EPIZYME, INC. Our management's discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, which have been prepared by us in accordance with accounting principles generally accepted inthe United States , or GAAP, and with Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended. This discussion and analysis should be read in conjunction with these condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Note on the COVID-19 Pandemic
Due to the evolving and uncertain global impacts of the COVID-19 pandemic, we cannot precisely determine or quantify the impact this pandemic will have on our business, operations and financial performance for the remainder of our fiscal year endingDecember 31, 2020 and beyond. We have established a remote operating model for all employees other than certain members of our laboratory and facilities staff, and we will continue to evaluate this policy for our offices based on guidance from federal, state and local government authorities. Although we currently remain on track for our clinical trial commitments for 2020, we are aware of the impact that COVID-19 has had on other clinical trials in our industry and there is a risk of material impact for our clinical trials as well. We are continuing to work with our clinical trial sites to ensure study continuity, enable medical monitoring, facilitate study procedures and maintain clinical data and records, including the use of local laboratories for testing, home delivery of study drug and remote data and records monitoring. To date, we have not had any material impact on our supply chain. However, the COVID-19 pandemic could materially adversely impact our suppliers and result in delays or disruptions in our current or future supply chain, so we are continuing to monitor and manage our supply chain. For our commercial activities for TAZVERIK, we have shifted commercial and medical affairs field activities toward virtual formats where possible in order to allow us to continue to serve the needs of healthcare providers, patients and other stakeholders during this critical time. We continue to assess the duration, scope and severity of the COVID-19 pandemic and its potential impacts on our business, operations and financial performance, and continue to work closely with our third-party vendors, collaborators and other parties in order to seek to advance our commercialization efforts with TAZVERIK as well as our pipeline as quickly as possible, while making the health and safety of our employees and their families, healthcare providers, patients and communities a top priority.
Please refer to our Risk Factors in Part II, Item 1A. of this Quarterly Report on Form 10-Q for further discussion of risks related to the COVID-19 pandemic.
Overview
We are a commercial-stage biopharmaceutical company that is committed to rewriting treatment for people with cancer and other serious diseases through the discovery, development, and commercialization of novel epigenetic medicines. By focusing on the genetic drivers of disease, our science seeks to match targeted medicines with the patients who need them. InJanuary 2020 , theU.S. Food and Drug Administration , or FDA, granted accelerated approval of TAZVERIK® (tazemetostat) for the treatment of adult and pediatric patients aged 16 years and older with metastatic or locally advanced epithelioid sarcoma, or ES, not eligible for complete resection. This approval was based on overall response rate and duration of response shown in the ES cohort of our Phase 2 trial in patients with INI1-negative tumors. We have made TAZVERIK available to eligible patients and their physicians inthe United States . As part of the accelerated approval for epithelioid sarcoma, continued approval for this indication is contingent upon verification and description of clinical benefit in a confirmatory trial. To provide this confirmatory evidence to support a full approval of TAZVERIK for this indication, we are conducting a global, randomized, controlled Phase 1b/3 confirmatory trial assessing TAZVERIK in combination with doxorubicin compared with doxorubicin plus placebo as a front-line treatment for epithelioid sarcoma. The trial is expected to enroll approximately 152 patients. The safety run-in portion of the trial is underway, and we expect to complete this portion of the trial in the second half of 2020. Subsequently, inJune 2020 , the FDA approved a supplemental New Drug Application, or sNDA, for TAZVERIK for the following follicular lymphoma, or FL, indications: (1) adult patients with relapsed or refractory FL whose tumors are positive for an EZH2 mutation as detected by an FDA-approved test and who have received at least two prior systemic therapies, and (2) adult patients with relapsed or refractory FL who have no satisfactory alternative treatment options. These indications were approved under accelerated approval with a priority review, based on overall response rate and duration of response shown in the FL cohort of our Phase 2 clinical trial in patients with EZH2 mutations and wild-type EZH2. We have made TAZVERIK available to eligible patients and their physicians inthe United States . 