sage-10q_20170331.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 March 31, 2017

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

Emerging Growth Company

 

 

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 13(a) of the Exchange Act.      

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 May 3, 2017, there were 37,346,289 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 of our product candidates, if clinical development is successful; and the anticipated review path and potential to obtain regulatory 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, if approved; 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 if approved;

 

our plans for expanding our activities, including outside the U.S., and the potential for future collaborations and other types of contractual relationships, if appropriate, for accomplishing our strategic objectives;

 

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

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publications, government data, and similar sources, in some cases applying our own assumptions and analysis that may, in the future, prove not to have been accurate.

 

 

3


 

Sage Therapeutics, Inc.

INDEX

 

 

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

5

 

 

Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016

 

5

 

 

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

 

6

 

 

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

 

7

 

 

Notes to Condensed Consolidated Financial Statements

 

8

Item 2.

 

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

 

18

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

27

Item 4.

 

Controls and Procedures

 

27

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

29

Item 1A.

 

Risk Factors

 

29

Item 6.

 

Exhibits

 

57

 

 

Signatures

 

58

 

 

4


 

PART I — FINANCIAL INFORMATION

Item 1.

Financial Statements

Sage Therapeutics, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(Unaudited)

 

 

 

March 31,

2017

 

 

December 31,

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

145,460

 

 

$

168,517

 

Marketable securities

 

 

197,104

 

 

 

228,962

 

Prepaid expenses and other current assets

 

 

6,480

 

 

 

5,100

 

Total current assets

 

 

349,044

 

 

 

402,579

 

Property and equipment, net

 

 

1,560

 

 

 

1,388

 

Restricted cash

 

 

564

 

 

 

564

 

Total assets

 

$

351,168

 

 

$

404,531

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

8,230

 

 

$

12,817

 

Accrued expenses

 

 

23,652

 

 

 

22,352

 

Total current liabilities

 

 

31,882

 

 

 

35,169

 

Other liabilities

 

 

840

 

 

 

845

 

Total liabilities

 

 

32,722

 

 

 

36,014

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

   March 31, 2017 and December 31, 2016; no shares issued or

   outstanding at March 31, 2017 and December 31, 2016

 

 

 

 

 

 

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

   March 31, 2017 and December 31, 2016; 37,307,047 and 37,222,518 shares issued

   at March 31, 2017 and December 31, 2016, respectively; 37,306,701 and 37,222,172

   shares outstanding at March 31, 2017 and December 31, 2016, respectively

 

 

4

 

 

 

4

 

Treasury stock, at cost; 346 shares at March 31, 2017 and December 31, 2016

 

 

(17

)

 

 

(17

)

Additional paid-in capital

 

 

695,645

 

 

 

688,959

 

Accumulated deficit

 

 

(377,105

)

 

 

(320,327

)

Accumulated other comprehensive income (loss)

 

 

(81

)

 

 

(102

)

Total stockholders’ equity

 

 

318,446

 

 

 

368,517

 

Total liabilities and stockholders’ equity

 

$

351,168

 

 

$

404,531

 

 

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

 

 

5


 

Sage Therapeutics, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

$

45,200

 

 

$

23,581

 

General and administrative

 

 

12,280

 

 

 

7,133

 

Total operating expenses

 

 

57,480

 

 

 

30,714

 

Loss from operations

 

 

(57,480

)

 

 

(30,714

)

Interest income, net

 

 

707

 

 

 

175

 

Other expense, net

 

 

(5

)

 

 

(4

)

Net loss

 

$

(56,778

)

 

$

(30,543

)

Net loss per share—basic and diluted

 

$

(1.52

)

 

$

(0.97

)

Weighted average common shares outstanding—basic and

   diluted

 

 

37,269,148

 

 

 

31,643,216

 

Comprehensive loss:

 

 

 

 

 

 

 

 

Net loss

 

$

(56,778

)

 

$

(30,543

)

Other comprehensive items:

 

 

 

 

 

 

 

 

Unrealized gain on marketable securities

 

 

21

 

 

 

 

Total other comprehensive gain

 

 

21

 

 

 

 

Total comprehensive loss

 

$

(56,757

)

 

$

(30,543

)

 

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

 

 

6


 

Sage Therapeutics, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(56,778

)

 

$

(30,543

)

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

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

6,208

 

 

 

3,714

 

Amortization of premium on marketable securities

 

 

33

 

 

 

 

Depreciation

 

 

130

 

 

 

41

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(1,380

)

 

 

(1,189

)

Accounts payable

 

 

(4,643

)

 

 

(799

)

Accrued expenses and other liabilities

 

