CEREVEL THERAPEUTICS HOLDINGS, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and notes thereto included elsewhere in this Annual Report. Certain of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the section entitled "Risk Factors," our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. You should carefully read the section entitled "Risk Factors" to gain an understanding of the material and other risks that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled "Cautionary Note Regarding Forward-Looking Statements."
Overview
Introduction
We are a clinical-stage biopharmaceutical company pursuing a targeted approach
to neuroscience that combines a deep understanding of disease-related biology
and neurocircuitry of the brain with advanced chemistry and central nervous
system, or CNS, target receptor selective pharmacology to discover and design
new therapies. We seek to transform the lives of patients through the
development of new therapies for neuroscience diseases, including schizophrenia,
epilepsy and Parkinson's disease. We are advancing our extensive and diverse
pipeline with numerous clinical trials underway or planned, including three
ongoing Phase 3 trials and an open-label extension trial for tavapadon in
Parkinson's, two planned Phase 2 trials and a planned open-label extension trial
for emraclidine (formerly known as CVL-231) in schizophrenia and an ongoing
Phase 2 proof-of-concept trial with an
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open-label extension trial for darigabat (formerly known as CVL-865) in focal
epilepsy. We have built a highly experienced team of senior leaders and
neuroscience drug developers who combine a nimble, results-driven biotech
mindset with the proven expertise of large pharmaceutical company experience and
capabilities in drug discovery and development.
Our portfolio of product candidates is based on a differentiated approach to
addressing neuroscience diseases, which incorporates three key pillars: (1)
targeted neurocircuitry, where we seek to unlock new treatment opportunities by
precisely identifying and targeting the neurocircuit that underlies a given
neuroscience disease, (2) receptor subtype selectivity, where we selectively
target the receptor subtype(s) related to the disease physiology to minimize
undesirable off-target effects while maximizing activity and (3) differentiated
pharmacology, where we design full and partial agonists, antagonists and
allosteric modulators to precisely fine-tune the receptor pharmacology and
neurocircuit activity to avoid over-activation or over-suppression of the
endogenous physiologic range. In addition, our portfolio is supported by robust
data packages and rigorous clinical trial execution designed to elucidate the
key points of differentiation for our compounds. We believe that this
science-driven approach is critical to achieving optimal therapeutic activity
while minimizing unintended side effects of currently available therapies.
Business Environment
The biopharmaceutical industry is extremely competitive. We are subject to risks and uncertainties common to clinical-stage companies in the biopharmaceutical industry. These risks include, but are not limited to, the introduction of new products, therapies, standards of care or technological innovations, our ability to obtain and maintain adequate protection for our in-licensed technology, data or other intellectual property and proprietary rights and compliance with extensive government regulation and oversight. We are also dependent upon the services of key personnel, including our Chief Executive Officer, executive team and other highly skilled employees. Demand for experienced personnel in the pharmaceutical and biotechnology industries is high and competition for talent is intense. Please read the section entitled "Risk Factors" for additional information. We face potential competition from many different sources, including pharmaceutical and biotechnology companies, academic institutions and governmental agencies as well as public and private research institutions. Many of our competitors are working to develop or have commercialized products similar to those we are developing and have considerable experience in undertaking clinical trials and in obtaining regulatory approval to market pharmaceutical products. Our competitors may also have significantly greater financial resources, established presence in the market, expertise in research and development, manufacturing, preclinical and clinical testing, obtaining regulatory approvals and reimbursement and marketing approved products. Other smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties also compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.
Risks and Liquidity
Product development is very expensive and involves a high degree of risk. Only a
small number of research and development programs result in the
commercialization of a product. We will not generate revenue from product sales
unless and until we successfully complete clinical development, are able to
obtain regulatory approval for and successfully commercialize the product
candidates we are developing or may develop. We currently do not have any
product candidates approved for commercial sale. In addition, we operate in an
environment of rapid change in technology. We are also dependent upon the
services of our employees, consultants, third-party contract research
organizations, or CROs, third-party contract manufacturing organizations, CMOs
and other third-party organizations.
Our product candidates, currently under development or that we may develop, will
require significant additional research and development efforts, including
extensive clinical testing and regulatory approval prior to commercialization.
These efforts require significant amounts of additional capital, adequate
personnel infrastructure and extensive compliance and reporting capabilities.
There can be no assurance that our research and development activities will be
successfully completed, that adequate protection for our licensed or developed
technology will be obtained and maintained, that products developed will obtain
necessary regulatory approval or that any approved products will be commercially
viable.
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We believe that our available financial resources will enable us to fund our
operating expense and capital expenditure requirements through at least 12
months from the issuance date of our audited consolidated financial statements
included elsewhere in this Annual Report. Our estimate may prove to be wrong,
and we could use our available capital resources sooner than we currently
expect. Further, changing circumstances, some of which may be beyond our
control, could cause us to consume capital significantly faster than we
currently anticipate, and we may need to seek additional funds sooner than
planned.
In the future, we will require additional capital to meet operational needs and
capital requirements. We are eligible to receive up to $125.0 million pursuant
to the Funding Agreements, of which approximately $31.1 million was received in
April 2021 . Except for this source of funding, we do not have any committed
external source of liquidity. Until such time, if ever, as we can generate
substantial product revenue, we will need substantial additional funding to
support our continuing operations and pursue our growth strategy, and we may
finance our operations through a combination of additional private or public
equity offerings, debt financings, collaborations, strategic alliances,
marketing, distribution or licensing arrangements with third parties or through
other sources of financing. We intend to consider opportunities to raise
additional funds through the sale of equity or debt securities when market
conditions are favorable for us to do so. However, the trading prices for our
common stock and for other biopharmaceutical companies have been highly
volatile. As a result, we may face difficulties raising capital through sales of
our common stock or such sales may be on unfavorable terms. Similarly, adverse
market or macroeconomic conditions could materially and adversely affect our
ability to consummate an equity or debt financing on favorable terms or at all.
To the extent that we raise additional capital through the sale of private or
public equity or convertible debt securities, your ownership interest will be
diluted, and the terms of these securities may include liquidation or other
preferences that adversely affect your rights as a common stockholder. Debt
financing and preferred equity financing, if available, may involve agreements
that include covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, making acquisitions or capital
expenditures or declaring dividends. If we raise additional funds through
collaborations, strategic alliances or marketing, distribution or licensing
arrangements with third parties, we may have to relinquish valuable rights to
our technologies, future revenue streams, research programs or drug candidates,
or grant licenses on terms that may not be favorable to us. If we are unable to
raise additional funds through equity or debt financings or other arrangements
when needed, we may be required to delay, limit, reduce or terminate our
research, product development or future commercialization efforts, grant rights
to develop and market product candidates that we would otherwise prefer to
develop and market ourselves, obtain funds through arrangement with
collaborators on terms unfavorable to us or pursue merger or acquisition
strategies, all of which could adversely affect the holdings or the rights of
our stockholders.
We have incurred significant operating losses since our inception and, as of
December 31, 2021 , had an accumulated deficit of $616.2 million and had not yet
generated revenues. Our net losses totaled $225.3 million , $152.1 million and
$128.4 million for the years ended December 31, 2021 , 2020 and 2019,
respectively. We have funded our operations primarily with the net proceeds
received from the issuance of preferred stock and common stock and net proceeds
from the consummation the Business Combination and the Funding Agreements.
