AIMMUNE THERAPEUTICS, INC. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part 1, Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and related notes thereto for the year endedDecember 31, 2019 , included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSecurities and Exchange Commission onFebruary 27, 2020 . This discussion and other parts of this report 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 report 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 Desensitization Immunology Therapy, or CODITTM, is designed to desensitize patients to food allergens and thereby reduce the risk of having an allergic reaction upon allergen 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, after 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 commenced 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 submitted a Marketing Authorization Application, or MAA, for PALFORZIA with theEuropean Medicines Agency , or EMA, inJune 2019 and the application is currently under review. 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. Regarding our multi-tree nut program, we recently had a positive pre-investigational new drug meeting with the FDA, which helped define a clear path forward for clinical development. Since commencing our operations in 2011, substantially all of our efforts have been focused on research, development and commercialization of PALFORZIA. We started generating revenue from product sales in the first quarter of 2020, and, as a result, we have incurred significant losses in the past. We incurred net losses of$86.4 million and$54.3 million for the quarters endedMarch 31, 2020 and 2019, respectively, and used$71.8 million of cash in operations for the quarters endedMarch 31, 2020 . As ofMarch 31, 2020 , our accumulated deficit was$811.1 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 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 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 PALFORZIA byJuly 31, 2020 in an amount of at least$30.0 million . 21
-------------------------------------------------------------------------------- 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 gross 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, if approved, 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 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 of PALFORZIA commercially inthe United States and as we prepare for the potential approval of the MAA with the EMA for PALFORZIA.
COVID-19 Update
To date, COVID-19 has had, and may continue to have, an adverse impact on our operations and the commercialization of PALFORZIA, our clinical trials, as well as on our clinical trial material distribution system and our expenses, including as a result of preventive and precautionary measures that we, other businesses and governments are taking. In particular, we have experienced significant business disruptions, including delaying the commercialization of PALFORZIA inthe United States as a result of a reduction in access to our customers due to the reduced business hours of medical facilities as local, state, federal, and foreign governments institute prolonged shelter-in-place and/or self-quarantine mandates. Under the Risk Evaluation and Mitigation Strategy, or REMS, for PALFORZIA, the first dose of each up-dosing level must be administered in a certified healthcare setting and, due to the strains placed on the providers of healthcare services by COVID-19, including shelter-in-place restrictions, many patients are not able to access physicians in a manner sufficient to commence treatment with PALFORZIA. Similarly, patients who have commenced treatment, but who have not yet advanced through the up-dosing phase, have been restricted from accessing the necessary healthcare settings and, as a result, are being maintained at their existing dose levels. Formulary adoption conversations with payers regarding PALFORZIA are proceeding virtually. As ofApril 30, 2020 , there were 15 plans inthe United States that have either interim or permanent policies written that cover PALFORZIA. These plans cover approximately 43 million lives. The Company anticipates that these interactions will continue and lead to additional formulary coverage decisions by payers later this year. However, the impact of the COVID-19 pandemic on formulary coverage for PALFORZIA is hard to assess due the rapidly evolving nature of the situation and it is possible that formulary coverage may be delayed. Until the product is formally covered on formularies, allergists can initiate patients on treatment via the use of the medical exception processes provided by payers. In regards to clinical trials of PALFORZIA, our POSEIDON (ARC005) Phase 3 clinical trial to explore the efficacy and safety of PALFORZIA in young peanut-allergic children ages 1 to <4 years is ongoing although enrollment has paused. Assuming clinical sites are able to resume operations and enroll patients, we expect to complete enrollment in the second half of 2020 and data in the first half of 2021. However, the impact of the COVID-19 pandemic on the timing of study enrollment and completions is hard to assess due the rapidly evolving nature of the situation and it is possible that the study enrollment and completion may be delayed. In regards to AR201, while we saw an increase in enrollment in our Phase 2 clinical trial in the first quarter of 2020, we experienced a significant decline in enrollment following the spread of COVID-19 inthe United States . As a result, as a cost saving measure and in light of the ongoing impacts of COVID-19, we have decided to end enrollment in the study. For those patients who had enrolled in the clinical trial and begun receiving treatment, we are continuing to deliver maintenance doses of AR201, and all patients presently enrolled in the study will be able to complete the trial once possible. We then intend to review the data from these subjects and determine the best path forward. We also follow FDA guidance on clinical trial conduct during the COVID-19 pandemic, including the remote monitoring of clinical data. In regards to our supply chain and distribution model, we have initiated direct-to-patient shipment of clinical trial materials inEurope and, more recently, inthe United States , to permit uninterrupted supply of clinical trial materials to our clinical trial subjects. This measure became necessary as clinical trial subjects were unable to visit their physician offices to receive re-supply of clinical trial materials due to the COVID-19 pandemic. Other than this shift in our distribution model for clinical trial materials, there have been no disruptions in our supply chain of drug manufacturers necessary to conduct our clinical trials and we believe that we will be able to supply the clinical material needs of our ongoing clinical studies. In addition, our supply chain for PALFORZIA has not been significantly impacted to date by the COVID-19 pandemic. Further, we do not believe that the pandemic has to date caused, or will going forward cause, a significant delay in the review and potential approval of our MAA by the EMA or our MAA by Swissmedic. 22
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As a result, we expect a standard overall review period for our MAA for PALFORZIA with a target action date in the fourth quarter of 2020. We also believe the Swissmedic review of PALFORZIA is ongoing and remains on track. The target action date is mid-2021.
