NGM BIOPHARMACEUTICALS, INC.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this Annual Report. This
discussion contains forward-looking statements that reflect our plans, estimates
and beliefs and involve risks and uncertainties. Our actual results and the
timing of certain events could differ materially from those anticipated in these
forward-looking statements as a result of several factors, including those
discussed in the section titled "Risk Factors" included under Part I, Item 1A
and elsewhere in this Annual Report. See "Special Note Regarding Forward-Looking
Statements" in this Annual Report.
Overview
We are a clinical-stage biopharmaceutical company developing novel therapeutics
based on our scientific understanding of key biological pathways underlying
cardio-metabolic, liver, oncologic and ophthalmic diseases. These diseases
represent leading causes of morbidity and mortality and a significant burden for
healthcare systems. Since the commencement of our operations in 2008, we have
generated a robust portfolio of product candidates. Our most advanced product
candidate, aldafermin, previously known as NGM282, is wholly-owned and entered
Phase 2b development for the treatment of NASH in 2019. Five of our other
product candidates are in Phase 1 clinical trials and our other programs are in
preclinical testing; some of these are subject to our Merck collaboration as
described below.
In February 2015 , we entered into a five-year research collaboration, product
development and license agreement with Merck that allows us to develop multiple
product candidates in parallel without bearing substantially greater costs or
incurring significantly greater risk compared to developing candidates on our
own. Through December 31, 2019 , Merck had paid us $414.5 million , of which $20.0
million was to license NGM313 and related compounds and $394.5 million was
upfront payment and reimbursement of research and development expenses. In March
2019 , Merck exercised its option to extend the collaboration through March 16,
2022 and has the right to extend it again through March 16, 2024 . As part of the
extension through March 16, 2022 , Merck agreed to continue to fund our research
and development efforts at the same levels during the two-year extension period
and, in lieu of a $20.0 million extension fee payable to us, Merck will make
additional payments totaling up to $20.0 million in support of our research and
development activities across 2021 and the first quarter of 2022.
In April 2019 , we completed the IPO of our common stock, in which we issued an
aggregate of 7,521,394 shares of common stock, including 854,727 shares of
common stock issued pursuant to the over-allotment option granted to the
underwriters, at a price of $16.00 per share, before underwriting discounts and
commissions. We received approximately $107.8 million in net proceeds, after
deducting underwriting discounts, commissions and offering expenses of $4.1
million , of which $2.2 million was paid in 2018. The deferred offering costs
were offset against the net proceeds received from the sale of common stock. At
the closing of the IPO, all shares of outstanding convertible preferred stock
were automatically converted to 47,283,839 shares of common stock. Concurrent
with the completion of the IPO, we also issued 4,121,683 shares of common stock
to Merck in a private placement at a price of $16.00 per share for proceeds of
$65.9 million , which resulted in Merck owning approximately 19.9% of our
outstanding shares of common stock.
We have incurred net losses in each year since our inception. Our consolidated
net losses were $42.8 million , $0.5 million and $14.2 million for the years
ended December 31, 2019 , 2018 and 2017, respectively. As of December 31, 2019 ,
we had an accumulated deficit of $196.1 million , of which $6.1 million was a
cumulative effect adjustment to accumulated deficit at January 1, 2019 for the
adoption of Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts
with Customers (Topic 606), and subsequent amendments, under the modified
retrospective approach. Substantially all of our net losses have resulted from
costs incurred in connection with our research and development programs and
general and administrative costs associated with our operations. Our net losses
may fluctuate significantly from quarter to quarter and year to year, depending
on the timing of our clinical trials and our expenses on other research and
development activities.
Since inception, we have funded our operations primarily through the private
placement of convertible preferred stock totaling $295.1 million , net proceeds
from our IPO of $107.8 million , a private placement of shares of common stock to
Merck for $65.9 million , research and development service fees provided by
collaboration partners of $324.7 million , upfront license fees paid by
collaboration partners of $123.0 million and the license of NGM313 and related
compounds to Merck for $20.0 million . We do not have any products approved for
sale and
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-------------------------------------------------------------------------------- do not anticipate generating revenue from product sales for the foreseeable future, if ever. We plan to continue to fund our operations and capital funding needs through public or private equity or debt financings, government or other third-party funding, collaborations, strategic alliances and licensing arrangements or a combination of these. The sale of convertible debt or additional equity could result in additional dilution to our stockholders. Incurring indebtedness would result in debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot assure you that financing will be available in the amounts we need or on terms acceptable to us, if at all. Our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets inthe United States and worldwide resulting from the ongoing COVID-19 pandemic. If we are not able to secure adequate additional funding, we may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible and/or suspend or curtail planned programs. Any of these actions could materially harm our business, results of operations and future prospects. To the extent we obtain additional funding through product collaborations, these arrangements would generally require us to relinquish rights to some of our technologies, product candidates or products, and we may not be able to enter into such agreements on acceptable terms, if at all. We have no manufacturing facilities and all of our manufacturing activities are contracted out to third parties. Additionally, we utilize third-party CROs to carry out certain clinical development activities. Financial Operations Overview
Collaboration Revenue
Our revenue to date has been generated primarily from recognition of license fees and research and development service funding pursuant to our collaboration agreements, the most significant of which is with Merck. Merck is also a significant stockholder and, as such, collaboration revenue from Merck is referred to as related party revenue. We have not generated any revenue from commercial product sales to date. We receive research and development funding pursuant to our Collaboration Agreement and we may also be entitled to receive additional milestone and other contingent payments upon the occurrence of specific events. Due to the nature of this Collaboration Agreement and timing of related revenue recognition, our revenue has fluctuated from period to period in the past and we expect that it will continue to fluctuate in future periods.
