CULLINAN THERAPEUTICS, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 (the "2021 10-K"), filed with theSecurities and Exchange Commission (the "SEC") onMarch 17, 2022 . This discussion and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties, such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the "Risk Factors" section of this Quarterly Report on Form 10-Q.
Overview
We are a biopharmaceutical company developing a diversified pipeline of targeted oncology therapeutic candidates across multiple modalities in order to bring important medicines to cancer patients. Our strategy is to source innovation through both internal discovery efforts and external collaborations, focusing on advanced-stage assets with novel technology platforms and differentiated mechanisms. Before we advance a product candidate into clinical development, we evaluate its potential for anti-tumor activity as a single agent as well as its ability to generate an immune system response or to inhibit oncogenic drivers. Using this strategy, we have efficiently developed or in-licensed a portfolio of therapeutic candidates. CLN-081, which we are co-developing withTaiho Pharmaceutical, Co. Ltd ("Taiho"), is an orally available small-molecule, irreversible epidermal growth factor receptor ("EGFR") inhibitor that is designed to selectively target cells expressing EGFR exon 20 insertion ("EGFRex20ins") mutations with relative sparing of cells expressing wild-type EGFR. InJune 2022 , Taiho acquired our partially-owned subsidiary,Cullinan Pearl Corp. ("Cullinan Pearl"), which has worldwide rights to CLN-081 outside ofJapan andGreater China , for an upfront payment of$275.0 million to us with the potential for an additional$130.0 million tied to EGFR exon20 non-small-cell lung cancer ("NSCLC") regulatory milestones. Concurrently with the closing of the sale of Cullinan Pearl, we entered into a co-development and co-commercialization agreement for CLN-081 with an affiliate of Taiho, pursuant to which we will collaborate to develop CLN-081 and will retain the option to co-commercialize CLN-081 in theU.S. Development costs for CLN-081 after the sale of Cullinan Pearl shall be shared equally between the Company and Taiho with each party receiving 50% of any future potential pre-tax profits fromU.S. sales of CLN-081. CLN-081 is being evaluated as a treatment for NSCLC in adult patients with EGFRex20ins mutations in a Phase 1/2a trial. Among 39 response evaluable patients treated at the 100mg twice daily dose in this trial, CLN-081 has shown an initial efficacy profile that is at the high end of exon 20 agents, including a 41% confirmed response rate, an estimated 21-month median duration of response and an estimated 12-month progression-free survival. We have also observed favorable safety and tolerability at this dose, which includes no grade 3 or greater EGFR-related toxicities and relatively low dose discontinuation and interruption rates. TheU.S. Food and Drug Administration ("FDA") has granted Breakthrough Therapy Designation to CLN-081. Our most advanced wholly-owned product candidates include CLN-049, a bispecific antibody targeting FLT3 and CD3, and CLN-619, a monoclonal antibody designed to stimulate natural killer and T cell responses by engaging a unique target, MICA/B. We initiated enrollment in clinical trials in the fourth quarter of 2021 for CLN-049 for patients with relapsed or refractory acute myeloid leukemia or myelodysplastic syndrome and for CLN-619 for patients with advanced solid tumors. In addition to the above product candidates, our portfolio includes several preclinical oncology programs. The most advanced of these programs include CLN-617, a fusion protein combining two potent antitumor cytokines, interleukin-2 and interleukin-12, with tumor retention domains for the treatment of solid tumors, and CLN-978, an internally-developed half-life extended T-cell engaging antibody construct designed to simultaneously engage CD19 and CD3. We expect to submit investigational new drug applications ("INDs") for both of these programs to the FDA by the first half of 2023. Our remaining preclinical programs include Opal, a bispecific fusion protein that blocks the PD-1 axis and selectively activates the 4-IBB/CD137 pathway on T cells in tumors; Jade, a cell therapy targeting a novel senescence and cancer-related protein that we are developing in collaboration with theFred Hutchinson Cancer Research Center ; and an HPK1 protein degrader research collaboration with theIcahn School of Medicine at Mount Sinai ("Icahn Mount Sinai"). At theAmerican Association for Cancer Research ("AACR") 2022 Annual Meeting inApril 2022 , we presented preclinical data across five of these programs, including CLN-049, CLN-619, CLN-617, CLN-978 and Opal. We hold worldwide development and commercialization rights to each of our wholly-owned product candidates. Since our inception in 2016, we have focused all of our efforts and financial resources on raising capital, organizing and staffing our company, identifying, acquiring or in-licensing and developing product and technology rights, establishing and protecting our intellectual property portfolio and developing and advancing our programs. To support these activities, we (i) identify and secure new programs, (ii) set up new subsidiaries to further advance individual programs, (iii) recruit key management team members, (iv) raise and allocate capital across the portfolio and (v) provide certain shared services, including research and development operations, administrative services, and business development, to our subsidiaries. We do not have any products approved for sale and have not generated any revenue from product sales. 