PTC THERAPEUTICS, INC. - Quarter Report: 2013 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2013

o	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: 001-35969

PTC Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

Delaware		04-3416587
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

100 Corporate Court

South Plainfield, NJ

07080

(Address of principal executive offices)

(Zip Code)

(908) 222-7000

(Registrant’s telephone number, including area code)

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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x

(Do not check if a smaller reporting company)

Smaller reporting company o

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

As of November 13, 2013 there were 24,917,089 shares of Common Stock, $0.001 par value per share, outstanding.

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TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements	2

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3. Quantitative and Qualitative Disclosures About Market Risk	25

Item 4. Controls and Procedures	25

PART II—OTHER INFORMATION	25

Item 1. Legal Proceedings	25

Item 1A. Risk Factors	25

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	51

Item 6. Exhibits	52

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

The forward-looking statements in this Quarterly Report on Form 10-Q include, among other things, statements about:

· the timing and conduct of our clinical trials of ataluren for the treatment of Duchenne muscular dystrophy and cystic fibrosis caused by nonsense mutations, including statements regarding the timing of initiation and completion of the trials and the period during which the results of the trials will become available;

· the timing of and our ability to obtain marketing approval, including conditional approval in the European Union, of ataluren and our other product candidates, and the ability of ataluren and our other product candidates to meet existing or future regulatory standards;

· the potential receipt of revenues from future sales of ataluren;

· our plans to pursue development of ataluren for additional indications other than Duchenne muscular dystrophy and cystic fibrosis caused by nonsense mutations;

· our plans to pursue research and development of other product candidates;

· the potential advantages of ataluren;

· the rate and degree of market acceptance and clinical utility of ataluren;

· our estimates regarding the potential market opportunity for ataluren;

· our sales, marketing and distribution capabilities and strategy;

· our ability to establish and maintain arrangements for manufacture of ataluren and our other product candidates;

· our intellectual property position;

· the impact of government laws and regulations;

· our competitive position; and

· our estimates regarding expenses, future revenues, capital requirements and needs for additional financing.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to the Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

PTC Therapeutics, Inc.

Balance sheets (unaudited)

	December 31, 2012			September 30, 2013
Assets
Current assets:
Cash and cash equivalents	$	2,725,702		$	24,044,819
Marketable securities	—			133,182,565
Prepaid expenses and other current assets	855,750			2,126,575
Grant and collaboration receivables, net	1,013,813			783,851
Total current assets	4,595,265			160,137,810
Fixed assets, net	8,280,037			6,942,956
Deposits and other assets	197,050			163,349
Total assets	$	13,072,352		$	167,244,115
Liabilities, convertible preferred stocks and stockholders’ (deficit) equity
Current liabilities:
Accounts payable and accrued expenses	$	7,023,971		$	10,205,493
Current portion of long-term debt	4,444,171			84,234
Deferred revenue	16,690,747			3,631,430
Total current liabilities	28,158,889			13,921,157
Deferred revenue, less current portion	741,667			—
Long-term debt, less current portion	438,810			—
Other long-term liabilities	2,549,719			2,290,445
Total liabilities	31,889,085			16,211,602
Series One convertible preferred stock, designated 2,000,000 shares; issued and outstanding 1,483,337 shares at December 31, 2012	62,263,852			—
Series Two convertible preferred stock, designated 13,750,000 shares; issued and outstanding 10,701,405 shares at December 31, 2012	18,182,129			—
Series Three convertible preferred stock, designated 13,750,000 shares; issued and outstanding 2,853,517 shares at December 31, 2012	377,787			—

Stockholders’ (deficit) equity:
Preferred stock, $0.001 par value. Undesignated 5,000,000 shares; issued and outstanding 0 shares at September 30, 2013	—			—
Common stock, $0.001 par value. Authorized 17,000,000 shares; issued and outstanding 4,526 shares at December 31, 2012. Authorized 125,000,000 shares; issued and outstanding 23,803,282 shares at September 30, 2013	545			24,344
Additional paid-in capital	177,583,672			461,960,966
Accumulated other comprehensive loss	—			(40,467		)
Accumulated deficit	(277,224,718		)	(310,912,330		)
Total stockholders’ (deficit) equity	(99,640,501		)	151,032,513
Total liabilities, convertible preferred stocks and stockholders’ (deficit) equity	$	13,072,352		$	167,244,115

See accompanying unaudited notes.

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PTC Therapeutics, Inc.

Statements of operations (unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2013			2012			2013

Revenues:
Collaboration revenue	$	6,042,746		$	15,455,361		$	22,860,543		$	27,395,315
Grant revenue	1,152,330			834,212			4,445,430			2,890,134
Total revenues and non-cash cancellation revenue	7,195,076			16,289,573			27,305,973			30,285,449
Operating expenses:
Research and development	10,466,454			13,886,196			36,688,786			39,855,115
General and administrative	3,783,929			6,678,992			11,390,938			17,735,294
Total operating expenses	14,250,383			20,565,188			48,079,724			57,590,409
Loss from operations	(7,055,307		)	(4,275,615		)	(20,773,751		)	(27,304,960		)
Interest (expense) income, net	(247,325		)	26,695			(1,007,586		)	(6,249,534		)
Loss on extinguishment of debt	—			(129,963		)	—			(129,963		)
Other income (expense), net	5,507			(37,616		)	1,818,279			(3,155		)
Net loss	(7,297,125		)	(4,416,499		)	(19,963,058		)	(33,687,612		)
Deemed dividend	—			—			—			(18,248,768		)
Gain on exchange of convertible preferred stock in connection with recapitalization	—			—			159,954,069			3,390,750
Less beneficial conversion charge	—			—			(377,787		)	—
Net (loss) income attributable to common stockholders	$	(7,297,125	)	$	(4,416,499	)	$	139,613,224		$	(48,545,630	)

Weighted-average shares outstanding:
Basic (in shares)	4,545			23,803,282			2,937			8,995,167
Weighted-average shares outstanding:
Diluted (in shares)	4,545			23,803,282			13,593			8,995,167
Net (loss) income per share applicable to common stockholders—basic (in dollars per share)	$	(1,605.53	)	$	(0.19	)	$	182.41		$	(5.40	)
Net (loss) income per share applicable to common stockholders—diluted (in dollars per share)	$	(1,605.53	)	$	(0.19	)	$	39.41		$	(5.40	)

See accompanying unaudited notes.

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PTC Therapeutics, Inc.

Statements of comprehensive loss (unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2013			2012			2013
Net loss	$	(7,297,125	)	$	(4,416,499	)	$	(19,963,058	)	$	(33,687,612	)
Other comprehensive loss:
Unrealized loss on marketable securities	—			(39,695		)	—			(40,467		)
Comprehensive loss	$	(7,297,125	)	$	(4,456,194	)	$	(19,963,058	)	$	(33,728,079	)

See accompanying unaudited notes.

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PTC Therapeutics, Inc.

Statements of cash flows (unaudited)

	Nine months ended September 30,
	2012			2013
Cash flows from operating activities
Net loss	$	(19,963,058	)	$	(33,687,612	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	2,048,682			1,810,850
Change in valuation of warrant liability	(1,818,279		)	3,158
Non-cash interest expense	204,422			6,048,580
Loss on extinguishment of debt	—			129,963
Share-based compensation expense	1,815,722			5,142,187
Changes in operating assets and liabilities:
Prepaid expenses and other current assets	2,250,089			(1,287,875		)
Grant and collaboration receivables	75,698			229,962
Deposits and other assets	24,399			33,699
Accounts payable and accrued expenses	(4,748,005		)	3,181,522
Other long-term liabilities	(68,432		)	(262,432		)
Deferred revenue	(16,711,980		)	(13,800,984		)
Net cash used in operating activities	(36,890,742		)	(32,458,982		)
Cash flows from investing activities
Purchases of fixed assets	(183,511		)	(473,769		)
Purchases of marketable securities	—			(139,730,579		)
Maturities of marketable securities	—			6,507,547
Net cash used in investing activities	(183,511		)	(133,696,801		)
Cash flows from financing activities
Payments on long-term debt	(6,240,116		)	(4,960,151		)
Net proceeds from sale of Series One convertible preferred stock	29,354,752			—
Net proceeds from sale of Series Four convertible preferred stock	—			60,785,363
Net proceeds from initial public offering	—			131,649,688
Net cash provided by financing activities	23,114,636			187,474,900
Net (decrease) increase in cash and cash equivalents	(13,959,617		)	21,319,117
Cash and cash equivalents, beginning of period	28,431,410			2,725,702
Cash and cash equivalents, end of period	$	14,471,793		$	24,044,819
Supplemental disclosure of cash information
Cash paid for interest	$	1,009,478		$	365,589
Supplemental disclosures of non-cash information related to investing and financing activities
Change in unrealized loss on marketable securities	$	—		$	(40,467	)
Change in carry value of preferred securities resulting from recapitalization	$	159,576,282		$	3,390,750

See accompanying unaudited notes.

