DENALI THERAPEUTICS INC. The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis and other parts of this report contain forward-looking statements based upon current beliefs, plans and expectations related to future events and our future financial performance that involve risks, uncertainties and assumptions, such as statements regarding our intentions, plans, objectives, expectations, forecasts and projections. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under the section titled "Risk Factors" included in this Quarterly Report on Form 10-Q.
Forward-looking statements include, but are not limited to, statements about:
•the success, cost and timing of our development activities, preclinical studies
and clinical trials, including the enrollment in such trials, and in particular
the development of our blood-brain barrier ("BBB") platform technology, programs
and biomarkers;
•the extent to which any dosing limitations that we have been subject to, and/or may be subject to in the future, may affect the success of our product candidates;
•the impact of preclinical findings on our ability to achieve exposures of our product candidates that allow us to explore a robust pharmacodynamic range of these candidates in humans; •expectations regarding the proposed transaction with Biogen, including all financial aspects of the collaboration and equity investment, the potential benefits and results of the proposed transaction, and the anticipated completion of the transaction; •the expected potential benefits and potential revenue resulting from strategic collaborations with third parties and our ability to attract collaborators with development, regulatory and commercialization expertise;
•the timing or likelihood of regulatory filings and approvals;
•our ability to obtain and maintain regulatory approval of our product candidates, and any related restrictions, limitations and/or warnings in the label of any approved product candidate;
•the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and technology;
•the terms and conditions of licenses granted to us and our ability to license and/or acquire additional intellectual property relating to our product candidates and BBB platform technology;
•our ability to obtain funding for our operations, including funding necessary to develop and commercialize our current and potential future product candidates;
•our plans and ability to establish sales, marketing and distribution infrastructure to commercialize any product candidates for which we obtain approval;
•future agreements with third parties in connection with the commercialization of our product candidates;
•the size and growth potential of the markets for our product candidates, if approved for commercial use, and our ability to serve those markets;
•the rate and degree of market acceptance of our product candidates;
28--------------------------------------------------------------------------------
Table of Contents
•existing regulations and regulatory developments in
•potential claims relating to our intellectual property and third-party intellectual property;
•our ability to contract with third-party suppliers and manufacturers and their ability to perform adequately;
•our potential plans and ability to develop our own manufacturing facilities;
•the pricing and reimbursement of our product candidates, if approved and commercialized;
•the success of competing products or platform technologies that are or may become available;
•our ability to attract and retain key managerial, scientific and medical personnel;
•the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;
•our ability to enhance operational, financial and information management systems;
•our financial performance; and
•our expectations regarding the impact of the COVID -19 pandemic on our business.
These forward-looking statements are subject to a number of risks,
uncertainties, and assumptions, including those described in "Risk Factors". In
some cases, you can identify these statements by terms such as "anticipate,"
"believe," "could," "estimate," "expects," "intend," "may," "plan," "potential,"
"predict," "project," "should," "will," "would" or the negative of those terms,
and similar expressions that convey uncertainty of future events or outcomes.
These forward-looking statements reflect our beliefs and views with respect to
future events and are based on estimates and assumptions as of the date of this
Quarterly Report on Form 10-Q and are subject to risks and uncertainties. We
discuss many of these risks in greater detail in the section entitled "Risk
Factors" included in Part II, Item 1A and elsewhere in this report. Moreover, we
operate in a very competitive and rapidly changing environment. New risks emerge
from time to time. It is not possible to predict all risks, nor can we assess
the impact of all factors on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements we may make. Given these
uncertainties, you should not place undue reliance on these forward-looking
statements. We qualify all of the forward-looking statements in this Quarterly
Report on Form 10-Q by these cautionary statements. Except as required by law,
we assume no obligation to update these forward-looking statements publicly, or
to update the reasons actual results could differ materially from those
anticipated in any forward-looking statements, whether as a result of new
information, future events or otherwise.
29
--------------------------------------------------------------------------------
Table of Contents
Overview
Our goal is to discover and develop therapeutics to defeat degeneration.
Our strategy is guided by three overarching principles that we believe will significantly increase the probability of success and will accelerate the timing to bring effective therapeutics to patients with neurodegenerative diseases:
•Genetic Pathway Potential: We select our therapeutic targets and disease pathways based on genes that, when mutated, cause, or are major risk factors for, neurodegenerative diseases. We refer to these genes as degenogenes;
•Engineering Brain Delivery: We engineer our product candidates to cross the BBB and act directly in the brain; and
•Biomarker-Driven Development: We discover, develop and utilize biomarkers to select the right patient population and demonstrate target engagement, pathway engagement and impact on disease progression of our product candidates.