 

1,220

 

 

 

1,341

 

Net cash used in operating activities

 

 

(55,210

)

 

 

(27,435

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Proceeds from sales and maturities of marketable securities

 

 

50,753

 

 

 

 

Purchases of marketable securities

 

 

(18,908

)

 

 

 

Purchases of property and equipment

 

 

(245

)

 

 

(341

)

Net cash provided by (used in) investing activities

 

 

31,600

 

 

 

(341

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from stock option exercises and employee stock purchase plan issuances

 

 

553

 

 

 

302

 

Payments of offering costs

 

 

 

 

 

(599

)

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

   discounts

 

 

 

 

 

141,000

 

Net cash provided by financing activities

 

 

553

 

 

 

140,703

 

Net increase (decrease) in cash and cash equivalents

 

 

(23,057

)

 

 

112,927

 

Cash and cash equivalents at beginning of period

 

 

168,517

 

 

 

186,753

 

Cash and cash equivalents at end of period

 

$

145,460

 

 

$

299,680

 

Supplemental disclosure of non-cash financing activities

 

 

 

 

 

 

 

 

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

 

$

64

 

 

$

279

 

 

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

 

 

7


 

SAGE THERAPEUTICS, INC. AND SUBSIDIARIES

Notes to Condensed 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, or CNS, disorders, where there are no approved therapies or existing therapies are inadequate.  The Company has a portfolio of product candidates with a current focus on modulating two critical CNS receptor systems, GABA and NMDA.  The GABA receptor family, which is recognized as the major inhibitory neurotransmitter in the CNS, mediates downstream neurologic and bodily function via activation of GABAA receptors.  The NMDA-type receptors of the glutamate receptor system are a major excitatory receptor system in the CNS.  Dysfunction in these systems is implicated in a broad range of CNS disorders.  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 March 31, 2017, the Company had an accumulated deficit of $377.1 million. From its inception through March 31, 2017, 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. Until such time, if ever, as the Company can generate substantial product revenue, the Company expects to finance its cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other sources of funding.  If the Company is unable to raise additional funds through equity or debt financings when needed, the Company may be required to delay, limit, reduce or terminate product development or future commercialization efforts or grant rights to develop and market products or product candidates that the Company would otherwise prefer to develop and market itself.

Based on its current operating plans, the Company believes its cash, cash equivalents and marketable securities of $342.6 million as of March 31, 2017 will be sufficient to fund its anticipated level of operations and capital expenditures into the second quarter of 2018.

 

In August 2014, the Financial Accounting Standards Board 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. After performing this evaluation, the Company believes that it has adequate cash resources to operate for 12 months from the date of issuance of these financial statements.

 

 

2. Summary of Significant Accounting Policies

Basis of Presentation

The unaudited interim condensed 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 (“GAAP”) have been condensed or omitted from this report, as is permitted by such rules and regulations. Accordingly, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2016.

8


 

The unaudited interim condensed 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 presentation of its financial position as of March 31, 2017, its results of operations and comprehensive loss for the three months ended March 31, 2017 and 2016, and its cash flows for the three months ended March 31, 2017 and 2016. The consolidated balance sheet at December 31, 2016 was derived from audited financial statements, but does not include all disclosures required by GAAP. The results for the three months ended March 31, 2017 are not necessarily indicative of the results for the year ending December 31, 2017, or for any future period.

Principles of Consolidation

The unaudited interim condensed 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, 2016. Intercompany accounts and transactions have been eliminated.

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 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.

Research and Development

Research and development expenses are comprised of costs incurred in performing research and development activities, including salaries and benefits, overhead costs, depreciation, contract services and other related costs. Research and development costs are expensed to operations as the related obligation is incurred.

The Company has entered into various research and development contracts with research institutions and other companies both inside and outside of the United States. These agreements are generally 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, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates may be 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.

Stock-Based Compensation

The Company recognizes compensation expense for stock-based awards made to employees and nonemployee directors, including grants of stock options and restricted stock, based on the estimated fair value on the date of grant, over the requisite service period.

For stock-based options and restricted stock issued to nonemployee consultants, the Company recognizes the fair value of the award as an expense over the period in which the related services are received. The fair value of the awards and measurement of related stock-based compensation is subject to periodic adjustments as the awards vest.

For awards that vest upon achievement of a performance condition, the Company recognizes compensation expense when achievement of the performance condition is deemed probable over the implicit service period.

