ANNEXON, INC. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K.
In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs, and expectations, and involve risks and uncertainties. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in the sections titled "Special Note Regarding Forward-Looking Statements" and "Risk Factors."
Overview
We are a clinical-stage biopharmaceutical company pioneering a new class of complement medicines designed to stop the classical complement pathway at its start, C1q, in order to bring therapies to patients suffering from serious complement-mediated autoimmune, neurodegenerative and ophthalmic disorders. C1q, the initiating molecule of the classical complement pathway, is a core component to the body's immune system that activates a powerful inflammatory cascade. We believe that by stopping the classical complement pathway at its start, our approach may have the potential to provide more complete protection against complement-mediated disorders of the body, brain and eye. Our proprietary platform leverages well-researched classical complement-mediated autoimmune and neurodegenerative disease processes, both of which are triggered by aberrant activation of C1q. Evidence suggests that potent and selective inhibition of C1q can prevent tissue damage triggered in antibody-mediated autoimmune disease and preserve loss of functioning synapses associated with cognitive and functional decline in complement-mediated neurodegeneration. By taking an upstream complement approach targeting C1q, our treatments are designed to act as an "on/off switch" to block all downstream components of the classical complement pathway that lead to excess inflammation, tissue damage and patient disability in a host of complement-mediated disorders, while preserving the normal immune function of the lectin and alternative complement pathways involved in the clearance of pathogens and damaged cells. We are advancing a broad pipeline of product candidates designed to block the activity of C1q and the entire classical complement pathway for a range of complement-mediated diseases. Our development strategy is focused on areas where C1q and the classical complement pathway is the key driver of disease. Our pipeline includes three clinical-stage assets across three therapeutic franchises:
• Autoimmune. We are advancing our lead candidate, ANX005, an
investigational, full-length monoclonal antibody formulated for
intravenous administration for several autoimmune indications. ANX005 is
currently being evaluated in a Phase 2/3 clinical trial for the
potential treatment of patients with Guillain-Barré Syndrome (GBS) with
data anticipated in 2023 and a Phase 2 trial in patients with warm
autoimmune hemolytic anemia (wAIHA) with data anticipated in the second
half of 2022. Our ANX009 clinical candidate is a subcutaneous
formulation of an antigen-binding fragment, or Fab. ANX009 has beenevaluated in a Phase 1 trial and based on the data from this trial, we
plan to advance ANX009 into a Phase 1b trial in patients with lupus
nephritis (LN) with initial data expected in the second half of 2022.
• Neurodegeneration. We are also developing ANX005 for the potentialtreatment of neurodegenerative indications . ANX005 is currently being
evaluated in Phase 2 trials in Huntington's disease (HD) and amyotrophic
lateral sclerosis (ALS). Interim data from the HD trial showed
improvements in clinical measures and that ANX005 had been generally
well tolerated. We plan to present the full data from our HD trial in
the second quarter of 2022. Data from Phase 2 trial of ANX005 in
patients with ALS is expected to be reported in 2023.
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• Ophthalmology. Our ANX007 program is a Fab formulated for intravitreal
administration for the potential treatment of neurodegenerative diseases
of the eye. We are currently conducting a Phase 2 trial in patients with
geographic atrophy (GA) with data expected in 2023.
Beyond our clinical-stage assets, our preclinical portfolio of next generation product candidates includes ANX105, an investigational monoclonal antibody targeting neurodegenerative indications, and ANX1502, an investigational oral small molecule in development for the treatment of certain autoimmune indications. Based on learnings from our initial trials and our expertise in the role of C1q and the classical complement pathway, we are evaluating additional orphan and large market indications that are driven by aberrant or excess classical complement activation. We hold worldwide development and commercialization rights, including through exclusive licenses, to all of our product candidates, which allows us to strategically maximize value from our product portfolio over time. Our patent portfolio includes patent protection for our upstream complement platform and each of our product candidates. We were incorporated inMarch 2011 and commenced operations later that year. To date, we have focused primarily on performing research and development activities, hiring personnel and raising capital to support and expand these activities. We do not have any products approved for sale, and we have not generated any revenue from product sales. We have incurred net losses each year since our inception. Our net losses were$130.3 million and$63.4 million for the years endedDecember 31, 2021 and 2020, respectively. As ofDecember 31, 2021 , we had an accumulated deficit of$296.3 million and cash and cash equivalents and short-term investments of$242.7 million .
