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OFFON

VYNE THERAPEUTICS INC.

(VYNE)
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VYNE THERAPEUTICS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

05/06/2021 | 08:48am EDT
You should read the following discussion and analysis of our financial condition
and results of operations in conjunction with the condensed consolidated
financial statements and the notes thereto included elsewhere in this Quarterly
Report on Form 10-Q and our Annual Report on Form 10-K for the year ended
December 31, 2020. In this Quarterly Report on Form 10-Q, unless otherwise
indicated, all references to the "Company," "we," "us" and "our" or similar
terms refer to VYNE Therapeutics Inc. The disclosure set forth in this section
reflects the Company's 1-for-4 reverse stock split, which was effected on
February 12, 2021. Accordingly, all share amounts and per share amounts have
been adjusted.
Company Overview
We are a specialty pharmaceutical company focused on developing proprietary,
innovative and differentiated therapies in dermatology and beyond. Our products,
AMZEEQ® (minocycline) topical foam, 4% ("AMZEEQ") for the treatment of
inflammatory lesions of moderate-to-severe acne vulgaris in adults and patients
9 years of age and older, and ZILXI® (minocycline) topical foam, 1.5% ("ZILXI")
for the treatment of inflammatory lesions of rosacea in adults, are the first
topical minocycline products to be approved by the FDA. AMZEEQ and ZILXI were
commercially launched in January and October of 2020, respectively, and serve as
a springboard for commercializing additional innovative products. Our product
pipeline includes FCD105 (minocycline 3% and adapalene 0.3%) ("FCD105"), our
proprietary novel topical combination foam formulation of minocycline and
adapalene for the treatment of moderate-to-severe acne vulgaris. FCD105 is a
Phase 3-ready asset that we believe has the potential to be a best-in-class
treatment for patients with acne. We may commence a Phase 3 program in the next
twelve to eighteen months based upon our results of operations, which depend on
numerous factors, including the impact of the COVID-19 pandemic and recent payor
formulary decisions. In addition, we recently announced a development program
for FMX114, which is a combination topical gel for the potential treatment of
mild-to-moderate atopic dermatitis. We plan to initiate a Phase 2a
proof-of-concept study for FMX114 in the third quarter of 2021 and anticipate
topline results prior to the end of 2021.
AMZEEQ and ZILXI utilize our proprietary Molecule Stabilizing Technology (MST)™
delivery system that is also being used to develop FCD105. Our MST™ proprietary
foam platform is designed to optimize the topical delivery of minocycline, an
active pharmaceutical ingredient ("API") that was previously available only in
oral form despite its prevalent use in dermatology. In addition to the MST
platform, we have a number of proprietary delivery platforms in development that
enable topical delivery of other APIs, each having unique pharmacological
features and characteristics designed to keep the API stable when delivered and
directed to the target site. We believe our MST vehicles and other topical
delivery platforms may offer significant advantages over alternative delivery
options and are suitable for multiple application sites across a range of
conditions.
Key Developments
Below is a summary of selected key developments affecting our business that have
occurred since December 31, 2020:
•From January 1, 2021 through January 25, 2021, the Company issued and sold
2,778,012 shares of common stock at a weighted average price per share of $9.76
for $26.3 million in net proceeds pursuant to a Sales Agreement (the "Sales
Agreement") with Cantor Fitzgerald & Co. ("Cantor Fitzgerald") through an
at-the-market equity offering program under which Cantor Fitzgerald acted as our
sales agent. Effective as of January 25, 2021, the Company terminated the Sales
Agreement and will not make any additional sales thereunder.
•On January 21, 2021, the Company announced the execution of a contract with CVS
Caremark ("Caremark"), one of the largest pharmacy benefit managers in the U.S.,
with respect to AMZEEQ and ZILXI. In late March 2021, Caremark informed the
Company that it decided to not include these products, and other new branded
comparator drugs, on its national formulary for 2021. Certain custom plans under
the Caremark umbrella have decided to add the Company's drugs to their
respective formularies. This could have an unfavorable pricing impact in the
future.
•On January 28, 2021, the Company completed a registered direct offering of
5,274,261 shares of common stock at a price of $9.48 per share. The net proceeds
of the offering were approximately $46.7 million, after deducting placement
agent fees and other offering expenses.