14 -------------------------------------------------------------------------------- We have three partially-owned development subsidiaries ("Asset Subsidiaries"):Cullinan Florentine Corp. ("Cullinan Florentine"), which is advancing CLN-049;Cullinan MICA Corp. ("Cullinan MICA"), which is advancing CLN-619; andCullinan Amber Corp. ("Cullinan Amber"), which is developing our AMBER platform and advancing CLN-617 as its first product candidate. The Company's former Asset Subsidiary, Cullinan Pearl, which is advancing CLN-081, was divested in the second quarter of 2022. We hold intellectual property rights and exclusive options for worldwide intellectual property for our earlier-stage programs, NexGem, Opal, Jade and the HPK1 degrader collaboration with Icahn Mount Sinai. Since inception, we have funded our operations primarily through the sale of equity securities and from licensing or selling the rights to our product candidates. As ofJune 30, 2022 , we have received net proceeds of$541.2 million from equity financings, inclusive of our net proceeds of$264.5 million from our initial public offering ("IPO"). We have received$18.9 million in net collaboration revenue from our previous license agreement ("Zai License Agreement") withZai Lab Shanghai Company, Limited ("Zai Lab ") and cash proceeds of$270.0 million , net of$5.0 million in escrow as ofJune 30, 2022 , from the sale of Cullinan Pearl. As ofJune 30, 2022 , we had cash, cash equivalents and short-term investments of$611.0 million and long-term investments and interest receivable of$44.6 million . Interest receivable is included in prepaid expenses and other current assets on the consolidated balance sheet and represents accrued and unpaid interest on our marketable securities. With the exception of the second quarter 2022, we have incurred operating losses and have had negative cash flows from operations since our inception. As ofJune 30, 2022 , we had retained earnings of$3.9 million . Besides the one-time gain from the sale of Cullinan Pearl, we expect to continue to generate operating losses for the foreseeable future. Our future viability is dependent on the success of our research and development and our ability to access additional capital to fund our operations. There can be no assurance that our current operating plan will be achieved or that additional funding will be available on terms acceptable to us, or at all. We are subject to risks and uncertainties common to early-stage companies in the biotechnology industry including, but not limited to, new technological innovations, protection of proprietary technology, dependence on key personnel, compliance with government regulations and the ability to obtain additional capital to fund operations. Our therapeutic programs will require significant additional research and development efforts, including preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require additional capital, adequate personnel and extensive compliance-reporting capabilities. There can be no assurance that our research and development will be successfully completed, that adequate protection for our intellectual property will be obtained, that any products developed will obtain necessary government regulatory approval or that any approved products will be commercially viable. Impact of COVID-19 Pandemic The duration and scope of the COVID-19 pandemic continues to be uncertain. Infection rates remain high in many parts of the world, and the virulence and spread of different strains of the virus have caused many local jurisdictions to continue or re-implement quarantines and restrictions on travel and mass gatherings. The extent and duration of the impact of COVID-19 on our operations and financial performance is currently unknown and will depend on future developments that are uncertain and unpredictable. We implemented remote working and other protective measures, but thus far, have not experienced a significant disruption or delay in our operations as it relates to the clinical development or drug production of our product candidates. However, COVID-19 has at times impacted the pace of our enrollment in our clinical trials and the conduct of our preclinical studies. In the future, COVID-19-related restrictions may adversely impact our operations. Such events may result in a period of business, supply and drug product manufacturing disruption, and in reduced operations, any of which could materially affect our business, financial condition and results of operations. To date, COVID-19 has not had a financial impact on us. The spread of COVID-19, which has caused a broad impact globally, may materially affect us economically. While the ultimate economic impact brought by, and the duration of, the COVID-19 pandemic remain difficult to assess or predict, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others, the pandemic has resulted in significant disruptions in the general commercial activity and the global economy and caused financial market volatility and uncertainty in significant and unforeseen ways. A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability to access capital, which could in the future negatively affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business.
