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, 2020 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. We are leveraging our proprietary switch-control kinase inhibitor
platform and deep expertise in kinase biology to develop a broad portfolio of
innovative medicines. We have one approved drug, QINLOCK, which was developed
through our proprietary platform. Beyond QINLOCK, we are developing three
clinical-stage drug candidates and advancing our research-stage programs. 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. We are preparing for a potential launch of QINLOCK in Europe and we have
entered, and intend in the future to enter, into select distributor arrangements
to offer QINLOCK in geographies where we do not intend to distribute QINLOCK on
our own, such as Australia and Canada.
Recent Developments
QINLOCK
In March 2021, the China National Medical Products Administration (NMPA)
approved QINLOCK for the treatment of adult patients with advanced GIST who have
received prior treatment with three or more kinase inhibitors, including
imatinib. In March 2021, the Hong Kong Department of Health approved QINLOCK in
Hong Kong for the treatment of adult patients with advanced GIST who have
received prior treatment with imatinib, sunitinib, and regorafenib.
We expect to announce top-line results from our pivotal Phase 3 trial in
second-line GIST, INTRIGUE, in the fourth quarter of 2021. Additionally, we
announced that we are planning to initiate a Phase 1b/2 trial of QINLOCK in
combination with binimetinib, a commercially available MEK inhibitor, in
patients with post-imatinib GIST, in the fourth quarter of 2021.
Rebastinib
Rebastinib is currently in clinical development for the treatment of multiple
solid tumors in combination with chemotherapy in two Phase 1b/2 trials, one with
paclitaxel and one with carboplatin. The Phase 1b/2 trial of rebastinib in
combination with paclitaxel is a two-part, open-label, multicenter study
assessing the safety, tolerability, anti-tumor activity, and pharmacokinetics of
rebastinib in patients with advanced or metastatic solid tumors. As previously
announced, in Part 2 of the trial of rebastinib in combination with paclitaxel,
designed as a Simon 2-stage design, we observed the required number of responses
in Part 2, Stage 1 in both the endometrial and platinum-resistant ovarian cancer
(PROC) cohorts, triggering the expansion of enrollment in these cohorts.
We expect to present updated data from the ongoing Phase 1b/2 trial of
rebastinib in combination with paclitaxel in the PROC cohort in the third
quarter of 2021 and finalize the pivotal development plan for rebastinib in
combination with paclitaxel in the second half of 2021, subject to favorable
data and discussions with regulators. In August 2021, we announced that the
inflammatory breast cancer and gynecological carcinosarcoma cohorts in Part 2,
Stage 1 of the trial of rebastinib in combination with paclitaxel, did not
advance to Part 2, Stage 2. Enrollment in these cohorts has been closed.
In August 2021, we announced that the platinum-sensitive ovarian cancer cohort
in Part 2, Stage 1 of the trial of rebastinib in combination with carboplatin,
designed as a Simon 2-stage design, did not advance to Part 2, Stage 2.
Enrollment in the trial has been closed.
DCC-3116
In June 2021, we announced dosing of the first patient in the Phase 1,
multicenter, open-label, first-in-human study of DCC-3116. DCC-3116 is an
investigational ULK kinase inhibitor designed to inhibit autophagy and is being
studied as a single agent and in combination with trametinib, a commercially
available MEK inhibitor, in patients with advanced or metastatic
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tumors with a documented RAS or RAF mutation who have progressed despite
standard therapies, or for whom conventional therapy is not considered effective
or tolerable, as judged by the investigator.
Recent Corporate Update
In August 2021, we entered into an agreement with Sprint Bioscience (Sprint) 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. VPS34 is involved in the endosomal trafficking of cellular cargo
targeted for lysosomal degradation in cancer cells. Targeting VPS34 may provide
an additional approach to regulating autophagy that is complementary to
inhibition of ULK kinase by blocking VPS34-mediated immunosuppression in tumors.
Pursuant to the terms of the agreement, we will make an upfront payment of $4.0
million during the third quarter of 2021. Sprint would also be eligible to
receive from us up to an additional $273.0 million in potential development and
commercial milestone payments as well as tiered percentage royalties ranging
from the mid-single-digits to the low-double-digits on the sales of a future
drug from the program, if approved.
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 the increasing availability 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 studies. Although COVID-19
infections have decreased in the U.S. and in many countries worldwide from the
height of the pandemic, 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, in response to local surges and waves of infection, including those
caused by the Delta variant, 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 have implemented 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. These safety measures may be eased,
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 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, we have 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 the Delta variant, 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. 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 and higher levels of unemployment caused by
the COVID-19 pandemic may lead to increased utilization of our patient
assistance programs, which could reduce revenues.
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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). 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 U.S. Food and Drug
Administration (FDA) guidance, as well as to ensure availability of study drug