The following table summarizes the sources of our collaboration revenue for the
years ended
Year Ended December 31,
2019(1) 2018 2017
Related party revenue:
Recognition of upfront fee $ - $ 18,800 $ 18,800
License revenue - 20,000 -
Collaboration service revenue 103,544 69,865 58,341
Total related party revenue $ 103,544 $ 108,665 $ 77,141 (1) We adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606),
and subsequent amendments, under the modified retrospective approach on
more details.
Research and Development Expenses
Research and development efforts relating to our product candidates include manufacturing drug substance, drug product and clinical trial materials, conducting preclinical testing and clinical trials and providing support for these operations.
Our research and development expenses consist of internal and external costs.
Our internal costs include employee, consultant, facility and other research and
development operating expenses. Our external costs include fees paid to CROs and
other service providers in connection with our clinical trials and preclinical
studies, third party license fees and costs related to acquiring and
manufacturing drug substance, drug product and clinical trial materials.
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Our clinical development efforts are focused on multiple programs. Our lead
product candidate, aldafermin, is the subject of our recently completed Phase 2
and ongoing and planned Phase 2b clinical trials for NASH. We anticipate the
majority of our financial resources outside of the Merck collaboration will be
dedicated to the development of aldafermin for the foreseeable future. We are
also devoting financial resources to the development of NGM395, a product
candidate in our GDF15 receptor agonist program, and may devote financial
resources to other programs in the event Merck does not elect to license these
programs upon completion of a proof-of-concept study or in the event Merck
elects to terminate its license to a program. Additionally, if our research and
development expenses exceed the funding caps provided in our Collaboration
Agreement, which we are anticipating in fiscal year ended December 31, 2020 and
onwards, we could be required to devote our financial resources toward the
development of programs subject to the collaboration.
The aldafermin clinical trials under our Phase 2 protocol include our recently
completed 24-week expansion cohort of aldafermin (Cohort 4) as a double-blind,
placebo-controlled study of once-daily 1 mg aldafermin for the treatment of
patients with fibrosis stage F2 or F3 NASH. We have also initiated the ALPINE
2/3 clinical trial, which is a double-blind, placebo-controlled format testing
0.3 mg, 1 mg and 3 mg daily doses of aldafermin for 24 weeks for the treatment
of patients with fibrosis stage F2 or F3 NASH, and plan to initiate the ALPINE 4
clinical trial of aldafermin for the treatment of F4 NASH patients with
compensated cirrhosis in the first half of 2020. Significant portions of our
research and development resources are focused on these clinical trials and
other work needed to prepare aldafermin for potential regulatory approval for
the treatment of NASH, including manufacturing of clinical trial materials and
preparation for Phase 3 testing of aldafermin in NASH.
Our NGM313 product candidate has completed the SAD and MAD portions of Phase 1
testing in overweight or obese but otherwise healthy adults, as well as a Phase
1b study in obese insulin resistant subjects with NAFLD. Merck exercised its
option to license the NGM313 program in 2018, and all future development
expenses will be paid for by Merck unless we elect to exercise our worldwide
cost and profit sharing option at the commencement of Phase 3 testing, at which
point we would be responsible for a portion of the future development expense.
We have initiated Phase 1 clinical trials for NGM120, NGM217 and NGM621, each of
which is subject to reimbursement under our Merck collaboration up to the
funding caps provided in the Collaboration Agreement. We recently completed a
Phase 1 trial assessing the safety, tolerability and pharmacokinetics of NGM120.
This clinical trial demonstrated that NGM120 was well tolerated at all doses
studied and the pharmacokinetics supported once-monthly dosing. Earlier this
year, we initiated a Phase 1a/1b clinical study with NGM120 in cancer patients
to explore its potential to treat cancer anorexia-cachexia syndrome and,
possibly, tumors. Merck has a one-time option to license NGM120 following
completion of a proof-of-concept study in humans.
We are also conducting a Phase 1 clinical trial of NGM217 to assess safety and
tolerability and to inform dose-range finding for future studies. Thereafter, we
plan to commence a Phase 1b/2a proof-of-concept study in diabetic patients to
assess the ability of the agent to increase insulin production by the pancreas
in the second half of 2020. Merck has a one-time option to license NGM217
following completion of a proof-of-concept study in humans.