28 -------------------------------------------------------------------------------- As part of the accelerated approval for FL, continued approval for these indications is contingent upon verification and description of clinical benefit in a confirmatory trial. To provide confirmatory evidence to support a full approval of TAZVERIK for these indications, we are conducting a single global, randomized, adaptive Phase 1b/3 confirmatory trial to evaluate the combination of TAZVERIK with "R2" (Revlimid® plus rituximab), an approved chemotherapy-free treatment regimen, for FL patients in the second-line or later treatment setting. The trial is expected to enroll approximately 500 FL patients, stratified based on their EZH2 mutation status. The safety run-in portion of the trial is underway, and we expect to complete this portion of the trial in the second half of 2020. In addition, we plan to conduct post-marketing commitments, including expanding our Phase 2 clinical trial with a cohort of FL patients with wild-type EZH2 to evaluate tazemetostat as a monotherapy in patients who have been treated with at least one prior systemic treatment, in order to inform the label and potentially expand in the relapsed and refractory setting in the future. Through our planned development efforts, our intention is to eventually make TAZVERIK available in all lines of treatment for patients with FL. We plan to leverage the confirmatory trial and post-marketing commitments to expand TAZVERIK into the second-line treatment setting. In collaboration withThe Lymphoma Study Association , or LYSA, and based on clinical activity observed with TAZVERIK in combination with R-CHOP as a front-line treatment for patients with high risk diffuse large B-cell lymphoma, or DLBCL, we plan to investigate this combination as a front-line treatment for high-risk patients with FL. In addition, we are finalizing plans for investigator-sponsored studies to evaluate tazemetostat in combination with rituximab, venetoclax or BTK inhibitors for the treatment of patients with FL in the third-line or later treatment settings. Tazemetostat is an oral, first in class, selective small molecule inhibitor of the EZH2 histone methyltransferase, or HMT, that we are developing for the treatment of a broad range of cancer types in multiple treatment settings. Tazemetostat has shown meaningful clinical activity as an investigational monotherapy in multiple cancer indications and has been generally well-tolerated across clinical trials to date. We believe tazemetostat is a "pipeline in a product" opportunity and plan to explore its utility as a monotherapy and in combinations through both company and investigator-sponsored studies in additional indications, including:
• Lymphomas and B-cell malignancies, such as DLBCL, mantle cell lymphoma, or
MCL, chronic lymphocytic leukemia, or CLL, chronic myeloid leukaemia, or
CML, and others;
• Mutationally defined solid tumors, such as chordoma, melanoma,
mesothelioma, and tumors harboring an EZH2 or SWI/SNF alteration;
• Chemotherapy or treatment-resistant tumors, such as triple-negative breast
cancer, small cell lung cancer, ovarian cancer, and metastatic
castration-resistant prostate cancer; and,
• Immuno-oncology-sensitive tumors, such as colorectal cancer, bladder
cancer, soft tissue sarcomas and non-small cell lung cancer.
We own the global development and commercialization rights to tazemetostat
outside of
TAZVERIK is available to eligible patients inthe United States via a specialty distribution network. To commercialize TAZVERIK for the ES and FL indications inthe United States , we have built a focused field presence and marketing capabilities. This includes an efficiently sized field-based organization of 76 individuals. For geographies outsidethe United States , we are evaluating the most efficient path to reach patients, including through potential collaborations. Tazemetostat is covered by claims ofU.S. and European composition of matter patents, which are expected to expire in 2032, exclusive of any patent term or other extensions. Tazemetostat has been granted Fast Track designation by the FDA in patients with relapsed or refractory FL, relapsed or refractory DLBCL with EZH2 activating mutations and metastatic or locally advanced ES who have progressed on or following an anthracycline-based treatment regimen. The FDA has also granted orphan drug designation to tazemetostat for the treatment of patients with FL, malignant rhabdoid tumors, or MRT, soft tissue sarcoma, or STS, and mesothelioma. With the approval of TAZVERIK for the treatment of patients with FL, orphan drug designation provides us with a seven-year market exclusivity. Beyond tazemetostat, we are progressing preclinical efforts to pursue additional development candidates for our pipeline and to further support our leadership position in epigenetics. We have collaborations withBoehringer Ingelheim International GmbH , or Boehringer Ingelheim, focused on the research, development and commercialization of novel small molecule inhibitors, discovered by us, directed toward previously unaddressed epigenetic targets as potential therapies for people with cancer, withGlaxo Group Limited (an affiliate of GlaxoSmithKline plc), or GSK, focused on the development of PRMT inhibitors discovered by us, and with Celgene Corporation, which was recently acquired by Bristol-Myers Squibb Company, andCelgene RIVOT Ltd. , an affiliate of Celgene Corporation, which we collectively refer to as 29
-------------------------------------------------------------------------------- Celgene, focused on the development of pinometostat and small molecule inhibitors directed to three HMT targets. InMarch 2020 , we and Boehringer Ingelheim amended the agreement to extend the research period for the shared program targeting enzymes within helicase families with Boehringer Ingelheim providing researching funding of$0.4 million . Additionally, Boehringer Ingelheim terminated the program targeting enzymes with HAT families inJune 2020 . ThroughJune 30, 2020 , in addition to revenues from product sales, we have raised an aggregate of$1,376.9 million to fund our operations. This includes$243.3 million of non-equity funding through our collaboration agreements,$218.1 million of funding received through agreements withRPI Finance Trust ("Royalty Pharma" or "RPI") andBioPharma Credit Investments V (Master) LP ,BPCR Limited Partnership and BioPharma Credit PLC (the "Lenders"),$839.5 million from the sale of common stock and series A convertible preferred stock in our public offerings and$76.0 million from the sale of redeemable convertible preferred stock in private financings prior to our initial public offering inMay 2013 .