We cannot at this time predict the specific extent, duration or full impact that the COVID-19 pandemic will have on our financial condition and results of operations. The impact of the COVID-19 pandemic on our financial performance will depend on future developments, including the duration and spread of the COVID-19 pandemic and related governmental advisories and restrictions. These developments and the impact of COVID-19 on the financial markets and the overall economy are also highly uncertain. If the financial markets and/or the overall economy are impacted for an extended period, our business, financial condition, results of operations and prospects may be adversely affected. In lateFebruary 2020 , our executive leadership team began to closely monitor the evolving COVID-19 crisis and advise on our response. In alignment with public health guidance designed to slow the spread of COVID-19, as ofmid-March 2020 , we implemented a remote work plan for all employees. We are supporting all of our employees by leveraging virtual meeting technology and encouraging employees to follow local health authority guidance. We may need to undertake additional actions that could impact our operations as required by applicable laws or regulations, or which we determine to be in the best interests of our employees.
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 condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles, or GAAP, inthe United States . The preparation of these condensed 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 revenue, costs and expenses recognized 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. There have been no new policies or significant changes to our critical accounting policies as disclosed in the critical accounting policies described in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , except as noted below. Our significant accounting policies are more fully described in Note 2 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Revenue Recognition
Pursuant to Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers, or ASC 606, we recognize revenue upon transfer of control of promised goods or services, in an amount that reflects the consideration to which we are entitled to in exchange for those goods or services. We calculate gross product revenues based on the price that we charge to the specialty pharmacies and distributors inthe United States , which we refer to herein as Customers. We estimate our domestic net product revenues by deducting from our gross product revenues: (a) trade allowances, such as distribution fees and discounts for prompt payment; (b) estimated government rebates and chargebacks; (c) certain other fees paid to specialty pharmacies, distributors and commercial payors; and (d) product returns. Discounts and allowances are complex and require significant judgment by management. Management assesses estimates each period and updates them to reflect current information. We initially record estimates for these deductions at the time we recognize the related gross product revenue, and revise these estimates in subsequent period as needed, resulting in net product revenue recognized. We base our estimates for the expected utilization on customer and payer data received from the specialty pharmacies and distributors and historical utilization rates as well as third-party market research data.
Inventories
Prior to regulatory approval of our product candidates, expenses incurred to manufacture drug products are recorded as research and development expense. Beginning in the first quarter of 2020, we began to capitalize inventory costs associated with PALFROZIA supply when it was determined that the inventory had a probable future economic benefit concurrent with FDA approval inJanuary 2020 . Inventory costs are determined using the standard cost methodology, and this methodology approximates actual cost determined using a first-in, first-out, or FIFO, basis cost flow assumption for the purposes of matching such costs to the related product sale. We periodically review our inventories for excess amounts or obsolescence and write down obsolete or otherwise unmarketable inventory to the estimated net realizable value. Our assessment of estimated excess, obsolete and non-sellable inventories are based on 23
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assumptions about future demand, past usage, changes to manufacturing processes and overall market conditions, and also consider future firm purchase commitments, which require management to utilize judgement in formulating estimates and assumptions that we believe to be reasonable under the circumstances.
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies of the Notes to Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for additional information.
Components of Results of Operations
Product Revenue, Net
Our product revenue, net consists of
Cost of Revenue Cost of revenue relates to sales of PALFORZIA, which began inMarch 2020 . Cost of revenue consists primarily of direct and indirect costs related to the manufacturing of PALFROZIA units sold, including raw materials, third-party contract manufacturing and packaging costs, freight costs, storage costs, allocation of overhead costs of employees involved with production of PALFORZIA and fixed costs to our contract manufacturers, if any, for anticipated shortfall in product demand relative to committed volumes. Prior to regulatory approval of PALFORZIA, expenses incurred to manufacture PALFORZIA were recorded as research and development expense.
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 equityplans 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.
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.
Selling, General and Administrative Expenses
Selling, 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 marketing expenses related to commercial launch preparation and
execution. 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.
