PRINCIPIA BIOPHARMA INC. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes to those statements included elsewhere in this report. 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" and elsewhere in this report. Overview We are a late-stage biopharmaceutical company focused on developing potential treatments for immune-mediated diseases. Our proprietary Tailored Covalency® platform enables us to design and develop reversible covalent and irreversible covalent, small molecule inhibitors with potencies and selectivities that we believe will rival those of injectable biologics, but with the convenience of an oral or topical treatment. We retain full, worldwide rights to rilzabrutinib, PRN473 Topical, PRN1371 and our oral immunoproteasome inhibitor program, and have established an ongoing collaboration with Sanofi for PRN2246/SAR442168. Since commencing operations in 2011, we have devoted substantially all our resources to identifying and developing our drug candidates, including conducting preclinical studies and clinical trials and providing general and administrative support for these operations. Our clinical pipeline programs include rilzabrutinib for the treatment of pemphigus (pemphigus vulgaris (PV) and pemphigus foliaceus (PF)); rilzabrutinib for the treatment of immune thrombocytopenia (ITP); rilzabrutinib for the treatment of IgG4-Related Disease (RD); PRN473 Topical, a reversible covalent BTK inhibitor being developed for immune-mediated diseases that could benefit from localized application to the skin; and PRN2246/SAR442168, an irreversible BTK inhibitor which crosses the blood-brain barrier, for the treatment of multiple sclerosis (MS) and other central nervous system (CNS) diseases. InJanuary 2020 , we announced suspension of PRN1371, an inhibitor of Fibroblast Growth Factor Receptor (FGFR) designed for the treatment of solid tumors, to focus our portfolio on immune-mediated diseases.
• Based on results from our Phase 2 clinical trial in pemphigus, we
initiated a global Phase 3 pivotal clinical trial of rilzabrutinib in
pemphigus in
rilzabrutinib in PV patients, and a smaller number of PF patients. We
anticipate Phase 3 data in the second half of 2021, which has been
accelerated from the original first half of 2022 timeline. In March 2019 ,
we presented the Phase 2 Part A data at the 2019 AAD Annual Meeting as a
late-breaking presentation. In December 2019 , we announced CDA and CR
rates from our Phase 2 Part B trial. Final data from the Phase 2 Part Btrial will be submitted for presentation at an upcoming medical conference
in the first half of 2020.
In parallel, we are evaluating rilzabrutinib in a Phase 1/2 clinical trial in ITP, and recently amended the clinical trial protocol to add a long-term extension cohort for responders and to allow for the flexibility to enroll additional patients if we determine additional data would help inform the Phase 3 design. We presented positive data from our Phase 1/2 trial at the 61st ASH Annual Meeting inDecember 2019 . We anticipate reporting Phase 2 data for rilzabrutinib in ITP in the second half of 2020. InJanuary 2020 , we announced an expansion in the development of rilzabrutinib into IgG4-RD, an immune-mediated disease of chronic inflammation and fibrosis that, if left untreated, can lead to severe morbidity including organ dysfunction and organ failure. We anticipate initiating a Phase 2 clinical trial for rilzabrutinib in IgG4-RD in the first half of 2020. Beyond pemphigus, ITP, and IgG4-RD, we believe there are numerous immune-mediated diseases for which rilzabrutinib may have therapeutic benefit. We anticipate commercializing rilzabrutinib, if approved, by developing our own sales organization targeting dermatologists, hematologists and rheumatologists at specialized centers inthe United States .
• In
We believe that this collaboration maximizes the potential of
PRN2246/SAR442168 to address target indications affecting larger
populations of patients with CNS diseases. We have completed our
development efforts under the early development plan and Sanofi isresponsible for further clinical development of this compound in patients
suffering from MS. In February 2020 , Sanofi announced data for its Phase
2b clinical trial in relapsing MS. Specifically, Sanofi announced thatPRN2246/SAR442168 met its primary endpoint, significantly reduced disease
activity associated with MS as measured by MRI and was well tolerated in
the Phase 2b trial with no new safety findings. Sanofi also announced that
it anticipates initiating four Phase 3 clinical trials in relapsing and
progressive forms of MS in the middle of 2020. We hold an option to fund aportion of Phase 3 development costs in return for, at our discretion,
either a profit and loss sharing arrangement within
an additional worldwide royalty that would result in rates up to the
high-teens.
• In
PRN473 Topical, which is being developed for immune-mediated diseases that
could benefit from localized application to the skin. In
initiated a Phase 1 clinical trial of PRN473 Topical, which is anticipated
to be completed in 2020. PRN473 Topical is our third BTK inhibitor in the
clinic, joining rilzabrutinib and PRN2246/SAR442168.
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• We are expanding our wholly owned pipeline by continuing to innovate and
discover differentiated oral or topical small molecules with the potential
to be best-in-class, and we intend to keep our programs at the forefront
of covalent inhibitor drug discovery by investing in new technologies that
will broaden the target space of our Tailored Covalency platform. In
addition, we plan to explore the new biology discovered with our oralimmunoproteasome inhibitors and to select the optimal development path for
these highly differentiated assets.
• As we have done with our collaboration with Sanofi, we plan to selectively
use collaborations and partnerships as strategic tools to maximize the
value of our drug candidates, particularly in indications with large
target patient populations.
