CYCLERION THERAPEUTICS, INC. Forward-Looking Information
The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated and combined financial statements and the corresponding notes included in this Quarterly Report on Form 10-Q, as well as the audited consolidated and combined financial statements and notes thereto included in our Annual Report on Form 10-K. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those referenced or set forth under "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" in Item 1A of this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements. Overview We are a clinical-stage biopharmaceutical company harnessing the power of soluble guanylate cyclase, or sGC, pharmacology to discover, develop and commercialize breakthrough treatments for serious and orphan diseases. Our focus is enabling the full therapeutic potential of next-generation sGC stimulators. Our strategy rests on a solid scientific foundation that is enabled by our people and capabilities, external collaborations and a responsive capital allocation approach.
We operate in one reportable business segment-human therapeutics.
Separation from Ironwood Pharmaceuticals
OnApril 1, 2019 , Ironwood Pharmaceuticals Inc., or Ironwood, completed the separation of its sGC business, and certain other assets and liabilities, into us as a separate, independent publicly traded company by way of a pro-rata distribution of our common stock through a dividend distribution of one share of our common stock, with no par value per share, for every 10 shares of Ironwood common stock held by Ironwood stockholders as of the close of business onMarch 19, 2019 , the record date for the distribution, which we refer to herein as the Separation. As a result of the Separation, we became an independent public company and commenced trading under the symbol "CYCN" on the Nasdaq Global Select Market onApril 2, 2019 .
In connection with the Separation, on
In addition, in connection with the Separation, onApril 1, 2019 , we entered into a Development Agreement, an Ironwood Transition Services Agreement (which has been terminated), a Cyclerion Transition Services Agreement and an Intellectual Property License Agreement with Ironwood.
On
Our historical condensed consolidated and combined financial statements for the periods prior to the Separation have been derived from Ironwood's combined financial statements and accounting records and are presented in conformity with United States Generally Accepted Accounting Principles, orU.S. GAAP. Our historical financial statements may not be indicative of our future performance and do not necessarily reflect what our results of operations, financial condition and cash flows would have been had we operated as a separate, publicly traded company for the periods presented prior to the Separation. The condensed consolidated and combined financial statements prior to the Separation included herein do not reflect any changes that occurred in our financing or operations as a result of the Separation from Ironwood. 22 Financial Overview Research and Development Expense. Research and development expenses are incurred in connection with the discovery and development of our product candidates. These expenses consist primarily of the following costs: compensation, benefits and other employee-related expenses, research and development related facilities, third-party contracts relating to nonclinical study and clinical trial activities. All research and development expenses are charged to operations as incurred. The core of our research and development strategy is to harness the power of sGC pharmacology to develop therapies for serious and orphan diseases. Our portfolio of programs includes: Olinciguat is a once-daily, orally administered vascular sGC stimulator that is well suited for the potential treatment of sickle cell disease, or SCD. We are conducting a randomized, placebo-controlled, dose-ranging Phase 2 study, STRONG-SCD, that has closed enrollment with 70 participants enrolled from both US and ex-US sites. This study is designed to explore a broad range of tolerated doses and optimize our understanding of the therapeutic potential of olinciguat in SCD. We expect topline data from this study in Q3 2020. InJune 2018 , theU.S. Food and Drug Administration , or the FDA, granted Orphan Drug Designation to olinciguat for the treatment of patients with SCD. Orphan Drug Designation provides marketing exclusivity for seven years from the date of the product's approval for marketing and contributes to a significant reduction in development costs. Praliciguat is an orally administered, once-daily systemic sGC stimulator that was evaluated in two recently completed Phase 2 proof-of-concept studies: a dose-ranging study in 156 adult patients with diabetic nephropathy, and a study in 196 adult patients with heart failure with preserved ejection fraction (HfpEF), CAPACITY-HfpEF. OnOctober 30, 2019 , we released topline results from these studies. In CAPACITY-HfpEF, the study did not meet statistical significance on its primary endpoint of improved exercise capacity from baseline as compared to placebo, measured by cardiopulmonary exercise testing. There was clear evidence of drug exposure and pharmacological activity as judged by expected reductions in blood pressure. Praliciguat was generally well tolerated. We are discontinuing development of praliciguat in HfpEF. The study of praliciguat in participants with diabetic nephropathy also did not meet statistical significance on its primary endpoint of reduction in