You should read the following discussion and analysis of our financial condition
and results of operations together with our consolidated financial statements
and the related notes and other financial information included in this Annual
Report on Form 10-K. Some of the information contained in this discussion and
analysis or set forth elsewhere in this Annual Report on Form 10-K, including
information with respect to our plans and strategy for our business, includes
forward-looking statements that involve risks and uncertainties as described
under the heading "Forward-Looking Statements" elsewhere in this Annual Report
on Form 10-
Overview
We are a clinical-stage biotechnology company that discovers and develops
Anticalin-based drugs to target validated disease pathways in unique and
transformative ways. Our clinical pipeline includes elarekibep, formerly
referred to as PRS-060/AZD1402, an inhaled IL-4R? antagonist Anticalin protein
to treat uncontrolled asthma, PRS-220, an inhaled CTGF antagonist to treat IPF
and other forms for fibrotic lung disease, an immuno-oncology, or IO, bispecific
PRS-344/S095012 targeting PD-L1 and 4-1BB. Proprietary to us, Anticalin proteins
are a novel class of therapeutics validated in the clinic and through
partnerships with leading pharmaceutical companies. In particular, we have
alliances with AstraZeneca and
• Elarekibep, our lead respiratory program partnered with AstraZeneca for the treatment of asthma, is a drug candidate that antagonizes IL-4R?, thereby inhibiting the downstream action of IL-4 and IL-13, two cytokines known to be key mediators in the inflammatory cascade that drive the pathogenesis of asthma and other inflammatory diseases. • Elarekibep was tested in a nebulized formulation and an IV arm for pharmacokinetic, or PK, assessment in 54 healthy volunteers at nominal dose levels ranging from 0.25 mg to 400 mg in a phase 1 single-ascending dose, or SAD, study. Data from that study were presented at theAmerican Thoracic Society International Conference inMay 2019 showing that elarekibep was well-tolerated when given as single inhaled or intravenous doses to healthy volunteers and there was systemic target engagement (as measured by pSTAT6 inhibition). Elarekibep was also tested in a phase 1 multiple-ascending dose, or MAD, study in 30 patients that were randomized to receive delivered doses via nebulizer ranging from 2 mg to 60 mg (5 mg to 150 mg nominal dose) twice daily for nine consecutive days and one final dose on the 10th day, and 12 patients were randomized to receive placebo at the same intervals. We presented interim data from the elarekibep phase 1 MAD study at theEuropean Respiratory Society International Congress inOctober 2019 and reported that elarekibep was well-tolerated at all doses, led to a statistically significant reduction in FeNO, a validated biomarker for eosinophilic airway inflammation, and showed dose-dependent systemic target engagement in patients with mild asthma and elevated levels of FeNO (? 35ppb). • The phase 2a asthma study is ongoing at multiple sites globally. This phase 2a study is a two-part, multi-center, placebo-controlled clinical study of elarekibep that will evaluate elarekibep at up to three dose levels using a dry powder formulation administered twice daily. In part 1a (1 mg and 3 mg dose safety) of the study, 31 asthma patients, controlled on standard of care (medium dose inhaled corticosteroids, or ICS, with long-acting beta agonists, or LABA), received elarekibep twice daily over four weeks to establish the safety profile and pharmacokinetics of the dry powder formulation of elarekibep. A safety review following completion of part 1a included an evaluation, compared to placebo, of the incidence of adverse events, changes in laboratory markers (immuno-biomarkers, clinical chemistry, and hematology), and forced expiratory volume in one second, or FEV1. Following the safety review, AstraZeneca began enrollment of part 2a (1 mg and 3 mg dose efficacy) of the study to evaluate efficacy, safety, and pharmacokinetics of elarekibep administered twice daily to asthma patients, uncontrolled on medium dose ICS with LABA, that have a blood eosinophil count of ? 150 cells/?L and FeNO ? 