DECIBEL THERAPEUTICS, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and related notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report, and our audited financial statements and related notes for the year endedDecember 31, 2021 included in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission , or theSEC , onMarch 18, 2022 , which we refer to as the 2021 Annual Report on Form 10-K. Some of the information contained in this discussion and analysis 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. Please also see the section entitled "Cautionary Note Regarding Forward-Looking Statements and Industry Data" of this Quarterly Report.
Overview
We are a clinical-stage biotechnology company dedicated to discovering and developing transformative treatments for hearing and balance disorders, one of the largest areas of unmet need in medicine. We aim to restore and improve hearing and balance through the restoration and regeneration of functional hair cells and non-sensory support cells within the inner ear. We have built a proprietary platform that integrates single-cell genomics and bioinformatics analyses, precision gene therapy technologies and our expertise in inner ear biology. We are leveraging our platform to advance our pipeline of clinical and preclinical gene therapy product candidates and programs that are designed to selectively replace genes for the treatment of congenital, monogenic hearing loss and to regenerate inner ear hair cells for the treatment of acquired hearing and balance disorders. We are developing our lead gene therapy product candidate, DB-OTO, to provide hearing to individuals born with profound hearing loss due to mutation of the otoferlin, or OTOF, gene. In addition to DB-OTO, we are advancing AAV.103 to restore hearing in individuals with mutations in the gap junction beta-2, or GJB2, gene and AAV.104 to restore hearing in individuals with mutations in the stereocilin, or STRC, gene. We also have additional gene therapy programs to convert supporting cells, the cells adjacent to hair cells, into either cochlear or vestibular hair cells in order to restore hearing or balance function. In addition to our gene therapy programs, we are developing DB-020 for the prevention of cisplatin-induced hearing loss, which we are currently evaluating in patients in a Phase 1b clinical trial. We are developing our lead gene therapy product candidate, DB-OTO, to provide hearing to individuals born with profound hearing loss due to an OTOF deficiency. OTOF is a protein expressed in the inner hair cells of the cochlea that enables communication between sensory cells of the inner ear and the auditory nerve by regulating synaptic transmission. We have designed DB-OTO utilizing a proprietary, cell-selective promoter to provide expression of OTOF that is limited to hair cells. In our preclinical studies, the hair cell-selective expression of OTOF provided by DB-OTO enabled restoration of hearing in mice that was more durable than when OTOF was expressed under the control of a ubiquitous promoter, which is designed to drive expression in all cells. In addition to the loss of durability, we observed that use of a ubiquitous promoter in mice resulted in the loss of inner hair cells throughout the cochlea. DB-OTO is an adeno-associated virus, or AAV, based gene therapy intended to be delivered to patients using the surgical approach employed by neurotologists and pediatric otolaryngologists during a standard cochlear implantation procedure. We believe the cell-selective expression of DB-OTO and its delivery by this established surgical procedure will provide a core competitive advantage important to the success of DB-OTO. InOctober 2022 , we received clearance from theU.S. Food and Drug Administration , or the FDA, for our Investigational New Drug, or IND, application to initiate a Phase 1/2 dose escalation clinical trial in pediatric patients. The Phase 1/2 clinical trial is designed to evaluate the safety, tolerability and efficacy of DB-OTO in pediatric patients with congenital hearing loss due to an otoferlin deficiency. In addition to safety and tolerability endpoints, established, clinically relevant, objective and behavioral measurements of hearing will be used as efficacy endpoints in the clinical trial. The auditory brainstem response, which was used to characterize dose-response of DB-OTO after intra-cochlear delivery in translational studies, will serve as an early, objective, clinically accepted readout of hearing thresholds in the clinical trial. Based on discussions with the FDA during the IND review period, we expect the first two participants in theU.S. portion of the Phase 1/2 clinical trial will be as young as seven years of age and that subsequent participants will include children as young as two years of age and infants younger than two years of age. The DB-OTO IND is part of a global regulatory strategy for development of DB-OTO, and based on feedback from scientific advice meetings with European regulatory authorities, we have also completed submission of Clinical Trial Applications, or CTAs, to theMedicines and Healthcare Products Regulatory Agency , or MHRA, in theUnited Kingdom and theSpanish Agency of Medicines and Medical Devices , or AEMPS. We have commenced trial site startup activities and expect to initiate the Phase 1/2 clinical trial of DB-OTO in the first half of 2023. The FDA has granted orphan drug designation and rare pediatric disease designation for DB-OTO for the treatment of OTOF-related, congenital hearing loss. In addition to DB-OTO, we are advancing AAV.103 and AAV.104, gene therapy programs targeting hearing loss resulting from other single gene mutations, or monogenic forms of hearing loss. AAV.103 aims to restore hearing in individuals with mutations in the GJB2 gene and AAV.104 aims to restore hearing in individuals with mutations in the STRC gene. We anticipate that we will identify a product candidate for our AAV.103 program in the fourth quarter of 2022. 