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DECIPHERA PHARMACEUTICALS, INC.

(DCPH)
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DECIPHERA PHARMACEUTICALS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

08/04/2022 | 07:13am EDT
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this Form 10-Q and our
Annual Report on Form 10-K (Form 10-K) for the year ended December 31, 2021 on
file with the SEC. Some of the information contained in this discussion and
analysis or set forth elsewhere in this Form 10-Q, including information with
respect to our plans and strategy for our business, includes forward looking
statements that involve risks and uncertainties. As a result of many factors,
including those factors set forth in the "Risk Factors" section of this Form
10-Q, 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.

Overview


We are a biopharmaceutical company focused on discovering, developing, and
commercializing important new medicines to improve the lives of people with
cancer. Leveraging our proprietary switch-control kinase inhibitor platform and
deep expertise in kinase biology, we design kinase inhibitors to target the
switch pocket region of the kinase with the goal of developing potentially
transformative medicines. Through our patient-inspired approach, we seek to
develop a broad portfolio of innovative medicines to improve treatment outcomes.
QINLOCK, our switch-control kinase inhibitor, was engineered using our
proprietary drug discovery platform and developed for the treatment of
fourth-line GIST. QINLOCK is approved in Australia, Canada, China, the EU, Hong
Kong, Switzerland, Taiwan, the U.S., and the U.K. for the treatment of
fourth-line GIST. We wholly own QINLOCK and all of our drug candidates with the
exception of a development and commercialization out-license agreement for
QINLOCK in Greater China. In addition to QINLOCK, we have identified and
advanced multiple drug candidates from our platform into clinical studies,
including vimseltinib and DCC-3116.

Recent Developments

QINLOCK


QINLOCK, an orally administered kinase switch control inhibitor of the KIT and
PDGFRA kinases, is approved in nine territories for the treatment of fourth-line
advanced GIST. We launched QINLOCK in Germany in January 2022 and received
approval by the French National Authority for Health (HAS) for a post-approval
paid access program in France, which we launched in April 2022. In addition, in
our effort to continue to pursue market access for QINLOCK in the EU and the
U.K. on a country-by-country basis, in May 2022 we submitted for National Health
Services (NHS) reimbursement to the National Institute for Health and Care
Excellence (NICE).

Vimseltinib

Vimseltinib is an investigational, orally administered, potent, and highly-selective switch-control kinase inhibitor of the colony stimulating factor 1 receptor (CSF1R).

We are currently studying vimseltinib in a pivotal Phase 3 study in patients with TGCT (MOTION study). The MOTION study is a two-part, randomized, double-blind, placebo-controlled study to assess the efficacy and safety of vimseltinib in patients with TGCT who are not amenable to surgery.


We are also conducting an international, multicenter, ongoing open-label Phase
1/2 study designed to evaluate the safety, efficacy, pharmacokinetics (PK), and
pharmacodynamics (PD) of vimseltinib in patients with solid tumors and TGCT, and
we expect to provide updated data from the Phase 1/2 study in patients with TGCT
in September 2022 in a poster presentation at the European Society For Medical
Oncology (ESMO) Congress 2022.

DCC-3116

DCC-3116 is a potential first-in-class investigational, orally administered, potent, and highly selective switch-control inhibitor of the ULK kinase.


DCC-3116 is being studied in a Phase 1 study designed to evaluate the safety,
tolerability, clinical activity, PK, and PD of DCC-3116 as a single agent and in
combination with trametinib, a U.S. Food and Drug Administration (FDA) approved
MEK inhibitor, in patients with advanced or metastatic tumors with a RAS or RAF
mutation. In August 2022, we announced that we expect to provide initial Phase 1
single agent dose escalation data on DCC-3116 in September 2022 in an oral
presentation as a Proffered Paper at the ESMO Congress 2022. Following and
subject to the selection of a recommended Phase 2 dose of DCC-3116 from the
monotherapy dose escalation portion of the Phase 1 study of DCC-3116, in the
second half of 2022 we expect to initiate three Phase 1b study combination dose
escalation cohorts: (i) in combination with trametinib, an FDA-approved
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MEK inhibitor, in patients with advanced or metastatic solid tumors with RAS,
NF1, or RAF mutations. (ii) in combination with binimetinib, an FDA-approved MEK
inhibitor, in patients with advanced or metastatic solid tumors with RAS, NF1,
or RAF mutations, and (iii) in combination with sotorasib, an FDA-approved
KRASG12C inhibitor, in patients with advanced or metastatic solid tumors with
KRASG12C mutations.

Early-Stage Research Programs

We are also making a focused investment in our next generation of research
programs, which are designed to provide first-in-class or best-in-class
treatments using our proprietary switch-control inhibitor platform. In August
2022, we announced that we plan to nominate a development candidate for our
pan-RAF research program, which targets inhibition of BRAF and CRAF kinases, by
the fourth quarter of 2022.