Since inception and through December 31, 2019 , we have financed our operations
primarily with proceeds totaling $541.0 million from our initial public offering
("IPO") and a subsequent equity offering in October 2019 , private placements of
our convertible preferred stock and convertible notes and with payments totaling
$110.0 million from license and research collaborations. We received a $30.0
million milestone payment in 2019 and milestone payments totaling $25.0
million in 2018 from our collaboration agreement with Sanofi. In 2017, we
received non-refundable upfront payments of $40.0 million and $15.0 million from
our collaboration agreements with Sanofi and AbbVie, respectively.
In October 2019 , we completed an equity offering of 8,625,000 shares of our
common stock (which included 1,125,000 shares of our common stock issued and
sold pursuant to the underwriters' option to purchase additional shares) at a
price to the public of $28.00 per share. We received net proceeds of
approximately $226.5 million after deducting underwriting discounts and
commissions and estimated offering expenses payable by us.
On September 13, 2018 , our Registration Statement on Form S-1 filed in
connection with our IPO was declared effective by the SEC . In connection with
our IPO, we issued and sold an aggregate of 7,187,500 shares of common stock,
including 937,500 shares issued and sold pursuant to the underwriters' full
exercise of their overallotment option to purchase additional shares, at an
offering price to the public of $17.00 per share. Proceeds from the IPO, net of
underwriting discounts and commissions, were $113.6 million . In connection with
the completion of our IPO in September 2018 , all then outstanding shares of
convertible preferred stock were converted into 15,760,102 shares of common
stock. In addition, warrants to purchase 12,285,434 shares of our convertible
preferred stock were converted into warrants to purchase shares of common stock.
In August 2018 , we sold 3,474,668 shares of Series C convertible preferred stock
at a price of $14.3898 per share for net proceeds of $49.8 million .
As of December 31, 2019 , we held cash, cash equivalents and marketable
securities totaling $367.8 million . We do not have any products for sale and
have not generated any product revenue since our inception. To date, all our
revenue has been generated from payments received from our agreements with
Sanofi and AbbVie. We have incurred significant operating losses since the
commencement of our operations. As of December 31, 2019 , we have an accumulated
deficit of $185.7 million . We expect to continue to incur significant expenses
as we advance our drug candidates and expand our pipeline through clinical
development, the regulatory approval process and, if successful, commercial
launch activities. If after reviewing the Phase 2 data, we elect to exercise our
option to fund a portion of Phase 3 development under the Sanofi Agreement, we
will be required to share in certain development costs. Furthermore, we expect
to incur additional costs associated with operating as a public company. Based
on our planned operations, we believe our cash, cash equivalents and marketable
securities at December 31, 2019 are sufficient to fund our operations for at
least the next 12 months from the issuance date of these financial statements.
Sanofi Agreement
InNovember 2017 , we entered into a strategic collaboration agreement with Sanofi, or the Sanofi Agreement, for an exclusive license to PRN2246/SAR442168 and backup molecules for development in MS and other CNS diseases. Under the Sanofi Agreement, we have completed the Phase 1 trials and Sanofi is taking on all further development activities. We and Sanofi are each responsible for certain early development costs, and Sanofi is responsible for all further development and commercialization costs, subject to our Phase 3 option described below. Sanofi has an exclusive license for PRN2246/SAR442168 and its backups for the CNS field, which includes indications of the central nervous system, retina and ophthalmic nerve. We have agreed not to develop other BTK inhibitors within the CNS field, and Sanofi has agreed not to develop PRN2246/SAR442168 or its backups for any indications outside the CNS field. In the event we cease all development and commercialization of our other BTK inhibitors or unilaterally decide to offer Sanofi a field expansion, Sanofi could expand its field upon a field expansion payment to us, as well as potential milestones payments and royalties within the expanded field. Under the amended Sanofi Agreement, we may receive development, regulatory and commercial milestone payments of up to an aggregate of$765.0 million , as well as royalties up to the mid-teens. We have an option to fund a portion of Phase 3 development costs in return for, at our option, either a profit and loss sharing arrangement withinthe United States , or an additional worldwide royalty that would result in royalties up to the high-teens. Only the additional royalty option would be available if we develop 80 -------------------------------------------------------------------------------- rilzabrutinib for major enumerated indications overseen by theFDA's Division of Pulmonary , Allergy and Rheumatology Products or if we experience a change in control involving certain Sanofi competitors. Royalties are subject to specified reductions and are payable, on a product-by-product and country-by-country basis until the later of the date that all of our patent rights that claim a composition of matter of such product expire in such country, the date of expiration of regulatory exclusivity for such product in such country, or the date that is ten years from the first commercial sale of such product in such country. AbbVie Agreement InJune 2017 , we entered into a collaboration agreement with AbbVie, or the AbbVie Agreement, to research and develop oral immunoproteasome inhibitors and received an upfront payment of$15.0 million . InMarch 2019 , we announced a mutual agreement with AbbVie to end our collaboration and to reacquire rights to the program following an assessment by AbbVie that there was no longer a strategic fit of our highly selective oral immunoproteasome inhibitors' biologic profiles relative to AbbVie's desired disease areas of focus. We and AbbVie agreed to conclude the collaboration effectiveMarch 2019 . There are no further financial obligations between AbbVie and us.