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PTC Therapeutics, Inc.

Notes to unaudited financial statements

September 30, 2013

1. The Company

PTC Therapeutics, Inc. (the Company or PTC) was incorporated as a Delaware corporation on March 31, 1998. The Company is a biopharmaceutical company focused on the discovery and development of orally administered, proprietary small-molecule drugs that target post-transcriptional control processes.

The Company has devoted substantially all of its efforts to research and development, including clinical trials. The Company has not completed development of any drugs. The Company has not generated product revenue to date and is subject to a number of risks similar to those of other early stage companies, including dependence on key individuals, the difficulties inherent in the development of commercially usable products, the potential need to obtain additional capital necessary to fund the development of its products, and competition from other companies. As of September 30, 2013, the Company had an accumulated deficit of approximately $310.9 million. The Company has financed its operations to date primarily through the issuance and sale of its common stock in its initial public offering (see note 7 below), private placements of its convertible preferred stock, collaborations, bank debt, convertible debt financings, grant funding and clinical trial support from governmental and philanthropic organizations and patient advocacy groups in the disease areas addressed by the Company’s product candidates. The Company believes that its existing cash, cash equivalents, including the Company’s net proceeds from its initial public offering of common stock, and marketable securities provide for sufficient resources to fund its currently planned operations through the fourth quarter of 2015.

2. Summary of significant accounting policies

The Company’s complete listing of significant accounting policies are described in note 2 of the notes to the Company’s audited financial statements as of December 31, 2012 included in the final prospectus dated June 19, 2013 related to the Company’s initial public offering.

Basis of Presentation

The accompanying financial information as of September 30, 2013 and for the three and nine months ended September 30, 2012 and 2013 has been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (GAAP) have been condensed or omitted pursuant to such rules and regulations. These interim financial statements should be read in conjunction with the Company’s audited financial statements as of December 31, 2012 and notes thereto included in the final prospectus related to the Company’s initial public offering.

In the opinion of management, the unaudited financial information as of September 30, 2013 and for three and nine months ended September 30, 2012 and 2013 reflects all adjustments, which are normal recurring adjustments, necessary to present a fair statement of financial position, results of operations and cash flows. The results of operations for the three and nine month periods ended September 30, 2013 are not necessarily indicative of the results to be expected for the year ended December 31, 2013 or for any other interim period or for any other future year.

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reverse stock split

On March 7, 2013, the Company effected a one-for-120 reverse stock split of its common stock, pursuant to which each 120 shares of the Company’s outstanding common stock were reclassified and combined into one share of common stock. All common stock share and per share references in the financial statements and notes thereto have been restated to reflect the reverse stock split on a retroactive basis.

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Marketable Securities

Management determines the classification of marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date. Marketable securities are classified as available-for-sale and carried at fair value, with any unrealized gain or loss recorded as a separate component of stockholders’ (deficit) equity.

Revenue recognition

The Company recognizes revenue when amounts are realized or realizable and earned. Revenue is considered realizable and earned when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the price is fixed or determinable; and (4) collection of the amounts due are reasonably assured.

The Company’s revenue is generated primarily through collaborative research and development and licensing agreements and grants.

The terms of these agreements typically include payments to the Company of one or more of the following: nonrefundable, upfront license fees; milestone payments; research funding and royalties on future product sales. In addition, the Company generates service revenue through agreements that generally provide for fees for research and development services and may include additional payments upon achievement of specified events.

For existing collaborations entered into prior to the adoption in 2011 of the revised multiple element revenue recognition guidance described below, the Company recognized revenue consistent with the approach established at the inception of each arrangement. For these existing collaborations, where the Company has continuing involvement, the Company recorded nonrefundable, upfront fees as deferred revenue and recognizes revenue on a straight-line basis as collaboration revenue over the expected performance period.

For new collaborations or for material modifications made to existing collaborations, in 2011 and thereafter, the Company adopted the updated multiple element revenue recognition guidance. Under this guidance, all non-contingent arrangement consideration is allocated to the identified units of accounting based on their relative selling price at inception of the collaboration arrangement. The Company derives the selling price using a combination of internal subjective and available external objective information, such as comparable transactions. The Company recognizes revenue commensurate with delivery, such as in the case with delivery of a license, or ratably over the course of a service period, as appropriate, such as in the case of ongoing research and development activities.

The Company evaluates all contingent consideration earned, such as a milestone payment, using the criteria as provided by the Financial Accounting Standards Board (FASB) guidance on the milestone method of revenue recognition. At the inception of a collaboration arrangement, the Company evaluates if milestone payments are substantive. The criteria requires that (1) the Company determines if the milestone is commensurate with either its performance to achieve the milestone or the enhancement of value resulting from its activities to achieve the milestone; (2) the milestone be related to past performance; and (3) the milestone be reasonable relative to all deliverable and payment terms of the collaboration arrangement. If these criteria are met then the contingent milestones can be considered as substantive milestones and will be recognized as revenue in the period that the milestone is achieved.

The Company recognizes royalties as earned in accordance with the terms of various research and collaboration agreements. If not substantive, the contingent consideration is allocated to the existing units of accounting based on relative selling price and recognized following the same basis previously established for the associated unit of accounting. The Company recognizes revenue for reimbursements of research and development costs under collaboration agreements as the services are performed. The Company records these reimbursements as revenue and not as a reduction of research and development expenses as the Company has the risks and rewards as the principal in the research and development activities.

Fair value of financial instruments

The Company follows the fair value measurement rules, which provides guidance on the use of fair value in accounting and disclosure for assets and liabilities when such accounting and disclosure is called for by other accounting literature. These rules establish a fair value hierarchy for inputs to be used to measure fair value of financial assets and liabilities. This hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels: Level 1 (highest priority), Level 2, and Level 3 (lowest priority).

· Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the balance sheet date.

· Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability

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(i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

· Level 3—Inputs are unobservable and reflect the Company’s assumptions as to what market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available.

Cash equivalents are reflected in the accompanying financial statements at fair value. The carrying amount of grant and collaboration receivables, accounts payable and accrued expenses, and debt approximates fair value due to the short-term nature of those instruments.

Warrant liability

Warrants to purchase the Company’s common stock with nonstandard antidilution provisions and preferred stock that include a put feature, regardless of the probability or likelihood that may conditionally obligate the issuer to ultimately transfer assets, are classified as liabilities and are recorded at their estimated fair value at each reporting period. Any change in fair value of these warrants is recorded as gain (loss) on warrant valuation each reporting period in Other income (expense), net on the Company’s statement of operations.

Share-based compensation

The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. For service type awards, share-based compensation expense is recognized on a straight-line basis over the period during which the employee is required to provide service in exchange for the entire award. For awards that vest or begin vesting upon achievement of a performance condition, the Company estimates the likelihood of satisfaction of the performance condition and recognizes compensation expense when achievement of the performance condition is deemed probable using an accelerated attribution model.

The fair value of options is calculated using the Black-Scholes option pricing model to determine the fair value of stock options on the date of grant based on key assumptions, such as expected volatility and expected term. As a new public company, the Company does not have sufficient history to estimate the volatility of its common stock price or the expected life of the options. The Company calculates expected volatility based on reported data for similar publicly traded companies for which historical information is available and will continue to do so until the historical volatility of its common stock is sufficient to measure expected volatility for future option grants.

3. Fair value of financial instruments and marketable securities

Fair value of certain marketable securities is based upon market prices using quoted prices in active markets for identical assets quoted on the last day of the period. In establishing the estimated fair value of the remaining investments, the Company used the fair value as determined by its investment advisors using observable inputs other than quoted prices.

The Company reviews its investments on a periodic basis for other-than-temporary impairments. This review is subjective, as it requires management to evaluate whether an event or change in circumstances has occurred in that period that may have a significant adverse effect on the fair value of the investment.

