Eloxx Pharmaceuticals, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q, or this Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business, includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations. These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties and other important 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 the forward-looking statements, including, but not limited to, the important factors discussed under the caption “Risk Factors” in this Report. These and other factors could cause actual results to differ materially from those indicated by the forward-looking statements made in this Report. Company Overview We are a clinical-stage biopharmaceutical company developing novel ribonucleic acid (RNA)-modulating drug candidates (designed to be eukaryotic ribosomal selective glycosides (ERSG)) that are formulated to treat rare and ultra-rare premature stop codon diseases. Premature stop codons are point mutations that disrupt the stability of the impacted messenger RNA (mRNA) and the protein synthesis from that mRNA. As a consequence, patients with premature stop codon diseases have reduced levels of, or no, protein from a gene whose product performs an essential function. This type of mutation accounts for some of the most severe phenotypes across genetic diseases. Nonsense mutations have been identified in over 1,800 rare and ultra-rare diseases. Read-through therapeutic development is focused on increasing mRNA stability and enabling functional protein synthesis. As opposed to a typical gene therapy approach of targeting a single, unique mutation in a target disease, this small molecule strategy enables targeting an entire class of mutations across the rare disease landscape. Our small molecule approach has the potential to address a range of different premature stop codons in a single gene since our ERSG are targeted to the ribosomes. ELX-02, our lead investigational drug product candidate, is a small molecule designed to restore production of full-length functional proteins. ELX-02, is in the early stages of clinical development for systemic administration for cystic fibrosis and cystinosis. ELX-02 is an investigational drug that has not been approved by any global regulatory body. In addition, we recently announced a new program studying intravitreal administration of ERSG compounds for rare inherited retinal disorders with a focus on Usher Syndrome. Our preclinical candidate pool consists of a library of novel ERSG drug candidates identified based on read-through potential and cytoplasmic ribosomal selectivity. From the outset, our research and development strategy targets rare or ultra-rare diseases where: a high unmet medical need exists, an identified nonsense mutation-bearing patient population is established, preclinical read-through can be established in predictive personalized medicine models, and a defined path through Orphan Drug development, regulatory approval, patient access and commercialization is identifiable. We believe patient advocacy to be an important element of patient focused drug development and seek opportunities to collaborate with patient advocacy groups throughout the discovery and development process. Our current clinical focus for our lead investigational drug product candidate, ELX-02 is Cystic Fibrosis where we expect to complete our MAD study in the first half of 2019 and report top line results from our Phase 2 clinical trial in the second half of 2019. We have participated in the North American Cystic Fibrosis Foundation (CFF) CFTR Translational Read-through Workshop and are engaged with CFF on extending our Cystic Fibrosis clinical studies to the United States. Eloxx presented positive new data for its lead investigational drug, ELX-02, at the European Cystic Fibrosis Society (ECFS) Basic Science Conference. In 2018, the European Cystic Fibrosis Society Clinical Trial Network assigned a “high priority” rating to our Phase 2 program. We have recently initiated a new program studying inherited retinal disease and are conducting IND enabling studies for several ERSG compounds from our library. Eloxx presented at the Sixth Annual Retinal Cell and Gene Therapy Innovation Summit and the Association for Research in Vision and Ophthalmology 2019 Annual Meeting. We entered into a multiyear partnership with the Foundation Fighting Blindness (FFB) to support the inherited retinal degenerative disease registry and educational programs. We presented as part of the FFB “Investing in Cures” 2019 meeting and believe that the ongoing R&D consultation and support provided by the FFB will accelerate our development programs that seek to support patients with ocular disease and high unmet medical need. 18 We intend to be t he global leader in the application of the science of translational read-through and the associated pathway of nonsense mediated decay (NMD). We believe that expanding our expertise across these basic science areas of mRNA regulation, ribosomal function, a nd protein translation forms a solid foundation to support our discovery and development activities. Our ERSG compounds modulate the activity of the ribosome, a complex of RNAs and proteins, and therefore, a ribonucleoprotein, responsible for protein produ ction, a process also known as translation. These novel small molecule ERSG compounds are designed to allow the ribosome to read-through a nonsense mutation in mRNA (which is transcribed from the DNA sequence), to restore the translation process to produce full - length, functional proteins and increase the amount of mRNA that would otherwise be degraded as part of a phenomenon called nonsense mediated mRNA decay. As our ERSG compounds target the general mechanism for protein production in the cell, we believ e they have the potential to treat hundreds of genetic diseases where nonsense mutations have impaired gene function. Since