Initial Public Offering
OnJuly 28, 2020 , we completed an initial public offering of our common stock on the Nasdaq Global Select Market, or the IPO. As part of the IPO, we issued and sold 14,750,000 shares of our common stock at a public offering price of$17.00 per share and 2,139,403 shares of our common stock to the underwriters of the IPO pursuant to the partial exercise of their option to purchase additional shares at a price of$17.00 per share less underwriting discounts and commissions. We received net proceeds of approximately$262.4 million from the IPO, after deducting underwriting discounts and commissions of$20.1 million and offering costs of$4.6 million .
Impact of COVID-19 Pandemic
The COVID-19 pandemic continues to rapidly evolve, and its ongoing impact is uncertain and subject to change. For instance, we have experienced interruption in clinical trial activities, shortages in clinical site staff, longer timelines for clinical site initiation and temporary shortages in lab kits and supplies. We will continue to monitor the COVID-19 pandemic situation closely. The extent of the impact of the COVID-19 pandemic on our clinical trials, business, financial condition, results of operations and clinical development timelines and plans remains uncertain, and will depend on, among other factors, the duration of the outbreak, the emergence of new variants, rates of infection in the locations in which we do business, restrictions that may be requested or mandated by governmental authorities, and the impact of the COVID-19 pandemic on our clinical trial enrollment, trial sites, contract research organizations, or CROs, third-party manufacturers, regulatory authorities and other third parties with whom we do business.
Components of Operating Results
Revenue
Our product candidates are not approved for commercial sale. We have not generated any revenue from sales of our product candidates and do not expect to do so in the foreseeable future and until we complete clinical development, submit regulatory filings and receive approvals from applicable regulatory bodies for such product candidates, if ever.
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--------------------------------------------------------------------------------Operating Expenses Research and Development
Research and development expenses account for a significant portion of our operating expenses. Research and development expenses consist primarily of direct and indirect costs incurred for the development of our product candidates.
Direct expenses include:
• preclinical and clinical outside service costs associated with
discovery, preclinical and clinical testing of our product candidates;
• professional services agreements with third party contract
organizations, investigative clinical trial sites and consultants that
conduct research and development activities on our behalf;
• contract manufacturing costs to produce clinical trial materials; and
• laboratory supplies and materials.
Indirect expenses include:
• compensation and personnel-related expenses (including stock-based
compensation);
• allocated expenses for facilities and depreciation; and
• other indirect costs.
We record research and development expenses as incurred. Payments made to other
entities are under agreements that are generally cancelable by us. Advance
payments for goods or services to be received in future periods for use in
research and development activities are deferred as prepaid expenses. The
prepaid amounts are then expensed as the related services are performed. 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, particularly as they
advance into later stages of development and as we conduct larger clinical
trials, engage in other research and development activities and seek regulatory
approvals for any product candidates that successfully complete clinical trials
and as we incur expenses associated with hiring additional personnel and
facility costs 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
General and administrative expenses consist primarily of compensation and personnel-related expenses (including stock-based compensation) for our personnel in executive, finance and other administrative functions. General and administrative expenses also include professional fees paid for accounting, legal and tax services, allocated expenses for facilities and depreciation and other general and administrative costs. We expect our general and administrative expenses to increase substantially for the foreseeable future as we continue to support our research and development activities, grow our business and, if any of our product candidates receive marketing approval, commercialization activities. We will also incur additional expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of theSEC , Sarbanes-Oxley Act and theNasdaq Stock Market , additional insurance expenses, investor relations activities and other administrative and professional services. We also expect to increase the size of our administrative function to support the growth of our business. 99 --------------------------------------------------------------------------------
Interest and Other Income, Net
Interest and other income, net, primarily consists of non-recurring income from research grants and interest income earned on our cash equivalents and short-term investments.