Basis of Presentation and Consolidation
Since our inception, we have created wholly-owned subsidiaries or made
investments in certain controlled entities. Losses attributed to noncontrolling
interests are reported separately in our consolidated statements of operations
and comprehensive income (loss).
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The following Asset Subsidiaries are consolidated into our financial statements:
Current Date Control Ownership as of
Consolidated Entities Relationship First Acquired June 30, 2022 (1)
Cullinan Pearl Corp. (2) Divested November 2018 0 %
Cullinan Amber Corp. Partially-owned
Subsidiary December 2019 94 %
Cullinan Florentine Corp. Partially-owned
Subsidiary December 2019 95 %
Cullinan MICA Corp. Partially-owned
Subsidiary May 2020 54 %
(1)Ownership percentages are reflected on a fully-diluted basis.
(2)
Refer to Note 3 of our notes to the consolidated financial statements.
Cullinan Pearl
The Company sold its partially-owned subsidiary, Cullinan Pearl, to Taiho inJune 2022 . Refer to Note 3 of our notes to the consolidated financial statements for additional details relating to the transaction.
Cullinan Amber
Cullinan Amber, incorporated inDecember 2019 , is our partially-owned operating subsidiary that has a license agreement with theMassachusetts Institute of Technology ("MIT") that provides exclusive worldwide rights to the patents related to technology that originated in the laboratory of Dr.Dane Wittrup to develop novel multifunctional constructs that are retained in the tumor microenvironment, which enables prolonged local activity of immunostimulatory cytokine combinations. InJune 2021 , Cullinan Amber issued 3.0 million shares of its Series A Preferred Stock to us for gross proceeds of$3.0 million and 0.2 million shares of its common stock toMIT in exchange for no additional consideration, pursuant to the license agreement withMIT . InJune 2022 , Cullinan Amber issued 6.0 million shares of its Series A Preferred Stock to us for gross proceeds of$6.0 million and 0.3 million shares of its common stock toMIT in exchange for no additional consideration, pursuant to the license agreement withMIT . As ofJune 30, 2022 , we owned 93.5% of the fully-diluted shares outstanding of Cullinan Amber, including 100% of Series A Preferred Stock. As ofJune 30, 2022 , noncontrolling interests collectively owned 6.5% of the equity of Cullinan Amber on a fully-diluted basis.
Pursuant to a voting agreement by and among Cullinan Amber, us, and other stockholders of Cullinan Amber, the holders of Cullinan Amber's Series A Preferred Stock, acting by majority vote, have the right to designate two members of the three-person board of directors.
Cullinan Florentine
Cullinan Florentine, incorporated inDecember 2019 , is our partially-owned operating subsidiary that has exclusive worldwide rights to CLN-049, our bispecific antibody targeting FLT3 and CD3, pursuant to an exclusive license agreement (the "Tübingen License Agreement") with Deutsches Krebsforschungszentrum ("DKFZ"),Eberhard Karls University of Tübingen, Faculty of Medicine ("University of Tübingen"), and Universitätsmedizin Gesellschaft für Forschung und Entwicklung mbH, Tübingen ("UFE").
In
As ofJune 30, 2022 , we owned 94.8% of the fully-diluted shares outstanding of Cullinan Florentine, including 100% of Series A Preferred Stock. As ofJune 30, 2022 , noncontrolling interests collectively owned 5.2% of the equity of Cullinan Florentine on a fully-diluted basis Pursuant to a voting agreement between Cullinan Florentine, us and other stockholders of Cullinan Florentine, holders of Cullinan Florentine's Series A Preferred Stock, acting by majority vote, have the right to designate two members of the four-person board of directors. DKFZ and UFE, acting jointly, have the right to appoint one director. Our current chief executive officer,Mr. Ahmed , is the fourth board member.
