 

 

2015

 

 

(Decrease)

 

 

 

(in thousands)

 

SAGE-547

 

$

13,557

 

 

$

9,891

 

 

$

3,666

 

SAGE-217

 

 

3,304

 

 

 

1,048

 

 

 

2,256

 

SAGE-689

 

 

375

 

 

 

521

 

 

 

(146

)

SAGE-718

 

 

2,114

 

 

 

1,060

 

 

 

1,054

 

Other research and development programs

 

 

2,037

 

 

 

1,804

 

 

 

233

 

Unallocated expenses

 

 

7,688

 

 

 

3,154

 

 

 

4,534

 

Total research and development expenses

 

$

29,075

 

 

$

17,478

 

 

$

11,597

 

 

Research and development expenses for the three months ended September 30, 2016 were $29.1 million, compared to $17.5 million for the three months ended September 30, 2015. The increase of $11.6 million was primarily due to the following:

 

an increase of $3.7 million in expenses related to our SAGE-547 program, due to the continued advancement of the program in clinical development, including ongoing enrollment in the Phase 3 clinical trial in SRSE; continued conduct of the Phase 2 clinical trial of SAGE-547 in PPD; conduct of supporting clinical pharmacology studies; and an increase in chemistry, manufacturing and controls, or CMC, work in preparation for a potential filing for regulatory approval. Expenses related to payments to consultants and licensors upon achievement of certain clinical development milestones were $0.3 million and $0.2 million for the three months ended September 30, 2016 and 2015, respectively;

 

an increase of $2.3 million in expenses related to our SAGE-217 program due to the initiation and conduct of two Phase 1 clinical trials and the initiation of Phase 2-enabling toxicology, formulation and manufacturing activities;

 

a decrease of $0.1 million in expenses related to our SAGE-689 program due to the delay in commencement of a Phase 1 clinical trial as a result of a request from the FDA for additional non-clinical study data;

 

an increase of $1.1 million in expenses due to the progression of our SAGE-718 program to IND-enabling non-clinical development and CMC activities in preparation for IND filing;

 

an increase of $0.2 million in expenses related to research and development programs and discovery efforts focused on identifying new clinical candidates and additional indications of interest, and on our back-up programs; and

 

an increase of $4.5 million in unallocated expenses, including an increase of $1.1 million of non-cash stock-based compensation expense, mainly due to the hiring of additional full-time employees to support the growth in our operations.

General and administrative expenses

 

 

 

Three Months

Ended September 30,

 

 

Increase

 

 

 

2016

 

 

2015

 

 

(Decrease)