The following represents the fair value using the hierarchy described in Note 2 for the Company’s financial assets that are required to be measured at fair value on a recurring basis as of December 31, 2012 and September 30, 2013:

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	December 31, 2012
	Total		Quoted prices in active markets for identical assets (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)
Warrant liability	$	95,661	$	—	$	—	$	95,661

	September 30, 2013
	Total		Quoted prices in active markets for identical assets (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)
Marketable securities	$	133,182,565	$	—	$	133,182,565	$	—
Warrant liability	98,819		—		—		98,819

The following is a summary of marketable securities accounted for as available-for-sale securities at September 30, 2013:

	September 30, 2013
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
Commercial paper	$	24,978,703	$	20,527	$	—		$	24,999,230
U.S. corporate debt securities	108,244,329		19,642		(80,636		)	108,183,335
	$	133,223,032	$	40,169	$	(80,636	)	$	133,182,565

At September 30, 2013, the Company held securities with an unrealized loss position that were not considered to be other-than-temporarily impaired as the Company has the ability to hold such investments until recovery of their fair value.

Marketable securities on the balance sheet at September 30, 2013 mature as follows:

	September 30, 2013
	Less Than 12 Months		More Than 12 Months
Commercial paper	$	24,999,230	$	—
U.S. corporate debt securities	57,824,657		50,358,678
Total Marketable securities	$	82,823,887	$	50,358,678

There were no marketable securities as of December 31, 2012.

Level 3 valuation

The warrant liability is classified in Other long-term liabilities on the Company’s balance sheet. The warrant liability is marked-to-market each reporting period with the change in fair value recorded as a gain or loss within Other income (expense), net on the Company’s statement of operations until the warrants are exercised, expire or other facts and circumstances lead the warrant liability to be reclassified as an equity instrument. The fair value of the warrant liability is determined at each reporting period by utilizing the Black-Scholes option pricing model.

The table presented below is a summary of changes in the fair value of the Company’s Level 3 valuation for warrant liability for the period ended September 30, 2013:

	Level 3 assets
Beginning balance as of December 31, 2012	$	95,661
Warrants issued in connection with convertible promissory notes	6,000,000
Deemed dividend	18,248,768
Exercise of warrants issued in connection with convertible promissory notes	(24,248,765		)
Change in fair value of warrant liability	3,155
Ending balance as of September 30, 2013	$	98,819

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Fair value of the warrant liability is estimated using an option-pricing model, which includes variables such as the expected volatility based on guideline public companies, the stock fair value, and the estimated time to a liquidity event. The significant assumptions used in preparing the option pricing model for valuing the Company’s warrants as of December 31, 2012 include (i) volatility (87%), (ii) risk free interest rate (0.16%—1.18%), (iii) strike price ($16), (iv) fair value of preferred shares ($2.35), and (v) expected life (1—7 years). The significant assumptions used in preparing the option pricing model for valuing the Company’s warrants as of September 30, 2013 include (i) volatility (69-87%), (ii) risk free interest rate (0.02%—1.705%), (iii) strike price ($128), (iv) fair value of common shares ($21.46), and (v) expected life (.22—5.98 years). See Note 7 for a description of the warrants issued in connection with the convertible notes.

4. Other comprehensive income (loss) and accumulated other comprehensive items

Other comprehensive income (loss) includes changes in equity that are excluded from net income (loss), such as unrealized gains and losses on marketable securities.

The following table summarizes other comprehensive loss and the changes in accumulated other comprehensive items for the three months ended September 30, 2013:

	Unrealized Losses On Marketable Securities			Total Accumulated Other Comprehensive Items

Balance at June 30, 2013	$	(772	)	$	(772	)
Other comprehensive loss before reclassifications	(39,695		)	(39,695		)
Amounts reclassified from other comprehensive items	—			—
Other comprehensive loss	(39,695		)	(39,695		)
Balance at September 30, 2013	$	(40,467	)	$	(40,467	)

The following table summarizes other comprehensive loss and the changes in accumulated other comprehensive items for the nine months ended September 30, 2013:

	Unrealized Losses On Marketable Securities			Total Accumulated Other Comprehensive Items

Balance at December 31, 2012	$	—		$	—
Other comprehensive loss before reclassifications	(40,467		)	(40,467		)
Amounts reclassified from other comprehensive items	—			—
Other comprehensive loss	(40,467		)	(40,467		)
Balance at September 30, 2013	$	(40,467	)	$	(40,467	)

5. Accounts payable and accrued expenses

Accounts payable and accrued expenses at December 31, 2012 and September 30, 2013 consist of the following:

	December 31, 2012		September 30, 2013
Employee compensation, benefits, and related accruals	$	3,096,475	$	3,659,084
Consulting and contracted research	2,515,678		3,556,350
Professional fees	559,228		1,532,458
Accounts payable	621,591		1,017,122
Other	230,999		440,479
	$	7,023,971	$	10,205,493

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6. Debt

In July 2013, the Company paid in full the outstanding principal and interest of $2.6 million due under promissory notes issued in connection with a $25 million secured debt facility with a syndicate of two lenders. The notes were secured by substantially all of the Company’s assets except for intellectual property and carried a fixed interest rate of 13.65%. As a result of this transaction, the Company recorded a loss on extinguishment of debt of $0.1 million on the Company’s statement of operations for the three months ended September 30, 2013, The loss on extinguishment of debt primarily represented the write off of related deferred financing costs, the acceleration of recognition of debt extinguishment fees and the prepayment premium payable.

7. Capital structure

2013 Recapitalization

During January and February of 2013, the Company entered into a “bridge” financing arrangement with certain existing investors providing for the issuance by the Company of an aggregate of $6 million of convertible promissory notes and warrants to purchase 2,527,675 shares of Series One convertible preferred stock (Series One) and Series Two convertible preferred stock (Series Two). The warrants have a per share exercise price of $0.01, and as such, they are referred to as “penny warrants”. This bridge financing was closed in anticipation of the March 2013 Series Four financing event, which the Company refers to as the “2013 recapitalization”.

The Company allocated the proceeds of the convertible promissory notes between debt and warrant liability. Since the value of the warrants exceeded the proceeds from the convertible notes issued to existing investors, the value of the warrant in excess of the proceeds is considered a deemed dividend and reflected as an equity transaction in the financial statements. The Company recorded $6 million to interest expense related to the debt discount associated with the convertible debt during the quarter ended March 31, 2013.

On March 7, 2013, the Company closed a private placement of a new series of convertible preferred stock that resulted in the 2013 recapitalization. In this private placement, the Company issued and sold an aggregate of 4,497,035 shares of its Series Four senior preferred stock (Series Four) for an aggregate purchase price of approximately $54 million. Including the $6 million raised with the bridge financing, total gross proceeds raised during the quarter ended March 31, 2013 was approximately $60 million. In addition, the Company issued an aggregate of 502,919 shares of Series Four upon the share settlement of the convertible promissory notes described above that were issued in January and February 2013.

In connection with this private placement, the Company effected a one-for-120 reverse stock split of its common stock and an exchange of outstanding shares of Series One, Series Two and Series Three convertible preferred stock (Series Three) into an aggregate of 6,700,487 shares of a new series of Series Five junior preferred stock (Series Five). In addition, the Company issued an aggregate of 2,527,675 shares of Series One and Series Two upon the exercise of the warrants issued in connection with the bridge loan that were immediately exchanged for 2,095,515 shares of Series Five during the 2013 recapitalization.

The Company accounted for the 2013 recapitalization as an extinguishment of its Series One, Series Two and Series Three convertible preferred stock and recorded the Series Five shares at their fair value as of the recapitalization date. In accordance with authoritative accounting guidance, the Company recorded a gain attributable to the common stockholders on the extinguishment of the Series One, Series Two and Series Three. The gain of approximately $3.4 million represents the excess of the Series One, Series Two and Series Three over the fair value of the shares Series Five issued in connection with the recapitalization.

Valuation—The value of the Company was estimated using the PWERM. The PWERM considered the most significant near-term driver of value for the Company as the Company’s ability to complete a Phase 3 clinical trial of ataluren for the treatment of Duchenne muscular dystrophy caused by nonsense mutations (nmDMD). The remaining scenarios in the PWERM related to funding the completion of the Phase 3 clinical trial for nmDMD. The path to raising this money made up the remaining nodes in the PWERM.

After identifying the various potential liquidity scenarios and their likely timing, a pre-money enterprise value was assigned to each scenario based on a combination of management’s guidance and recent trends in the capital markets. The resulting enterprise value for each liquidity event was divided by the total shares that would be outstanding under each scenario to arrive at a price per share for the common and preferred classes of stock. Each scenario was then assigned an outcome probability based on management’s estimates. The resulting probability weighted share values were then discounted to present value at a rate that reflects general industry risks (but not Company specific risks).