24 -------------------------------------------------------------------------------- We are also using our platform to design and develop a pipeline of gene therapies for hair cell regeneration within the inner ear. We are engineering gene therapies to convert supporting cells, the cells adjacent to hair cells, into either cochlear or vestibular hair cells in order to restore hearing or balance function. These gene therapy programs are designed to express the developmental or reprogramming factors that regulate cell fate and use our proprietary, cell-selective promoters to control expression spatially and temporally. Our DB-ATO and AAV.201 gene therapy programs aim to restore balance by promoting regeneration of hair cells in the vestibular system, the sensory system responsible for balance. In these programs, we are focused on the development of a treatment for bilateral vestibulopathy, or BVP, a debilitating, acquired condition that significantly impairs balance, mobility and stability of vision. DB-ATO is an AAV-based gene therapy that utilizes a proprietary, supporting cell-selective promoter to express ATOH1, a transcription factor required for hair cell differentiation. We are also developing AAV.201, which combines ATOH1 and an inhibitor of Sox2, a reprogramming factor, designed to promote further differentiation of the regenerated cells. In addition, we are advancing our cochlear hair cell regeneration program to treat acquired hearing loss by regenerating cochlear outer hair cells. We plan to provide an update on our vestibular regeneration program in 2023. In addition to our gene therapy product candidates and programs, we are developing a clinical-stage product candidate, DB-020, for the prevention of cisplatin-induced hearing loss. DB-020 is a novel formulation of sodium thiosulfate, or STS, that we have optimized for local delivery to the ear. STS inactivates cisplatin, a widely used chemotherapy that often leads to hearing loss and related complications in patients being treated for cancer. We are developing DB-020 to prevent cisplatin-induced hearing loss without impacting the beneficial, anti-tumor effect of cisplatin. In 2019, we completed a randomized, double-blind, placebo-controlled Phase 1 clinical trial of DB-020 in healthy volunteers, in which DB-020 was well tolerated. Following the Phase 1 clinical trial, we initiated a randomized, double-blind, placebo-controlled, multicenter Phase 1b clinical trial in 2020 to evaluate the safety and efficacy of DB-020 for the prevention of cisplatin-induced hearing loss. InJune 2022 , we reported topline data from an interim analysis of the ongoing Phase 1b clinical trial. Patients enrolled in the Phase 1b clinical trial were randomized to receive one of two doses of DB-020 in one ear while the contralateral ear received placebo, enabling each patient to serve as their own control. Patients were administered DB-020 and placebo up to three hours prior to each cisplatin infusion. Consistent with the results of the Phase 1 clinical trial, data from the interim analysis demonstrated that DB-020 was well tolerated, with mostly mild to moderate adverse events and no significant safety issues observed. In the data from the interim analysis, 88% of patients experienced ototoxicity in their placebo-treated ear, and of these patients, 87% were partially or completely protected from ototoxicity in their DB-020-treated ears. The interim analysis included data collected as ofFebruary 4, 2022 from 19 cisplatin-naïve cancer patients being treated with high doses of cisplatin every 21 or 28 days. Of the 19 patients in the interim analysis, 17 patients had evaluable audiograms at baseline and after being dosed with DB-020 in one ear and placebo in the contralateral ear in conjunction with their prescribed infusion of cisplatin chemotherapy. Ototoxicity was defined according to theAmerican Speech-Language-Hearing-Association criteria for significant ototoxic change. We have ceased enrolling patients in the clinical trial in response to the positive interim analysis results from the first 19 patients enrolled. We plan to report additional data from the interim analysis in 2023 and we are working with key opinion leaders to integrate learnings from the interim analysis into an updated clinical development plan and may consult with regulatory agencies as part of that planning. We are considering a range of potential approaches by which to advance DB-020, including entering into strategic collaborations for the further development and commercialization of DB-020. The FDA has granted fast track designation for DB-020 for the prevention of cisplatin-related ototoxicity. Since inception, we have devoted substantially all of our resources on organizing and staffing, business planning, raising capital, establishing our intellectual property portfolio and performing research and development of our product candidates, programs and platform. OnFebruary 5, 2021 , we issued and sold 15,870,209 shares of our Series D convertible preferred stock for$27.4 million of aggregate cash proceeds, net of issuance costs. OnFebruary 17, 2021 , we completed an initial public offering, or IPO, of our common stock in which we issued and sold 7,062,000 shares of our common stock at a public offering price of$18.00 per share, and onFebruary 24, 2021 , we issued and sold an additional 600,000 shares of common stock pursuant to the underwriters' partial exercise of their option to purchase additional shares of common stock, for aggregate net proceeds of$125.0 million . Upon the closing of our IPO, all of our outstanding shares of convertible preferred stock automatically converted into 16,662,011 shares of common stock. Subsequent to the closing of our IPO, there were no shares of preferred stock outstanding. To date, we have financed our operations primarily with proceeds from sales of our convertible preferred stock (including borrowings under convertible promissory notes, which converted into convertible preferred stock in 2015), payments under our license and collaboration agreement with Regeneron Pharmaceuticals, Inc., or Regeneron, and, most recently, from the sale of common stock in our IPO. We have not generated any revenue from product sales, and do not expect to generate any revenue from product sales for at least the next several years. All of our programs are still in preclinical and early-stage clinical development. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our product candidates, if approved. Since inception, we have incurred significant operating losses. Our net losses were$47.1 million for the nine months endedSeptember 30, 2022 , and$51.8 million and$39.3 million for the years endedDecember 31 , 25 -------------------------------------------------------------------------------- 2021 and 2020, respectively. As ofSeptember 30, 2022 , we had an accumulated deficit of$261.6 million . We expect to incur significant expenses and operating losses for the foreseeable future. We anticipate that our expenses will increase substantially if and as we:
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initiate and conduct our planned Phase 1/2 clinical trial of DB-OTO for the treatment of profound hearing loss due to mutation of the OTOF gene;