•On February 1, 2021, we announced that the FDA approved a label update for
AMZEEQ, including new information indicating the low propensity of
Propionibacterium acnes (more commonly known as P. acnes) to develop resistance
to minocycline.
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•On February 10, 2021, our Board of Directors approved a one-for-four reverse
stock split of our outstanding shares of common stock. The reverse stock split
was effected on February 12, 2021 at 5:00 p.m. Eastern time. At the effective
time, every four issued and outstanding shares of our common stock were
converted into one share of common stock. No fractional shares were issued in
connection with the reverse stock split, and in lieu thereof, each stockholder
holding fractional shares was entitled to receive a cash payment (without
interest or deduction) from the Company's transfer agent in an amount equal to
such stockholder's respective pro rata share of the total net proceeds from the
Company's transfer agent sale of all fractional shares at the then-prevailing
prices on the open market. In connection with the reverse stock split, the
number of authorized shares of our common stock was also reduced on a
one-for-four basis, from 300 million to 75 million. The par value of each share
of common stock remained unchanged. A proportionate adjustment was also made to
the maximum number of shares issuable under the Company's 2019 Equity Incentive
Plan, 2018 Omnibus Incentive Plan and 2019 Employee Share Purchase Plan.
•On March 1, 2021, we announced development plans for FMX114 for the potential
treatment of mild-to-moderate atopic dermatitis. FMX114 is a fixed combination
of tofacitinib, which is a pan-Janus kinase (JAK) inhibitor, and fingolimod, a
sphingosine 1-phosphate receptor modulator. FMX114 attempts to address both the
source and cause of inflammation in atopic dermatitis and support skin barrier
recovery.
Financial Overview
Our cash, cash equivalents, restricted cash and investments
totaled $120.4 million as of March 31, 2021. We believe that our cash and cash
equivalents and investments and projected cash flows from revenues will provide
sufficient resources for our current ongoing needs through December 31, 2022.
However, the Company may seek additional financing in order to achieve its
longer-term strategic plans. See "-Liquidity and Capital Resources" below.
We have incurred net losses since our inception. Until the first quarter of
2020, when we commenced commercial operations, our business activities were
primarily limited to developing product candidates, raising capital and
performing research and development activities. As of March 31, 2021, we had an
accumulated deficit of $586.7 million. We recorded net losses of $20.6 million
and $40.2 million for the three months ended March 31, 2021 and 2020,
respectively.
Our capital resources and business efforts are largely focused on activities
relating to the commercialization of AMZEEQ and ZILXI and advancing our product
candidates and pipeline. We expect to continue to incur operating losses until
our products generate adequate commercial revenue to reach profitability. If we
do not successfully commercialize AMZEEQ, ZILXI or any current or future product
candidates, if approved, we may be unable to generate adequate product revenues
to achieve such profitability. We may be required to obtain further funding
through debt or equity offerings or other sources. Adequate additional funding
may not be available to us on acceptable terms, or at all. If we are unable to
raise capital when needed or on acceptable terms, we may be forced to delay,
reduce or eliminate our research and development programs or commercialization
or manufacturing efforts. Additionally, we are closely monitoring ongoing
developments in connection with the COVID-19 pandemic, which may have an adverse
impact on our commercial prospects and projected cash position.
Components of Operating Results
Revenues
Our revenue during the periods presented has been comprised of AMZEEQ and ZILXI
product sales and collaboration revenue.
We received FDA approval for AMZEEQ on October 18, 2019 and launched AMZEEQ in
the United States in January 2020. We commercially launched ZILXI on October 1,
2020. We have generated product revenue of $3.9 million for the three months
ended March 31, 2021. We will not commercially launch our other product
candidates in the United States or generate any revenues from sales of any of
our product candidates unless and until we obtain marketing approval. Our
ability to generate revenues from sales will depend on the successful
commercialization of our drug products AMZEEQ and ZILXI and any other product
candidates that receive marketing approval.
Historically, we have generated revenues under development and license
agreements including royalty payments in relation to Finacea, the prescription
foam product that we developed in collaboration with Bayer, which later assigned
it to Leo Pharma A/S ("LEO"). In the three months ended March 31, 2020, we did
not receive or become entitled to any royalty payments due to the suspension of
the manufacturing of Finacea by LEO, following inadequate supply of
quality-compliant batches of the API used in such product. In April 2020, LEO
informed us that it had reestablished the supply of Finacea foam and resumed
commercial sale in the United States. In the three months ended March 31, 2021
we received royalties of $0.2 million.