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The rights and preferences of the shares of Series Four and Series Five are as follows:

Dividends—The holders of Series Four and Series Five, in preference to the holders of common stock, are entitled to noncumulative dividends when and if declared by the Board of Directors.

Liquidation—Upon the liquidation, dissolution, reorganization or winding-up of the Company, the holders of Series Four will be entitled to receive, before any distribution or payment is made to any other class of security, an amount equal to the original issuance price, plus all declared, but unpaid, dividends. To the extent there are excess assets to distribute, the holders of Series Five will be entitled to receive, before any distribution or payment is made to the holders of the common stock, an amount equal to the stated liquidation preference, plus all declared, but unpaid, dividends. To the extent there are remaining assets to distribute, the holders of common stock will be entitled to receive such remaining assets.

Voting—Each holder of Series Four and Series Five are entitled to cast the number of votes into which such holder’s shares would convert. Except as required by law, holders of common stock have limited voting rights. Additionally, except as required by law, and except in certain enumerated circumstances, holders of Series Four and Series Five shall vote together with the holders of common stock as a single class.

Conversion—Each share of Series Four and Series Five is convertible at any time at the option of the holder into one share of common stock. These conversion ratios are subject to adjustment for certain dilutive events, including certain types of stock splits or stock dividends or future recapitalizations.

In May 2013, the Company issued and sold an additional 375,000 shares of Series Four, at a price per share of $12.00, for an aggregate purchase price of $4.5 million.

Common Stock

In May 2013, the Company’s Board of Directors and stockholders approved an amendment to the Company’s certificate of incorporation increasing the number of authorized shares of common stock to 125,000,000.

Initial Public Offering

In June 2013, the Company closed the initial public offering of its common stock pursuant to a registration statement on Form S-1, as amended. The Company issued and sold an aggregate of 9,627,800 shares of common stock under the registration statement at a public offering price of $15.00 per share, including 1,255,800 shares pursuant to the exercise by the underwriters of an over-allotment option. The Company received net proceeds from the initial public offering of approximately $131.6 million, after deducting underwriting discounts and commissions and other offering expenses payable by the Company.

Upon closing the initial public offering, all outstanding shares of the Series Four and Series Five were converted into 14,170,956 shares of common stock.

Warrants

All of the Company’s outstanding warrants were classified as liabilities as of December 31, 2012 because they contained either non-standard antidilution provisions or they were exercisable into preferred shares that included a put feature.

The following is a summary of the Company’s outstanding warrants as of December 31, 2012:

	Warrant shares	Exercise price		Expiration
Series Two	24,712	$	16.00	2014
Series Two	50,000	$	16.00	2017
Series Two	56,250	$	16.00	2019 and 2020
Common stock	645	$	2,520	2013 and 2014

In connection with the 2013 recapitalization, all of the Series Two outstanding warrants became warrants to purchase Series Five. In connection with the Company’s initial public offering all of the Series Five outstanding warrants became warrants to purchase common stock.

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The following is a summary of the Company’s outstanding warrants as of September 30, 2013:

	Warrant shares	Exercise price		Expiration
Common stock	3,088	$	128.00	2014
Common stock	6,250	$	128.00	2017
Common stock	7,030	$	128.00	2019 and 2020
Common stock	645	$	2,520	2013 and 2014

8. Net income (loss) per share

Basic earnings per share is computed by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings per share is computed by dividing net income (loss) available to common stockholders by the weighted-average number of common shares plus the effect of dilutive potential common shares outstanding during the period.

The Series One, Series Two and Series Three outstanding during 2012 (subsequent to the recapitalization) participated in the earnings of the Company through dividend rights. Accordingly, the Company measured earnings per share based upon the two-class method prior to the Company’s initial public offering in June 2013.

The following tables set forth the computation of basic and diluted net income (loss) per share for common stockholders:

	Three months ended September 30,
	2012			2013
Numerator
Net loss attributable to common stockholders	$	(7,297,125	)	$	(4,416,499	)
Denominator
Denominator for basic net loss per share	4,545			23,803,282
Net loss per share:
Basic and diluted	$	(1,605.53	)*	$	(0.19	)*

* In the three months ended September 30, 2012 and 2013, the Company experienced a net loss and therefore did not report any dilutive share impact.

	Nine months ended September 30,
	2012			2013
Numerator
Net loss	$	(19,963,058	)	$	(33,687,612	)
Deemed dividend	—			(18,248,768		)
Gain on exchange of convertible preferred stock in connection with recapitalization	159,954,069			3,390,750
Less beneficial conversion charge	(377,787		)	—
Less net income attributable to participating securities	(139,077,495		)	—
Net income (loss) attributable to common stockholders	$	535,729		$	(48,545,630	)
Denominator
Denominator for basic net income (loss) per share	2,937			8,995,167
Effect of dilutive securities
Series Three convertible preferred stock	10,656			—
Denominator for diluted net income (loss) per share	13,593			8,995,167
Net income (loss) per share:
Basic	$	182.41		$	(5.40	)*
Diluted	$	39.41		$	(5.40	)*

* In the nine months ended September 30, 2013, the Company experienced a net loss and therefore did not report any dilutive share impact.

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The following table shows historical dilutive common share equivalents outstanding, which are not included in the above historical calculation, as the effect of their inclusion is anti-dilutive during each period.

	As of September 30,
	2012	2013

Stock Options	44,218	1,987,860
Unvested restricted stock	—	1,113,807
Total	44,218	3,101,667

9. Stock option plan

On March 5, 2013, the Company’s Board of Directors approved the 2013 Stock Incentive Plan, which provides for the granting of stock option awards, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards in the aggregate of 739,937 shares of common stock. On March 5, 2013, the Board approved a grant of 735,324 shares of restricted stock and 4,613 stock options. There are no additional shares available for issuance under this plan.

In May 2013, the Company’s Board of Directors and stockholders increased by 2,500,000 the number of shares authorized under the 2009 Stock Incentive Plan, which provides for the granting of stock option awards, restricted stock awards, and other stock-based and cash-based awards.

In May 2013, the Company’s Board of Directors and stockholders approved the 2013 Long Term Incentive Plan, which became effective upon the closing of the Company’s IPO. The 2013 Long Term Incentive Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock awards and other stock-based awards. The number of shares of common stock reserved for issuance under the 2013 Long Term Incentive Plan is the sum of (1) 122,296 shares of common stock available for issuance under the Company’s 2009 Equity and Long Term Incentive Plan and 2013 Stock Incentive Plan, (2) the number of shares (up to 3,040,444 shares) equal to the sum of the number of shares of common stock subject to outstanding awards under the Company’s 1998 Employee, Director and Consultant Stock Option Plan and 2013 Stock Incentive Plan that expire, terminate or are otherwise surrendered, cancelled, forfeited or repurchased by the Company at their original issuance price pursuant to a contractual repurchase right plus (3) an annual increase, to be added on the first day of each fiscal year until the expiration of the 2013 Long Term Incentive Plan, equal to the lowest of 2,500,000 shares of common stock, 4% of the number of shares of common stock outstanding on the first day of the fiscal year and an amount determined by the Company’s Board of Directors.

A summary of stock option activity is as follows:

	Number of options		Exercise price		Weighted- average exercise price		Weighted- average remaining contractual term	Aggregate intrinsic value
								(in thousands)
Outstanding at December 31, 2012	42,394		$	218.40-$1,149.60	$	469.48
Granted	2,007,713		$	10.59-$10.85	$	10.85
Exercised	—		—		—
Forfeited	(62,247	)	$	10.85—$1,149.60	$	17.10
Outstanding at September 30, 2013	1,987,860		$	10.59—$1,149.60	$	20.44	9.51 years	$	20,652
Exercisable at September 30, 2013	61,834		$	10.59—$1,149.60	$	290.39	6.06 years	$	265

The fair value of grants made in the period ended September 30, 2013 was contemporaneously estimated on the date of grant using the following assumptions:

		Nine months ended September 30, 2013
Risk-free interest rate		0.85%-1.69%
Expected volatility		87%-88%
Expected term		5.00 to 6.00 years
Expected dividend yield		0.0%

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The Company assumed no expected dividends for all grants. The weighted average grant date fair value of options granted during the nine month period ended September 30, 2013 was $7.86 per share.