InNovember 2009 andSeptember 2011 , we entered into license agreements with the Regents of theUniversity of California , or the Regents, which were subsequently amended and restated at various dates (the "UC Agreements"). Under the UC Agreements, the Regents have granted to us exclusive, worldwide licenses, with the right to grant sublicenses, under the Regents' patent rights in certain patent applications to make, use, sell, offer for sale, and import products and services and practice methods covered by such patent applications in all fields of use. We have paid the Regents license fees of$40,000 in total under the UC Agreements and are required to pay annual license maintenance fees totaling$40,000 prior to launching any licensed product. We may be obligated to make one-time regulatory and development milestone payments under the UC Agreements for future drug candidates and are obligated to pay tiered royalty payments in the low single digits on net sales of the licensed products. Additionally, we are obligated to pay the Regents payments on non-royalty licensing revenue we receive from our sub-licensees for products covered by UC patents. Pursuant to the UC Agreements, we also made IPO milestone payments to the Regents totaling approximately$140,000 inOctober 2018 . Under the UC Agreements, we are required to diligently proceed with the development, manufacture, regulatory approval, and sale of licensed products which include obligations to meet certain development-stage milestones within specified periods of time and to market the resulting licensed products in sufficient quantity to meet market demand. We have the right and option to extend the date by which we must meet any milestone in one year extensions by paying an extension fee for second and subsequent extension, provided we can demonstrate we made diligent efforts to meet the milestone.
Components of Operating Results
Revenue
To date, all our revenue has been generated from payments pursuant to our collaboration arrangements with Sanofi and AbbVie.
In connection with the Sanofi Agreement, we received a$40.0 million non-refundable upfront payment inDecember 2017 , additional milestone payments totaling$25.0 million in 2018 for successful development activities under the early development plan, and a$30.0 million clinical development milestone payment in 2019 for the initiation of Sanofi's Phase 2b clinical trial of PRN2246/SAR442168. We identified the following performance obligations under our Sanofi Agreement: (i) granting a license of rights to PRN2246/SAR442168, (ii) transferring of technology (know-how) related to PRN2246/SAR442168, and (iii) performance of research and development services related to our responsibilities under the early development plan. We concluded that the delivered license was not distinct at the inception of the arrangement due to our proprietary expertise with respect to the licensed compound and related developmental participation under the agreement, which was required for Sanofi to fully realize the value from the delivered license. Therefore, we combined these performance obligations as one unit of accounting and recognized the$40.0 million upfront payment and the aggregate of$25.0 million in milestone payments ratably over the performance period, which ended as ofDecember 31, 2018 . OnJanuary 1, 2019 , we adopted Accounting Standards Codification ("ASC") No. 2014-09, Revenue from Contracts with Customers, or ASC 606, using the modified retrospective approach. We concluded upon analysis that there is no adjustment necessary to revenue recognized throughDecember 31, 2018 under ASC 606 for the Sanofi Agreement. All deliverables under ASC 605 and all performance obligations under ASC 606 had been completed as ofDecember 31, 2018 . InJune 2019 , we received a$30.0 million milestone payment from Sanofi for achieving a clinical development milestone and recognized the full payment as revenue. For the years endedDecember 31, 2019 , 2018 and 2017, we recognized$30.0 million ,$63.1 million and$1.9 million in revenue from Sanofi, respectively. There was no deferred revenue related to the Sanofi Agreement atDecember 31, 2019 and 2018. 81 -------------------------------------------------------------------------------- In connection with the AbbVie Agreement, we received a$15.0 million non-refundable upfront payment inJune 2017 . Prior to the adoption of ASC 606, we concluded under ASC 605 that the delivered license was not distinct at the inception of the arrangement due to our proprietary expertise with respect to the licensed compounds and related ongoing research participation under the AbbVie Agreement, which was required for AbbVie to fully realize the value from the licensed compound. Therefore, the$15.0 million received related to this combined unit of accounting was recognized as revenue ratably over the performance period, which as ofDecember 31, 2018 , was estimated to continue through the fourth quarter of 2019. OnJanuary 1, 2019 , we adopted ASC 606 using the modified retrospective approach. Upon adoption, the fixed non-refundable and non-creditable upfront payment of$15.0 million received in 2017 was determined to be the transaction price. Revenue was recognized based on a measurement of progress toward the completion of the performance obligation of providing research services for two years, subject to an extension for up to six months. The measurement was calculated using an input-method based on research costs incurred by us during each reporting period compared to the total projected research costs to provide research services by us pursuant to the AbbVie Agreement. Such costs included external direct costs and internal direct labor consisting of the efforts of certain of our employees that dedicated their time providing research services pursuant to the AbbVie Agreement. Based on this methodology, we concluded that under ASC 606, approximately$9.8 million in revenue should be recognized throughDecember 31, 2018 , as compared to$9.4 million under ASC 605. We recorded a cumulative adjustment to decrease accumulated deficit and deferred revenue by$0.4 million as of the adoption date. InMarch 2019 , we and AbbVie agreed to end our collaboration. Therefore, we recognized the remaining balance of the transaction price of$5.2 million in the first quarter of 2019, upon termination of the AbbVie Agreement. Revenue related to AbbVie for the years endedDecember 31, 2019 , 2018 and 2017 was$5.2 million ,$6.0 million and$3.4 million , respectively. There was no deferred revenue related to the AbbVie Agreement atDecember 31, 2019 . Deferred revenue related to the AbbVie Agreement was$5.6 million atDecember 31, 2018 .