25 ppb in the 1 mg and 3 mg arms and a placebo arm. Following a four-week run-in period, patients will be dosed and monitored over four weeks. FEV1 improvement at four weeks compared to placebo will be the primary endpoint in this portion of the study. Also following the safety review, AstraZeneca initiated part 1b of the study to evaluate the safety of the 10 mg dose in asthma patients controlled on standard of care who will receive elarekibep twice daily over four weeks, and part 1b has now completed enrollment. In the second quarter of 2022, AstraZeneca conducted a reforecast of the study, which has taken into account the global challenges of recruiting for respiratory clinical trials caused by the continued impact of the COVID-19 pandemic, and has broadened enrollment criteria in part 2 (previously referenced as part 2a) of the study to facilitate recruitment of the study. AstraZeneca also now plans to focus part 2 on the 3 mg cohort for the efficacy readout and plans to stop enrollment for the 1 mg cohort. AstraZeneca no longer plans to enroll the 10 mg cohort for the efficacy readout (previously referenced as part 2b). Topline data from part 2 of this study are expected to be reported by the middle of 2024. • Upon receipt of the topline data and notice from AstraZeneca, including a product development plan and budget, we will have 30 days to opt into co-development of the program with AstraZeneca at one of two levels, neither of which includes an option exercise fee. If we do not choose to participate in co-development, we would still be entitled to sales royalties from single-digit up to the mid-teens, plus the potential for more than$1 billion in sales milestones. At the first opt-in level, we would be responsible for 25% of the cost-share through regulatory approval with a predetermined cost cap. At this level, for the lifetime of this product, we would receive sales royalties from single-digit up to the high teens, plus the potential for multi-billion dollar sales milestones. The second opt-in level would be at a 50% cost share without a cost cap which, instead of sales royalties and milestones, would result in a gross margin share in the mid-twenty percent range for the lifetime of the product. We also have a separate option to co-commercialize elarekibep with AstraZeneca inthe United States independent of the co-development opt-in decision. • There are currently two discovery-stage programs included in the AstraZeneca alliance beyond elarekibep, the targets and disease areas of which are undisclosed. Pieris retains co-development andU.S. co-commercialization options for the two discovery-stage programs. • Our lead fully proprietary respiratory asset, PRS-220, an oral inhaled Anticalin protein targeting connective tissue growth factor, or CTGF, is being developed as a local treatment for idiopathic pulmonary fibrosis, or IPF, and other forms of fibrotic lung disease. CTGF, a matricellular protein, is a driver of fibrotic tissue remodeling and the protein has been found over-expressed in lung tissue from patients suffering from IPF. Clinical data from a phase 2 study with pamrevlumab conducted by Fibrogen indicated that inhibition of CTGF reduced the decline in lung function in patients, thus demonstrating clinical proof of concept for this target. • In 2021, we received a €14.2 million grant from theBavarian Ministry of Economic Affairs ,Regional Development and Energy supporting research and development of the PRS-220 program. 94
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Table of Contents • We presented initial preclinical data for PRS-220 at theEuropean Respiratory Society International Congress 2021 demonstrating a more potent and durable target engagement profile compared to a clinical-stage, systemically delivered anti-CTGF antibody benchmark. Additionally, the targeting of CTGF locally in the lung showed increased attenuation of fibrotic lung remodeling in vivo compared to the systemically delivered antibody. This outcome correlates with superior lung tissue exposure of PRS-220 compared to that of the systemically administered antibody in head-to-head studies, where intratracheally administered PRS-220 efficiently penetrates the fibrotic, interstitial lung tissue of mice. • We are conducting a phase 1 study of PRS-220 in healthy volunteers inAustralia . The study is a randomized, two-part, blinded, placebo-controlled study, designed to assess the safety, tolerability, pharmacokinetics, and immunogenicity of single and multiple ascending doses of PRS-220 when administered by oral inhalation to healthy subjects. We expect to report the outcome of the study later this year. • InMay 2021 , we also entered into a multi-program research collaboration and license agreement withGenentech , a member of the Roche Group, to discover, develop and commercialize locally delivered respiratory and ophthalmology therapies. We are currently conducting joint discovery activities in each of the two committed programs. • PRS-400 is a fully