|
Scott A. Samuels | 617 348 1798 | ssamuels@mintz.com |
One Financial Center Boston, MA 02111 617-542-6000 617-542-2241 fax www.mintz.com |
FOIA CONFIDENTIAL TREATMENT REQUESTED
PURSUANT TO 17 C.F.R. § 200.83
BY INTERCEPT PHARMACEUTICALS, INC.
| September 24, 2012 |
Via EDGAR
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549
Attention: Jeffrey Riedler, Assistant Director
| Re: | Intercept Pharmaceuticals, Inc. | |
| Registration Statement on Form S-1 | ||
| Filed September 4, 2012 | ||
| File No. 333-183706 |
Ladies and Gentlemen:
We are submitting this letter on behalf of Intercept Pharmaceuticals, Inc. (the “Company”) in response to comments from the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) received by letter dated September 18, 2012 (the “Comment Letter”) from Jeffrey P. Riedler, Assistant Director, to Mark Pruzanski, the Company’s President and Chief Executive Officer, relating to the above-referenced registration statement on Form S-1 of the Company filed with the Commission on September 4, 2012. As discussed with the Staff, we are filing this letter via EDGAR for the Staff’s review in advance of filing Amendment No. 1 to the registration statement (“Amendment No. 1” and, as amended, the “Registration Statement”), which will be filed subsequent to the Staff’s review of this letter.
For convenient reference, we have set forth below in italics each of the Staff’s comments set forth in the Comment Letter and have keyed the Company’s responses to the numbering of the comments and the headings used in the Comment Letter. All of the responses are based on information provided to Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. by representatives of the Company. Where appropriate, the Company has indicated that it will revise its disclosure in Amendment No. 1 and has included the proposed text of such revised disclosure as an exhibit to this letter.
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
Boston | London | Los Angeles | New York | San Diego | San Francisco | Stamford | Washington
| FOIA CONFIDENTIAL TREATMENT REQUESTED | |
| PURSUANT TO 17 C.F.R. § 200.83 | |
| BY INTERCEPT PHARMACEUTICALS, INC. |
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
United States Securities and Exchange Commission
September 24, 2012
Page 2
Registration Statement on Form S-1
| 1. | Please note that when you file a pre-effective amendment that includes your price range, it must be bona fide. We interpret this to mean that your range may not exceed $2 if you price below $10 and 20% if you price above $10. |
Response: The Company acknowledges the Staff’s comment on the bona fide price range.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies and Estimates
Valuation of Stock-Based Compensation and Warrant Liability, page 58
| 2. | While you state in response to comment 2 that you used the PWERM approach to determine your enterprise value and related allocation to your common stockholders, it is unclear how you determined your enterprise value underlying each of the exit scenarios you identify. As a result, for each exit scenario you identify on pages 60 and 61, please revise your disclosure to clarify how you estimated your enterprise value at each valuation date. In your revised disclosure: |
| · | describe the valuation approaches used; |
| · | discuss the major assumptions used for each valuation approach; |
| · | discuss how you determined that the assumptions used to determine fair value were reasonable and appropriate for your stage of development; |
| · | discuss whether you used different approaches or assumptions under different exit scenarios, and if so, why; and |
| · | discuss the variance between the enterprise values underlying each exit scenario at each valuation date. |
Response: In response to the Staff’s comments, the Company submits that it will revise the disclosure on pages 60 through 64 of the prospectus contained in the Registration Statement as set forth in Exhibit A to this letter in connection with its filing of Amendment No. 1.
| 3. | Please tell us whether, and if so by how much, the events described on pages 61 and 62 impacted your enterprise value. If these events did not change your enterprise value, please explain why not. |
Response: In response to the Staff’s comments, the Company submits that it will revise the disclosure on pages 61 and 62 of the prospectus contained in the Registration Statement as set forth in Exhibit A to this letter in connection with its filing of Amendment No. 1.
| FOIA CONFIDENTIAL TREATMENT REQUESTED | |
| PURSUANT TO 17 C.F.R. § 200.83 | |
| BY INTERCEPT PHARMACEUTICALS, INC. |
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
United States Securities and Exchange Commission
September 24, 2012
Page 3
| 4. | Please tell us what the estimated fair value of the common stock would have been at July 31, 2012 if you had assumed 100% probability for the IPO scenario. Separately explain to us why you did not use a higher probability of completing the IPO at that date and bridge for us the underlying differences between this value and the midpoint of your anticipated IPO price range. |
Rule 83 confidential treatment request made by INTERCEPT
PHARMACEUTICALS, Inc.; Request No. 2012.09.24.3.1
Response: The Company’s valuation model as of July 31, 2012 used two separate valuations for the IPO scenario using the assumption that the IPO would be completed in either the near term (the “Near Term IPO Scenario”) or the long term (the “Long Term IPO Scenario”). The Near Term IPO Scenario and the Long Term IPO Scenario as of July 31, 2012 yielded estimated fair values of $[***] and $[***] per share of the Company’s common stock, respectively, prior to applying the 25% discount for the lack of liquidity, the discount to present value, and the 50% probability weighting for the IPO scenarios as of July 31, 2012. After giving effect to a reverse stock split of 1-for-[***], as the Company supplementally advised the Staff in its comment response letter dated September 4, 2012, the estimated fair value of the common stock in the Near Term IPO Scenario and the Long Term IPO Scenario would have been $[***] and $[***] per share, respectively. In comparison, in the Company’s comment response letter dated September 4, 2012, the Company supplementally advised the Staff that it anticipates disclosing an offering with a proposed price range of $[***] to $[***] per share (the “Anticipated Price Range”), after giving effect to an anticipated reverse stock split of 1-for-[***], and an offer of such number of shares of common stock to be determined, in a pre-effective amendment to the Registration Statement. The midpoint of the Anticipated Price Range is $[***] per share.