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select a product candidate for our AAV.103 program and initiate IND-enabling activities;
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continue our current research programs and our preclinical development of AAV.103, AAV.104, AAV.201, DB-ATO and any product candidates that may arise from our current or future research programs;
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advance the clinical development of DB-020;
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advance additional product candidates into preclinical and clinical development;
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expand the capabilities of and invest in our platform;
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seek marketing approvals for any product candidates that successfully complete clinical trials;
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ultimately establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval;
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expand, maintain and protect our intellectual property portfolio;
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hire additional clinical, research, development, scientific, regulatory, and quality control personnel;
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establish and maintain agreements with manufacturers for our product candidates; and
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add operational, legal, compliance, financial and management information systems and personnel, including personnel to support our research, product development and future commercialization efforts and support our operations as a public company. In addition, as we progress toward marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. As a result, we will need substantial additional funding to support our continuing operations and pursue our strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings and other sources of capital, which may include collaborations with other companies or other strategic transactions. We may be unable to raise additional funds or enter into other collaborations, strategic alliances or licensing arrangements with third parties when needed or on favorable terms, or at all. If we are unable to raise additional funds through equity or debt financings or enter into such other agreements when needed, we may have to significantly delay, reduce or eliminate some or all of our product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve profitability. Even if we are able to generate revenue from product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations. As ofSeptember 30, 2022 , we had cash, cash equivalents and available-for-sale securities of$111.9 million . We believe that our cash, cash equivalents and available-for-sale securities as ofSeptember 30, 2022 will enable us to fund our operating expenses and capital expenditure requirements into 2024. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we anticipate.
Impact of COVID-19 on Our Business
The worldwide COVID-19 pandemic has affected and may affect in the future our ability to initiate and complete preclinical studies, delay the initiation and completion of our current and planned clinical trials, disrupt regulatory activities or have other adverse effects on our business, results of operations, financial condition and prospects. In addition, the pandemic has caused substantial disruption to global supply chains and may adversely impact economies worldwide, both of which could adversely affect our business, operations and ability to raise funds to support our operations.
We are following, and plan to continue to follow recommendations from federal, state and local governments regarding workplace policies, practices and procedures. In response to the COVID-19 pandemic and in accordance with direction from state and
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local governmental authorities, we previously restricted access to our facility
to those individuals who must perform critical research, translational medicine
and laboratory support activities that must be completed on site, limited the
number of such people that can be present at our facility at any one time, and
required that most of our employees work remotely. In February 2022 we re-opened
our facility to all of our employees. Screening and enrollment in our Phase 1b
clinical trial of DB-020 in Australia and the United States had been adversely
impacted by the COVID-19 pandemic. Patient screening and enrollment were paused
in the second quarter of 2020 in both Australia and the United States , and
screening for enrollment did not resume until early in the third quarter of 2020
in Australia and early in the fourth quarter of 2020 in the United States . We
have also experienced delays in site start-up and the withdrawal of some sites
in the United States . In addition, we and the third-party manufacturers,
contract research organizations, or CROs, and academic collaborators that we
engage have faced in the past and may face in the future disruptions that could
affect our ability to initiate and complete preclinical studies or clinical
trials. This includes disruptions in procuring items and providing adequate
resources that are essential for our research and development activities, such
as, for example, raw materials used in the manufacture of our product
candidates, laboratory supplies for our preclinical studies and clinical trials,
or animals that are used for preclinical testing, in each case, for which there
may be shortages because of ongoing efforts to address the COVID-19 pandemic,
including supply chain disruptions. For example, due to increased quarantine
mandates in China , the receipt of shipments and data from some of our vendors
and CROs were more difficult and unpredictable during the first half of 2022.
This caused some delays in preclinical studies for our gene therapy programs.
We cannot be certain what the overall impact of the COVID-19 pandemic will be on
our business. The extent of the impact of COVID-19 on our business will depend
on the length and severity of the pandemic, including the extent there is any
resurgence of the COVID-19 virus or any variant strains of the virus, the
availability and effectiveness of vaccines and the impact of the foregoing on
our preclinical studies, current and planned clinical trials, employees and
vendors, which is uncertain and cannot be predicted. The pandemic has the
potential to adversely affect our business, financial condition, results of
operations and prospects.