The fair value of each option grant is estimated using the Black-Scholes option-pricing model. Through July 2014, the Company was a private company and lacked sufficient Company-specific historical and implied volatility information. Therefore, in 2016, the Company began estimating its expected volatility using a weighted average of the historical volatility of publicly traded peer companies and the volatility of its common stock, and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its traded stock price for the duration of the expected term. The expected term of the Company’s options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options, while the expected term of its options granted to consultants and nonemployees has been determined based on the contractual term of the options. 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

9


 

approximately equal to the expected term of the award. The expected dividend yield is based on the fact that the Company never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.

The Company also applies a forfeiture rate in order to calculate stock-based compensation expense. To the extent actual forfeitures differ from the estimates, the difference will be recorded as a cumulative adjustment in the period in which the estimates are revised. The Company recognizes stock-based compensation expense for only the portion of awards that are expected to vest. Expected forfeitures are based on the Company’s historical experience and management’s expectations of future forfeitures.

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.  No declines in value were deemed to be other than temporary during the three months ended March 31, 2017.

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 March 31, 2017 and December 31, 2016 were carried at fair value, determined according to the fair value hierarchy.

The carrying amounts reflected in the unaudited consolidated balance sheets for accounts payable and accrued expenses approximate their fair values due to their short-term maturities at March 31, 2017 and December 31, 2016, respectively.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. The FASB has continued to issue accounting standards updates to clarify and provide implementation guidance related to Revenue from Contracts with Customers, including ASU 2016-08, Revenue from Contract with Customers: Principal versus Agent Considerations, ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, and ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients. These amendments address a number of areas, including the entity’s identification of its performance obligations in a contract, collectability, non-cash consideration, presentation of sales tax and an entity’s evaluation of the nature of its promise to grant a license of intellectual property and whether or not that revenue is recognized over time or at a point in time. These new standards will be effective for the Company beginning January 1, 2018. The Company could early adopt the standard for the year ending December 31, 2017. The Company early adopted the standard as of January 1, 2017, although there is no impact of this new guidance on its consolidated financial statements as it does not currently have any revenue generating arrangements.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which will replace the existing guidance in ASC 840, “Leases.” The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize leased assets and leased liabilities on the consolidated balance sheets and requiring disclosure of key information about leasing arrangements.

10


 

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, Improvements to Employee Share-Based Payment Accounting, which intends to simplify several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows.  The standard is effective for annual periods beginning after December 15, 2016 and for interim periods within those fiscal years. The Company adopted ASU 2016-09 on the required effective date of January 1, 2017. The Company elected to maintain its existing policy to estimate forfeitures when determining periodic stock-based compensation expense. The adoption of the other provisions of ASU 2016-09 had no impact on the Company’s financial position, results of operations or cash flows.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduces a new methodology for accounting for credit losses on financial instruments, including available-for-sale debt securities. The guidance establishes a new "expected loss model" that requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. 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.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash that changes the presentation of restricted cash and cash equivalents on the statement of cash flows. Restricted cash and restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This standard is effective for the Company in the fiscal year beginning January 1, 2018, but early adoption is permissible. The Company is in the process of evaluating the impact that this new guidance will have on its consolidated financial statements.  After adopting the standard, the amounts of restricted cash shown on the consolidated balance sheets would be included in cash and cash equivalents in the statement of cash flows.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.

 

 

3. Fair Value Measurements

The Company’s cash equivalents are 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 based on prices obtained from independent pricing sources.  Consistent with the fair value hierarchy described above, securities with validated quotes from pricing services are 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.

11


 

The following tables summarize the Company’s money market funds and marketable securities as of March 31, 2017 and December 31, 2016:

 

 

 

March 31, 2017

 

 

 

Total

 

 

Quoted

Prices in

Active

Markets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

 

(in thousands)

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

145,460

 

 

$

145,460

 

 

$

 

 

$

 

Total cash equivalents

 

 

145,460

 

 

 

145,460

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

 

 

91,970

 

 

 

 

 

 

91,970

 

 

 

 

U.S. corporate bonds

 

 

39,118

 

 

 

 

 

 

39,118

 

 

 

 

International corporate bonds

 

 

15,181

 

 

 

 

 

 

15,181

 

 

 

 

U.S. commercial paper

 

 

21,891

 

 

 

 

 

 

21,891

 

 

 

 

International commercial paper

 

 

28,944

 

 

 

 

 

 

28,944

 

 

 

 

Total marketable securities

 

 

197,104

 

 

 

 

 

 

197,104

 

 

 

 

Total cash equivalents and marketable securities

 

$

342,564

 

 

$

145,460

 

 

$

197,104

 

 

$

 

 

 

 

December 31, 2016

 

 

 

Total

 

 

Quoted

Prices in

Active

Markets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

 