Rule 83 confidential treatment request made by INTERCEPT
PHARMACEUTICALS, Inc.; Request No. 2012.09.24.3.2
If we assume that the IPO is certain to occur, the 50% probability weighting for the IPO would be increased to 100% and the discount for the lack of marketability would be disregarded. As of the date of the actual closing of the IPO, the discount to present value applied in the July 31, 2012 valuation would be disregarded or decreased depending on the scenario because the IPO will occur at a date subsequent to July 31, 2012. As discussed above, the valuation as of July 31, 2012 utilized an estimated fair value of $[***] per share of common stock in the Near Term IPO Scenario and $[***] per share of common stock in the Long Term IPO Scenario, before applying the illiquidity discount, discount to present value and the probability assessment.
| FOIA CONFIDENTIAL TREATMENT REQUESTED | |
| PURSUANT TO 17 C.F.R. § 200.83 | |
| BY INTERCEPT PHARMACEUTICALS, INC. |
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
United States Securities and Exchange Commission
September 24, 2012
Page 4
Furthermore, as of the time of the IPO closing, the preferred stock will be converted into common stock and the economic rights and preferences pertaining to the preferred stock will no longer be applicable. In addition, the proceeds from the IPO would substantially strengthen the Company’s cash position and balance sheet, while providing the Company with access to the public debt and equity markets. When these factors are considered together with the per share values noted above for the two IPO scenarios, the Company believes that the midpoint of the Anticipated Price Range is reasonable and appropriate.
Rule 83 confidential treatment request made by INTERCEPT
PHARMACEUTICALS, Inc.; Request No. 2012.09.24.4.1
The Company respectfully submits that its management believed that a 50% probability for an IPO as of July 31, 2012 is reasonable and appropriate. As of July 31, 2012, the Company was in advanced negotiations in respect of the Series C preferred stock financing. The indicative terms at this stage of the negotiation included a backstop provision whereby the investors would purchase additional shares of Series C preferred stock for additional gross proceeds of $20 million to the Company if the Company was not able to successfully complete its IPO within one year of closing the Series C preferred stock financing. When the Series C preferred stock financing was completed, as disclosed in the prospectus contained in the Registration Statement, the terms of the transaction included this backstop provision. With the proceeds of the first closing of the Series C preferred stock financing and this backstop provision, management believed that the Company has sufficient committed funds for its operations until [***]. Furthermore, the capital markets remained highly speculative at July 31, 2012, including for biopharmaceutical companies in similar stages of development as the Company, some of which had recently been unsuccessful in completing an IPO due to lack of sufficient investor interest. In addition, management believed that there were a number of other aspects of the Company’s business and stage of development, such as those disclosed in the prospectus contained in the Registration Statement under the heading “Risk Factors,” that could make an IPO more challenging, thereby rendering a 50% probability of completion reasonable at that time.
| FOIA CONFIDENTIAL TREATMENT REQUESTED | |
| PURSUANT TO 17 C.F.R. § 200.83 | |
| BY INTERCEPT PHARMACEUTICALS, INC. |
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
United States Securities and Exchange Commission
September 24, 2012
Page 5
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm, page F-2
| 5. | Both of the audit reports reference information included in the inception-to date under ASC 915-205-45-2 that does not appear in your filing. As the inception-to-date information is identified in the referenced guidance as “additional information” it must be audited in its entirety. Accordingly, as originally requested in comment 32 of our July 17, 2012, please obtain an auditor’s report that covers the financial statements for the period from inception to December 31, 2011. In this regard, the auditor’s report may refer to the predecessor auditor’s report that must continue to be included in your filing. |
Response: The Company submits to the Staff that it will include in Amendment No. 1 a revised auditor’s report from KPMG LLP that will cover the full period from inception to December 31, 2011, with a reference to the predecessor auditor’s report for the period audited by the predecessor firm, whose audit report will be included in the filing.
Notes to Consolidated Financial Statements
3. Significant Agreements, F-11
| 6. | We acknowledge your response to comment 9. Please address the following additional comments: |
| · | In your disclosure added in Note 2M on page F-11 you indicate in part that a substantive milestone is commensurate with the enhanced value of the intellectual property as a result of the milestone achievement. ASC 605-28-25-2a requires a substantive milestone to be commensurate with either the vendor’s performance or the enhanced value as a result of a specific outcome resulting from the vendor’s performance. Please demonstrate to us how your performance impacts the achievement of these milestones and revise your disclosure accordingly. |
| · | Please revise your disclosure added in Note 3 to disclose the nature of your development milestones. |
| · | We do not believe that the disclosure of an individually significant milestone would be confusing or misleading and is required to comply with the guidance in ASC 605-28-50-2b to disclose each individual milestone. As a result, please disclose the requested information for any individually significant milestones. In this disclosure, you may qualify, if true, that you do not expect to achieve these milestones for at least several years as represented in your response. |
Response: The Company responds to the Staff’s comments as follows:
Response to Bullet 1: In response to the Staff’s comment in bullet 1, the Company submits that it will revise the disclosure in Note 2M on page F-11 of the prospectus contained in the Registration Statement as set forth in Exhibit B to this letter in connection with its filing of Amendment No. 1.
