ALECTOR, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties, including those described in the section titled "Special Note Regarding Forward Looking Statements." Our actual results and the timing of selected events could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those set forth under the section titled "Risk Factors" included elsewhere in this report.
Overview
We are a clinical stage biopharmaceutical company pioneering immuno-neurology, a
novel therapeutic approach for the treatment of neurodegeneration.
Our operations have been financed primarily through our collaborations with
AbbVie and GSK and the issuance and sale of convertible preferred stock and of
common stock upon the completion of our initial public offering (IPO) and
follow-on offering. We completed our IPO in
99
--------------------------------------------------------------------------------
follow-on offering in
To date, we have not had any products approved for sale and have not generated
any revenue from product sales. Further, we do not expect to generate revenue
from product sales until such time, if ever, that we are able to successfully
complete the development and obtain marketing approval for one of our product
candidates. We will continue to require additional capital to develop our
product candidates and fund operations for the foreseeable future. We have
incurred net losses in each year since inception and we expect to continue to
incur net losses for the foreseeable future. Our ability to generate product
revenue will depend on the successful development and eventual commercialization
of one or more of our product candidates. Our net losses were
•
advance product candidates through preclinical studies and clinical trials;
•
pursue regulatory approval of product candidates;
•
hire additional personnel;
•
acquire, discover, validate, and develop additional product candidates;
•
require the manufacture of supplies for our preclinical studies and clinical trials; and
•
obtain, maintain, expand, and protect our intellectual property portfolio.
Components of Results of Operations
Revenue
We have not generated any revenue from product sales and do not expect to do so in the near future. Our revenue to date has been primarily related to the AbbVie Agreement and GSK Agreement for the license and co-development of product candidates with those parties. We recognize revenue from the upfront payments from AbbVie over time as services are provided. We recognize revenue from the upfront payments from GSK at a point in time for a development license and over time for research and development services. Revenues for research and development services are recognized as the program costs are incurred by measuring actual costs incurred to date compared to the overall total expected costs to satisfy the performance obligation.
Under the terms of our AbbVie Agreement, in addition to receiving the upfront payments from AbbVie, we may also be entitled to development and regulatory milestone payments, opt-in payments for continued development after proof-of-concept for AL002, and other future payments from profit sharing or royalties after commercialization of product candidates from such program.
Under the terms of our GSK Agreement, we received
In
We expect that our revenue for the next several years will be derived primarily
from the AbbVie and GSK Agreements. The balance of deferred revenue was
100
--------------------------------------------------------------------------------
Research and Development Expenses
Research and development expenses account for a significant portion of our operating expenses. We record research and development expenses as incurred. Research and development expenses consist primarily of costs incurred for the discovery and development of our product candidates, which include:
•
expenses incurred under agreements with third-party contract organizations, preclinical testing organizations, and consultants;
•
costs related to production of clinical materials, including fees paid to contract manufacturers;
•
laboratory and vendor expenses related to the execution of preclinical studies and clinical trials;
•
personnel-related expenses, including salaries, benefits, and stock-based compensation for personnel engaged in research and development functions;
•
costs related to the preparation of regulatory submissions;
•
third-party license fees; and
•
facilities and other expenses, which include expenses for rent and maintenance of facilities, depreciation and amortization expense, and other supplies.
We expense all research and development costs in the periods in which they are incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors, collaborators, and third-party service providers. Nonrefundable advance payments for goods or services to be received in future periods for use in research and development activities are deferred and capitalized. The capitalized amounts are then expensed as the related goods are delivered and as services are performed.
Specific program expenses include expenses associated with the development of our most advanced product candidates: latozinemab, which is being studied in a pivotal Phase 3 clinical trial, INFRONT-3, which has an ongoing Phase 2 clinical trial; AL002, which is being studied in a Phase 2 clinical trial; and AL101, for which we have completed a Phase 1 clinical trial. We also have expenses related to the discovery and development of future product candidates and separately tracked expenses related to programs that we expect to move out of preclinical studies and into Phase 1 clinical trials. These expenses primarily relate to salaries and benefits, stock-based compensation, facility expenses, including depreciation, and lab consumables.
Where we share costs with our collaboration partners, such as in our GSK Agreement, research and development expenses may include cost sharing reimbursements from, or payments to, our partner.