Operating Expenses
We classify our operating expenses into two categories: research and development and general and administrative.
Research and Development
Our research and development expenses account for a significant portion of our operating expenses and relate to expenses incurred in connection with research and development activities, including the preclinical and clinical development of our drug candidates. These expenses primarily consist of preclinical and clinical expenses; payroll and personnel expenses, including stock-based compensation, for our research and development employees; consulting costs, laboratory supplies and facilities costs. We expense both internal and external research and development costs as they are incurred. Non-refundable advance payments for services that will be used or rendered for future research and development activities are recorded as prepaid expenses and recognized as an expense as the related services are performed.
Our external research and development expenses consist primarily of:
• expenses incurred with contract research organizations, investigative
clinical trial sites and other vendors involved in conducting our clinical
trials;
• expenses incurred with contract manufacturing organizations for process
development, scale up, as well as manufacturing of drug substance and drug
candidates;
• expenses incurred with third party vendors for performing preclinical
testing on our behalf; and
• consulting fees and certain laboratory supply costs related to the
execution of preclinical studies and clinical trials.
With respect to internal costs, several of our departments support multiple clinical programs, and we do not allocate those costs by clinical program. Internal research and development expenses consist primarily of personnel-related costs, facilities and infrastructure costs, certain laboratory supplies and non-capitalized equipment used for internal research and development activities.
We expect our research and development expenses to increase over the next
several years as we continue to execute on our business strategy, advance our
current programs and expand our research and development efforts, and pursue
regulatory approvals of any of our drug candidates that successfully complete
clinical trials.
General and Administrative
General and administrative expenses consist primarily of payroll and personnel
related expenses, including stock-based compensation, for our personnel in
finance, legal, human resources, business and corporate development and other
administrative functions, professional consulting fees for legal and accounting
services, costs related to our intellectual property and other allocated costs,
such as facility expenses not otherwise allocated to research and development,
and infrastructure costs.
82
-------------------------------------------------------------------------------- We expect our general and administrative expenses to increase as a result of operating as a public company. Additional expenses include those related to compliance with the rules and regulations of theSEC and the Nasdaq Global Market, additional insurance expenses, investor relations activities and other administrative and professional services.
Other Income (Expense), Net
Other income (expense), net, consists primarily of changes in fair value related to the outstanding convertible preferred stock warrant liability and the convertible notes redemption features liability.
Interest Income
Interest income is primarily related to interest earned on our marketable securities.
Interest Expense
Interest expense consists primarily of interest expense related to our debt obligation, and the accretion of non-cash debt discounts related to the beneficial conversion features of our convertible notes, the convertible notes redemption features and the convertible preferred stock warrants.
Results of Operations
Comparison of the Years Ended
The following table summarizes our results of operations for the years ended
Year Ended December 31, Change
2019 2018 $ %
Revenue $ 35,160 $ 69,137 $ (33,977 ) (49 %)
Operating expenses:
Research and development 74,083 40,533 33,550 83 %
General and administrative 19,842 11,462 8,380 73 %
Total operating expenses 93,925 51,995 41,930 81 %
Income (loss) from operations (58,765 ) 17,142 (75,907 ) *
Other income (expense), net - (653 ) 653 *
Interest income 4,973 1,678 3,295 196 %
Net income (loss) $ (53,792 ) $ 18,167 $ (71,959 ) *
* Percentage not meaningful
Revenue
Revenue for the year ended December 31, 2019 was $35.2 million , consisting of a
$30.0 million clinical development milestone payment received in connection with
the Sanofi Agreement and a portion of the upfront payments received in
connection with the AbbVie Agreement. Revenue for the year ended December 31,
2018 was $69.1 million , consisting of a portion of the upfront and additional
payments we received in connection with the Sanofi Agreement and a portion of
the upfront payment received in connection with the AbbVie Agreement.
The clinical development milestone payment of $30.0 million received in 2019
under the Sanofi Agreement was recognized as revenue when earned in the second
quarter of 2019. The aggregate payments of $65.0 million received in 2017 and
2018 under the Sanofi Agreement were recognized ratably over the estimated
performance period ended December 31, 2018 , and we recorded approximately $63.1
million in revenue related to the Sanofi Agreement for the year ended December
31, 2018 .
The nonrefundable upfront payment under the AbbVie Agreement was recognized
ratably over the estimated performance period, and we recorded approximately
$5.2 million and $6.0 million in revenue related to the AbbVie Agreement for the
years ended December 31, 2019 and 2018, respectively.
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Research and Development Expenses
Research and development expenses were$74.1 million for the year endedDecember 31, 2019 , an increase of$33.6 million , compared to$40.5 million for the year endedDecember 31, 2018 . The increase was primarily driven by a$13.7 million increase in personnel related expenses, a$11.4 million increase in external rilzabrutinib program costs due to the initiation of a global Phase 3 trial in pemphigus inNovember 2018 and certain manufacturing campaigns to supply drug products for our rilzabrutinib clinical trials, and a$5.4 million increase in other unallocated research and development expenses, mainly facility costs related to our move to our new office space inFebruary 2019 . The increase in personnel related expenses is due to increased research and development headcount and increased stock-based compensation expenses. The following table summarizes research and development expenses (in thousands): Year Ended December 31, 2019 2018 Rilzabrutinib program external expenses$ 31,683
PRN1371 program external expenses 2,911
1,713
PRN2246/SAR442168 program external expenses 8
616
Preclinical external expenses(1) 4,066
1,623
Personnel related expenses(2) 25,661
11,933
Other unallocated research and development expenses 9,754
4,333
Total research and development expenses$ 74,083 $ 40,533
(1) Preclinical external expenses include external research and development
expenses for all of our preclinical programs. This includes the oral
immunoproteasome program we reacquired from AbbVie in
(2) Personnel related expenses include stock-based compensation expense of
million and
respectively. As our research and development personnel generally support
several of our programs and a significant amount of our internal development
activities broadly support all of our programs, we do not separately track or
allocate our personnel related expenses by program.