albuminuria from baseline as compared to placebo, measured by urine albumin creatinine ratio. However, there was a trend toward improvement across the total intention-to-treat study population. Praliciguat was generally well tolerated. As previously announced, discussions continue on the out-licensing of praliciguat for late-stage global development and commercialization. IW-6463 is an orally administered central nervous system-penetrant sGC stimulator that, because it readily crosses the blood-brain barrier, affords an unprecedented opportunity to expand the utility of sGC pharmacology to serious neurodegenerative diseases. OnJanuary 13, 2020 we released positive top line results from our first-in-human study of IW-6463. IW-6463 was generally well tolerated in healthy human adults. The study demonstrated IW-6463 penetration across the blood-brain-barrier at levels expected to be pharmacologically active as well as a mild reduction in blood pressure providing evidence of peripheral pharmacological activity. The Company intends to continue development activities for IW-6463. InDecember 2019 we initiated an ongoing translational pharmacology study in elderly subjects. Topline data from this study is expected in mid-2020.Discovery Research . Our orally administered liver-targeted sGC stimulator is designed to selectively partition to the liver. By achieving liver concentrations many fold higher than corresponding plasma concentrations, we intend to maximize hepatic pharmacology. In animal models of liver fibrosis treated with systemic sGC stimulators, we have observed reductions in liver fibrosis, inflammation and steatosis, pathophysiological processes that underlie multiple chronic liver diseases. Our lung-targeted sGC stimulator will be administered via inhalation and will be aimed at realizing the full potential of sGC stimulation in pulmonary diseases by selectively increasing exposure in the lung. By achieving significantly greater selectivity for lung over plasma, we intend to maximize pulmonary pharmacology. 23
Additional discovery efforts are ongoing and aimed at further expanding the potential of sGC stimulation in disorders of the central nervous system, or CNS.
The following table summarizes our research and development expenses related to our product pipeline, as well as employee and facility related costs allocated to research and development expense, for the three months endedMarch 31, 2020 and 2019. These product pipeline expenses relate primarily to external costs associated with nonclinical studies and clinical trial costs, which are presented by development candidates. Three Months Ended March 31, 2020 2019 (in thousands) Product pipeline external costs: Olinciguat 2,626$ 3,971 Praliciguat $ 135 5,738 IW-6463 1,338 461 Discovery research 13 534 Total product pipeline external costs 4,112
10,704
Personnel and related internal costs 7,737
9,758
Facilities and other 4,976
5,942
Total research and development expenses
Securing regulatory approvals for new drugs is a lengthy and costly process. Any failure by us to obtain, or any delay in obtaining, regulatory approvals would materially adversely affect our product development efforts and our business overall.
Given the inherent uncertainties of pharmaceutical product development, we cannot estimate with any degree of certainty how our programs will evolve, and therefore the amount of time or money that would be required to obtain regulatory approval to market them. As a result of these uncertainties surrounding the timing and outcome of any approvals, we are currently unable to estimate precisely when, if ever, our discovery and development candidates will be approved. We invest carefully in our pipeline, and the commitment of funding for each subsequent stage of our development programs is dependent upon the receipt of clear, supportive data.
The successful development of our product candidates is highly uncertain and subject to a number of risks including, but not limited to:
· The COVID-19 pandemic could affect our programs and operations in ways that are
difficult to precisely judge at this time, including its operations, clinical
trials, corporate development discussions and other activities. Cyclerion is
working closely with its clinical trial sites and investigators to deliver its
ongoing and planned trials in a manner consistent with the safety of study
participants and healthcare professionals.
· The duration of clinical trials may vary substantially according to the type
and complexity of the product candidate and may take longer than expected.
· The FDA and comparable agencies in foreign countries impose substantial and
varying requirements on the introduction of therapeutic pharmaceutical
products, which typically require lengthy and detailed laboratory and clinical
testing procedures, sampling activities and other costly and time-consuming
procedures.
· Data obtained from nonclinical and clinical activities at any step in the
testing process may be adverse and lead to discontinuation or redirection of
development activity. Data obtained from these activities also are susceptible
to varying interpretations, which could delay, limit or prevent regulatory
approval. 24
· The duration and cost of discovery, nonclinical studies and clinical trials may
vary significantly over the life of a product candidate and are difficult to
predict.
· The costs, timing and outcome of regulatory review of a product candidate may
not be favorable, and, even if approved, a product may face post-approval
development and regulatory requirements.