The Company uses the “simplified method” to determine the expected term of options. Under this method, the expected term represents the average of the vesting period and the contractual term. The expected volatility of share options was estimated based on a historical volatility analysis of peers that were similar to the Company with respect to industry, stage of life cycle, size, and financial leverage. The risk-free rate of the option is based on U.S. Government Securities Treasury Constant Maturities yields at the date of grant for a term similar to the expected term of the option.

Restricted Stock Awards—Restricted stock awards are granted subject to certain restrictions, including in some cases service conditions (restricted stock). The grant-date fair value of restricted stock awards, which has been determined based upon the market value of the Company’s shares on the grant date, is expensed over the vesting period.

The following table summarizes information on the Company’s restricted stock:

	Restricted Stock
	Number of Shares		Weighted Average Grant Date Fair Value
January 1, 2013	—		—
Granted	1,131,524		$	10.68
Vested	—		$	—
Forfeited	(17,717	)	$	10.63
Unvested at September 30, 2013	1,113,807		$	10.68

The Company recorded share-based compensation expense in the statement of operations as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2013		2012		2013

Research and development	$	193,199	$	676,499	$	653,462	$	1,377,640
General and administrative	327,201		1,963,197		1,162,260		3,764,547
Total	$	520,400	$	2,639,696	$	1,815,722	$	5,142,187

As of December 31, 2012 and September 30, 2013, there was approximately $2.2 million and $21.0 million, respectively of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the 1998, 2009 and 2013 Plans. This cost is expected to be recognized as share-based compensation expense over the weighted average remaining service period of approximately 2.28 years.

10. Collaboration Revenue

On August 8, 2013, the Company announced the selection of a development candidate in its spinal muscular atrophy collaboration with F. Hoffman-La Roche Ltd and Hoffman-La Roche Inc. (Roche) and the Spinal Muscular Atrophy Foundation. The achievement of this milestone triggered a $10.0 million payment to the Company from Roche. The Company considered this milestone event substantive because the applicable criteria of its revenue recognition policy (see Note 2) would be satisfied and recorded it as collaboration revenue for the three months ended September 30, 2013.

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

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the notes to those financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2012 included in our final prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the Securities and Exchange Commission on June 20, 2013. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth in Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

We are a biopharmaceutical company focused on the discovery and development of orally administered, proprietary small-molecule drugs that target post-transcriptional control processes. Our lead product candidate is ataluren for the treatment of patients with genetic disorders that arise from a type of genetic mutation known as a nonsense mutation. In addition to ataluren, we have a pipeline of product candidates that are in preclinical development. Our preclinical and discovery programs are focused on the development of new treatments for multiple therapeutic areas, including rare disorders, oncology and infectious diseases.

We have initiated a Phase 3 clinical trial of ataluren for the treatment of Duchenne muscular dystrophy caused by nonsense mutations, or nmDMD. We dosed the first patient in this trial in April 2013. In October 2012, we submitted a marketing authorization application, or MAA, to the European Medicines Agency, or EMA, for conditional approval of ataluren for the treatment of nmDMD. We plan to complete our confirmatory Phase 3 clinical trial of ataluren for the treatment of nmDMD before applying for marketing approval from the U.S. Food and Drug Administration, or FDA. Based on our estimates regarding patient enrollment, we expect to complete this trial and have initial, top-line data available in mid-2015. We are also planning a Phase 3 clinical trial of ataluren for the treatment of cystic fibrosis caused by nonsense mutations, or nmCF. We expect to dose the first patient in this trial in the first half of 2014, subject to the conclusion of our ongoing discussions with regulatory authorities regarding our proposed trial design. Our goal in these continuing discussions is to achieve consensus between the EMA and the FDA that a single placebo controlled Phase 3 clinical trial can serve as the basis for full approval of ataluren to treat nmCF in both the European Union and the United States. In addition, we plan to continue pursuing early access programs for ataluren for nmDMD patients in selected territories that support reimbursement for such programs.

In March 2013, the EMA informed us of major objections that would preclude a recommendation for conditional approval of ataluren for the treatment of nmDMD unless adequately addressed. Recently, as part of the ongoing regulatory review process, the EMA reiterated major objections to conditional approval. However, the EMA also recently notified us that it intends to convene a scientific advisory group meeting as part of the regulatory review process of our MAA for conditional approval of ataluren for the treatment of nmDMD. The scientific advisory group meeting may shift the expected timing of a final opinion regarding conditional approval of ataluren for the treatment of nmDMD into the first quarter of 2014. There remains a substantial risk that the EMA will not grant this conditional approval.

To date, we have financed our operations primarily through the issuance and sale of our common stock in our initial public offering, private placements of our preferred stock, collaborations, bank debt, convertible debt financings, grant funding and clinical trial support from governmental and philanthropic organizations and patient advocacy groups in the disease areas addressed by our product candidates. As of September 30, 2013, we had an accumulated deficit of $310.9 million. We had a net loss of $33.7 million for the nine months ended September 30, 2013. In June 2013, we closed the initial public offering of our common stock, pursuant to which we issued and sold an aggregate of 9,627,800 shares of common stock at a public offering price of $15.00 per share, including 1,255,800 shares pursuant to the exercise by the underwriters of an over-allotment option. We received net proceeds from the initial public offering of approximately $131.6 million, after deducting underwriting discounts and commissions and other offering expenses payable by us.

We anticipate that our expenses will increase substantially in connection with initiating and continuing confirmatory Phase 3 clinical trials for ataluren for the treatment of nmDMD and nmCF, commencing early access programs for ataluren for nmDMD patients in selected territories and seeking marketing approval for ataluren for these indications in the European Union and the United States. If we obtain marketing approval of ataluren for either nmDMD or nmCF, we also expect to incur significant sales, marketing, distribution and manufacturing expenses, as well as ongoing research and development expenses for our other product candidates. The timing of commercialization expenses for ataluren depends in part on whether we receive conditional approval for ataluren for either or both of nmDMD and nmCF. We expect to incur additional costs associated with operating as a public company. Although we cannot reasonably estimate the amount of these additional public company costs, we expect that these costs will include significant

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legal, accounting, investor relations and other expenses that we did not incur as a private company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. Adequate additional financing may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts. We will need to generate significant revenues to achieve and sustain profitability, and we may never do so.

Financial operations overview

Revenues

To date, we have not generated any product sale revenues. Based on our current plans, we do not expect to generate significant product revenues unless and until we obtain marketing approval for, and commercialize, ataluren for the treatment of nmDMD or nmCF. The timing of any product revenues depends in part on whether we receive conditional approval for ataluren for either or both of nmDMD and nmCF. Our revenues to date have consisted of collaborative agreements revenues and grant revenues.

We have ongoing collaborations with F. Hoffman-La Roche Ltd and Hoffman-La Roche Inc., which we refer to collectively as Roche, and the Spinal Muscular Atrophy Foundation, or the SMA Foundation, for our spinal muscular atrophy program and early stage discovery arrangements with other institutions. In addition, in 2008, we entered into a collaboration with Genzyme Corporation for the development and commercialization of ataluren, which agreement was restructured in 2011 and terminated in 2012.

Roche and the SMA Foundation. In November 2011, we entered into a license and collaboration agreement with Roche and the SMA Foundation pursuant to which we are collaborating with Roche and the SMA Foundation to further develop and commercialize compounds identified under our spinal muscular atrophy sponsored research program with the SMA Foundation, as described below, and to research, develop and commercialize other small molecule compounds with potential for therapeutic use in patients with spinal muscular atrophy. Pursuant to the license and collaboration agreement, Roche paid us an upfront nonrefundable payment of $30.0 million.

On August 8, 2013 we announced the selection of a development candidate in our spinal muscular atrophy collaboration with Roche and the SMA Foundation. The achievement of this milestone triggered a $10.0 million payment to us from Roche. We recognized this amount as collaboration revenue for the three months ended September 30, 2013.

Grant revenue. We receive grant funding from various institutions and governmental bodies. The grants are typically for early discovery research, and generally the grant program lasts from two to five years.

Research and development expense

Research and development expenses consist of the costs associated with our research activities, as well as the costs associated with our drug discovery efforts, conducting preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings. Our research and development expenses consist of:

· external research and development expenses incurred under agreements with third-party contract research organizations and investigative sites, third-party manufacturing organizations and consultants;

· employee-related expenses, which include salaries and benefits, including share-based compensation, for the personnel involved in our drug discovery and development activities; and

· facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of leasehold improvements and equipment, and laboratory and other supplies.