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We may become entitled to additional contingent payments in the future, subject
to achievement of the applicable clinical results by our other licensees.
However, in light of the current phase of development and associated milestone
schedules under these agreements, we do not expect to receive significant
payments in the near term, if at all. We are also entitled to additional
royalties from net sales or net profits generated by other products to be
developed under these agreements, if they are successfully commercialized.
Additionally, on April 23, 2020, we entered into a licensing agreement with
Cutia for AMZEEQ as well as certain of our other topical minocycline product
candidates, once approved, on an exclusive basis in Greater China. Under the
terms of the agreement, Cutia will have an exclusive license to obtain
regulatory approval of and commercialize AMZEEQ, ZILXI and, if approved in
the U.S., FCD105 in the Greater China territory. We will supply the finished
licensed products to Cutia for clinical and commercial use. We received an
upfront cash payment of $10 million in 2020 ($6.0 million received in the three
months ended June 30, 2020 and $4.0 million received in the three months ended
September 30, 2020) and will be eligible to receive an additional $1
million payment upon the receipt of marketing approval in China of the first
licensed product. We will also receive royalties on net sales of any licensed
products pursuant to the agreement. There was no license revenue for the three
months ended March 31, 2021.
Cost of Goods Sold
Cost of goods sold for the three months ended March 31, 2021 and 2020 were
approximately $0.6 million and $0.3 million, respectively.
Our gross margin percentage of 85% was favorably impacted during the three
months ended March 31, 2021 and March 31, 2020 by product sales with certain
materials produced prior to FDA approval and therefore expensed in prior
periods. If inventory sold during the three months ended March 31, 2021 and
March 31, 2020 was valued at cost, our gross margin for the period then ended
would have been 81% and 79%, respectively.
Cost of goods sold expenses consist primarily of:
•third party expenses incurred in manufacturing product for sale;
•transportation costs incurred in shipping manufacturing materials between third
parties; and
•other costs associated with delivery and manufacturing of product.
Operating Expenses
Research and Development Expenses
Our research and development expenses to date relate primarily to the
development of AMZEEQ, ZILXI, serlopitant, FCD105 and FMX 114. Our total
research and development expenses for the three months ended March 31, 2021 and
2020 were approximately $6.3 million and $16.0 million, respectively. We charge
all research and development expenses to operations as they are incurred.
Research and development expenses consist primarily of:
•employee-related expenses, including salaries, benefits and related expenses,
including share-based compensation expenses;
•expenses incurred under agreements with third parties, including
subcontractors, suppliers and consultants that conduct regulatory activities,
clinical trials and preclinical studies;
•expenses incurred to acquire, develop and manufacture clinical trial materials;
•facilities, depreciation and other expenses, which include direct and allocated
expenses for rent and maintenance of facilities, insurance, and other operating
costs;
•costs associated with the creation, development and protection of intellectual
property;
•other costs associated with preclinical and clinical activities and regulatory
operations; and
•materials and manufacturing costs related to commercial production prior to FDA
approval.
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Selling, General and Administrative Expenses
Our selling, general and administrative expenses for the three months ended
March 31, 2021 and 2020 were approximately $16.6 million and $25.4 million,
respectively.
Our selling, general and administrative expenses consist principally of:
•employee-related expenses, including salaries, benefits and related expenses,
including share-based compensation expenses;
•costs associated with selling, marketing and shipping and handling costs;
•legal and professional fees for auditors and other consulting expenses; and
•facility, information technology and depreciation expenses.
Interest Expense
Interest expense primarily consists of interest expense on our long-term debt.
Other Expense, net
Other Expense, net primarily consists of gains from interest earned from our
bank deposits, financial income on our marketable securities and a revaluation
of our derivative liability.
Income Taxes and Net Operating Loss Carryforwards
We have incurred significant net operating losses ("NOLs") since our inception.
We expect to continue to incur NOLs until such a time when AMZEEQ, ZILXI or any
other product, if approved in the future, generates adequate revenues for us to
reach profitability. As of December 31, 2020, we had federal and state net
operating loss carryforwards of $243.2 million and $66.3 million, respectively,
of which $44.3 million and $66.3 million of these carryforwards will begin to
expire in 2031 for federal and state purposes, respectively. As of December 31,
2020, we had federal and state research and development tax credit carryforwards
of $6.6 million and $1.2 million, respectively. The federal credits begin to
expire in 2031 and the California research credits have no expiration dates. As
of December 31, 2020, the company had $198.9 million in federal and state NOLs
with no limited period of use. There are no significant updates through March
31, 2021.