(in thousands)

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

168,517

 

 

$

168,517

 

 

$

 

 

$

 

Total cash equivalents

 

 

168,517

 

 

 

168,517

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

 

 

100,031

 

 

 

 

 

 

100,031

 

 

 

 

U.S. corporate bonds

 

 

58,452

 

 

 

 

 

 

58,452

 

 

 

 

International corporate bonds

 

 

24,190

 

 

 

 

 

 

24,190

 

 

 

 

U.S. commercial paper

 

 

30,351

 

 

 

 

 

 

30,351

 

 

 

 

International commercial paper

 

 

15,938

 

 

 

 

 

 

15,938

 

 

 

 

Total marketable securities

 

 

228,962

 

 

 

 

 

 

228,962

 

 

 

 

Total cash equivalents and marketable securities

 

$

397,479

 

 

$

168,517

 

 

$

228,962

 

 

$

 

 

During the three months ended March 31, 2017 and 2016, there were no transfers among the Level 1, Level 2 and Level 3 categories.

Marketable Securities

The following tables summarize the gross unrealized gains and losses of the Company’s marketable securities as of March 31, 2017 and December 31, 2016:

 

 

 

March 31, 2017

 

 

 

Amortized Cost

 

 

Gross Unrealized

Gains

 

 

Gross Unrealized

Losses

 

 

Fair Value

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

 

$

92,026

 

 

$

 

 

$

(56

)

 

$

91,970

 

U.S. corporate bonds

 

 

39,138

 

 

 

 

 

 

(20

)

 

 

39,118

 

International corporate bonds

 

 

15,186

 

 

 

 

 

 

(5

)

 

 

15,181

 

U.S. commercial paper

 

 

21,891

 

 

 

 

 

 

 

 

 

21,891

 

International commercial paper

 

 

28,944

 

 

 

 

 

 

 

 

 

28,944

 

 

 

$

197,185

 

 

$

 

 

$

(81

)

 

$

197,104

 

12


 

 

 

 

December 31, 2016

 

 

 

Amortized Cost

 

 

Gross Unrealized

Gains

 

 

Gross Unrealized

Losses

 

 

Fair Value

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

 

$

100,055

 

 

$

2

 

 

$

(26

)

 

$

100,031

 

U.S. corporate bonds

 

 

58,508

 

 

 

 

 

 

(56

)

 

 

58,452

 

International corporate bonds

 

 

24,212

 

 

 

 

 

 

(22

)

 

 

24,190

 

U.S. commercial paper

 

 

30,351

 

 

 

 

 

 

 

 

 

30,351

 

International commercial paper

 

 

15,938

 

 

 

 

 

 

 

 

 

15,938

 

 

 

$

229,064

 

 

$

2

 

 

$

(104

)

 

$

228,962

 

 

As of March 31, 2017, all marketable securities held by the Company had remaining contractual maturities of one year or less.

 

There have been no impairments of the Company’s assets measured and carried at fair value during the three months ended March 31, 2017 and the year ended December 31, 2016.

 

 

4. Accrued Expenses

Accrued expenses consist of the following:

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

(in thousands)

 

Development costs

 

$

18,792

 

 

$

14,541

 

Employee-related expenses

 

 

2,145

 

 

 

5,948

 

Professional services

 

 

2,715

 

 

 

1,751

 

Other accrued expenses

 

 

 

 

 

112

 

 

 

$

23,652

 

 

$

22,352

 

 

 

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 lease under which, beginning in September 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 expire in February 2022.

Future minimum lease payments under non-cancelable operating leases are as follows at March 31, 2017:

 

Years Ending December 31,

 

(in thousands)

 

2017

 

$

2,009

 

2018

 

 

2,729

 

2019

 

 

2,771

 

2020

 

 

2,813

 

2021

 

 

2,855

 

Thereafter

 

 

480

 

 

 

$

13,657

 

 

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

13


 

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 months ended September 30, 2016 of $0.3 million. 

In December 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 months ended December 31, 2016 of $0.5 million. 

For the three months ended March 31, 2017, the Company did not record any expense or make any milestone payments under the license agreement with CyDex.

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 year ended December 31, 2016, the Company did not record any expense or make any milestone payments under the license agreement with Washington University.

For the three months ended March 31, 2017, the Company did not record any expense or make any milestone payments under the license agreement with Washington University.

14


 

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.

For the years ended December 31, 2013 and 2014, the Company did not record any expense or make any milestone or royalty payments under the license agreement with the University of California.

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 year ended December 31, 2015, three clinical development milestones were met, and accordingly, the Company recorded research and development expenses and made cash payments totaling $0.1 million.

