You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our audited financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this Annual Report of on Form 10-K titled "Risk Factors." Except as may be required by law, we assume no obligation to update these forward-looking statements or the reasons that results could differ from these forward-looking statements.
Overview
We are a biopharmaceutical company developing and commercializing treatments for potentially life-threatening food allergies. It is estimated that over 30 million people inthe United States andEurope have a food allergy, with peanut allergy being the most prevalent and most commonly associated with severe outcomes and life-threatening events. Patients with food allergies are typically counseled to practice strict dietary avoidance. When accidental exposure to food allergens invokes a serious allergic reaction, rescue therapies, such as antihistamines or injectable epinephrine, are the only recourse available. Our main therapeutic approach, which we refer to as Characterized Oral Desensitized Immunology Therapy, or CODITTM, is designed to desensitize patients to food allergens and thereby reduce the risk of having an allergic reaction upon accidental exposure or reduce symptom severity should an allergic reaction occur. As a result, we believe CODIT could contribute to reducing the burden and anxiety experienced by food-allergic patients and their families. PALFORZIATM (Peanut (Arachis hypogaea) Allergen Powder-dnfp) (formerly AR101) is our lead internally developed product utilizing CODIT and was approved by the FDA for marketing and sale inthe United States inJanuary 2020 . PALFORZIA is indicated for the mitigation of allergic reactions, including anaphylaxis, that may occur with accidental exposure to peanut. PALFORZIA is approved for use in patients with a confirmed diagnosis of peanut allergy. Initial Dose Escalation may be administered to patients aged 4 through 17 years. Up-dosing and maintenance may be continued in patients 4 years of age and older. PALFORZIA is to be used in conjunction with a peanut-avoidant diet. We are currently commercializing PALFORZIA inthe United States through a specialty sales force of approximately 80 Practice Account Managers targeting practicing allergists. We expect to commence commercial sales in the first quarter of 2020. In addition to the approved indication, we are developing PALFORZIA for use in young children aged one to less than four years old in a randomized, double-blind, placebo controlled multinational Phase 3 trial called POSEIDON. We expect to complete enrolment of this trial in the second half of 2020. We also submitted a Marketing Authorization Application, or MAA, for PALFORZIA with theEuropean Medicines Agency , or EMA, inJune 2019 and the application is currently under review. We expect the EMA to issue a decision on the application in the fourth quarter of 2020. We maintain worldwide commercial rights to PALFORZIA and all of our product candidates. If approved in theEuropean Union , or EU, and theUnited Kingdom , we currently intend to commercialize PALFORZIA inEurope by developing a specialty sales force targeting allergy-focused clinicians in major European markets, beginning withGermany . We are developing additional CODIT product candidates beyond peanut allergy. InAugust 2019 , we commenced a Phase 2 clinical trial in subjects with hen egg allergy for our product candidate, AR201, which we expect to be fully enrolled for in the second half of 2020. We are also exploring a product candidate designed to treat multi-nut allergy, including walnut allergy. Since commencing our operations in 2011, substantially all our efforts have been focused on research, development and commercialization of PALFORZIA. We have not generated any revenue from product sales and, as a result, we have incurred significant losses. We incurred net losses of$248.5 million ,$210.8 million and$131.3 million for the years endedDecember 31, 2019 , 2018, and 2017, respectively, and used$195.4 million of cash in operations for the year endedDecember 31, 2019 . As ofDecember 31, 2019 , our accumulated deficit was$724.7 million . We expect to continue to incur losses for the foreseeable future, and we anticipate these losses will increase as we begin to commercialize PALFORZIA and as we continue to develop other product candidates. In February andMarch 2018 , we issued and sold an aggregate of 6,325,000 shares of our common stock in an underwritten public offering at a price to the public of$32.00 per share, including the closing of the full exercise of the underwriters' option to purchase an additional 825,000 shares of common stock. In addition, inNovember 2018 , we sold an additional 3,237,529 shares of our common stock to Nestlé Health Science at a price of$30.27 per share, for aggregate proceeds of$98.0 million . 