Cullinan MICA
Cullinan MICA, formerly known asPDI Therapeutics, Inc. , of which we assumed operational control inMay 2020 , is our partially-owned operating subsidiary that owns intellectual property related to CLN-619, our MICA/B-targeted humanized IgG1 monoclonal antibody. InJune 2021 , we purchased 5.4 million shares of Cullinan MICA's Series A Senior Preferred Stock for$7.1 million , and certain other existing investors purchased 0.7 million shares for$0.9 million .
In
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As of June 30, 2022 , we own 53.5% of the fully-diluted shares outstanding of
Cullinan MICA, including 52% of Series A Preferred Stock. Noncontrolling
interests own 46.5% of the fully-diluted shares outstanding of Cullinan MICA,
including 48% of Series A Preferred Stock.
Pursuant to a voting agreement, by and among Cullinan MICA, us, and other stockholders of Cullinan MICA, we have the right to appoint three members of the five-person board of directors.
Components of Our Results of Operations
Revenue
For the six months endedJune 30, 2021 , we recognized$18.9 million of revenue, relating to the upfront fee earned from the Zai License Agreement. We have not generated any revenue from the sale of products since our inception and do not expect to generate any revenue from the sale of products in the near future, if at all. If our development efforts for our product candidates are successful and result in regulatory approval or if we enter into collaboration or license agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from such collaboration or license agreements.
Operating Expenses
Research and Development Expenses
Research and development expenses consist primarily of costs incurred in connection with the research and development of our wholly-owned and jointly-developed product candidates and programs. We expense research and development costs and intangible assets acquired that have no alternative future use as incurred. These expenses include:
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employee-related expenses, including salaries, related benefits and equity-based compensation expense, for employees engaged in research and development functions;
•
expenses incurred under agreements with organizations that support our drug discovery and development activities;
•
expenses incurred in connection with the preclinical and clinical development of
our product candidates and programs, including under agreements with contract
research organizations ("CROs");
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costs related to contract manufacturing organizations, that are primarily engaged to provide drug substance, raw material and drug product for our clinical trials, research and development programs, as well as investigative sites and consultants that conduct our clinical trials, nonclinical studies and other scientific development services;
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the costs of acquiring and manufacturing nonclinical and clinical trial materials, including manufacturing registration and validation batches;
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costs related to compliance with quality and regulatory requirements;
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payments made under third-party licensing agreements; and
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direct and allocated costs related to facilities, information technology, personnel and other overhead.
Advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. Such amounts are recognized as an expense as the goods are delivered or consumed or the related services are performed, or until it is no longer expected that the goods will be delivered or the services rendered. 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 and duration of later-stage clinical trials. We expect that our research and development expenses will increase substantially in connection with our planned clinical development activities in the near term and in the future. At this time, we cannot accurately estimate or know the nature, timing and costs of the efforts that will be necessary to complete the clinical development of any current or future product candidates.
Our clinical development costs may vary significantly based on factors such as:
• per patient trial costs;
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the number of trials required for approval;
•
the number of sites included in the trials;
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the countries in which the trials are conducted;
•
the length of time required to enroll eligible patients;
•
the number of patients that participate in the trials;
•
the number of doses that patients receive;
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the drop-out or discontinuation rates of patients;
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potential additional safety monitoring requested by regulatory agencies;
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the duration of patient participation in the trials and follow-up periods;
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the cost and timing of manufacturing our product candidates;
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the phase of development of our product candidates;
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the efficacy and safety profile of our product candidates; and
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the number of product candidates we are developing.