In addition, we anticipate that our expenses will increase substantially if, and as, we:
•
advance our clinical-stage product candidates through clinical development, including as we advance these candidates into later-stage clinical trials;
•
seek regulatory approvals for any product candidates that successfully complete clinical trials;
•
hire additional clinical, quality control, medical, scientific and other technical personnel to support our clinical operations;
•
experience an increase in headcount as we expand our research and development organization and initiate pre-commercial activities;
•
undertake any pre-commercial or commercial activities to establish sales, marketing and distribution capabilities;
•
advance our preclinical-stage product candidates into clinical development;
•
seek to identify, acquire and develop additional product candidates, including through business development efforts to invest in or in-license other technologies or product candidates;
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meet the requirements and demands of being a public company, particularly now that we neither qualify as an "emerging growth company" nor a "smaller reporting company";
•
maintain, expand and protect our intellectual property portfolio;
•
make milestone, royalty or other payments due under the Pfizer License Agreement and any future in-license or collaboration agreements; and
•
make milestone, royalty or other payments due under the Funding Agreements and any future financing or other arrangements with third parties.
Business Combination Transaction
OnOctober 27, 2020 ,ARYA Sciences Acquisition Corp II , or ARYA, completed the acquisition ofCerevel Therapeutics, Inc. , or Old Cerevel, a private company, pursuant to the Business Combination Agreement. Net proceeds from this transaction totaled approximately$439.5 million . ARYA was incorporated as aCayman Islands exempted company onFebruary 20, 2020 and was formed for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses. Old Cerevel was incorporated inDelaware onJuly 23, 2018 , under the namePerception Holdco, Inc. , which was subsequently changed toCerevel Therapeutics, Inc. onOctober 23, 2018 . Upon closing of the Business Combination Transaction, Old Cerevel became a wholly owned subsidiary of ARYA and ARYA was renamedCerevel Therapeutics Holdings, Inc. , or New Cerevel, and the existing stockholders of Old Cerevel exchanged their equity interests of Old Cerevel for shares of common stock of New Cerevel. We accounted for the Business Combination Transaction as a reverse recapitalization, which is the equivalent of Old Cerevel issuing stock for the net assets of ARYA, with ARYA treated as the acquired company for accounting purposes. The net assets of ARYA were stated at historical cost with no goodwill or other intangible assets recorded. Reported results from operations included herein prior to the Business Combination Transaction are those of Old Cerevel. The shares and corresponding capital amounts and loss per share related to Old Cerevel's outstanding redeemable convertible preferred stock, redeemable convertible common stock, and common stock prior to the Business Combination Transaction have been retroactively restated to give effect to the exchange ratio established in the Business Combination Agreement (1.00 share of Old Cerevel for 2.854 shares of New Cerevel), or the Exchange Ratio. For additional information on our operations, please read Note 1, Nature of Operations, to our audited consolidated financial statements included elsewhere in this Annual Report. For additional information on the Business Combination Transaction, please read Note 3, Business Combination, to our audited consolidated financial statements included elsewhere in this Annual Report.
Follow-on Public Offering
OnJuly 7, 2021 , we completed a follow-on offering of our common stock pursuant to which we issued and sold 14,000,000 shares of our common stock at a price to the public of$25.00 per share. The aggregate net proceeds from this offering totaled approximately$328.3 million , after deducting underwriting discounts and commissions of$21.0 million and offering expenses of approximately$0.7 million .
ATM Program
OnNovember 10, 2021 , we entered into an open market sales agreement withJefferies LLC , as sales agent, to provide for the ability of issuance and sale of up to$250.0 million of our common stock from time-to-time in "at-the-market" offerings, or the ATM Program. As ofDecember 31, 2021 , no sales had been made pursuant to the ATM Program. Pfizer License Agreement InAugust 2018 we entered into a license agreement with Pfizer, or the Pfizer License Agreement, pursuant to which we were granted an exclusive, sublicensable, worldwide license under certain Pfizer patent rights, and a non-exclusive, sublicensable, worldwide license under certain Pfizer know-how to develop, manufacture and commercialize certain compounds and products, which currently constitute substantially all of our asset portfolio, in 135 -------------------------------------------------------------------------------- the field of treatment, prevention, diagnosis, control and maintenance of all diseases and disorders in humans, subject to the terms and conditions of the Pfizer License Agreement. Under the Pfizer License Agreement, we are solely responsible for the development, manufacture, regulatory approval and commercialization of compounds and products in the field and we will pay Pfizer tiered royalties on the aggregate net sales during each calendar year, determined on a product-by-product basis, with respect to products under the Pfizer License Agreement, and we may pay potential milestone payments to Pfizer, based on the successful achievement of certain regulatory and commercial milestones. To date, no regulatory or commercial approval milestone payments or royalty payments were made or became due under this agreement.
For additional information on our Pfizer License Agreement, please read Note 6, Pfizer License Agreement, to our audited consolidated financial statements included elsewhere in this Annual Report.
Equity Commitment and Share Purchase Option
Old Cerevel's principal operations commenced on
Under the terms of the Stock Purchase Agreement entered into in connection with the Formation Transaction Bain Investor retained an option to purchase a combination of additional shares of Series A-1 Preferred Stock and Series A Common Stock at a price of$10.00 per share, up to an aggregate amount of$100.0 million , pursuant to certain conditions detailed in the agreement, which we refer to as the Share Purchase Option. Upon closing of the Business Combination Transaction, the Equity Commitment, Share Purchase Option and Stock Purchase Agreement were terminated and the remaining Equity Commitment immediately prior to the closing of$149.9 million was considered satisfied.
For additional information on the Equity Commitment, please read Note 7, Equity Commitment and Share Purchase Option, to our audited consolidated financial statements included elsewhere in this Annual Report.
Funding Agreements
OnApril 12, 2021 , we entered into funding agreements, or the Funding Agreements, withNovaQuest Co-Investment Fund XVI, L.P. , or NovaQuest, andBC Pinnacle Holdings, LP , or Bain, pursuant to which NovaQuest and Bain will provide up to$125.0 million , or the Total Funding Commitment, to support our development of tavapadon for the treatment of Parkinson's disease over four years, of which approximately$31.1 million (25% of the Total Funding Commitment, net of$0.2 million of fees incurred by Bain and NovaQuest) was received inApril 2021 .
For additional information on our funding agreements, please read Note 8, Financing Liabilities, to our audited consolidated financial statements included elsewhere in this Annual Report.
Impact of the Ongoing COVID-19 Pandemic
The ongoing COVID-19 pandemic is evolving, and to date has led to the implementation of various responses, including government-imposed quarantines, travel restrictions and other public health safety measures.
We are closely monitoring the impact of the COVID-19 pandemic on all aspects of
our business, including how it has impacted and may continue to impact our
operations and the operations of our suppliers, vendors and business partners.
We have taken steps to identify and mitigate the adverse impacts on, and risks
to, our business posed by its spread and actions taken by governmental and
health authorities to address this pandemic; however, the spread of COVID-19 has
caused us to modify our business practices, including enacting a COVID-19
vaccination policy for all employees and visitors to our facility. We expect to
continue to take actions as may be required or recommended by government
authorities or as we determine are in the best interests of our employees and
other business partners in light of COVID-19.
