The following discussion of our financial condition and results of operations
should be read in conjunction with the unaudited condensed consolidated
financial statements and the related notes to those statements thereto appearing
elsewhere in this Quarterly Report and our audited consolidated financial
statements and related notes thereto included in our Annual Report on Form 10-K
filed with the
Overview
We are a biopharmaceutical company focused on developing and commercializing precision therapies for genetically defined cancers with alterations in mTOR pathway genes. Our lead drug product, FYARROTM, nab-sirolimus, (sirolimus protein-bound particles for injectable suspension), is a form of sirolimus bound to albumin. Sirolimus is a potent inhibitor of the mTOR biological pathway, the activation of which pathway can promote tumor growth, and inhibits downstream signaling from mTOR.
In
In addition to advanced malignant PEComa, based on data from our completed Phase
2 registrational study, Advanced Malignant PEComa Trial ("AMPECT") and our
expanded access program, we have initiated a registration-directed
tumor-agnostic Phase 2 study ("PRECISION 1") of FYARRO in patients with
Recent Developments
• OnJanuary 13, 2022 , we entered into a Negotiated Purchase Order Terms and Conditions for Clinical and Commercial Product (the "FK Agreement") withFresenius Kabi, LLC ("Fresenius Kabi"), pursuant to which Fresenius Kabi will manufacture FYARRO for us, and we will purchase FYARRO as a finished drug from Fresenius Kabi, on a purchase order basis. Under the FK Agreement, which shall be effective throughDecember 31, 2022 (or such later date as may be agreed between the parties in writing), we may purchase FYARRO for either clinical or commercial purposes for use inthe United States andCanada . The price of FYARRO will be fixed, subject to the ability of Fresenius Kabi to increase pricing under specified circumstances. We have an obligation to purchase certain minimum quantities of FYARRO, and failure to purchase those minimum quantities will result in an additional payment from us to Fresenius Kabi. • OnFebruary 22, 2022 , we launched the sale of FYARRO inthe United States and recorded net product sales of$2.3 million . • InFebruary 2022 , we opened PRECISION 1 trial for enrollment inthe United States and the first patient was dosed inMarch 2022 . • InApril 2022 , we received notification of a product-specific, permanent J-code for FYARRO. Under the Healthcare Common Procedure Coding System (HCPCS), the J-code (J9331) will become effective onJuly 1, 2022 . J-codes are permanent, product-specific reimbursement codes assigned to outpatient and physician-administered "buy and bill" products under Medicare Part B and are used by commercial insurers and government payers to facilitate and standardize claims submissions and reimbursements for medications like FYARRO. With the permanent J-code now in effect, all hospital outpatient departments, 25
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ambulatory surgery centers and physician offices inthe United States will have one consistent HCPCS code to standardize the submission and payment of FYARRO insurance claims across Medicare, Medicare Advantage, Medicaid and commercial plans. • OnApril 25, 2022 , we received a formal notice of termination from Gossamer Bio, Inc. ("Gossamer") for the license agreement datedJune 24, 2018 , as amended (the "Gossamer License Agreement"), that was related to Gossamer's GB004 product candidate, a legacy product candidate of our predecessor,Aerpio Pharmaceuticals, Inc. , after announcing that its Phase 2 SHIFT-UC clinical trial studying GB004 in patients with mild-to-moderate active ulcerative colitis did not meet the primary or secondary endpoints at week 12 and the study was being terminated for lack of treatment benefit. The Gossamer License Agreement will terminate, effectiveJuly 24, 2022 . We expect to fully impair the intangible asset,$3.7 million , of which the Gossamer License Agreement for GB004 is the underlying asset, in the second quarter of 2022. • In connection with the termination of the Gossamer License Agreement, the Contingent Value Rights Agreement, dated as ofAugust 26, 2021 (the "CVR Agreement"), pursuant to which the Contingent Value Rights ("CVRs") were issued to legacy holders of common stock ofAerpio Pharmaceuticals, Inc. immediately prior to the Merger (as defined in Note 1 to the condensed consolidated financial statements), will automatically terminate in accordance with its terms and the CVRs will no longer be eligible for payment under the CVR Agreement and will automatically be cancelled and forfeited without any consideration or payment, in each case effectiveJuly 24, 2022 . Celgene License Agreement
In
Under the terms of an
EOC License Agreement
In
In accordance with the Celgene License Agreement, we are required to pay 20% of
all sublicense fees to Celgene. As such, we recognized
During the fourth quarter of 2021, we recognized license revenue and received
Key Trends and Factors Affecting Comparability Between Periods
• Commercial sale of FYARRO was launched onFebruary 22, 2022 for the treatment of patients with advanced malignant PEComa. We recorded net product sales of$2.3 million during the three months endedMarch 31, 2022 . 26