The successful development and commercialization of product candidates is highly uncertain due to the numerous risks and uncertainties associated with product development and commercialization, including the following:
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the timing and progress of nonclinical and clinical development activities;
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the number and scope of nonclinical and clinical programs we decide to pursue;
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raising necessary additional funds;
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the progress of the development efforts of parties with whom we may enter into collaboration arrangements;
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our ability to maintain our current development programs and to establish new ones;
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our ability to establish new licensing or collaboration arrangements;
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the successful initiation and completion of clinical trials with safety, tolerability and efficacy profiles that are satisfactory to the FDA or any comparable foreign regulatory authority;
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the receipt and related terms of regulatory approvals from applicable regulatory authorities;
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the availability of drug substance and drug product for use in the production of our product candidates;
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establishing and maintaining agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if our product candidates are approved;
•
our ability to obtain and maintain patents, trade secret protection and
regulatory exclusivity, both in the
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our ability to protect our rights in our intellectual property portfolio;
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the commercialization of our product candidates, if and when approved;
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obtaining and maintaining third-party insurance coverage and adequate reimbursement;
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the acceptance of our product candidates, if approved, by patients, the medical community and third-party payors;
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competition with other products; and
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a continued acceptable safety profile of our therapies following approval.
A change in the outcome of any of these variables with respect to the development of our product candidates could significantly change the costs and timing associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any of our product candidates or programs.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related
costs for personnel in executive management, finance, corporate and business
development, and other administrative functions. General and administrative
expenses also include legal fees relating to patent and corporate matters;
professional fees for accounting, auditing, tax, and administrative consulting
services; insurance costs; administrative travel expenses; marketing expenses;
and other operating costs.
We have incurred increased accounting, audit, legal, regulatory, compliance and
director and officer insurance costs as well as investor and public relations
expenses associated with being a public company. We anticipate that our general
and administrative expenses will increase in the future as we increase our
headcount to support development of our product candidates and programs and our
continued research activities.
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--------------------------------------------------------------------------------Gain on Sale of Cullinan Pearl
Gain on sale of Cullinan Pearl represents the excess of the consideration received over the carrying value of the non-financial assets sold. Refer to Note 3 of our notes to the consolidated financial statements for additional details relating to the transaction. Other Income
Other income consists primarily of interest income earned on our cash, cash equivalents, short-term investments and long-term investments.
Income Taxes
Income taxes consist primarily of federal and state income taxes.
Results of Operations
Comparison of the Three and Six Months Ended
The following table presents our results of operations:
Three Months Ended June 30, Six Months Ended June 30,
(in thousands) 2022 2021 2022 2021
License revenue $ - $ - $ - $ 18,943
Operating expenses:
Research and development 26,411 11,778 50,947 24,193
General and administrative 10,695 4,826 18,816 9,982
Total operating expenses 37,106 16,604 69,763 34,175
Gain on sale of Cullinan Pearl 276,785 - 276,785 -
Income (loss) from operations 239,679 (16,604 ) 207,022 (15,232 )
Other income (expense):
Interest income 697 173 894 222
Other income (expense), net (241 ) (8 ) (241 ) (10 )
Net income (loss) before income taxes 240,135 (16,439 ) 207,675 (15,020 )
Income tax expense 66,070 - 46,502 -
Net income (loss) 174,065 (16,439 ) 161,173 (15,020 )
Net income (loss) attributable to
noncontrolling interest (833 ) (803 ) (1,627 ) 686
Net income (loss) attributable to common
stockholders of Cullinan $ 174,898 $ (15,636 ) $ 162,800 $ (15,706 )
License Revenue
In the six months ended
Research and Development Expenses
Three Months Ended June 30, Six Months Ended June 30,
(in thousands) 2022 2021 2022 2021
Cullinan Pearl (CLN-081) $ 4,245 $ 3,428 $ 12,143 $ 9,146
Cullinan MICA (CLN-619) 5,606 1,836 9,167 3,470
Cullinan Amber (CLN-617) 2,738 422 4,518 747
Cullinan Florentine (CLN-049) 1,226 1,781 2,350 3,599
Total Asset Subsidiaries expenses 13,815 7,467 28,178 16,962
Early-stage research 5,311 1,215 10,965 1,647
Other personnel and unallocated 2,906 818 4,764 1,752
Equity-based compensation 4,379 2,278 7,040 3,832
Total research and development expenses
We separately disclose additional details for expenses incurred in connection with the research and development activities conducted for the product candidates and programs being developed by our partially-owned subsidiaries Cullinan Amber, Cullinan Florentine, Cullinan MICA and Cullinan Pearl, as we believe they represent key portfolio value drivers. InJune 2022 , we completed the sale of Cullinan Pearl to Taiho. We expect to share with Taiho 50% of future development costs for CLN-081 along with 50% of any future potential pre-tax profits fromU.S sales of CLN-081.