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More specifically, in response to the onset of the COVID-19 pandemic, we paused
patient screening and enrollment of our Phase 3 trials of tavapadon for the
treatment of Parkinson's in March 2020 (which we subsequently resumed in the
second half of 2020) and concluded dosing of Cohort 1 of our Phase 1 SAD trial
of CVL-936 after receiving sufficient clinical data for the intended purposes
for this trial. Due, in part, to the ongoing COVID-19 pandemic, data for our
Phase 2a exploratory trial for CVL-871 in dementia-related apathy has been
delayed from the second half of 2022 to the first half of 2023.
The extent to which COVID-19 impacts our business, results of operations and
financial condition will depend on future developments, which, despite progress
in vaccination efforts, are highly uncertain and cannot be predicted with
confidence, including the duration of the outbreak, new information that may
emerge concerning the severity of COVID-19, such as new strains of the virus,
including the Delta and Omicron variants and any future variants that may
emerge, which may impact rates of infection and vaccination efforts,
developments or perceptions regarding the safety of vaccines and the extent and
effectiveness of actions to contain COVID-19 or treat its impact, including
vaccination campaigns and lockdown measures, among others. In addition,
recurrences or additional waves of COVID-19 cases could cause other widespread
or more severe impacts depending on where infection rates are highest. We cannot
presently predict the scope and severity of any potential business shutdowns or
disruptions, but if we or any of the third parties with whom we engage were to
experience prolonged business shutdowns or other disruptions, our ability to
conduct our business in the manner and on the timelines presently planned could
be materially and negatively affected, which could have a material adverse
impact on our business, results of operations and financial condition.
We have not incurred any significant impairment losses in the carrying values of
our assets as a result of the pandemic and we are not aware of any specific
related event or circumstance that would require us to revise our estimates
reflected in our audited consolidated financial statements included elsewhere in
this Annual Report. Our estimates of the impact on our business may change based
on new information that may emerge concerning COVID-19 and the actions to
contain it or treat its impact and the economic impact on local, regional,
national and international markets.
Components of Operating Results
Revenues
We have not generated any revenues since our inception and do not expect to generate any revenues from the sale of products in the near future, if at all. If our development efforts for our current product candidates or additional product candidates that we may develop in the future are successful and can be commercialized, we may generate revenue in the future from product sales. Additionally, we may enter into collaboration and license agreements from time to time that provide for certain payments due to us. Accordingly, we may generate revenue from payments from such collaboration or license agreements in the future. Research and Development We support our drug discovery and development efforts through the commitment of significant resources to our preclinical and clinical development activities. Our research and development expense includes:
•
employee-related expenses, consisting of salaries, benefits and equity-based compensation for personnel engaged in our research and development activities;
•
expenses incurred in connection with the preclinical and clinical development of our product candidates, including costs incurred under agreements with clinical research organizations, or CROs, investigative clinical trial sites and consultants and other third-party organizations that conduct research and development activities on our behalf;
•
costs associated with preclinical studies and clinical trials, including research materials;
•
materials and supply costs associated with the manufacture of drug substance and drug product for preclinical testing and clinical trials; and
•
certain indirect costs incurred in support of overall research and development activities, including facilities, depreciation and technology expenses.
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We expense research and development expenses as incurred. Payments we make for
research and development services prior to the services being rendered are
recorded as prepaid assets in our consolidated balance sheets and are expensed
as the services are provided. We estimate and accrue the value of goods and
services received from CROs, CMOs and other third parties each reporting period
based on estimates of the level of services performed and progress in the period
when we have not received an invoice from such organizations. When evaluating
the adequacy of accrued liabilities, we analyze progress of the studies or
clinical trials, including the phase of completion of events, invoices received
and contracted costs. We reassess and adjust our accruals as actual costs become
known or as additional information becomes available. Our historical accrued
estimates have not been materially different from actual costs.
Our external research and development expenses for our clinical stage product
candidates are tracked on a program-by-program basis and consist primarily of
fees, reimbursed materials and other costs paid to consultants, contractors,
CROs and CMOs. External research and developments costs that directly support
our discovery activities and preclinical programs are classified within other
research and development programs. Program costs for the periods presented do
not reflect an allocation of expenses associated with personnel costs,
equity-based compensation expense, activities that benefit multiple programs or
indirect costs incurred in support of overall research and development, such as
technology and facilities-related costs.
We expect that our research and development expenses will increase substantially
in connection with our planned preclinical and clinical development activities
both in the near-term and beyond as we continue to invest in activities to
develop our product candidates and preclinical programs and as certain product
candidates advance into later stages of development. Product candidates in later
stages of clinical development generally have higher development costs than
those in earlier stages of clinical development, primarily due to the increased
size, scope and duration of later-stage clinical trials. Furthermore, the
process of conducting the necessary clinical trials to obtain regulatory
approval is costly and time-consuming, and the successful development of our
product candidates is highly uncertain. As a result, we cannot accurately
estimate or know the nature, timing and costs that will be necessary to complete
the preclinical and clinical development for any of our product candidates or
when and to what extent we may generate revenue from the commercialization and
sale of any of our product candidates or achieve profitability.
The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors that include:
•
per patient trial costs;
•
the number of patients that participate in the trials;
•
the number of sites included in the trials;
•
the countries in which the trials are conducted;
•
the length of time required to enroll eligible patients;
•
the number of doses that patients receive;
•
the drop-out or discontinuation rates of patients;
•
potential additional safety monitoring or other studies requested by regulatory agencies;
•
the duration of patient follow-up; and
•
the efficacy and safety profile of our product candidates.
Changes in any of these assumptions could significantly impact the cost and
timing associated with the development of our product candidates. Additionally,
future competition and commercial and regulatory factors beyond our control may
also impact our clinical development programs and plans.
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We expense general and administrative costs as incurred. General and administrative expenses consist primarily of salaries, benefits, equity-based compensation and outsourced labor for personnel in executive, finance, human resources, legal and other corporate administrative functions. General and administrative expenses also include legal fees incurred relating to corporate and patent matters, professional fees incurred for accounting, auditing, tax and administrative consulting services, insurance costs, facilities and depreciation expenses. We estimate and accrue for services provided by third parties related to the above expenses by monitoring the status of services provided and receiving estimates from our service providers. We reassess and adjust our accruals as actual costs become known or as additional information becomes available. We expect our general and administrative expenses will increase both in the near-term and beyond as we continue to build general corporate infrastructure to support the growth of our organization as we expand our research and development organization and initiate pre-commercialization activities.
Interest Income, Net
Interest income, net primarily consists of interest earned on our cash, cash equivalents, marketable securities and restricted cash.