proprietary Anticalin protein targeting Jagged-1 and is being developed as a local treatment for muco-obstructive lung diseases. Jagged-1 is one of five cell surface ligands interacting with Notch receptors. It has been demonstrated that Jagged-1/Notch signaling drives secretory cell trans-differentiation in the airways and that blocking Jagged-1/Notch signaling reduces secretory cell number, mucin expression and mucus plugging in vivo. InAugust 2022 , we presented preclinical data at theEuropean Respiratory Society International Congress 2022 indicating that candidate molecules inhibit Jagged-1-induced Notch 2 signaling in a dose-dependent manner and also demonstrate that PRS-400 reduces mucin expression ex vivo. Additionally, PRS-400 was found in vivo to reduce mucin gene expression and goblet cells in mice with IL-13-induced airway inflammation. These findings suggest that PRS-400 represents a promising opportunity to address muco-obstructive respiratory diseases locally with an attractive therapeutic index. • Cinrebafusp alfa is a bispecific Mabcalin compound comprising a HER2-targeting antibody genetically linked to 4-1BB-targeting Anticalin proteins. Cinrebafusp alfa is designed to drive tumor localized T cell activation through tumor-targeted drug clustering mediated by HER2 expressed on tumor cells. This program was the first 4-1BB bispecific T cell co-stimulatory agonist to enter clinical development. • InJuly 2022 , we received fast track designation from FDA for cinrebafusp alfa. InAugust 2022 , we announced the decision to cease further enrollment in the two-arm, multicenter, open-label phase 2 study of cinrebafusp alfa as part of a strategic pipeline prioritization to focus our resources. Cinrebafusp alfa has demonstrated clinical benefit in phase 1 studies, including single agent activity in a monotherapy setting, and in the phase 2 study in HER2-expressing gastric cancer, giving the Company confidence in its broader 4-1BB franchise. • PRS-344/S095012 is a bispecific Mabcalin protein compound comprising a PD-L1-targeting antibody genetically linked to 4-1BB-targeting Anticalin proteins. PRS-344/S095012 is being developed as part of our IO collaboration withServier . • The first patient in phase 1/2 study of PRS-344/S095012 was dosed inNovember 2021 and the study is being conducted in multiple countries, includingthe United States . • The first-in-human phase 1/2 multicenter open-label dose escalation study is designed to determine the safety and preliminary activity of PRS-344/S095012 in patients with advanced and/or metastatic solid tumors. We plan to present the escalation data at a medical meeting in 2023. • Pieris andServier presented preclinical data and the phase 1/2 study design at theAmerican Association for Cancer Research , or AACR, medical meeting inApril 2022 . • We expect to initiate the expansion cohorts in a select number of jointly vetted indications later this year. • Our IO portfolio also includes additional drug candidates beyond PRS-344/S095012 that are multi-specific Anticalin-based fusion proteins designed to engage immunomodulatory targets, comprising a variety of multifunctional biotherapeutics. Other IO drug candidates are being developed as part of our collaborations withServier , Seagen, andBoston Pharmaceuticals . • We have already handed one of the programs in the Seagen collaboration, SGN-BB228 (also referenced as PRS-346), a CD228 x 4-1BB bispecific antibody-Anticalin compound, over to Seagen, who is responsible for further advancement and funding of the asset. InJanuary 2023 , the first patient was dosed in a Seagen-sponsored phase 1 study of SGN-BB228, upon which we achieved a$5.0 million milestone. Seagen presented preclinical data for this program at theSociety for Immunotherapy of Cancer 37th Annual Meeting inNovember 2022 . The program is one of three programs in the Seagen alliance, and we believe the previous achievement of a key development milestone for this program validates our approach and leadership in IO bispecifics, complementing the encouraging clinical data seen with cinrebafusp alfa. During the third quarter of 2021, we initiated the second program, and during the fourth quarter of 2022, we initiated the third program within the collaboration with Seagen. We retain a co-promotion option for one program in the Seagen collaboration inthe United States . • PRS-342/BOS-342 is a 4-1BB/GPC3 bispecific Mabcalin compound that we have exclusively licensed toBoston Pharmaceuticals .Boston Pharmaceuticals continues to advance PRS-342/BOS-342 towards the clinic, with phase 1 expected in the coming months.