69 -------------------------------------------------------------------------------- InJanuary 2019 , we entered into a loan agreement with an affiliate of KKR for up to$170.0 million in three tranches. Of the total loan amount,$40.0 million was funded upon the closing of the transaction inJanuary 2019 and$85.0 million was funded inFebruary 2020 upon FDA approval of AR101 and satisfaction of other customary borrowing conditions. The remaining$45.0 million is to be made available at our option in 2020, upon the satisfaction of certain borrowing conditions, including our achievement of aggregate net sales (as defined in the agreement) for PALFORIZA byJuly 31, 2020 in an amount of at least$30.0 million . InFebruary 2020 , we sold Nestlé Health Science an additional 525,634 shares of our Series A Preferred Stock at a price of$319.675 per share and 1,000,000 shares of our common stock at a price of$31.97 per share for aggregate proceeds of$200.0 million . We rely exclusively on theGolden Peanut Company , or GPC, to provide standard food-grade peanut flour pursuant to a long-term exclusive commercial supply agreement. We currently utilize contract manufacturers for all our manufacturing activities. InJune 2015 , we entered into a lease for a manufacturing facility inClearwater, Florida . InJune 2017 , we completed the construction of the manufacturing facility within the leased building, which we intend to handle full-scale cGMP (current Good Manufacturing Practices) commercial production of PALFORZIA and supply future clinical trials of AR101. This manufacturing facility became operational inNovember 2018 . We plan to continue to rely on the contract manufacturer that is located at the same site to manage the operations of this new manufacturing facility. Additionally, we currently utilize specialized clinical vendors, clinical trial sites, consultants, and clinical research organizations, or CROs, to ensure the proper and timely conduct of our clinical trials. We expect to continue to significantly increase our investment in our manufacturing process and commercial organization as we launch PALFORZIA commercially inthe United States and as we prepare for the potential approval of the MAA with the EMA for PALFORZIA.
Credit Agreement with KKR
InJanuary 2019 , we entered into a Credit Agreement withKKR Peanut Aggregator L.P. , an affiliate ofKKR LLC , which we refer to, together with the several banks and other financial institutions from time to time party to the Credit Agreement, collectively as the Lenders, andCortland Capital Market Services LLC , as the administrative agent and the collateral agent, or Agent. The Credit Agreement consists of a six-year term loan facility for an up to aggregate principal amount of$170.0 million , which we refer to as the Term Loans. The Credit Agreement provided for an initial Term Loan of$40.0 million , which was funded inJanuary 2019 . We drew an additional$85.0 million of the Term Loans inFebruary 2020 following FDA approval of PALFORZIA and satisfaction of other customary borrowing conditions. At our option and, subject to the fulfillment of customary conditions precedent, including our achievement of aggregate net sales (as defined in the agreement) for PALFORIZA byJuly 31, 2020 in an amount of at least$30.0 million , we may draw the remaining$45.0 million of the Term Loans. The Term Loans under the Credit Agreement bear interest through maturity, at our election, with respect to (a) ABR Loans, 6.50% per annum and (b) LIBOR Loans, 7.50% per annum. We began accruing interest on the outstanding Term Loans onMarch 31, 2019 , and continue to accrue interest on the outstanding Term loans on the last business day of each March, June, September and December thereafter while any Term Loan is outstanding, as well as on the final maturity date of the Term Loans. For each interest payment date until and including the fiscal quarter endingJune 30, 2020 , we have the option to elect whether the interest payments due on such interest payment date shall be paid in cash or paid in kind and capitalized. We have selected to pay in kind and have the interest capitalized for the year endingDecember 31, 2019 . Principal payments on the Term Loans are paid according to the following schedule: (i) onDecember 31, 2023 , 50.0% of the outstanding principal amount of the Term Loans as of such date, including any capitalized interest, (ii) on each interest payment date thereafter, 12.5% of the outstanding principal amount of the Term Loans as ofDecember 31, 2023 and (iii) onJanuary 3, 2025 , any remaining outstanding balance of the Term Loans. We are also required to make mandatory prepayments of the Term Loans under the Credit Agreement, subject to specified exceptions, with the proceeds of asset sales, debt issuances, royalty transactions, collaboration transactions, and specified other events. In addition, upon the occurrence of a change of control, we must prepay, the outstanding amount of the Term Loans. If all or any of the Term Loans are prepaid or required to be prepaid under the Credit Agreement, then we will pay, in addition to such prepayment, a prepayment premium equal to (i) with respect to any such prepayment paid on or prior toJanuary 3, 2021 , the amount, if any, by which (a) the present value as of such date of determination of (x) 105.00% of the principal amount of the Term Loans prepaid plus (y) all required interest payments that would have been due on the principal amount of the Term Loans prepaid through and includingJanuary 3, 2021 , computed using a discount rate equal to the treasury rate most nearly equal to the period from such date of prepayment toJanuary 3, 2021 plus 50 basis points exceeds (b) the