Other Income (Expense), Net
Other income (expense), net primarily consists of gains (losses) on the fair value remeasurement of our financing liabilities and gains (losses) on the fair value remeasurement of the private placement warrants through their cashless exercise and settlement inSeptember 2021 . Other income (expense) also reflected gains (losses) on the fair value remeasurement of the Equity Commitment and Share Purchase Option through their termination upon completion of the Business Combination Transaction inOctober 2020 as well as amounts for other miscellaneous income and expense unrelated to our core operations. As permitted under ASC 825, Financial Instruments, we elected the Fair Value Option for our financing liabilities, wherein the financial instruments were initially measured at their issue-date estimated fair value and are subsequently remeasured at estimated fair value on a recurring basis at each reporting period date. Changes in the fair value of our financing liabilities, excluding the impact of the change in fair value attributable to instrument-specific credit risk, are separately presented as a component of other income (expense), net in our consolidated statements of operations and comprehensive loss. The portion of the fair value adjustment attributed to a change in the instrument-specific credit risk is recognized and separately presented as a component of other comprehensive income (loss). Changes in the fair value of our financing liabilities can result from changes to one or multiple inputs, including adjustments to discount rates, changes in the expected achievement or timing of any sales-based, development and regulatory milestones, changes in the amount or timing of expected net cash flows, changes in the probability of certain clinical events and changes in the assumed probability associated with regulatory approval. The private placement warrants were determined to be free-standing financial instruments that were reclassified from equity to other long-term liabilities onMarch 31, 2021 . We revalued the private placement warrants on a recurring basis each reporting period through their cashless exercise and settlement inSeptember 2021 , with increases or decreases in the fair value of these warrants recognized as an adjustment to other income (expense), net in our consolidated statements of operations and comprehensive loss. Changes in the fair value of the private placement warrants resulted from changes to one or multiple inputs, including adjustments to the discount rate, expected volatility and dividend yield as well as changes in the fair value of our common stock and public warrants. The Equity Commitment and Share Purchase Option were free-standing financial instruments that were recorded at their fair value on the Formation Transaction Date. We revalued these instruments each reporting period and recorded increases or decreases in their respective fair value as an adjustment to other income (expense), net in our consolidated statements of operations and comprehensive loss. Changes in the fair value of these financial instruments resulted from changes to one or multiple inputs, including adjustments to the discount rates and expected volatility and dividend yield as well as changes in the amount and timing of the anticipated future funding required to settle these instruments and the fair value of our preferred and common stock that were expected to be exchanged to complete that additional funding. Discount rates in our valuation models represent a measure of the credit risk associated with settling the financial instruments. 139 --------------------------------------------------------------------------------
Significant judgment is employed in determining the appropriateness of the assumptions underlying the initial fair value determination for each of these instruments and for each subsequent period.
Income Tax Benefit (Provision), Net
To date, we have not recorded any significant amounts related to income tax expense, we have not recognized any reserves related to uncertain tax positions, nor have we recorded any income tax benefits for net operating losses incurred to date or for our research and development tax credits. We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in our consolidated financial statements or our tax returns. Deferred tax assets and liabilities are determined based on difference between the financial statement carrying amounts and tax bases of existing assets and liabilities and for loss and credit carryforwards, which are measured using the enacted tax rates and laws in effect in the years in which the differences are expected to reverse. The realization of our deferred tax assets is dependent upon the generation of future taxable income, the amount and timing of which are uncertain. Valuation allowances are provided, if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. As ofDecember 31, 2021 and 2020, we continue to maintain a full valuation allowance against all of our deferred tax assets based on our evaluation of all available evidence. We file income tax returns in theU.S. federal tax jurisdiction and state jurisdictions and may become subject to income tax audit and adjustments by related tax authorities. Our initial tax return period forU.S. federal income taxes was the 2018 period. We currently remain open to examination under the statute of limitations by the Internal Revenue Service and state jurisdictions for the 2020, 2019 and 2018 tax years. We record reserves for potential tax payments to various tax authorities related to uncertain tax positions. The nature of uncertain tax positions is subject to significant judgment by management and subject to change, which may be substantial. These reserves are based on a determination of whether and how much a tax benefit taken by us in our tax filings or positions is more likely than not to be realized following the resolution of any potential contingencies related to the tax benefit. We develop our assessment of uncertain tax positions, and the associated cumulative probabilities, using internal expertise and assistance from third-party experts. As additional information becomes available, estimates are revised and refined. Differences between estimates and final settlement may occur resulting in additional tax expense. Potential interest and penalties associated with such uncertain tax positions is recorded as a component of our income tax benefit (provision), net. To date, no amounts are being presented as an uncertain tax position. Results of Operations
The following table summarizes our results of operations for the years ended
For the year ended
December 31 , Change
2021 vs. 2020 vs.(In thousands) 2021 2020 2019 2020 2019 Operating expenses: Research and development$ 161,855 $ 103,303 $ 50,294 57 % 105 % General and administrative 58,243 45,813 33,169 27 % 38 % Total operating expenses 220,098 149,116 83,463 48 % 79 % Loss from operations (220,098 ) (149,116 ) (83,463 ) 48 % 79 % Interest income, net 157 224 1,552 (30 )% (86 )% Other income (expense), net (5,393 ) (3,274 ) (46,433 ) 65 % (93 )% Loss before income taxes (225,334 ) (152,166 ) (128,344 ) 48 % 19 % Income tax benefit (provision), net - 24 (45 ) (100 )% (153 )% Net loss$ (225,334 ) $ (152,142 ) $ (128,389 ) 48 % 19 % 140
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Research and Development
The following table summarizes the components of research and development
expense for the years ended
For the year ended
December 31, Change
2021 vs. 2020 vs.
(In thousands) 2021 2020 2019 2020 2019
Tavapadon $ 48,858 $ 31,678 $ 16,973 54 % 87 %
Darigabat 19,461 10,984 8,174 77 % 34 %
Emraclidine 15,472 16,360 2,646 (5 )% 518 %
CVL-871 4,773 1,003 - 376 % 100 %
Other research and development programs 15,973 8,414 3,425 90 % 146 %
Unallocated 13,773 8,608 3,587 60 % 140 %
Personnel costs 34,325 23,017 12,887 49 % 79 %
Equity-based compensation 9,220 3,239 2,602 185 % 24 %
Total research and development $ 161,855 $ 103,303 $ 50,294 57 % 105 %
For 2021 compared to 2020, the increase in research and development expense was
primarily due to the continued advancement of our tavapadon, darigabat and
CVL-871 programs as well as increased investment in our preclinical and
discovery research efforts. Decreased costs associated with emraclidine reflect
the completion of the Phase 1b clinical trial in June 2021 . The increase in
research and development expense also reflects higher personnel costs, including
equity-based compensation, as we continue to develop our organizational
infrastructure to advance our pipeline. The increase in unallocated costs
reflects the impact of our laboratory becoming operational in the second quarter
of 2021 and our increased investment in technology that supports our research
and development efforts. For 2021, expense associated with other research and
development programs was reduced by $0.9 million related to the reimbursement of
certain research and development costs received from the National Institute of
Drug Abuse agency of the National Institutes of Health .
For 2020 compared to 2019, the increase in research and development expense was
primarily due to an increase in program costs related to advancing our pipeline
and increased personnel costs, including equity-based compensation, as well as
an increase in unallocated costs as we grew our organization. The increase in
unallocated costs is primarily related to an increase in professional services
and other indirect research and development costs reflecting our increased
investment in technology, increased consulting and professional fees for
cross-program support activities and other overhead expenses.
General and Administrative
For the year ended
December 31, Change
(In thousands) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
General and administrative $ 58,243 $ 45,813 $ 33,169 27 % 38 %
For 2021 compared to 2020, the increase in general and administrative expense
was primarily due to increased public company costs and higher personnel costs,
including equity-based compensation as we continued to grow our organization.
General and administrative expense for 2021 also includes a $2.5 million net
charge associated with the departure of certain executives. General and
administrative expense for 2020 includes the write-off of approximately $2.5
million of deferred financing costs in June 2020 upon signing of the term sheet
for the Business Combination Transaction and $3.8 million of nonrecurring costs
pursuant to the Management Agreement with affiliate entities of Bain Investor,
inclusive of a $3.0 million charge related to the payment of remaining
management fees due under the agreement that became payable upon the completion
of the Business Combination Transaction.