Since inception, we have devoted nearly all of our efforts and resources to our
research and development activities and have incurred significant net losses.
For the years ended
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We have not generated any revenues from product sales to date, and we do not
expect to generate revenues from product sales for the foreseeable future. Our
revenues for the fiscal years ended
A significant portion of our operations are conducted in countries other than
Key Financial Terms and Metrics
The following discussion summarizes the key factors our management believes are necessary for an understanding of our consolidated financial statements.
Revenues
We have not generated any revenues from product sales to date and we do not
expect to generate revenues from product sales for the foreseeable future. Our
revenues for the last two years have been from the license and collaboration
agreements with AstraZeneca,
The revenues from AstraZeneca,
Research and Development Expenses
The process of researching and developing drugs for human use is lengthy, unpredictable, and subject to many risks. We expect to continue incurring substantial expenses for the next several years as we continue to develop our clinical and preclinical drug candidates and programs. We are unable, with any certainty, to estimate either the costs or the timelines in which those expenses will be incurred. Our current development plans focus on the following programs: our lead respiratory program, elarekibep, our proprietary respiratory programs, PRS-220 and PRS-400, and our partnered IO programs, including PRS-344/S095012. These programs consume a large proportion of our current, as well as projected, resources.
Our research and development costs include costs that are directly attributable to the creation of certain of our Anticalin drug candidates and are comprised of:
• internal recurring costs, such as personnel-related costs (salaries, employee benefits, equity compensation and other costs), materials and supplies, facilities and maintenance costs attributable to research and development functions; and • fees paid to external parties who provide us with contract services, such as preclinical testing, manufacturing and related testing and clinical trial activities.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries, employee benefits, equity compensation, and other personnel-related costs associated with executive, administrative and other support staff. Other significant general and administrative expenses include the costs associated with professional fees for accounting, auditing, insurance costs, consulting and legal services, along with facility and maintenance costs attributable to general and administrative functions.
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Table of Contents Results of Operations
Comparison of Years Ended
The following table sets forth our revenues and operating expenses for the
fiscal years ended
Years ended December 31, 2022 2021 Revenues$ 25,902 $ 31,418 Research and development expenses 52,982 66,656
General and administrative expenses 16,394 16,593 Total operating expenses
69,376 83,249 Interest income 721 4 Grant income 8,173 3,685 Other (expense) income , net 1,303 2,404 Loss before income taxes (33,277 ) (45,738 ) Benefit for income tax - - Net loss$ (33,277 ) $ (45,738 ) Revenues
The following table provides a comparison of revenues for the years ended
Year Ended December 31, 2022 2021 Increase/(Decrease) Customer revenue$ 25,469 $ 27,940 $ (2,471 ) Collaboration revenue 433 3,478 (3,045 ) Total Revenue$ 25,902 $ 31,418 (5,516 ) • The$2.5 million decrease in customer revenue for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 is driven by the following: • Current year revenue recorded due to the discontinuation of two early-stage programs under the AstraZeneca collaboration (approximately$9.2 million ), completion of the performance obligation related to the material right for PRS-352 (approximately$4.9 million ), milestone revenue recorded under the Seagen collaboration ($5.0 million ) and completion of the performance obligation related to the expiration of the target swap for the second program under the Seagen collaboration (approximately$1.5 million ) as well as program progress on the Seagen andGenentech collaborations. • Prior year revenue was slightly higher and primarily consisted of a phase 2a milestone ($13.0 million ) recognized for elarekibep under the AstraZeneca collaboration along with higher reimbursable costs incurred on this program, revenue recognized under theBoston Pharmaceuticals collaboration ($5.7 million ) and higher reimbursable costs for phase 1 preparation activities due fromServier . . • Collaboration revenue decreased by$3.0 million in the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . The decrease relates to an updated estimate of project completion for PRS-344/S095012 under theServier collaboration, leading to lower revenue recognized in the current period along with increased activities managed byServier for the phase 1 study which offset our revenue generating activities. 97