We are developing a broad portfolio of targeted therapeutic candidates for neurodegenerative diseases. Our programs are at different stages of clinical and preclinical development, including five programs in clinical studies.
We have also developed a proprietary BBB platform technology, our transport
vehicle ("TV"), which enables multiple modality-based platforms to deliver a
wide range of large-molecule therapeutics across the BBB, including enzymes,
antibodies, proteins and oligonucleotides. This technology is designed to engage
specific BBB transport receptors, which are ubiquitously expressed in brain
capillaries and facilitate transport of proteins into the brain. We are
currently optimizing and broadening this platform technology.
Our four clinical-stage programs are:
•our leucine-rich repeat kinase 2 ("LRRK2") inhibitor program, partnered with
Biogen, to address Parkinson's disease;
•our eukaryotic translation initiation factor 2B ("EIF2B") activator program to
address diseases such as ALS and frontotemporal dementia ("FTD");
•our ETV:IDS program, our most advanced program enabled by our enzyme transport
vehicle ("ETV") technology, which is designed to restore iduronate 2-sulfatase
("IDS"), and reduce glycosaminoglycans, both peripherally and in the brain, in
patients with mucopolysaccharidosis II ("MPS II", or "Hunter syndrome"); and
•our receptor interacting serine/threonine protein kinase 1 ("RIPK1") inhibitor
program, partnered with Sanofi, to address peripheral inflammatory diseases such
as rheumatoid arthritis.
30
--------------------------------------------------------------------------------
Table of Contents
Program Product Candidate(s) Clinical Phase Indication(s) Operational Control
LRRK2 DNL151 Ph 1 and Ph 1b Parkinson's disease Joint(1)
EIF2B DNL343 Ph 1 ALS and FTD Denali
ETV:IDS DNL310 Ph 1/2 Hunter syndrome (MPS II) Denali
RIPK1 (Peripheral) DNL758 Ph 1b Systemic inflammatory diseases, Sanofi
Coronavirus (COVID-19)
__________________________________________________
(1)InAugust 2020 we entered into a binding agreement with Biogen to co-develop and co-commercialize our small molecule inhibitors of LRRK2 for Parkinson's disease. Operational control of development activities will be finalized upon execution of a definitive collaboration agreement. To complement our internal capabilities, we have entered into arrangements with biopharmaceutical companies, patient-focused data companies, numerous leading academic institutions and foundations to gain access to new product candidates, enable and accelerate the development of our existing programs and deepen our scientific understanding of certain areas of biology. We rely on third-party contract manufacturers to manufacture and supply our preclinical and clinical materials to be used during the development of our product candidates. We currently do not need commercial manufacturing capacity.
Since we commenced operations, we have devoted substantially all of our resources to discovering, acquiring and developing product candidates, building our BBB platform technology and assembling our core capabilities in understanding key neurodegenerative disease pathways.