For 2020 compared to 2019, the increase in general and administrative expense
was primarily due to increased personnel costs, including equity-based
compensation, higher facility-related costs as we grew our organization, as well
as certain non-recurring charges recognized in connection with our Business
Combination Transaction. The
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increase in facility-related costs is primarily associated with the lease for
our headquarters in Cambridge, Massachusetts . General and administrative expense
for 2020 includes a $3.0 million charge recognized in October 2020 related to
the payment of remaining management fees due pursuant to the Management
Agreement with affiliate entities of Bain Investor upon the completion of the
Business Combination Transaction. General and administrative expense for 2020
also includes a $2.5 million charge related to the write-off of deferred
financing costs directly associated with our previously anticipated initial
public offering, or IPO, and other financing activities that were abandoned in
June 2020 upon signing of the term sheet for our Business Combination
Transaction.
Interest Income, Net
For the year ended
December 31, Change
(In thousands) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Interest income, net $ 157 $ 224 $ 1,552 (30 )% (86 )%
Interest income, net primarily consists of interest earned on our cash, cash equivalents, marketable securities and restricted cash.
For 2021 compared to 2020, the decrease in interest income, net, reflects a reduction in market interest rates. Interest income, net for 2021 includes interest earned on our portfolio of available-for-sale marketable securities purchased in the fourth quarter of 2021.
For 2020 compared to 2019, the decrease in interest income, net, reflects a reduction in market interest rates and lower average comparative cash, cash equivalents and restricted cash balances.
Other Income (Expense), Net
The following table summarizes the components of other income (expense), net for
the years ended
For the year ended
December 31, Change
2021 vs. 2020 vs.
(In thousands) 2021 2020 2019 2020 2019
Loss on fair value remeasurement of
Equity Commitment $ - $ (3,530 ) $ (51,562 ) (100 )% (93 )%
Gain on fair value remeasurement of
Share Purchase Option - 260 5,120 (100 )% (95 )%
Loss on fair value remeasurement of
financing liability, related party (751 ) - - ** **
Loss on fair value remeasurement of
financing liability (751 ) - - ** **
Loss on fair value remeasurement of
private placement warrants (3,881 ) - - ** **
Other, net (10 ) (4 ) 9 150 % (144 )%
Other income (expense), net $ (5,393 ) $ (3,274 ) $ (46,433 ) 65 % (93 )%
** Not meaningful
For 2021, other income (expense), net, primarily reflects losses on the fair
value remeasurement of our financing liabilities and the private placement
warrants. The changes in fair value remeasurement of our financing liabilities
were primarily due to changes in our discount rates, changes in the amount or
timing of expected net cash flows and the passage of time. Changes in fair value
remeasurement of the private placement warrants were primarily due to changes in
the fair values of our common stock and public warrants, as well as changes in
the volatility implied by the market price of our public warrants through their
cashless exercise and settlement in September 2021 .
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For 2020, other income (expense), net, primarily reflects the loss on the fair
value remeasurement of the Equity Commitment. The net loss reflects a $5.5
million loss recognized on the partial settlement of the Equity Commitment
liability in July 2020 upon Bain Investor contributing an additional $25.0
million in exchange for the issuance of convertible preferred and convertible
common stock partially offset by a net gain of $2.0 million related to the fair
value remeasurement of the Equity Commitment through its termination.
For 2019, other income (expense), net, primarily reflects the loss on the fair
value remeasurement of Equity Commitment, partially offset by a gain on fair
value remeasurement of the Share Purchase Option. The loss on fair value
remeasurement of the Equity Commitment reflects a loss recognized upon the
partial settlement of the Equity Commitment liability upon the issuance of
Series A-1 Preferred Stock and Series A Common Stock in December 2019 . Changes
in fair value remeasurement of the Equity Commitment and Share Purchase Option
also reflect changes in the probability of exercise and timing of future
expected funding required in settlement of the Equity Commitment and Share
Purchase Option and increases in the fair value of our preferred and common
stock expected to be exchanged for that additional funding.
For additional information on our Equity Commitment and Share Purchase Option,
please read Note 7, Equity Commitment and Share Purchase Option, to our audited
consolidated financial statements included elsewhere in this Annual Report.
Liquidity and Capital Resources
Sources of Liquidity and Capital
We have incurred significant operating losses since our inception and we expect to continue to incur significant and increasing expenses and operating losses for the foreseeable future. Our net losses totaled$225.3 million ,$152.1 million and$128.4 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively, and as ofDecember 31, 2021 , we had an accumulated deficit of$616.2 million . We have not yet generated revenues. Our cash, cash equivalents and marketable securities totaled$618.0 million as ofDecember 31, 2021 . Until required for use in our business, we typically invest our cash in money market funds and investment grade short to intermediate-term fixed income securities. We attempt to minimize credit risk related to our cash, cash equivalents and marketable securities by maintaining balances in accounts only with accredited financial institutions and maintaining a well-diversified portfolio that limits the amount of exposure as to institution, maturity, and investment type. Prior to the Business Combination Transaction, our operations were funded primarily from the issuance of convertible preferred stock, convertible common stock and common stock. Upon closing of the Business Combination Transaction inOctober 2020 , we received net proceeds totaling approximately$439.5 million . OnApril 12, 2021 , we entered into the Funding Agreements, pursuant to which NovaQuest and Bain will provide up to$125.0 million in funding to support our development of tavapadon for the treatment of Parkinson's disease over four years, of which approximately$31.1 million (25% of the Total Funding Commitment, net of$0.2 million of fees incurred by Bain and NovaQuest) was received inApril 2021 . OnJuly 7, 2021 , we completed a follow-on public offering of our common stock pursuant to which we issued and sold 14,000,000 shares of our common stock at a price to the public of$25.00 per share. The aggregate net proceeds from this offering totaled approximately$328.3 million , after deducting underwriting discounts and commissions of$21.0 million and offering expenses of approximately$0.7 million . OnNovember 10, 2021 , we entered into an open market sales agreement withJefferies LLC , as sales agent, to provide for the ability of issuance and sale of up to$250.0 million of our common stock from time-to-time in "at-the-market" offerings, or the ATM Program. As ofDecember 31, 2021 , no sales had been made pursuant to the ATM Program.
Future Funding Requirements
Our primary use of cash is to fund operating expenses, primarily related to our
research and development activities. Cash used to fund operating expenses is
impacted by the timing of when we pay these expenses, as reflected in the change
in our outstanding accounts payable, accrued expenses and prepaid expenses.
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--------------------------------------------------------------------------------We have incurred significant operating expenses since our inception, and we expect to continue to incur significant and increasing expenses and operating losses for the foreseeable future.