As of
We commenced active operations in early 2008, and since inception, have incurred significant operating losses. Our net loss was$58.5 million and$109.4 million , respectively, for the three and six months endedJune 30, 2020 . As ofJune 30, 2020 , our accumulated deficit totaled$866.4 million . Notwithstanding the initiation of sales of TAZVERIK, we expect to continue to incur significant expenses and operating losses over the next several years. Our net losses may fluctuate significantly from quarter to quarter and year to year. We expect our expenses to increase in connection with our ongoing activities, particularly as we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. In addition, we expect our expenses to increase as we fund our tazemetostat development program; continue our collaborations with Boehringer Ingelheim and Celgene; and continue research and development and initiate clinical trials of, and seek regulatory approval for, any future product candidates.
Funding Agreements with
We executed a purchase agreement with RPI onNovember 4, 2019 , or the RPI Purchase Agreement. Pursuant to the RPI Purchase Agreement, we sold to RPI 6,666,667 shares of our common stock and a warrant to purchase up to 2,500,000 shares of our common stock at an exercise price of$20.00 per share, or the Warrant. We also sold our rights to receive royalties from Eisai with respect to net sales by Eisai of tazemetostat products inJapan , or the Japan Royalty, pursuant to the amended and restated collaboration and license agreement between us and Eisai, dated as ofMarch 12, 2015 , or the Eisai License Agreement. In consideration for the sale of shares of our common stock, the Warrant and the Japan Royalty, RPI paid us$100.0 million upon the closing of the RPI Purchase Agreement inNovember 2019 . In addition, RPI agreed, in connection with RPI's acquisition from Eisai of the right to receive royalties from us under the Eisai License Agreement, to reduce our royalty obligation by low single digits upon the achievement of specified annual net sales levels. We also had the option to sell to RPI$50.0 million of shares of common stock for an 18-month period beginningNovember 4, 2019 , or the Put Option. OnFebruary 11, 2020 , we sold 2,500,000 shares of common stock to RPI for an aggregate of$50.0 million in proceeds at a sale price of$20.00 per share of common stock pursuant to the Put Option. OnNovember 4, 2019 , we also entered into a Loan Agreement with the Collateral Agent, and the Lenders, providing for up to$70.0 million in secured term loans to be advanced in up to three tranches, or the Loan Agreement. We borrowed$70.0 million in the aggregate under the three tranches pursuant to the Loan Agreement. With theFDA's June 2020 approval of tazemetostat for the treatment of FL inthe United States , we also have the right, but not the obligation, to request up to an additional$300.0 million in secured term loans, subject to the approval of the Lenders, provided that we have not prepaid any outstanding term loans at the time of such request and such request is made beforeNovember 18, 2021 . We are required to make interest only payments on the outstanding obligation throughFebruary 28, 2023 , and thereafter eight quarterly payments of principal and interest. The obligations under the Loan Agreement are secured by a first priority security interest in and a lien on substantially all of our assets, subject to certain exceptions. The Loan Agreement contains certain customary representations and warranties, affirmative and negative covenants and events of default applicable to us and our subsidiaries. If an event of default occurs and is continuing, the Collateral Agent may, among other things, accelerate the loans and foreclose on the collateral. Collaborations
Refer to Note 12, Collaborations, of the notes to our condensed consolidated
financial statements included in this Quarterly Report on Form 10-Q for a
description of the key terms of our arrangements with Boehringer Ingelheim,
Celgene, GSK, Eisai and
30
--------------------------------------------------------------------------------Results of Operations Revenues
The following is a comparison of total revenues for the three and six months
ended
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 Change 2020 2019 Change
(In millions) (In millions)
Product revenues, net $ 2.2 $ - $ 2.2 $ 3.5 $ - $ 3.5
Collaboration revenue 0.2 5.9 (5.7 ) 0.3 13.8 (13.5 )
Total revenues $ 2.4 $ 5.9 $ (3.5 ) $ 3.8 $ 13.8 $ (10.0 )
Product Revenues, net
Net product revenues represent U.S. sales from our sole commercial product,
TAZVERIK, which was approved by the FDA on January 23, 2020 . During the three
and six months ended June 30, 2020 , net product revenues were $2.2 million and
$3.5 million , respectively. Sales allowances and accruals consisted of patient
financial assistance, distribution fees, discounts, and chargebacks. We did not
have product revenues in 2019.