| FOIA CONFIDENTIAL TREATMENT REQUESTED | |
| PURSUANT TO 17 C.F.R. § 200.83 | |
| BY INTERCEPT PHARMACEUTICALS, INC. |
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
United States Securities and Exchange Commission
September 24, 2012
Page 6
The Company’s agreement with Dainippon Sumitomo Pharma Co. Ltd. (“DSP”) contains development milestones based on the initiation or completion of clinical trials, regulatory approval milestones and sales milestones based on various aggregate sales revenues generated by DSP in its territory. The Company has assessed each of the individual milestones in the DSP agreement and has determined that each is (i) either dependent on the Company’s performance to achieve the milestone or is an enhancement of the value of the item delivered as a result of a specific outcome resulting from the Company’s performance to achieve the milestone, (ii) relates solely to past performance of the Company, and (iii) is reasonable relative to all deliverables and payment terms in the arrangement. The development milestones and the regulatory approval milestones satisfy these requirements because, even though DSP is responsible for the development and the regulatory submissions relating to the jurisdictions covered by the DSP agreement, DSP will utilize the OCA data generated by the Company in designing its clinical trials and programs, initiating clinical trials and ultimately submitting applications for product approval, which would not have been possible without the Company’s efforts. The receipt of regulatory approvals in the United States is directly related to the Company’s performance and is commensurate with the enhanced value to OCA because the Company has to generate data needed for regulatory approval through its studies and trials. Furthermore, the value of OCA is enhanced significantly upon approval because regulatory risk is significantly reduced upon approval. The sales milestones in the DSP agreement are triggered by the satisfaction of certain net sales thresholds for OCA in the DSP territory. The achievement of commercialization and the sales thresholds for OCA will depend, in part, on the efficacy and safety of OCA in the Company’s studies and clinical trials and the strength of the patent protection established by the Company.
The Company’s agreement with Les Laboratories Servier and Institut De Recherches Servier (collectively, “Servier”) contains development milestones based on the initiation of clinical trials by Servier or the selection by Servier of product candidates for development, milestones based on regulatory submissions and approvals and sales milestones based on various aggregate sales amounts in the Servier territory. The Company has assessed each of the individual milestones in the Servier agreement and has determined that each is (i) either dependent on the Company’s performance to achieve the milestone or is an enhancement of the value of the item delivered as a result of a specific outcome resulting from the Company’s performance to achieve the milestone, (ii) relates solely to past performance of the Company, and (iii) is reasonable relative to all deliverables and payment terms in the arrangement. The development milestones and the regulatory submission and approval milestones satisfy these requirements because, even though Servier is responsible for the development of the product candidates in its territory, Servier will utilize data generated by the Company for those product candidates in designing its clinical trials, initiating clinical trials and ultimately submitting applications for product approvals which would not have been possible without the Company’s efforts. The receipt of regulatory approvals for the Company’s product candidates are directly related to the Company’s performance and is commensurate with the enhanced value to the Company’s product candidates because the product candidates must generate positive data needed for regulatory submission and approval in studies and trials. Furthermore, the value of the product candidates is enhanced upon the satisfaction of the regulatory milestones because regulatory risk is reduced at each stage. The sales milestones in the Servier agreement are triggered by the satisfaction of certain net sales thresholds for the Company’s product candidates, including the achievement of first sale of the first product candidate in certain specified European countries. The achievement of commercialization and sales levels of the Company’s product candidates will depend, in part, on the efficacy and safety of the Company’s product candidates, as well as the data generated by the studies and trials related thereto, and the strength of the patent protection established by the Company.
| FOIA CONFIDENTIAL TREATMENT REQUESTED | |
| PURSUANT TO 17 C.F.R. § 200.83 | |
| BY INTERCEPT PHARMACEUTICALS, INC. |
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
United States Securities and Exchange Commission
September 24, 2012
Page 7
As each of the DSP and Servier agreements was the result of an arm’s-length negotiation between unrelated parties, the Company believes that the milestone amounts are reflective and commensurate with what the parties believe would be the enhanced value to the product candidates as a result of the Company’s performance that led to the satisfaction of the related milestone. As such, the Company respectfully submits to the Staff that each milestone is substantive in accordance with ASC 605-28-25-2a.
Response to Bullets 2 and 3: In response to the Staff’s comments in bullets 2 and 3, the Company submits that it will revise its disclosure in Note 3 relating to the DSP and Servier agreements on pages F-14 through F-15 of the prospectus contained in the Registration Statement as set forth in Exhibit C to this letter in connection with its filing of Amendment No. 1.
7. Warrants to Purchase Common Stock, page F-17
| 7. | The analysis you provide in response to comment 12 provides only one scenario as of the latest balance sheet date for one instrument and does not appear to contemplate the need to raise capital, at potentially lower prices that would trigger your down-round provisions, at each period end impacting the historical financial statements presented in your filing. As a result please restate your financial statements as necessary to employ the use of a binomial/lattice or simulation model for these instruments. Alternatively, provide us an analysis as of December 31, 2009, 2010 and 2011 and June 30, 2011 and 2012 as well as for the years 2010 and 2011 and the six months ended June 30, 2011 and 2012 that demonstrates for all of your instruments that the impact between the use of the Black-Scholes model is not materially different from a binomial/lattice or simulation model. Please provide this analysis using a binomial/lattice or simulation model or demonstrate to us how the methodology you use contemplates the factors included in such models, including, but not limited to the fact that: |
| FOIA CONFIDENTIAL TREATMENT REQUESTED | |
| PURSUANT TO 17 C.F.R. § 200.83 | |
| BY INTERCEPT PHARMACEUTICALS, INC. |
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
United States Securities and Exchange Commission
September 24, 2012
Page 8
| · | you raised capital at various times since the issuance of your first financing that included warrants with down-round provisions, demonstrating your need to fund operations through external means; |
| · | there was no guarantee that these subsequent rounds of financing would not trigger warrant exercise price adjustments under the down-round provisions; and |
| · | you must use reasonable assumptions for all relevant variables that would have applied at each such balance sheet date. |
Response: The Company is submitting the information contained in Exhibit D hereto in response to this comment, as further discussed with the Staff in telephonic conferences held on September 19, 2012 and September 21, 2012.