Key operational and financing milestones in 2020 to date include:
•InJanuary 2020 , we announced positive results from our LRRK2 program. Phase 1b results with DNL201 in patients with Parkinson's disease demonstrated high levels of target and pathway engagement and improvement of lysosomal biomarkers. Interim Phase 1 results with DNL151 in more than 150 healthy volunteers also met all safety and biomarker goals. Both clinical trials showed dose-dependent target engagement, improvement in biomarkers of lysosomal function and demonstrated safety profiles supporting progression to further development; •InJanuary 2020 , we sold 9.0 million shares of common stock (inclusive of shares sold pursuant to an overallotment option granted to the underwriters in connection with the offering) through an underwritten public offering at a price of$23.00 per share for aggregate net proceeds of$193.9 million ; •InFebruary 2020 , we initiated a Phase 1 clinical trial for DNL343 (EIF2B) in healthy volunteers; •InJune 2020 , we announced the results from Phase 1b clinical studies with small molecule RIPK1 inhibitor DNL747 in Alzheimer's disease and ALS, and provided a broad RIPK1 program update including CNS compound DNL788 and peripherally-restricted compound DNL758. Safety endpoints were met in the Phase 1b patient studies with DNL747 in ALS and Alzheimer's disease, however further dose escalation to achieve higher levels of target inhibition may be limited by preclinical chronic safety data. As such, we announced, together with our partner Sanofi, that we have decided to pause clinical studies with DNL747 and focus our efforts on accelerating development of DNL788, which we believe has superior drug properties and a more rapid path toward proof-of-concept clinical studies in patients in multiple neurological indications; 31 -------------------------------------------------------------------------------- Table of Contents •InJuly 2020 , we announced that our partner Sanofi has commenced dosing of DNL758, a peripherally-restricted small molecule inhibitor of RIPK1, in a Phase 1b clinical study in hospitalized adult patients with severe COVID-19 lung disease. InJune 2020 , data from the completed Phase 1 study with DNL758 in healthy volunteer subjects displayed an encouraging profile, as the molecule appears well tolerated at doses tested; •InAugust 2020 , we dosed the first patient in our Phase 1/2 clinical study of DNL310 (ETV:IDS) in Hunter syndrome (MPS II) patients following the acceptance of the IND inJanuary 2020 . We continue to collect data from patients enrolled in our ongoing observational biomarker study; •InAugust 2020 , we entered into a binding agreement with Biogen to co-develop and co-commercialize our small molecule inhibitors of LRRK2 for Parkinson's disease. Biogen will also receive rights to opt into two programs and a right of first negotiation for two additional programs, in each case for neurodegenerative diseases leveraging our TV technology platform to cross the BBB. Under the terms of the agreement, Biogen will make an upfront payment to us of$560 million and make a$465 million equity investment from the purchase of 13.3 million newly issued shares of our common stock at approximately$34.94 per share, representing 11.2 percent of our pro-forma outstanding stock. Should the LRRK2 program achieve certain development and commercial milestones, we will be eligible to receive up to$1.125 billion in potential milestone payments. In the LRRK2 collaboration, we will share responsibility and costs for global development (60 percent Biogen; 40 percent Denali), and will share responsibility and costs as well as profits and losses for commercialization in theU.S. (50 percent Biogen; 50 percent Denali) andChina (60 percent Biogen; 40 percent Denali). Outside theU.S. andChina , Biogen will be responsible for commercialization and pay us tiered royalties. The transaction is expected to close in the coming months after satisfaction of requirements under applicable antitrust laws and other customary closing conditions, and with respect to the collaboration, execution of a definitive collaboration agreement; •InAugust 2020 , we announced that we have selected DNL151 to progress into late stage clinical studies in Parkinson's disease patients with a kinase activating mutation in LRRK2 and in sporadic Parkinson's disease patients. Patient enrollment is expected to commence in 2021; and •To address risks posed by the COVID-19 pandemic, we have implemented policies that enable some of our employees to work remotely. For all on-site personnel, we have implemented several safety protocols, including regular, mandatory COVID-19 testing procedures and compliance measures for social distancing and use of personal protective equipment. After initial COVID-19 pandemic shutdown restrictions were put into place inMarch 2020 , we experienced a pause in patient recruitment in several clinical trials. Recruitment has since resumed for all affected clinical trials. We do not have any products approved for sale and have not generated any product revenue since our inception. We have funded our operations primarily from the issuance and sale of convertible preferred stock, and the proceeds from our initial public offering ("IPO"), follow-on offering, and payments received from our collaboration agreements withTakeda and Sanofi. 32 -------------------------------------------------------------------------------- Table of Contents We have incurred significant operating losses to date and expect to continue to incur operating losses for the foreseeable future. Our ability to generate product revenue will depend on the successful development and eventual commercialization of one or more of our product candidates. Our net losses were$58.8 million and$115.5 million for the three and six months endedJune 30, 2020 , respectively, and$58.3 million and$97.3 million for the three and six months endedJune 30, 2019 , respectively. As ofJune 30, 2020 , we had an accumulated deficit of$541.1 million . We expect to continue to incur significant expenses and operating losses as we advance our current clinical stage programs through healthy volunteer and patient trials; broaden and improve our BBB platform technology; acquire, discover, validate and develop additional product candidates; obtain, maintain, protect and enforce our intellectual property portfolio; and hire additional personnel. Components of Operating Results Collaboration Revenue To date, we have not generated any revenue from product sales and do not expect to generate any revenue from product sales for the foreseeable future. All revenue recognized to date has been collaboration revenue from our collaboration agreements withTakeda and Sanofi. In the future, we will continue to recognize revenue from theTakeda Collaboration Agreement and Sanofi Collaboration Agreement and may generate revenue from product sales or milestones, royalties and cost reimbursement from other collaboration agreements, such as the collaboration agreement with Biogen, strategic alliances and licensing arrangements. We expect that our revenue will fluctuate from quarter-to-quarter and year-to-year as a result of the timing and amount of license fees, milestones, reimbursement of costs incurred and other payments and product sales, to the extent any are successfully commercialized. If we fail to complete the development of our product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected.