Collaboration Revenue
Our revenue during the periods consisted of collaboration revenue, including
amounts recognized from deferred revenue related to upfront payments for
licenses or options to obtain licenses in the future, research and development
services revenue earned and milestone payments earned under collaboration and
license agreements with our collaboration partners.
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 Change 2020 2019 Change
(In millions) (In millions)
Collaboration Partner
Boehringer Ingelheim: $ 0.2 $ 5.9 $ (5.7 ) $ 0.3 $ 13.8 $ (13.5 )
$ 0.2 $ 5.9 $ (5.7 ) $ 0.3 $ 13.8 $ (13.5 )
In the three and six months ended June 30, 2020 , we recognized $0.2 million and
$0.3 million , respectively, in collaboration revenue. This collaboration revenue
was earned as part of our Boehringer Ingelheim collaboration. The revenue
recognized during the three and six months ended June 30, 2020 was related to an
amendment to extend the research period under the collaboration agreement under
which Boehringer Ingelheim agreed to fund up to $0.4 million of additional
research activities. Through June 30, 2020 , we have recognized $25.8 million in
total collaboration revenue under our agreement with Boehringer Ingelheim.
In three and six months ended June 30, 2019 , we recognized $5.9 million and
$13.8 million , respectively, in collaboration revenue as part of our Boehringer
Ingelheim collaboration. We recognized revenue as our research services were
performed. Under the agreement we received $15.0 million in an upfront payment
from Boehringer Ingelheim for our license to inhibitor technology of two
undisclosed targets, $5.5 million for a development milestone for selection of a
lead optimization candidate for the shared program targeting enzymes within
helicase families and $1.3 million in research funding in the second quarter of
2019. Through June 30, 2019 , we had recognized $15.5 million in total
collaboration revenue under our agreement with Boehringer Ingelheim.
31
--------------------------------------------------------------------------------Cost of Product Revenue
The following is a comparison of cost of product revenue for the three and six
months ended
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 Change 2020 2019 Change
(In millions) (In millions)
Cost of product revenue $ 1.0 $ - $ 1.0 $ 1.6 $ - $ 1.6
The cost of product revenue consists of costs related to the sales of TAZVERIK.
These costs include materials, labor, manufacturing overhead, amortization of
milestone payments, and royalties payable on net sales of TAZVERIK. During the
three months ended June 30, 2020 , the cost of product revenue was $1.0 million
and consisted of $0.1 million in costs associated with manufacturing TAZVERIK,
$0.6 million in amortization expense related to the two $25.0 million milestone
payments under our agreement with Eisai upon regulatory approval of tazemetostat
for ES and upon regulatory approval of tazemetostat for follicular lymphoma, and
$0.3 million in world-wide royalties owed to Royalty Pharma on net sales of
TAZVERIK in the three months ended June 30, 2020 . During the six months ended
June 30, 2020 , the cost of product revenue was $1.6 million and consisted of
$0.2 million in costs associated with manufacturing TAZVERIK, $0.9 million in
amortization expense related to the two $25.0 million milestone payments under
our agreement with Eisai upon regulatory approval of tazemetostat for
epithelioid sarcoma and upon regulatory approval of tazemetostat for follicular
lymphoma, and $0.5 million in world-wide royalties owed to Royalty Pharma on net
sales of TAZVERIK in the three months ended June 30, 2020 . All product costs
incurred prior to FDA approval of TAZVERIK in January 2020 were expensed as R&D
expenses. We expect our cost of product revenues (excluding amortization of
intangible assets) to continue to be positively impacted during 2020 and 2021,
as we sell through certain inventory that was expensed prior to FDA approval of
TAZVERIK in January 2020 . We did not have cost of product revenues in 2019.