General and Administrative Expenses
General and administrative expenses were$19.8 million for the year endedDecember 31, 2019 , an increase of$8.4 million , compared to$11.5 million for the year endedDecember 31, 2018 . The increase was primarily driven by a$7.6 million increase in personnel related expenses due to increased headcount expenses and increased stock-based compensation expenses.
Other Income (Expense), Net
There was no other income (expense), net, for the year endedDecember 31, 2019 . Other expense, net, was$0.7 million for the year endedDecember 31, 2018 and primarily included expense related to the remeasurement and conversion of our preferred stock warrants upon our IPO. 84
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Interest Income
Interest income for the years endedDecember 31, 2019 and 2018 was$5.0 million and$1.7 million , respectively, and consists primarily of interest income earned on our cash, cash equivalents and marketable securities. The increase of$3.3 million is mainly due to higher balances of marketable securities in 2019 as compared to 2018.
Comparison of the Years Ended
The following table summarizes our results of operations for the years ended
Year Ended December 31, Change
2018 2017 $ %
Revenue $ 69,137 $ 5,247 $ 63,890 *
Operating expenses:
Research and development 40,533 25,390 15,143 60 %
General and administrative 11,462 6,443 5,019 78 %
Total operating expenses 51,995 31,833 20,162 63 %
Income (loss) from operations 17,142 (26,586 ) 43,728 (164 )%
Other income (expense), net (653 ) 5,096 (5,749 ) *
Interest income 1,678 16 1,662 *
Interest expense - (7,223 ) 7,223 *
Net income (loss) $ 18,167 $ (28,697 ) $ 46,864 (163 )%
* Percentage not meaningful.
Revenue
Revenue for the year ended December 31, 2018 was $69.1 million , consisting of a
portion of the upfront payment received in connection with the AbbVie Agreement
and a portion of the upfront and additional payments we received in connection
with the Sanofi Agreement. Revenue for the year ended December 31, 2017 was $5.2
million , consisting of portions of the upfront payments received in connection
with the AbbVie Agreement and Sanofi Agreement, which were signed in June and
November 2017 , respectively.
The aggregate payments of $65.0 million under the Sanofi Agreement were
recognized ratably over the performance period, and we recorded $63.1 million
and $1.9 million in revenue related to the Sanofi Agreement for the years ended
December 31, 2018 and 2017, respectively.
The nonrefundable upfront payment under the AbbVie Agreement was recognized
ratably over the estimated performance period, and we recorded
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Research and Development Expenses
Research and development expenses were$40.5 million for the year endedDecember 31, 2018 , an increase of$15.1 million , compared to$25.4 million for the year endedDecember 31, 2017 . The increase was primarily driven by a$9.9 million increase in external rilzabrutinib program costs, a$4.9 million increase in personnel related expenses, and a$1.2 million increase in other unallocated research and development costs, partially offset by a decrease of$0.8 million in costs related to PRN2246/SAR442168. The increase in rilzabrutinib program costs was mainly due to various manufacturing campaigns to supply drug products for our rilzabrutinib clinical trials and the initiation of a global Phase 3 trial in pemphigus inNovember 2018 . The increase in personnel related expenses was mainly due to our R&D headcount increase as we build out our R&D team. The following table summarizes research and development expenses (in thousands): Year Ended December 31, 2018 2017 Rilzabrutinib program external expenses$ 20,315
PRN1371 program external expenses 1,713
1,973
PRN2246/SAR442168 program external expenses 616
1,431
Preclinical external expenses(1) 1,623
1,528
Personnel related expenses(2) 11,933
6,989
Other unallocated research and development expenses 4,333
3,111
Total research and development expenses$ 40,533 $ 25,390
(1) Preclinical external expenses include external research and development
expenses for all of our preclinical programs. This includes the oral
immunoproteasome program we reacquired from AbbVie in
(2) Personnel related expenses include stock-based compensation expense of
million and
respectively. As our research and development personnel generally support
several of our programs and a significant amount of our internal development
activities broadly support all of our programs, we do not separately track or
allocate our personnel related expenses by program.
General and Administrative Expenses
General and administrative expenses were$11.5 million for the year endedDecember 31, 2018 , an increase of$5.0 million , compared to$6.4 million for the year endedDecember 31, 2017 . The increase was primarily driven by an increase in personnel and facility expenses. The increase in personnel costs was related to increased headcount during 2018 as we built out our organization. The increase in facility costs was due to certain rent expense recognition starting fromAugust 1, 2018 , the date when we gained access to our new leased premises, which we commenced occupancy inFebruary 2019 .