Coronavirus (COVID-19)

The full extent to which the COVID-19 pandemic, or the future outbreak of any
other highly infectious or contagious diseases, may impact our business,
including our preclinical studies, clinical trial operations, or
commercialization efforts will depend on continuously changing circumstances,
which are highly uncertain and cannot be predicted at this time, such as the
duration of such pandemic including future waves of infection, new strains of
the virus that causes COVID-19, or the impact of effective vaccines, the actions
taken to contain the pandemic or mitigate its impact, and the direct and
indirect economic effects of the pandemic and containment measures, among
others. The ongoing fluidity of this situation precludes any prediction as to
the full impact of the COVID-19 pandemic but it could have a material adverse
effect on our business, financial condition, and results of operations. The
COVID-19 pandemic may also have the effect of heightening the risks to which we
are subject, including various aspects of our preclinical studies and ongoing
clinical trials, the reliance on third parties in our supply chain for materials
and manufacturing of our drug and drug candidates, disruptions in health
regulatory agencies' operations globally, the volatility of our common stock,
our ability to access capital markets, and our ability to successfully
commercialize and generate revenue from QINLOCK.

We are continuing to assess the long-term impact of COVID-19 on our business
operations in an effort to mitigate interruption to our clinical programs,
research efforts, commercialization of QINLOCK, and other business activities
and to ensure the safety and well-being of our employees, as well as the
physicians and patients participating in our clinical trials. COVID-19
infections continue to fluctuate in the U.S. and in many countries worldwide as
local surges and new waves of infection continue to be reported, in particular
as caused by new variants of the virus that causes COVID-19 and the lack of
availability of effective vaccines in certain countries or regions, or failure
to utilize available vaccines in other geographies. Although some of the
restrictions aimed at minimizing the spread of COVID-19 have been and may from
time to time be eased or lifted in the U.S. and other countries from the height
of the pandemic, in response to local surges and waves of infection, including
those caused by certain variants of the virus, some countries, states, and local
governments have maintained or reinstituted these restrictions, or may
reinstitute these restrictions from time to time, in response to rising rates of
infection. In response to the COVID-19 pandemic, we implemented, and may from
time to time implement precautionary measures to protect the health and safety
of our employees, partners, and patients, including encouraging all employees,
other than those engaged in laboratory research activities, to work-from-home,
and requiring adherence to onsite occupancy limits and appropriate safety
measures designed to comply with federal, state, and local guidelines. Some of
these safety measures have been eased but may be lifted or reinstituted in
accordance with updates to such guidelines.

Our ability to successfully commercialize and generate revenue from QINLOCK may
be adversely affected by the impact of the ongoing COVID-19 pandemic. While
restrictive safety measures are in place, limited hospital access for
non-patients, including our sales personnel, social distancing requirements, and
precautionary measures due to COVID-19 may impact the ability of our sales
personnel to interact in-person with customers in the same manner as they did
before the COVID-19 pandemic. In response to previous restrictions, we
implemented a virtual sales model to supplement traditional means of customer
engagement. Although some of these restrictions have been, and may continue to
be lifted in certain healthcare institutions, the impact of prior and continued
COVID-19 related safety measures, and the potential for reimposition of
restrictions due to local surges and new waves of infection, including those
caused by new variants of the virus, may adversely affect the ability of our
sales professionals to effectively market QINLOCK to physicians, which may have
a negative impact on our sales and our market penetration. The persistence of
the COVID-19 pandemic could also impact the patient treatment paradigm and how
patients are diagnosed and monitored. In addition, in the U.S., we are utilizing
various programs to help patients afford our products, including patient
assistance programs for eligible patients. Market disruption caused by the
COVID-19 pandemic and high levels of inflation may lead to increased utilization
of our patient assistance programs, which could reduce revenues.

In addition, we continue to actively monitor risks associated with potential
interruptions to our clinical studies due to the impact of COVID-19 and are in
frequent communication with clinical study sites and contract research
organizations (CROs).
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Some clinical trial sites have maintained or reinstituted restrictions on site
visits by sponsors and CROs, initiation of new trials, patient visits, and new
patient enrollment as a result of COVID-19. While all of our studies remain open
for enrollment, we have provided guidance to our clinical trial sites that new
patient enrollment may occur at sites where resources allow these patients to be
safely enrolled and closely monitored and enrollment has slowed at, or has been
or may in the future be temporarily paused for new patients in some sites. In
addition, we continue to work closely with our study sites and CROs to allow for
utilization of remote and local assessments, such as televisits, in accordance
with FDA and European Medicines Agency (EMA) guidance, as well as to ensure
availability of trial drugs for patients. While study activities are continuing
in the clinical trials we have underway in sites across the globe, and although
some of these restrictions have been, and may from time to time be eased or
lifted, we cannot guarantee that COVID-19 precautions, either now or in the
future, or the impact of the pandemic, will not directly or indirectly affect
the expected timelines for some of our clinical trials.

In light of the changing circumstances surrounding the ongoing COVID-19 pandemic, the operating environment remains fluid and uncertain, and the full significance of the impact of COVID-19 on our business and the duration for which it may have an impact cannot be determined at this time.

Components of Our Results of Operations

Revenues


QINLOCK is approved in Australia, Canada, China, the EU, Hong Kong, Switzerland,
Taiwan, the U.S. and the U.K. for the treatment of fourth-line GIST. We may
generate revenue in the future from a combination of product sales or payments
from collaboration, distribution, or any potential additional license agreements
that we may enter into with third parties. We expect that our revenue in the
foreseeable future will be derived primarily from sales of QINLOCK and, payments
owed to us under the license (the Zai License Agreement) and supply (the Zai
Supply Agreement) agreements we entered into with Zai in June 2019 and February
2020, respectively, including royalty revenues under the Zai License Agreement
following the approvals of QINLOCK in the PRC and Hong Kong in March 2021. We
cannot provide assurance as to what extent we will generate revenue from the
commercialization of QINLOCK or if, when, or to what extent we will generate
revenue from the commercialization and sale of our drug candidates for which we
may receive marketing approval, if any. Additionally, we cannot provide
assurance as to the extent of future royalty payments, the timing of future
milestone payments, or that we will achieve and receive any future milestone
payments at all. We may never succeed in obtaining regulatory approval for any
of our drug candidates other than QINLOCK.