Research and Development
The following is a comparison of research and development expenses for the three
and six months ended
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 Change 2020 2019 Change
(In millions) (In millions)
Research and development
During the three and six months endedJune 30, 2020 , total research and development expenses decreased by$14.5 million and$16.3 million compared to the three and six months endedJune 30, 2019 . The decrease in both the three and six months endedJune 30, 2020 primarily relates to the payment of a$10.0 million clinical development milestone to Eisai in 2019, decreases in tazemetostat manufacturing costs, in clinical trial expenses and discovery research activities related to tazemetostat in other indications, which were offset by increased costs associated with the buildout of our regulatory and late-stage development groups. The following table illustrates the components of our research and development expenses: Three Months Ended Six Months Ended June 30, June 30, Product Program 2020 2019 2020 2019 (In millions) (In millions) External research and development expenses: Tazemetostat and related EZH2 programs$ 10.1 $ 25.2 $ 18.7 $ 36.9 Pinometostat and related DOT1L programs 0.0 0.1 0.0 0.1 Discovery and preclinical stage product programs, collectively 3.1 4.3 6.8 9.2 Unallocated personnel and other expenses 13.2 11.3 26.0 21.6
Total research and development expenses
32
-------------------------------------------------------------------------------- External research and development expenses for tazemetostat and related EZH2 programs decreased$15.1 million and$18.2 million for the three and six months endedJune 30, 2020 , respectively, compared to the three and six months endedJune 30, 2019 . The decrease for the three and six months endedJune 30, 2020 relates to a decrease in tazemetostat manufacturing costs, as the Company began to capitalize the cost of manufacturing following the approval of TAZVERIK inJanuary 2020 , decreased clinical trial expenses and decreased discovery research activities related to tazemetostat in other indications, which were offset by increased costs associated with the buildout of our regulatory and late stage development groups. There were no costs incurred related to pinometostat for the three and six months endedJune 30, 2020 . For the three and six months endedJune 30, 2019 , external research and development expenses for pinometostat and related DOT1L programs were$0.1 million for each period, respectively. In general, costs related to pinometostat primarily associate with costs attributed to theCooperative Research and Development Agreement, or CRADA, with theNational Cancer Institute , or NCI, to evaluate tazemetostat in clinical trials in a variety of hematologic malignancies and solid tumors. External research and development expenses for discovery and preclinical stage product programs decreased$1.2 million and$2.4 million during the three and six months endedJune 30, 2020 , respectively, compared to the three and six months endedJune 30, 2019 . This decrease is primarily related to reduced spending for discovery research activities and decreased development activities related to our G9a preclinical program. Unallocated personnel and other expenses are comprised of compensation expenses for our full-time research and development employees and other general research and development expenses. Unallocated personnel and other expenses increased by$1.9 million and$4.4 million during the three and six months endedJune 30, 2020 , respectively, compared to the three and six months endedJune 30, 2019 , as a result of allocation of expenses to projects and increases in facilities and equipment related expenses offset by an increase in unallocated personnel costs.
We expect that research and development expenses will increase in 2020, as we increase our clinical trial activity for tazemetostat and utilize our drug discovery platform to progress preclinical efforts and pursue additional development candidates to expand our pipeline.
Selling, General and Administrative
The following is a comparison of selling, general and administrative expenses
for the three and six months ended
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 Change 2020 2019 Change
(In millions)
(In millions)
Selling, general and administrative
For the three months endedJune 30, 2020 , our selling, general and administrative expenses increased$17.0 million compared to the three months endedJune 30, 2019 . For the six months endedJune 30, 2020 , our selling, general and administrative expenses increased$31.9 million compared to the six months endedJune 30, 2019 . The increases in expenses for the three and six months endedJune 30, 2020 compared to the three and six months endedJune 30, 2019 are due to increased commercialization activities, including the build out of our salesforce and commercial infrastructure to support the launch of TAZVERIK in the ES indication, and an expansion of our infrastructure to support the commercial launch in FL, and increased personnel related expenses. We expect that selling, general and administrative expenses will increase during the remainder of 2020, as we continue to increase our commercial activities for tazemetostat. 33
--------------------------------------------------------------------------------
Other Income, Net
The following is a comparison of other (expense) income, net for the three and
six months ended
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 Change 2020 2019 Change
(In thousands) (In thousands)
Other income, net
Interest income $ 756 $ 2,254 $ (1,498 ) $ 2,246 $ 3,913 $ (1,667 )
Interest expense (1,325 ) (1 ) (1,324 ) (2,059 ) (2 ) (2,057 )
Other expense, net (15 ) (13 ) (2 ) (64 ) (19 ) (45 )
Non-cash interest expense
related to sale of future
royalties (301 ) - (301 ) (596 ) - (596 )
Other (expense) income, net $ (885 ) $ 2,240 $ (3,125 ) $ (473 ) $ 3,892 $ (4,365 )
Other income, net consists of interest income earned on our cash equivalents and
marketable securities, net of imputed interest expense paid under our capital
lease obligation. The decrease in other income for the three months ended June
30, 2020 is principally due to an increase in interest expense of $1.3 million
incurred in connection with our long-term debt obligations, non-cash interest
expense related to the sale of future royalties of $0.3 million , and a decrease
in net interest income of $1.5 million during the three months ended June 30,
2020 compared to the three months ended June 30, 2019 . The decrease in other
income for the six months ended June 30, 2020 is principally due to an increase
in interest expense of $2.1 million incurred in connection with our long-term
debt obligations, non-cash interest expense related to the sale of future
royalties of $0.6 million , and a decrease in net interest income of $1.7 million
during the six months ended June 30, 2020 compared to the six months ended June
30, 2019 .