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--------------------------------------------------------------------------------Results of Operations
Comparison of the Quarters Ended
Quarter Ended March 31,
2020 2019 $ Change % Change
(In thousands)
Product revenue, net $ 575 $ - $ 575 *
Costs and operating expenses:
Cost of revenue 257 - 257 *
Research and development 36,463 31,316 5,147 16 %
Selling, general and administrative 49,138 23,712 25,426 107 %
Total costs and operating expenses 85,858 55,028 30,830 56 %
Loss from operations (85,283 ) (55,028 ) (30,255 ) 55 %
Interest income 978 1,901 (923 ) (49 )%
Interest expense (2,229 ) (1,144 ) (1,085 ) 95 %
Other income, net 221 34 187 550 %Loss before provision for income taxes (86,313 ) (54,237 )
(32,076 ) 59 % Provision for income taxes 119 29 90 310 % Net loss$ (86,432 ) $ (54,266 ) $ (32,166 ) 59 % *Percentage not meaningful Product Revenue, Net: The following table summarizes our product revenue during the quarters endedMarch 31, 2020 and 2019: Quarter Ended March 31, 2020 2019 $ Change % Change (In thousands) Product revenue, net $ 575 $ -$ 575 * *Percentage not meaningful
Product revenue consists of sales of PALFORZIA, which was approved by FDA in
Cost of Revenue:
The following table summarizes our cost of revenue expenses incurred during the
quarters ended
Quarter Ended March 31,
2020 2019 $ Change % Change
(In thousands)
Cost of revenue $ 257 $ - $ 257 *
*Percentage not meaningful
Cost of revenue during the quarter ended March 31, 2020 consists of costs
associated with product shipments as well as the cost for the write-off of one
manufacturing lot, which did not meet our stringent manufacturing
specifications. Prior to regulatory approval of PALFORZIA, we incurred expenses
to manufacture PALFORZIA, which were recorded as research and development
expense. We expect to sell inventory previously expensed to research and
development over approximately the current year, and accordingly we expect our
costs of product sales of PALFORZIA to increase as a percentage of net sales in
future periods as we produce and sell inventory that reflects the full cost of
manufacturing the product. Discrete period costs such as those incurred in the
first quarter of 2020 are difficult to predict and will be recorded as incurred.
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Research and Development Expenses
The following table summarizes our research and development expenses incurred
during the quarters ended
Quarter Ended March 31,
2020 2019 $ Change % Change
(In thousands)
External clinical-related expenses
$ 3,842 22 % Employee-related costs 8,431 8,275 156 2 % Stock-based compensation expense 4,061 2,743 1,318 48 % Facilities and other costs 2,365 2,534 (169 ) (7 )%
Total research and development expenses
$ 5,147 16 % Research and development expenses increased by$5.1 million for the quarter endedMarch 31, 2020 , compared to the quarter endedMarch 31, 2019 , primarily due to increased external clinical-related and stock-based compensation expenses. External clinical-related expenses increased primarily due to the$10.0 million equity and cash upfront payments to Xencor inFebruary 2020 under our development arrangement for AIMab7195. This increase was partially offset by decreased clinical trial costs primarily due to the close-out of certain PALFORZIA clinical trials and decreased manufacturing costs as we began capitalizing costs for inventory upon FDA approval of PALFORZIA. Stock-based compensation expenses increased as a result of the vesting of RSUs granted to certain key employees based on the achievement of certain regulatory approvals for PALFORZIA. 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.
Selling, General and Administrative Expenses
The following table summarizes our selling, general and administrative expenses
incurred during the quarters ended
Quarter Ended March 31,
2020 2019 $ Change % Change
(In thousands)
Employee-related costs $ 20,527 $ 8,884 $ 11,643 131 %
Stock-based compensation expense 6,238 5,022 1,216 24 %
External professional services 20,989 9,327 11,662 125 %
Facilities and other costs 1,384 479 905 189 %
Total selling, general and
administrative expenses $ 49,138 $ 23,712 $ 25,426 107 %
Selling, general and administrative expenses increased by $25.4 million for the
quarter ended March 31, 2020 , compared to the quarter ended March 31, 2019 ,
primarily due to increased employee-related costs, external professional
services costs, stock-based compensation expense and facilities and other costs.
Employee-related expenses and stock-based compensation expense increased as a
result of increased headcount to support the commercialization of PALFORZIA,
including the addition of a specialty field team of approximately 80 Practice
Account Managers targeting practicing allergists. External professional services
increased primarily due to consulting services for commercial launch, 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.
We expect our quarterly selling, general and administrative expenses to continue
at this level or decrease for the remainder of 2020 as we implement cost
containment measures in both the United States and Europe . The commercialization
of PALFORZIA in the United States remains our top priority.
Interest Income
Interest income decreased by $0.9 million for the quarter ended March 31, 2020 ,
compared to the quarter ended March 31, 2019 , primarily due to lower average
cash, cash equivalents, and investment balances.
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Interest Expense
Interest expense increased by
Other Income, net
Other income, net increased by
Provision for Income Taxes
The provision for income taxes for the quarters ended
Liquidity and Capital Resources
As ofMarch 31, 2020 , we had cash, cash equivalents and investments of$371.6 million . In light of the launch delay caused by COVID-19, we are taking numerous active steps to conserve financial resources. We anticipate that based on our current business plan, our financial resources fully fund us. 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 PALFORZIA 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 quarters endedMarch 31, 2020 and 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 gross aggregate proceeds of$200.0 million . With FDA approval of PALFORZIA inJanuary 2020 , we commenced 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 . While we have ended enrollment in our Phase 2 clinical trial of AR201, we intend to continue to make investments to develop our product candidates.
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