Results of Operations
Comparison of the Years Ended
The following tables summarize our results of operations for the periods
presented:
Year Ended
December 31,
2021 2020 Dollar Change % Change
(in thousands)
Operating expenses:
Research and development $ 100,066 $ 49,271 $ 50,795 103%
General and administrative 30,647 14,198 16,449 116%
Total operating expenses 130,713 63,469 67,244 106%
Loss from operations (130,713 ) (63,469 ) (67,244 ) 106%
Interest and other income, net 390 57 333 *
Net loss $ (130,323 ) $ (63,412 ) $ (66,911 ) 106%
* Not meaningful
Research and Development Expenses
Year Ended
December 31,
2021 2020 Dollar Change % Change
(in thousands)
Direct costs:
Clinical and nonclinical outside services $ 42,380 $ 18,712 $ 23,668 126%
Consulting and professional services 8,023 3,947 4,076 103%
Contract manufacturing 19,322 12,588 6,734 53%
Laboratory supplies and materials 1,104 726 378 52%
Indirect costs:
Compensation and personnel-related
(including stock-based compensation) 24,350 11,876
12,474 105%
Facilities and depreciation 4,745 1,018 3,727 *
Other 142 404 (262 ) (65%)
Total research and development expenses $ 100,066 $ 49,271 $ 50,795 103%
* Not meaningful
100-------------------------------------------------------------------------------- Research and development expenses increased by$50.8 million , or 103%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The increase was primarily due to an increase of$23.7 million in direct clinical outside services related to our multiple ongoing and planned clinical trials in GBS, warm autoimmune hemolytic anemia, Huntington's Disease, amyotrophic lateral sclerosis and geographic atrophy as well as preclinical outside services to support pre-IND activities for ANX105 and our small molecule program, ANX1502. Contract manufacturing expense increased by$6.7 million related to the production of ANX005, ANX007, and ANX009 as well as pre-IND manufacturing activities for ANX105 and ANX1502. Compensation and personnel-related expenses increased by$12.5 million , including an increase of$6.3 million in stock-based compensation, due to an increase in headcount. Direct consulting and professional services costs increased by$4.1 million related to the support of multiple functions including clinical development, translational, regulatory and project management. Facilities and depreciation costs increased by$3.7 million due to the commencement of our new office lease inBrisbane, California .
General and Administrative Expenses
Year Ended
December 31,
2021 2020 Dollar Change % Change
(in thousands)
Consulting and professional services $ 13,726 $ 7,350 6,376 87%
Compensation and personnel-related (including
stock-based compensation) 13,567 5,715 7,852 137%
Facilities and depreciation 2,353 729 1,624 *
Other 1,001 404 597 148%
Total general and administrative expenses
* Not meaningful General and administrative expenses increased by$16.4 million , or 116%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The increase was primarily due to an increase of$7.9 million in compensation and personnel-related expenses, including an increase of$5.0 million in stock-based compensation, due to an increase in headcount. Consulting and professional services for accounting, legal and audit fees and directors and officers' liability insurance increased by$6.4 million . Facilities and depreciation costs increased by$1.6 million due to the commencement of our new office lease inBrisbane, California .
Liquidity and Capital Resources
Sources of Liquidity
Due to our significant research and development expenditures, we have generated operating losses since our inception.
We have funded our operations primarily through the sale of equity securities. From our inception throughDecember 31, 2021 , we have raised net cash proceeds of$233.9 million from private placements of our redeemable convertible preferred stock and$262.4 million from the IPO. As ofDecember 31, 2021 , we had available cash and cash equivalents and short-term investments of$242.7 million and an accumulated deficit of$296.3 million . 101 --------------------------------------------------------------------------------
Cash Flows
Year Ended
December 31,
2021 2020
(in thousands)
Net cash used in operating activities $ (106,110 ) $ (53,087 )
Net cash used in investing activities (88,236 ) (83,164 )
Net cash provided by financing activities 1,795 360,876
(Decrease) increase in cash, cash equivalents and restricted cash$ (192,551 ) $ 224,625
Cash Flows from Operating Activities
Cash used in operating activities for the year endedDecember 31, 2021 was$106.1 million , which consisted of a net loss of$130.3 million , partially offset by$20.9 million in non-cash charges and a net change of$3.3 million in our operating assets and liabilities. The non-cash charges consisted of stock-based compensation of$16.3 million , depreciation and amortization of$2.1 million , accretion of discount on available-for-sale securities of$1.3 million , and reduction in the carrying amount of right-of-use assets of$1.3 million . Cash used in operating activities for the year endedDecember 31, 2020 was$53.1 million , which consisted of a net loss of$63.4 million , partially offset by$5.6 million in non-cash charges and a net change of$4.7 million in our net operating assets and liabilities. The non-cash charges consisted of stock-based compensation of$4.9 million and depreciation and amortization of$0.7 million .