* * * * *
When appropriate, the Company will provide a written request for acceleration of the effective date of the Registration Statement and will include the requested “Tandy” language therein. The Company and the underwriters are aware of their respective obligations under Rules 460 and 461 regarding requesting acceleration of the effectiveness of the Registration Statement.
We hope that the above responses and the related revisions to the Registration Statement will be acceptable to the Staff. Please do not hesitate to contact me at 617-348-1798 or sasamuels@mintz.com or Bryan Yoon of this firm at 212-692-6847 or byoon@mintz.com with any comments or questions regarding the Registration Statement and this letter. We thank you for your time and attention.
| Sincerely, | |
| /s/ Scott A. Samuels | |
| Scott A. Samuels, Esq. |
| FOIA CONFIDENTIAL TREATMENT REQUESTED | |
| PURSUANT TO 17 C.F.R. § 200.83 | |
| BY INTERCEPT PHARMACEUTICALS, INC. |
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
United States Securities and Exchange Commission
September 24, 2012
Page 9
| cc: | Securities and Exchange Commission |
| Jeffrey Riedler, Assistant Director | |
| Rose Zukin | |
| Bryan Pitko | |
| Kei Nakada | |
| Mark Brunhofer |
| Intercept Pharmaceuticals, Inc. | |
| Mark Pruzanski, M.D., President and Chief Executive Officer | |
| Barbara Duncan, Chief Financial Officer, Treasurer and Secretary | |
| Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. | |
| William T. Whelan | |
| Bryan Yoon | |
| Goodwin Procter LLP | |
| Christopher J. Austin | |
| KPMG LLP | |
| Brian K. Roberson | |
| Thomas R. Klockner |
| FOIA CONFIDENTIAL TREATMENT REQUESTED | |
| PURSUANT TO 17 C.F.R. § 200.83 | |
| BY INTERCEPT PHARMACEUTICALS, INC. |
Exhibit D
The Company has concluded that value of its warrants with down-round provisions is not materially different if calculated using the Black-Scholes model rather than a binomial/lattice or simulation model. While the Company recognizes that a binomial/lattice or simulation model is generally accepted as a better valuation model than the Black-Scholes model in relation to warrants with down-round provisions, the Company believes that the difference in values obtained using the two valuation methodologies is not material to the Company’s financial statements for each period included in the Registration Statement. Management believes that the immaterial differences resulting from the use of a binomial/lattice or simulation model on a quarterly basis would not warrant the considerable additional effort and expense. However, as with any non-GAAP policy that is applied for convenience, the Company submits to the Staff that it will continue to monitor the assumptions that could potentially impact the valuation of the warrants to ensure that any change in circumstances is evaluated using assessments commensurate with those outlined below in order to determine whether such a change would have a material impact on the valuation of the warrants under a binomial/lattice or simulation model.
The following is a summary of all of the Company’s warrants with down-round provisions along with their historical valuation at each of the balance sheet dates using the Black-Scholes valuation method:
| Issue | Expiration | Exercise | Number | Liability Value ($) | ||||||||||||||||||||||||||||||
| Date | Date | Price | of Shares | 12/31/09 | 12/31/10* | 6/30/11 | 12/31/11* | 6/30/12* | ||||||||||||||||||||||||||
| 10/4/03 | 10/24/13 | $ | 0.50 | 12,500 | 17,759 | 15,021 | 14,916 | 13,444 | 13,833 | |||||||||||||||||||||||||
| 5/4/04 | 10/27/13 | $ | 0.50 | 793,094 | 1,096,308 | 995,123 | 955,769 | 852,994 | 880,765 | |||||||||||||||||||||||||
| 5/8/06 | 5/8/11 | $ | 1.70 | 500,000 | 579,602 | 127,768 | - | - | - | |||||||||||||||||||||||||
| 5/23/08 | 5/23/13 | $ | 1.80 | 625,000 | 646,869 | 396,957 | 436,813 | 279,852 | 285,438 | |||||||||||||||||||||||||
| 1/25/10 | 1/25/15 | $ | 1.80 | 5,000,000 | - | 5,334,224 | 5,379,000 | 4,681,671 | 3,673,500 | |||||||||||||||||||||||||
| 6,930,594 | 2,340,537 | 6,869,092 | 6,786,498 | 5,827,961 | 4,853,536 | |||||||||||||||||||||||||||||
| * | The December 31, 2010 and December 31, 2011 total values are $11,611 and $7,916 less than the amounts recorded on the respective balance sheets included on page F-4 of the prospectus contained in the Registration Statement as the balance sheets erroneously included a tranche of 12,500 warrants that do not include a down-round provision. The June 30, 2012 total value is $2,866 less than the amount recorded on that balance sheet included on page F-4 of the prospectus contained in the Registration Statement due to rounding in the process of recording the entries to the financial statements. These discrepancies are de minimis. |
| D-1 |
| FOIA CONFIDENTIAL TREATMENT REQUESTED | |
| PURSUANT TO 17 C.F.R. § 200.83 | |
| BY INTERCEPT PHARMACEUTICALS, INC. |
The 2003 and 2004 warrants set forth above, which represent approximately 10% of the shares available for issuance under all outstanding warrants, contain “full ratchet” down-round provisions, while the remainder of the warrants set forth above have weighted average down-round provisions.
2010 Warrant
In order to form the materiality assessment, the Company made quantitative and qualitative judgments. The Company performed a binomial model as of two dates for the warrant to purchase 5,000,000 shares of common stock at $1.80 per share that was issued in 2010 (the “2010 Warrant”), which represents 76% to 80% of the warrant liability. The purpose of this analysis was to determine the potential magnitude of the difference of the warrant liability between the two valuation methods at two key dates – the date of the balance sheet in which the liability was first recognized (December 31, 2010) as well as the date of the most recent balance sheet (June 30, 2012). Based on the results of these valuations, the underlying nature of the Company and the terms of the outstanding warrants, the Company determined that qualitative assessments were sufficient to determine that the differences between the valuations using the two methodologies were immaterial for the intervening dates with respect to the 2010 Warrant and with respect to each of the other outstanding warrants as of all dates.