Operating Expenses
Research and Development
Research and development activities account for a significant portion of our operating expenses. We record research and development expenses as incurred. Research and development expenses incurred by us for the discovery and development of our product candidates and BBB platform technology include:
•external research and development expenses, including:
-expenses incurred under arrangements with third parties, such as contract
research organizations ("CROs"), preclinical testing organizations, contract
development and manufacturing organizations ("CDMOs"), academic and non-profit
institutions and consultants;
-expenses to acquire technologies to be used in research and development that have not reached technological feasibility and have no alternative future use;
-fees related to our license and collaboration agreements;
•personnel related expenses, including salaries, benefits and stock-based compensation expense; and
•other expenses, which include direct and allocated expenses for laboratory, facilities and other costs.
33
--------------------------------------------------------------------------------
Table of Contents
A portion of our research and development expenses are direct external expenses,
which we track on a program-specific basis once a program has commenced
late-stage IND-enabling studies.
Program expenses include expenses associated with our most advanced product
candidates and the discovery and development of backup or next-generation
molecules. We also track external expenses associated with our TV platform.
These expenses include those incurred by us relating to our Takeda Collaboration
Agreement and Sanofi Collaboration Agreement. All external costs associated with
earlier stage programs, or that benefit the entire portfolio, are tracked as a
group. We do not track personnel or other operating expenses incurred for our
research and development programs on a program-specific basis. These expenses
primarily relate to salaries and benefits, stock-based compensation, facility
expenses including rent and depreciation, and lab consumables.
It is challenging to predict the nature, timing and estimated long-range costs
of the efforts that will be necessary to complete the development of, and obtain
regulatory approval for, any of our product candidates. This is made more
challenging by events outside of our control, such as the recent COVID-19
pandemic. We are also unable to predict when, if ever, material net cash inflows
will commence from sales or licensing of our product candidates. This is due to
the numerous risks and uncertainties associated with drug development, including
the uncertainty of:
•our ability to add and retain key research and development personnel;
•our ability to establish an appropriate safety profile with IND-enabling toxicology studies;
•our ability to successfully develop, obtain regulatory approval for, and then successfully commercialize, our product candidates;
•our successful enrollment in and completion of clinical trials;
•the costs associated with the development of any additional product candidates we identify in-house or acquire through collaborations;
•our ability to discover, develop and utilize biomarkers to demonstrate target engagement, pathway engagement and the impact on disease progression of our molecules;
•our ability to establish agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if our product candidates are approved;
•the terms and timing of any collaboration, license or other arrangement, including the terms and timing of any milestone payments thereunder;
•our ability to obtain and maintain patent, trade secret and other intellectual property protection and regulatory exclusivity for our product candidates if and when approved;
•our receipt of marketing approvals from applicable regulatory authorities;
•our ability to commercialize products, if and when approved, whether alone or in collaboration with others; and
•the continued acceptable safety profiles of the product candidates following approval.
34
--------------------------------------------------------------------------------
Table of Contents
A change in any of these variables with respect to the development of any of our
product candidates would significantly change the costs, timing and viability
associated with the development of that product candidate. We expect our
research and development expenses to increase at least over the next several
years as we continue to implement our business strategy, advance our current
programs, expand our research and development efforts, seek regulatory approvals
for any product candidates that successfully complete clinical trials, access
and develop additional product candidates and incur expenses associated with
hiring additional personnel to support our research and development efforts. In
addition, product candidates in later stages of clinical development generally
incur higher development costs than those in earlier stages of clinical
development, primarily due to the increased size and duration of later-stage
clinical trials.
General and Administrative
General and administrative expenses include personnel-related expenses, such as
salaries, benefits, travel and stock-based compensation expense, expenses for
outside professional services and allocated expenses. Outside professional
services consist of legal, accounting and audit services and other consulting
fees. Allocated expenses consist of rent, depreciation and other expenses
related to our office and research and development facility not otherwise
included in research and development expenses.