We initiated a Phase 1 clinical trial of NGM621 in 2019 to assess the safety and
tolerability of up to two intravitreal injections of NGM621 in patients with GA,
the dry form of AMD. We also plan to initiate a Phase 2 proof-of-concept
clinical trial in the second half of 2020. Merck has a one-time option to
license NGM621 following completion of a proof-of-concept study in humans.
NGM395 and NGM386 comprise our GDF15 receptor agonist program and both were
licensed to Merck at the inception of our collaboration. Substantially all of
the related research and development expenses for these programs were borne
directly by Merck under our Collaboration Agreement. Effective May 31, 2019 ,
Merck terminated its license to the GDF15 receptor agonist program and we
regained full rights to NGM395 and NGM386. Following our assessment of the
NGM386 study results, we decided to suspend activities related to NGM386 and
focus on advancing NGM395. We initiated a Phase 1 clinical trial to assess
safety, tolerability and pharmacokinetics of NGM395 in obese but otherwise
healthy adults in the first quarter of 2020. As a result, we will continue to
incur research and development expenses with respect to NGM395 in the future.
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--------------------------------------------------------------------------------Our research and development expenses related to the development of aldafermin, NGM313, NGM120, NGM217, NGM621 and NGM395 consist primarily of:
• fees paid to our CROs in connection with our clinical trials and other
related clinical trial fees;
• costs related to acquiring and manufacturing drug substance, drug product
and clinical trial materials, including continued testing, such as process
validation and stability, of drug substance and drug product;
• costs related to toxicology testing and other research and preclinical
related studies;
• salaries and related overhead expenses, which include stock-based
compensation and benefits, for personnel in research and development
functions;
• fees paid to consultants for research and development activities;
• research and development operating expenses, including facility costs and
depreciation expenses; and
• costs related to compliance with regulatory requirements.
The process of conducting and supplying materials for preclinical studies and
clinical trials necessary to obtain regulatory approval of our product
candidates is costly and time consuming. We may never succeed in achieving
marketing approval for our product candidates. The success of each product
candidate may be affected by numerous factors, including preclinical data,
clinical data, competition, manufacturing capability, our sales capabilities,
our ability to work effectively with our collaboration partners, regulatory
matters, third-party payor matters and commercial viability.
The following is a comparison of research and development expenses for our
programs, including programs that are subject to our Collaboration Agreement
with Merck, for the years ended
Year Ended December 31,
2019 2018 2017
External research and development expenses:
Aldafermin (FGF19 analog)$ 32,001 $ 15,359 $ 15,126 NGM313 (FGFR1c/KLB agonist) 2,009 3,544 3,948 NGM120 (GFRAL antagonist) 3,414 3,442 3,621 NGM217 (undisclosed) 2,139 2,808 3,764 NGM621 (C3 inhibitor) 4,420 6,791 186 NGM395 (GDF15 analog) 585 701 350
Other external research and development
expenses 17,690 6,670
4,680
Total external research and development
expenses 62,258 39,315
31,675
Personnel-related expenses 38,171 30,908
25,915
Internal and unallocated research and
development expenses(1) 28,824 25,491
22,146
Total research and development expenses
$ 79,736
(1) Internal and unallocated research and development expenses consist primarily
research supplies and consulting fees, which we deploy across multiple
research and development programs.
The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the remainder of the development of our product candidates or the period, if any, in which material net cash inflows from these product candidates may commence. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:
• our ability to hire and retain key research and development personnel;
• whether Merck will elect to license or terminate its license to any of our
programs and the timing of such election or termination;
• the scope, rate of progress, results and expense of our ongoing, as well as
any additional, clinical trials and other research and development
activities; and
• the timing and receipt of any regulatory approvals.
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-------------------------------------------------------------------------------- A change in the outcome of any of the risks and uncertainties associated with the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation. Other significant costs include legal fees relating to patent and corporate matters, facility costs not otherwise included in research and development expenses and fees for accounting and other consulting services. We anticipate that our general and administrative expenses will increase in the future to support our continued research and development activities. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, lawyers and accountants, among other expenses. Additionally, we anticipate increased costs associated with being a public company, including expenses related to services associated with maintaining compliance with Nasdaq listing rules and relatedSEC requirements and insurance and investor relations costs. In addition, we may incur expenses associated with building a commercial organization in connection with, and prior to, potential future regulatory approval of our product candidates. Results of Operations
Comparison of the Years Ended
The following table summarizes our results of operations for the years ended
Year Ended December 31,
2019 2018 Change
Related party revenue
Operating expenses:
Research and development 129,253 95,714 33,539
General and administrative 23,631 17,265 6,366
Total operating expenses 152,884 112,979 39,905
Loss from operations (49,340 ) (4,314 ) 45,026
Interest income 6,692 3,622 3,070
Other income (expense), net (147 ) 199 (346 )
Net loss $ (42,795 ) $ (493 ) $ 42,302
Related Party Revenue. Related party revenue was $103.5 million and $108.7
million for the years ended December 31, 2019 and 2018, respectively. The
decrease of $5.1 million in revenue was primarily due to license revenue of
$20.0 million related to NGM313 in 2018, partially offset by an increase of $9.7
million in reimbursable costs related to research personnel and research and
development activities and an increase $5.2 million in upfront fee revenue due
to the change in revenue recognition methodology associated with the adoption of
ASC 606, which requires the recognition of revenue using the cost-based input
method as opposed to ratable recognition under ASC 605, which was effective
January 1, 2019 .