The Company engaged a valuation specialist to assist it in the preparation of a binominal model for the 2010 Warrant. In addition to accounting for a large majority of the warrant liability, this warrant represents 65% to 70% of the potential shares that could be issued under all of the Company’s outstanding warrants. In addition, this warrant has a high exercise price of $1.80, so it would have a higher likelihood of a down-round financing affecting its exercise price. The Company used very conservative assumptions in order to simplify the valuation process under the binomial valuation model, since the model’s primary purpose was to assess materiality.
Conservative estimates employed
As discussed above, the Company performed valuations using the binomial method for the 2010 Warrants as of June 30, 2012 and December 31, 2010. In the binomial valuations for both dates, the Company used a series of conservative assumptions and inputs. First, even though the adjustment provision in the 2010 Warrant is a weighted average formula, the valuation under the binomial method was performed using a full ratchet adjustment (i.e., as if the exercise price would be decreased to the new offering price as opposed to the weighted average value per the actual terms of the 2010 Warrant). This assumption has a significant impact on the valuation of the down-round provision. Second, the binomial valuation model used potential prices for the future financing transactions that would likely be lower than what would reasonably be expected. Third, for the June 30, 2012 valuation, the Company made conservative assumptions relating to the timing of potential future financing transactions.
| D-2 |
| FOIA CONFIDENTIAL TREATMENT REQUESTED | |
| PURSUANT TO 17 C.F.R. § 200.83 | |
| BY INTERCEPT PHARMACEUTICALS, INC. |
The assumptions used by the Company to evaluate materiality resulted in a larger warrant liability value than would be obtained using more realistic assumptions, exaggerating the impact of using the binomial method. Therefore, to the extent that the binomial method employed shows an increase in the liability as compared to Black-Scholes, it would be expected to be a smaller actual increase if realistic assumptions were used. It should also be noted that using more realistic assumptions such as weighted average anti-dilution also substantially increases the effort and expense of running the binomial simulation.
For the June 30, 2012 binomial valuation, in addition to the assumption that the warrants contained a full-ratchet adjustment provision, the Company assumed that it would undertake another financing in 1.5 years, which is prior to the expiration of the 2010 Warrant (January 2015), for the June 30, 2012 binomial valuation. However, as a result of the private financing that was under negotiation as of June 30, 2012, and which culminated with the closing of the Series C preferred stock financing on August 9, 2012, management believes that the Company would have sufficient capital, even without completing this initial public offering, to enable the Company to avoid another financing transaction over the remaining life of the 2010 Warrant as of that valuation date.
Rule
83 confidential treatment request made by INTERCEPT
PHARMACEUTICALS, Inc.; Request No. 2012.09.24.Exh-D.1
Furthermore, the binomial valuation model for June 30, 2012 involved potential prices of the assumed future offering that would likely be lower than what would reasonably be expected. The model assumed that a future financing with a $[***] per share value had a [***]% probability, a $[***] per share value had an [***]% probability, a $[***] per share value had a [***]% probability, a $[***] per share value had a [***]% probability and the remaining probabilities were applied to potential future financings of $[***] to $[***] per share values. Based on our history of financing at levels of $1.70 and $1.80 per share since May 2006 and with the Series C offering price of $2.00, these down-round values would actually have a much lower probability of occurring.
Rule
83 confidential treatment request made by INTERCEPT
PHARMACEUTICALS, Inc.; Request No. 2012.09.24.Exh-D.2
Running the binomial model incorporating these three sets of conservative assumptions and inputs, the valuation of the 2010 Warrant as of June 30, 2012 would have been $[***] million, as compared to $3.7 million under the Black-Scholes model, representing an increase of $[***] million, which the Company believes to be immaterial to the presentation of its financial statements. Using less conservative assumptions and inputs would have resulted in the difference being much smaller.
In fact, the valuation as of June 30, 2012 for the down-round provisions in all of the warrants is arguably negligible. This is because all of the outstanding warrants expire prior to the date that the Company anticipates needing to raise funds, after taking into consideration the Series C preferred stock financing that was under negotiation at that time. Although it is possible that the Company’s cash would be exhausted more quickly than planned, management believes this is a small probability that would not have much impact on the overall valuation.
| D-3 |
| FOIA CONFIDENTIAL TREATMENT REQUESTED | |
| PURSUANT TO 17 C.F.R. § 200.83 | |
| BY INTERCEPT PHARMACEUTICALS, INC. |
The Company also performed a binomial valuation of the 2010 Warrant as of December 30, 2010 because warrants generally have a higher value closer to the issuance date. Although differing factors in a binomial model can cause values of warrants to increase or decrease throughout their life, warrants generally decline in value over time as they approach their expiration date, so the value of the warrants is higher closer to the issuance date.