We expect to continue to incur certain expenses as a result of operating as a
public company, including expenses related to compliance with the rules and
regulations of the SEC and those of any national securities exchange on which
our securities are traded, insurance expenses, investor relations activities and
other administrative and professional services. We also expect to increase our
administrative headcount as we advance our product candidates through clinical
development, which will also increase our general and administrative expenses.
Interest and Other Income, Net
Interest and other income, net, consists primarily of interest income and investment income earned on our cash, cash equivalents, and marketable securities, gains and losses on foreign currency hedges, and sublease income.
35
--------------------------------------------------------------------------------
Table of Contents
Results of Operations
Comparison of the three and six months ended June 30, 2020 and 2019
The following table sets forth the significant components of our results of
operations (in thousands):
Three Months Ended June 30, Change
2020 2019 $ %
Collaboration revenue:
Collaboration revenue from customers $ 5,811 $ 4,098 $ 1,713 42 %
Other collaboration revenue 36 99 (63) (64)
Total collaboration revenue 5,847 4,197 1,650 39
Operating expenses:
Research and development 53,152 51,884 1,268 2
General and administrative 13,972 15,076 (1,104) (7)
Total operating expenses 67,124 66,960 164 -
Loss from operations (61,277) (62,763) 1,486 (2)
Interest and other income, net 2,598 4,113 (1,515) (37)
Loss before Income taxes (58,679) (58,650) (29) -
Income tax benefit (provision) (79) 313 (392) (125)
Net loss $ (58,758) $ (58,337) $ (421) 1 %
Six Months Ended June 30, Change
2020 2019 $ %
Collaboration revenue:
Collaboration revenue from customers $ 9,363 $ 8,209 $ 1,154 14 %
Other collaboration revenue 88 193 (105) (54)
Total collaboration revenue 9,451 8,402 1,049 12
Operating expenses:
Research and development 104,168 89,287 14,881 17
General and administrative 26,527 24,386 2,141 9
Total operating expenses 130,695 113,673 17,022 15
Loss from operations (121,244) (105,271) (15,973) 15
Interest and other income, net 5,667 7,629 (1,962) (26)
Loss before Income taxes (115,577) (97,642) (17,935) 18
Income tax benefit 56 313 (257) (82)
Net loss $ (115,521) $ (97,329) $ (18,192) 19 %
Collaboration revenue
Collaboration revenue was $5.8 million and $9.5 million for the three and six
months ended June 30, 2020 , respectively, and $4.2 million and $8.4 million for
the three and six months ended June 30, 2019 , respectively. The increases in
collaboration revenue of $1.6 million and $1.1 million for the three and six
months ended June 30, 2020 , respectively, compared to the comparative period in
the prior year were due to increases in revenue from our collaboration with
Takeda , driven by increased costs incurred in the programs partnered with
Takeda , partially offset by decreases in revenue from our collaboration with
Sanofi driven by the fact that revenue for retained activities under the Sanofi
Collaboration Agreement are winding down as activities are transferred to
Sanofi.
36
--------------------------------------------------------------------------------
Table of Contents
Research and development expenses
Research and development expenses were $53.2 million and $104.2 million for the
three and six months ended June 30, 2020 , compared to $51.9 million and $89.3
million for the three and six months ended June 30, 2019 .