At this time, we cannot reasonably estimate or know the nature, timing, and estimated costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates. We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates, as our product candidates advance into later stages of development, as we begin to conduct larger clinical trials, as we seek regulatory approvals for any product candidates that successfully complete clinical trials, and incur expenses associated with hiring additional personnel to support our research and development efforts. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel-related costs, including stock-based compensation, for our personnel in executive, legal, finance and accounting, information technology, human resources, and other administrative functions. General and administrative expenses also include legal fees relating to intellectual property and corporate matters, professional fees paid for accounting, auditing, consulting, and tax services, insurance costs, and facility costs not otherwise included in research and development expenses.
101
--------------------------------------------------------------------------------
Other Income, Net
Other income, net consists of interest earned on our cash equivalents and marketable securities and foreign currency transaction gains and losses incurred during the period.
Results of Operations
Comparison of the Years Ended
Year Ended
December 31, Dollar
2022 2021 Change
(In thousands)
Collaboration revenue $ 133,617 $ 207,085 $ (73,468 )
Operating expenses:
Research and development 210,418 189,407 21,011
General and administrative 61,033 55,038 5,995
Total operating expenses 271,451 244,445 27,006
Loss from operations (137,834 ) (37,360 ) (100,474 )
Other income, net 7,778 1,031 6,747
Loss before income taxes (130,056 ) (36,329 ) (93,727 )
Income tax expense 3,254 - 3,254
Net loss $ (133,310 ) $ (36,329 ) $ (96,981 )
Revenue
Collaboration revenue was
Research and Development Expenses
Research and development expenses were
102
--------------------------------------------------------------------------------
Year Ended
December 31, Dollar
2022 2021 Change
(In thousands)
Direct research and development expenses
Latozinemab $ 22,118 $ 31,689 $ (9,571 )
AL101 7,751 6,728 1,023
AL002 34,805 25,941 8,864
AL044 7,546 9,935 (2,389 )
Other early stage programs 37,385 37,740 (355 )
Indirect research and development expenses
Personnel related (including stock-based
compensation) 76,063 58,519 17,544
Facilities and other unallocated research and
development expenses 24,750 18,855 5,895
Total research and development expenses
General and Administrative Expenses
General and administrative expenses were
Other Income, Net
Other income, net was
Income Tax Expense
Income tax expense was
Liquidity and Capital Resources
Since our inception through
As of
Future Funding Requirements
Our primary uses of cash are to fund our operations, which consist primarily of research and development expenditures related to our programs, and to a lesser extent, general and administrative expenditures. We expect our expenses to continue to increase in connection with our ongoing activities, in particular as we continue to advance our product candidates and our discovery programs. In addition, we expect to incur additional costs associated with operating as a public company.
Based on our current operating plan, we believe that our existing cash, cash equivalents, and marketable securities will enable us to fund our operations and capital expenditure requirements through 2025. We have based
103
--------------------------------------------------------------------------------
this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. We may also choose to seek additional financing opportunistically. We may seek to raise capital through public equity or debt financings, license agreements, collaborative agreements or other arrangements with other companies, asset sales, or through other sources of financing. We expect to need to obtain substantial additional funding in the future for our research and development activities and continuing operations. If we were unable to raise capital when needed or on favorable terms, we would be forced to delay, reduce, or eliminate our research and development programs or future commercialization efforts.
Our future capital requirements will depend on many factors, including:
•
the timing and progress of preclinical and clinical development activities; including, without limitation, our collaboration efforts with AbbVie and GSK;
•
the number and scope of preclinical and clinical programs we decide to pursue;
•
successful enrollment in and completion of clinical trials;
•
our ability to establish agreements with third-party manufacturers for clinical supply for our clinical trials and, if our product candidates are approved, commercial manufacturing;
•
our ability to maintain our current research and development programs and establish new research and development programs;
•
addition and retention of key research and development personnel;
•
our efforts to enhance operational, financial, and information management systems, and hire additional personnel, including personnel to support development of our product candidates;
•
negotiating favorable terms in any collaboration, licensing, or other arrangements into which we may enter and performing our obligations in such collaborations;
•
the timing and amount of milestone and other payments we may receive under our collaboration arrangements;
•
the costs and timing of regulatory approvals;
•
our eventual commercialization plans for our product candidates;
•
the effects of inflationary pressures; and
•
the costs involved in prosecuting, defending, and enforcing patent claims and other intellectual property claims.
A change in the outcome of any of these or other variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate. Furthermore, our operating plans may change in the future, and we may need additional funds to meet operational needs and capital requirements associated with such operating plans.