Income Tax Expense
We did not record a federal or state income tax provision or benefit for the
three and six months ended June 30, 2020 and 2019 due to the expected and known
loss before income taxes to be incurred, or incurred, as applicable, for the
years ended December 31, 2020 and 2019, as well as our continued maintenance of
a full valuation allowance against our net deferred tax assets, with the
exception of the deferred tax asset related to alternative minimum tax credit.
Liquidity and Capital Resources
ThroughJune 30, 2020 , in addition to revenues from product sales, we have raised an aggregate of$1,376.9 million to fund our operations. This includes$243.3 million of non-equity funding through our collaboration agreements,$218.1 million of funding received through agreements with RPI and the Lenders,$839.5 million was from the sale of common stock and series A convertible preferred stock in our public offerings and$76.0 million was from the sale of redeemable convertible preferred stock in private financings prior to our initial public offering inMay 2013 . As ofJune 30, 2020 , we had$322.1 million in cash, cash equivalents and marketable securities. InNovember 2019 , we raised approximately$123.1 million in net proceeds from the sale to RPI of 6,666,667 shares of our common stock, the Warrant and the Japan Royalty for, as well as from proceeds of the Tranche A Loan borrowings under the Loan Agreement. OnFebruary 11, 2020 , we sold 2,500,000 shares of common stock to RPI for an aggregate of$50.0 million in proceeds at a sale price of$20.00 per share of common stock pursuant to the Put Option. OnMarch 27, 2020 , we received proceeds of the Tranche B Loan borrowings of$25.0 million under the Loan Agreement. OnJune 30, 2020 , we received proceeds of the Tranche C Loan borrowings of$20.0 million under the Loan Agreement. InMarch 2019 , we raised approximately$122.7 million in net proceeds (after deducting underwriting discounts and commissions and estimated offering expenses, but excluding any expenses and other costs reimbursed by the underwriters) from the sale of 11,500,000 shares of our common stock in a public offering at a price of$11.50 per share. We also raised approximately$37.4 million in net proceeds (after deducting underwriting discounts and commissions and estimated offering expenses, but excluding any expenses and other costs reimbursed by the underwriters) from the sale of 350,000 shares of series A convertible preferred stock in a public offering at a price of$115 per share. The series A convertible preferred stock is convertible into 3,500,000 shares of our common stock. InOctober 2018 , we raised approximately$81.6 million in net proceeds (after deducting underwriting discounts and commissions and offering expenses, but excluding any expenses and other costs reimbursed by the underwriters) from the sale of 9,583,334 shares of our common stock in a public offering at a price of$9.00 per share. 34
-------------------------------------------------------------------------------- In addition to our existing cash, cash equivalents and marketable securities, we may receive research and development co-funding and are eligible to earn a significant amount of option exercise and milestone payments under our collaboration agreements. Our ability to earn these payments and the timing of earning these payments is dependent upon the outcome of our research and development activities and is uncertain at this time.
Funding Requirements
Our primary uses of capital are clinical trial costs, third-party research and development services, expenses related to commercialization, compensation and related expenses, laboratory and related supplies, our potential future milestone payment obligations to Roche Sequencing under the amended Roche Sequencing companion diagnostics agreement, legal and other regulatory expenses and general overhead costs. Because the continued approval of TAZVERIK both in the ES indication and in the FL indications is contingent upon verification and description of clinical benefit in confirmatory trials and, because we are developing tazemetostat for other indications and because our product candidates are in various stages of development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of TAZVERIK, for all indications we are exploring or plan to explore, or our product candidates or whether, or when, we may achieve profitability. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity or debt financings and collaboration arrangements. Except for any obligations of our collaborators to make license, milestone or royalty payments under our agreements with them, and remaining amounts available to us under the Loan Agreement with the Lenders, which are subject to certain conditions, we do not have any committed external sources of liquidity. To the extent that we raise additional capital through the future sale of equity or debt, the ownership interest of our stockholders may be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaboration arrangements in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise any additional funds that may be needed through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate 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.
Outlook
Based on our current operating plan, we expect that our existing cash, cash equivalents and marketable securities as ofJune 30, 2020 , together with the cash we expect to generate from product sales, will be sufficient to fund our planned operating expenses and capital expenditure requirements and pay our debt service obligations as they become due into 2022, without giving effect to any potential option exercise fees or milestone payments we may receive under our collaboration agreements. We have based this estimate on assumptions that may prove to be wrong, such as the revenue that we expect to generate from the sale of our products, and particularly as the process of testing drug candidates in clinical trials is costly and the timing of progress in these trials is uncertain. As a result, we could use our capital resources sooner than we expect.
