$CARA Form 10-K

Overview

Introduction

We are a clinical-stage biopharmaceutical company focused on developing and commercializing new chemical entities designed to alleviate pain and pruritus by selectively targeting kappa opioid receptors. We are developing a novel and proprietary class of product candidates that target the body’s peripheral nervous system and have demonstrated efficacy in patients with moderate-to-severe pain without inducing many of the undesirable side effects typically associated with currently available pain therapeutics.

Our most advanced product candidate, intravenous, or I.V., CR845, has demonstrated significant pain relief and a favorable safety and tolerability profile in three Phase 2 clinical trials in patients with acute postoperative pain. We have scheduled an End of Phase 2 meeting with the FDA to be held in the second quarter of 2015 to discuss the design of Phase 3 trials for I.V. CR845 in acute pain and anticipate initiating our initial Phase 3 clinical trial during the second quarter of 2015. In addition, in the fourth quarter of 2014, we successfully completed a Human Abuse Liability (“HAL”) trial of I.V. CR845. We believe that the totality of results from the HAL trial are supportive of the potential for CR845 to be the first non-scheduled or low (schedule V) scheduled peripheral opioid for acute pain.

We are also developing an oral version of CR845, or Oral CR845, for acute and chronic pain. We have successfully completed a Phase 1 trial of a capsule formulation of Oral CR845 that established oral bioavailability parameters. In the second quarter of 2014, we initiated a Phase 1 trial of a tablet formulation of Oral CR845, for which we announced positive top-line data in the fourth quarter of 2014. We are preparing to advance this formulation of Oral CR845 into a Phase 2 clinical trial in the second quarter of 2015.

CR845 has exhibited anti-pruritic (anti-itch) potency in standard preclinical models. In the second quarter of 2014, we filed an IND and in the third quarter of 2014 we initiated a proof-of-concept Phase 2 trial for I.V. CR845 for the treatment of uremic pruritus, a systemic condition with high prevalence in dialysis patients for which there are no approved therapeutics in the U.S. In the fourth quarter of 2014, we reported positive top-line dose-ranging pharmacokinetic (PK) and safety data from this trial (considered a Phase 1b trial) and expect to report top-line efficacy results in the second quarter of 2015.

We commenced operations in 2004, and our primary activities to date have been organizing and staffing our company, developing our product candidates, including conducting preclinical studies and clinical trials of CR845-based product candidates and raising capital. To date, we have financed our operations primarily through sales of our equity and debt securities and payments from license agreements. We have no products currently available for sale, and substantially all of our revenue to date has been revenue from license agreements, although we have received nominal amounts of revenue under research grants.

Since our inception and through December 31, 2014, we have received net proceeds of $56.3 million from the sale of 5.75 million shares of our common stock in our initial public offering (“IPO”), which closed on

In addition to our financing activities, we have received aggregate payments of $30.1 million pursuant to license agreements related to CR845 and an earlier product candidate for which development efforts ceased in 2007. Included in those aforementioned payments pursuant to license agreements, in April 2013, we received $15.0 million as an upfront payment, and in August 2014, we received an additional $0.5 million related to achievement of a milestone in connection with the license of rights to CR845 in Japan to Maruishi. In 2012, we received aggregate upfront and milestone payments of $1.2 million pursuant to a license agreement with CKD, in connection with the license of rights to CR845 in South Korea.

Since inception, we have incurred significant operating and net losses available to common stockholders. Our net losses available to common stockholders were $17.7 million, $3.1 million and $6.3 million for the years ended December 31, 2014, December 31, 2013 and December 31, 2012, respectively. As of December 31, 2014, we had an accumulated deficit of $80.2 million. We expect to continue to incur significant expenses and operating and net losses over at least the next several years. Our net losses may fluctuate significantly from quarter to quarter and year to year, depending on the timing of our clinical trials, the receipt of additional milestone payments, if any, under our collaborations with Maruishi and CKD, the receipt of payments under any future collaborations we may enter into, and our expenditures on other research and development activities.

We anticipate that our expenses will increase substantially as we:

� initiate our planned Phase 3 clinical trials of I.V. CR845;

� continue the research and development of our Oral CR845 and other product candidates;

� seek regulatory approvals for I.V. CR845 and any product candidates that successfully complete clinical trials;

� establish a sales, marketing and distribution infrastructure and scale up external manufacturing capabilities to commercialize any products for which we may obtain regulatory approval;

� maintain, expand and protect our global intellectual property portfolio;

� hire additional clinical, quality control and scientific personnel; and

� add operational, financial and management information systems and personnel, including personnel to support our drug development and potential future commercialization efforts.