The following table summarizes our research and development expenses by program
and category (in thousands):
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
LRRK2 program external expenses $ 6,174 $ 8,454 $ 15,766 $ 12,616
EIF2B program external expenses 1,994 1,899 3,306 2,201
ETV:IDS program external expenses 5,212 4,747 8,350 8,013
TV platform and other program external
expenses 3,462 4,196 6,186 7,269
Other external research and development
expenses 7,782 8,247 15,174 14,608
Personnel-related expenses (1) 20,251 15,915 39,122 28,990
Other unallocated research and development
expenses 8,277 8,426 16,264 15,590
Total research and development expenses $ 53,152 $
51,884
__________________________________________________
(1)Personnel-related expenses include stock-based compensation expense of$7.1 million and$13.2 million for the three and six months endedJune 30, 2020 , respectively, and$5.3 million and$9.3 million for the three and six months endedJune 30, 2019 , respectively, reflecting an increase of$1.8 million and$3.9 million , respectively. There was an increase in total research and development expenses of$1.3 million for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . This increase was a result of a$4.3 million increase in personnel-related expenses, consisting of a$2.5 million increase in salaries and related expenses attributable to an increase in our research and development headcount, and a$1.8 million increase in stock-based compensation expense primarily attributable to new equity award grants. Additionally, there were increases in external expenses related to progression of our portfolio, including an increase of$0.5 million in ETV:IDS program external expenses and an increase of$0.1 million in EIF2B program external expenses due to the progress of these programs in the clinic. These increases were partially offset by a$2.3 million decrease in LRRK2 program expenses, reflecting completion of DNL201 clinical activities and slowdown of DNL151 clinical activities in the three months endedJune 30, 2020 as a result of COVID-19, a$0.7 million decrease in TV platform and other program external expenses driven by the$1.5 million contingent consideration payment to F-star in 2019, a$0.5 million decrease in other external research and development expenses, primarily attributable to a decrease in DNL747 costs after completion of the Phase 1b trials, and a decrease in other unallocated research and development expenses of$0.1 million . There was an increase in total research and development expenses of$14.9 million for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . This increase was a result of a$10.1 million increase in personnel-related expenses, consisting of a$6.2 million increase in salaries and related expenses attributable to an increase in our research and development headcount, and a$3.9 million increase in stock-based compensation expense primarily attributable to new equity award grants. Additionally, there were increases in external expenses related to progression of our portfolio, including an increase of$3.2 million in the LRRK2 program, an increase of$1.1 million in EIF2B program external expenses, and an increase of$0.3 million in ETV:IDS program external expenses, all driven by the progress of these programs in the clinic, partially offset by a decrease of$1.1 million in TV platform and other program external expenses driven by the$1.5 million contingent consideration payment to F-star in 2019. There was also a$0.6 million increase in other external research and development expenses to support our growing pipeline, and an increase in other unallocated research and development expenses of$0.7 million , which was primarily due to an increase in facilities-related expenses resulting from increased rent expense associated with the new headquarters lease. 37 -------------------------------------------------------------------------------- Table of Contents General and administrative expenses General and administrative expenses were$14.0 million for the three months endedJune 30, 2020 compared to$15.1 million for the three months endedJune 30, 2019 . The decrease of approximately$1.1 million was primarily attributable to a$2.0 million decrease in personnel-related expenses, primarily driven by higher stock-based compensation expense in the three months endedJune 30, 2019 related to certain performance and market-based awards, partially offset by increases of$0.9 million in professional services costs and$0.1 million in facilities-related expenses. Additionally, there was a decrease of$0.1 million in other general and administrative costs related to other miscellaneous costs such as insurance and taxes. General and administrative expenses were$26.5 million for the six months endedJune 30, 2020 compared to$24.4 million for the six months endedJune 30, 2019 . The increase of approximately$2.1 million was primarily attributable to increases of$1.1 million in personnel-related expenses primarily driven by higher headcount,$0.8 million in professional services costs,$0.1 million in facilities-related expenses and$0.1 million in other general and administrative costs related to other miscellaneous costs such as insurance and taxes.
Interest and other income, net
Interest and other income, net was$2.6 million for the three months endedJune 30, 2020 compared to$4.1 million for the three months endedJune 30, 2019 . The decrease of$1.5 million was primarily due to a$1.8 million decrease in interest income earned on our investments due to declining interest rates, partially offset by an increase of$0.3 million in sublease income received in the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . Interest and other income, net was$5.7 million for the six months endedJune 30, 2020 compared to$7.6 million for the six months endedJune 30, 2019 . The decrease of$1.9 million was primarily due to a$3.0 million decrease in interest income earned on our investments due to declining interest rates, partially offset by an increase of$1.1 million in sublease income received in the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . Income tax benefit (provision) Income tax provision associated with a decrease in unrealized gains on marketable securities in other comprehensive income was$0.1 million for the three months endedJune 30, 2020 compared to an income tax benefit of$0.3 million for the three months endedJune 30, 2019 associated with unrealized gains on marketable securities in other comprehensive income. Income tax benefit associated with an unrealized gain on marketable securities in other comprehensive income was$0.1 million for the six months endedJune 30, 2020 compared to$0.3 million for the six months endedJune 30, 2019 . Comparison of the three and six months endedJune 30, 2019 and 2018 Refer to "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations" in our Form 10-Q for the three and six months endedJune 30, 2019 for a discussion of the results of operations for the three and six months endedJune 30, 2019 compared to the three and six months endedJune 30, 2018 . 