License and Collaboration Agreement with Regeneron
InNovember 2017 , we entered into a license and collaboration agreement with Regeneron, or the Regeneron Agreement. The Regeneron Agreement had an original research term of five years and granted Regeneron the right to extend the research term for up to two years in one-year intervals. InNovember 2021 , Regeneron exercised its right to extend the research term and extended the research term by one year toNovember 2023 . The Regeneron Agreement is focused on the discovery and development of new potential therapies directed to a set of defined collaboration targets. We are currently developing DB-OTO, AAV.103 and AAV.104 in collaboration with Regeneron under the Regeneron Agreement. InOctober 2020 , we entered into an amendment to the Regeneron Agreement pursuant to which, among other things, ATOH1, the target of our DB-ATO program, was removed as a collaboration target and the terms and plans for the DB-OTO and AAV.103 programs were modified. We issued 10,000,000 shares of our Series C convertible preferred stock to Regeneron in consideration for its entry into the amendment. Pursuant to the Regeneron Agreement, Regeneron paid us an upfront fee of$25.0 million and purchased 12,500,000 shares of our Series B convertible preferred stock at a price per share of$2.00 . Regeneron is provided two options to extend the research term for a one-year period each and is obligated to pay us$10.0 million for each extension. The first option to extend the research term was exercised by Regeneron inNovember 2021 . The$10.0 million fee is payable in the fourth quarter of 2022. On a collaboration-product-by-collaboration-product basis, upon achievement of pre-defined milestones which began at initiation of manufacturing to support Good Laboratory Practices, or GLP, toxicology studies and conclude at initiation of a Phase 2 clinical trial, Regeneron is obligated to pay us milestone payments of up to$35.5 million in aggregate if the collaboration product is a biologic or up to$33.5 million in aggregate if the collaboration product is a small molecule, which is intended to reflect approximately half of the total cost needed to achieve the next milestone. From and after the initiation of a registration-enabling trial, unless Regeneron decides to opt-out, we have agreed to split development and regulatory costs with Regeneron on an equal basis through the registration-enabling trials. ThroughSeptember 30, 2022 , we had received an aggregate of$5.5 million in milestone payments from Regeneron pursuant to the collaboration. Under the Regeneron Agreement, we are required to pay Regeneron tiered royalties on the worldwide net sales of collaboration products at percentages which range from mid-single digit to mid-thirties, with the exact royalty rate depending on the extent to which Regeneron shared in the funding of the collaboration product, the level of net sales of the collaboration product, the nature of any intellectual property contributed by Regeneron included in the collaboration product and whether the product is sold inside or outside the field. In the case of collaboration products for which Regeneron does not opt-out, our obligation to pay tiered royalties on the worldwide net sales ranges from percentages in the mid-twenties to mid-thirties. In the case of collaboration products for which Regeneron opts-out, our obligation to pay tiered royalties on the worldwide net sales ranges from percentages in the mid-single digits to mid-twenties. Our obligation to make royalty payments to Regeneron on account of worldwide net sales of collaboration products continues so long as we, our affiliates, licensees or sublicensees sell collaboration products. To date, we have not made any royalty or other payments to Regeneron under the Regeneron Agreement. 27 -------------------------------------------------------------------------------- Pursuant to the amendment to the Regeneron Agreement, Regeneron agreed to pay us$0.3 million to fund our ongoing research program and$0.5 million to help secure the services of a contract development and manufacturing organization, or CDMO. The$0.5 million payment was creditable against the milestone associated with the initiation of manufacturing to support GLP toxicology studies of DB-OTO. Additionally, Regeneron agreed to reimburse us for up to$10.5 million of third-party costs related to the GLP toxicology studies of DB-OTO as such costs are incurred, and we agreed that the aggregate potential milestone payments for DB-OTO would be reduced by$15.0 million . In addition, notwithstanding its removal from the collaboration, for DB-ATO, we agreed to pay to Regeneron a royalty calculated as a low-to mid-single digit percentage of net sales of DB-ATO, on a country-by-country basis, until the latest of the expiration of the last patent covering DB-ATO in such country, the expiration of all applicable regulatory exclusivities for DB-ATO in such country and the tenth anniversary of the first commercial sale of DB-ATO in such country. As ofSeptember 30, 2022 , we had unbilled receivables of$10.0 million due from Regeneron, relating to Regeneron exercising its right to extend the research term by one year toNovember 2023 . Because we consider Regeneron a collaborative partner that is subject to the significant risks and rewards under the Regeneron Agreement, we have accounted for the Regeneron Agreement under FASB ASC Topic 808, Collaborative Arrangements, or ASC 808. Under ASC 808, we view all consideration received from Regeneron as reimbursement of our costs under the Regeneron Agreement. These costs are accounted for as research and development expenses in our condensed consolidated statements of operations and comprehensive loss. As such, we are recognizing total consideration of$46.9 million , comprised of the$25.0 million upfront payment, the additional payment of$0.3 million received from Regeneron pursuant to the amendment, the reimbursement of$10.5 million of third-party costs related to the GLP toxicology studies of DB-OTO, the$5.5 million of cumulative milestone payments received, and the$10.0 million extension payment due in the fourth quarter of 2022, net of the$4.4 million in fair value of the Series C convertible preferred stock issued to Regeneron, over the research term as a reduction to research and development expenses (contra-research and development expense) in our condensed consolidated statements of operations and comprehensive loss based on our progress toward completion of our research activities under the research plan. Any future milestone payments will be included in the measurement of contra-research and development expense if and when achieved. For the three months endedSeptember 30, 2022 and 2021, we recognized contra-research and development expense of approximately$1.8 million and$2.4 million , respectively, related to consideration received from Regeneron. We recognized$7.0 million and$8.1 million as contra-research and development expenses during the nine months endedSeptember 30, 2022 and 2021, respectively. As ofSeptember 30, 2022 , we had unbilled receivables of$10.0 million due from Regeneron, relating to Regeneron exercising its right to extend the research term by one year toNovember 2023 . As ofSeptember 30, 2022 , we had deferred collaboration liabilities of$17.6 million on our condensed consolidated balance sheet, which consisted of$8.4 million classified as current deferred collaboration liabilities and$9.2 million classified as long-term collaboration liabilities. See Note 12 to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report.