Cash Flows
The following is a summary of cash flows for the three months endedJune 30, 2020 and 2019: Six Months Ended June 30, 2020 2019 Change (In millions) Net cash (used in) operating activities$ (110.7 ) $ (73.5 ) $ (37.2 ) Net cash provided by (used in) investing activities (12.8 ) (129.5 ) 116.7 Net cash provided by financing activities 101.2 162.3 (61.1 )
Net cash used in operating activities during the six months endedJune 30, 2020 primarily relates to our net loss of$109.4 million and changes in working capital of$17.9 million , partially offset by net depreciation and amortization of$1.2 million , non-cash stock-based compensation of$14.8 million , and non-cash interest expense associated with the sale of future royalties of$0.6 million . Net cash used in operating activities for the six months endedJune 30, 2019 primarily relates to our net loss of$77.8 million , changes in working capital of$2.3 million and net depreciation and amortization of$1.3 million , partially offset by non-cash stock-based compensation of$7.9 million . 35 --------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities during the six months endedJune 30, 2020 reflects maturities of available-for-sale securities of$131.6 million , offset by$94.1 million of purchases of available-for-sale securities, a$25.0 million milestone payment under the Eisai collaboration agreement upon regulatory approval of tazemetostat for ES, a$25.0 million milestone payment under the Eisai collaboration agreement upon regulatory approval of tazemetostat for FL, and$0.3 million of purchases of property and equipment. Net cash used in investing activities during the six months endedJune 30, 2019 reflects$297.9 million of purchases of available-for-sale securities and$0.2 million of purchases of property and equipment, offset by maturities of available-for-sale securities of$168.5 million .
Net Cash Provided by Financing Activities
Net cash provided by financing activities of$101.2 million during the six months endedJune 30, 2020 primarily reflects cash received from the sale of common stock of$50.0 million in connection with our exercise of our Put Option to sell shares of our common stock to Royalty Pharma, net cash received during the period from Tranche B Loan borrowings of$25.0 million under the Loan Agreement, net cash received during the period from Tranche C Loan borrowings of$20.0 million under the Loan Agreement, stock option exercises of$5.8 million , and the purchases of shares under our employee stock purchase plan of$0.6 million , partially offset by payments of debt issuance costs of$0.1 million and offering costs of$0.1 million . Net cash provided by financing activities of$162.3 million during the six months endedJune 30, 2019 primarily reflects cash received from the sale of common and preferred stock of$160.4 million , stock option exercises of$1.8 million , and the purchases of shares under our employee stock purchase plan of$0.4 million , partially offset by payments of public offering costs of$0.3 million . Contractual Obligations There were no material changes to our contractual obligations and commitments described under "Management's Discussion and Analysis and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 .
Critical Accounting Policies and Use of Estimates
Our management's discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these condensed consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the balance sheets and the reported amounts of collaboration revenue, inventories and expenses during the reporting periods. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances at the time such estimates are made. Actual results and outcomes may differ materially from our estimates, judgments and assumptions. We periodically review our estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates are reflected in the condensed consolidated financial statements prospectively from the date of the change in estimate. We define our critical accounting policies as those accounting principles generally accepted inthe United States of America that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations as well as the specific manner in which we apply those principles. Management has determined that our most critical accounting policies are those relating to revenue recognition, inventories, stock-based compensation and research and development expenses, including our accounting for clinical trial expense and accruals. As our clinical development plan for tazemetostat progresses, we expect research and development expenses and, in particular, our accounting for clinical trial accruals to be an increasingly important critical accounting policy. Except as described below with respect to revenue recognition for product revenue, during the six months endedJune 30, 2020 , there have been no material changes with respect to our critical accounting policies disclosed in our Annual Report on Form 10-K for our fiscal year endedDecember 31, 2019 . Revenue Recognition
We recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the
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transaction price; (iv) allocate the transaction price to the performance
obligations in the contract; and (v) recognize revenue when (or as) we satisfy a
performance obligation. We only apply the five-step model to contracts when it
is probable that we will collect the consideration we are entitled to in
exchange for the goods or services we transfer to the customer.
We sell TAZVERIK in the United States principally to a limited number of
specialty pharmacies, which dispense the product directly to patients, and
specialty distributors, which in turn sell the product to hospital pharmacies
and community practice pharmacies (collectively, healthcare providers) for the
treatment of patients. The specialty pharmacies and specialty distributors are
referred to as our customers.
Revenue is recognized by us when the customer obtains control of the product,
which occurs at a point in time, typically when the product is received by our
customers. We provide a right of return to our customers for unopened product
for a limited time before and after its expiration date, which lapses upon
shipment to a patient. Healthcare providers to whom specialty distributors sell
TAZVERIK hold limited inventory that is designated for patients, and we are able
to monitor inventory levels in the distribution channel, thereby limiting the
risk of return.