38 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Sources of Liquidity We fund our operations primarily with the proceeds from our IPO, our follow-on offering, and payments received from our collaboration agreements withTakeda and Sanofi. We received net proceeds of$264.3 million from our IPO inDecember 2017 . InJanuary 2020 , we sold 9.0 million shares of common stock (inclusive of shares sold pursuant to an overallotment option granted to the underwriters in connection with the offering) through an underwritten public offering at a price of$23.00 per share for aggregate net proceeds of$193.9 million . Pursuant to the Takeda Collaboration Agreement, we have received$55.0 million related to upfront and milestone payments throughJune 30, 2020 . Further, under the associated Purchase Agreement we received$110.0 million inFebruary 2018 for the sale and issuance of 4,214,559 shares of our common stock. Pursuant to the Sanofi Collaboration Agreement, we have received$135.0 million related to upfront and milestone payments, and further payments of$13.2 million for performance of Retained Activities throughJune 30, 2020 . As ofJune 30, 2020 , we had cash, cash equivalents and marketable securities in the amount of$556.8 million . Future Funding Requirements To date, we have not generated any product revenue. We do not expect to generate any product revenue unless and until we obtain regulatory approval of and commercialize any of our product candidates, and we do not know when, or if, either will occur. We expect to continue to incur significant losses for the foreseeable future, and we expect the losses to increase as we expand our research and development activities and continue the development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products. Further, we expect general and administrative expenses to increase as we continue to incur additional costs associated with supporting our growing operations. We are subject to all of the risks typically related to the development of new product candidates, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. We anticipate that we will need substantial additional funding in connection with our continuing operations. Until we can generate a sufficient amount of revenue from the commercialization of our product candidates or from our existing collaboration agreements, or future agreements with other third parties, if ever, we expect to finance our future cash needs through public or private equity or debt financings. Additional capital may not be available on reasonable terms, if at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates. If we raise additional funds through the issuance of additional debt or equity securities, it could result in dilution to our existing stockholders, increased fixed payment obligations and the existence of securities with rights that may be senior to those of our common stock. If we incur indebtedness, we could become subject to covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Additionally, any future collaborations we enter into with third parties may provide capital in the near term but limit our potential cash flow and revenue in the future. Any of the foregoing could significantly harm our business, financial condition and prospects. 39 -------------------------------------------------------------------------------- Table of Contents Since our inception, we have incurred significant losses and negative cash flows from operations. We have an accumulated deficit of$541.1 million throughJune 30, 2020 . We expect to incur substantial additional losses in the future as we conduct and expand our research and development activities. We believe that our existing cash, cash equivalents and marketable securities will be sufficient to enable us to fund our projected operations through at least 12 months from the filling date of this Form 10-Q. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Our future funding requirements will depend on many factors, including:
•the timing and progress of preclinical and clinical development activities;
•the number and scope of preclinical and clinical programs we decide to pursue;
•the progress of the development efforts of third parties with whom we have entered into license and collaboration agreements;
•our ability to maintain our current research and development programs and to establish new research and development, license or collaboration arrangements;
•our ability and success in securing manufacturing relationships with third parties or, in the future, in establishing and operating a manufacturing facility;
•the costs involved in prosecuting, defending and enforcing patent claims and other intellectual property claims;
•the cost and timing of regulatory approvals;
•our efforts to enhance operational, financial and information management systems and hire additional personnel, including personnel to support development of our product candidates; and
•the costs and ongoing investments to in-license and/or acquire additional technologies.
A change in the outcome of any of these or other variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate. Furthermore, 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. Cash Flows
The following table sets forth a summary of the primary sources and uses of cash for each of the periods presented below (in thousands):
Six
Months Ended
2020 2019
Net cash used in operating activities $ (97,849) $ (73,498)
Net cash provided by (used in) investing activities (43,744) 55,834
Net cash provided by financing activities 199,328 3,477
Net increase (decrease) in cash, cash equivalents and
restricted cash $ 57,735 $ (14,187)
40-------------------------------------------------------------------------------- Table of ContentsNet Cash Used In Operating Activities During the six months endedJune 30, 2020 , cash used in operating activities was$97.8 million , which consisted of a net loss of$115.5 million , adjusted by non-cash items primarily related to stock-based compensation, depreciation, and non-cash rent expenses, partially offset by net amortization of discounts on marketable securities. Cash used in operating activities was also driven by changes in our operating assets and liabilities.