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Research and Development Expenses
The following table provides a comparison of the research and development
expenses for the years ended
Year Ended December 31, 2022 2021 Increase/(Decrease) Respiratory$ 12,845 $ 17,158 $ (4,313 ) Immuno-oncology 13,743 23,210 (9,467 ) Other R&D activities 26,394 26,288 106 Total$ 52,982 $ 66,656 (13,674 ) • The$9.5 million decrease in our immuno-oncology program spending period-over-period is due primarily to a decrease in overall costs for cinrebafusp alfa as the program was stopped during 2022, decreased manufacturing costs for PRS-344/S095012, and lower license fees given transactions that occurred in 2021, partially offset by higher clinical costs for PRS-344/S095012 and slightly higher pre-clinical costs for discovery stage programs. • The$4.3 million decrease for our respiratory program spending period-over-period is due to lower program costs for elarekibep as there was limited phase 1 clinical activities to complete in 2022 along with some phase 2 manufacturing costs both of which were fully reimbursed by AstraZeneca, lower manufacturing costs for PRS-220, and lower license fees given amendments to the AstraZeneca collaboration that occurred in 2021, all partially offset by higher clinical costs for PRS-220 and higher pre-clinical and consumable costs for PRS-400. • The$0.1 million increase in other research and development activities expenses is due primarily to higher personnel costs due to higher average headcount along with an increase in travel expenses, both partially offset by lower overall license fees, lower external consulting expenses, and lower general lab supply costs.
General and Administrative Expenses
General and administrative expenses were
Other income (expense), net
Our other income was
Liquidity and Capital Resources
We are subject to risks common to companies in the biotechnology industry, including but not limited to, the need for additional capital, risks of failure of preclinical studies and clinical trials, the need to obtain marketing approval and reimbursement for any drug product candidate that we may identify and develop, the need to successfully commercialize and gain market acceptance of our product candidates, dependence on key personnel, protection of proprietary technology, compliance with government regulations, development of technological innovations by competitors, reliance on third-party manufacturers and the ability to transition from pilot-scale production to large-scale manufacturing of products.
Through
As of
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The following table provides a summary of operating, investing, and financing
cash flows for the years ended
Year EndedDecember 31, 2022 2021
Net cash used in operating activities
(21,236 ) (949 ) Net cash provided by financing activities 7,214 59,127
Net cash used in operating activities for the year ended
The change in net cash used in investing activities for the year ended
Financing activities for the year ended
In
Our future success is dependent on our ability to identify and develop our product candidates, expand our corporate infrastructure and ultimately upon our ability to attain profitable operations. We have devoted substantially all of our financial resources and efforts to research and development and general and administrative expenses to support such research and development. We have several research and development programs underway in varying stages of development and we expect that these programs will continue to require increasing amounts of cash for development, conducting clinical trials, and testing and manufacturing of product material. Cash necessary to fund operations will increase significantly over the next several years as we continue to conduct these activities necessary to pursue governmental regulatory approval of clinical-stage programs and other product candidates.