· The emergence of competing technologies and products and other adverse market
developments may negatively impact us.
As a result of the factors listed in the "Risk Factors" section in Item 1A of our annual report on Form 10-K for the fiscal year endedDecember 31, 2019 , and elsewhere in this Quarterly Report on Form 10-Q, we are unable to determine the duration and costs to complete current or future nonclinical and clinical stages of our product candidates or when, or to what extent, we will generate revenues from the commercialization and sale of our product candidates. Development timelines, probability of success and development costs vary widely. We anticipate that we will make determinations as to which additional programs to pursue and how much funding to direct to each program on an ongoing basis in response to the data from the studies of each product candidate, the competitive landscape and ongoing assessments of such product candidate's commercial potential. General and Administrative Expense. General and administrative expense consists primarily of compensation, benefits and other employee-related expenses for personnel in our administrative, finance, legal, information technology, business development, communications and human resource functions. Other costs include the legal costs of pursuing patent protection of our intellectual property, general and administrative related facility costs, insurance costs and professional fees for accounting and legal services. Certain costs associated with our Separation from Ironwood are included in these expenses. We record all general and administrative expenses as incurred.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated and combined financial statements prepared in accordance withU.S. GAAP. The preparation of these financial statements requires us to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated and combined financial statements, and the amounts of expenses during the reported periods. Significant estimates and assumptions in our condensed consolidated and combined financial statements include those related to allocation of expenses, assets and liabilities from Ironwood's historical financial statements for the periods prior to the Separation, impairment of long-lived assets; income taxes, including the valuation allowance for deferred tax assets; research and development expenses; contingencies and share-based compensation. We base our estimates on our historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ materially from our estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known.
We believe that our application of accounting policies requires significant
judgments and estimates on the part of management and is the most critical to
aid in fully understanding and evaluating our reported financial results. Our
significant accounting policies are more fully described in Note 2, Summary of
Significant Accounting Policies, of the condensed consolidated and combined
financial statements elsewhere in this Quarterly Report on Form 10-Q.
All research and development expenses are expensed as incurred. We defer and
capitalize nonrefundable advance payments we make for research and development
activities until the related goods are received or the related services are
performed. See Note 2, Summary of Significant Accounting Policies, of the
condensed consolidated and combined financial statements appearing elsewhere in
this Quarterly Report on Form 10-Q.
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Results of Operations
For the period prior to the Separation, our condensed consolidated and combined
financial statements include an allocation of expenses related to certain
Ironwood corporate functions, including senior management, legal, human
resources, finance, information technology and quality assurance. These expenses
were allocated to Cyclerion based on direct usage or benefit where identifiable,
with the remainder allocated pro-rata based on project related costs, headcount
or other measures. We considered the allocation methodologies used to be a
reasonable and appropriate reflection of the historical Ironwood expenses
attributable to us. The expenses reflected in the condensed consolidated and
combined financial statements may not be indicative of expenses that will be
incurred by us in the future. After the Separation, we began performing these
corporate functions using internal resources or purchased services, certain of
which were provided by Ironwood under the Transition Services Agreement. The
following discussion summarizes the key factors we believed are necessary for an
understanding of our consolidated financial statements.
Three Months Ended March 31, Change
2020 2019 $ %
(dollars in thousands)
Revenue from related party $ 1,014 $ - $ 1,014 -
Cost and expenses:
Research and development 16,825 26,404 (9,579 ) (36 )%
General and administrative 6,891 10,977 (4,086 ) (37 )%
Gain on lease modification (2,113 ) - (2,113 ) 100 %
Total cost and expenses 21,603 37,381 (15,778 ) (42 )%
Loss from operations (20,589 ) (37,381 ) 16,792 (45 )%Interest and other income 361 -
361 100 % Net loss$ (20,228 ) $ (37,381 ) $ 17,153 (46 )%
Revenue from related party. The increase in revenue from related party for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 is the result of services performed under the Development Agreement for Ironwood, which was entered into in connection with the Separation. Research and development expense. The decrease in research and development expense of approximately$9.6 million for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 was primarily related to a decrease of approximately$2.0 million in employee-related expenses as compared to the allocation of such costs by Ironwood in the prior period, a decrease of approximately$1.0 million in facilities and operating costs allocated to research and development, and a net decrease of approximately$6.6 million in external research costs. The net decrease in external research costs was primarily due to decreases over the periods of approximately$5.6 million associated with the completion of two praliciguat phase 2 proof-of-concept studies, both of which reported top line data onOctober 30, 2019 ,$1.3 million associated with olinciguat due to the completion of supporting ancillary studies, and$0.5 million in discovery research. These decreases were partially offset by an increase over the periods of approximately$0.9 million associated with IW-6463 studies. General and administrative expense. The decrease in general and administrative expenses of approximately$4.1 million for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 was primarily driven by approximately$3.5 million of non-recurring outsourced professional services and other costs associated with the Separation recorded in the prior period and a decrease of approximately$0.6 million of salaries, bonus and other employee-related costs as compared to the pre-Separation allocation from Ironwood recorded in the prior period.