Research and development expenses were
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The increase of $6.3 million of research and development expenses of the Asset
Subsidiaries was primarily related to an increase in chemistry, manufacturing
and controls ("CMC") costs of $4.2 million relating to our ongoing clinical
trials for CLN-081 and CLN-619 and to support IND-enabling activities with
CLN-617 and an increase of $2.4 million relating to preclinical and clinical
activities across CLN-081, CLN-049 and CLN-619.
The remaining increase within research and development expenses was primarily
related to an increase in the discovery and development of early-stage product
candidates, inclusive of the collaboration agreement entered into with Icahn
Mount Sinai in December 2021 , and an increase in equity-based compensation
expense due to increased headcount and new grants in the three months ended June
30, 2022 .
Research and development expenses were
The increase of$11.2 million of research and development expenses of the Asset Subsidiaries was primarily related to an increase in CMC costs of$10.8 million relating to our ongoing clinical trials for CLN-081 and CLN-619 and to support IND-enabling activities with CLN-617 and an increase of$3.2 million related to preclinical and clinical activity across CLN-081, CLN-049 and CLN-619, partially offset by a$3.0 million royalty payment to Taiho for the upfront fee from the Zai License Agreement that was made in the first six months of 2021 and did not recur in 2022. The remaining increase within research and development expenses was primarily related to an increase in the discovery and development of early-stage product candidates, inclusive of the collaboration agreement entered into with Icahn Mount Sinai inDecember 2021 , and an increase in equity-based compensation expense due to increased headcount and new grants in the six months endedJune 30, 2022 .
General and Administrative Expenses
General and administrative expenses were$10.7 million for the three months endedJune 30, 2022 compared to$4.8 million for the three months endedJune 30, 2021 . The increase of$5.9 million was primarily due to a$2.4 million increase in equity-based compensation expense relating to increased headcount and new grants in the three months endedJune 30, 2022 , a$1.1 million increase in personnel costs relating to increased headcount and non-recurring costs of$1.7 million related to the Cullinan Pearl sale. General and administrative expenses were$18.8 million for the six months endedJune 30, 2022 compared to$10.0 million for the six months endedJune 30, 2021 . The increase of$8.8 million was primarily due to a$4.4 million increase in equity-based compensation expense relating to increased headcount and new grants in the six months endedJune 30, 2022 , a$1.7 million increase in personnel costs relating to increased headcount and non-recurring costs of$2.0 million related to the Cullinan Pearl sale.
Gain on Sale of Cullinan Pearl
The$276.8 million gain on sale of Cullinan Pearl represents the excess of the consideration received over the carrying value of the non-financial assets sold. Refer to Note 3 of our notes to the consolidated financial statements for additional details relating to the transaction.
Other Income
Other income was
Other income was
Income Tax Expense
The income tax expense was$66.1 million and$46.5 million for the three and six months endedJune 30, 2022 , respectively. The net income tax expense of$46.5 million recognized for the six months endedJune 30, 2022 represents the expected tax from the gain on sale of Cullinan Pearl, including the expected utilization of current year and certain historical tax attributes.
We did not record a provision for income taxes for the three or six months ended
Net Income (Loss) Attributable to Noncontrolling Interests
Net loss attributable to noncontrolling interests was
Net loss attributable to noncontrolling interests was$1.6 million during the six months endedJune 30, 2022 compared to net income of$0.7 million during the six months endedJune 30, 2021 . The decrease was primarily related to our allocation of income to our noncontrolling interests in the six months endedJune 30, 2021 due to the recognition of revenue from the Zai License Agreement under Cullinan Pearl. 20 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Overview
We have incurred significant operating losses, with the exception of the one-time gain on the sale of Cullinan Pearl in the three and six months endedJune 30, 2022 , and negative cash flows from operations since our inception and expect to continue to generate operating losses for the foreseeable future. We have not yet commercialized any products and we do not expect to generate revenue from sales of products for several years, if at all. To date, we have funded our operations primarily with proceeds from the sale of equity securities and from licensing or selling the rights to our product candidates. As ofJune 30, 2022 , we had cash, cash equivalents and short-term investments of$611.0 million and long-term investments and interest receivable of$44.6 million . InJanuary 2021 , we completed our IPO and received net proceeds of$264.5 million from the offering, after deducting underwriting discounts, commissions and other offering expenses. Based on our current operational plans and assumptions, we expect that our current cash, cash equivalents, short-term investments, and long-term investments, will be sufficient to fund operations through 2026. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. We cannot guarantee that we will be able to raise additional capital on reasonable terms or at all. InJune 2022 , we sold our partially-owned subsidiary, Cullinan Pearl, to Taiho for an upfront payment of$275.0 million , of which$5.0 million will remain in escrow until we and Taiho finalize any post-sale net working capital adjustment, which is not expected to be material.