Any requirements for additional capital will depend on many factors, including the following:
• the scope, rate of progress, results and cost of our clinical studies, preclinical testing and other related activities; • the cost of manufacturing clinical supplies, and establishing commercial supplies, of our drug candidates and any products that we may develop; • the number and characteristics of drug candidates that we pursue; • the cost, timing and outcomes of regulatory approvals; 99
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Table of Contents • the cost and timing of establishing sales, marketing and distribution capabilities; • the terms and timing of any collaborative, licensing and other arrangements that we may establish; • the timing, receipt and amount of sales, profit sharing or royalties, if any, from our potential products; • the cost of preparing, filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; • the extent to which we acquire or invest in businesses, products or technologies, although we currently have no commitments or agreements relating to any of these types of transactions; and • the effects of the COVID-19 pandemic and the cost and timing of actions taken to contain it.
In addition, any unfavorable development or delay in the progress of our core clinical-stage programs, including elarekibep, could have a material adverse impact on our ability to raise additional capital. We would need to raise additional capital over the next year to continue our current level of research and development activities across all of our active programs, as well as to maintain the general and administrative functions to support such activities. Without access to additional capital or management making decisions to reduce spending, these conditions raise substantial doubt about our ability to continue as a going concern.
We plan to raise additional capital to fulfill our operating and capital requirements through public or private equity financings, utilization of our current "at the market offering" program, or ATM Program, strategic collaborations, licensing arrangements, government grants and/or the achievement of milestones under our collaborative agreements. The funding requirements of our operating plans, however, are based on estimates that are subject to risks and uncertainties and may change as a result of many factors currently unknown. Although management continues to pursue these funding plans, there is no assurance that we will be successful in obtaining sufficient funding on terms acceptable to us to fund continuing operations, if at all. Until such time that we can generate substantial product revenues, if ever, we expect to finance our cash needs through a combination of equity offerings, debt financings, strategic partnerships, licensing arrangements and government grants. The terms of any future financing may adversely affect the holdings or the rights of our existing stockholders.
If we are unable to obtain additional funding on acceptable terms when needed, we will defer or limit a substantial portion of our research, development and clinical projects, reduce discretionary expenditures and other fixed or variable personnel costs to alleviate the substantial doubt as to our ability to continue as a going concern. Our budget and operating plan for 2023, approved by the Board, does not include such discretionary costs, and management is prepared to gate future investments on PRS-220 and PRS-400, including certain Phase 2-readiness activities for PRS-220 and IND-enabling activities for PRS-400, in the interest of achieving our top priority, namely, obtaining data from the elarekibep Phase 2a study in asthma. On the basis of our approved budget and actions within management's control, we believe that our currently available funds will be sufficient to fund our remaining limited operations through at least the next 12 months from the issuance of this Annual Report on Form 10-K. Our belief with respect to our ability to fund operations is based on estimates that are subject to risks and uncertainties.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined under applicable
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
are based on our financial statements, which have been prepared in accordance
with accounting principles generally accepted in
While our significant accounting policies are more fully described in the notes to our consolidated financial statements, we have identified the following accounting policies that we believe require application of management's most subjective judgments, often requiring the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Our actual results could differ from these estimates and such differences could be material.
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Pieris has entered into several licensing agreements with collaboration partners for the development of Anticalin therapeutics against a variety of targets. The terms of these agreements provide for the transfer of multiple goods or services which may include: (i) licenses, or options to obtain licenses, to Pieris' Anticalin technology and/or specific programs and (ii) research and development activities to be performed on behalf of or with a collaborative partner. Payments to Pieris under these agreements may include upfront fees (which include license and option fees), payments for research and development activities, payments based upon the achievement of certain milestones, and royalties on product sales. There are no performance, cancellation, termination or refund provisions in any of the arrangements that could result in material financial consequences to Pieris.
The Company accounts for revenue recognition pursuant to FASB ASC Topic 606, Revenue Recognition, or ASC 606. The standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services.