For the year ended December 31, 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.

For the three months ended March 31, 2017, 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 non-employee 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.

In January and March 2014, the first clinical development milestones for each of two programs included in the consulting agreement were met. Accordingly, the Company recorded research and development expense for the year ended December 31, 2014 of $0.2 million, comprised of $50,000 in cash and $0.1 million related to the issuance of 15,872 shares of the Company’s common stock.

For the year ended December 31, 2015, the second and third clinical development milestones for one of the programs included in the consulting agreement were met. Accordingly, the Company recorded research and development expense for the year ended December 31, 2015 of $1.7 million, comprised of $0.5 million in cash and $1.2 million related to the issuance of 23,809 shares of the Company’s common stock, related to the achievement of these milestones.

For the year ended December 31, 2016 and three months ended March 31, 2017, the Company did not record any expense or make any milestone payments under the consulting agreement with the non-employee 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.

15


 

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 December 15, 2016, the Board of Directors of the Company approved the 2016 Inducement Equity Plan (the “2016 Stock Option Plan”). The 2016 Stock Option Plan provides for the grant of equity awards to individuals who have not previously been an employee or a non-employee director of the Company to induce them to accept employment and to provide them with a proprietary interest in the Company.

As of March 31, 2017, the total number of shares reserved under the 2016 Stock Option Plan and the 2014 Stock Option and Incentive Plan (the “2014 Stock Option Plan”) was 8,283,295, and the Company had 2,798,233 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 year, by up to 4% of the Company’s issued and outstanding shares of common stock on the last day of the prior year. On January 1, 2017, 1,488,886 shares of common stock, representing 4% of the Company’s issued and outstanding shares of common stock as of December 31, 2016, were added to the 2014 Stock Option Plan.

During the three months ended March 31, 2017 and 2016, the Company granted 449,208 and 74,039 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 March 31, 2017 and 2016, the achievement of none of the remaining milestones that are criteria for performance-based stock options were considered probable, nor met, and therefore no expense has been recognized related to these awards for the three months ended March 31, 2017 and 2016.

Stock-based compensation expense recognized during the three months ended March 31, 2017 and 2016 was as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

 

 

(in thousands)

 

Research and development

 

$

3,596

 

 

$

1,611

 

General and administrative

 

 

2,612

 

 

 

2,103

 

 

 

$

6,208

 

 

$

3,714

 

 

The weighted average grant date fair value per share relating to outstanding stock options granted under the Company’s stock option plans during the three months ended March 31, 2017 and 2016 was $34.61 and $21.87, respectively.

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, 2016

 

 

4,231,807

 

 

$

29.99

 

 

 

8.24

 

 

$

92,843

 

Granted

 

 

1,370,800

 

 

 

49.74

 

 

 

 

 

 

 

 

 

Exercised

 

 

(97,513

)

 

 

8.53

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(51,632

)

 

 

37.12

 

 

 

 

 

 

 

 

 

Outstanding as of March 31, 2017

 

 

5,453,462

 

 

$

35.27

 

 

 

8.47

 

 

$

195,365

 

Exercisable as of March 31, 2017

 

 

1,940,608

 

 

$

25.03

 

 

 

7.47

 

 

$

89,484

 

 

At March 31, 2017, the Company had unrecognized stock-based compensation expense related to its unvested service-based stock option awards of $62.7 million, which is expected to be recognized over the remaining weighted average vesting period of 2.99 years. The total fair value of options vested for the three months ended March 31, 2017 and 2016 was $6.1 million and $4.1 million,

16


 

respectively. In addition, the Company granted 691,654 performance-based stock options that are both outstanding and unvested, and the total unrecognized stock-based compensation expense related to those awards was $14.9 million at March 31, 2017.

Restricted Stock Units

During the three months ended March 31, 2017, the Company granted 32,500 restricted stock units to employees of the Company. The Company did not grant restricted stock units prior to January 1, 2017.  During the three months ended March 31, 2017, the Company recorded $0.1 million of stock-based compensation expense related to its restricted stock units. These restricted stock units vest ratably over two years, with a 50% cliff vesting at both the one year and two year anniversary of the grant. 