Cash Flows
Comparison of the Six Months Ended
The following table summarizes our sources and uses of cash for each of the
periods presented:
Six Months Ended June 30,
(in thousands) 2022 2021
Net cash used in operating activities $ (47,328 ) $ (17,711 )
Net cash provided by (used in) investing activities 335,563 (292,320 )
Net cash provided by financing activities 5,554 265,503
Net increase (decrease) in cash and cash equivalents
Cash Flow from Operating Activities
For the six months endedJune 30, 2022 , operating activities used$47.3 million of cash. Net income of$161.2 million and a benefit of$51.1 million from the net change in our operating assets and liabilities was more than offset by a net non-cash benefit of$259.6 million . The net non-cash benefit primarily consisted of the gain on sale of Cullinan Pearl of$276.8 million , partially offset by$15.2 million from equity-based compensation expense and$1.7 million in amortization and accretion on marketable securities. For the six months endedJune 30, 2021 , operating activities used$17.7 million of cash, primarily consisting of our net loss of$15.0 million and changes in net operating assets and liabilities of$11.5 million , which were partially offset by non-cash charges of$8.8 million . Our non-cash charges of$8.8 million primarily consisted of$7.7 million from equity-based compensation expense and$1.0 million in amortization and accretion on marketable securities.
Cash Flow from Investing Activities
For the six months endedJune 30, 2022 , net cash provided by investing activities was$335.6 million , which consisted of$270.0 million of proceeds from the sale of Cullinan Pearl, net of$5.0 million in escrow, and$158.9 million from the sales and maturities of investments, partially offset by the purchase of$93.4 million of investments.
For the six months ended
Cash Flow from Financing Activities
For the six months ended
For the six months endedJune 30, 2021 , net cash provided by financing activities was$265.5 million , which primarily consisted of$267.3 million net proceeds from the initial public offering and$0.9 million from the issuance of noncontrolling interests, partially offset by the$2.7 million payment of deferred offering costs. 21 --------------------------------------------------------------------------------
Future Funding Requirements
We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities, manufacturing and clinical trials of our product candidates. In addition, we have and will continue to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company. Our expenses will also increase as we:
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continue our research and development efforts and submit INDs for our product candidates and programs;
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conduct preclinical studies and clinical trials for our current and future product candidates;
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take temporary precautionary measures to help minimize the risk of COVID-19 to our employees;
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experience any delays or encounter any issues with any of the above, including but not limited to failed studies, complex results, safety issues, or other regulatory challenges;
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develop the necessary processes, controls, and manufacturing capabilities to obtain marketing approval for our product candidates and to support manufacturing on a commercial scale;
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develop and implement plans to establish and operate in-house manufacturing operations and facility;
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seek regulatory approvals for any product candidates that successfully complete clinical trials, if any;
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hire and retain additional personnel, such as non-clinical, clinical, pharmacovigilance, quality assurance, regulatory affairs, manufacturing, distribution, legal, compliance, medical affairs, finance, general and administrative, commercial, and scientific personnel; and
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develop, maintain, expand, and protect our intellectual property portfolio.