Rule
83 confidential treatment request made by INTERCEPT
PHARMACEUTICALS, Inc.; Request No. 2012.09.24.Exh-D.3
The valuation as of December 31, 2010 was also done using the approach of assuming a full ratchet down-round provision, which as discussed above is conservative because it overstates the value of a warrant with a weighted-average down-round provision. The December 31, 2010 binomial valuation assumed two financings prior to the expiration date – one at the end of 2011 and then another at the end of 2013. These projected financings were determined based on the Company’s cash position and projected usage rate at the time. The model assumed the first financing would have prices including $[***] ([***]% probability), $[***] ([***]% probability), $[***] per share ([***]% probability), $[***] per share ([***]% probability), and $[***] per share ([***]% probability). As with the June 30, 2012 valuation, this model produced a very high probability of financings with per share prices that are much below the Company’s two most recent financings completed prior to December 2010 of $1.80 per share. The second financing, which had many more permutations due to the nature of the model, also included a high probability of a down-round. Even after applying these conservative assumptions in the binomial model, the valuation of the 2010 Warrant as of December 31, 2010 would have been $[***] million, as compared to $5.33 million under the Black-Scholes model, representing an increase of $[***] million, which the Company believes to be an immaterial difference to the presentation of its financial statements. As with the June 30, 2012 valuation, the actual difference would be less if less conservative assumptions and inputs had been used, particularly if a weighted-average adjustment model had been employed.
Rule
83 confidential treatment request made by INTERCEPT
PHARMACEUTICALS, Inc.; Request No. 2012.09.24.Exh-D.4
The binomial valuations of the 2010 Warrant as of the earliest and latest dates also provides information on the range of the differences in results obtained using the two methods over time. Over the 1.5 year period, the difference between the valuation obtained using a binomial method and the valuation obtained using a Black-Scholes method only changed by approximately $[***], as the difference between the two methods was $[***] as of December 31, 2010, and $[***] as of June 30, 2012. While the warrant values will almost certainly increase or decrease from period to period regardless of which method of calculation is used, the Company does not believe that the differences between the two methods in the values derived would be material during that time. The amounts involved, especially when considering the conservatism embedded in the valuations above, are so small that the variability would not be expected to cause the intervening fluctuations in valuation to be material. For example, the Company’s financial statements would not be materially affected even after taking into account variations of 25% in the values obtained from the binomial method. With the downward pressure on the valuation of the warrants as the expiration date nears, significant changes in the underlying business of the Company or its financing environment would need to take place for a change to be of such significance for the difference to be material. Based on the nature of the Company, that is not the case. As discussed more fully below in the 2003 to 2008 Warrant section, the Company’s value has remained steady during this entire period and, due to the development stage nature of the Company, its cash needs are highly predictable.
| D-4 |
| FOIA CONFIDENTIAL TREATMENT REQUESTED | |
| PURSUANT TO 17 C.F.R. § 200.83 | |
| BY INTERCEPT PHARMACEUTICALS, INC. |
Rule
83 confidential treatment request made by INTERCEPT
PHARMACEUTICALS, Inc.; Request No. 2012.09.24.Exh-D.5
With a change in valuation based on the different methods over the 1.5 year period between December 31, 2010 to June 30, 2012 of only $[***], based on the conservative valuations and the factors discussed above, the impact on the income statements during the period would be immaterial. If the amounts were corrected, the full amount of the original difference would be recorded as a reclassification between liabilities and equity at the issuance date and only the change in value would be recorded in the income statement over the life of the warrant.
Given the results of the December 31, 2010 and June 30, 2012 binomial valuations of the 2010 Warrant, and the lack of significant changes in the intervening period, the Company does not believe it is necessary to prepare binomial valuations for this warrant as of June 30, 2011 or December 31, 2011 to show that the difference remains immaterial, given that our qualitative assessment of the underlying business and financing environment did not reveal material differences which would impact the binomial model.
2003 to 2008 Warrants
Given the immaterial difference for the 2010 Warrant, which represents up to 80% of the value of the Company’s total warrant liability and has the highest exercise price, and given the terms and nature of the Company’s other outstanding warrants, the Company determined that a qualitative assessment of the materiality of any differences in value resulting from the use of the binomial model was appropriate for the remainder of the warrants for all periods.
In performing the qualitative assessment, the Company considered its funding needs throughout this period and equity offerings that took place previous to each of the periods under review. The Company’s funding needs have been largely predictable, given that the Company is in a pre-commercial development stage with all of its efforts focused on research and no product revenues that create variability. The Company’s spending patterns are within its control since it can increase or decrease the pace of development based on the current financing environment. The only equity offering that took place during the period above was the January 2010 Series B preferred stock purchase by Genextra S.p.A. (“Genextra”). This offering was completed at $1.80 per share and included the 2010 Warrant, which had an exercise price of $1.80. The preferred stock is convertible into common on a 1-for-1 basis, so the price considered for purposes of the down-round provisions is $1.80, which is at or above the strike prices of all of the outstanding warrants. This offering was being negotiated as of December 31, 2009 and was included in our qualitative assessment as of that date.
| D-5 |
| FOIA CONFIDENTIAL TREATMENT REQUESTED | |
| PURSUANT TO 17 C.F.R. § 200.83 | |
| BY INTERCEPT PHARMACEUTICALS, INC. |
This was the second preferred stock purchase by Genextra, which also purchased preferred stock at $1.80 per share in the May 2008 Series A financing. The Series A preferred stock is also convertible into common stock on a 1-for-1 basis, resulting in a price of $1.80 for purposes of the down-round provisions in the outstanding warrants and thus no down-round provisions were triggered by this financing. The 2008 Series A preferred stock financing resulted in Genextra gaining control of the Company as its majority stockholder, and Genextra has since then had control over equity financings and other funding activities. After gaining such control in the 2008 Series A preferred stock financing, Genextra has been intent on the Company not conducting any equity financings at a down-round price. While the Company’s financial situation was not completely within Genextra’s control, it did reject subsequent equity financing offers that were made at a lower price than $1.80 per share. This is also evident in that the 2010 Series B preferred stock transaction, in which they were the sole purchaser at the price of $1.80 per share. Genextra’s protection of the equity valuation is also evidenced by the next financing event in March 2011, the up-front DSP payment of $15 million pursuant to entering our licensing agreement. At the time, the Company and Genextra were considering several opportunities to raise funds and settled on the DSP licensing agreement since Genextra did not want to dilute their equity ownership with a possible down-round financing. In addition to this, the Company’s estimated fair value of its common stock stayed consistent throughout this period, indicating overall stability and predictability.