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 COVID-19 pandemic, the
operating environment remains fluid and uncertain, and the full significance of
the impact of the COVID-19 outbreak 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
On May 15, 2020, QINLOCK was approved by the FDA for the treatment of adult
patients with advanced GIST who have received prior treatment with three or more
kinase inhibitors, including imatinib. Following the FDA approval of QINLOCK, in
May 2020, we commenced commercial sales of QINLOCK in the U.S. and began
generating product revenue. 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, if any, made 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 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 receive any
of these payments at all. We may never succeed in obtaining regulatory approval
for any of our drug candidates other than QINLOCK.
Product Revenues, Net
Following the FDA approval of QINLOCK in May 2020, we commenced commercial sales
of QINLOCK in the U.S. and began generating product revenue. During the three
and six months ended June 30, 2021 and 2020, 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, of these consolidated
financial statements for further details of the reserves recorded for variable
considerations.
Collaboration Revenues
For the three and six months ended June 30, 2021 and 2020, 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 became eligible to receive up to $185.0 million in
potential development and commercial milestone payments, consisting of up to
$50.0 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 QINLOCK, including certain follow-on compounds (the
Licensed Products), in Greater China, 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.
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Zai Supply Agreement
Pursuant to the terms of the Zai Supply Agreement, costs we incur for external
manufacturing services 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.
Cost of sales for newly launched products, such as QINLOCK, will not be
significant until the initial pre-launch inventory is depleted, and additional
inventory is manufactured and sold. As a result, the gross margin on sales of
QINLOCK for the three and six months ended June 30, 2021 and 2020 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.
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 complete clinical development of and
commercialize QINLOCK and 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
•the ability to obtain clearance or approval of companion diagnostic tests, if
required, on a timely basis, or at all.
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 costs to increase as our drug and drug
candidate development programs progress. However, 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
increase as we continue to support the commercialization of QINLOCK in the U.S.,
the potential launch of QINLOCK in Europe, if approved, and the establishment of
a targeted commercial infrastructure in key European markets. We also anticipate
that we will continue to incur accounting, audit, legal, regulatory, compliance,
and investor and public relations expenses associated with growth of 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.
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Income Taxes
On October 2, 2017, immediately prior to the completion of our initial public
offering (IPO), we engaged in a series of transactions whereby Deciphera
Pharmaceuticals, LLC became a wholly owned subsidiary of Deciphera
Pharmaceuticals, Inc., a Delaware corporation (the Conversion). Prior to the
Conversion, we were treated as a partnership for tax purposes and had not been
subject to U.S. federal or state income taxation. Upon the Conversion, we became
subject to typical corporate U.S. federal and state income taxation; however, we
do not have net operating loss carryforwards from periods prior to October 2,
2017 available to offset taxable income earned in future periods in which we
will be treated as a corporation.
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, 2020 on file with the SEC, as of June 30, 2021, 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, 2020 on file with the SEC.
There have been no significant changes to our critical accounting policies since
December 31, 2020.
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Results of Operations
Comparison of the Three and Six Months Ended June 30, 2021 and 2020
The following table summarizes our results of operations for the three and six
months ended June 30, 2021 and 2020:
                                                 Three Months Ended June 30,                    Six Months Ended June 30,
(in thousands)                                     2021                  2020                   2021                    2020
Revenues:
Product revenues, net                        $       22,048          $   4,825          $       42,010              $    4,825
Collaboration revenues                                1,525              2,265                   6,719                   2,327
Total revenues                                       23,573              7,090                  48,729                   7,152
Cost and operating expenses:
Cost of sales                                         1,275                  8                   1,497                       8
Research and development                             59,984             46,081                 115,665                  97,469
Selling, general, and administrative                 32,828             29,933                  63,575                  53,869
Total cost and operating expenses                    94,087             76,022                 180,737                 151,346
Loss from operations                                (70,514)           (68,932)               (132,008)               (144,194)
Other income (expense):
Interest and other income, net                           81              1,691                     277                   4,146