Financial Operations Overview
Revenue
We have not generated any revenue since inception and do not expect to generate any revenue from the sale of products for at least the next several years. If our development efforts for our current or future product candidates are successful and result in marketing approval or if we enter into collaboration or license agreements with third parties, we may generate revenue in the future from product sales or payments from third-party collaborators or licensors.
Operating Expenses
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our research activities and development of our programs and product candidates. These expenses include:
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personnel-related expenses, including salaries, benefits and stock-based compensation expense for employees engaged in research and development functions;
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expenses incurred under agreements with third parties, such as consultants and investigative sites that conduct our preclinical studies and clinical trials and in-licensing arrangements;
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costs incurred to maintain compliance with regulatory requirements;
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costs incurred with third-party CDMOs to acquire, develop and manufacture materials for preclinical and clinical studies;
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costs associated with our technology and our intellectual property portfolio;
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expenses incurred for the procurement of materials, laboratory supplies and non-capital equipment used in the research and development process; and
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depreciation, amortization and other direct and allocated expenses, including
rent, insurance and other operating costs, incurred as a result of our research
and development activities.
We use our employee and infrastructure resources for the advancement of our
platform and for discovering and developing programs and product candidates. We
track direct research and development costs, consisting primarily of external
costs, such as fees paid to CDMOs, CROs, and consultants in connection with our
preclinical studies, clinical trials and experiments by program after a
development candidate has been identified. Due to the number of ongoing programs
and our ability to use resources across several projects, personnel-related
expenses and indirect or shared operating costs incurred for our research and
development programs are not recorded or maintained on a program-by-program
basis, nor are our external program costs incurred for our programs prior to the
identification of a development candidate for such program.
The following table sets forth our research and development expense, including
direct program-specific expense summarized by program, personnel-related
expenses and indirect or shared operating costs recognized during each period
presented (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
DB-OTO $ 2,861 $ 5,649 $ 13,055 $ 13,647
DB-020 622 922 1,563 2,257
Personnel-related (including stock-based
compensation) 3,952 2,703 10,703 7,249
Other indirect research and development
expenses 2,595 (254 ) 3,416 (1,286 )
Total research and development expenses $ 10,030 $ 9,020 $
28,737
Consideration we receive under the Regeneron Agreement is being recognized as a reduction to research and development expense (contra-research and development expense) in our condensed consolidated statements of operations and comprehensive loss based on our progress towards completion of our research activities under the research plan for the collaboration. For purposes of the table above, recognition of consideration received from Regeneron is included as a reduction of other indirect research and development expenses. For the three months endedSeptember 30, 2022 and 2021, we recognized contra-research and development expense of approximately$1.8 million and$2.4 million , respectively, related to consideration received from Regeneron. For the nine months endedSeptember 30, 2022 and 2021, we recognized contra-research and development expense of approximately$7.0 million and$8.1 million , respectively, related to consideration received from Regeneron. Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher 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 continue to increase for the foreseeable future as we advance our programs and product candidates into and through the development phase, and as we continue to develop additional product candidates. We also expect our discovery research efforts and our related personnel costs will increase and, as a result, we expect our research and development expenses, including costs associated with stock-based compensation, will increase above historical levels. In addition, we may incur additional expenses related to milestone and royalty payments payable to third parties with whom we may enter into license, acquisition and option agreements to acquire the rights to future product candidates.
At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates or programs. This is due to the numerous risks and uncertainties associated with drug development, including the uncertainty of:
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the timing and progress of preclinical and clinical development activities;
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the number and scope of preclinical and clinical programs we decide to pursue;
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our ability to successfully complete clinical trials with safety, potency and purity profiles that are satisfactory to the FDA or any comparable foreign regulatory authority;
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our ability to successfully develop, obtain regulatory approval for, and then successfully commercialize, our product candidates;
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our ability to hire and retain key research and development personnel;
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our successful enrollment in and completion of clinical trials;
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the costs associated with the development of any additional product candidates we develop or acquire through collaborations;
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our ability to establish and maintain agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if our product candidates are approved;
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the terms and timing of any collaboration, license or other arrangement, including the terms and timing of any milestone payments thereunder;
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our ability to obtain and maintain patent, trade secret and other intellectual property protection and regulatory exclusivity for our product candidates if and when approved;
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our receipt of marketing approvals from applicable regulatory authorities;
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our ability to commercialize products, if and when approved, whether alone or in collaboration with others;
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the continued acceptable safety profiles of the product candidates following approval; and
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the effects of the COVID-19 pandemic on our research and development employees, contractors and those who may participate in our studies.
A change in any of these variables with respect to the progress of any of our product candidates would significantly change the costs, timing and viability associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any product candidate we may develop.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel-related costs, including salaries, benefits and stock-based compensation, for personnel in our executive, finance, legal, business development, human resources and administrative functions. General and administrative expenses also include legal fees relating to corporate matters and costs to secure and defend our intellectual property; professional fees for accounting, auditing, tax, human resources and administrative consulting services; insurance costs; administrative travel expenses and facility-related expenses, which include direct depreciation costs and allocated expenses for office rent and other operating costs. These costs relate to the operation of the business, unrelated to the research and development function, or any individual program. We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support the expected growth in our research and development activities and the potential commercialization of our product candidates. We also expect to continue to incur increased expenses associated with being a public company, including increased costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing andSEC requirements, director and officer insurance costs and investor and public relations costs. We also expect to incur additional intellectual property-related expenses as we file patent applications to protect innovations arising from our research and development activities.