Product Revenues, Net


During the three and six months ended June 30, 2022 and 2021, our only source of
product revenues was from the sales of QINLOCK. Product revenues are recorded
net of estimates of variable consideration. Please read Note 2, Revenues, to the
consolidated financial statements included in this Form 10-Q for further details
of the reserves recorded for variable consideration.

Collaboration Revenues

For the three and six months ended June 30, 2022 and 2021, collaboration revenues were associated with the Zai License Agreement and Zai Supply Agreement.

Zai License Agreement


Pursuant to the terms of the Zai License Agreement, we received an upfront cash
payment of $20.0 million and three development milestone payments totaling
$12.0 million and will be eligible to receive up to $173.0 million in potential
development and commercial milestone payments, consisting of up to $38.0 million
of development milestones and up to $135.0 million of commercial milestones. In
addition, during the term of the Zai License Agreement, Zai will be obligated to
pay us tiered percentage royalties ranging from low to high teens on annual net
sales of the Licensed Products in the Territory, subject to adjustments in
specified circumstances. Additionally, certain costs we incur associated with
the Zai License Agreement are reimbursed by Zai.

During the second quarter of 2021, following the approvals of QINLOCK in the PRC
and Hong Kong in March 2021, we began recognizing royalty revenues under the Zai
License Agreement.

Zai Supply Agreement

Pursuant to the terms of the Zai Supply Agreement, costs incurred by us for
external manufacturing services associated with the production of QINLOCK for
use in the Territory for clinical trials and commercial inventory are reimbursed
by Zai.
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During the second quarter of 2021, following the approvals of QINLOCK in the PRC
and Hong Kong in March 2021, we began recognizing revenues associated with sales
of commercial inventory of QINLOCK under the Zai Supply Agreement.

Cost of Sales


Our cost of sales includes external costs of producing and distributing
inventories that are related to product revenue during the respective period of
the associated sales. In addition, shipping and handling costs for product
shipments are recorded in cost of sales as incurred. Further, cost of sales
includes the external costs of producing and distributing commercial inventories
sold under the Zai Supply Agreement. Cost of sales also includes charges related
to inventory written down as a result of excess, obsolescence, unmarketability,
or other reasons.

Cost of sales for newly launched products will not include the full cost of
manufacturing until the initial pre-launch inventory is depleted, and additional
inventory is manufactured and sold. The gross margin on sales of QINLOCK for the
three and six months ended June 30, 2022 and 2021 was enhanced by sales of the
initial pre-launch inventory, and therefore, use of active pharmaceutical
ingredients and components that were previously expensed as research and
development expenses prior to the launch of QINLOCK, referred to as zero cost
inventories. However, we do not expect that the cost of sales as a percentage of
net sales of QINLOCK will increase significantly after we have sold all zero
cost inventories and commenced the sales of inventories which will reflect the
full cost of manufacturing.

Operating Expenses

The successful development and commercialization of our drug and drug candidates is highly uncertain. This is due to the numerous risks and uncertainties, including the following:


•continuing to establish sales, marketing, and distribution capabilities to
support the commercialization of QINLOCK or our drug candidates, if and when
approved, whether alone or in collaboration with others such as Zai, our
licensee for QINLOCK in Greater China;

•successful completion of preclinical studies and clinical trials;

•receipt and related terms of marketing approvals from applicable regulatory authorities;

•acceptance of QINLOCK or our drug candidates, if and when approved, by patients, the medical community, and third-party payors;

•developing and implementing marketing and reimbursement strategies;

•raising additional funds necessary to fund ongoing operations and capital expenditure requirements, including to complete clinical development of and commercialize any current or future drug candidates for which we receive approval;

•making arrangements with third-party manufacturers, or establishing manufacturing capabilities, for both clinical and commercial supplies of our drug and drug candidates;

•maintaining a continued acceptable safety profile of our products following approval;

•obtaining and maintaining patent, trade secret, and other intellectual property protection, and regulatory exclusivity for our drug and drug candidates;

•protecting and enforcing our rights in our intellectual property portfolio;

•effectively competing with other therapies; and

•attracting additional licensees and/or collaborators or distributors with development, regulatory, and commercialization expertise.


A change in the outcome of any of these variables with respect to the
commercialization of QINLOCK or the development of our drug or any of our drug
candidates would significantly change the costs and timing associated with the
commercialization of QINLOCK or development of our drug or that drug candidate.
We may never succeed in obtaining regulatory approval for any of our drug
candidates other than QINLOCK.
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Research and Development Expenses


Research and development expenses consist primarily of costs incurred for our
research activities, including our drug discovery efforts and the development of
our drug and drug candidates, which include:

•employee-related expenses, including salaries, related benefits, travel, and stock-based compensation expense for employees engaged in research and development functions;

•expenses incurred in connection with the preclinical and clinical development of our drug candidates, including under agreements with CROs;


•the cost of consultants and contract manufacturing organizations (CMOs) that
manufacture drug products for use in our preclinical studies and clinical trials
as well as all expenses associated with the pre-launch manufacturing of
commercial inventory of QINLOCK prior to FDA approval; and

•facilities, depreciation, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance, supplies, and technology-related costs.