Total other income (expense), net                        81              1,691                     277                   4,146
Net loss                                     $      (70,433)         $ (67,241)         $     (131,731)             $ (140,048)


Revenues
Product Revenues, Net
During the three and six months ended June 30, 2021 and 2020, our only source of
product revenues was from the sales of QINLOCK, which commenced in the U.S. in
May 2020 following the FDA approval of QINLOCK on May 15, 2020. During the three
and six months ended June 30, 2021 and 2020, net product revenues by geography
consisted of the following:
                                                          Three Months Ended June 30,                 Six Months Ended June 30,
(in thousands)                                              2021                  2020                 2021                  2020
U.S.                                                 $        20,732          $   4,825          $       40,019          $   4,825

Rest of world                                                  1,316                  -                   1,991                  -
Total product revenues, net                          $        22,048

$ 4,825 $ 42,010 $ 4,825




For the three and six months ended June 30, 2021 compared to the same periods in
2020, net product revenues increased $17.2 million and $37.2 million,
respectively, primarily due to full quarters of sales in U.S. in the first and
second quarters of 2021, as applicable, compared to a partial quarter of sales
in the U.S. in the second quarter of 2020.
Collaboration Revenues
For the three months ended June 30, 2021 compared to the same period in 2020,
collaboration revenues decreased $0.7 million primarily due to the recognition
of a $2.0 million development milestone in the second quarter of 2020, partially
offset by an increase in revenues under the Zai Supply Agreement and an increase
from royalty revenues. 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 the sales of commercial inventory of
QINLOCK under the Zai Supply Agreement and began recognizing royalty revenues
under the Zai License Agreement.
For the six months ended June 30, 2021 compared to the same period in 2020,
collaboration revenues increased $4.4 million primarily due to an increase in
milestone revenues of $3.0 million under the Zai License Agreement. The increase
in milestone revenues was 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, partially offset by the recognition of a $2.0
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million development milestone in the second quarter of 2020. There were also
increased revenues from the Zai Supply Agreement and an increase from royalty
revenues.
Cost of Sales
During the three and six months ended June 30, 2021 and 2020, cost of sales by
type consisted of the following:
                                                        Three Months Ended June 30,               Six Months Ended June 30,
(in thousands)                                            2021                2020                 2021                2020
Cost of product sales                                $       394          $        8          $       616          $        8
Cost of collaboration sales                                  881                   -                  881                   -
Total cost of sales                                  $     1,275          $        8          $     1,497          $        8