Interest Income
Interest income consists of interest income earned from our cash, cash equivalents and available-for-sale securities.
Income Taxes
Since our inception, we have not recorded anyU.S. federal, foreign, or state income tax benefits for the net losses we have incurred in each year or for our earned research and development tax credits as it is more likely-than-not that these benefits will not be realized. We haveU.S. federal and state net operating loss carryforwards and research and development tax credit carryforwards to offset future taxable income. We have recognized a reserve for a foreign uncertain tax position and recorded a foreign tax provision.
Income taxes are determined at the applicable tax rates adjusted for non-deductible expenses, research and development tax credits and other permanent differences. Our income tax provision may be significantly affected by changes to our estimates.
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--------------------------------------------------------------------------------Results of Operations
Comparison of the three months ended
The following tables summarizes our results of operations for each period
presented (in thousands):
Three Months Ended September 30,
2022 2021 Change
Operating expenses:
Research and development $ 10,030 $ 9,020 $ 1,010
General and administrative 6,319 5,680 639
Total operating expenses 16,349 14,700 1,649
Loss from operations (16,349 ) (14,700 ) (1,649 )
Other income:
Interest income 374 33 341
Total other income, net 374 33 341
Net loss before provision for income taxes (15,975 ) (14,667 ) (1,308 )
Provision for income taxes (30 ) (1,732 ) 1,702
Net loss $ (16,005 ) $ (16,399 ) $ 394 Research and Development Expenses
The following tables summarizes our research and development expenses for each period presented (in thousands):
Three Months Ended September 30,
2022 2021 Change
DB-OTO $ 2,861 $ 5,649 $ (2,788 )
DB-020 622 922 (300 )
Personnel-related (including stock-based
compensation) 3,952 2,703 1,249
Other indirect research and development
expenses 2,595
(254 ) 2,849
Total research and development expenses $ 10,030 $ 9,020
Research and development expenses for the three months endedSeptember 30, 2022 were$10.0 million , compared to$9.0 million for the three months endedSeptember 30, 2021 . The increase of$1.0 million was primarily attributable to the following:
•
$2.8 million decrease in expenses incurred to advance DB-OTO, primarily attributable to a decrease of$2.6 million for manufacturing costs related to IND-enabling activities incurred during the three months endedSeptember 30, 2021 and a decrease of$1.2 million related to preclinical and in vivo pharmacology costs, partially offset by an increase of$0.7 million of expenses related to the preparation for clinical trials and translational research costs and an increase of$0.3 million related to external support and additional costs to support our IND application;
•
$0.3 million decrease in expenses related to our DB-020 program, driven primarily by decreased clinical trial costs due to ceasing enrollment in our Phase 1b clinical trial of DB-020 in response to the positive interim analysis results reported inJune 2022 ;
•
•
$2.8 million net increase in other indirect research and development expenses, driven primarily by a$2.2 million increase in preclinical expenses relating to internal and external research, discovery efforts, and translational research for our preclinical programs, and a$0.6 million decrease in contra-research and development expenses under the Regeneron Agreement. Contra-research and development expenses under the Regeneron Agreement were$1.8 million and$2.4 million for the three months endedSeptember 30, 2022 and 2021, respectively.
General and Administrative Expenses
General and administrative expenses for the three months endedSeptember 30, 2022 were$6.3 million , compared to$5.7 million for the three months endedSeptember 30, 2021 . The increase of$0.6 million was primarily attributable to a$0.6 million 31 --------------------------------------------------------------------------------
increase in professional fees, driven primarily by expenses related to external legal services, as well as consulting, accounting advisory and audit services.
Interest Income
The increase in interest income for the three months endedSeptember 30, 2022 was primarily attributable to an increase in interest rates and higher yields from our investments in cash equivalents and available-for-sale securities.
Provision for Income Taxes
The provision for income taxes for the three months endedSeptember 30, 2022 was due to the recognition of an insignificant amount related to a foreign tax provision and interest expense related to a previously established foreign uncertain tax position. The provision for income taxes for the three months endedSeptember 30, 2021 was due to the recognition of an income tax expense of$1.7 million related to a foreign uncertain tax position and a foreign tax provision.