Cash Flows from Investing Activities
Cash used in investing activities for the year endedDecember 31, 2021 was$88.2 million , which consisted of$225.6 million of purchases of available-for-sale securities and$1.7 million of purchase of property and equipment, partially offset by$133.0 million of proceeds from maturities of available-for-sale securities and$6.0 million of proceeds from sale of available-for-sale securities. Cash used in investing activities for the year endedDecember 31, 2020 was$83.2 million , which consisted of$82.7 million of purchases of available-for-sale securities and$0.5 million of purchases of property and equipment.
Cash Flows from Financing Activities
Cash provided by financing activities for the year endedDecember 31, 2021 was$1.8 million , related to$1.8 million of proceeds from the exercise of common stock options and employee stock purchase plan purchases. Cash provided by financing activities for the year endedDecember 31, 2020 was$360.9 million , which consisted of the net proceeds of$262.4 million from the IPO, net of underwriting discounts and expenses, the net proceeds received from sale and issuance of our Series D redeemable convertible preferred stock of approximately$96.8 million , and proceeds of$0.5 million from the Paycheck Protection Program loan which was repaid in full.
Funding Requirements
We use our cash to fund operations, primarily to fund our clinical trials,
research and development expenditures and related personnel costs. 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 our product candidates, particularly as they advance into later stages of
development and as we conduct larger clinical trials, engage in other research
and development activities, seek regulatory approvals for any product candidates
that successfully complete clinical trials and as we incur expenses associated
with hiring additional personnel to support our research and development
efforts. In addition, we expect our general and administrative expenses to
increase substantially for the foreseeable future as we continue to support our
research and development activities and to grow our business and as we expect to
engage in commercialization activities, if any of our product candidates receive
marketing approval. We
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will also incur additional expenses as a result of operating as a public company
and also expect to increase the size of our administrative function to support
the growth of our business. The timing and amount of our operating expenditures
will depend on many factors, including:
• the scope, progress, results and costs of researching and developing our
current product candidates or any other future product candidates we
choose to pursue, and conducting preclinical studies and clinical
trials;
• the timing of, and the costs involved in, obtaining regulatory approvals
for our lead product candidates or any future product candidates;
• the number and characteristics of any additional product candidates we
develop or acquire;
• the timing and amount of any milestone, royalty and/or other payments we
are required to make pursuant to our current or any future license or
collaboration agreements;
• the cost of manufacturing our lead product candidates or any futureproduct candidates and any products we successfully commercialize;
• the cost of building a sales force in anticipation of product
commercialization;
• the cost of commercialization activities of our product candidates, if
approved for sale, including marketing, sales and distribution costs;
• our ability to establish strategic collaborations, licensing or otherarrangements and the financial terms of any such agreements, including
the timing and amount of any future milestone, royalty or other payments
due under any such agreement;
• any product liability or other lawsuits related to our products;
• the expenses needed to attract, hire and retain skilled personnel;
• the costs associated with operating as a public company;
• the costs involved in preparing, filing, prosecuting, maintaining,
defending and enforcing our intellectual property portfolio; and
• the timing, receipt and amount of sales of any future approved products.
Based upon our current operating plan, we believe that our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements into the first quarter of 2024. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. We expect to continue to expend significant resources for the foreseeable future. Until such time, if ever, as we can generate substantial product revenue, we will be required to seek additional funding in the future and currently intend to do so through public or private equity offerings or debt financings, credit or loan facilities, collaborations or a combination of one or more of these funding sources. Additional funds may not be available to us on acceptable terms or at all. If we fail to obtain necessary capital when needed on acceptable terms, or at all, we could be forced to delay, limit, reduce or terminate our product development programs, commercialization efforts or other operations. If we raise additional funds by issuing equity securities, our stockholders will suffer dilution and the terms of any financing may adversely affect the rights of our stockholders. In addition, as a condition to providing additional funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders. Debt financing, if available, is likely to involve restrictive covenants limiting our flexibility in conducting future business activities, and, in the event of insolvency, debt holders would be repaid before holders of our equity securities received any distribution of our corporate assets.