Research and Development Expenses. Research and development expenses were
$129.3 million and $95.7 million for the years ended December 31, 2019 and 2018,
respectively. The increase in research and development expenses of $33.5 million
was primarily attributable to an increase of $16.6 million in external expenses
driven by ongoing clinical trials for our aldafermin program, $11.0 million for
the acquisition of clinical trial materials, $7.3 million in personnel-related
expenses due to increased headcount and $3.3 million in unallocated research and
development expenses related to early research testing. These increases were
partially offset by a decrease of $4.7 million in other program external
expenses resulting from timing of clinical trial and manufacturing activities.
We expect our research and development expenses to increase substantially in
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connection with our ongoing activities, particularly to the extent that product
candidates whose costs are not borne by our collaborator, such as aldafermin and
NGM395, advance in clinical development.
General and Administrative Expenses. General and administrative expenses were
$23.6 million and $17.3 million for the years ended December 31, 2019 and 2018,
respectively. The increase in general and administrative expenses of $6.3
million was primarily attributable to an increase of $3.4 million in
personnel-related expenses, including stock-based compensation due to increased
headcount and the implementation of the 2019 Employee Stock Purchase Plan ("2019
ESPP"). Further increasing our general and administrative expenses were $2.0
million for consulting expenses, $1.3 million for legal and accounting expenses
and $1.3 million in other miscellaneous general and administrative expenses,
including supplies, travel and rent expenses. These increases were offset by
$1.7 million in allocated overhead expenses from general and administrative
expenses to research and development expenses. We anticipate general and
administrative expenses will continue to increase year over year in connection
with being a public company which may include increased expenses related to
services associated with maintaining compliance with Nasdaq listing rules and
related SEC requirements, insurance and investor relations costs.
Interest Income. Interest income was $6.7 million and $3.6 million for the
years ended December 31, 2019 and 2018, respectively. The increase in interest
income was primarily attributable to an increase in our cash and investments
balance subsequent to the completion of our IPO and private placement in April
2019 .
Comparison of the Years Ended
The following table summarizes our results of operations for the years ended
Year Ended December 31,
2018 2017 Change
Related party revenue
Operating expenses:
Research and development 95,714 79,736 15,978
General and administrative 17,265 14,830 2,435
Total operating expenses 112,979 94,566 18,413
Loss from operations (4,314 ) (17,425 ) (13,111 )
Interest income 3,622 2,358 1,264
Other income (expense), net 199 (152 ) 351
Net loss before taxes (493 ) (15,219 ) (14,726 )
Benefit from income taxes - (1,060 ) (1,060 )
Net loss $ (493 ) $ (14,159 ) $ (13,666 )
Related Party Revenue. Total related party revenue was $108.7 million and
$77.1 million for the years ended December 31, 2018 and 2017, respectively, of
which $18.8 million in both periods was related to the partial recognition of
the upfront payment from Merck in 2015. The increase of $31.5 million in total
revenue was due to an additional $20.0 million of revenue in 2018 recognized
from the $20.0 million received from Merck to license NGM313 and related
compounds and an increase in both reimbursable personnel related expenses and
higher overall external research and development expenses that we incurred in
2018.
Research and Development Expenses. Research and development expenses were $95.7
million and $79.7 million for the years ended December 31, 2018 and 2017,
respectively. The increase in research and development expenses of $16.0 million
was primarily attributable to an increase of $9.2 million in external spend
mainly driven by manufacturing costs of clinical materials related to our NGM621
program, $5.0 million in hiring- and personnel-related expenses and $3.3 million
in unallocated research and development expenses related to early research
testing. These increases were offset by a decrease of $1.5 million in external
expense due to NGM217 program external expenses for manufacturing costs of
clinical materials that occurred in 2017 and timing of clinical trial activities
for our other programs.
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-------------------------------------------------------------------------------- General and Administrative Expenses. General and administrative expenses were$17.3 million and$14.8 million for the years endedDecember 31, 2018 and 2017, respectively. The increase in general and administrative expenses of$2.4 million was primarily due to an increase of$2.8 million in personnel-related expenses,$0.7 million for increased rent expense and increases in professional fees and contract services expenses, including$0.4 million for legal expenses and$0.4 million in audit and tax expenses. These increases were partially offset by$1.9 million in allocated overhead expenses from general and administrative expenses to research and development expenses.