The next financing that occurred was the Series C preferred stock financing that closed in August 2012. The convertible preferred stock was issued at $2.00 per share and is convertible into shares of common stock on a 1-for-1 basis. Once again, there was no assurance that the private financing would not be completed at a lower price, but it is further evidence of Genextra’s continuing effort not to have the Company engage in a down-round financing. While the possibility of a down-round financing must be considered up until the time that financing actually closes, the Company believes that the intent of Genextra and the success the Company has had in avoiding down-round financings is support for previous assessments that there was a low probability of a down-round throughout the period.
With that information as background, following is a qualitative assessment of each of the other warrants for each of the balance sheet dates.
2003 Warrants
These warrants were issued close to the inception of the Company, well before the December 31, 2009 valuation, which was the adoption period for EITF 07-5 that resulted in the warrants being classified as a liability. These warrants have an exercise price of $0.50 per share. Based on the very limited number of shares that could potentially be issued, the valuation of these warrants – less than $18,000 as of the December 31, 2009 valuation and declining from there – is immaterial at each of the reporting periods as illustrated in the table above. Based on this Black-Scholes valuation and the very low exercise price of these warrants, the Company concluded that any impact of using a binomial/lattice or simulation model would be de minimis and no further assessment was made.
| D-6 |
| FOIA CONFIDENTIAL TREATMENT REQUESTED | |
| PURSUANT TO 17 C.F.R. § 200.83 | |
| BY INTERCEPT PHARMACEUTICALS, INC. |
2004 Warrants
These warrants were also issued close to the inception of the Company and were issued with an exercise price of $0.50 per share. There are a much larger number of shares underlying these warrants than the 2003 warrants, which resulted in a greater Black-Scholes valuation for the 2004 warrants. However, the very low exercise price also lowers the value of the down-round provision, given that the possibility of a down-round is negligible as of each of the reporting periods. This is supported by the fact that as of the first date considered, December 31, 2009, the Company had already agreed the terms of the January 2010 Series B preferred stock financing at $1.80 per share. While a down-round issuance prior to the expiration of the 2004 warrants was possible at each of the valuation dates, the Company believes any probability of an issuance below the $0.50 exercise price factored into a binomial/lattice or simulation model would be negligible and the resulting valuation difference would be immaterial.
2006 Warrants
These warrants were issued with an exercise price of $1.70 per share. While the probability of a subsequent down-round financing occurring would be higher due to the higher exercise price, the 2006 warrants had a shorter term than the preceding warrants and expired in May 2011. Also, the 2006 warrants had a weighted-average down-round pricing provision, thereby lowering any value of the down-round provision. The valuation as of December 31, 2009 would necessarily take into account the January 2010 Series B preferred stock financing which provided sufficient funding through the expiration date of these warrants. Similarly, the value of the 2006 warrants was immaterial by December 31, 2010 due to their impending expiration. Based on these factors, the Company concluded that the probability of a down-round financing in a binomial/lattice or simulation model would be minimal and would not have a material impact on the valuation. These warrants have no impact on the June 30, 2011, December 31, 2011 or June 30, 2012 valuations since they had already expired as of such dates.
2008 Warrants
These warrants were issued to placement agents in conjunction with the 2008 Series A preferred stock financing by Genextra. These 2008 warrants have an exercise price of $1.80 per share, the same price of the Series A preferred stock. These 2008 warrants expire in May 2013 and have a weighted average down-round pricing provision. These 2008 warrants have similar features to the 2010 Warrants, for which the conservative binomial valuations were calculated as discussed above. However, the 2008 warrants are exercisable for a much lower number of shares relative to the 2010 Warrant and expire approximately two years prior to the expiration of the 2010 Warrant, which decreases their relative value. As a result, if a model similar to the one for the 2010 Warrants were applied to the 2008 warrants, the Company believes that the 2008 warrants would have resulted in immaterial amounts at each of the valuation dates.
| D-7 |
| FOIA CONFIDENTIAL TREATMENT REQUESTED | |
| PURSUANT TO 17 C.F.R. § 200.83 | |
| BY INTERCEPT PHARMACEUTICALS, INC. |
All of these warrants issued from 2003 to 2008 were outstanding as of the adoption of EITF 07-5. As a result, if the immaterial difference between the valuation methods was recorded, it would result in an adjustment to the cumulative effect adjustment in equity and the liability recorded upon adoption. This immaterial difference would then presumably decline in value as the expiration dates approached with the change recorded through the income statement. This immaterial difference at inception would be recorded to the income statement over the vesting period of the warrants, with presumably even smaller amounts affecting each income statement. This further supports the notion that any restatement would have an immaterial impact on the financial statements.
The Company believes there is strong evidence that the difference in valuations between the Black-Scholes model and a binomial/lattice or simulation model are immaterial given the specific facts and circumstances applicable to the Company. For some of the warrants, based on the terms, the difference would be negligible. For the 2010 Warrants, representing 76% to 80% of the total liability, the Company has performed a binomial model that shows that the valuation differential would be immaterial as of June 30, 2012 and December 31, 2010 (and have also discussed above the rationale for the conclusion that the difference would be immaterial during the 1.5 year intervening period).