We use our employee and infrastructure resources across multiple research projects, including our drug development programs. We track expenses related to our clinical programs and certain preclinical programs on a per project basis.

We expect our research and development expenses to increase in connection with our ongoing activities, particularly as we initiate and continue confirmatory Phase 3 clinical trials of ataluren for the treatment of nmDMD and nmCF, continue our research activities in our preclinical programs and initiate clinical development of other product candidates. The timing and amount of these expenses will depend upon the outcome of our ongoing clinical trials and the costs associated with our planned clinical trials. The timing and amount of these expenses will also depend on the costs associated with potential future clinical trials of our product candidates and the related expansion of our research and development organization, regulatory requirements, advancement of our preclinical programs and product candidate manufacturing costs.

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The following table provides research and development expense for our most advanced principal product development programs.

	Three months ended September 30,				Nine months ended September 30,
	2012		2013		2012		2013
	(in thousands)
Ataluren	$	5,421	$	7,300	$	16,967	$	22,070
Antibacterial	1,173		1,522		3,739		4,212
BMI1	962		194		4,080		1,012
Spinal muscular atrophy	664		737		2,435		2,084
Other research and preclinical	2,246		4,133		9,468		10,477
Total research and development	$	10,466	$	13,886	$	36,689	$	39,855

The successful development of our product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

· the scope, rate of progress and expense of our clinical trials and other research and development activities;

· the potential benefits of our product candidate over other therapies;

· our ability to market, commercialize and achieve market acceptance for any of our product candidates that we are developing or may develop in the future;

· clinical trial results;

· the terms and timing of regulatory approvals; and

· the expense of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights.

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

General and administrative expense

General and administrative expenses consist primarily of salaries and other related costs for personnel, including share-based compensation expenses, in our executive, legal, business development, finance, accounting, information technology and human resource functions. Other general and administrative expenses include facility-related costs not otherwise included in research and development expense; advertising and promotional expenses; costs associated with industry and trade shows; and professional fees for legal services, including patent-related expenses, and accounting services.

We expect that general and administrative expenses will increase in 2013 and in future periods as a result of increased payroll, expanded infrastructure, commercial operations, increased consulting, legal, accounting and investor relations expenses associated with being a public company and costs incurred to seek collaborations with respect to any of our product candidates, among other factors.

Interest expense, net

Interest income (expense), net consists of interest expense related to our secured debt facility and interest income earned on investments. In July 2013, we paid in full the outstanding principal and interest related to our secured debt facility.

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Critical accounting policies and significant judgments and estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with generally accepted accounting principles in the United States. 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 financial statements, as well as the reported revenues and expenses during the reporting periods. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in the notes to our financial statements appearing in our final prospectus related to our initial public offering, we believe that the following accounting policies are the most critical to understanding and evaluating our financial condition and results of operations.

As an emerging growth company under the Jumpstart Our Business Startups Act of 2012, we have elected to delay the adoption of new or revised accounting standards until those standards would otherwise apply to private companies. As a result of this election, our financial statements may not be comparable to the financial statements of other public companies.

Revenue recognition

We recognize revenue when amounts are realized or realizable and earned. Revenue is considered realizable and earned when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the price is fixed or determinable; and (4) collection of the amounts due are reasonably assured.

Our revenue is generated primarily through collaborative research and development and licensing agreements and grants.

The terms of these agreements typically include payments of one or more of the following: nonrefundable, upfront license fees; milestone payments; research funding; and royalties on future product sales. In addition, we generate service revenue through agreements that generally provide for fees for research and development services and may include additional payments upon achievement of specified events.

For existing collaborations entered into prior to the adoption in 2011 of the revised multiple element revenue recognition guidance described below, we recognize revenue consistent with the approach established at the inception of each arrangement. For these existing collaborations, where we have continued involvement, we recorded nonrefundable, upfront fees as deferred revenue and recognize revenue on a straight line basis as collaboration revenue over the expected performance period.

For new collaborations or for material modifications made to existing collaborations, in 2011, we adopted the updated multiple element revenue recognition guidance. Under this guidance, all non-contingent arrangement consideration is allocated to the identified units of accounting based on their relative selling price at inception of the collaboration arrangement. We derive the selling price using a combination of internal subjective and available external objective information, such as comparable transactions. We recognize revenue commensurate with delivery, such as in the case with delivery of a license, or ratably over the course of a service period, as appropriate, such as in the case of ongoing research and development activities.

We evaluate all contingent consideration earned, such as a milestone payment, using the criteria as provided by the Financial Accounting Standards Board, or FASB, guidance on the milestone method of revenue recognition. At the inception of a collaboration arrangement, we evaluate if milestone payments are substantive. The criteria requires that (1) we determine if the milestone is commensurate with either its performance to achieve the milestone or the enhancement of value resulting from our activities to achieve the milestone; (2) the milestone be related to past performance; and (3) the milestone be reasonable relative to all deliverable and payment terms of the collaboration arrangement. If these criteria are met then the contingent milestones can be considered as substantive milestones and will be recognized as revenue in the period that the milestone is achieved. We recognize royalties as earned in accordance with the terms of various research and collaboration agreements. If not substantive, the contingent consideration is allocated to the existing units of accounting based on relative selling price and recognized following the same basis previously established for the associated unit of accounting.

We recognize reimbursements for research and development costs under collaboration agreements as revenue as the services are performed. We record these reimbursements as revenue and not as a reduction of research and development expenses as we have the risks and rewards as the principal in the research and development activities.

Our principal obligation under our grant agreements is to conduct the internal or external research in the specific field funded by the grant. We determine, through the grant’s normal research process, which research and development projects to pursue. We recognize

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grant revenues as the research activities are performed. If the grant includes an upfront payment, we defer the amount and recognize it as revenue as the expenditures are incurred.

Accrued expenses

As part of the process of preparing our financial statements, we are required to estimate accrued expenses. This process involves communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. Examples of estimated accrued expenses include:

· fees paid to contract research organizations in connection with preclinical and toxicology studies and clinical trials;

· fees paid to investigative sites in connection with clinical trials;

· fees paid to contract manufacturers in connection with the production of clinical trial materials; and

· professional service fees.

Share-based compensation

We expect to grant additional stock options that will result in additional share-based compensation expense. We measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. For service type awards, share-based compensation expense is recognized on a straight-line basis over the period during which the employee is required to provide service in exchange for the entire award. For awards that vest or begin vesting upon achievement of a performance condition, we estimate the likelihood of satisfaction of the performance condition and recognize compensation expense when achievement of the performance condition is deemed probable using an accelerated attribution model.

The fair value of options is calculated using the Black-Scholes option pricing model to determine the fair value of stock options on the date of grant based on key assumptions, such as expected volatility and expected term. As a new public company, we do not have sufficient history to estimate the volatility of our common stock price or the expected life of the options. We calculate expected volatility based on reported data for similar publicly traded companies for which historical information is available and will continue to do so until the historical volatility of our common stock is sufficient to measure expected volatility for future option grants.

Restricted stock awards are granted subject to certain restrictions, including service conditions. The grant date fair value of restricted stock awards, which is determined based upon the market value of our common stock on the grant date, is expensed over the vesting period.

The fair value of grants made in the nine months ended September 30, 2012 and 2013 was contemporaneously estimated on the date of grant using the following assumptions:

	Nine months ended September 30,
	2012	2013
Risk-free interest rate	1.135%	0.85%-1.69%
Expected volatility	87%	87-88%
Expected term	6.00-6.25 years	5.00-6.00 years

We assumed no expected dividends for all grants. The weighted average grant date fair value per share was $160.65 for options granted during the nine months ended September 30, 2012 and $7.86 for options granted during the nine months ended September 30, 2013.

We use the “simplified method” to determine the expected term of options. Under this method, the expected term represents the average of the vesting period and the contractual term. The expected volatility of share options was estimated based on a historical volatility analysis of peers that were similar to us with respect to industry, stage of life cycle, size and financial leverage. The risk-free rate of the options is based on U.S. Government Securities Treasury Constant Maturities yields at the date of grant for a term similar to the expected term of the option.

We recognized share-based compensation expense of approximately $1.8 million for the nine months ended September 30, 2012 and $5.1 million for the nine months ended September 30, 2013.