principal amount of the Term Loans prepaid, (ii) with respect to any prepayment paid or required to be paid afterJanuary 3, 2021 but on or prior toJanuary 3, 2022 , 5.00% of the principal amount of the Term Loans prepaid, (iii) with respect to any prepayment paid or required to be paid afterJanuary 3, 2022 but on or prior toJanuary 3, 2023 , 2.00% of the principal amount of the Term Loans prepaid and (iv) with respect to any prepayment paid or required to be prepaid thereafter, 0.00% of the principal amount of the Term Loans prepaid. Upon the prepayment or repayment of all or any of the Term Loans, we will pay an additional (in addition to the prepayment premium) exit fee in an amount equal to 4.00% of the principal amount of the Term Loans prepaid or repaid. In addition, we paid certain customary fees and expenses to the Agent and other service providers upon the closing of the transaction. 70 -------------------------------------------------------------------------------- The obligations under the Credit Agreement are secured by a lien on substantially all of our tangible and intangible property. The Credit Agreement contains certain affirmative covenants, negative covenants and events of default, including, covenants and restrictions that among other things, require us and our subsidiary guarantors to satisfy a minimum cash balance covenant and restricts our ability and each of our subsidiaries' ability to incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, engage in asset sales or sale and leaseback transactions, and declare dividends or redeem or repurchase capital stock. A failure to comply with these covenants could permit the Lenders under the Credit Agreement to declare the Term Loans, together with accrued interest and fees, to be immediately due and payable.
Collaboration with
InNovember 2016 , we entered into a two-year strategic collaboration with an affiliate ofNestle Health Science US Holdings, Inc. for the advancement of food allergy therapeutics and issued and sold toNestle Health Science US Holdings, Inc. (together with its affiliate,Nestle Health Science ) 7,552,084 shares of common stock in a private placement at a price of$19.20 per share, which represented approximately 15.1% of our outstanding shares at the time of the transaction. Subject to certain limited exceptions,Nestle Health Science agreed to a two-year market standoff provision under which it agreed not to sell or transfer any of our common stock or other securities. Subject to certain limited exceptions,Nestle Health Science also agreed to a two-year standstill agreement under whichNestle Health Science agreed not to acquire us through any means. We agreed to register the resale of the shares thatNestle Health Science purchased on a registration statement to be filed with theSEC upon the request ofNestle Health Science , which cannot make the request prior to the 45th day preceding the end of the market standoff provision. The investment and the collaboration do not include any development milestones, product marketing rights or royalties. InNovember 2018 , we entered into an extension of the strategic collaboration on similar terms and issued and sold an additional 3,237,529 shares of our common stock in a private placement at a price of$30.27 per share for aggregate proceeds of$98.0 million , increasing Nestlé Health Science's ownership of Aimmune to approximately 19%. The transaction documents include the extension of the registration rights, standstill rights and market standoff provisions. We are not subject to any partnership, collaboration, or negotiation restrictions under the extension agreements. In addition, we retain all rights to our current and future pipeline assets, and we and Nestlé Health Science expect to continue to collaborate towards the successful development of such assets. The initial investment launched a two-year strategic collaboration, which was extended for an additional two years inNovember 2018 , between us andNestle Health Science , the terms of which enable both parties to discuss our current and future oral immunotherapy development programs through a newly established pipeline forum.Nestle Health Science will provide ongoing scientific, regulatory, and commercial expertise and advice to us through the pipeline forum. Any information disclosed in the collaboration will remain our confidential information, and any new ideas or inventions that arise that relate to our products will be our solely owned intellectual property. If we elect to seek a partner or collaborator for one of our oral immunotherapy development programs during the two-year term of the collaboration,Nestle Health Science will have a three-month period to negotiate exclusively with us. During the term of the collaboration, and for so long asNestle Health Science holds not less than ten percent of our outstanding common stock,Nestle Health Science will be entitled to designate one nominee to serve as a director on our Board of Directors. InNovember 2016 ,Greg Behar joined our Board of Directors on behalf ofNestle Health Science . The strategic collaboration agreement contains a non-competition covenant pursuant to whichNestle Health Science has agreed not to engage in certain activities relating to OIT for the treatment of food allergies.