To fund further operations, we will need to raise additional capital. As of December 31, 2014, we had cash and cash equivalents of approximately $52.7 million. We may obtain additional financing in the future through the issuance of our common stock, through other equity or debt financings or through collaborations or partnerships with other companies. We may not be able to raise additional capital on terms acceptable to us, or at all, and any failure to raise capital as and when needed could compromise our ability to execute on our business plan. Although it is difficult to predict future liquidity requirements, we believe that our existing cash and cash equivalents, together with interest thereon, will be sufficient to fund our operations for at least the next 15 months without giving effect to any potential milestone payments we may receive under our collaboration agreements. However, our ability to successfully transition to profitability will be dependent upon achieving a level of revenues adequate to support our cost structure. We cannot assure you that we will ever be profitable or generate positive cash flow from operating activities.

Collaborations with Maruishi and CKD

To date, we have entered into two license agreements relating to the development of CR845.

In April 2013, we entered into a license agreement with Maruishi under which we granted Maruishi an exclusive license to develop, manufacture and commercialize drug products containing CR845 in Japan in the

In April 2012, we entered into a license agreement with CKD under which we granted CKD an exclusive license to develop, manufacture and commercialize drug products containing CR845 in South Korea. We and CKD are each required to use commercially reasonable efforts, at our respective expense, to develop, obtain regulatory approval for and commercialize CR845 in the United States and South Korea, respectively. Under the terms of the agreement, we received a non-refundable and non-creditable upfront license fee of $0.6 million and are eligible to receive up to an aggregate of $2.3 million in clinical development milestones and $1.5 million in regulatory milestones. We also issued 173,611 shares of our Junior Preferred Stock to CKD in consideration for $0.4 million, which shares were automatically converted into 69,444 shares of common stock upon the closing of our initial public offering. During 2012, we received $0.6 million, net of foreign taxes, from CKD upon the achievement of clinical development milestones under the license agreement. We are also eligible to receive tiered royalties with percentages ranging from the high single digits to the high teens, based on net sales of products containing CR845 in South Korea, if any, and share in any sub-license fees.

Components of Operating Results

Revenue

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the near future. Substantially all of our revenue recognized to date has consisted of upfront payments under license agreements with Maruishi and CKD for CR845, a portion of which was deferred upon receipt, as well as license agreements for CR665, our first generation drug program for which development efforts have ceased. We have not received any significant development or regulatory milestone payments, or any royalties, under these collaborations.

Research and Development

To date, our research and development expenses have related primarily to the development of CR845. Research and development expenses consist of expenses incurred in performing research and development activities, including compensation and benefits for full-time research and development employees, facilities expenses, including laboratory build-out costs, overhead expenses, cost of laboratory supplies, clinical trial and related clinical manufacturing expenses, third-party formulation expenses, fees paid to CROs and other consultants, stock-based compensation for research and development employees and other outside expenses. Our research and development expenses also include expenses related to preclinical activities, such as drug discovery, target validation and lead optimization for CR845 and our other, earlier stage programs.

Research and development costs are expensed as incurred. Non-refundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized as prepaid expense. The capitalized amounts are expensed as the related goods are delivered or the services are performed. Most of our research and development costs have been external costs, which we track on a program-

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect our research and development expenses to increase significantly over the next several years as we seek to progress I.V. CR845 through Phase 3 trials and the FDA approval process. However, it is difficult to determine with certainty the duration and completion costs of our current or future preclinical programs and clinical trials of our product candidates, or if, when or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain regulatory approval. We may never succeed in achieving regulatory approval for any of our product candidates.

The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors including:

� per patient trial costs;

� the number of patients that participate in the trials;

� the number of sites included in the trials;

� the countries in which the trial is conducted;

� the length of time required to enroll eligible patients;

� the number of doses that patients receive;

� the drop-out or discontinuation rates of patients;

� potential additional safety monitoring or other studies requested by regulatory agencies;

� the duration of patient follow-up; and

� the efficacy and safety profile of the product candidate.

In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability. We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each product candidate, as well as an assessment of each product candidate’s commercial potential.

General and Administrative

General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in executive, finance, accounting, business development and human resources functions. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees and fees for accounting and consulting services.

We anticipate that our general and administrative expenses will increase in the future to support our continued research and development activities and potential commercialization of our product candidates and the increased costs of operating as a public company. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, lawyers and accountants, as well as insurance and investor relations costs. In addition, if I.V. CR845 or any future product candidate obtains regulatory approval for marketing, we expect to incur expenses associated with building a sales and marketing team.

Interest income (expense), net, consists of interest paid on debt instruments, amortized deferred financing costs and amortized debt discount, as offset by any interest income earned on our cash and cash equivalents and restricted cash. The debt discount primarily consists of the intrinsic value of the beneficial conversion feature embedded in the convertible promissory notes we issued in December 2012 and February 2013. All convertible promissory notes were either converted to shares of series D convertible preferred stock or repaid prior to December 31, 2013.