NOLs and tax credit carryforwards are subject to review and possible adjustment
by the Internal Revenue Service and may become subject to an annual limitation
in the event of certain cumulative changes in the ownership interest of
significant stockholders over a three-year period in excess of 50%, as defined
under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended.
This could limit the amount of tax attributes that can be utilized annually to
offset future taxable income or tax liabilities. The amount of the annual
limitation is determined based on the value of our company immediately prior to
the ownership change. Subsequent ownership changes may further affect the
limitation in future years. State NOLs and tax credit carryforwards may be
subject to similar limitations under state laws. We have not determined if we
have experienced Section 382 ownership changes in the past and if a portion of
our net operating loss and tax credit carryforwards are subject to an annual
limitation under Sections 382 or 383. We may have experienced ownership changes
in the past, including in connection to our initial public offering ("IPO"), and
as a result of the Merger and/or subsequent shifts in our stock ownership, some
of which may be outside of our control. As a result, even if we earn net taxable
income, our ability to use the NOL and tax credit carryforwards may be
materially limited, which could harm our future operating results by effectively
increasing our future tax obligations.
Results of Operations
Comparison of the Three-Month Periods Ended March 31, 2021 and 2020
Revenue
Revenues totaled $4.1 million and $1.8 million for the three months ended
March 31, 2021 and 2020, respectively. For the three months ended March 31,
2021, our revenue consisted of $3.9 million of product sales, and $0.2 million
of royalty revenue. For the three months ended March 31, 2020, revenues
consisted solely of $1.8 million of product sales.
The increase in product sales is due to the ZILXI product launch in October 2020
and an increase in demand for AMZEEQ.
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The COVID-19 pandemic and government measures taken in response to the pandemic
have had a significant impact on our operations. Access to healthcare providers
has been limited, which has dampened sales and negatively impacted the Company's
ability to execute its commercial strategy with respect to AMZEEQ and ZILXI.
Access to healthcare providers has remained limited through the first quarter of
2021. The length of time and extent to which the COVID-19 pandemic will directly
or indirectly impact the Company's business, results of operations and financial
condition and liquidity will depend on future developments that are highly
uncertain, subject to change and will continue to evolve with geographical
re-openings, surges in cases and the vaccination effort. If the activities of
our sales force continue to be disrupted or patients elect not to visit their
healthcare providers during the pandemic, we may continue to generate less
revenue than expected, which would have a material adverse effect on our
financial results and liquidity as well as hinder our ability to satisfy certain
covenants contained in the Amended and Restated Credit Agreement.
Cost of Goods Sold
Cost of goods sold was $0.6 million and $0.3 million for the three months ended
March 31, 2021 and 2020, respectively. The increase in cost of goods sold is
primarily due to an increase in sales volume.
Our gross margin percentage of 85% for both the three months ended March 31,
2021 and March 31, 2020 was favorably impacted by product sales with certain
materials produced prior to FDA approval and therefore expensed in prior
periods. If inventory sold during the three months ended March 31, 2021 and
March 31, 2020 was valued at cost, our gross margin for the period then ended
would have been 81% and 79%, respectively.
Research and Development Expenses
Our research and development expenses for the three months ended March 31, 2021
were $6.3 million, representing a decrease of $9.6 million, or 60.3%, compared
to $16.0 million for the three months ended March 31, 2020. Employee-related
expenses decreased $5.2 million primarily due to severance costs incurred in
2020 due to the Merger. Clinical trial and manufacturing expenses decreased with
the completion of FCD 105 and serlopitant clinical trials and the product
launches of AMZEEQ and ZILXI during 2020.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses for the three months ended
March 31, 2021 were $16.6 million, representing a decrease of $8.8 million, or
34.6%, compared to $25.4 million for the three months ended March 31, 2020.
Employee-related expenses decreased by $6.1 million primarily due to severance
costs incurred in 2020 due to the Merger. Professional services spend decreased
as these expenses were incurred in 2020 as a result of the Merger.
Interest Expense
Interest expense for the three months ended March 31, 2021 and March 31, 2020
was $1.1 million.