In
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles, or GAAP, inthe United States . The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates. Our significant accounting policies are more fully described in Note 2 of Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K. 71
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We record expenses for our research and development activities conducted by third-party service providers, which include the conduct of pre-clinical studies and clinical trials, contract manufacturing activities and pre-approval inventory, based upon the estimated amount of services provided and work completed but not yet invoiced and in accordance with agreements established with these third-party service providers. We include these costs in accrued liabilities in the consolidated balance sheets and within research and development expenses in the consolidated statements of operations and comprehensive loss. These costs are a significant component of our research and development expenses. We estimate the amount of work completed through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fee to be paid for such services. We make significant judgments and estimates in determining the accrued balance in each reporting period. As actual costs become known, we adjust our accrued estimates. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed, the number of patients enrolled and the rate of patient enrollment may vary from our estimates and could result in us reporting amounts that are too high or too low in any particular period. Our accrued expenses are dependent, in part, upon the receipt of timely and accurate reporting from clinical research organizations and other third-party service providers. To date, there have been no material differences from our accrued expenses to actual expenses.
Stock-Based Compensation
We recognize compensation costs related to stock options granted to employees and directors based on the estimated fair value of the awards on the date of grant, net of estimated forfeitures. We estimate the grant date fair value using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. The fair value of ESPP is expensed over the purchase period, which is generally six months, on a straight-line basis.
We recorded stock-based compensation expense of
In determining the fair value of the stock-based awards used to calculate stock-based compensation expense, we use the Black-Scholes option-pricing model and assumptions discussed below. Each of these inputs is subjective and generally requires judgment to determine.
• Expected Term. The expected term of stock-bases awards represents the
weighted average period the stock-based awards are expected to be
outstanding. We have opted to use the simplified method for estimating the
expected term as provided by the Securities and Exchange Commission Staff
Accounting Bulletin, or
"plain vanilla". The simplified method calculates the expected term as the
average time-to-vesting and the contractual life of the options. We plan to continue to use the simplified method underSAB 110 until we have sufficient exercise history as a publicly traded company.
• Expected Volatility. As we have limited trading history for our common
stock, the expected stock price volatility assumption is determined based
on the historical volatilities of a group of industry peers as well as the
historical volatility of our own common stock since we began trading
subsequent to our IPO in
public companies in the biopharmaceutical industry with comparable
characteristics including enterprise value, risk profiles and position
within the industry. We intend to continue to consistently apply this
process using the same or similar public companies until a sufficient
amount of historical information regarding the volatility of our own common stock share price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which
case, more suitable companies whose share prices are publicly available
would be utilized in the calculation.
• Risk-Free Interest Rate. The risk-free interest rate is based on the
implied yield available on
the time of grant for periods corresponding with the expected term of the
stock-based award.
• Expected Dividend Yield. We have never paid dividends on our common stock
and have no plans to pay dividends on our common stock. Therefore, we used
an expected dividend yield of zero for all years presented. 72
-------------------------------------------------------------------------------- Restricted Stock Units, or RSUs are measured based on the fair market value of the underlying stock on the date of grant and recognized as expense on a straight-line basis over the employee's requisite service period (generally the vesting period). The weighted-average assumptions used to estimate the fair value of stock options using the Black-Scholes option valuation model and the resulting weighted average grant date fair value of stock options granted were as follows: Year Ended December 31, 2019 2018 2017 Expected term (in years) 6.0 6.0 6.0 Expected volatility 62.4 % 67.8 % 73.1 % Risk free interest rate 2.3 % 2.5 % 2.0 % Dividend yield - - -
Weighted average estimated fair value
In addition to the Black-Scholes assumptions, we estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior and other factors. The impact from any forfeiture rate adjustment would be recognized in full in the period of adjustment, and if the actual number of future forfeitures differs from our estimates, we might be required to record adjustments to stock-based compensation in future periods. We will continue to use judgment in evaluating the expected volatility, expected terms and forfeiture rates utilized for our stock-based compensation expense calculations on a prospective basis. As ofDecember 31, 2019 , we had$48.2 million and$7.9 million of unrecognized stock-based compensation expense related to unvested stock options and stock awards, respectively, which is expected to be recognized over an estimated weighted-average period of 2.7 years and 2.4 years, respectively. For stock options subject to ratable vesting, we recognize stock-based compensation expense on a straight-line basis over the service period for the entire award. In future periods, our stock-based compensation expense is expected to increase as a result of recognizing our existing unrecognized stock-based compensation for awards that will vest and as we issue additional stock-based awards to attract and retain our employees.