Benefit from Income Taxes

The benefit from income taxes relates to state research and development tax credits exchanged for cash pursuant to the Connecticut Research and Development Tax Credit Exchange Program, which permits qualified small businesses engaged in research and development activities within Connecticut to exchange their unused research and development tax credits for a cash amount equal to 65% of the value of the exchanged credits.

Results of Operations

Comparison of the years ended December 31, 2014, 2013 and 2012

                                                                    Year Ended December 31,
                                          2014                                2013                                2012
                                                                  Dollar amounts in thousands
                                                         % change                            % change
License and milestone fee revenue     $        302             -97 %      $      9,637             710 %      $      1,190
Collaborative revenue                        2,201              -1 %             2,225             100 %                -
Clinical compound revenue                      674             561 %               102             100 %                -

Total revenue                         $      3,177             -73 %      $     11,964             905 %      $      1,190

License and milestone fee revenue for the years ended December 31, 2014, 2013 and 2012, respectively, consists of (1) the portion of the $0.5 million milestone achieved under the license agreement with Maruishi which was attributable to a previously delivered license; (2) $9.6 million from the upfront payment under the Maruishi license agreement entered into in April 2013; and (3) license revenue of $0.7 million from the upfront payment and milestone revenue of $0.5 million, net of $0.2 million of tax, recognized in connection with the CKD license agreement entered into in April 2012.

Collaborative revenue

Collaborative revenue for each of the years ended December 31, 2014 and 2013 includes $2.2 million of revenue that had been deferred upon entry into the license agreement with Maruishi.

Clinical compound revenue

Clinical compound revenue for the years ended December 31, 2014 and 2013 includes $674 thousand and $102 thousand, respectively, from the sale of clinical compound to Maruishi.

Research and Development Expense



                                                               Year Ended December 31,
                                     2014                                2013                                2012
                                                             Dollar amounts in thousands
                                                    % change                            % change
Direct preclinical studies
and clinical trial costs         $     10,066              83 %      $      5,515             202 %      $      1,825
Consultant services in
support of preclinical
studies and clinical trials             1,308             174 %               477             134 %               204
Stock-based compensation                  349             388 %                71              48 %                48
Depreciation and
amortization                              422              -1 %               426             -35 %               654
Other operating expenses                2,923              33 %             2,196              16 %             1,866

Total R&D expense                $     15,068              73 %      $      8,685              89 %      $      4,597

For the year ended December 31, 2013 compared to the year ended December 31, 2012, the increase in direct preclinical studies and clinical trial costs and related consultant costs resulted primarily from increases of $1.6 million of CR845 drug manufacturing costs, $1.1 million from the completion of the Phase 2 I.V. CR845 bunionectomy trial and $1.0 million from the Phase 1 I.V. CR845 renal impairment trial and $0.3 million in preclinical costs for formulation and studies related to oral tablets of CR845. The increase in other R&D operating expenses resulted primarily from an increase of $0.3 million of payroll and related costs. The decrease in depreciation and amortization expense resulted from the sale of fixed assets used in research and development during 2012.

The following table summarizes our research and development expenses by product candidate for the years ended December 31, 2014, 2013 and 2012:

                                                               Year Ended December 31,
                                     2014                                2013                                2012
                                                             Dollar amounts in thousands
                                                    % change                            % change
External research and
development expenses:
I.V. CR845                       $      7,369              84 %      $      3,995             154 %      $      1,570
Oral CR845                              4,371             139 %             1,826             420 %               351
Internal research and
development expenses                    3,328              16 %             2,864               7 %             2,676

Total research and
development expenses             $     15,068              73 %      $      8,685              89 %      $      4,597

General and Administrative Expense



                                                                Year Ended December 31,
                                     2014                                 2013                                2012
                                                              Dollar amounts in thousands
                                                     % change                            % change
Professional fees and
public/investor relations        $      1,773                8 %      $      1,639              89 %      $        867
Stock-based compensation                1,022             1876 %                52             295 %                13
Depreciation and
amortization                              361                0 %               363              -1 %               367
Other operating expenses                3,025              107 %             1,462              -8 %             1,582

Total G&A expense                $      6,181               76 %      $      3,516              24 %      $      2,829

For the year ended December 31, 2013 compared to the year ended December 31, 2012, professional fees increased due to an increase in accounting, legal and consulting professional fees of $0.8 million, incurred in connection with the Maruishi license agreement and preparation for our initial public offering. Other G&A operating expenses decreased $0.3 million due to a loss on the sale of assets in the year ended December 31, 2012, partially offset by an increase of $0.1 million of payroll and related costs.

Interest Income (Expense), net



                                Year Ended December 31,
                  2014                    2013                    2012
                              Dollar amounts in thousands

The 2013 period includes $3.7 million of non-cash expenses in connection with the convertible promissory notes, including the accretion of debt discount relating to the intrinsic value of the beneficial conversion feature embedded in the notes and amortization of deferred financing costs, and accrued interest . . .