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• We have built a cross-functional commercial team consisting of marketing, market access, commercial operations and continue to build our sales and commercial infrastructure with capabilities designed to scale when necessary to support future commercial launches. Expenses related to our commercial launch including personnel expenses, sales support, and marketing are included in selling, general and administrative expenses for the three months endedMarch 31, 2022 . We expect these expenses will continue to increase, as compared to the prior year, with the launch of FYARRO and preparation for potential future launches. • We continue to build out our research and development team and we expect our research and development costs will increase in 2022, relative to 2021, as a result of significant expenses related to the PRECISION 1 trial which was open to enrollment during the three months endedMarch 31, 2022 , with the first patient dosed inMarch 2022 . • As a public company our expenses have increased from prior year as a privately-held company, including (i) costs to comply with the rules and regulations of theSecurities and Exchange Commission (the "SEC") and those of the Nasdaq Capital Market ("Nasdaq"), (ii) legal, accounting and other professional services, (iii) insurance, (iv) investor relations activities, and (v) other administrative and professional services. • The COVID-19 pandemic has resulted, and is likely to continue to result in, significant national and global economic disruption and may adversely affect our operations. Our clinical trials have been, and may continue to be, affected by the closure of offices, lack of resources or closure of borders, among other measures being put in place around the world. The inability to travel and conduct face-to-face meetings, as well as constraints surrounding hospital infrastructure and staff, can also make it more difficult to enroll and maintain patients in ongoing or planned clinical trials. We are actively monitoring the impact of COVID-19 and the possible effects on our financial condition, liquidity, operations, suppliers, industry and workforce. However, the full extent, consequences and duration of the COVID-19 pandemic and the resulting impact on us cannot currently be predicted. We will continue to evaluate the impact that these events could have on our operations, financial position, results of operations and cash flows in fiscal year 2022.
Liquidity and Capital Resources
As of
Basis of Presentation
The following discussion highlights our results of operations and the principal
factors that have affected our financial condition as well as our liquidity and
capital resources for the periods described and provides information that
management believes is relevant for an assessment and understanding of the
condensed consolidated balance sheets and statements of operations presented
herein. The following discussion and analysis are based on our condensed
consolidated financial statements contained in this Quarterly Report, which we
have prepared in accordance with
Components of Statements of Operations
Revenue
Product Sales, Net
FYARRO was approved by the FDA in
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• Distribution Fees: Distribution fees include distribution service fees paid to the SDs and SP based on a contractually fixed percentage of the wholesale acquisition cost ("WAC"). Distribution fees are recorded as an offset to product sales based on contractual terms at the time the sale is recognized. • Rebates: Allowance for rebates include mandated discounts under the Medicaid Drug Rebate Program and TRICARE program. Rebates are amounts owed after the final dispensing of the product to a benefit plan participant and are based upon contractual agreements or statutory requirements. The allowance for rebates is based on contracted or statutory discount rates and expected utilization by benefit plan participants. Our estimates for expected utilization of rebates are based on utilization data received from the SDs and SP since product launch. Rebates are generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter's activity. If actual future rebates vary from estimates, we may need to adjust prior period accruals, which would affect product sales in the period of adjustment. • Chargebacks: Chargebacks are discounts and fees that relate to contracts with government and other entities purchasing from the SDs and SP at a discounted price. The SDs and SP charge back to us the difference between the price initially paid by the SDs and SP and the discounted price paid to the SDs and SP by these entities. If actual future chargebacks vary from these estimates, we may need to adjust prior period accruals, which would affect product sales in the period of adjustment. • Co-Payment Assistance: We offer co-payment assistance to commercially insured patients meeting certain eligibility requirement. Co-payment assistance is accrued at the time of product sale to the SDs and SP based on estimated patient participation and average co-pay benefit to be paid per a claim. Our estimated amounts are compared to actual program participation and co-pay amounts paid using data provided by third-party administrators. If actual amounts differ from the original estimates the assumptions being applied are updated and adjustment for prior period accruals will be adjusted in the current period. • Product Returns: Consistent with industry practice, we offer the SDs and SP limited product return rights for damages, shipment errors, and expiring product, provided that the return is within a specified period around the product expiration date as set forth in the applicable individual distribution agreement. We do not allow product returns for product that has been dispensed to a patient. As we receive inventory reports from the SDs and SP and have the ability to control the amount of product that is sold to the SDs and SP, we estimate future potential product returns based on the this on-hand channel inventory data and sell-through data obtained from the SDs and SP. In arriving at its estimate, we also consider historical product returns, the underlying product demand, and industry data specific to the specialty pharmaceutical distribution industry.