Recent Accounting Pronouncements
The information required by this item is included in Note 2, Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Components of Results of Operations
Research and Development Expenses
The largest component of our total operating expenses has historically been our investment in research and development activities. Research and development expenses consist primarily of external-related expenses, employee-related expenses, stock-based compensation expense, and facilities and other costs, which include the following:
• External costs include costs incurred to conduct research, such as the
discovery and development of our product candidates; costs related to the
production of clinical supplies and pre-approval inventory, including fees
paid to contract manufacturers; fees paid to consultants and vendors,
including clinical research organizations in conjunction with implementing
and monitoring our clinical trials and acquiring and evaluating clinical
trial data, including all related fees, such as for investigator grants,
patient screening fees, laboratory work and statistical compilation and
analysis; costs for scientific conferences and meetings; and costs related
to compliance with drug development regulatory requirements.
• Employee-related costs include salaries, bonuses, severance and benefits
for personnel in our research and development functions.
• Stock-based compensation expense is expense associated with our equity
plans for awards to personnel in our research and development functions.
• Facilities and other costs include facilities-related rent, depreciation
and other allocable expenses, which include general and administrative
support functions and general supplies for our research and development
activities. 73
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We recognize all research and development expenses as they are incurred. Clinical trial, contract manufacturing prior to FDA approval and other development costs incurred by third parties are expensed as the contracted work is performed.
General and Administrative Expenses
General and administrative expenses include employee-related costs, stock-based compensation expense, external professional services expenses, and facilities and other costs. Employee-related costs include salaries, bonuses, severance and benefits for personnel in our general and administrative functions, including medical affairs. Stock-based compensation expense is expense associated with our equity plans for awards to personnel in our general and administrative functions. External professional services expenses consist of legal, accounting, and audit services, certain medical affairs related-expenses and other consulting fees. Facilities and other costs consist of allocable expenses, including facilities-related rent and depreciation, from our facilities and information technology departments, which are allocated between research and development and general and administrative functions based on headcount.
Results of Operations
Comparison of the years ended
Year Ended December 31, 2019 2018 $ Change % Change (In thousands) Operating expenses: Research and development$ 123,987 $ 133,420 $ (9,433 ) (7 )% General and administrative 125,817 81,921 43,896 54 % Total operating expenses 249,804 215,341 34,463 16 % Loss from operations (249,804 ) (215,341 ) (34,463 ) 16 % Interest income 5,851 4,984 867 17 % Interest expense (4,916 ) (113 ) (4,803 ) 4250 % Other income (expense), net 1,088 (221 ) 1,309 (592 )%
Loss before provision for income taxes (247,781 ) (210,691 )
(37,090 ) 18 % Provision for income taxes 716 61 655 1074 % Net loss$ (248,497 ) $ (210,752 ) $ (37,745 ) 18 %
Research and Development Expenses
The following table summarizes our research and development expenses incurred
during the years ended
Year Ended December 31, 2019 2018 $ Change % Change (In thousands)
External clinical-related expenses
31,644 27,903 3,741 13 % Stock-based compensation expense 11,245 9,945 1,300 13 % Facilities and other costs 12,836 8,995 3,841 43 % Total research and development$ 123,987 $ 133,420 $ (9,433 ) (7 )% Research and development expenses decreased by$9.4 million for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 , primarily due to decreased external clinical-related expenses, which were partially offset by higher employee-related costs, stock-based compensation expense and facilities and other costs. External costs decreased primarily due to the close-out of certain PALFORZIA clinical trials, including RAMSES, ARC009, ARTEMIS and ARC011, and were partially offset by an increase in manufacturing costs for the production of pre-approval inventory of PALFORZIA as well as costs related to our Phase 2 clinical trial of AR201 in subjects with hen egg allergy. Employee-related costs and stock-based compensation expense increased primarily due to increased headcount to support continued development of PALFORZIA. Facilities and other costs increased primarily due to the allocation of higher facilities and information technology costs, which are allocable from general and administrative to research and development expenses based on headcount. 74 -------------------------------------------------------------------------------- We expect research and development expenses to decrease in the near-term as we continue to close-out PALFORZIA related clinical trials, which we expect to be partially offset by the development of additional CODIT product candidates, including for the treatment of egg allergy and multi-tree nut allergy. Following our receipt of regulatory approval of PALFORZIA inJanuary 2020 , future manufacturing costs will be capitalized as inventory and will subsequently be expensed as costs of goods sold when such inventory is sold.