Interest Income. Interest income was
Benefit from Income Taxes. Benefit from income taxes was zero and$1.1 million for the years endedDecember 31, 2018 and 2017, respectively. The benefit from income taxes in 2017 was due to a federal alternative minimum tax credit carryforward that became refundable as a result of the 2017 Tax Cuts and Jobs Act ("2017 Tax Act"). Liquidity and Capital Resources We have incurred losses and negative cash flows from operating activities since our inception. To date, our operations have been financed primarily through the private placement of convertible preferred stock, research and development service fees provided by collaboration partners, primarily Merck, upfront license fees paid by collaboration partners and proceeds from our IPO and concurrent private placement inApril 2019 . As ofDecember 31, 2019 , we had cash and cash equivalents of$245.6 million , short-term marketable securities of$98.9 million , working capital (excluding deferred revenue) of$320.4 million and an accumulated deficit of$196.1 million . We anticipate that we will continue to incur net losses for the foreseeable future as we continue the development of our product candidates, expand our corporate infrastructure to support operations as a public company and conduct pre-commercialization activities. We will require substantial additional capital to achieve our development and commercialization goals for our wholly-owned programs, aldafermin and NGM395, for any future programs that Merck does not opt to license under the Collaboration Agreement and that we choose to develop, for any Merck licensed programs that we opt to co-develop, and for any programs that Merck chooses to license under the Collaboration Agreement and later elects to terminate. Additionally, if our research and development expenses exceed the funding caps provided in our Collaboration Agreement, we could be required to devote our financial resources toward the development of programs subject to the collaboration. If our Merck collaboration were to be terminated, we would require significant additional capital in order to proceed with development and commercialization of our product candidates, or we may enter into additional collaboration or license agreements in order to fund such development and commercialization. We plan to continue to fund our operations and capital funding needs through public or private equity or debt financings, government or other third-party funding, collaborations, strategic alliances and licensing arrangements or a combination of these. The sale of convertible debt or additional equity could result in additional dilution to our stockholders. Incurring indebtedness would result in debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot assure you that financing will be available in the amounts we need or on terms acceptable to us, if at all. Our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets inthe United States and worldwide resulting from the ongoing COVID-19 pandemic. To the extent we obtain additional funding through product collaborations, these arrangements would generally require us to relinquish rights to some of our technologies, product candidates or products, and we may not be able to enter into such agreements on acceptable terms, if at all. If we are not able to secure adequate additional funding, we may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible and/or suspend or curtail planned programs. Any of these actions could materially harm our business, results of operations and future prospects. 117 -------------------------------------------------------------------------------- We believe that our existing cash and cash equivalents, along with amounts available to us under our Collaboration Agreement with Merck, will be sufficient to meet our anticipated cash requirements for at least the next 12 months. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. Cash Flows
The following table shows a summary of our cash flows for the years ended
Year Ended December 31,
2019 2018 2017Net cash provided by (used in):
Operating activities$ (41,174 ) $ (7,597 ) $ (17,413 ) Investing activities 48,723 38,729 (2,796 ) Financing activities 180,751 198 339
Net increase (decrease) in cash and cash
equivalents$ 188,300 $ 31,330
Cash Used in Operating Activities
During the year endedDecember 31, 2019 , cash used in operating activities was$41.2 million , which consisted of a net loss of$42.8 million , adjusted for non-cash charges of$19.6 million and cash used through changes in operating assets and liabilities of$17.9 million . The non-cash charges consisted primarily of stock-based compensation expense of$13.0 million and depreciation expense of$7.6 million . The change in operating assets and liabilities was mainly driven by an increase in related party receivable from collaboration of$1.5 million , increase in prepaid expenses and other current assets of$2.0 million , increase in accounts payable of$3.6 million and increase in accrued expenses and other current liabilities of$8.9 million . These increases were offset by a decrease in deferred rent of$2.7 million and deferred revenue of$24.2 million primarily attributed to both the changes in revenue recognition associated with the adoption of ASC 606 and the timing of advance payments from Merck related to the reimbursement of costs associated with research and development activities. During the year endedDecember 31, 2018 , cash used in operating activities was$7.6 million , which consisted of a net loss of$0.5 million , adjusted for non-cash charges of$16.5 million and cash used through changes in operating assets and liabilities of$23.6 million . The non-cash charges consisted primarily of stock-based compensation expense of$10.0 million and depreciation expense of$7.2 million . The change in operating assets and liabilities was primarily due to an increase in related party receivable from collaboration of$3.7 million under our agreement with Merck, increase in prepaid expenses and other current assets of$4.4 million , increase in accounts payable of$3.5 million and increase in accrued expenses and other current liabilities of$4.1 million . These increases were offset by a decrease in deferred rent and deferred revenue of$2.0 million and$21.1 million , respectively. The decrease in deferred revenue is primarily due to the recognition of upfront fees from Merck and the timing of advance payments from Merck related to the reimbursement of