 

 

8. Net Loss Per Share

Basic and diluted net loss per share was calculated as follows for the three months ended March 31, 2017 and 2016:

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Basic net loss per share:

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

Net loss (in thousands)

 

$

(56,778

)

 

$

(30,543

)

Denominator:

 

 

 

 

 

 

 

 

Weighted average common stock outstanding—basic

 

 

37,269,148

 

 

 

31,643,216

 

Dilutive effect of shares of common stock equivalents resulting from

   common stock options and restricted stock units

 

 

 

 

 

 

Weighted average common stock outstanding—diluted

 

 

37,269,148

 

 

 

31,643,216

 

Net loss per share—basic and diluted

 

$

(1.52

)

 

$

(0.97

)

 

The following common stock equivalents outstanding as of March 31, 2017 and 2016 were excluded from the computation of diluted net loss per share for the periods presented because including them would have been anti-dilutive:

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Stock options

 

 

4,801,491

 

 

 

3,146,627

 

Restricted stock units

 

 

31,600

 

 

 

 

Employee stock purchase plan

 

 

4,676

 

 

 

3,851

 

Restricted stock awards

 

 

 

 

 

24,721

 

 

 

 

4,837,767

 

 

 

3,175,199

 

 

 

9. Subsequent Event

In May 2017, the Company entered into the Sixth Amendment to the Lease with ARE-MA Region No. 38 (“Sixth Amendment”).  The Company increased the amount of square feet of office space at 215 First Street, Cambridge, Massachusetts, by 32,876 square feet, consisting of (i) 8,200 rentable square feet beginning on or around August 15, 2017, and (ii) 24,676 rentable square feet beginning on or around January 1, 2018. 

The term for this additional space will expire no later than 84 months after the date on which the Company begins to rent the portion of the lease that is approximately 8,200 square feet.  Additionally, the term of the existing lease will be extended from March 1, 2022 until the expiration date of the Sixth Amendment, which is anticipated to be on or around August 15, 2024.  The increase in future expected payments under the Sixth Amendment will be approximately $15.8 million.

 

 

17


 

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 condensed 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, 2016, 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 no approved therapies or existing therapies are inadequate. We have a portfolio of product candidates with a current focus on modulating two critical CNS receptor systems, GABA and NMDA.  The GABA receptor family, which is recognized as the major inhibitory neurotransmitter in the CNS, mediates downstream neurologic and bodily function via activation of GABAA receptors.  The NMDA-type receptors of the glutamate receptor system are a major excitatory receptor system in the CNS.  Dysfunction in these systems is implicated in a broad range of CNS disorders.  We are targeting CNS indications where patient populations are easily identified, clinical endpoints are well-defined, and development pathways are feasible.

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

 

 

18


 

Our lead product candidate, SAGE-547 (brexanolone, USAN), is a proprietary intravenous, or IV, formulation of allopregnanolone, a naturally occurring neuroactive steroid that acts as a positive allosteric modulator of GABAA receptors, including both synaptic and extrasynaptic populations. We are currently conducting Phase 3 clinical trials of SAGE-547 in both super-refractory status epilepticus, or SRSE, and post-partum depression, or PPD.

Our Phase 3 clinical trial in SRSE, known as the STATUS Trial, is evaluating SAGE-547 as a potential adjunctive therapy in the treatment of SRSE.  SRSE is a rare and life-altering condition in which a patient experiences a state of continuous seizure called status epilepticus, or SE, that continues or recurs despite standard treatment regimens normally sufficient to stop the seizure activity.  We expect to report top-line results from the STATUS Trial in the third quarter of 2017 after enrollment of an anticipated 126 evaluable patients and completion of all study follow-up periods and data analysis.  If successful, we believe the results from this Phase 3 clinical trial, together with other data from the SAGE-547 development program will be sufficient to form the basis of a New Drug Application, or NDA, submission to the U.S. Food and Drug Administration, or FDA, seeking approval for SAGE-547 in SRSE in the U.S. Based on scientific advice we received in the fourth quarter of 2016 from the European Medicines Agency, or EMA, we also believe our current Phase 3 clinical program in SRSE, if successful, will be sufficient to support submission of a marketing authorization application, or MAA, to the EMA seeking approval of SAGE-547 for SRSE in the European Union, or EU.

Our Phase 3 clinical program in PPD is evaluating SAGE-547 as a potential treatment for PPD.  PPD is a distinct and readily identified depressive disorder that is a biological complication of childbirth, affecting a subset of women typically commencing in the third trimester of pregnancy or within four weeks after giving birth.  We anticipate announcing top-line data from the Phase 3 clinical program, known as the Hummingbird Study, encompassing two placebo-controlled trials, in the second half of 2017.  We have received Breakthrough Therapy designation from the FDA for SAGE-547 as a potential treatment for PPD. Based on input we received from the FDA during a Breakthrough Therapy meeting, we believe that, if successful, the results of the Phase 3 clinical program, together with the results of prior clinical studies of SAGE-547 in PPD, and ongoing non-clinical studies, will be sufficient to support the submission of an NDA to the FDA seeking approval for SAGE-547 in PPD in the U.S.   We also received PRIority MEdicines (PRIME) designation from the EMA for SAGE-547 in the treatment of PPD in the EU.