General and Administrative Expenses
The following table summarizes our general and administrative expenses incurred
during the years ended
Year Ended December 31, 2019 2018 $ Change % Change (In thousands) Employee-related costs$ 44,684 $ 22,949 $ 21,735 95 %
Stock-based compensation expense 21,684 22,787 (1,103 ) (5 )% External professional services
56,168 35,028 21,140 60 % Facilities and other costs 3,281 1,157 2,124 184 %
Total general and administrative
54 % General and administrative expenses increased by$43.9 million for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 , primarily due to increased employee-related costs, external professional services costs and facilities and other costs. Employee-related costs increased primarily due to increased headcount, which was for additional administrative support for the continued buildout of our infrastructure to support the commercialization of PALFORZIA, including the establishment of key commercial functions such as marketing, market access and our field teams and a medical science liaison organization. External professional services costs increased primarily due to consulting services for commercial planning, medical education and grants, and support for PALFORZIA. Facilities and other costs increased due to increased general and administrative costs related to support functions and general supplies for our growing headcount. Stock-based compensation expense decreased primarily due to lower expense from our stock issuance to an affiliate of GPC as a result of lower stock prices in 2019. We expect our general and administrative expenses to continue to increase as we continue to build our commercial infrastructure, including the hiring of additional personnel, and incur expenses related to the commercialization of PALFORZIA. Interest Income Interest income increased by$0.9 million for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 , primarily due to higher interest income resulting from higher average cash, cash equivalents, and investment balances. Interest Expense
Interest expense increased by
Other income (expense), net
Other income (expense), net, increased by
Provision for Income Taxes
The provision for income taxes for the year ended
75
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Comparison of the years ended
Refer to our Annual Report on Form 10-K filed with the
Liquidity and Capital Resources
As ofDecember 31, 2019 , we had cash, cash equivalents and investments of$158.2 million . With the proceeds from Nestlé Health Science's$200.0 million equity investment and the draw of the second loan tranche from KKR of$85.0 million inFebruary 2020 , we anticipate that these financial resources will fully fund us based on our current business plan. In February andMarch 2018 , we issued and sold an aggregate of 6,325,000 shares of our common stock in an underwritten public offering at a price to the public of$32.00 per share, including the closing of the full exercise of the underwriters' option to purchase an additional 825,000 shares of common stock. InNovember 2018 , we sold 3,237,529 shares of our common stock to Nestlé Health Science at a price of$30.27 per share, for aggregate proceeds of$98.0 million . InJanuary 2019 , we entered into a loan agreement with an affiliate of KKR for up to$170.0 million in three tranches. Of the total loan amount,$40.0 million was funded upon the closing of the transaction inJanuary 2019 and$85.0 million was funded inFebruary 2020 upon FDA approval of AR101 and satisfaction of other customary borrowing conditions. The remaining$45.0 million is to be made available at our option in 2020, upon the satisfaction of certain borrowing conditions, including our achievement of aggregate net sales (as defined in the agreement) for PALFORIZA byJuly 31, 2020 in an amount of at least$30.0 million . The loan can be prepaid at our discretion, at any time, subject to prepayment fees. The weighted-average interest rate will be calculated based on the daily cost of borrowing, reflecting the relevant adjusted London Interbank Offered Rate, or LIBOR, or Alternate Base Rate, or ABR plus the applicable margin. We have the option to elect to make interest payments from available funds or make interest payments in kind by capitalizing such interest amounts on the applicable interest payment date by adding the amounts to the outstanding principal amount of the loan. Any capitalized amounts shall thereafter bear interest. The Company has selected to pay in kind and have the interest capitalized for the year endingDecember 31, 2019 . InFebruary 2020 , we sold Nestlé Health Science an additional 525,634 shares of our Series A Preferred Stock at a price of$319.675 per share and 1,000,000 shares of our common stock at a price