We expense research and development costs to operations as incurred. Advance
payments for goods or services to be received in the future for use in research
and development activities are recorded as prepaid expenses within our
consolidated balance sheets. The prepaid amounts are expensed as the related
goods are delivered or the services are performed.

Our direct research and development expenses are tracked on a program-by-program
basis and consist primarily of external costs, such as fees paid to consultants,
central laboratories, contractors, CMOs, and CROs in connection with our
preclinical and clinical development activities. We do not allocate employee
costs, costs associated with our proprietary switch-control kinase inhibitor
platform technology, or facility expenses, including depreciation or other
indirect costs, to specific drug or drug candidate development programs because
these costs are deployed across multiple drug or drug candidate development
programs and, as such, are not separately classified.

Research and development activities are central to our business model. Drugs and
drug 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 research and development expenses associated with vimseltinib and
DCC-3116 will increase in 2022 as our drug and drug candidate development
programs progress. However, we expect research and development expenses will
decrease overall as compared to 2021 due to the cost reduction measures included
in the corporate restructuring implemented in the fourth quarter of 2021. We do
not believe that it is possible at this time to accurately project total
program-specific expenses through commercialization. There are numerous factors
associated with the successful commercialization of our drug and any of our drug
candidates, including future trial design and various regulatory requirements,
many of which cannot be determined with accuracy at this time based on our stage
of development. Additionally, future commercial and regulatory factors beyond
our control will impact our clinical development programs and plans.

Selling, General, and Administrative Expenses


Selling, general, and administrative expenses consist primarily of salaries and
related costs, including stock-based compensation, for personnel in executive,
legal, finance, commercial, human resources, and administrative functions.
Selling, general, and administrative expenses also include direct and allocated
facility- and technology-related costs as well as professional fees for legal,
patent, consulting, accounting, and audit services.

We anticipate that our selling, general, and administrative expenses will
decrease overall due to the cost reduction measures included in the corporate
restructuring implemented in the fourth quarter of 2021, despite increased
selling, general, and administrative expenses to be incurred related to the
launch of QINLOCK in Germany and France in 2022. We also anticipate that we will
continue to incur accounting, audit, legal, regulatory, compliance, and investor
and public relations expenses associated with the business and continued
operations as a public company.

Other Income (Expense)

Interest and Other Income, net


Interest income consists of interest earned on our cash, cash equivalents, and
marketable securities balances. Other income, net, consists of insignificant
amounts of miscellaneous income and expenses unrelated to our core operations,
including the impacts of foreign currency exchange differences.
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Income Taxes


Consistent with our income tax disclosures described under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Components of Our Results of Operations" in our Form 10-K for the
year ended December 31, 2021 on file with the SEC, as of June 30, 2022, we have
not recorded any U.S. federal or state income tax benefits for either the net
losses we have incurred or our earned research and orphan drug credits, due to
the uncertainty of realizing a benefit from those items in the future.

Critical Accounting Policies and Significant Judgments and Estimates


Our consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the U.S. (GAAP). The preparation of our
consolidated financial statements and related disclosures requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue, costs and expenses, and related disclosures in the consolidated
financial statements. We believe that our critical accounting policies that
involve the most judgment and complexity are those relating to:

•product revenue reserves;

•accrued research and development expenses; and

•stock-based compensation.


Accordingly, we believe the policies set forth above are critical to fully
understanding and evaluating our financial condition and results of operations.
If actual results or events differ materially from the estimates, judgments, and
assumptions used by us in applying these policies, our reported financial
condition and results of operations could be materially affected.

For a description of our critical accounting policies, please see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Critical Accounting Policies and Significant Judgments and Estimates"
in our Form 10-K for the year ended December 31, 2021 on file with the SEC.
There have been no significant changes to our critical accounting policies since
December 31, 2021.

Results of Operations

Comparison of the Three and Six Months Ended June 30, 2022 and 2021

The following table summarizes our results of operations for the three and six months ended June 30, 2022 and 2021:

                                                 Three Months Ended June 30,                    Six Months Ended June 30,
(in thousands)                                     2022                  2021                   2022                    2021
Revenues:
Product revenues, net                        $       31,497          $  22,048          $      60,306               $   42,010
Collaboration revenues                                  997              1,525                  1,411                    6,719
Total revenues                                       32,494             23,573                 61,717                   48,729
Cost and operating expenses:
Cost of sales                                         1,799              1,275                  2,181                    1,497
Research and development                             44,858             59,984                 92,270                  115,665
Selling, general, and administrative                 29,625             32,828                 57,946                   63,575
Total cost and operating expenses                    76,282             94,087                152,397                  180,737
Loss from operations                                (43,788)           (70,514)               (90,680)                (132,008)
Other income (expense):
Interest and other income, net                          727                 81                    727                      277

Total other income (expense), net                       727                 81                    727                      277
Net loss                                     $      (43,061)         $ (70,433)         $     (89,953)              $ (131,731)


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Revenues

Product Revenues, Net

During the three and six months ended June 30, 2022 and 2021, our only source of
product revenues was from the sales of QINLOCK. During the three and six months
ended June 30, 2022 and 2021, net product revenues by geography consisted of the
following:

                                                         Three Months Ended June 30,                 Six Months Ended June 30,
(in thousands)                                             2022                  2021                 2022                 2021
U.S.                                                 $       23,733          $  20,732          $      47,142          $  40,019

Rest of world                                                 7,764              1,316                 13,164              1,991
Total product revenues, net                          $       31,497         

$ 22,048 $ 60,306 $ 42,010



For the three and six months ended June 30, 2022 compared to the same periods in
2021, U.S. net product revenues increased $3.0 million and $7.1 million,
respectively, primarily due to increased sales volume. For the three and six
months ended June 30, 2022 compared to the same periods in 2021, rest of world
net product revenues increased $6.4 million and $11.2 million, respectively,
primarily due to increased sales volume in Germany, which launched in January
2022, and France, which launched a post-approval paid access program in April
2022, as we continued our commercialization efforts.

Collaboration Revenues


For the three months ended June 30, 2022 compared to the same period in 2021,
collaboration revenues decreased $0.5 million, which was primarily due to a
decrease in royalty revenues, which we began recognizing in the second quarter
of 2021 following the approvals of QINLOCK in the PRC and Hong Kong.

For the six months ended June 30, 2022 compared to the same period in 2021,
collaboration revenues decreased $5.3 million, which was primarily due to the
recognition of a $5.0 million development milestone in the first quarter of 2021
associated with the approval of QINLOCK for the treatment of adult patients with
advanced GIST who have received prior treatment with three or more kinase
inhibitors, including imatinib, by the China NMPA in March 2021.

Cost of Sales

During the three and six months ended June 30, 2022 and 2021, cost of sales by type consisted of the following:

                                                         Three Months Ended June 30,                 Six Months Ended June 30,
(in thousands)                                             2022                  2021                 2022                 2021
Cost of product sales                                $          975        

$ 394 $ 1,341 $ 616 Cost of collaboration sales

                                     824                881                    840                881
Total cost of sales                                  $        1,799          $   1,275          $       2,181          $   1,497


For the three and six months ended June 30, 2022 compared to the same periods in
2021, cost of sales increased $0.5 million and $0.7 million, respectively,
primarily due to increased product sales of QINLOCK in the U.S., Germany and
France. During the three and six months ended June 30, 2022, cost of sales also
included a $0.4 million charge for inventory written down as a result of excess,
obsolescence, unmarketability, or other reasons. During the six months ended
June 30, 2021, cost of sales also included a charge of less than $0.1 million
for inventory written down as a result of excess, obsolescence, unmarketability,
or other reasons. Cost of sales associated with product sales of QINLOCK was
primarily related to the sales of zero cost inventories, which consisted of
packaging, labeling, shipping, and distribution costs. As a result, the full
costs of manufacturing QINLOCK inventory are not included in cost of sales
during the three and six months ended June 30, 2022 and 2021.

Prior to receiving FDA approval for QINLOCK in May 2020, we manufactured
inventory to be sold and recorded approximately $6.0 million related to this
inventory build-up as research and development expense. We did not record any
such costs related to the build-up of this inventory as research and development
expense during the three and six months ended June 30, 2022 and 2021.
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Utilizing the actual direct costs to manufacture QINLOCK prior to receiving FDA
approval, had the previously expensed inventory been capitalized and recognized
when sold, the total cost of sales with these manufacturing costs included for
the three and six months ended June 30, 2022 would have increased by
approximately $0.7 million and $1.3 million, respectively, and $0.7 million and
$1.1 million, respectively, in the prior year comparative periods.

We do not expect our cost of sales for QINLOCK to increase significantly as a
percentage of net sales in future periods as we continue to produce inventory
for future sales, which will reflect the full cost of manufacturing, and then
sell such inventory. We expect to continue to sell the zero cost inventories of
QINLOCK in the U.S. through the third quarter of 2022.

Operating Expenses

[[Image Removed: dcph-20220630_g2.jpg]][[Image Removed: dcph-20220630_g3.jpg]]

Research and Development Expenses

QINLOCK


For the three and six months ended June 30, 2022 compared to the same periods in
2021, research and development expenses related to QINLOCK decreased primarily
as a result of decreases in clinical trial expenses of $4.1 million and $10.5
million and decreases in manufacturing costs of $3.3 million and $5.2 million,
respectively. Clinical trial expenses for QINLOCK decreased primarily as a
result of decreased expenses associated with INTRIGUE, our Phase 3 study of
QINLOCK for the treatment of second-line GIST, which we initiated in December
2018 and for which enrollment was completed in December 2020 and our Phase 1
trial of QINLOCK. Manufacturing costs decreased primarily due to timing of
processing of inventory for clinical and commercial use and due to the
discontinuation of certain clinical trials as a result of the corporate
restructuring implemented in the fourth quarter of 2021.
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Vimseltinib


For the three and six months ended June 30, 2022 compared to the same periods in
2021, expenses related to our vimseltinib program increased primarily as a
result of increases in clinical trial expenses of $0.9 million and $2.6 million,
partially offset by preclinical expenses of $0.2 million and $0.7 million,
respectively. Additionally, for the six months ended June 30, 2022 clinical
trial expenses were offset by decreases in manufacturing costs of $0.9 million.
Clinical trial expenses increased primarily due to increased activities
associated with our Phase 3 study of vimseltinib in patients with TGCT, MOTION,
which was initiated in the fourth quarter of 2021 and increased clinical
pharmacology study activities, partially offset by a decrease in clinical trial
expense associated with our Phase 1/2 study of vimseltinib to assess the safety,
tolerability, pharmacokinetics, and pharmacodynamics in patients with TGCT.
Manufacturing costs for the vimseltinib program decreased for the six months
ended June 30, 2022 as a result of increased manufacturing in the prior year
period to prepare for the initiation of the MOTION study.

Rebastinib


For the three and six months ended June 30, 2022 compared to the same periods in
2021, expenses related to our rebastinib program decreased primarily as a result
of the discontinuation of our rebastinib program in the fourth quarter of 2021
following the corporate restructuring implemented in the fourth quarter of 2021.

DCC-3116


For the three and six months ended June 30, 2022 compared to the same periods in
2021, expenses related to our DCC-3116 program increased primarily as a result
of increases in manufacturing costs of $1.6 million and $3.3 million and
increases in clinical trial expenses of $0.8 million and $1.4 million,
respectively, associated with our Phase 1 study of DCC-3116, which we initiated
in June 2021, partially offset by a decrease in preclinical expense of $0.2
million and $0.3 million, respectively, due to the program moving from the
preclinical to clinical stage in June 2021.

Preclinical


For the six months ended June 30, 2022 compared to the same period in 2021, the
increase in preclinical costs of $1.2 million was primarily due to increased
activities for our early-stage drug discovery programs.

Unallocated Expenses


For the three and six months ended June 30, 2022 compared to the same periods in
2021, the decreases in unallocated research and development expenses were
primarily associated with decreased personnel-related costs of $3.8 million and
$1.4 million, respectively, primarily due to the cost reduction measures
included in the corporate restructuring implemented in the fourth quarter of
2021, partially offset by an increase in employee expenses related to our
international employees, who were primarily hired in the second half of 2021.
Additionally, for the six months ended June 30, 2022, the decrease was also
partially offset by an increase in stock-based compensation expense of $1.1
million, primarily due stock-based compensation grants issued in the fourth
quarter of 2021 in connection with our corporate restructuring.

We expect research and development expenses associated with vimseltinib and
DCC-3116 will increase in the second half of 2022 as we continue to invest in
the development of these programs. However, we expect research and development
expenses will decrease overall as compared to 2021 due to the cost reduction
measures included in the corporate restructuring implemented in the fourth
quarter of 2021.

Selling, General, and Administrative Expenses


For the three and six months ended June 30, 2022 compared to the same periods in
2021, the decrease in selling, general, and administrative expenses was
primarily associated with a decrease in professional and consultant fees of $2.6
million and $5.6 million, respectively. The decreases in professional and
consultant fees were primarily due to a decrease in various advisory fees
related to establishing, in the prior year period, a targeted commercial
infrastructure and commercialization preparedness in key European markets to
support the launch of QINLOCK in Germany, which launched in January 2022, and a
post-approval paid access program in France, which launched in April 2022.

We anticipate that our selling, general, and administrative expenses will
decrease overall due to the cost reduction measures included in the corporate
restructuring implemented in the fourth quarter of 2021, despite increased
selling, general, and administrative expenses to be incurred related to the
launch of QINLOCK in Germany and a post-approval paid access program in France
in 2022.
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Interest and Other Income, Net

For the three and six months ended June 30, 2022 compared to the same periods in 2021, the increases in interest and other income, net, was primarily due to increased interest income on our cash equivalents and marketable securities associated with an increase in our investment holdings and foreign currency exchange differences.

Restructuring

In November 2021, we announced a corporate restructuring intended to prioritize clinical development of select programs, streamline commercial operations, maintain a focus on discovery research, and extend our cash runway.


As a result of the restructuring, we recognized a one-time charge in the fourth
quarter of 2021 of approximately $26.2 million. This charge includes
approximately $9.8 million of employee-related termination costs and
approximately $16.4 million of discontinuation costs such as contract
termination fees and non-cancellable commitments related to the rebastinib and
ripretinib programs.

The following table summarizes the charges and spending related to the Company's restructuring efforts during the six months ended June 30, 2022:


                                                         Workforce          

Pipeline

(in thousands)                                           Reduction             Programs             Total

Restructuring reserve as of December 31, 2021 $ 7,383 $ 13,408 $ 20,791 Payments

                                                    (6,772)             (12,001)           (18,773)
Restructuring reserve as of June 30, 2022              $       611          

$ 1,407 $ 2,018

Liquidity and Capital Resources


Since our inception in 2003, we have focused substantially all of our efforts
and financial resources on organizing and staffing our company, business
planning, raising capital, developing product and technology rights, conducting
research and development activities for our drug candidates, building a
commercial and marketing organization, and commercializing our first approved
product, QINLOCK. Our only product approved for sale is QINLOCK and we have not
generated sufficient revenues to result in a profit.

As a result, we have incurred significant operating losses since our inception.
We have generated limited revenue to date primarily from our product sales and
under the Zai License Agreement and Zai Supply Agreement. QINLOCK is approved in
nine territories for the treatment of fourth-line GIST. During the three and six
months ended June 30, 2022 and 2021, our product revenues were primarily derived
from sales of QINLOCK in the U.S. Additionally, we launched QINLOCK in Germany
in January 2022 and launched a post-approval paid access program in France in
April 2022. We have also entered into exclusive distributor arrangements to
facilitate product sales of QINLOCK in select geographies where we do not
currently intend to distribute QINLOCK on our own. During the second quarter of
2021, following the approvals of QINLOCK in the PRC and Hong Kong in March 2021,
we also began to recognize royalty revenues under the Zai License Agreement.
However, we cannot provide assurance as to what extent we will generate revenue
from the commercialization of QINLOCK by us or our partners. We do not expect to
generate revenue from sales of any drug candidates in the near future, if at
all, unless and until we obtain marketing approval for, and begin to sell, such
drug candidates. We may never generate revenues that are significant enough to
achieve profitability.

On October 2, 2017, we completed our initial public offering (IPO) of our common
stock. Since October 2017, we have primarily supported our operations by
completing issuances of our common stock through our IPO, subsequent follow-on
offerings, including our underwritten public offering announced in April 2022,
and an Open Market Sale Agreement? (the Sales Agreement) with Jefferies LLC
(Jefferies). Through such issuances, we have issued and sold 37,170,625 shares
of our common stock and pre-funded warrants to purchase 9,748,761 shares of our
common stock resulting in net proceeds of $1.1 billion after deducting
underwriting discounts and commissions and other offering expenses.

In August 2020, we entered into the Sales Agreement with Jefferies, pursuant to
which we may issue and sell shares of our common stock having aggregate offering
proceeds of up to $200.0 million (the Shares) from time to time through
Jefferies as our sales agent. Upon delivery of a placement notice and subject to
the terms and conditions of the Sales Agreement, Jefferies may sell the Shares
by any method permitted by law deemed to be an "at the market offering" as
defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as
amended. We may sell the Shares in amounts and at times to be determined by
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us from time to time subject to the terms and conditions of the Sales Agreement,
but we have no obligation to sell any Shares under the Sales Agreement. We or
Jefferies may suspend or terminate the offering of Shares upon notice to the
other party and subject to other conditions. On April 26, 2022, we delivered
written notice to Jefferies that we were suspending and terminating the
prospectus related to our common stock (the ATM Prospectus) issuable pursuant to
the Sales Agreement. As a result, we will not make any sales of our securities
pursuant to the Sales Agreement, unless and until a new prospectus, prospectus
supplement or a new registration statement is filed. Other than the termination
of the ATM Prospectus, the Sales Agreement remains in full force and effect.

In April 2022, we entered into an underwriting agreement with J.P. Morgan
Securities LLC and Jefferies, as representatives of the several underwriters
named therein, relating to the issuance and sale of an aggregate of 7,501,239
shares of our common stock at a public offering price of $10.00 per share of
common stock to certain investors. In addition, we offered pre-funded warrants
to purchase 9,748,761 shares of our common stock at a purchase price of $9.99
per pre-funded warrant, which equals the public offering price per share of the
common stock less the $0.01 exercise price per share of each pre-funded warrant.
The offering closed on April 29, 2022, resulting in net proceeds of
$163.4 million after deducting underwriting discounts and commissions and other
offering expenses.

During the second quarter of 2022, 317,316 shares of pre-funded warrants were
exercised resulting in net proceeds of less than $0.1 million. As of June 30,
2022, there were 9,431,445 pre-funded warrants outstanding.

Cash Flows

As of June 30, 2022, our principal sources of liquidity were cash, cash equivalents, and marketable securities of $393.1 million.

The following table summarizes our sources and uses of cash and cash equivalents for each of the periods presented:

                                                                          Six Months Ended June 30,
(in thousands)                                                            2022                    2021
Net cash flows used in operating activities                       $     (96,876)              $ (119,649)
Net cash flows (used in) provided by investing activities               (44,542)                  63,455
Net cash flows provided by financing activities                         164,307                   11,206
Net increase (decrease) in cash and cash equivalents              $      22,889               $  (44,988)


Operating Activities


During the six months ended June 30, 2022 compared to the same period in 2021,
net cash flows used in operating activities decreased $22.8 million, primarily
resulting from a decrease in our net loss of $41.8 million and increases in net
non-cash charges of $3.5 million, primarily due to an increase in share-based
compensation of $3.8 million, partially offset by increases in net cash flows
related to changes in our operating assets and liabilities of $22.5 million. The
increase in net cash flows related to changes in our operating assets and
liabilities were generally due to the timing of vendor invoicing and payments
and the capitalization of inventory.

Investing Activities


During the six months ended June 30, 2022 compared to the same period in 2021,
net cash flows used in investing activities increased $108.0 million, primarily
resulting from a decrease in proceeds from maturities and sales of marketable
securities of $139.0 million, partially offset by a decrease in purchases of
marketable securities of $30.2 million and a decrease in purchases of property
and equipment of $0.8 million.

Financing Activities


During the six months ended June 30, 2022 compared to the same period in 2021,
net cash flows provided by financing activities increased $153.1 million,
primarily resulting from an increase in net proceeds from offerings of our
common stock and pre-funded warrants of $155.2 million, partially offset by a
decrease in proceeds from stock option exercises and employee stock purchase
plan activity of $1.7 million. Net of underwriting discounts and commissions and
other offering costs, the increase in proceeds from offerings was due to our
issuance of our common stock and pre-funded warrants in a follow-on public
offering in April 2022 of $163.4 million as compared to our issuances of our
common stock under the Sales Agreement during the six months ended June 30, 2021
of $8.5 million.
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Funding Requirements


Our ability to generate product revenues sufficient to achieve profitability
will depend heavily on the successful commercialization of QINLOCK and eventual
commercialization of one or more of our drug candidates. Our net loss was $90.0
million for the six months ended June 30, 2022 and $300.0 million for the year
ended December 31, 2021. As of June 30, 2022, we had an accumulated deficit of
$1.1 billion. We expect to continue to incur significant expenses and operating
losses for the foreseeable future. We expect that our expenses and capital
requirements will increase in connection with our ongoing activities,
particularly as we:

•continue to commercialize QINLOCK in the U.S., and continue to build our global commercial capability as we actively prepare to bring QINLOCK to eligible patients around the world, including in key European markets;

•continue with our ongoing and planned clinical programs for vimseltinib as a potential single agent therapy for the treatment of TGCT;

•develop DCC-3116, our ULK kinase inhibitor, for the potential treatment of mutant RAS or RAF cancers;

•continue research and development and drug discovery activities and initiate additional clinical trials;

•seek marketing approval for our drug or any of our drug candidates that successfully complete clinical development;

•develop and scale up our capabilities to support our ongoing preclinical activities and clinical trials for our drug candidates and commercialization of any of our drug candidates for which we obtain marketing approval;

•make payments, if any, pursuant to any license or collaboration agreement we may enter into, including those associated with the Sprint Agreement;

•maintain, expand, protect, and enforce our intellectual property portfolio; and


•maintain our operational, financial, and management systems and personnel,
including to support our clinical development and commercialization efforts and
our operations as a public company, including international operations in key
European markets and other potential geographies.

As we continue to seek regulatory approval for our drug candidates, we expect to
incur significant expenses related to our ongoing clinical development efforts
and activities related to maintaining and expanding our internal
commercialization capability to support product sales, marketing, and
distribution except to the extent we enter into a commercialization partnership
that covers such expenses. Further, we expect to continue to incur costs
associated with operating as a public company.

As a result, we will need substantial additional funding to support our
continuing operations and pursue our growth strategy. Even if we are able to
generate substantial product sales of QINLOCK, we may not become profitable.
Until we become profitable, if ever, we expect to finance our operations
primarily through a combination of equity, debt, or other financings,
collaborations, strategic alliances, and marketing, distribution, or additional
licensing arrangements. We may be unable to raise additional funds or enter into
such other agreements or arrangements when needed on favorable terms, or at all.
Market volatility resulting from global economic developments, political unrest,
high inflation, the COVID-19 pandemic or other factors could also adversely
impact our ability to access capital as and when needed. If we are unable to
raise additional funds through equity or debt financings or other arrangements
when needed, we may be required to delay, limit, reduce, or terminate our
research, product development, or commercialization efforts or grant rights to
develop and market drugs and drug candidates that we would otherwise prefer to
develop and market ourselves.

To the extent that we raise additional capital through the sale of equity or
convertible debt securities, the ownership interest of existing equity holders
will be diluted, and the terms of these securities may include liquidation or
other preferences that adversely affect the rights of common stockholders. Debt
financing and preferred equity financing, if available, may involve agreements
that include covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, making acquisitions or capital
expenditures, or declaring dividends. If we raise additional funds through
collaborations, strategic alliances or marketing, distribution, or licensing
arrangements with third parties (such as the Zai License Agreement), we may have
to relinquish valuable rights to our technologies, future revenue streams,
research programs, drugs, or drug candidates, or grant licenses on terms that
may not be favorable to us.

Because of the numerous risks and uncertainties associated with pharmaceutical
product development and commercialization, we are unable to accurately predict
the timing or amount of increased expenses and capital requirements or when or
if we will be able to achieve or maintain profitability. If we fail to become
profitable or are unable to sustain profitability
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on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to further reduce or terminate our operations. The timing and amount of our operating expenditures will depend largely on:

•the timing and progress of preclinical and clinical development activities;

•successful enrollment in and completion of clinical trials;

•the success of our commercialization efforts and market acceptance for QINLOCK or any of our future approved drugs;

•the timing and outcome of regulatory review of our drug and drug candidates;

•the cost to develop companion diagnostics as needed for each of our drug candidates;

•our ability to establish and manage agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing;

•addition and retention of key research and development and commercial, including sales and marketing, personnel;

•the costs and timing of commercialization activities, including product manufacturing, marketing, sales, and distribution, for QINLOCK, including our commercial launch of QINLOCK in key European markets, and any of our drug candidates for which we obtain marketing approval;

•the legal and patent costs involved in prosecuting patent applications and enforcing patent claims and other intellectual property claims; and


•the terms and timing of any collaboration, license, distribution, or other
arrangement, including the terms and timing of any upfront, milestone, and/or
royalty payments thereunder.

We believe that our cash, cash equivalents, and marketable securities as of
June 30, 2022 of $393.1 million, together with anticipated product, royalty, and
supply revenues, but excluding any potential future milestone payments under our
collaboration or license agreements will enable us to fund our operating
expenses and capital expenditure requirements into 2025. 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.

Contractual Obligations and Commitments

As of June 30, 2022, there have been no material changes to our contractual obligations and commitments outside the ordinary course of business from those that were presented in our Form 10-K for the year ended December 31, 2021.

Off-Balance Sheet Arrangements


We did not have during the periods presented, and we do not currently have, any
off-balance sheet arrangements, as defined in the rules and regulations of the
SEC.

Recently Issued Accounting Pronouncements

Based on our review of recently issued accounting pronouncements, we do not believe there are any such pronouncements that will have a material impact on our financial position or results of operations.

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