costs associated with research and development activities. During the year endedDecember 31, 2017 , cash used in operating activities was$17.4 million , which consisted of a net loss of$14.2 million , adjusted for non-cash charges of$14.5 million and cash used through changes in operating assets and liabilities of$17.7 million . The non-cash charges consisted primarily of stock-based compensation expense of$7.7 million and depreciation expense of$6.4 million . The change in operating assets and liabilities was primarily due to an increase in prepaid expenses and other current assets of$1.1 million primarily resulting from a federal tax receivable generated as a result of the 2017 Tax Act that was signed into law inDecember 2017 and increase in accrued expenses and other current liabilities of$2.6 million resulting from the timing of payments related to our clinical trial expenses and other research and development activities. These increases were offset by a decrease in related party receivable from collaboration of$2.8 million due to payments received from Merck under the Collaboration Agreement, decrease in accounts payable of$4.2 million , decrease in deferred rent of$1.3 million and decrease in deferred revenue of$16.5 million due to the recognition of revenue related to upfront fees from Merck and the timing of advance payments from Merck related to the reimbursement of costs associated with research and development activities. 118
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Cash Provided by Investing Activities
During the year endedDecember 31, 2019 , cash provided by investing activities was$48.7 million , which consisted of$186.5 million in proceeds from the maturities of marketable securities, partially offset by purchases of marketable securities of$134.3 million and purchases of property and equipment of$3.5 million . During the year endedDecember 31, 2018 , cash provided by investing activities was$38.7 million , which consisted of$178.2 million in proceeds from the maturities of marketable securities, partially offset by purchases of marketable securities of$133.6 million and purchases of property and equipment of$5.8 million . During the year endedDecember 31, 2017 , cash used in investing activities was$2.8 million , which consisted of$217.3 million in purchases of marketable securities and purchases of property and equipment of$6.4 million , partially offset by proceeds from the maturities of marketable securities of$220.9 million .
Cash Provided by Financing Activities
During the year endedDecember 31, 2019 , cash provided by financing activities was$180.8 million , which consisted of net proceeds from issuance of common stock upon completion of our IPO of$110.0 million , issuance of common stock upon completion of the private placement with Merck of$65.9 million , issuance of common stock upon the exercise of previously granted stock options of$3.6 million and issuance of common stock in connection with our 2019 ESPP of$1.3 million . The net proceeds received from the completion of our IPO of$110.0 million included proceeds, after deducting underwriting discounts and commissions, of$111.9 million less offering expenses of$4.1 million , of which$2.2 million was paid in 2018. During the year endedDecember 31, 2018 , cash provided by financing activities was$0.2 million , which consisted proceeds from the issuance of common stock upon the exercise of previously granted stock options of$2.6 million less deferred IPO costs of$2.2 million and repurchases of common stock of$0.2 million . During the year endedDecember 31, 2017 , cash provided by financing activities was$0.3 million , which consisted of proceeds from the issuance of common stock upon the exercise of previously granted stock options. Off-Balance Sheet Arrangements We currently have not entered into and do not have any relationships with unconsolidated entities or financial collaborations, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purpose. Contractual Obligations
Our principal obligations consist of the operating lease for our facilities and
non-cancelable purchase commitments with contract manufacturers or service
providers. The following table sets out, as of
Payments due by period
Less than 1 to 3 4 to 5 More than
1 year years years 5 years Total
Contractual obligations:
Operating lease obligations(1)
- $ 20,885 Total contractual obligations
- $ 20,885 (1) Consists of our corporate headquarters lease encompassing approximately
122,000 square feet of office and laboratory space that expires in December
2023.
We enter into agreements in the normal course of business with CROs, contract
manufacturers and with vendors for preclinical studies and other services and
products for operating purposes that are generally cancelable at any time by us,
upon prior written notice, and may or may not include cancellation fees. Given
that the amount and timing related to such payments are uncertain, they have not
been included in the table above.
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We are obligated to make future payments to third parties under in-license
agreements, including sublicense fees, low single-digit royalties and payments
that become due and payable on the achievement of certain development and
commercialization milestones. As the amount and timing of sublicense fees and
the achievement and timing of these milestones are not probable and estimable,
such commitments have not been included on our consolidated balance sheets or in
the contractual obligations table above.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results
of operations is based on our consolidated financial statements, which we have
prepared in accordance with United States generally accepted accounting
principles ("U.S. GAAP"). The preparation of our consolidated financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of our consolidated financial statements, as
well as revenue and expenses during the reported periods. We evaluate these
estimates and judgments on an ongoing basis. We base our estimates on 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 materially from these estimates under
different assumptions or conditions.
Our significant accounting policies are described in Note 2 to our consolidated
financial statements appearing elsewhere in this Annual Report. We believe that
the following accounting policies are the most critical for fully understanding
and evaluating our financial condition and results of operations.