of$31.97 per share for aggregate proceeds of$200.0 million . With FDA approval inJanuary 2020 , we expect to commence commercial sales in the first quarter of 2020. Until such time that we can generate substantial revenue from product sales, if ever, we expect to finance our operating activities with existing cash and investment and through a combination of equity offerings and debt financings and we may seek to raise additional capital through strategic collaborations. However, we may be unable to raise additional funds or enter into such arrangements when needed on favorable terms, or at all, which would have a negative impact on our financial condition and could force us to delay, limit, reduce or terminate our development programs or commercialization efforts or grant to others rights to develop or market product candidates that we would otherwise prefer to develop and market ourselves. Failure to receive additional funding could cause us to cease operations, in part or in full. Furthermore, even if we believe we have sufficient funds for our current or future operating plans, we may seek additional capital due to favorable market conditions or strategic considerations. We expect to incur continued expenditures in the future in connection with the expansion of ourU.S. commercial infrastructure and sales force in connection with commercializing PALFORZIA inthe United States . In addition, we intend to continue to make investments in the development of AR201 to treat egg allergy and explore other product candidates.
Summary Statement of Cash Flows
Comparison of the years ended
Year Ended December 31, 2019 2018 Change (In thousands) Net cash provided by (used in): Operating activities$ (195,408 ) $ (169,128 ) $ (26,280 ) Investing activities 111,899 (96,010 ) 207,909 Financing activities 55,878 299,162
(243,284 )
Net change in cash and cash equivalents
76
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Net cash used in operating activities was$195.4 million for the year endedDecember 31, 2019 , an increase of$26.3 million from$169.1 million for the year endedDecember 31, 2018 . This increase was primarily due to higher net loss from operations resulting from increased general and administrative expenses.
Net Cash Provided By Investing Activities
Net cash provided by investing activities was$111.9 million for the year endedDecember 31, 2019 , an increase of$207.9 million from net cash used in investing activities of$96.0 million for the year endedDecember 31, 2018 . The increase was primarily due to the timing of net maturities of various investments and capitalized assets.
Net Cash Provided By Financing Activities
Net cash provided by financing activities was$55.9 million for the year endedDecember 31, 2019 , a decrease of$243.3 million from$299.2 million for the year endedDecember 31, 2018 . The decrease was primarily due to 6,325,000 shares issued and sold during our public offering inFebruary 2018 , which was partially offset by our net debt borrowing under the KKR agreement of$36.1 million inJanuary 2019 .
As of
Comparison of the years ended
Refer to our Annual Report on Form 10-K filed with the
Contractual Obligations and Other Commitments
The following table summarizes our future contractual obligations as ofDecember 31, 2019 : Years Total Less than 1 1-3 3-5 More than 5 (In thousands) Operating leases$ 17,506 $ 3,772 $ 7,868 $ 5,639 $ 227 Capital lease 78 34 44 - - Long-term debt (1) 44,004 - - 44,004 - Other purchase commitments and obligations (2), (3), (4), (5) 52,389 11,892 18,592 18,875 3,030 Total contractual obligations$ 113,977 $ 15,698 $ 26,504 $ 68,518 $ 3,257
(1) In
for up to
million was funded upon the closing of the transaction. The loan can be prepaid at our discretion, at any time, subject to prepayment fees. The weighted-average interest rate is calculated based on the daily cost of borrowing, reflecting the relevant adjusted LIBOR Rate or ABR plus the
applicable margin. We have the option to elect to make interest payments from
available funds or make interest payments in kind by capitalizing such
interest amounts on the applicable interest payment date by adding the
amounts to the outstanding principal amount of the loan. Any capitalized
amounts shall thereafter bear interest. The Company selected to pay in kind
and have the interest capitalized for the year ending
InFebruary 2020 ,$85.0 million was funded following FDA approval of PALFORZIA and satisfaction of other customary borrowing conditions. The remaining$45.0 million is to be made available at our option in 2020, upon the satisfaction of certain borrowing conditions, including our achievement of aggregate net sales (as defined in the agreement) for PALFORIZA byJuly 31, 2020 in an amount of at least$30.0 million .