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We had total unrecognized compensation cost related to unvested share-based compensation arrangements of $2.2 million as of December 31, 2012 and $21.0 million as of September 30, 2013. We expect to recognize this cost as share-based compensation expense over the weighted average remaining service period of approximately 2.28 years.

Results of operations

Three months ended September 30, 2012 compared to three months ended September 30, 2013

The following table summarizes revenues and selected expense and other income data for the three months ended September 30, 2012 and 2013.

	Three months ended September 30,
(in thousands)	2012			2013			Change 2013 vs. 2012
Revenues	$	7,195		$	16,290		$	9,095
Research and development expense	10,466			13,886			3,420
General and administrative expense	3,784			6,679			2,895
Interest income (expense), net	(247		)	27			274
Loss on extinguishment of debt	—			(130		)	(130		)

Revenues. Revenues were $16.3 million for the three months ended September 30, 2013, an increase of $9.1 million, or 126%, from $7.2 million for the three months ended September 30, 2012. Collaboration revenue was $15.5 million for the three months ended September 30, 2013, an increase of $9.4 million, or 156%, from collaboration revenues of $6.0 million for the three months ended September 30, 2012. The increase was due to the achievement of a $10.0 million milestone related to our collaboration agreement with Roche. Grant revenue was $0.8 million for the three months ended September 30, 2013, a decrease of $0.4 million from grant revenue of $1.2 million for the three months ended September 30, 2012.

Research and development expense. Research and development expense was $13.9 million for the three months ended September 30, 2013, an increase of $3.4 million, or 33%, from $10.5 million for the three months ended September 30, 2012. The increase resulted primarily from an increase in clinical trial related costs of $2.3 million related to the initiation of the Phase 3 clinical trial of ataluren for the treatment of nmDMD and an increase in share-based compensation of approximately $0.5 million.

General and administrative expense. General and administrative expense was $6.7 million for the three months ended September 30, 2013, an increase of $2.9 million, or 77%, from $3.8 million for the three months ended September 30, 2012. The increase resulted primarily from increased share-based compensation expense of approximately $1.6 million and increases in public company related expenses and pre-commercial activities.

Interest income (expense), net. Net interest income was $0.03 million for the three months ended September 30, 2013. The increase from net interest expense of $0.2 million for the three months ended September 30, 2012 was due to interest income related to investments offset by lower interest expense resulted from the payoff of debt in July 2013.

Loss on extinguishment of debt. In July 2013, we paid in full the outstanding principal and interest of $2.6 million due under promissory notes issued in connection with a $25 million secured debt facility with a syndicate of two lenders. In connection with the repayment, we incurred a loss on extinguishment of debt of $0.1 million, primarily related to the write off of deferred financing costs, the acceleration of recognition of debt extinguishment fees and the prepayment premium payable. The notes were secured by substantially all our assets except for intellectual property and carried a fixed interest rate of 13.65%.

Nine months ended September 30, 2012 compared to nine months ended September 30, 2013

The following table summarizes revenues and selected expense and other income data for the nine months ended September 30, 2012 and 2013

	Nine months ended September 30,
(in thousands)	2012			2013			Change 2013 vs. 2012
Revenues	$	27,306		$	30,285		$	2,979
Research and development expense	36,689			39,855			3,166
General and administrative expense	11,391			17,735			6,344
Interest income (expense), net	(1,008		)	(6,250		)	(5,242		)
Loss on extinguishment of debt	—			(130		)	(130		)
Other income (expense), net	1,818			(3		)	(1,821		)

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Revenues. Revenues were $30.3 million for the nine months ended September 30, 2013, an increase of $3.0 million, or 11%, from $27.3 million for the nine months ended September 30, 2012. Collaboration revenue was $27.4 million for the nine months ended September 30, 2013, an increase of $4.5 million, or 20%, from collaboration revenues of $22.9 million for the nine months ended September 30, 2012. The increase resulted primarily from the achievement of a $10.0 million milestone related to the Roche agreement in July 2013, partially offset by a decrease in the recognition of the deferred revenue balance related to the value of the remaining performance obligations under our restructured agreement with Genzyme in 2012. Grant revenue was $2.9 million for the nine months ended September 30, 2013, a decrease of $1.5 million, or 34%, from grant revenue of $4.4 million for the nine months ended September 30, 2012.

Research and development expense. Research and development expense was $39.9 million for the nine months ended September 30, 2013, an increase of $3.2 million, or 9%, from $36.7 million for the nine months ended September 30, 2012. The increase resulted from increased clinical trial costs of $4.5 million related to the initiation of the Phase 3 clinical trial of ataluren for the treatment of nmDMD and an increase in share-based compensation of $0.7 million partially offset by a decrease in personnel costs of $2.5 million as a result of a reduction in force that we implemented in the second quarter of 2012.

General and administrative expense. General and administrative expense was $17.7 million for the nine months ended September 30, 2013, an increase $6.3 million or 56% from $11.4 million for the nine months ended September 30, 2012. The increase resulted primarily from an increase in share-based compensation of $2.6 million and pre-commercial activities and increases in public company related expenses and pre-commercial activities.

Interest (income)expense, net. Net interest expense was $6.3 million for the nine months ended September 30, 2013, an increase of $5.2 million from $1.0 million for the nine months ended September 30, 2012. The increase was due to interest related to the debt discount associated with the convertible debt that we issued in 2013 partially offset by interest income related to investments.

Loss on extinguishment of debt. In July 2013, we paid in full the outstanding principal and interest of $2.6 million due under promissory notes issued related to a $25 million secured debt facility with a syndicate of two lenders. In connection with the repayment, we incurred a loss on extinguishment of debt of $0.1 million, primarily related to the write off of deferred financing costs, the acceleration of recognition of debt extinguishment fees and the prepayment premium payable. The notes were secured by substantially all our assets except for intellectual property and carried a fixed interest rate of 13.65%.

Other income (expense) net. Other income (expense), net was $(0.003) million for the nine months ended September 30, 2013, a decrease of $1.8 million from $1.8 million for the nine months ended September 30, 2012. The decrease was due to the change in fair value related to our warrant liability.

Liquidity and capital resources

Sources of liquidity

Since inception, we have incurred significant operating losses. To date, we have not generated any product sale revenues. We have financed our operations primarily through the issuance and sale of our common stock in our initial public offering, private placements of our preferred stock, collaborations, bank debt, convertible debt financings, grant funding and clinical trial support from governmental and philanthropic organizations and patient advocacy groups in the disease areas addressed by our product candidates. In June 2013, we closed the initial public offering of our common stock, pursuant to which we issued and sold an aggregate of 9,627,800 shares of common stock at a public offering price of $15.00 per share, including 1,255,800 shares pursuant to the exercise by the underwriters of an over-allotment option. We received net proceeds from the initial public offering of approximately $131.6 million, after deducting underwriting discounts and commissions and other offering expenses payable by us.

Cash flows

As of September 30, 2013, we had cash, cash equivalents and marketable securities of $157.2 million.

The following table provides information regarding our cash flows and our capital expenditures for the periods indicated.

	Nine months ended September 30,
(in thousands)	2012			2013
Cash provided by (used in):
Operating activities	$	(36,891	)	$	(32,459	)
Investing activities	(184		)	(133,697		)
Financing activities	23,115			187,475

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Net cash used in operating activities was $36.9 million for the nine months ended September 30, 2012 and $32.5 million for the nine months ended September 30, 2013. The change in net cash used in operating activities primarily related to supporting clinical development, pre-commercial activities and public company readiness.

Net cash used in investing activities was $0.2 million for nine months ended September 30, 2012 and $133.7 million for the nine months ended September 30, 2013. Cash used in investing activities was related to purchases of property and equipment for the nine months ended September 30, 2012. Cash used in investing activities was related to purchases of investments for the nine months ended September 30, 2013.

Net cash provided by financing activities was $23.1 million for nine months ended September 30, 2012. Net cash provided by financing activities in 2012 was attributable to $29.4 million in proceeds from the sale of Series One preferred stock, offset by $6.2 million payments on debt obligations. Net cash provided by financing activities was $187.5 million for the nine months ended September 30, 2013. Net cash provided by financing activities in 2013 was primarily attributable to the $60.8 million in net proceeds that we received from the sale of Series Four preferred stock and $131.6 million in net proceeds received from the initial public offering. Partially offsetting these proceeds were payments on debt obligations of $5.0 million in 2013.

Funding requirements

In addition, our expenses will increase if and as we:

· initiate or continue the research and development of ataluren for additional indications and of our other product candidates;

· seek to discover and develop additional product candidates;

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

· add operational, financial and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts.