Gain on lease modification. The gain on lease modification of
26 Interest and other income. Interest and other income increased by approximately$0.4 million for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 due to the recognition of$0.2 million of interest generated on excess operating funds from investments inU.S. government money market funds in the current period and the recognition of approximately$0.1 million of net sublease income in the current period. There was no interest or sublease income recognized for the three months endedMarch 31, 2019 because there was no cash allocated to Cyclerion and no lease directly attributed to Cyclerion prior to the Separation.
Liquidity and Capital Resources
Prior to the Separation, the primary source of liquidity for our business was cash flow allocated to Cyclerion from Ironwood. Post Separation, transfers of cash to and from Ironwood related to the Transition Service Agreements, Development Agreement and provisions of the Separation Agreement, have been reflected in the condensed consolidated and combined statement of cash flows. After giving effect to the completion of the Separation onApril 1, 2019 , we raised approximately$165 million net of direct financing expenses with the closing of the Private Placement onApril 2, 2019 . Subsequent to the Separation, we no longer participate in Ironwood's centralized cash management or receive direct funding from Ironwood.
OnMarch 31, 2020 , we had approximately$67.1 million of unrestricted cash and cash equivalents. Our cash equivalents include amounts held inU.S. government money market funds. We invest cash in excess of immediate requirements in accordance with our investment policy, which requires all investments held by us to be at least "AAA" rated or equivalent, with a remaining final maturity when purchased of less than twelve months, so as to primarily achieve liquidity
and capital preservation. Our ability to fund our operations and capital needs will depend on our ongoing ability to generate cash from operations and access to capital markets and other sources of capital, as further described below. We anticipate that our principal uses of cash in the future will be primarily to fund our operations, working capital needs, capital expenditures and other general corporate purposes. Going Concern Based on our development plans and clinical stage patient testing and our timing expectations related to the progress of our discovery research programs, we expect that our existing cash and cash equivalents as ofMarch 31, 2020 , will be sufficient to fund our planned operating expenses and capital expenditure requirements into the second quarter of 2021, excluding net cash flows from potential business development activities. We have based this estimate on assumptions that may prove to be wrong, particularly as the process of testing drug candidates in clinical trials is costly and the timing of progress in
these trials is uncertain. Cash Flows The following is a summary of cash flows for the years endedMarch 31, 2020 and 2019: Three Months Ended March 31, Change 2020 2019 $ % (dollars in thousands) Net cash used in operating activities$ (29,180 ) $ (34,271 ) $ 5,091 (15 )% Net cash used in investing activities$ (1,356 ) $ (1,814 ) $ 458 (25 )% Net cash provided by financing activities $ 1$ 36,085 $ (36,084 ) (100 )% 27
Cash Flows from Operating Activities
Net cash used in operating activities was$29.2 million for the three months endedMarch 31, 2020 compared to$34.3 million for the three months endedMarch 31, 2019 . The decrease in net cash used in operations of$5.1 million primarily relates to a decrease of$17.2 million in our net loss, partially offset by the payment of a$6.3 million termination fee related to the master lease modification in the current year, an increase in working capital accounts of$3.8 million and the recording of a non-cash gain on lease modification of
$2.1 million in the current year.
Cash Flows from Investing Activities
Net cash used in investing activities was$1.4 million for the three months endedMarch 31, 2020 compared to$1.8 million for the three months endedMarch 31, 2019 . The decrease in net cash used in investing activities was primarily from a decrease in purchases of property and equipment, primarily leasehold improvements.