Other Income (Expense), Net
Other expense, net, for the year endedDecember 31, 2018 was$0.7 million compared to other income, net, of$5.1 million for the year endedDecember 31, 2017 . Other expense, net, for the year endedDecember 31, 2018 included$0.7 million of expense related to the conversion of our preferred stock warrants upon our IPO. Other income, net, for the year endedDecember 31, 2017 was primarily due to a net change of$5.1 million in 2017 for the fair values of the convertible note redemption features and the fair values of the outstanding convertible preferred stock warrants.
Interest Income
Interest income for the year endedDecember 31, 2018 was$1.7 million , related to our investments in marketable securities. Interest income for the year endedDecember 31, 2017 was insignificant.
Interest Expense
There was no interest expense for the year endedDecember 31, 2018 . Interest expense for the year endedDecember 31, 2017 was$7.2 million , comprised of$5.5 million of debt discounts and$1.7 million of accrued interest expense on the convertible notes, which were converted into preferred stock inDecember 2017 .
Liquidity and Capital Resources
Since inception and throughDecember 31, 2019 , we have financed our operations primarily with proceeds totaling$541.0 million from our IPO and a subsequent equity offering inOctober 2019 , private placements of our convertible preferred stock and convertible notes and with payments totaling$110.0 million from license and research collaborations. As ofDecember 31, 2019 and 2018, we held cash, cash equivalents and marketable securities totaling$367.8 million and$180.6 million , respectively. 86
-------------------------------------------------------------------------------- We do not have any products for sale and have not generated any product revenue since our inception. As ofDecember 31, 2019 , all our revenue has been generated from the non-refundable upfront and milestone payments received from our collaboration agreements with Sanofi and AbbVie. For the years endedDecember 31, 2019 , 2018 and 2017, we recorded a net loss of$53.8 million , net income of$18.2 million and a net loss of$28.7 million , respectively. As ofDecember 31, 2019 , we have an accumulated deficit of$185.7 million , and we do not expect positive cash flows from operations for the foreseeable future. We expect to continue to incur significant expenses and net operating losses as we advance our clinical drug candidates and expand our pipeline, seek regulatory approval and, if successful, proceed to commercial launch activities. Furthermore, we expect to incur additional costs associated with operating as a public company. In addition, we do not yet have a sales organization or commercial infrastructure. Accordingly, we will incur significant expenses to develop a sales organization and/or commercial infrastructure in advance of generating any commercial product sales. As a result, we will need substantial additional capital to support our operating activities. We currently anticipate that we will seek to fund our operations through equity or debt financings or other sources, such as potential collaboration agreements with third parties.
Based on our planned operations, we believe our cash, cash equivalents and
marketable securities at
We have based our projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all of our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:
• the scope, rate of progress, results and costs of research and development
activities, conducting preclinical studies, laboratory testing and
clinical trials for our drug candidates;
• the number and scope of clinical programs we decide to pursue;
• the cost, timing and outcome of regulatory review of our drug candidates;
• the scope and cost of manufacturing development and commercial
manufacturing activities;
• the timing and amount of milestone payments, if any, we receive under the
Sanofi Agreement;
• our ability to maintain existing and establish new, strategic
collaborations, licensing or other arrangements on favorable terms, if at
all;
• the costs of preparing, filing, prosecuting, maintaining, defending and
enforcing our intellectual property portfolio;
• our efforts to enhance operational systems and our ability to attract,
hire and retain qualified personnel, including personnel to support the
development of our drug candidates;
• the costs associated with being a public company; and
• the costs associated with commercialization activities if any of our drug
candidates are approved for sale.
See our "Risk Factors" elsewhere in this report for a description of additional risks associated with our substantial capital requirements.
Cash Flows
The following table summarizes cash flows for each of the periods presented
below (in thousands):
Year Ended December 31,
2019 2018 2017Net cash provided by (used in) operating
activities$ (42,546 ) $ (21,173
)
Net cash used in investing activities (182,623 ) (146,866
) (90 )
Net cash provided by financing activities 230,135 161,941
8,377
Effect of foreign exchange rate changes on
cash, cash
equivalents and restricted cash - - 52
Net increase (decrease) in cash, cash
equivalents and restricted cash$ 4,966 $ (6,098 ) $ 35,187
Net cash provided by (used in) operating activities
During the year endedDecember 31, 2019 , net cash used in operating activities was$42.5 million , which resulted from a net loss of$53.8 million adjusted for changes in operating assets and liabilities and non-cash charges. Non-cash charges included$12.2 million in stock-based compensation and$1.8 million in depreciation and amortization, partially offset by$1.6 million from the 87 -------------------------------------------------------------------------------- amortization of discounts on marketable securities. Changes in operating assets and liabilities included a decrease of$5.2 million in deferred revenue and a decrease of$2.1 million in accounts payable, partially offset by a$6.8 million increase in accrued liabilities. During the year endedDecember 31, 2018 , net cash used in operating activities was$21.2 million , which resulted from net income of$18.2 million adjusted for changes in operating assets and liabilities and non-cash charges. Non-cash charges included$2.8 million in stock-based compensation,$0.6 million related to the change in fair value of the convertible preferred stock warrant liability,$0.7 million for deferred rent and$0.3 million for depreciation and amortization. Changes in operating assets and liabilities included a decrease of$44.1 million in deferred revenue, an increase of$2.2 million in prepaid expenses and other assets, an increase of$1.0 million in accounts payable and an increase of$2.0 million in accrued liabilities. During the year endedDecember 31, 2017 , net cash provided by operating activities was$26.8 million , which resulted from a net loss of$28.7 million adjusted for changes in operating assets and liabilities and non-cash charges. We received nonrefundable upfront payments of$40.0 million and$15.0 million from the Sanofi Agreement and the AbbVie Agreement, respectively. We recorded revenues of approximately$1.9 million and$3.4 million related to Sanofi and AbbVie, respectively, for the year endedDecember 31, 2017 . The remaining$49.8 million was recorded as deferred revenue atDecember 31, 2017 . Other changes in operating assets and liabilities included increases of$1.3 million and$2.0 million in accounts payable and accrued liabilities, respectively, partially offset by a decrease of$0.8 million in prepaid expenses and other current assets. Non-cash charges included debt discount amortization of$5.5 million , the conversion of accrued interest expense of$1.7 million into preferred stock, stock-based compensation and depreciation expenses of$1.0 million and$0.2 million , respectively, partially offset by a$5.1 million net gain related to changes in the fair values of the redemption features liability and convertible preferred stock warrant liability.