Our future funding requirements will depend on many factors, including:
•
the scope, progress, results and costs of researching and developing our current product candidates, as well as other additional product candidates we may develop and pursue in the future;
•
the timing of, and the costs involved in, obtaining marketing approvals for our product candidates and any other additional product candidates we may develop and pursue in the future;
•
the number of future product candidates that we may pursue and their development requirements;
•
subject to receipt of regulatory approval, the costs of commercialization activities for our product candidates, to the extent such costs are not the responsibility of any future collaborators, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities;
•
subject to receipt of regulatory approval, revenue, if any, received from commercial sales of our product candidates or any other additional product candidates we may develop and pursue in the future;
•
the achievement of milestones that trigger payments under the Pfizer License Agreement and the Funding Agreements;
•
the royalty payments due under the Pfizer License Agreement and the Funding Agreements;
•
the extent to which we in-license or acquire rights to other products, product candidates or technologies;
•
our ability to establish collaboration arrangements for the development of our product candidates on favorable terms, if at all;
•
our receipt of additional funding under the Funding Agreements;
•
our headcount growth and associated costs as we expand our research and development and initiate pre-commercialization activities;
•
the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights, including enforcing and defending intellectual property related claims; and
•
the costs of operating as a public company.
Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the total amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials and preclinical studies. Our expectations with respect to our ability to fund current planned operations is based on estimates that are subject to risks and uncertainties. Our operating plan may change as a result of many factors currently unknown to us and there can be no assurance that the current operating plan will be achieved in the time frame anticipated by us, and we may need to seek additional funds sooner than planned.
For additional information on risks associated with our substantial capital requirements, please read the sections entitled "-Risks and Liquidity" and "Risk Factors" included elsewhere in this Annual Report.
Warrants
Upon the consummation of the Business Combination Transaction, there were 4,983,314 public warrants and 166,333 private placement warrants (collectively, the warrants) outstanding. Each outstanding warrant of ARYA became one warrant to purchase one share of our common stock. Each whole warrant entitled the holder to purchase one share of our common stock at an exercise price of$11.50 per share. The warrants became exercisable beginning onJune 9, 2021 . OnJuly 30, 2021 , we announced the redemption of all of the outstanding public warrants with a redemption date ofAugust 30, 2021 , or the Redemption Date. Any public warrants that remained outstanding as of the Redemption Date became void and no longer exercisable and the holders of such public warrants became entitled to receive the redemption price of$0.01 per public warrant. At any time prior to the Redemption Date, the public 144 -------------------------------------------------------------------------------- warrants were able to be exercised by the holders to purchase shares of our common stock at the exercise price of$11.50 per share. An aggregate of 4,822,947 public warrants were exercised prior to the Redemption Date for an equal number of shares of our common stock resulting in gross proceeds of approximately$55.5 million . The 160,367 public warrants that remained unexercised following the Redemption Date were redeemed for the redemption price of$0.01 per public warrant. No public warrants remained outstanding as ofDecember 31, 2021 .
In
Working Capital
The following table summarizes our total working capital, defined as current
assets less current liabilities as of
As of December 31,
(In thousands) 2021 2020 Change
Current assets $ 578,017 $ 390,560 48 %
Current liabilities (42,538 ) (29,548 ) 44 %
Total working capital $ 535,479 $ 361,012 48 %
The change in working capital at
The net increase in total current assets was primarily driven by an increase in current marketable securities offset by a reduction in our cash and cash equivalents. These changes reflect our investment of excess cash provided by financing activities, offset by cash used in operations and for purchases of property and equipment and non-current marketable securities, as discussed in further detail below. The net increase in current liabilities was primarily driven by increases in accounts payable and accruals related to external research and development services, employee compensation and other personnel costs, partially offset by decreases in accruals for the purchase of property and equipment.
Cash Flows
The following table summarizes our sources and uses of cash for the years ended
For the year ended
December 31, Change
2021 vs. 2020 vs.
(In thousands) 2021 2020 2019 2020 2019
Net cash flows used in operating
activities $ (178,546 ) $ (117,802 ) $ (70,720 ) 52 % 67 %
Net cash flows used in investing
activities (435,661 ) (18,892 ) (1,099 ) 2,206 % 1,619 %
Net cash flows provided by
financing activities 423,602 440,835 60,058 (4 )% 634 %
Net increase (decrease) in cash,
cash equivalents, and restricted
cash $ (190,605 ) $ 304,141 $ (11,761 ) (163 )% (2,686 )%
Cash flows used in Operating Activities
Net cash flows used in operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities. We expect cash provided by financing activities will continue to be our primary source of funds to finance operating needs and capital expenditures for the foreseeable future.
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--------------------------------------------------------------------------------Net cash flows used in operating activities is derived by adjusting our net loss for:
•
non-cash operating items such as depreciation and amortization, adjustments to operating lease expense, equity-based compensation, impairments and write-offs of deferred charges and amortization of premiums and accretion of discounts on marketable securities;
•
changes in operating assets and liabilities reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in results of operations; and
•
changes in the fair value remeasurement of the Equity Commitment and Share Purchase Option, our financing liabilities and private placement warrants.
For 2021, cash used in operating activities primarily reflects our net loss for the period of$225.3 million , adjusted for net non-cash charges totaling$31.2 million and a net change of$15.5 million in our net operating assets and liabilities. Our non-cash charges primarily consisted of$23.9 million of equity-based compensation expense,$3.9 million related to the final fair value remeasurement of private placement warrants through their cashless exercise and settlement,$2.7 million of depreciation and amortization and$1.5 million related to the fair value remeasurement of our financing liabilities. The net changes in our operating assets and liabilities primarily reflect an increase in operating lease liabilities resulting from landlord reimbursement for tenant improvements, an increase in accounts payable related to increased operating activities and the timing of payments, and an increase in accrued expenses related to increased operating activities. These increases are partially offset by a reduction in amounts accrued for property and equipment, an increase in prepaids and other current assets primarily due to advances related to clinical trials and other research activities, and the prepayment of insurance premiums and software licenses. For 2020, cash used in operating activities primarily reflects our net loss for the period of$152.1 million , adjusted for net non-cash charges totaling$16.6 million and a net change of$17.7 million in our net operating assets and liabilities. Our non-cash charges primarily consisted of$10.5 million of equity-based compensation expense, net losses totaling$3.3 million recognized in relation to the Equity Commitment and Share Purchase Option and a$2.5 million charge related to the write-off of deferred financing costs directly associated with Old Cerevel's previously anticipated initial public offering and other financing activities that were abandoned inJune 2020 upon signing of the term sheet for the Business Combination Transaction. The net changes in our operating assets and liabilities primarily reflect an increase in account payable and accrued expenses and other liabilities associated with compensation, external research and development services and an increase in operating lease liabilities resulting from landlord reimbursement for tenant improvements. For 2019, net cash used in operating activities primarily reflected our net loss for the period of$128.4 million , adjusted by non-cash charges totaling$57.3 million and a net change of$0.3 million in relation to our net operating assets and liabilities. Our non-cash charges primarily consisted of net losses totaling$46.4 million recognized related to the Equity Commitment and Share Purchase Option,$8.3 million of equity-based compensation expense and$2.4 million of non-cash rent expense. The net changes in our operating assets and liabilities primarily reflect an increase in accounts payable and accrued expenses and other current liabilities, partially offset by an increase in prepaid expenses, other current assets and other assets.
Cash flows used in Investing Activities
For 2021, cash used in investing activities reflected$425.2 million used for purchases of marketable securities and$10.5 million of property and equipment, primarily related to the build-out of ourCambridge, Massachusetts headquarters. For 2020, cash used in investing activities reflected$18.9 million used for purchases of property and equipment, primarily related to the build-out of ourCambridge, Massachusetts headquarters.
For 2019, cash used in investing activities reflected
Cash flows provided by Financing Activities
For 2021, net cash provided by financing activities totaled
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warrants, $31.3 million of proceeds received under the Funding Agreements and
$9.0 million of proceeds received from stock option exercises and purchases of
stock under our ESPP.