At-the-Market Offering
InAugust 2021 , we entered into a sales agreement withCowen and Company LLC , or Cowen, as sales agent, pursuant to which we may issue and sell shares of our common stock for an aggregate maximum offering price of$100.0 million under an at-the-market offering program, or 2021 ATM program. We will pay Cowen up to 3% of gross proceeds for the common stock sold through the 2021 ATM program. As ofDecember 31, 2021 , no shares of common stock have been sold under the 2021 ATM program. 103 --------------------------------------------------------------------------------
Off-Balance Sheet Arrangements
Since our inception, we have not engaged in any off-balance sheet arrangements,
as defined in the rules and regulations of the
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 withU.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, expenses and related disclosures. 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 and any such differences may be material. While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations.
We estimate preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions, clinical research organizations, and clinical manufacturing organizations that conduct and manage preclinical studies and clinical trials on our behalf. In recording service fees as either prepaid or accrued costs, we estimate the period over which services will be performed and the level of effort to be expended in each period. These estimates of the expense are based on communications with and information provided by the third-party service providers at each balance sheet date. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the amounts recorded accordingly. The estimates are trued up to reflect the best information available at the time of the financial statement issuance. We have not experienced any material differences between accrued or prepaid costs and actual costs incurred since inception. We defer and capitalize non-refundable advance payments for goods or services that will be used or rendered for future research and development activities as prepaid expenses until the related goods are delivered or services are performed. We evaluate such payments for current or long-term classification based on when such services are expected to be received.
Operating Lease Obligations
We determine if an arrangement is a lease at inception. Upon adoption of Accounting Standards Codification 842, Leases, as ofJanuary 1, 2021 , we include operating leases in operating lease right of use, or ROU, assets, current and noncurrent operating lease liabilities in our consolidated balance sheets. The ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. We measure our ROU assets based on the associated lease liabilities adjusted for any lease incentives such as tenant improvement allowances. As most of the leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at the commencement date. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise the option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. As a practical expedient, we elected, for all facility leases, not to separate non-lease components from lease components and instead to account for each separate lease component and its associated non-lease components as a single lease component. We elected to exclude from our balance sheets recognition of leases having a term of 12 months or less (short-term leases). 104 --------------------------------------------------------------------------------
Stock-Based Compensation
We maintain a stock-based compensation plan as a long-term incentive for employees, non-employee directors and consultants. The plan allows for the issuance of incentive stock options, non-qualified stock options, restricted stock units and other forms of equity awards.
We recognize stock-based compensation expense for stock options on a straight-line basis over the requisite service period and account for forfeitures as they occur. Our stock-based compensation costs are based upon the grant date fair value of options estimated using the Black-Scholes option pricing model.
This model utilizes inputs which are highly subjective assumptions and generally require significant judgment. These assumptions include:
Fair Value of Common Stock-Historically, for all periods prior to the IPO inJuly 2020 , fair values of the shares of common stock underlying our share-based awards were estimated on each grant date by our board of directors. Our board of directors considered, among other things, valuations of our common stock which were prepared by an independent third-party valuation firm in accordance with the guidance provided by theAmerican Institute of Certified Public Accountants 2013 Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. After the completion of our IPO, our board of directors determined the fair value of each share of underlying common stock based on the closing price of our common stock as reported on the date of grant on the Nasdaq Global Select Market.
Expected Term-The expected term represents the period that the stock-based awards are expected to be outstanding and is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term).
Expected Volatility-We do not have sufficient trading history for our common stock, the expected volatility was estimated based on the average volatility for comparable publicly traded life sciences companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on the similar size, stage in life cycle or area of specialty.
Risk-Free Interest Rate-The risk-free interest rate is based on the
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.
See Note 7-Equity Incentive Plan to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options. Certain of such assumptions involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation could be materially different.
Recent Accounting Pronouncements Not Yet Adopted
See Note 2-Basis of Presentation and Significant Accounting Policies to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one yet, of their potential impact on our financial condition of results of operations.
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