Comparison of the nine months ended
The following tables summarize our results of operations for each period
presented (in thousands):
Nine Months Ended September 30,
2022 2021 Change
Operating expenses:
Research and development $ 28,737 $ 21,867 $ 6,870
General and administrative 18,734 15,462 3,272
Total operating expenses 47,471 37,329 10,142
Loss from operations (47,471 ) (37,329 ) (10,142 )
Other income:
Interest income 532 141 391
Total other income, net 532 141 391
Net loss before provision for income taxes (46,939 ) (37,188 ) (9,751 )
Provision for income taxes (128 ) (1,732 ) 1,604
Net loss $ (47,067 ) $ (38,920 ) $ (8,147 ) Research and Development Expenses
The following tables summarize our research and development expenses for each period presented (in thousands):
Nine Months Ended September 30,
2022 2021 Change
DB-OTO $ 13,055 $ 13,647 (591 )
DB-020 1,563 2,257 (694 )
Personnel-related (including stock-based
compensation) 10,703 7,249 3,454
Other indirect research and development
expenses 3,416 (1,286 ) 4,702
Total research and development expenses $ 28,737 $
21,867
Research and development expenses for the nine months endedSeptember 30, 2022 were$28.7 million , compared to$21.9 million for the nine months endedSeptember 30, 2021 . The increase of$6.9 million was primarily attributable to the following:
•
$0.6 million decrease in expenses incurred to advance our DB-OTO program, primarily attributable to a decrease of$5.4 million for manufacturing costs related to IND-enabling activities incurred during the nine months endedSeptember 30, 2021 ; partially offset by an increase of$1.8 million related to preclinical and in vivo pharmacology costs, an increase of$2.0 million of expenses related to the preparation for clinical trials and translational research costs and an increase of$1.0 million related to external support and additional costs to support our IND application;
•
$0.7 million decrease in expenses related to our DB-020 program, driven primarily by decreased clinical trial costs due to ceasing enrollment in our Phase 1b clinical trial of DB-020 in response to the positive interim analysis results reported inJune 2022 ;
•
32
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$4.7 million net increase in other indirect research and development expenses, driven primarily by a$3.0 million increase in preclinical expenses relating to internal research, discovery efforts and translational research for our preclinical programs, an increase of$0.5 million in facilities costs allocated to research and development and a$1.1 million decrease in contra-research and development expenses under the Regeneron Agreement. Contra-research and development expenses under the Regeneron Agreement were$7.0 million and$8.1 million for the nine months endedSeptember 30, 2022 and 2021, respectively.
General and Administrative Expenses
General and administrative expenses for the nine months endedSeptember 30, 2022 were$18.7 million , compared to$15.5 million for the nine months endedSeptember 30, 2021 . The increase of$3.2 million was primarily attributable to the following:
•
$1.9 million increase in personnel-related costs primarily due to an increase in headcount and wages within the general and administrative function, as well as increased stock-based compensation expense; and
•
$1.2 million increase in professional fees, driven primarily by expenses related to external legal services, as well as consulting, accounting advisory and audit services. Interest Income The increase in interest income for the nine months endedSeptember 30, 2022 primarily attributable to an increase in interest rates and higher yields from our investments in cash equivalents and available-for-sale securities.
Provision for Income Taxes
The provision for income taxes for the nine months endedSeptember 30, 2022 was due to the recognition of$0.1 million related to a foreign tax provision and interest expense related to a previously established foreign uncertain tax position. The provision for income taxes for the nine months endedSeptember 30, 2021 was due to the recognition of an income tax expense of$1.7 million related to a foreign uncertain tax position and a foreign tax provision.
Liquidity and Capital Resources
Sources of Liquidity and Capital
Since our inception, we have incurred significant operating losses and negative cash flows from operations. We have not yet commercialized any of our product candidates, which are in various phases of preclinical and clinical development, and we do not expect to generate revenue from sales of any products for several years, if at all. ThroughSeptember 30, 2022 , we funded our operations primarily from net proceeds of$219.5 million from the issuance and sale of our convertible preferred stock,$41.3 million from the Regeneron Agreement and$125.0 million from the issuance and sale of our common stock in our IPO. InMarch 2022 , we filed a universal shelf registration statement on Form S-3 to register for sale from time to time up to$200.0 million of common stock, preferred stock, debt securities, warrants and/or units in one or more offerings. Further, inMarch 2022 , we entered into an Open Market Sale AgreementSM, or the Sales Agreement, withJefferies LLC , or Jefferies, pursuant to which, from time to time, we may offer and sell shares of our common stock. Sales of common stock through Jefferies may be made by any method that is deemed an "at-the-market" offering as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended. Jefferies is entitled to compensation at a rate equal to 3.0% of the gross proceeds from any shares of common stock sold under the Sales Agreement. InAugust 2022 , we filed a prospectus supplement under our universal shelf registration for the offer and sale of shares of our common stock having an aggregate offering price up to$50.0 million pursuant to the Sales Agreement. As ofSeptember 30, 2022 , we had not sold any shares of common stock pursuant to the Sales Agreement. 33 --------------------------------------------------------------------------------
Cash Flows
The following table provides information regarding our cash flows for each period presented (in thousands):
Nine
Months Ended
2022 2021
Net cash provided by (used in):
Operating activities $ (49,132 ) $ (33,605 )
Investing activities 49,449 (95,431 )
Financing activities (158 ) 152,359
Net increase in cash, cash equivalents and restricted cash $ 159 $ 23,323
Operating Activities
Our cash flows from operating activities are greatly influenced by our use of
cash for operating expenses and working capital requirements to support the
business. We have historically experienced negative cash flows from operating
activities as we invested in developing our pipeline, platform, drug discovery
efforts and related infrastructure. The cash used in operating activities
resulted primarily from our net losses adjusted for non-cash charges, which are
generally attributable to stock-based compensation, depreciation and
amortization and accretion of discounts on available-for-sale securities, as
well as changes in components of operating assets and liabilities, which are
generally attributable to increased expenses, timing of vendor payments and
performance under the Regeneron Agreement.
During the nine months ended
During the nine months ended
Investing Activities
During the nine months endedSeptember 30, 2022 , net cash provided by investing activities of$49.4 million was primarily due to maturities and redemptions of available for sale securities of$121.6 million , partially offset by purchases of available-for-sale securities of$71.9 million and purchases of property and equipment of$0.3 million . During the nine months endedSeptember 30, 2021 , net cash used in investing activities of$95.4 million was primarily due to purchases of available-for-sale securities of$165.7 million and purchases of property and equipment of$0.4 million , partially offset by maturities of available-for-sale securities of$70.7 million .