For the three and six months ended June 30, 2021 compared to the same periods in
2020, cost of sales increased $1.3 million and $1.5 million, respectively,
primarily associated with the costs of commercial inventory of QINLOCK sold
under the Zai Supply Agreement beginning in the second quarter of 2021 as well
as increased product sales of QINLOCK due to full quarters of sales in U.S. in
the first and second quarters of 2021, as applicable, compared to a partial
quarter of sales in the U.S. in the second quarter of 2020. Cost of sales
associated with product sales of QINLOCK was primarily related to packaging,
labeling, shipping, and distribution costs. 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. External manufacturing costs associated with QINLOCK inventory
prior to FDA approval were previously expensed as research and development
expenses and, therefore, are not included in cost of sales during the three and
six months ended June 30, 2021 and 2020.
We expect our cost of sales for QINLOCK to increase 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 that cost of net product sales in the U.S. will not be significant
through at least 2021.
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Operating Expenses
[[Image Removed: dcph-20210630_g2.jpg]][[Image Removed: dcph-20210630_g3.jpg]]
Research and Development Expenses
QINLOCK
For the six months ended June 30, 2021 compared to the same period in 2020,
research and development expenses related to QINLOCK decreased primarily as a
result of decreased clinical trial expenses of $8.9 million. Clinical trial
expenses for QINLOCK decreased primarily as a result of decreased expenses
associated with INTRIGUE, which we initiated in December 2018 and for which
enrollment was completed in December 2020, and INVICTUS, which we initiated in
January 2018 and announced top-line results from in August 2019. In addition,
clinical trial expenses decreased due to decreased expenses associated with our
ongoing Phase 1 trial of QINLOCK.
Vimseltinib
For the three and six months ended June 30, 2021 compared to the same periods in
2020, expenses related to our vimseltinib program increased primarily as a
result of increases in clinical trial expenses of $3.1 million and $4.5 million
and increases in manufacturing costs of $0.9 million and $1.8 million,
respectively. Clinical trial expenses increased primarily due to increased
activities associated with our ongoing Phase 1/2 study of vimseltinib to assess
the safety, tolerability, pharmacokinetics, and pharmacodynamics in patients
with tenosynovial giant cell tumor (TGCT), increased clinical pharmacology study
activities, and expenses associated with planning for potential pivotal
development of vimseltinib. Manufacturing costs for the vimseltinib program
increased as a result of increased activities to support clinical trials.
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Rebastinib
For the three and six months ended June 30, 2021 compared to the same periods in
2020, expenses related to our rebastinib program decreased primarily as a result
of decreases in clinical trial expenses of $0.8 million and $1.9 million,
respectively. The decrease in clinical trial expenses was primarily associated
with our Phase 1b/2 trial of rebastinib in combination with paclitaxel due to
the completion of enrollment of multiple cohorts in the trial, including
completion of enrollment in Part 2, Stage 2 of both the endometrial and
platinum-resistant ovarian cancer cohorts, as announced in February 2021.
DCC-3116
For the three and six months ended June 30, 2021 compared to the same periods in
2020, expenses related to our DCC-3116 program were relatively consistent as we
completed preclinical studies, submitted our IND, and initiated clinical trials
for DCC-3116. For the three and six months ended June 30, 2021 compared to the
same periods in 2020, the changes in expenses were primarily as a result of
increased clinical trial expenses of $0.9 million during each comparative period
associated with our Phase 1 study of DCC-3116, in connection with which we
announced dosing of the first patient in June 2021, and increased manufacturing
costs of $0.2 million and $0.5 million, respectively, to support our Phase 1
study of DCC-3116, partially offset by decreased preclinical activities,
including IND-enabling studies, of $1.0 million and $1.7 million, respectively.
Preclinical
For the three and six months ended June 30, 2021 compared to the same periods in
2020, the increases in preclinical costs of $1.7 million and $3.3 million,
respectively, were associated with increased activities for our early-stage drug
discovery programs.
Unallocated Expenses
For the three and six months ended June 30, 2021 compared to the same periods in
2020, the increases in unallocated research and development expenses were
related to personnel-related and other research and development costs. For the
three and six months ended June 30, 2021 compared to the same periods in 2020,
the increases in personnel-related costs, including increases in stock-based
compensation expense of $0.3 million and $2.0 million, respectively, were
primarily due to an increase in headcount in our research and development
functions. The increases in stock-based compensation expense were partially
offset by $1.3 million of expenses related to the achievement of the vesting
event associated with performance-based restricted stock units during the three
and six months ended June 30, 2020. Increases in other research and development
costs were primarily due to increased costs for temporary staffing of $1.3
million and $2.4 million, respectively, and increased technology-related costs
to support our research and development functions as well as increases in
facility-related expenses associated with a lease at our headquarters that
commenced in July 2020.
We expect research and development expenses will increase in the second half
2021 as compared to the first half of 2021 as we continue to invest in the
development of our clinical pipeline.
Selling, General, and Administrative Expenses
For the three and six months ended June 30, 2021 compared to the same periods in
2020, the increases in selling, general, and administrative expenses were
primarily related to personnel-related costs and professional and consultant
fees. For the three and six months ended June 30, 2021 compared to the same
periods in 2020, the increases in personnel-related costs, including increases
in stock-based compensation of $1.5 million and $3.9 million, respectively, were
primarily a result of increases in headcount in our selling, general, and
administrative functions. The increases in professional and consultant fees were
primarily due to an increase in various advisory fees, including those related
to establishing a targeted commercial infrastructure in key European markets to
support a potential launch of QINLOCK in Europe, if approved.
We expect selling, general, and administrative expenses will increase in the
second half of 2021 as compared to the first half of 2021 as we continue to
execute on the commercialization of QINLOCK in the U.S. and prepare for a
potential commercial launch in Europe, if approved.
Interest and Other Income, Net
For the three and six months ended June 30, 2021 compared to the same periods in
2020, the decreases in interest and other income, net, were primarily due to
decreases in interest income earned on our cash equivalents and marketable
securities associated with a decreased balance of our investment holdings and
holding a greater proportion of lower yield investments.
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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
license and supply agreements with Zai. On May 15, 2020, QINLOCK was approved by
the FDA for the treatment of adult patients with advanced GIST who have received
prior treatment with three or more kinase inhibitors, including imatinib.
Following the FDA approval of QINLOCK, in May 2020, we commenced commercial
sales of QINLOCK in the U.S. and began generating product revenue. During the
three and six months ended June 30, 2021 and 2020, our product revenues were
primarily derived from sales of QINLOCK in the U.S. In addition to U.S. sales,
we generate product revenue in select geographies where we do not currently
intend to distribute QINLOCK on our own through exclusive distributor
arrangements. 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 an 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, and an Open Market Sale Agreement? (the Sales Agreement) with
Jefferies LLC (Jefferies). Through such issuances, we have issued and sold
29,669,386 shares of our common stock resulting in net proceeds of $956.5
million 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 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. As of June 30, 2021, there was
$172.5 million available for future issuance under the Sales Agreement.
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Issuances of our common stock and shares issued pursuant to the underwriters'
partial or full exercises of options to purchase additional shares of common
stock, if applicable, associated with our IPO, subsequent follow-on offerings,
and issuances of shares pursuant to the Sales Agreement have been summarized in
the following table:
                                                                                                                       Shares Issued Pursuant to The