Collaborative Arrangements
We consider the nature and contractual terms of an arrangement and assess whether the arrangement involves a joint operating activity pursuant to which we are an active participant and are exposed to significant risks and rewards with respect to the arrangement. If we are an active participant and are exposed to the significant risks and rewards with respect to the arrangement, we account for these arrangements pursuant to ASC 808, Collaborative Arrangements, or ASC 808, and apply a systematic and rational approach to recognize revenue. We classify payments received as revenue and payments made as a reduction of revenue in the period in which they are earned.
Revenue from Contracts with Customers
In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which we expect to be entitled in exchange for these goods and services. To achieve this core principle, we apply the following five steps: 1) identify the customer contract; 2) identify the contract's performance obligations; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations; and 5) recognize revenue when or as a performance obligation is satisfied.
We evaluate all promised goods and services within a customer contract and determines which of such goods and services are separate performance obligations. This evaluation includes an assessment of whether the good or service is capable of being distinct and whether the good or service is separable from other promises in the contract. In assessing whether promised goods or services are distinct, we consider factors such as the stage of development of the underlying intellectual property and the capabilities of the customer to develop the intellectual property on their own or whether the required expertise is readily available.
Licensing arrangements are analyzed to determine whether the promised goods or services, which often include licenses, research and development services and governance committee services, are distinct or whether they must be accounted for as part of a combined performance obligation. If the license is considered not to be distinct, the license would then be combined with other promised goods or services as a combined performance obligation. If we are involved in a governance committee, we assess whether our involvement constitutes a separate performance obligation. When governance committee services are determined to be separate performance obligations, we determine the fair value to be allocated to this promised service.
Certain contracts contain optional and additional items, which are considered marketing offers and are accounted for as separate contracts with the customer if such option is elected by the customer, unless the option provides a material right which would not be provided without entering into the contract. An option that is considered a material right is accounted for as a separate performance obligation.
The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring goods and services to the customer. A contract may contain variable consideration, including potential payments for both milestone and research and development services. For certain potential milestone payments, we estimate the amount of variable consideration by using the most likely amount method. In making this assessment, we evaluate factors such as the clinical, regulatory, commercial and other risks that must be overcome to achieve the milestone. Each reporting period we re-evaluate the probability of achievement of such variable consideration and any related constraints. We will include variable consideration, without constraint, in the transaction price to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. For potential research and development service payments, we estimate the amount of variable consideration by using the expected value method, including any approved budget updates arising from additional research or development services.
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price among the performance obligations on a relative standalone selling price basis unless a portion of the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct good or service that forms part of a single performance obligation.
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We allocate the transaction price based on the estimated standalone selling price of the underlying performance obligations or in the case of certain variable consideration to one or more performance obligations. We must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. We utilize key assumptions to determine the stand-alone selling price, which may include other comparable transactions, pricing considered in negotiating the transaction and the estimated costs to complete the respective performance obligation. Certain variable consideration is allocated specifically to one or more performance obligations in a contract when the terms of the variable consideration relate to the satisfaction of the performance obligation and the resulting amounts allocated to each performance obligation are consistent with the amount we would expect to receive for each performance obligation.
When a performance obligation is satisfied, revenue is recognized for the amount of the transaction price, excluding estimates of variable consideration that are constrained, that is allocated to that performance obligation on a relative standalone selling price basis. Significant management judgment is required in determining the level of effort required under an arrangement and the period over which we are expected to complete its performance obligations under an arrangement.
For performance obligations consisting of licenses and other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non- refundable, up-front fees. We evaluate the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we will recognize revenue from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license.
Milestones and Royalties
We aggregate milestones into four categories: (i) research milestones, (ii) development milestones, (iii) commercial milestones, and (iv) sales milestones. Research milestones are typically achieved upon reaching certain success criteria as defined in each agreement related to developing an Anticalin protein against the specified target. Development milestones are typically reached when a compound reaches a defined phase of clinical research or passes such phase or upon gaining regulatory approvals. Commercial milestones are typically achieved when an approved pharmaceutical product reaches the status for commercial sale, including regulatory approval. Sales milestones are certain defined levels of net sales by the licensee, such as when a product first achieves global sales or annual sales of a specified amount.