Financing Activities
During the nine months ended
During the nine months endedSeptember 30, 2021 , net cash provided by financing activities of$152.4 million consisted primarily of proceeds from the issuance and sale of common stock, net of cash paid for offering costs, in connection with our IPO of$125.0 million and proceeds from the issuance and sale of our Series D convertible preferred stock of$27.4 million , net of cash paid for offering costs.
Funding Requirements
We expect our expenses to increase substantially in connection with our ongoing research and development activities, particularly as we advance the preclinical activities and clinical trials of our product candidates. In addition, we expect to continue to incur additional costs associated with operating as a public company. As a result, we expect to incur substantial operating losses and negative operating cash flows for the foreseeable future. As ofSeptember 30, 2022 , we had cash, cash equivalents and available-for-sale securities of$111.9 million . We believe that our cash, cash equivalents and available-for-sale securities will enable us to fund our operating expenses and capital expenditure 34 --------------------------------------------------------------------------------
requirements into 2024. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we anticipate.
Because of the numerous risks and uncertainties associated with product development, and because the extent to which we may enter into collaborations with third parties for the development of our product candidates is unknown, we may incorrectly estimate the timing and amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our funding requirements and timing and amount of our operating expenditures will depend on many factors, including, but not limited to:
•
the progress, costs and results of our planned Phase 1/2 clinical trial of DB-OTO and any future clinical development of DB-OTO;
•
the approach we determine for the advancement of DB-020, including further potential clinical development;
•
the scope, progress, costs and results of preclinical and clinical development for our other product candidates and programs, including AAV.103, AAV.104, AAV.201 and DB-ATO;
•
the number of, and development requirements for, other product candidates that we may identify and develop;
•
the scope, costs, timing and outcome of regulatory review of our product candidates;
•
the cost and timing of completion of commercial-scale manufacturing activities;
•
the success of our collaboration with Regeneron;
•
the payment or receipt of milestones and of other collaboration-based revenues, if any;
•
our ability to establish and maintain additional strategic collaborations, licensing or other arrangements and the financial terms of such arrangements;
•
the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any of our product candidates for which we receive marketing approval;
•
the amount and timing of revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;
•
the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property and proprietary rights and defending any intellectual property-related claims;
•
the extent to which we may acquire or in-license other products, product candidates and technologies;
•
the impacts of the COVID-19 pandemic;
•
the impact of continued increase in inflation rates or interest rates;
•
the ability to receive additional non-dilutive funding, including grants from organizations and foundations; and
•
the costs of operating as a public company.
Identifying potential product candidates and conducting preclinical testing and clinical trials is a time consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for several years, if ever. Accordingly, we will need to obtain substantial additional funds to achieve our business objectives. Our expectation 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 management 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. Adequate additional funds may not be available to us on acceptable terms, or at all. We do not have any committed external source of funds, other than amounts we are entitled to under the Regeneron Agreement. As ofSeptember 30, 2022 , we had$10.0 million of unbilled receivables from Regeneron, reflecting the amount owed for Regeneron's one-year extension of the research term under the Regeneron Agreement. Market volatility resulting from the COVID-19 pandemic or other factors could also adversely impact our ability to access capital as and when needed. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of holders of our common stock. Additional debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take 35 -------------------------------------------------------------------------------- specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and may require the issuance of warrants, which could potentially dilute the ownership interests of holders of our common stock. We may be unable to raise additional funds or enter into other collaborations, strategic alliances or licensing arrangements with third parties when needed on favorable terms, or at all. If we are unable to raise additional funds through equity or debt financings or enter into such agreements when needed, we may have to significantly delay, reduce or eliminate some or all of our product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves or on terms that may not be favorable to us.
Material Cash Requirements
There have been no material changes to our material cash requirements described in our 2021 Annual Report on Form 10-K.
Critical Accounting Estimates and Significant Judgments
Our management's discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
There have been no material changes to our critical accounting estimates from those described in our 2021 Annual Report on Form 10-K.
Emerging Growth Company and Smaller Reporting Company Status
We are an "emerging growth company" as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, enacted inApril 2012 . As a result, we may take advantage of reduced reporting requirements that are otherwise applicable to public companies. In particular, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. We have elected not to "opt out" of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we can adopt the new or revised standard at the time private companies adopt the new or revised standard and may do so until such time that we either (1) irrevocably elect to "opt out" of such extended transition period or (2) no longer qualify as an emerging growth company. We are also a "smaller reporting company" as defined in Rule 12b-2 under the Securities and Exchange Act of 1934, as amended. We may continue to be a smaller reporting company if either (i) the market value of our shares held by non-affiliates is less than$250 million or (ii) our annual revenue was less than$100 million during the most recently completed fiscal year and the market value of our shares held by non-affiliates is less than$700 million . If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies.
Recently Issued Accounting Pronouncements
We have reviewed all recently issued accounting pronouncements and have
determined that, other than as disclosed in Note 2 to our consolidated financial
statements included in our 2021 Annual Report on Form 10-K, such standards will
not have a material impact on our financial statements or do not otherwise apply
to our current operations.
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