Cash Flows from Financing Activities
Cash provided by financing activities was de minimis for the three months endedMarch 31, 2020 . Cash provided by financing activities for the three months endedMarch 31, 2019 was approximately$36.1 million , resulting from the cash transferred to us from Ironwood based on changes in our cash used for operations prior to the Separation. Funding Requirements We expect our expenses to fluctuate as we advance the preclinical activities and clinical trials of our product candidates. Our expenses will also fluctuate
as we:
· continue advancing our product candidates into preclinical and clinical
development;
· seek regulatory approvals for any product candidates that successfully complete
clinical trials;
· may potentially hire additional clinical, quality control and scientific
personnel;
· enhance our operational, financial and management systems; and
· maintain, expand and protect our intellectual property portfolio.
We believe that our existing cash and cash equivalents as of
Because of the many risks and uncertainties associated with research, development and commercialization of product candidates, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on, and could increase or decrease significantly as a result of, many factors, including the:
· scope, progress, results and costs of researching and developing our product
candidates, and conducting preclinical studies and clinical trials;
· costs, timing and outcome of regulatory review of our product candidates;
· costs of future activities, including medical affairs, manufacturing and
distribution, for any of our product candidates for which we receive marketing
approval;
· cost and timing of necessary actions to support our strategic objectives;
· costs of preparing, filing and prosecuting patent applications, maintaining and
enforcing our intellectual property rights and defending intellectual property-related claims; and
· timing, receipt and amount of sales of, or milestone payments related to or
royalties on, our current or future product candidates, if any.
28
A change in any of these or other variables with respect to the development of any of our product candidates could significantly change the costs and timing of the development of that product candidate. Further, our operating plans may change in the future, and we may need additional funds to meet operational needs and capital requirements associated with such operating plans. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances or licensing arrangements with third parties. As discussed under the "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , to preserve the tax-free treatment of the Separation, we may be barred, in certain circumstances, for a two year period following the Separation, from engaging in certain capital raising transactions. To the extent that we raise additional capital through the sale of equity or convertible debt securities, outstanding equity ownership may be materially diluted, and the terms of securities sold in such transactions could include liquidation or other preferences that adversely affect the rights of holders of common stock. Debt financing and preferred equity financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specified actions, such as incurring additional debt, making capital expenditures or declaring dividends. In addition, debt financing would result in increased
fixed payment obligations.
If we raise funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us.
If we are unable to raise additional funds when needed, we may be required to delay, reduce or eliminate our product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Contractual Commitments and Obligations
Tax-related Obligations
We exclude assets, liabilities or obligations pertaining to uncertain tax
positions from our summary of contractual commitments and obligations as we
cannot make a reliable estimate of the period of cash settlement with the
respective taxing authorities. As of
Other Funding Commitments As ofMarch 31, 2020 , we had, and continue to have, several ongoing studies in various clinical trial stages. Our most significant clinical trial spending is with clinical research organizations, or CROs. The contracts with CROs generally are cancellable, with notice, at our option and do not have any significant cancellation penalties.
Transition from Ironwood and Costs to Operate as an
Our condensed consolidated and combined financial statements for the period prior to the Separation reflect our operating results and financial position as it was operated by Ironwood, rather than as an independent company. As a result of the Separation, we have incurred additional ongoing operating expenses to operate as an independent, publicly traded, company. These costs include the cost of various corporate headquarters functions, incremental information technology-related costs and incremental costs to operate stand-alone accounting, legal, human resources and other administrative functions. We also incur non-recurring expenses and non-recurring capital expenditures. 29
We entered into the Ironwood Transition Services Agreement that provided us with certain services and resources related to corporate functions for an initial term of up to two years from the date of the Separation (as applicable). All services provided by Ironwood to the Company under the Ironwood Transition Services Agreement were completed as ofMarch 31, 2020 , and it has been terminated. It is not practicable to estimate the costs that would have been incurred in each of the periods presented in the historical financial statements for the functions described above. Actual costs that would have been incurred if we operated as a stand-alone company for the periods prior to the Separation would have depended on various factors, including organizational design, outsourcing and other strategic decisions related to corporate functions, information technology and back office infrastructure.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships. We enter into guarantees in the ordinary course of business related to the guarantee of our own performance. New Accounting Pronouncements
For a discussion of new accounting pronouncements see Note 2, Summary of Significant Accounting Policies, of the condensed consolidated and combined financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
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