For 2020, net cash provided by financing activities totaled
For 2019, net cash provided by financing activities totaled$60.1 million , which primarily consisted of net proceeds from the issuance of Series A-1 Preferred Stock and Series A Common Stock.
Management Agreement
In connection with the initial financing, on the Formation Transaction Date, Old Cerevel entered into an agreement withBain Capital Private Equity, LP andBain Capital Life Sciences, LP , which are entities related to Bain Investor, whereby such entities provided certain management services to us for a fee of$1.0 million per year, paid in quarterly, non-refundable installments, or the Management Agreement. This agreement obligated us to pay such entities, in the aggregate, a$5.0 million fee upon the completion of a qualified public offering or change of control transaction, less any quarterly fees previously paid to such entities. Upon completion of the Business Combination Transaction, we paid the remaining approximately$3.0 million of management fees payable under the Management Agreement and no additional fees remained payable pursuant to this agreement. Inclusive of the final payment made under the Management Agreement, we incurred management fees toBain Capital Private Equity, LP andBain Capital Life Sciences, LP totaling$3.8 million and$1.0 million during the years endedDecember 31, 2020 and 2019, respectively. Following the closing of the Business Combination Transaction, we entered into a new management agreement withBain Capital Private Equity, LP andBain Capital Life Sciences, LP providing for the expense reimbursement and indemnification of such entities. No amounts were incurred under the management agreement during the year endedDecember 31, 2021 .
Contractual Obligations and Other Commitments
Our contractual obligations primarily consist of our obligations under
non-cancellable operating leases, contracts and other purchase obligations. We
did not have any debt obligations as of
Our most significant contracts relate to agreements with CROs for clinical trials and preclinical studies, CMOs and other service providers for operating purposes, which we enter into in the normal course of business. These contracts are generally cancelable at any time by us following a certain period after notice and therefore, we believe that our non-cancelable obligations under these agreements are not material. In addition, we have obligations with respect to potential future royalties payable, contingent development, regulatory and commercial milestone payments and potential amounts related to uncertain tax positions. The timing and amount of such obligations are unknown or uncertain as ofDecember 31, 2021 . For additional information on potential royalties and milestone payments payable to Pfizer, please read Note 6, Pfizer License Agreement, to our audited consolidated financial statements included elsewhere in this Annual Report. Funding Agreements OnApril 12, 2021 , we entered into the Funding Agreements, pursuant to which we will receive up to a combined total of up to$125.0 million , to support our development of tavapadon for the treatment of Parkinson's disease. In return, we agreed to pay to NovaQuest and Bain significant regulatory milestone, sales milestone and royalty payments upon approval of tavapadon by the FDA that collectively will not exceed$531.3 million . In addition, we have the option to satisfy our payment obligations to NovaQuest and Bain upon the earlier of FDA approval orMay 1, 2025 , by paying an amount equal to the Total Funding Commitment multiplied by an initial factor of 3.00x. This factor will increase ratably over time up to a maximum of 4.25x, less amounts previously paid to NovaQuest and Bain.
For additional information on our funding agreements, please read Note 8, Financing Liabilities, to our audited consolidated financial statements included elsewhere in this Annual Report.
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--------------------------------------------------------------------------------As ofDecember 31, 2021 and 2020, we recorded accrued expenses of approximately$12.2 million and$7.1 million , respectively, in our consolidated balance sheets for expenditures incurred by CROs and CMOs.
Tax Related Obligations
To date, we have not recognized any reserves related to uncertain tax positions.
As of
Off-balance sheet arrangements
We have not entered into any off-balance sheet arrangements and do not have holdings in any variable interest entities.
Critical Accounting Policies and Estimates
This 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. generally accepted accounting principles, orU.S. GAAP. The preparation of the consolidated financial statements in conformity withU.S. GAAP requires us to make estimates, judgments and assumptions that may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses 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. Other significant accounting policies are outlined in Note 4, Summary of Significant Accounting Policies, to our audited consolidated financial statements included elsewhere in this Annual Report.
We have entered into various agreements with CROs, CMOs and other service providers. Our research and development accruals are estimated based on the level of services performed, progress of the studies, including the phase or completion of events, and contracted costs. The estimated costs of research and development provided, but not yet invoiced, are included in accrued liabilities on the balance sheet. If the actual timing of the performance of services or the level of effort varies from the original estimates, we will adjust the accrual accordingly. Payments made to third parties under these arrangements in advance of the performance of the related services are recorded as prepaid expenses and other current assets until the services are rendered. To date, our estimated accruals have not differed materially from actual costs incurred.
Fair Value Option for Funding Agreements
We elected to account for our funding agreements and related financial
liabilities described in Note 8, Financing Liabilities, in accordance with the
fair value option permitted under ASC 825-10, Financial Instruments. A liability
associated with each of our funding agreements was initially recognized at their
estimated fair value within our consolidated balance sheets. We revalue these
financial instruments on a recurring basis each reporting period with subsequent
changes in fair value, excluding the impact of the change in fair value related
to instrument-specific credit risk, separately presented as a component of other
income (expense), net in our consolidated statements of operations and
comprehensive loss. The portion of the fair value adjustment attributed to a
change in the instrument-specific credit risk is recognized and separately
presented as a component of other comprehensive income (loss).
We determined the estimated fair values using a Monte Carlo simulation model
under the income approach determined by utilizing probability assessments of the
expected future cash receipts and expected future cash payments. Changes in the
fair value of our financing liabilities can result from changes to one or
multiple inputs, including adjustments to discount rates, changes in the
expected achievement or timing of any sales-based, development and regulatory
milestones, changes in the amount or timing of expected net cash flows, changes
in the
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probability of certain clinical events and changes in the assumed probability
associated with regulatory approval. These fair value measurements represent
Level 3 measurements as they are based on significant inputs not observable in
the market.
Upfront, direct costs and fees related to the instruments for which we have elected the fair value option were recognized in general and administrative expense in earnings as incurred.
The decision to elect the fair value option is determined on an instrument-by-instrument basis, and must be applied to an entire instrument and is irrevocable once elected, but need not be applied to all similar instruments. Assets and liabilities measured at fair value pursuant to ASC 825-10 are required to be reported separately from those instruments measured using another accounting method. If actual results or events differ materially from the estimates, judgments and assumptions used by us in applying these policies, our reported financial condition and results of operations could be materially affected. For additional information on our qualifying instruments that we have elected to account for under the fair value option, please read Note 8, Financing Liabilities, and Note 9, Fair Value Measurements, to our audited consolidated financial statements included elsewhere in this Annual Report.
Fair Value of Equity Commitment and Share Purchase Option
The Equity Commitment and Share Purchase Option were free-standing financial
instruments that may have required us to transfer equity upon settlement or
exercise, respectively, and were recorded at fair value on the Formation
Transaction Date. The fair value of each financial instrument on the Formation
Transaction Date was allocated to the Series A-1 Preferred Stock, Series A-2
Preferred Stock and Series A Common Stock.
We utilized a hybrid methodology that combines both an income approach and a
market approach, which incorporated a probability weighted expected return
(PWERM) related to pre-IPO funding, to estimate the fair value of our Equity
Commitment and Share Purchase Option during 2019 and throughout 2020, until the
Equity Commitment and Share Purchase Option were terminated upon completion of
the Business Combination Transaction. Under this methodology, these financial
instruments were valued based upon a probability weighted-average of two
separate models prepared following an income approach and a market approach. The
fair value of the funding obligation under each model was estimated as the net
present value of the anticipated future funding, reduced by the value of the
additional shares of preferred and common stock that would be exchanged for
future funding.
We revalued these financial instruments each reporting period, until the Equity
Commitment and Share Purchase Option were terminated, utilizing models that are
sensitive to changes in the unobservable inputs such as changes in the estimated
future funding dates or fair value of our stock. Changes in the fair value of
these instruments resulted from changes to one or multiple inputs, including
adjustments to the discount rates and expected volatility and dividend yield as
well as changes in the amount and timing of the anticipated future funding
required in settlement of the Equity Commitment and Share Purchase Option and
the fair value of our preferred and common shares expected to be exchanged for
that additional funding. Discount rates in our valuation models represented a
measure of the credit risk associated with settling the financial instruments.
The expected dividend yield was assumed to be zero as we have never paid
dividends and do not have current plans to pay any dividends on our common
stock. Significant judgment was employed in determining these assumptions as of
the Formation Transaction Date and for each subsequent period.
Changes in fair value of the Equity Commitment and Share Purchase Option were
recognized as a component of other income (expense), net in our consolidated
statements of operations and comprehensive loss. We classified the fair value of
the remaining Equity Commitment and the fair value of the Share Purchase Option
as an asset or liability within our consolidated balance sheets. Immediately
prior to the closing of the Business Combination Transaction, these financial
instruments were adjusted to their final fair value of zero and were terminated
upon closing.
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--------------------------------------------------------------------------------Equity-Based Compensation
We determine the fair value of each award issued under our equity-based compensation plan on the date of grant. We recognize compensation expense for service-based awards on a straight-line basis over the requisite service period which generally approximates the vesting term. For service-based awards with performance or market conditions that were satisfied upon closing of the Business Combination Transaction, we recognize compensation expense on a straight-line basis over the requisite service period for each separate vesting portion of the award, with the amount of compensation expense recognized at any date at least equaling the portion of the grant-date fair value of the award that is vested at that date.
Determination of Fair Value - Preferred and Common Stock
Prior to the completion of the Business Combination Transaction, given the absence of an active market for our common stock, we were required to estimate the fair value of our common stock at the time of each grant of an equity-based award. We used a hybrid methodology that combines both an income approach and a market approach to estimate the business enterprise value and our total equity value to calculate the fair value of our preferred stock and common stock during 2019 and throughout 2020, until completion of the Business Combination Transaction. A probability-weighted discounted cash flow analysis was first prepared reflecting multiple scenarios for future outcomes associated with the acquired product candidates in order to estimate the cash flows associated with estimated liquidity events (i.e., an IPO). We also used a PWERM to determine the fair value of pre-IPO funding scenarios. We then used a market approach to estimate the value as of each potential date of liquidity, resulting in an estimate of the total equity value, including the value of planned future funding. The value of the preferred stock and common stock was then estimated using an option pricing method, allocating total equity value based on an assumed future liquidity date, the liquidation preference of the preferred stock and the assumed funding in each scenario. Each of these scenarios was probability-weighted based on the expected outcomes to arrive at a final estimated fair value per share of the common stock. The estimates and assumptions underlying our valuations included a number of objective and subjective factors. We believe our methodologies are reasonable based upon our internal peer company analyses and further supported by transactions involving our preferred stock. If different assumptions had been made, equity-based compensation expense, consolidated net loss and consolidated net loss per share could have been significantly different. Pursuant to the terms of our Business Combination Agreement, the stockholders of Old Cerevel exchanged their shares of common stock in Old Cerevel for shares ofCerevel Therapeutics Holdings, Inc. , based upon the Exchange Ratio. Subsequent to the closing of the Business Combination Transaction, our board of directors determines the fair value of each share of common stock underlying stock-based awards based on the closing price of our common stock as reported by Nasdaq on the date of grant.
Determination of Fair Value - Stock Option Awards
Prior to the closing of the Business Combination Transaction, we estimated the
fair value of the stock option awards on the date of grant using the option
pricing method, which is a variant of an income approach. The option pricing
method was used given that a portion of the option awards have an exercise price
that is considered to be "deeply out of the money." The option pricing method
incorporated the probability of the performance and market conditions being met
and adjustments to the estimated life and value of the options to reflect the
necessary growth in the common share value for such shares to become
exercisable. Our option awards granted prior to the Business Combination
Transaction, reflects multiple strike prices. In order to motivate our
employees, a premium in exercise price was applied to 25% of each option award.
As there was no public market for our common stock prior to the closing of the
Business Combination Transaction, we determined the volatility for options
granted based on an analysis of reported data for a peer group of companies. The
expected volatility of granted options were determined using a weighted-average
of the historical volatility measures of this peer group of companies. The
expected life of options for these awards were determined by
probability-weighting the calculated expected life of the option at each month
the option was eligible to be at- or in-the-money to estimate the overall
adjusted expected life. We did not utilize the "simplified method" to determine
expected life as this method is not valid for options that are "deeply out of
the money." The risk-free interest rate utilized in our calculations is based on
a treasury instrument whose term is consistent with the expected life of the
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--------------------------------------------------------------------------------stock options. The expected dividend yield is assumed to be zero as we have never paid dividends and do not have current plans to pay any dividends on our common stock.
Awards under our previously existing equity incentive plans, including the 2020 Old Cerevel Equity Incentive Plan and the 2018 Old Cerevel Equity Incentive Plan, were exchanged for awards issued under a new equity incentive plan adopted byCerevel Therapeutics Holdings, Inc. at the same Exchange Ratio.
Subsequent to the closing of the Business Combination Transaction, we estimate the fair value of our stock option awards using the Black Scholes method utilizing the fair value of our common stock and the following assumptions:
•
Expected term - We have opted to utilize the "simplified method," for determining the expected life of the award, which is based on the mid-point between the vesting date and the end of the contractual term as all options granted after becoming a public entity will be granted "at-the-money."
•
Expected volatility - We determine the volatility for options granted based on an analysis of reported data for a peer group of companies. The expected volatility of granted options has been determined using a weighted-average of the historical volatility measures of this peer group of companies. We will continue to apply this method until a sufficient amount of historical information regarding the volatility of our own stock price becomes available.
•
Risk-free interest rate - The risk-free interest rate utilized in our calculations is based on a treasury instrument whose term is consistent with the expected life of the stock options.
•
Expected Dividend - The expected dividend yield is assumed to be zero as we have never paid dividends and do not have current plans to pay any dividends on our common stock. Following the closing of the Business Combination Transaction, the strike price of our option awards reflects the closing price of our common stock as reported by Nasdaq on the date of grant. As ofDecember 31, 2021 , total unrecognized equity-based compensation expense relating to stock options was$70.1 million , of which only approximately$4.8 million related to awards granted prior to the Business Combination Transaction.
For additional information on the Business Combination and our equity-based incentive plans, please read Note 3, Business Combination and Note 13, Equity-Based Compensation, to our audited consolidated financial statements included elsewhere in this Annual Report.
Recent Accounting Pronouncements
For a discussion of new accounting standards and their expected impact on our consolidated financial statements or disclosures, please read Note 5, Recent Accounting Guidance, to our audited consolidated financial statements included elsewhere in this Annual Report.
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