nonsense mutations may occur at different positions within a given gene, a potential advantage of the small molecule ERSG approach i s being able to use one molecule to address a range of mutations within a given disease state. Our subcutaneously injected ERSG molecules have the potential to be self-administered for systemic disease and to be active at most tissue locations across the b ody. We believe that our library of related novel small molecules holds the potential to be disease-modifying therapies that may change the course of hundreds of genetic diseases and improve the lives of patients. Our early preclinical data in animal models of nonsense mutations suggests that drug product candidates from our read-through compound library may have potential beneficial effects for each of the following diseases: cystic fibrosis, cystinosis, a variety of inherited retinal diseases (including Usher Syndrome), primary ciliary diskinesia, polycystic kidney disease, mucopolysaccharidosis type 1, Duchenne muscular dystrophy and Rett syndrome, and have demonstrated the potential for beneficial effects in multiple organs such as the brain, eye, kidney, muscles and others. Of the novel compounds in the ERSG Library, approximately 30 compounds have been selected, based on read-through activity, for continued preclinical research and we anticipate additional compounds advancing toward IND filings. Currently our lead program, ELX-02, is focused on development for cystic fibrosis and cystinosis patients with diagnosed nonsense mutations. Our clinical trial application (“CTA”) has been approved by the Federal Agency for Medicines and Health Products (the “FAMHP”) in Brussels and our IND submitted to the U.S. Food and Drug Administration (the “FDA”) is open. Our Phase 2 program has been given a “high priority” ranking by the European Cystic Fibrosis Society Clinical Trial Network. We expect to initiate Phase 2 studies in cystic fibrosis and cystinosis following completion of our ongoing Phase 1b MAD study in the first half and to report top line Phase 2 data in the second half of 2019. In 2018, we entered into a collaboration with Dr. Paul Goodyear at McGill University as part of the Genome Canada Genomic Applications Partnership Program (GAAP), to conduct clinical trials of ELX-02 for the treatment of cystinosis. During 2018, Eloxx submitted an IND to the FDA for the conduct of Phase 2 studies in cystinosis and the IND is now open. The Phase 2 program as discussed with the FDA will enroll no more than 6 patients to evaluate multiple doses of ELX-02 for the primary endpoint of safety and exploratory endpoints that will include white blood cell cystine levels. In support of the cystinosis program where many patients have impaired renal function, we initiated a renal impairment safety study. We are pleased that the cohorts of subjects with mild and moderate renal impairment have been successfully completed. To date, the pharmacokinetic results were as expected with no adverse events. As part of our clinical program, we have completed a Phase 1 SAD study in a total of 60 healthy volunteers at sites in Israel (ClinicalTrials.gov Identifier: NCT02807961) and Belgium (ClinicalTrials.gov Identifier: NCT03292302). The results of the SAD study were published in the Journal of Clinical Pharmacology in January 2019. Our MAD study is being conducted in Belgium (ClinicalTrials.gov Identifier: NCT03309605). We have initiated the 7 th and final cohort of the MAD study in the U.S. and expect to complete the study in the first half of this year. In 2018, we initiated a new program studying inherited retinal disorders with a focus on Usher Syndrome by conducting pre-IND enabling studies on several compounds from our library. We expect to advance one or more compounds into development for intravitreal administration. We believe there is a significant unmet medical need in the treatment of cystic fibrosis patients carrying nonsense mutations on one or both alleles of the Cystic Fibrosis Transmembrane Conductance Regulator (“CFTR”) gene. Cystic fibrosis is the most prevalent genetic disease in the western world and there are no currently approved therapies that target the impairment associated with Class 1 CFTR mutations. We believe that nonsense mutations may impact a similar proportion of patients diagnosed with cystinosis. There are no currently approved therapeutics that target the nonsense mutation mediated impairment of cystinosin, the cystine-selective transport channel in the lysosomal membrane that is attributed as the cause for the accumulation of cystine in this disease state. Given the high proportion of pediatric patients in each of these rare orphan diseases we intend to apply for relevant Orphan Drug incentives in the U.S. and Europe, including the Rare Pediatric Disease Priority Review Voucher in the U.S. 19 Currently, the European Medicines Agency (the “EMA”) has designated ELX-02 as an orphan medicine for the treatment of cystic fibrosis and mucopolysaccharidosis type I (“MPS I”), and the FDA has granted orphan drug designation to ELX-02 for the t reatment of cystinosis, MPS I, and Rett Syndrome. We hold worldwide development and commercialization rights to ELX-02 and other novel compounds in our read-through library, for all indications, in all territories, under a license from the Technion Research and Development Foundation Ltd. (“TRDF”). Professor Timor Baasov, the inventor of our compounds, has served as our senior consultant since our incorporation. We believe that our cash, cash equivalents and marketable securities of $53.5 million at March 31, 2019 will enable us to meet the anticipated cash needs required to reach top line Phase 2 data in cystic fibrosis and cystinosis in 2019 and maintain our current and planned operations into the second quarter of 2020. Since our inception, we have incurred significant operating losses. As of March 31, 2019, we had an accumulated deficit of $98.1 million. To date, we have financed our operations primarily through equity capital investments, and to a lesser extent, from loans and grants from the Israeli Innovation Authority of the Ministry of Economy and Industry, or the IIA. We have devoted substantially all of our financial resources and efforts to research and development. We expect that it will be many years, if ever, before we receive regulatory approval and have a product candidate ready for commercialization. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase substantially if, and as, we: • advance ELX-02 further into clinical trials; • continue the preclinical development of our research programs and advance candidates into clinical trials; • identify additional product candidates and advance them into preclinical development; • pursue regulatory authorization to conduct clinical trials of additional product candidates; • seek marketing approvals for our product candidates that successfully complete clinical trials; • establish a sales, marketing and distribution infrastructure to commercialize any product candidates for which we obtain marketing approval; • maintain, expand and protect our intellectual property portfolio; • hire additional clinical, regulatory, management and scientific personnel; • add operational, financial and management information systems and personnel, including personnel to support product development; • acquire or in-license other product candidates and technologies; and • operate as a public company. Results of Operations Critical Accounting Policies and Use of Estimates Our management’s discussion and analysis of financial condition and results of operations is based on our unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires us 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 Condensed Consolidated Financial Statements, as well as the reported revenue and expense during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions. 20 The critical accounting policies that we believe impact significant judgments and estimates used in the preparation of our financial statements presented in this Report are described in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K . There have been no material changes to our critical accounting p o licies through March 31, 2019 , from those discussed in our Annual Report on Form 1 0-K filed with the SEC on March 1 4 , 201 9 . Results of Operations The following table summarizes our results of operations for each of the periods presented (in thousands): Three Months Ended March 31, Change 2019 2018 $ % Operating expenses: Research and development $ 6,019 $ 4,394 $ 1,625 37 % General and administrative 5,958 3,393 2,565 76 % Reverse merger related expenses — 761 (761 ) -100 % Total operating expenses 11,977 8,548 3,429 40 % Loss from operations (11,977 ) (8,548 ) (3,429 ) 40 % Other (income) expense, net (60 ) 43 (103 ) -240 % Net loss $ (11,917 ) $ (8,591 ) $ (3,326 ) 39 % Research and development expense Research and development expenses were $6.0 million for the three months ended March 31, 2019 compared to $4.4 million for the same period ended March 31, 2018, an increase of $1.6 million. Research and development expenses increased $0.7 million primarily related to fees incurred for subcontractors, consultants and advisors in connection with ongoing clinical trials and research and development activities and $0.9 million due to an increase in headcount and related salaries, stock-based compensation, and other personnel related costs. General and administrative expenses General and administrative expenses were $6.0 million for the three months ended March 31, 2019, compared to $3.4 million for the same period ended March 31, 2018, an increase of $2.6 million. The increase in general and administrative expenses was primarily due to an increase in headcount and related salaries, stock-based compensation, and other personnel related costs of $2.8 million, offset by infrastructure-related costs of $0.2 million, including legal, accounting and other professional fees following the reverse merger. Reverse merger related expenses We recorded a decrease of $0.8 million in professional service fees incurred during the three months ended March 31, 2018 related to the reverse merger we completed on December 19, 2017. Other (income) expense We recorded $60 thousand in other income for the three months ended March 31, 2019, compared to $43 thousand in other expense for the same period ended March 31, 2018. The increase was primarily due to an increase in interest income of $0.3 million due to our higher cash balance resulting from net proceeds of $53.6 million received from our initial public offering, described below under Principal Financing Activities in April 2018 and proceeds received of $15 million from the issuance of debt in January 2019, offset by interest expense incurred on that debt of $0.3 million. 21 Liquidity and Capital Resources Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures. Since our inception and through March 31, 2019, we have funded our operations primarily through equity and convertible debt financings in private placements, as described below. We have a history of net losses and negative cash flows from operating activities since inception, and as of March 31, 2019, had an accumulated deficit of $98.1 million. We expect to continue to incur net losses and use cash in our operations in the foreseeable future. To date, we have not generated revenue from the sale of any product or service and do not expect to generate significant revenue unless and until obtaining marketing approval and commercialization of our product candidates currently in development. A successful transition to profitable operations is dependent upon achieving a level of revenue adequate to support