Net cash used in investing activities
During the year endedDecember 31, 2019 , net cash used in investing activities was$182.6 million and is primarily the result of purchases in excess of maturities of marketable securities of$180.5 million and purchases of property and equipment of$2.2 million .
During the year ended
During the year ended
Net cash provided by financing activities
During the year endedDecember 31, 2019 , net cash provided by financing activities was$230.1 million , resulting from net proceeds of$226.5 million from the equity offering of our common stock inOctober 2019 and$3.7 million from issuances of common stock upon exercise of options and participation in the employee stock purchase plan. During the year endedDecember 31, 2018 , net cash provided by financing activities was$161.9 million and includes$110.6 million of net proceeds, after deducting underwriting discounts, commissions and offering costs, from our IPO of our common stock,$49.8 million of proceeds from our Series C preferred stock issuance and$1.5 million from the issuance of common stock pursuant to our equity incentive plans. During the year endedDecember 31, 2017 , net cash provided by financing activities was$8.4 million , consisting of$8.1 million of proceeds from the issuance of convertible notes and$0.3 million of proceeds from the issuance of common stock.
Off-Balance Sheet Arrangements
We currently do not have, and did not have during the periods presented, any
off-balance sheet arrangements, as defined under
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as ofDecember 31, 2019 (in thousands): Payments due by period Less Than More Than Total 1 Year 1 to 3 Years 3 to 5 Years 5 Years Operating lease obligations$ 20,432 $ 3,093 $ 6,489 $ 6,917 $ 3,933 88
-------------------------------------------------------------------------------- Our corporate headquarters are located inSouth San Francisco, California , where we lease approximately 47,500 square feet of office, research and development, and laboratory space startingFebruary 2019 , for a seven-year period with an option to extend for another seven-year period, subject to certain conditions. Our previous lease, which expired onJanuary 31, 2019 , was for 30,000 square feet of office, research and development, and laboratory space inSouth San Francisco .
JOBS Act
The JOBS Act permits an "emerging growth company" such as ours to take advantage of an extended transition time to comply with new or revised accounting standards applicable to public companies. We have elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, which extension runs until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. We will remain an emerging growth company until the earliest of (i) the last day of our first fiscal year (a) following the fifth anniversary of the completion of our IPO, (b) in which we have total annual gross revenues of at least$1.07 billion , or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates as of the end of our second fiscal quarter, orJune 30th , exceeds$700.0 million , and (ii) the date on which we have issued more than$1.0 billion in non-convertible debt securities during the prior three-year period.
Critical Accounting Policies, Significant Judgments and Use of Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles inthe United States ("U.S. GAAP"). The preparation of our 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 financial statements, as well as the reported 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.
Revenue Recognition
EffectiveJanuary 1, 2019 , we adopted ASC 606 using the modified retrospective approach. Under this approach, we recorded a cumulative adjustment to decrease accumulated deficit and deferred revenue by$0.4 million as of the adoption date. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies 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 and services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract, determine those that are performance obligations and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. We have entered into licensing and collaboration agreements that are within the scope of ASC 606. In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under such licensing and collaboration agreements, we perform the five-step model under ASC 606. As part of the accounting for these arrangements, we must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. Licenses of Intellectual Property: If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from non-refundable, upfront fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promised goods or services, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, upfront fees. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. 89 -------------------------------------------------------------------------------- Milestone Payments: At the inception of each arrangement that includes development, regulatory and/or commercial milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant reversal of cumulative revenue would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our control or that of our licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received or the underlying activity has been completed. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, we re-evaluate the probability of achievement of such development milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration revenue in the period of adjustment. Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, we have not recognized any royalty revenue resulting from any of our licensing arrangements.
Research and Development Expense Accruals
We accrue and expense research and development expense related to services performed by third parties based upon actual work completed in accordance with agreements established with such third parties. This process involves identifying services that have been performed and estimating the level of service performed and the associated contractual cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we modify our estimates of clinical trial accruals accordingly on a prospective basis. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven timing of payments. To date, we have not experienced any material differences between estimated clinical trial expenses and actual clinical trial expenses.