Revenue Recognition
On
Prior to the adoption of ASC 606, our revenue from collaboration agreements was recognized when we determined that persuasive evidence of an arrangement exists, services had been rendered, the price was fixed or determinable and collectability was reasonably assured. We would record amounts received prior to satisfying the above revenue recognition criteria as deferred revenue until all applicable revenue recognition criteria were met. Revenue allocated to research activities was generally recognized in the period the services were performed, and revenue allocated to licenses was generally recognized on a straight-line basis over the contractual term. Allocations to non-contingent elements were based on the relative selling price of each element using vendor-specific objective evidence or third-party evidence, where available. In the absence of either of these measures, we used the best estimate of selling price for that deliverable. The most significant change to our policies upon the adoption of ASC 606 is the estimation of an arrangement's total transaction price, which includes unconstrained variable consideration, and the recognition of that transaction price based on a cost-based input method that requires estimates to determine, at each reporting period, the percentage of completion based on the estimated total effort required to complete the project and the total transaction price. Given the differences in revenue recognition policies, the revenue recognized in prior years is not strictly comparable to revenue recorded in the year endingDecember 31, 2019 or in future periods (see Recently Adopted Accounting Pronouncements in the consolidated financial statements). The core principle in ASC 606 requires an entity to recognize revenue upon the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We apply the following five-step revenue recognition model outlined in ASC 606 to adhere to this core principle: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) we satisfy a performance obligation. 120 -------------------------------------------------------------------------------- All of our revenue to date has been generated from our collaboration agreements, primarily our Collaboration Agreement. The terms of these agreements generally require us to provide (i) license options for our compounds, (ii) research and development services and (iii) non-mandatory services in connection with participation in research or steering committees. Payments received under these arrangements may include non-refundable upfront license fees, partial or complete reimbursement of research and development costs, contingent consideration payments based on the achievement of defined collaboration objectives and royalties on sales of commercialized products. In some agreements, the collaboration partner is solely responsible for meeting defined objectives that trigger contingent or royalty payments. Often the partner only pursues such objectives subsequent to exercising an optional license on compounds identified as a result of the research and development services performed. We assess whether the promises in our arrangements, including any options provided to the customer, are considered distinct performance obligations that should be accounted for separately. Judgment is required to determine whether the license to a compound is distinct from research and development services or participation in steering committees, as well as whether options create material rights in the contract. The transaction price in each arrangement is generally comprised of a non-refundable upfront fee and unconstrained variable consideration related to the performance of research and development services. We typically submit a budget for the research and development services to the customer in advance of performing the services. The transaction price is allocated to the identified performance obligations based on the standalone selling price ("SSP") of each distinct performance obligation. Judgment is required to determine SSP. In instances where SSP is not directly observable, such as when a license or service is not sold separately, SSP is determined using information that may include market conditions and other observable inputs. We utilize judgment to assess the nature of our performance obligations to determine whether they are satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress toward completion. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. Our collaboration agreements may include contingent payments related to specified development and regulatory milestones or contingent payments for royalties based on sales of a commercialized product. Milestones can be achieved for such activities in connection with progress in clinical trials, regulatory filings in various geographical markets and marketing approvals from regulatory authorities. Sales-based royalties are generally related to the volume of annual sales of a commercialized product. At the inception of each agreement that includes such payments, we evaluate whether the milestones are considered probable of being achieved and estimate the amount to be included in the transaction price by using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our or our customer's control, such as those related to regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation based on a relative SSP basis. At the end of each subsequent reporting period, we re-evaluate the probability of achievement of each such milestone and any related constraint and, if necessary, adjust our estimate of the overall transaction price. Pursuant to the guidance in ASC 606, sales-based royalties are not included in the transaction price. Instead, royalties are recognized at the later of when the performance obligation is satisfied or partially satisfied, or when the sale that gives rise to the royalty occurs. 121 --------------------------------------------------------------------------------
As part of the process of preparing these consolidated financial statements, we are required to estimate and accrue expenses, the largest of which are research and development expenses. This process involves:
• Identifying services that have been performed on our behalf by third-party
vendors and estimating the level of service performed and the associated
cost incurred for the service when we have not yet been invoiced or
otherwise notified of actual cost;
• estimating and accruing expenses in our consolidated financial statements as
of each balance sheet date based on facts and circumstances known to us at
the time; and
• periodically confirming the accuracy of our estimates with selected service
providers and making adjustments, if necessary.
Examples of estimated research and development expenses that we accrue include:
• fees paid to CROs in connection with preclinical studies and clinical trials;
• fees paid to investigative sites in connection with clinical trials;
• fees paid to CMOs in connection with the production of clinical trial
materials; and
• professional service fees for consulting and other services.