(2) We purchase standard food-grade peanut flour from
GPC, a wholly-owned subsidiary of Archer Daniels Midland, pursuant to a
long-term exclusive commercial supply agreement, which was expanded and
extended in
products to any third party worldwide for use in OIT for the treatment or
cure of peanut allergy, provided that we are in compliance with our exclusive
purchase obligation and meet specified annual purchase commitments. The
restated agreement remains in effect until ten years after the first delivery
to us of peanut flour for commercial use and includes an option for us to
extend the term for an additional five years. In connection with the
expansion and extension of the agreement, we issued Archer Daniels Midland
Company 300,000 shares of our common stock, vesting over a 3.5-year period.
77 -------------------------------------------------------------------------------- Pursuant with the restated agreement, our purchase obligation commences with the first delivery of peanut flour for commercial use, which occurred in 2019. The aggregate purchase commitment under this agreement would be$5.6 million over a term of nine years.
(3) In
protein with
access to the clinical and commercial use of
any egg allergy treatment, prevention or cure for a period of up to 15 years
beyond the potential approval of AR201.
(4) In
Supply Agreement, pursuant to which
commercial supply of PALFORZIA, if approved. Under the Commercial Supply
Agreement, we are required to purchase a minimum percentage of our PALFORZIA
commercial supply requirements in each of the first six years of the
Commercial Supply Agreement, subject to certain conditions and restrictions,
ranging from 100% in 2019 and decreasing to a majority in 2024.We are also
required to purchase a minimum percentage or our PALFORZIA supply
requirements for release testing in each of the first six years of the
Commercial Supply Agreement, ranging from 100% in 2019 and decreasing to a
significant majority in 2024. As of
purchase commitment under this agreement would be
term of the Commercial Supply Agreement began upon execution of the
Commercial Supply Agreement and will continue until
Commercial Supply Agreement then automatically renews for
successive two-year terms, unless earlier terminated pursuant to its terms,
or upon either party's notice of termination to the other.
(5) In
Commercial Packaging Agreement, with
PCI of
accordance with our specifications, applicable laws and the terms and
conditions of the Commercial Packaging Agreement. The initial term of the
Commercial Packaging Agreement is for four contract years following the
effective date. Contract Year one means the period beginning on the effective
date of the Commercial Packaging Agreement and ending on
Each contract year thereafter is the 12-month period from
for one-year terms after the end of the Initial Term unless and until one
party gives the other party at least three (3) years prior written notice of
its desire to terminate as of the end of the then-current term, or is
otherwise terminated in accordance with the other terms of the Commercial
Packaging Agreement. As of
commitment under this agreement would be$3.0 million . InFebruary 2020 , we entered into a license agreement, or the License Agreement, with Xencor, Inc., or Xencor, for the exclusive, worldwide, royalty-bearing license for the development, manufacture and commercialization of biopharmaceutical products containing or comprising the humanized monoclonal antibody AIMab7195 (formerly XmAb7195) or certain variants of AIMab7195, each of which is referred to as an AIMab7195 Product. We will be solely responsible for costs related to the development of AIMab7195. We are obligated to pay Xencor an aggregate of up to$380.0 million in milestone payments, which includes$17.0 million in development milestones,$53.0 million in regulatory milestones and$310.0 million in sales milestone, and to issue an additional number of shares of our Common Stock having an aggregate value of$5.0 million in connection with the achievement of the first development milestone with respect to an AIMab7195 Product. We will also pay a royalty to Xencor equal to a percentage of net sales of AIMab7195 Products in the high single-digit to mid-teen range. Our contractual obligations under the License Agreement are not reflected in the table above.
In connection with our entry into the License Agreement, we also agreed to
assume Xencor's rights and obligations under its license of the AIMab7195 cell
line from
We enter into agreements in the normal course of business with vendors for other services and products for operating purposes, including contract research organizations for clinical trials and vendors for manufacturing-related expenses, which are cancelable at any time by us, generally upon 30 days prior written notice. These payments are not included in this table of contractual obligations.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements and do not have variable interests in variable interest entities.
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