Net Cash Provided By (Used In) Investing Activities
During the six months endedJune 30, 2020 , cash used in investing activities was$43.7 million , which consisted of$323.6 million of purchases of marketable securities and$1.2 million of capital expenditures to purchase property and equipment, partially offset by$281.1 million in proceeds from the maturity of marketable securities.
Net Cash Provided By Financing Activities
During the six months endedJune 30, 2020 , cash provided by financing activities was$199.3 million , which consisted of$193.9 million in net cash proceeds from our follow-on offering completed inJanuary 2020 and$5.4 million in proceeds from the exercise of options to purchase common stock and issuance of ESPP shares. Discussion of the six months endedJune 30, 2019 Refer to "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" in our Form 10-Q for six months endedJune 30, 2019 for a discussion of the cash flows for that period. Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements. Contractual Obligations and Commitments
InMay 2018 , we entered into an amendment to our operating lease for our former corporate headquarters inSouth San Francisco (the "Headquarters Lease Amendment") to relocate and expand our headquarters to 148,020 rentable square feet in a building inSouth San Francisco, California (the "New Premises"). The Headquarters Lease Amendment has a contractual term of ten years from the legal commencement date, which wasApril 1, 2019 when the building was ready for occupancy. For accounting purposes, the lease commencement date was determined to beAugust 1, 2018 , which was the date at which we were deemed to have obtained control over the property. We have an option to extend the lease term for a period of ten years by giving the landlord written notice of the election to exercise the option at least nine months, but not more than twelve months, prior to the expiration of the Headquarters Lease Amendment lease term. We determined that this renewal was not reasonably certain at lease inception. The Headquarters Lease Amendment provides for monthly base rent amounts escalating over the term of the lease. In addition, the Headquarters Lease Amendment provided a tenant improvement allowance ("TIA") of up to$25.9 million , which was fully utilized, of which$4.4 million will be repaid to the landlord in the form of additional monthly rent. This is recorded as leasehold improvement assets and an offset to the lease ROU asset on the Consolidated Balance Sheets as ofJune 30, 2020 andDecember 31, 2019 . We are also required to pay the operating expenses for the New Premises, such as taxes and insurance, which are treated as variable lease payments. 41 -------------------------------------------------------------------------------- Table of Contents EffectiveSeptember 2017 , we entered into a Development and Manufacturing Services Agreement, as amended ("DMSA") withLonza Sales AG ("Lonza") for the development and manufacture of biologic products. Under the DMSA, we will execute purchase orders based on project plans authorizing Lonza to provide development and manufacturing services with respect to certain of our antibody and enzyme products, and will pay for the services provided and batches delivered in accordance with the DMSA and project plan. Unless earlier terminated, the DMSA will expire onSeptember 6, 2022 . As ofJune 30, 2020 andDecember 31, 2019 , we had open non-cancellable purchase orders for biological product development and manufacturing costs totaling$18.0 million and$21.2 million , respectively. The activities under these purchase orders are expected to be completed byMay 2027 . As ofJune 30, 2020 andDecember 31, 2019 , we had total non-cancellable purchase commitments, under the DMSA of$12.1 million and$11.2 million , respectively. During the three months endedJune 30, 2020 and 2019, we incurred costs of$3.8 million and$3.1 million , respectively, and made payments of$2.0 million and$3.9 million , respectively, for the development and manufacturing services rendered under the DMSA. During the six months endedJune 30, 2020 and 2019, we incurred costs of$4.8 million and$6.7 million , respectively, and made payments of$5.2 million and$6.5 million , respectively, for the development and manufacturing services rendered under the DMSA. Other than those detailed above, there have been no other material changes from the contractual obligations and commitments previously disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , as filed with theSEC onFebruary 27, 2020 . Critical Accounting Policies and Significant Judgments and Estimates This discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported revenues recognized and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
There have been no material changes to our critical accounting policies and
estimates during the six months ended
Except as described in Note 1 to the condensed consolidated financial statements under the headings "Recently Issued Accounting Pronouncement" and "Recently Adopted Accounting Pronouncement," there have been no new accounting pronouncements or changes to accounting pronouncements during the six months endedJune 30, 2020 , as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , as filed with theSEC onFebruary 27, 2020 , that are of significance or potential significance to us. 42 --------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