Overall Materiality Assessment
Rule
83 confidential treatment request made by INTERCEPT
PHARMACEUTICALS, Inc.; Request No. 2012.09.24.Exh-D.6
The Company believes that the differences in valuation resulting from the use of a Black-Scholes valuation model as opposed to a binomial/lattice or simulation model is immaterial. The Company first evaluated the difference as of the most recent date using an iron curtain approach. In doing so, the binomial valuation as of June 30, 2012 for the 2010 Warrant, which represented 76% of the warrant liability at that time, resulted in a difference of approximately $[***] as compared to the valuation under the Black-Scholes model. Given that the binomial model was based on conservative factors such as employing a full ratchet (despite the fact that the 2010 Warrants only have a weighted average provision), conservative probabilities of significant down-rounds, and the assumption of a financing taking place despite the Company having adequate cash available through the expiration date, the actual difference would be much less. As discussed above, all of the warrants would arguably have a minimal increased value as of June 30, 2012 since all of them have expiration dates within the period during which the Company has adequate funding. The net loss in 2011 was $12,737,654 and the loss through the first six months of 2012 was $7,765,680 with projections that the full year loss in 2012 will exceed the prior year. Based on these amounts, even the $[***] difference in valuation for the 2010 Warrants is clearly immaterial on an iron curtain basis as it is [***]% of the 2011 net loss and even less of the projected loss for 2012. Adding an expected difference for the other warrants, which likely account for less value than the overstatement of the value of the 2010 Warrant, would still not result in a material misstatement.
| D-8 |
| FOIA CONFIDENTIAL TREATMENT REQUESTED | |
| PURSUANT TO 17 C.F.R. § 200.83 | |
| BY INTERCEPT PHARMACEUTICALS, INC. |
Qualitatively, the amount is also clearly immaterial. This liability will never result in a cash outlay by the Company; therefore, it is of very little significance to the evaluation of the results of the Company, which is driven by the potential of the product candidates in its pipeline and the prospects for their approval and market acceptance, as is the case for most development stage biotechnology companies. The main financial statement metric reviewed by investors is the net cash balances and cash usage, which is not affected by this liability. As a result, the Company concluded that there are no qualitative factors that would cause a quantitatively immaterial difference to become material. In fact, based on the Company’s qualitative analyses, the Company strongly believes that the difference in this liability arising from the two different valuation methodologies is of minimal importance to the Company’s current and potential investors.
Rule
83 confidential treatment request made by INTERCEPT
PHARMACEUTICALS, Inc.; Request No. 2012.09.24.Exh-D.7
Looking back to previous reporting periods, the Company’s analysis shows that the valuation difference on the 2010 Warrants decreased by approximately $[***] over a 1.5 year period (using the conservative valuation models). While this difference would not be a straight amortization through the income statements in the intervening period, as discussed above, there is no indication that the values would vary widely during the intervening period and there would be downward pressure on the difference as the expiration approaches, as evidenced by the approximate $[***] decrease over the 1.5 years. Over the intervening period, the Company lost approximately $3 million dollars per quarter. With no indications that the value would vary significantly, the income statement adjustments through the intervening period would not be material.
Rule
83 confidential treatment request made by INTERCEPT
PHARMACEUTICALS, Inc.; Request No. 2012.09.24.Exh-D.8
Even if the prior years are reviewed on an iron curtain basis (even though no cumulative amount would ever be recorded through a historical income statement), the amounts involved are immaterial. Net losses from 2009 through 2011 were $14,354,000 in 2009, $15,087,000 in 2010 and $12,738,000 in 2011. As discussed above, the liability for the 2010 Warrant using the binomial model has a difference of approximately $[***] at December 31, 2010, with the actual difference being less if the model is done using a weighted average approach. The difference between the valuation methodologies of approximately $[***] is only [***]% of 2010 net loss. Allowing for additional differences in the other warrants, which as discussed above would not be expected to be significant, would still result in differences that are immaterial.
The qualitative factors discussed above for the June 30, 2012 analysis apply equally throughout the entire period being assessed.
In our financial statements included in the Registration Statement, we will discuss the fact that we value the warrants using a Black-Scholes model and that we have determined that the Black-Scholes model provides a value that is immaterially different from the value that would be derived from a binomial/lattice or simulation model.
| D-9 |
| FOIA CONFIDENTIAL TREATMENT REQUESTED | |
| PURSUANT TO 17 C.F.R. § 200.83 | |
| BY INTERCEPT PHARMACEUTICALS, INC. |
Approach Going Forward
As discussed above, the difference in valuation as of June 30, 2012 is immaterial and the Company expects that any differences will continue to remain immaterial throughout the remaining life of all of the warrants, which expire from May 2013 to January 2015. The Company plans to continue to apply a Black-Scholes valuation model to value the warrant liability. As with any other non-GAAP policy that is applied in financial statements, the Company will continue to monitor developments to ensure there are no indicators that would lead it to believe the difference could be material. As discussed above, the Company believes it will have funds sufficient to last past the expiration date of all of its warrants, even without an IPO. The timing for the need of additional funds is a key factor in the Company’s evaluation. The Company will also continue to disclose that the use of the Black-Scholes model is not materially different from a binomial/lattice or simulation model.
Rule
83 confidential treatment request made by INTERCEPT
PHARMACEUTICALS, Inc.; Request No. 2012.09.24.Exh-D.9
This approach and position that a future down-round financing during the life of these warrants is highly unlikely is supported by the anticipated IPO price range of $[***] to $[***] per share, prior to giving effect to the anticipated reverse stock split. In addition, the Series C preferred stock financing that closed in August 2012 includes a second tranche backstop financing at $2.00 per share (which would result in gross proceeds of $20 million to the Company) if an IPO does not occur, which is anticipated to be sufficient to fund the Company through the expiration date of the 2010 Warrant. As a result, there is very little incentive to complete an IPO if the offering price would be less than the per share price for the backstop financing. Based on all of these factors, the Company strongly believes that there is very little possibility of a down-round over the remaining life of the warrants and any value ascribed to the down-round provision will remain immaterial.
| D-10 |