Our most advanced next-generation product candidate is SAGE-217, a novel neuroactive steroid that, like SAGE-547, is a positive allosteric modulator of GABAA receptors, targeting both synaptic and extrasynaptic GABAA receptors. We are currently conducting Phase 2 clinical trials of SAGE-217 in two mood disorders, major depressive disorder, or MDD, and PPD, and in two movement disorders, Parkinson’s disease and essential tremor.  In February 2017, we announced top-line results from the open-label, proof-of-concept portion (Part A) of our Phase 2 clinical trial of SAGE-217 in MDD, which met our criteria for advancing SAGE-217 into the blinded, placebo-controlled portion (Part B) of the Phase 2 clinical trial.  We initiated dosing of Part B of the MDD Phase 2 clinical trial in April of 2017, and expect to report top-line results from this trial in the first half of 2018.  In May 2017, we reported top-line results from an open-label Phase 2 clinical trial exploring the safety, tolerability, pharmacokinetics and activity of SAGE-217 in 12 Parkinson’s disease patients with moderate severity disease who were on stable doses of the anti-parkinsonian agent, levodopa/carbidopa. In the trial, patients were administered levodopa/carbidopa (morning dose only) for three days, and then were taken off this medication, and given a single morning dose of SAGE-217 administered as a monotherapy for four days.  For the overall population in the trial, levodopa/carbidopa activity was primarily focused on the motor symptoms of bradykinesia and rigidity, while SAGE-217 activity as a monotherapy was primarily focused on tremor symptoms.  In the five patients with overt tremor (tremor score over five at baseline), an approximate 20-30% improvement in tremor symptoms was observed on the four days of SAGE-217 open-label treatment, as assessed by change in the Movement Disorder Society-Unified Parkinson’s Disease Rating Scale (MDS-UPDRS) Part III tremor score. SAGE-217 was found to be generally well-tolerated with no serious adverse events or discontinuations reported.   Similar to the findings of the Phase 1 program, the most common adverse events were sedation and somnolence (occurring 2 to 4 hours post dose).  As a result, while dosing in this trial was initiated at the 30 mg per day maximum tolerated dose established in the Phase 1 clinical program, dosing for a majority of patients was down-titrated to 10 to 20mg per day of SAGE-217.  Based on the signal of activity in reducing Parkinsonian tremor in the patients with overt tremor, we plan to proceed to an additional open-label (Part B) study evaluating SAGE-217 as an adjunctive treatment to anti-Parkinsonian agents in tremor-predominant patients, and intend to further evaluate non-motor symptoms of Parkinson’s disease, including depression, anxiety, cognition and sleep. We expect to initiate the SAGE-217 Parkinson’s disease open-label Part B study in the first half of 2017 with top-line results anticipated in the second half of 2017.  We also anticipate reporting top-line results from the blinded, placebo-controlled Phase 2 clinical trials of SAGE-217 in essential tremor and PPD in the second half of 2017.  

We also have a portfolio of other novel compounds that target GABAA receptors, including SAGE-324 and SAGE-689, which are at earlier stages of development with a focus on both acute and chronic CNS disorders.

Our second area of focus is the development of novel compounds that target the NMDA receptor. The first product candidate selected for development from this program is SAGE-718, an oxysterol-based positive allosteric modulator of the NMDA receptor.  Our initial areas of focus for development of SAGE-718 will be cerebrosterol deficit disorders, Anti-NMDA Receptor Encephalitis, and other indications involving NMDA receptor hypofunction. We believe measuring levels of anti-NMDA receptor antibodies or decreased levels of cerebrosterol, a naturally occurring oxysterol, may represent biomarkers to identify, for future study, broader

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patient populations characterized by cognitive dysfunction 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 commenced the Phase 1 clinical program for SAGE-718 in the second quarter of 2017.  We expect to report top-line results from a Phase 1 single ascending dose (SAD) trial of SAGE-718 in healthy volunteers in the second half of 2017.

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, as a starting point, on knowledge of the chemical scaffolds of certain endogenous neuroactive steroids. We believe our knowledge of the chemistry and activity of allosteric modulators allows us to efficiently design molecules with different characteristics.  This diversity enables us to regulate important properties such as half-life, brain penetration and receptor pharmacology to develop product candidates that have the potential for better selectivity, increased tolerability, and fewer off-target side effects than either current CNS therapies or previous therapies which have failed in development.  