Cash Flows
The following table summarizes our cash flows for the periods indicated (in thousands):
Year Ended December 31,
2022 2021 2020
Cash provided by (used in) operating activities
(159,014 ) (49,663 ) (105,051 )
Cash provided by financing activities 4,514 30,295 232,113
Operating Activities
For the year ended
104
--------------------------------------------------------------------------------
upfront payment received less revenue recognized. In addition, we had non-cash
charges of
For the year ended
For the year ended
Investing Activities
For the year ended
For the year ended
For the year ended
Financing Activities
For the year ended
For the year ended
For the year ended
Critical Accounting Policies and Estimates
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 in
Revenue Recognition
We recognize revenue when control of promised goods or services is transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under arrangements, we perform the
105
--------------------------------------------------------------------------------
following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies the performance obligation. If it is determined that multiple performance obligations exist, the transaction price is allocated at the inception of the agreement to all identified performance obligations based on the relative standalone selling price (SSP). The relative SSP for each deliverable is estimated using external sourced evidence if it is available. If external sourced evidence is not available, we use our best estimate of the SSP for the deliverable.
We recognize collaboration revenue at a point in time if control of the promised
good or service has been transferred to the customer. We recognize collaboration
revenue over time by measuring the progress toward complete satisfaction of the
performance obligation using an input measure. In order to recognize revenue
over the research and development period, we measure actual costs incurred to
date compared to the overall total expected costs to satisfy the performance
obligation. Revenues are recognized as the program costs are incurred. We
re-evaluate the estimate of expected costs to satisfy the performance obligation
each reporting period and make adjustments for any significant changes. Clinical
trials are expensive and can take many years to complete, and the outcome is
inherently uncertain. Changes in our forecasted costs are likely to occur over
time based upon changes in clinical trial procedures set forth in protocols,
changes in estimates of manufacturing costs, or feedback from regulators on the
design or operation of our clinical trials. We have had changes to the overall
expected costs to satisfy the performance obligations from period to period. For
the year ended
We record accrued expenses for estimated preclinical study and clinical trial expenses. Estimates are based on the services performed pursuant to contracts with research institutions, CROs in connection with clinical studies, investigative sites in connection with clinical studies, vendors in connection with preclinical development activities, and contract manufacturing organizations in connection with the production of materials for clinical trials. Further, we accrue expenses related to clinical trials based on the level of patient enrollment and activity according to the related agreement. We monitor patient enrollment levels and related activity to the extent reasonably possible and make judgments and estimates in determining the accrued balance in each reporting period. If we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates. To date, we have not experienced significant changes in our estimates of preclinical studies and clinical trial accruals.
Stock-based Compensation
Stock-based compensation is measured at the date of grant, based on the estimated fair value of the award and recognized as expense over the employee's requisite service period (usually the vesting period). We estimate the grant date fair value for options to purchase common stock, and the resulting stock-based compensation, using the Black-Scholes option-pricing model.
The Black-Scholes option-pricing model requires the use of highly subjective assumptions which determine the fair value of stock-based awards. These assumptions include:
Expected Term-The expected term represents the period that stock-based awards are expected to be outstanding. The expected term was derived by using the simplified method which uses the midpoint between the average vesting term and the contractual expiration period of the stock-based award.
Expected Volatility-We have limited information on the volatility of our stock
as shares of our common stock were not actively traded on any public markets
prior to
Risk-Free Interest Rate-The risk-free interest rate is based on the
106
--------------------------------------------------------------------------------
Expected Dividend-The expected dividend rate is zero because we have not historically paid and do not expect for the foreseeable future to pay a dividend on our common stock.
Stock-based compensation associated with RSUs is based on the fair value of our common stock on the grant date, which equals the closing price of our common stock on the grant date. We recognize expense over the vesting period of the awards. Expense for options and RSUs are recognized on a straight-line basis.
We also granted RSUs with market conditions to certain executives. The fair value of the RSUs with market conditions are estimated using a Monte Carlo simulation model. Assumptions and estimates utilized in the model include the stock price on grant date, risk-free interest rate, dividend yield, expected stock volatility, and the estimated period to achieve the market condition. The expense is recognized based on continued employment of the participants, regardless of achievement of the market condition. Expense related to the RSUs with market conditions is recognized using the accelerated attribution method.
We account for forfeitures as they occur for all awards.
© Edgar Online, source