Stock-based Compensation
We use the Black-Scholes valuation model to estimate the grant date fair value of stock option awards with time-based vesting terms. Stock-based compensation expense is recognized based on the grant date fair value on a straight-line basis over the requisite service period and is reduced for forfeitures as they occur. The determination of fair value for stock-based awards on the date of grant using an option-pricing model requires us to make certain assumptions that represent our best estimates of volatility, risk-free interest rate, expected life and dividend yield. Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized. These assumptions include:
• Risk-Free Interest Rate: We base the risk-free interest rate on the
interest rate payable on
grant, for a period that is commensurate with the assumed expected option
term.
• Expected Term of Options: The expected term of options represents the
period of time options are expected to be outstanding. The expected term
of the options granted is derived from the "simplified" method (that is,
estimating the expected term as the mid-point between the vesting date and
the end of the contractual term for each option).
• Expected Stock Price Volatility: The expected volatility used is based on
historical volatilities of similar entities within our industry for a
period that is commensurate with our expected term assumption.
• Expected Dividend Yield: The estimate for annual dividends is zero because
we have not historically paid and do not expect for the foreseeable future
to pay a dividend.
Options granted to non-employee consultants are re-measured at the current fair
value at the end of each reporting period until the underlying equity
instruments vest. Stock-based compensation expense for non-employee consultants
was insignificant for all periods presented.
90--------------------------------------------------------------------------------
Determination of the estimated fair value of our common stock on grant dates prior to our IPO
Prior to the IPO, the estimated fair value of our common stock was determined by our board of directors, with input from management, considering our most recently available third-party valuations of common stock and our board of directors' assessment of additional objective and subjective factors that it believed were relevant, including factors that may have changed from the date of the most recent valuation through the date of the grant. The factors considered by our board of directors include, but are not limited to: the prices at which we sold shares of our convertible preferred stock to outside investors in arms-length transactions; the rights, preferences and privileges of our convertible preferred stock relative to those of our common stock; our results of operations, financial position and capital resources; current business conditions and projections; the lack of marketability of our common stock; the hiring of key personnel and the experience of management, progress of our research and development activities; our stage of development and material risks related to its business; the fact that the option grants involve illiquid securities in a private company; and the likelihood of achieving a liquidity event, such as an IPO or sale, in light of prevailing market conditions. Subsequent to the IPO, we estimate at the date of grant the fair value of the option to buy our underlying common stock, which is traded publicly on the Nasdaq Global Select Market. We have periodically determined the estimated fair value of our common stock at various dates using contemporaneous valuations performed in accordance with the guidance outlined in theAmerican Institute of Certified Public Accountant's Accounting and Valuation Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation, or the Practice Aid. The Practice Aid identifies various available methods for allocating enterprise value across classes and series of capital stock to determine the estimated fair value of common stock at each valuation date. In accordance with the Practice Aid, our board of directors considered the following methods:
• Option Pricing Method. Under the option pricing method, or OPM, shares are
valued by creating a series of call options with exercise prices based on
the liquidation preferences and conversion terms of each equity class. The
estimated fair values of the preferred and common stock are inferred by
analyzing these options.
• Probability-Weighted Expected Return Method. The probability-weighted
expected return method, or PWERM, is a scenario-based analysis that
estimates value per share based on the probability-weighted present value
of expected future investment returns, considering each of the possible
outcomes available to us, as well as the economic and control rights of
each share class.
For the valuations of our common stock performed in
Our board of directors and management develop best estimates based on application of these approaches and the assumptions underlying these valuations, giving careful consideration to the advice from our third-party valuation specialist. Such estimates involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation expense could be materially different. In determining the estimated fair value of our common stock, our board of directors also considered the fact that our stockholders could not freely trade our common stock in the public markets. Accordingly, we applied discounts to reflect the lack of marketability of our common stock based on the weighted-average expected time to liquidity.
Determination of the fair value of our common stock on grant dates following our IPO
The fair values of each granted option to buy underlying common stock is estimated, based on the price of our common stock as reported by the Nasdaq Global Select Market, at the date of grant.
Stock-based compensation expense was$12.2 million ,$2.8 million and$1.0 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. As ofDecember 31, 2019 , we had$36.2 million of total unrecognized stock-based compensation expenses which we expect to recognize over a weighted-average period of 2.9 years. We have not recognized, and we do not expect to recognize in the near future, any tax benefit related to employee stock-based compensation expense as a result of the full valuation allowance on our deferred tax assets including deferred tax assets related to our net operating loss carryforwards.
Income Taxes
We account for income taxes under the asset and liability method. Deferred tax
assets and liabilities are recognized for future tax consequences attributable
to the differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and net operating loss and
tax credit carryforwards. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Deferred tax
assets and liabilities are measured at the balance sheet
91--------------------------------------------------------------------------------
date using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period such tax rate changes are enacted.
We record uncertain tax positions on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense or benefit. To date, there have been no interest or penalties charged in relation to the underpayment of income taxes. As ofDecember 31, 2019 , our total deferred tax assets were$45.9 million . The realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, we have provided for a full valuation allowance against our deferred tax assets.
Recent Accounting Pronouncements
The information required by this item is included in Note 2, Significant Accounting Policies, to the Consolidated Financial Statements included elsewhere in Part II, Item 8, of this Annual Report on Form 10-K.
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