Other Expense (Income), net
Other expense (income), net for the three months ended March 31, 2021 was $0.1
million of expense as compared with $0.7 million of income for the three months
ended March 31, 2020.
Income Taxes
There was no income tax (benefit) expense for the three months ended March 31,
2021 and March 31, 2020.
Liquidity and Capital Resources
Since inception, we have funded operations primarily through private and public
placements of our equity, debt, warrants and through fees, cost reimbursements
and royalties received from our licensees. We commenced generating product
revenues related to sales of AMZEEQ in the first quarter of 2020.  ZILXI became
available in pharmacies nationwide on October 1, 2020. We have incurred losses
and experienced negative operating cash flows since our inception and anticipate
that we will continue to incur losses until such a time when our product and
product candidates, if approved, are commercially successful, if at all. We will
not generate any revenue from any current or future product candidates unless
and until we obtain regulatory approval and commercialize such products.
As of March 31, 2021, we had cash, cash equivalents, restricted cash and
investments of $120.4 million. Our cash, cash equivalents, restricted cash and
investments are held in money market accounts and marketable securities.
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VYNE Pharmaceuticals Inc., a Delaware corporation and a subsidiary of the
Company (the "Borrower"), Foamix and the Company, each as a guarantor, the
lenders party thereto, and Perceptive Credit Holdings II, LP, as administrative
agent for the lenders, entered into an Amended and Restated Credit Agreement and
Guaranty, dated as of March 9, 2020 (the "Credit Agreement"). We have guaranteed
the indebtedness obligation of the Borrower under the Credit Agreement and in
connection with the Credit Agreement also granted a first priority security
interest in substantially all of our assets for the benefit of the lenders. The
Credit Agreement provides for a senior secured delayed draw term loan facility
in an aggregate principal amount of up to $50.0 million, and as of March 31,
2021, approximately $35.0 million was drawn under the Credit Agreement. We did
not, and do not expect to, incur the remaining $15.0 million under the Credit
Agreement.
Prior to the Merger, the Company was focused on the development and
commercialization of serlopitant for pruritic conditions. Following the receipt
of the results of the Phase 3 clinical trials evaluating serlopitant for the
treatment of PN and the impact of the COVID-19 pandemic, the Company has revised
its operating plan to focus on the commercialization of AMZEEQ and its other
topical minocycline product candidates. In addition, the revised operating plan
reflects prudent resource prioritization and allocation management, including
the rationalization of research and development spend to focus on existing
product candidates.
As a result of recent unfavorable payor formulary decisions, coupled with
continued uncertainties surrounding the impact of COVID-19, the Company's
current projections indicate that it may not be in compliance with certain
revenue covenants in each of the subsequent periods of 2021. The Company
believes that its existing cash, cash equivalents and investments as of March
31, 2021 and projected cash flows from revenues will provide sufficient
resources to fund its current ongoing needs, including all potential debt
obligations, for at least the next twelve months from the issuance of these
financial statements. However, the Company may seek additional financing in
order to achieve its longer-term strategic plans. We have based this estimate on
assumptions that may prove to be wrong, and we could use our capital resources
sooner than we currently expect. See "Note 1 - Nature of Operations."
The COVID-19 pandemic and government measures taken in response to the pandemic
have had a significant impact on the Company's operations. Access to healthcare
providers has been limited, which has dampened sales and negatively impacted the
Company's ability to execute its commercial strategy with respect to AMZEEQ and
ZILXI. On August 5, 2020, the Company and its lenders amended the minimum net
revenue covenant in the Amended and Restated Credit Agreement following an
assessment of the impact of the pandemic on the Company's revenue. See "Note 8 -
Long-Term Debt." Access to healthcare providers has remained limited through the
first quarter of 2021. The length of time and extent to which the COVID-19
pandemic will directly or indirectly impact the Company's business, results of
operations and financial condition and liquidity will depend on future
developments that are highly uncertain, subject to change and will continue to
evolve with geographical re-openings, surges in cases and the vaccination
effort. If the activities of the Company's sales force continue to be disrupted
or patients elect not to visit their healthcare providers during the pandemic,
the Company may continue to generate less revenue than expected, which would
have a material adverse effect on its financial results and liquidity as well as
hinder its ability to satisfy certain covenants contained in the Amended and
Restated Credit Agreement.
Summary Statement of Cash Flows
The following table summarizes our statement of cash flows for the three months
ended March 31, 2021 and 2020:

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