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 $377.1 million as of March 31, 2017. Our net losses were $56.8 million for the three months ended March 31, 2017 and $159.0 million for the year ended December 31, 2016. 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:

 

complete the ongoing Phase 3 clinical trials for SAGE-547 in SRSE and PPD,  as well as additional clinical trials and non-clinical studies of SAGE-547 required for regulatory approval in SRSE and PPD;

 

complete the ongoing and currently planned Phase 2 clinical trials of SAGE-217 in essential tremor, Parkinson’s disease, PPD and MDD, and advance SAGE-217 further in development depending on the outcome of the ongoing trials;

 

continue to advance SAGE-718, our early-stage novel allosteric modulator for NMDA, including the ongoing Phase 1 clinical program;

 

continue non-clinical studies of SAGE-324 with a focus on orphan epilepsies and indications involving GABA hypofunction;

 

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

 

advancing regulatory activities focused on potential filings of NDAs for SAGE-547 in SRSE and in PPD in the U.S. and future potential regulatory filings in the EU;

 

continue initial preparations for a potential future commercial launch of SAGE-547, if our development efforts are successful;

 

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 service-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 need additional financing in the future 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 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 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

20


 

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 March 31, 2017 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 development 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.

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

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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 for a particular indication, 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 and tax services, director and officer insurance premiums, investor relations and legal costs, including legal expenses to pursue patent protection of our intellectual property. 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 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,

 

 

Increase

 

 

 

2017

 

 

2016

 

 

(Decrease)

 

 

 

(in thousands)

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

45,200

 

 

$

23,581

 

 

$

21,619

 

General and administrative

 

 

12,280

 

 

 

7,133

 

 

 

5,147

 

Total operating expenses

 

$

57,480

 

 

$

30,714

 

 

$

26,766

 

Loss from operations

 

 

(57,480

)

 

 

(30,714

)

 

 

(26,766

)

Interest income, net

 

 

707

 

 

 

175

 

 

 

532

 

Other expense, net

 

 

(5

)

 

 

(4

)

 

 

(1

)

Net loss

 

$

(56,778

)

 

$

(30,543

)

 

$

(26,235

)

 

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Research and development expenses

 

 

 

Three Months

Ended March 31,

 

 

Increase

 

 

 

2017

 

 

2016

 

 

(Decrease)

 

 

 

(in thousands)

 

SAGE-547

 

$

19,924

 

 

$

10,379

 

 

$

9,545

 

SAGE-217

 

 

8,967

 

 

 

5,106

 

 

 

3,861

 

SAGE-718

 

 

1,307

 

 

 

1,047

 

 

 

260

 

Other research and development programs

 

 

2,678

 

 

 

1,805

 

 

 

873

 

Unallocated expenses

 

 

12,324

 

 

 

5,244

 

 

 

7,080

 

Total research and development expenses

 

$

45,200

 

 

$

23,581

 

 

$

21,619

 

 

Research and development expenses for the three months ended March 31, 2017 were $45.2 million, compared to $23.6 million for the three months ended March 31, 2016. The increase of $21.6 million was primarily due to the following:

 

an increase of $9.5 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 trials in SRSE and PPD; conduct of supporting clinical pharmacology studies; and an increase in chemistry, manufacturing and control, or CMC, work in preparation for a potential filing for regulatory approval. No expenses related to payments to consultants and licensors upon achievement of certain clinical development milestones were incurred in the three months ended March 31, 2017 and 2016;

 

an increase of $3.9 million in expenses related to conduct of our Phase 2 clinical trials of SAGE-217 in MDD, essential tremor and Parkinson’s Disease and PPD, and production of clinical supply to support these clinical trials;

 

an increase of $0.3 million in expenses for our SAGE-718 program due to the completion of the Investigational New Drug, or IND,-enabling non-clinical development and CMC activities in preparation for IND filing, and expenses related to preparation in anticipation of commencement of the Phase 1 clinical program;

 

an increase of $0.9 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 $7.1 million in unallocated expenses, mainly due to the hiring of additional full-time employees to support the growth of our operations, including an increase of $2.0 million of non-cash stock-based compensation.

General and administrative expenses

 

 

 

Three Months

Ended March 31,

 

 

Increase

 

 

 

2017

 

 

2016

 

 

(Decrease)

 

 

 

(in thousands)

 

Personnel-related

 

$

6,210

 

 

$

4,187

 

 

$

2,023

 

Professional fees

 

 

2,334

 

 

 

1,572

 

 

 

762

 

Commercial planning