We base our expense accruals related to clinical trials on our estimates of the
services received and efforts expended pursuant to contracts with multiple
research institutions and CROs that conduct and manage clinical trials on our
behalf. The financial terms of these agreements vary from contract to contract
and may result in uneven payment flows. Payments under some of these contracts
depend on factors such as the successful enrollment of patients and the
completion of clinical study milestones. Our service providers generally invoice
us monthly in arrears for services performed. In accruing service fees, we
estimate the time period over which services will be performed and the level of
effort to be expended in each period. If we do not identify costs that we have
begun to incur or if we underestimate or overestimate the level of services
performed or the costs of these services, our actual expenses could differ from
our estimates.
All of our clinical trials have been executed with support from CROs and other
vendors. We accrue costs for clinical trial activities performed by CROs based
upon the estimated amount of work completed on each trial. For clinical trial
expenses, the significant factors used in estimating accruals include the number
of patients enrolled, the activities to be performed for each patient, the
number of active clinical sites and the duration for which the patients will be
enrolled in the trial. We monitor patient enrollment levels and related
activities to the extent possible through internal reviews, correspondence with
CROs and review of contractual terms. We base our estimates on the best
information available at the time.
To date, we have not experienced significant changes in our estimates of accrued
research and development expenses after a reporting period. However, due to the
nature of estimates, we cannot assure that we will not make changes to our
estimates in the future as we become aware of additional information about the
status or conduct of our clinical trials and other research activities.
Stock-Based Compensation
Stock-based compensation expense represents the grant-date fair value of employee stock option granted under our 2008 Equity Incentive Plan (the "2008 Plan") and 2018 Equity Incentive Plan (the "2018 Plan") and rights to acquire stock granted under our 2019 ESPP, recognized over the requisite service period of the awards (usually the vesting period) on a straight-line basis, net of estimated forfeitures. OnJanuary 1, 2019 , we adopted ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Non-Employee Share-Based Payment Accounting. Subsequent to the adoption of ASU 2018-07, stock-based compensation expense for non-employee stock-based awards is also measured based on the fair value on grant date with its estimated fair value recorded over the requisite service period of the awards (usually the vesting period) on a straight-line basis, net of estimated forfeitures. 122
-------------------------------------------------------------------------------- We calculate the fair value of stock-based compensation awards using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the use of subjective assumptions, including stock price volatility, the expected life of stock options, risk free interest rate and the fair value of the underlying common stock on the date of grant. Our key assumptions are:
• Expected Stock Price Volatility: The expected volatility is based on the
historical volatility of the common stock of similar entities within our
industry over periods commensurate with our expected term assumption.
• 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 using 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).
• 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 Annual Dividends: The estimate for annual dividends is zero
because we have not historically paid dividends and do not expect to pay
dividends for the foreseeable future.
We recorded stock-based compensation expense related to employees, directors and
nonemployees of $12.9 million , $9.9 million and $7.7 million for the years ended
December 31, 2019 , 2018 and 2017, respectively. As of December 31, 2019 , we had
unrecognized stock-based compensation cost related to options granted to
employees and directors of $24.1 million , net of forfeitures, which is expected
to be recognized as expense over approximately 2.67 years.
Prior to the closing of the Company's IPO, the fair value of the common stock
underlying our share-based awards was estimated on each grant date by our board
of directors. In order to determine the fair value of our common stock
underlying option grants, our board of directors considered, among other things,
timely valuations of our common stock prepared by an unrelated third-party
valuation firm in accordance with the guidance provided by the American
Institute of Certified Public Accountants ("AICPA") Practice Guide, Valuation of
Privately-Held-Company Equity Securities Issued as Compensation. Given the
absence of a public trading market for our common stock historically, our board
of directors exercised reasonable judgment and considered a number of objective
and subjective factors to determine the best estimate of the fair value of our
common stock, including our stage of development; progress of our research and
development efforts; the rights, preferences and privileges of our convertible
preferred stock relative to those of our common stock; equity market conditions
affecting comparable public companies; and the lack of marketability of our
common stock.
After our IPO, the fair market value of each share of underlying common stock is
determined based on the closing price of our common stock as reported by the
Nasdaq Global Select Market on the date of grant.
JOBS Act Accounting Election
We are an "emerging growth company," as defined in the JOBS Act. Under the JOBS
Act, emerging growth companies may delay the adoption of new or revised
accounting standards issued subsequent to the enactment of the JOBS Act until
such time as those standards would otherwise apply to private companies.
The JOBS Act permits an "emerging growth company" such as us to take advantage
of an extended transition time to comply with new or revised accounting
standards as 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 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 earlier to occur of (1)
(a) December 31, 2024 , (b) the last day of the fiscal year in which our annual
gross revenue is $1.07 billion or more, or (c) the date on which we are deemed
to be a "large-accelerated filer," under the rules of the SEC , which means the
market value of our equity
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securities that is held by non-affiliates exceeds
Newly Issued Accounting Pronouncements
Refer to Note 2 of our consolidated financial statements included elsewhere in
this Annual Report on Form 10-K for a summary of recently issued and adopted
accounting pronouncements.
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