Grant Revenue
Grant revenue is derived from federal grants, primarily with the FDA. We have determined that the government agencies providing grants to us are not customers. Grant revenue is recognized when there is reasonable assurance of compliance with the conditions of the grant and reasonable assurance that the grant revenue will be received. We recognize grant revenue as reimbursable grant costs are incurred. The costs associated with these reimbursements are reflected as a component of research and development expense in the accompanying statements of operations.
With respect to grant revenue derived from reimbursement of direct out-of-pocket expenses for research costs associated with federal contracts, where we act as principal with discretion to choose suppliers, bear credit risk and perform part of the services required in the transaction, we record revenue for the gross amount of the reimbursement. The costs associated with these reimbursements are reflected as a component of research and development expense in the accompanying statements of operations.
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Operating Expenses
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries and
related benefits, including stock-based compensation, related to our executive,
finance, business development, sales and marketing, and other corporate
functions. Other general and administrative expenses include professional fees
for legal, auditing, tax and business consulting services, insurance costs,
intellectual property and patent costs, facility costs and travel costs. We
expect that selling, general and administrative expenses will increase in the
future as we expand our operating activities. Additionally, we have incurred,
and expect to continue to incur, significant additional expenses associated with
being a public company that we did not incur as a privately-held company,
including (i) costs to comply with the rules and regulations of the
Research and Development Expenses
Research and development expenses, which consist primarily of costs associated with our product research and development efforts, are expensed as incurred. Research and development expenses consist primarily of: (i) employee related costs, including salaries, benefits and stock-based compensation expense for employees engaged in scientific research and development functions; (ii) third-party contract costs relating to research, formulation, manufacturing, nonclinical studies and clinical trial activities; (iii) external costs of outside consultants who assist with technology development, regulatory affairs, clinical development and quality assurance; (iv) payments made under our third-party licensing agreements; and (v) allocated facility-related costs.
Costs for certain activities, such as manufacturing, nonclinical studies and clinical trials are generally recognized based on the evaluation of the progress of completion of specific tasks using information and data provided by our vendors and collaborators. Research and development activities are central to our business. We expect to increase our investment in research and development in order to advance our product candidates through clinical trials. As a result, we expect that our research and development expenses will increase substantially in the foreseeable future as we continue to invest in research and development activities, pursue clinical development of our product candidates and expand our product candidate pipeline.
The process of commercialization and conducting the necessary preclinical and clinical research to obtain regulatory approval is costly and time-consuming. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. Accordingly, to the extent that our product candidates continue to advance into clinical trials, including larger and later-stage clinical trials, our expenses will increase substantially and may become more variable.
Cost of Goods Sold
Cost of goods sold consist primarily of royalties paid to Celgene, costs
incurred on sales of FYARRO and costs to manufacture and prepare the product for
sales subsequent to the FDA approval in
Other Expense, Net
Other expense, net consists of the change in fair value of convertible promissory notes and interest expense related to such notes. These expenses are partially offset by interest income earned on cash and cash equivalents and gain on extinguishment of debt.
Income Tax Expense
During the three months ended
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