our cost structure. We have financed our operations primarily from the sale of our equity securities. We may never achieve profitability, and unless and until we do, we will continue to need to raise additional cash to fund our operations. We believe that our cash and cash equivalents of $53.5 million at March 31, 2019 will enable us to meet the anticipated cash needs required to reach top line Phase 2 data in cystic fibrosis and cystinosis in 2019 and maintain our current and planned operations into the second quarter of 2020. Our cash and cash equivalents are highly liquid investments with original maturities of 90 days or less at the date of purchase and consist of cash in operating accounts and secured investments, primarily in U.S. treasuries. Management intends to fund future operations through private or public debt or equity financing transactions, and may seek additional capital through arrangements with strategic partners or from other sources. If we are unable to obtain financing, we will evaluate options which may include reducing or deferring operating expenses which may have a material adverse effect on our operations and future prospects. Principal Financing Activities On April 30, 2018, we completed an underwritten public offering of 5,899,500 shares of common stock of the Company at the public offering price of $9.75 per share. We received net proceeds of approximately $53.6 million after deducting underwriting discounts and commissions and estimated offering expenses. On January 30, 2019, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (“SVB”), in its capacity as administrative agent, collateral agent and lender, and WestRiver Innovation Lending Fund VIII, L.P. (“WestRiver”). Pursuant to the terms and conditions of the Loan Agreement, the Lenders agreed to extend term loans to us in an aggregate principal amount of up to $25 million, comprised of (i) an initial loan advance of $15 million and (ii) a subsequent loan advance of $10 million, subject to first achieving certain conditions (collectively, the “Term Loan Advances”). The initial term loan was funded on January 30, 2019. The subsequent loan advance is available at our election prior to December 31, 2019 after the occurrence of certain milestone events relating to data from our clinical trials and receipt by us of certain minimum cash proceeds of at least $75 million from an additional equity offering through a private placement or a public offering. Cash Flows The following table summarizes our sources and uses of cash for each of the periods presented (in thousands): Three Months Ended March 31, 2019 2018 Net cash used in operating activities $ (9,188 ) $ (5,697 ) Net cash used in investing activities (19 ) (57 ) Net cash provided by financing activities 5,177 — 22 Our operating activities used cash of $ 9. 2 million and $5.7 million during the three months ended March 31, 2019 and March 31, 2018 , respectively . For the three month s ended March 31, 2019, n et cash used in operating activities resulted primarily from our net loss of $ 11.9 million partially offset by n on-cash charges of $ 2. 7 million related to stock-based compensation , $ 33 thousand of depreciation expen se and $0.1 million related to our amortization of debt discount. For the three months ended March 31, 2018, net cash used in operating activities resulted primarily from our net loss of $ 8.6 million partially offset by non-cash charges of $ 2.1 million related to changes in working capital primarily for accounts payable and accrued expenses and $0.7 million related to stock-based compensation. Our investing activities used cash of $19 thousand and $57 thousand during the three months ended March 31, 2019 and March 31, 2018, respectively. Cash used in investing activities was primarily for the purchase of property and equipment and deposits on leased office space. Our financing activities provided cash of $5.2 million for the three months ended March 31, 2019. Cash provided resulted primarily from the issuance of debt of $15 million in January 2019 and proceeds of $0.5 million from the purchase of common stock offset by the purchase of marketable securities of $8.9 million and the payment of taxes of $1.1 million associated with the vesting of restricted stock units. No cash was provided or used by financing activities during the period ended March 31, 2018. Form S-3 and Equity Sales Agreement On April 10, 2018, we filed a shelf registration statement (“April 2018 Shelf”) on Form S-3 with the Securities and Exchange Commission (the “SEC”). The 2018 Shelf (File No. 333-224207) was declared effective on April 20, 2018 and covers the offering, issuance and sale of up to $125 million of our common stock, preferred stock, debt securities or warrants and other securities, either individually or in combination. In November 2018, we entered into an Equity Distribution Agreement (“the Agreement”) with Citigroup Global Markets Inc. and Cantor Fitzgerald & Co. (collectively, the “Sales Agents”), pursuant to which we may sell and issue shares of our common stock up to an aggregate of $50 million through the Sales Agents. The shares were offered pursuant to the April 2018 Shelf. In January 2019, we sold 35,362 shares of common stock and received net proceeds of $0.7 million. At March 31, 2019, there was approximately $47.0 million available for future sales pursuant to the Agreement. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not have any off-balance sheet arrangements, as such term is defined under Item 303 of Regulation S-K, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expense, results of operations, liquidity, capital expenditures or capital resources that is material to investors. 23 Item 3. Quantitative and Qualitati ve Disclosures about Market Risk Not applicable to a “smaller reporting company”, as defined in Item 10(f)(1) of SEC Regulation S-K.