Reserves for Variable Consideration
Revenues from product sales are recorded at the net sales price (transaction
price), which includes estimates of variable consideration for which reserves
are established and which result from discounts, returns, chargebacks, rebates,
co-pay assistance and other allowances that are offered within contracts between
us and our customers, health care providers, payors and other indirect customers
relating to our product sales. These reserves are based on the amounts earned or
to be claimed on the related sales and are classified as reductions of accounts
receivable (if the amount is payable to the customer) or a current liability (if
the amount is payable to a party other than a customer). Where appropriate,
these estimates take into consideration a range of possible outcomes that are
probability-weighted for relevant factors such as our historical experience,
current contractual and statutory requirements, specific known market events and
trends, industry data and forecasted customer buying and payment patterns.
Overall, these reserves reflect our best estimates of the amount of
consideration to which we are entitled based on the terms of the contract. The
amount of variable consideration that is included in the transaction price may
be constrained, and is included in the net sales price only to the extent that
it is probable that a significant reversal in the amount of the cumulative
revenue recognized will not occur in a future period. Actual amounts of
consideration ultimately received may differ from our estimates. If actual
results in the future vary from our estimates, we will adjust these estimates,
which would affect net product revenue and earnings in the period such variances
become known.
Trade Discounts and Allowances: We generally provide customers with discounts
that include incentive fees that are explicitly stated in our contracts and are
recorded as a reduction of revenue in the period the related product revenue is
recognized. In addition, we receive sales order management, data and
distribution services from certain customers. To the extent the services
received are distinct from our sale of products to the customer, these payments
are classified in selling, general and administrative expenses in the
consolidated statements of operations and comprehensive loss.
Product Returns: Consistent with industry practice, we generally offer customers
a limited right of return based on the product's expiration date for product
that has been purchased from us, which lapses upon shipment to a patient. We
estimate the amount of our product sales that may be returned by our customers
and record this estimate as a reduction of revenue in the period the related
product revenue is recognized. We currently estimate product return liabilities
using available industry data and our own historical sales information,
including our visibility into the inventory remaining in the distribution
channel.
Provider Chargebacks and Discounts: Chargebacks for fees and discounts to
providers represent the estimated obligations resulting from contractual
commitments to sell products to qualified healthcare providers at prices lower
than the list prices charged to customers who directly purchase the product from
us. Customers charge us for the difference between what they pay for the product
and the ultimate selling price to the qualified healthcare providers. These
reserves are established in the same period that the related revenue is
recognized, resulting in a reduction of product revenue and accounts receivable.
Chargeback amounts are generally determined at the time of resale to the
qualified healthcare provider by customers, and we generally issue credits for
such amounts within a few weeks of the customer's notification to us of the
resale. Reserves for chargebacks consist of credits that we expect to issue for
units that remain in the distribution channel inventories at each reporting
period end that we expect will be sold to qualified healthcare providers, and
chargebacks that customers have claimed but for which we have not yet issued a
credit.
Government Rebates: We are subject to discount obligations under state Medicaid
programs and Medicare. We estimate our Medicaid and Medicare rebates based upon
a range of possible outcomes that are probability-weighted for the estimated
payor mix. These reserves are recorded in the same period the related revenue is
recognized, resulting in a reduction of product revenue and the establishment of
a current liability that is included in accrued expenses on the consolidated
balance sheet. For Medicare, we also
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estimate the number of patients in the prescription drug coverage gap for whom
we will owe an additional liability under the Medicare Part D program. Our
liability for these rebates consists of invoices received for claims from prior
quarters that have not been paid or for which an invoice has not yet been
received, estimates of claims for the current quarter, and estimated future
claims that will be made for product that has been recognized as revenue, but
remains in the distribution channel inventories at period end.
Payor Rebates: We may contract with various private payor organizations,
primarily insurance companies and pharmacy benefit managers, for the payment of
rebates with respect to utilization of our products. We estimate these rebates
and record such estimates in the same period the related revenue is recognized,
resulting in a reduction of product revenue and the establishment of a current
liability.
Other Incentives: Other incentives that we offer include voluntary patient
assistance programs such as co-pay assistance. Co-pay assistance programs are
intended to provide financial assistance to qualified commercially insured
patients with prescription drug co-payments required by payors. The calculation
of the accrual for co-pay assistance is based on an estimate of claims and the
cost per claim that we expect to receive associated with product that has been
recognized as revenue, but remains in in the distribution channel inventories at
period end.
Recently Adopted Accounting Pronouncements
For detailed information regarding recently issued accounting pronouncements and the expected impact on our condensed consolidated financial statements, see Note 2, Summary of Significant Accounting Policies-Recently Adopted Accounting Pronouncements, in the accompanying Notes to Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.
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