There is uncertainty that the events to obtain the research and development milestones will be achieved given the nature of clinical development and the stage of our technology. We have thus determined that all research and development milestones will be constrained until it is deemed probable that a significant revenue reversal will not occur. For revenues from research and development milestones, payments will be recognized consistent with the recognition pattern of the performance obligation to which they relate.
For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and for which the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). Commercial milestones and sales royalties are determined by sales or usage-based thresholds and will be accounted for under the royalty recognition constraint as constrained variable consideration.
Contract Balances
We recognize a contract asset when we transfer goods or services to a customer before the customer pays consideration or before payment is due, excluding any amounts presented as a receivable (i.e., accounts receivable). A contract asset is an entity's right to consideration in exchange for goods or services that the entity has transferred to a customer. The contract liabilities (i.e., deferred revenue) primarily relate to contracts where we have received payment but has not yet satisfied the related performance obligations.
Contingencies
Accruals are recorded for loss contingencies when it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. We evaluate, on a quarterly basis, developments in legal proceedings and other matters that could cause an increase or decrease in the amount of the liability that has been accrued previously. Considering facts known at the time of the assessment, we determine whether potential losses are considered reasonably possible or probable and whether they are estimable. Based upon this assessment, we carry out an evaluation of disclosure requirements and consider possible accruals in the financial statements.
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Research and Development Expense
Research and development costs are charged to expense as incurred in performing research and development activities. Research and development expenses are comprised of costs incurred in performing research and development activities, including salaries and benefits, facilities costs, pre-clinical and clinical costs, contract services, consulting, depreciation and amortization expense, and other related costs. Costs associated with acquired technology, in the form of upfront fees or milestone payments, are charged to research and development expense as incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating losses and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted statutory tax rates expected to apply to taxable income in the jurisdictions and years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
We evaluate the realizability of our net deferred tax assets, including considering the level of historical operating results and projections of taxable income for the future. We record a full valuation allowance to reduce our net deferred tax assets when it is determined that it is more likely than not that our net deferred tax assets will not be realized.
We recognize, measure, present and disclose in our financial statements any
uncertain tax positions that we have taken or expect to take on a tax return. We
operate in multiple jurisdictions, both within and outside
Our policy is to classify interest and penalties related to unrecognized tax benefits as income tax expense
Recently Issued Accounting Pronouncements
We review new accounting standards to determine the expected financial impact, if any, that the adoption of each standard will have. For the recently issued accounting standards that we believe may have an impact on our consolidated financial statements, see "Note 2-Summary of Significant Accounting Policies" in our consolidated financial statements.
Smaller Reporting Company Status
Currently, we qualify as a smaller reporting company.
As a smaller reporting company, we are eligible and have taken advantage of certain exemptions from various reporting requirements that are not available to public reporting companies that do not qualify for this classification, including, but not limited to:
• An opportunity for reduced disclosure obligations regarding executive compensation in our periodic and annual reports, including without limitation exemption from the requirement to provide a compensation discussion and analysis describing compensation practices and procedures, • An opportunity for reduced financial statement disclosure in registration statements and in annual reports on Form 10-K, which only requires two years of audited financial statements rather than the three years of audited financial statements that are required for other public companies, • An opportunity for reduced audit and other compliance expenses as we are not subject to the requirement to obtain an auditor's report on internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002, and • An opportunity to utilize the non-accelerated filer time-line requirements beginning with our annual report for the year endingDecember 31, 2020 and quarterly filings thereafter.
For as long as we continue to be a smaller reporting company, we expect that we will take advantage of both the reduced internal control audit requirements and the disclosure obligations available to us as a result of this classification.
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