As a publicly-traded company, we incur significant legal, accounting and other expenses. We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act enacted inApril 2012 . For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding nonbinding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the closing of our initial public offering, (b) in which we have total annual gross revenue of at least$1.07 billion or (c) in which we are deemed to be a large accelerated filer, which requires the market value of our common stock that is held by non-affiliates to exceed$700 million as of the priorJune 30th , and (2) the date on which we have issued more than$1 billion in non-convertible debt during the prior three-year period. To achieve compliance with Section 404 after we no longer qualify as an emerging growth company, we will be required to provide an attestation of our internal controls over financial reporting processes, which will require additional costs and personnel. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants, adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. We expect these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. Based on our current operational plans and assumptions, we expect that our current cash, cash equivalents, short-term and long-term investments, will be sufficient to fund operations through 2026. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. As we progress with our development programs and the regulatory review process, we expect to incur significant commercialization expenses related to product manufacturing, pre-commercial activities and commercialization. We may also require additional capital to pursue in-licenses or acquisitions of other programs to further expand our pipeline. Because of the numerous risks and uncertainties associated with research, development and commercialization of our product candidates and programs, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on and could increase significantly as a result of many factors, including:
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the scope, progress, results, and costs of drug discovery, laboratory testing and preclinical and clinical development for our current and future product candidates;
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timely completion of our preclinical studies and clinical trials, which may be significantly slower or cost more than we currently anticipate and will depend substantially upon the performance of third-party contractors;
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the prevalence, duration and severity of potential side effects or other safety issues experienced by patients receiving our product candidates or future product candidates;
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our ability to establish and maintain collaborations and license agreements on favorable terms, if at all, and the extent to which we acquire or in-license technologies or programs, if at all;
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our ability to enroll clinical trials in a timely manner and to quickly resolve any delays or clinical holds that may be imposed on our development programs;
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timing delays with respect to preclinical and clinical development of our current and future product candidates, including as result of the COVID-19 pandemic;
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the costs of expanding our facilities to accommodate our expected growth in personnel;
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our ability and the ability of third parties with whom we contract to manufacture adequate clinical and commercial supplies of our product candidates or any future product candidates, remain in good standing with regulatory authorities and develop, validate, and maintain commercially viable manufacturing processes that are compliant with current good manufacturing practices;
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the costs of preparing, filing, and prosecuting patent applications, maintaining and enforcing our intellectual property rights, and defending intellectual property-related claims;
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the extent to which we acquire or in-license technologies or programs;
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the sales price and availability of adequate third-party coverage and reimbursement for our product candidates, if and when approved; and
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the ongoing costs of operating as a public company.
Until such time, if ever, that we can generate product revenue sufficient to achieve profitability, we expect to finance our cash needs through equity offerings, debt financings, government or other third-party funding, marketing and distribution arrangements, and other collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity, current ownership interests will be diluted. If we raise additional funds through government or third-party funding, collaboration agreements, strategic alliances, licensing arrangements, or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, or grant licenses on terms that may not be favorable to us. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce, or terminate our product development or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves.
Contractual Obligations and Other Commitments
We have certain payment obligations under various license and collaboration agreements. Under these agreements, we are required to make milestone payments upon successful completion and achievement of certain intellectual property, clinical, regulatory, and sales milestones. The payment obligations under the license and collaboration agreements are contingent upon future events, such as our achievement of specified development, clinical, regulatory, and commercial milestones, and we will be required to make milestone and royalty payments in connection with the sale of products developed under these agreements. As the achievement and timing of these future milestone payments are not probable or estimable, such amounts have not been included in our consolidated balance sheet as ofJune 30, 2022 andDecember 31, 2021 . Operating lease obligations as ofJune 30, 2022 were$1.1 million , with$0.5 million payable within 12 months. See Note 12 to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for further detail on our obligations and the timing of expected future payments.
In addition, we enter into agreements in the normal course of business with CROs for clinical trials and with vendors for preclinical studies, manufacturing services, and other services and products for operating purposes, which are generally cancelable upon written notice.
Critical Accounting Policies and Estimates
Our critical accounting policies have not materially changed from those described in the 2021 10-K.
Recently Issued and Adopted Accounting Pronouncements
A description of recently adopted accounting pronouncements that may materially
impact our financial position and results of operations is disclosed in Note 2
to our unaudited consolidated financial statements appearing at the beginning of
this Quarterly Report on Form 10-Q.
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