We believe that our existing cash and cash equivalents, including the net proceeds from our initial public offering of common stock, marketable securities and research funding that we expect to receive under our collaborations, will be sufficient to enable us to fund our operating expenses, debt service obligations and capital expenditure requirements through the fourth quarter of 2015. 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. This estimate assumes, among other things, that we do not receive conditional approval to market ataluren for nmDMD or nmCF in the European Union prior to completing a confirmatory Phase 3 clinical trial for the applicable indication and, as a result, that we do not incur significant related commercialization expenses prior to such time. Our future capital requirements will depend on many factors, including:

· the progress and results of confirmatory Phase 3 clinical trials of ataluren for nmDMD and nmCF;

· the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for ataluren for additional indications and for our other product candidates;

· the number and development requirements of other product candidates that we pursue;

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

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

· subject to receipt of marketing approval, revenue received from commercial sales of ataluren or any of our other product candidates;

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

· the extent to which we acquire or invest in other businesses, products and technologies; and

· our ability to establish and maintain collaborations.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances, grants and clinical trial support from governmental and philanthropic organizations and patient advocacy groups in the disease areas addressed by our product candidates and marketing, distribution or licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Contractual obligations

The following table summarizes our significant contractual obligations and commercial commitments as of September 30, 2013.

(in thousands)	Total		Less than 1 year		1-3 years		4-5 years		More than 5 years
Debt obligations(1)	$	84	$	84	$	—	$	—	$	—
Operating and equipment lease obligations(2)	4,786		913		2,546		1,327		—
Total fixed contractual obligations	$	4,870	$	997	$	2,546	$	1,327	$	—

(1) In July 2013, we paid in full the outstanding principal and interest of $2.6 million due under promissory notes issued in connection with a $25 million secured debt facility with a syndicate of two lenders. The notes were secured by substantially all our assets except for intellectual property and carried a fixed interest rate of 13.65%.

(2) We lease office space under a noncancelable operating lease with a term that extends through February 2019. We also lease certain office equipment under operating leases.

The preceding table excludes contingent contractual payments that we may become obligated to make. Under various agreements, we will be required to pay royalties and milestone payments upon the successful development and commercialization of products, including the following agreements with The Wellcome Trust Limited, or Wellcome Trust, and the SMA Foundation.

We have entered into funding agreements with Wellcome Trust for the research and development of small molecule compounds in connection with our BMI1 and antibacterial programs. To the extent that we develop and commercialize program intellectual property on a for-profit basis, we may become obligated to pay to Wellcome Trust development and regulatory milestone payments of up to an aggregate of $68.9 million and single-digit royalties on sales of any research program product. Our obligation to pay such royalties would continue on a country-by-country basis until the longer of the expiration of the last patent in the program intellectual property in such country covering the research program product and the expiration of market exclusivity of such product in such country.

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We have also entered into a sponsored research agreement with the SMA Foundation in connection with our spinal muscular atrophy program. We may become obligated to pay the SMA Foundation single-digit royalties on worldwide net product sales of any collaboration product that we successfully develop and subsequently commercialize or, with respect to collaboration products we outlicense, a specified percentage of certain payments we receive from our licensee. We are not obligated to make such payments unless and until annual sales of a collaboration product exceed a designated threshold. Our obligation to make such payments would end upon our payment to the SMA Foundation of a specified amount.

We have employment agreements with certain employees which require the funding of a specific level of payments, if certain events, such as a change in control or termination without cause, occur.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risk related to changes in interest rates. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are in marketable securities. Our available for sale securities are subject to interest rate risk and will fall in value if market interest rates increase.

Item 4. Controls and Procedures.

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2013. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2013, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time in the ordinary course of our business, we are subject to claims, legal proceedings and disputes as a result of patients seeking to participate in our clinical trials or otherwise gain access to our product candidates. These matters are subject to various uncertainties, and it is possible that some of these matters may be resolved unfavorably to us. However, we believe that the ultimate outcome of the matters that are currently pending will not have a material adverse impact on our business.

Item 1A. Risk Factors.

The following risk factors and other information included in this Quarterly Report on Form 10-Q should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. Please see page 1 of this Quarterly Report on Form 10-Q for a discussion of some of the forward-looking statements that are qualified by these risk factors. If any of the following risks occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected.

Risks related to our financial position and need for additional capital

We have incurred significant losses since our inception. We expect to incur losses for at least the next several years and may never generate profits from operations or maintain profitability.

Since inception, we have incurred significant operating losses. As of September 30, 2013, we had an accumulated deficit of $310.9 million. To date, we have financed our operations primarily through the issuance and sale of our common stock in our initial public offering, the private placements of our preferred stock, collaborations, bank debt, convertible debt financings, grant funding and

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clinical trial support from governmental and philanthropic organizations and patient advocacy groups in the disease areas addressed by our product candidates. In June 2013, we closed the initial public offering of our common stock, pursuant to which we issued and sold an aggregate of 9,627,800 shares of common stock at a public offering price of $15.00 per share, including 1,255,800 shares pursuant to the exercise by the underwriters of an over-allotment option. We received net proceeds from the initial public offering of approximately $131.6 million, after deducting underwriting discounts and commissions and other offering expenses payable by us. We have devoted substantially all of our efforts to research and development, including clinical trials. We have not completed development of any drugs. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. The net losses we incur may fluctuate significantly from quarter to quarter.

We anticipate that our expenses will increase substantially in connection with initiating and completing confirmatory Phase 3 clinical trials for our lead product candidate, ataluren, for the treatment of patients with Duchenne muscular dystrophy caused by nonsense mutations, or nmDMD, and patients with cystic fibrosis caused by nonsense mutations, or nmCF, commencing early access programs for ataluren for nmDMD patients in selected territories and seeking marketing approval for ataluren for these indications in the European Union and the United States. We have submitted a marketing authorization application, or MAA, to the European Medicines Agency, or EMA, for conditional approval of ataluren for the treatment of nmDMD. Subject to the conclusion of our ongoing discussions with regulatory authorities regarding the proposed design of our planned Phase 3 clinical trial, we also plan to pursue conditional approval of ataluren for the treatment of nmCF in the European Union. EMA conditional approval would permit us to market ataluren in the European Union for treatment of the applicable indication prior to completion of the confirmatory Phase 3 clinical trial for that indication. If we obtain marketing approval of ataluren for either nmDMD or nmCF, we also expect to incur significant sales, marketing, distribution and manufacturing expenses. The timing of commercialization expenses for ataluren depends in part on whether we receive conditional approval for ataluren for either or both of nmDMD and nmCF.

In addition, our expenses will increase if and as we:

· initiate or continue the research and development of ataluren for additional indications and of our other product candidates;

· seek to discover and develop additional product candidates;

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

· add operational, financial and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts.

Our ability to generate profits from operations and remain profitable depends on our ability to successfully develop and commercialize drugs that generate significant revenue. Based on our current plans, we do not expect to generate significant revenue unless and until we obtain marketing approval for, and commercialize, ataluren for the treatment of nmDMD or nmCF. This will require us to be successful in a range of challenging activities, including:

· obtaining approval to market ataluren for the treatment of either or both of nmDMD and nmCF;

· successfully initiating and completing confirmatory Phase 3 clinical trials of ataluren for the treatment of either or both of nmDMD and nmCF;

· protecting our rights to our intellectual property portfolio related to ataluren;

· contracting for the manufacture of commercial quantities of ataluren;

· negotiating and securing adequate reimbursement from third-party payors for ataluren; and

· establishing sales, marketing and distribution capabilities to effectively market and sell ataluren in the European Union and the United States.

We may never succeed in these activities and, even if we do, may never generate revenues that are significant enough to generate profits from operations. Even if we do generate profits from operations, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to generate profits from operations and remain profitable would decrease the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our product offerings or continue our operations. A decline in the value of our company could also cause our stockholders to lose all or part of their investment in our comapny.

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We will need substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.

We expect our research and development expenses to increase in connection with our ongoing activities, particularly as we initiate and continue confirmatory Phase 3 clinical trials of ataluren for the treatment of nmDMD and nmCF, continue our research activities in our preclinical programs and initiate clinical development of other product candidates. In addition, if we obtain regulatory approval for ataluren or any of our other product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, distribution and manufacturing. We also expect to incur expenses in connection with commencing early access programs for ataluren for nmDMD patients in selected territories. We expect to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts.