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DECIPHERA PHARMACEUTICALS, INC.

(DCPH)
  Report
Delayed Nasdaq  -  04:00:00 2023-01-27 pm EST
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DECIPHERA PHARMACEUTICALS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

11/03/2022 | 06:12am EST
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 advanced 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, we submitted for National Health Services
(NHS) reimbursement to the National Institute for Health and Care Excellence
(NICE) in the second quarter of 2022 and submitted for Agenzia Italiana Del
Farmaco (AIFA) reimbursement in Italy and initiated the market access process in
Spain with the Spanish Agency of Medicines and Medical Devices (AEMPS) in the
third quarter of 2022.

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. In
September 2022, we announced updated data from the Phase 1 dose escalation and
Phase 2 expansion portions of the study in patients with TGCT in a poster
presentation at the European Society For Medical Oncology (ESMO) Congress 2022.
In the Phase 2 expansion portion of the study, Cohort A includes TGCT patients
with no prior anti-CSF1/CSF1R (previous therapy with imatinib or nilotinib is
eligible) and Cohort B includes patients with prior anti-CSF1/CSF1R (previous
therapy with imatinib or nilotinib is not eligible). As of the May 6, 2022
cutoff date, the objective response rate (ORR) was 69% in Phase 1 across all
dose cohorts, 53% in Phase 2 Cohort A, and 46% in Phase 2 Cohort B. In addition,
the ORR at week 25 in Phase 2 Cohort A was 38%. The median duration of treatment
for patients in (i) Phase 1 across all dose cohorts was 17.5 months with 53% of
patients remaining on treatment as of the data cutoff date, (ii) Phase 2 Cohort
A was 9.8 months with 61% of patients remaining on treatment as of the cutoff
date, and (iii) Phase 2 Cohort B was 5.9 months with 67% of patients remaining
on treatment as of the cutoff date. In both Phase 1 and Phase 2, treatment with
vimseltinib was generally well tolerated in patients with TGCT in Phase 1 across
all cohorts and in Phase 2 at the recommended dose of 30 mg twice weekly. Most
non-laboratory treatment-emergent
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adverse events (TEAEs) were Grade 2 or lower and the only Grade 3/4 TEAE observed in >5% of patients was elevated creatine phosphokinase.

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.

We presented 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. As of the June 9, 2022 cutoff date, 18 patients with locally advanced or
metastatic cancer with a RAF or RAS mutation were enrolled across four dose
cohorts treated with DCC-3116 twice daily (BID): 50 mg BID (n=3); 100 mg BID
(n=4); 200 mg BID (n=7); and 300 mg BID (n=4). The median number of prior
anti-cancer regimens was three (range 1-10). The most common cancer types were
colorectal (56%) and pancreatic (28%) and patients had KRAS (83%) and BRAF (17%)
mutations. DCC-3116 exposure appeared to increase dose-proportionally across the
four dose levels tested from 50 mg BID to 300 mg BID; at all doses levels, the
area under the curve (AUC) of DCC-3116 was at or above the AUC of the lowest
tested dose that was active in preclinical studies. DCC-3116 demonstrated target
inhibition with significant decreases in phosphorylation of ATG14, a direct
ULK1/2 substrate, in peripheral blood mononuclear cells. At all dose levels,
reductions in phosphorylated ATG14 were observed that were associated with
anti-tumor activity in preclinical studies combining DCC-3116 and a MEK
inhibitor as measured by reductions in phosphorylated ATG13 in tumors.

Treatment with DCC-3116 was well tolerated and most TEAEs were Grade 1/2 except
for two related asymptomatic and reversible Grade 3 alanine transaminase
increases that led to dose interruption and reduction. The most common (?15%)
TEAEs regardless of relatedness reported (all grades) were: fatigue (39%),
dehydration (22%), alanine transaminase increases (17%), anemia (17%), aspartate
transaminase increases (17%), decreased appetite (17%), hyponatremia (17%),
nausea (17%), and vomiting (17%).

In the fourth quarter of 2022, we completed enrollment of the monotherapy dose
escalation portion of the Phase 1 study of DCC-3116. Single-agent DCC-3116 did
not reach a maximum tolerated dose, and we selected 50 mg BID as the starting
dose of DCC-3116 for the combination dose escalation portion of the study. We
also opened enrollment for our three combination dose escalation cohorts: (i) in
combination with trametinib, an FDA-approved 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. In addition,
in the fourth quarter of 2022, we treated the first patient in the combination
dose escalation portion of the study.

DCC-3084


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 November
2022, we announced the nomination of DCC-3084 for our pan-RAF development
candidate. DCC-3084 is a selective inhibitor of BRAF/CRAF kinases that inhibits
Class I, II, and III BRAF mutants, BRAF fusions, and NRAS mutant cell lines.

Coronavirus (COVID-19)


We continue to closely monitor the impact of the COVID-19 pandemic 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. In addition,
we 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). While all
of our studies remain open for enrollment, we have experienced some delays or
disruptions in enrollment and enrollment may in the future be temporarily paused
for new patients at some sites. We will continue to assess the duration, scope,
and severity of the COVID-19 pandemic as it evolves and monitor local COVID-19
trends and government guidance for each of our site and office locations.
However, 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
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may have an impact cannot be determined at this time. For further information
regarding the impact of the COVID-19 pandemic on us, see "Part II. Item 1A -
Risk Factors" included in this Quarterly Report on Form 10-Q.

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 nine months ended September 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 nine months ended September 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. 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.
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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 nine months ended September 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. We will begin selling inventory with the full cost
of manufacturing in the fourth quarter of 2022.

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.

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
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•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.

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 September 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
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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 Nine Months Ended September 30, 2022 and 2021

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

                                             Three Months Ended September 30,           Nine Months Ended September 30,
(in thousands)                                   2022                2021                  2022                   2021
Revenues:
Product revenues, net                        $   32,318          $  21,682          $         92,624          $   63,692
Collaboration revenues                            3,656              1,538                     5,067               8,257
Total revenues                                   35,974             23,220                    97,691              71,949
Cost and operating expenses:
Cost of sales                                     3,344                917                     5,525               2,414
Research and development                         47,485             66,444                   139,755             182,109
Selling, general, and administrative             30,026             35,527                    87,972              99,102
Total cost and operating expenses                80,855            102,888                   233,252             283,625
Loss from operations                            (44,881)           (79,668)                 (135,561)           (211,676)
Other income (expense):
Interest and other income, net                    1,838               (170)                    2,565                 107

Total other income (expense), net                 1,838               (170)                    2,565                 107
Net loss                                     $  (43,043)         $ (79,838)         $       (132,996)         $ (211,569)


Revenues

Product Revenues, Net

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

                                                     Three Months Ended September 30,       Nine Months Ended September 30,
(in thousands)                                           2022                2021               2022                2021
U.S.                                                 $   24,478          $  19,975          $   71,621          $  59,994

Rest of world                                             7,840              1,707              21,003              3,698
Total product revenues, net                          $   32,318          $  21,682          $   92,624          $  63,692


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For the three and nine months ended September 30, 2022 compared to the same periods in 2021, U.S. net product revenues increased $4.5 million and $11.6 million, respectively, primarily due to increased sales volume and an increase in net price.


For the three and nine months ended September 30, 2022 compared to the same
periods in 2021, rest of world net product revenues increased $6.1 million and
$17.3 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 September 30, 2022 compared to the same period in
2021, collaboration revenues increased $2.1 million, which was primarily due to
an increase in revenues under the Zai Supply Agreement.

For the nine months ended September 30, 2022 compared to the same period in
2021, collaboration revenues decreased $3.2 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. This decrease
was partially offset by an increase in revenues under the Zai Supply Agreement.

Cost of Sales

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


                                                     Three Months Ended 

September 30, Nine Months Ended September 30, (in thousands)

                                            2022                2021                2022                2021
Cost of product sales                                $       672          $     193          $     2,013          $     809
Cost of collaboration sales                                2,672                724                3,512              1,605
Total cost of sales                                  $     3,344          $     917          $     5,525          $   2,414


For the three and nine months ended September 30, 2022 compared to the same
periods in 2021, cost of sales increased $2.4 million and $3.1 million,
respectively, primarily due to costs associated with the commercial inventory of
QINLOCK sold under the Zai Supply Agreement and increased product sales of
QINLOCK in Germany and France. During the three and nine months ended
September 30, 2022, cost of sales also included a $0.3 million and $0.7 million,
respectively, of charges for inventory written down as a result of excess,
obsolescence, unmarketability, or other reasons. During the nine months ended
September 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 nine months ended September 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 nine months ended September 30, 2022 and 2021.

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 nine months ended September 30, 2022 would have increased by
approximately $0.6 million and $1.9 million, respectively, and $0.3 million and
$1.4 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 continued to sell the zero cost inventories of QINLOCK
in the U.S. through the third quarter of 2022, and we will begin selling
inventory with the full cost of manufacturing in the fourth quarter of 2022.
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Operating Expenses

[[Image Removed: dcph-20220930_g2.jpg]][[Image Removed: dcph-20220930_g3.jpg]]

Research and Development Expenses

QINLOCK


For the three and nine months ended September 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 $10.1 million
and $20.6 million and decreases in manufacturing costs of $1.4 million and $6.6
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.

Vimseltinib


For the three and nine months ended September 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 $2.7 million and $5.3
million,
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respectively. Additionally, for the nine months ended September 30, 2022
clinical trial expenses were offset by decreases in manufacturing costs of $0.7
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 nine months
ended September 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 nine months ended September 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 nine months ended September 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 $2.1 million and $5.4 million
and increases in clinical trial expenses of $0.7 million and $2.2 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 $0.4 million, respectively, due to the program moving from the
preclinical to clinical stage in June 2021.

Preclinical


For the three and nine months ended September 30, 2022 compared to the same
periods in 2021, the decrease in preclinical costs of $4.8 million and $3.6
million, respectively, was primarily due to a $4.0 million upfront payment to
Sprint Bioscience (Sprint) pursuant to the Sprint Agreement, an agreement to
exclusively in-license worldwide rights to a research-stage program targeting
VPS34, a key kinase in the autophagy pathway for the potential treatment of
cancer, during the third quarter of 2021.

Unallocated Expenses


For the three and nine months ended September 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 $3.6 million
and $5.0 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 nine months ended September 30, 2022, the decrease was
also partially offset by an increase in stock-based compensation expense of $1.0
million, primarily due to 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 fourth quarter 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 nine months ended September 30, 2022 compared to the same
periods in 2021, the decrease in selling, general, and administrative expenses
was primarily associated with a decreases in personnel-related costs of $2.5
million and $2.3 million, respectively, and professional and consultant fees of
$2.3 million and $7.9 million, respectively. The decreases in personnel-related
costs were primarily due to the cost reduction measures included in our
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 nine months ended September 30, 2022, the decrease in personnel-related
costs was also partially offset by an increase in stock-based compensation
expense of $3.3 million, primarily due to stock-based compensation grants issued
in the fourth quarter of 2021 in connection with our corporate restructuring.
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

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administrative expenses to be incurred related to the launch of QINLOCK in Germany and a post-approval paid access program in France in 2022.

Interest and Other Income, Net


For the three and nine months ended September 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 nine months ended September 30, 2022:


                                                         Workforce          

Pipeline

(in thousands)                                           Reduction             Programs             Total

Restructuring reserve as of December 31, 2021 $ 7,383 $ 13,408 $ 20,791 Adjustments to previous estimates, net

                        (374)                 192               (182)
Payments                                                    (6,930)             (13,600)           (20,530)

Restructuring reserve as of September 30, 2022 $ 79 $ - $ 79

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
nine months ended September 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 and as amended, the
Amended 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.
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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 three and nine months ended September 30, 2022, 575,482 and 892,798
shares of pre-funded warrants were exercised resulting in net proceeds of less
than $0.1 million and $0.1 million, respectively. As of September 30, 2022,
there were 8,855,963 pre-funded warrants outstanding.

On August 4, 2022, we entered into an amendment to our existing 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 Amended 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 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 Amended Sales Agreement. We or Jefferies may suspend or terminate the
offering of Shares upon notice to the other party and subject to other
conditions. During the nine months ended September 30, 2021, we issued 172,094
shares under the Sales Agreement resulting in net proceeds of $8.5 million after
deducting discounts and commissions and other offering expenses. During the nine
months ended September 30, 2022, we did not issue any shares under the Sales
Agreement of the Amended Sales Agreement.

Cash Flows

As of September 30, 2022, our principal sources of liquidity were cash, cash equivalents, and marketable securities of $371.6 million.

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

                                                                      Nine Months Ended September 30,
(in thousands)                                                           2022                   2021
Net cash flows used in operating activities                       $       (117,704)         $ (173,648)
Net cash flows (used in) provided by investing activities                  (50,613)             77,896
Net cash flows provided by financing activities                            164,516              12,912
Net increase (decrease) in cash and cash equivalents              $         (3,801)         $  (82,840)


Operating Activities

During the nine months ended September 30, 2022 compared to the same period in
2021, net cash flows used in operating activities decreased $55.9 million,
primarily resulting from a decrease in our net loss of $78.6 million, partially
offset by decreases in net non-cash charges of $0.8 million, including an
increase in share-based compensation of $4.3 million, and increases in net cash
flows related to changes in our operating assets and liabilities of $21.8
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.

Investing Activities

During the nine months ended September 30, 2022 compared to the same period in
2021, net cash flows used in investing activities increased $128.5 million,
primarily resulting from a decrease in proceeds from maturities and sales of
marketable securities of $207.8 million, partially offset by a decrease in
purchases of marketable securities of $73.1 million, a decrease in purchases of
property and equipment of $2.2 million and a $4.0 million upfront payment to
Sprint pursuant to the Sprint Agreement during the third quarter of 2021.

Financing Activities


During the nine months ended September 30, 2022 compared to the same period in
2021, net cash flows provided by financing activities increased $151.6 million,
primarily resulting from an increase in net proceeds from offerings of our
common stock and pre-funded warrants of $154.8 million, partially offset by a
decrease in proceeds from stock option exercises and
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employee stock purchase plan activity of $3.2 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 nine months ended September 30, 2021 of $8.5 million.

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 $133.0
million for the nine months ended September 30, 2022 and $300.0 million for the
year ended December 31, 2021. As of September 30, 2022, we had an accumulated
deficit of $1.2 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.
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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 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
September 30, 2022 of $371.6 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 September 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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