Underwriters' Exercise of Options to


                                                          Shares Issued in Offering of Common Stock                        Purchase Additional Shares of Common Stock (if applicable)                              Total
(in millions, except share  Price per
and per share amounts)        Share¹                Date                Shares Issued            Net Proceeds²                Date                Shares Issued            Net Proceeds²           Shares Issued            Net Proceeds²
IPO                        $   17.00          October 2, 2017                  7,500,000       $        114.1          October 4, 2017                     666,496       $         10.5                   8,166,496       $        124.6
June 2018 Follow-on Public
Offering                       40.00          June 11, 2018                    4,300,000                161.0          June 20, 2018                       645,000                 24.3                   4,945,000                185.3
Third Quarter of 2019
Follow-on Public Offering      37.00          August 19, 2019                 10,810,810                375.4          September 3, 2019                 1,621,621                 56.4                  12,432,431                431.8
February 2020 Follow-on
Public Offering                55.00          February 19, 2020                3,181,818                163.7          February 25, 2020                   477,272                 24.7                   3,659,090                188.4
Issuances Pursuant to the
Sales Agreement3           Various3           Various3                    466,369                           26.4                                 Not applicable                                             466,369                 26.4
                                                                                                                                                                                     Total               29,669,386       $        956.5


1.The price per share presented above represents the price per share at which
shares were sold for both the public offering of shares and the underwriters'
exercise of options to purchase additional shares, if applicable.
2.Proceeds are presented net of underwriting discounts and commissions and other
offering expenses.
3.Information presented above represents the total number of shares of our
common stock issued, and total net proceeds from issuances of shares of our
common stock, pursuant to the Sales Agreement through June 30, 2021. Shares
issued pursuant to the Sales Agreement were sold on multiple days at varying
prices.
Cash Flows
As of June 30, 2021, our principal sources of liquidity were cash, cash
equivalents, and marketable securities of $451.0 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)                                                            2021                    2020
Net cash flows used in operating activities                       $     (119,649)             $ (141,214)
Net cash flows provided by (used in) investing activities                 63,455                 (19,441)
Net cash flows provided by financing activities                           11,206                 195,781
Net (decrease) increase in cash and cash equivalents              $      (44,988)             $   35,126


Operating Activities
During the six months ended June 30, 2021 compared to the same period in 2020,
net cash flows used in operating activities decreased $21.6 million, resulting
from a decrease in our net loss of $8.3 million, increases in net non-cash
charges of $9.9 million, and increases in net cash flows related to changes in
our operating assets and liabilities of $3.4 million. Net non-cash charges
increased primarily due to an increase in share-based compensation of $5.9
million and an increase in net amortization of premiums on marketable securities
of $2.9 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, settlement of accounts receivable, and capitalization of
inventory.
Investing Activities
During the six months ended June 30, 2021 compared to the same period in 2020,
net cash flows from investing activities increased $82.9 million, primarily
resulting from a decrease in purchases of marketable securities of $606.1
million, partially offset by a decrease in proceeds from sales and maturities of
marketable securities of $526.4 million.
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Financing Activities
During the six months ended June 30, 2021 compared to the same period in 2020,
net cash flows provided by financing activities decreased $184.6 million,
primarily resulting from a decrease in net proceeds from offerings of our common
stock of $180.4 million and a decrease in proceeds from stock option exercises
and employee stock purchase plan activity of $4.7 million. Net of underwriting
discounts and commissions and other offering costs, the decrease in proceeds
from our offerings was due to our issuance in February 2020 of $188.4 million as
compared to our issuances under the Sales Agreement during the six months ended
June 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 the
development and eventual commercialization of one or more of our drug
candidates. Our net loss was $131.7 million for the six months ended June 30,
2021 and $266.5 million for the year ended December 31, 2020. As of June 30,
2021, we had an accumulated deficit of $886.2 million. 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 Europe, if approved;
•continue with our ongoing pivotal Phase 3 study of QINLOCK in second-line GIST
and potentially other areas of GIST treatment;
•continue with our ongoing and planned clinical programs for vimseltinib as a
potential single agent therapy for the treatment of TGCT, rebastinib as a
combination therapy in solid tumor cancers, and DCC-3116, our ULK kinase
inhibitor, for the potential treatment of RAS or RAF mutant 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;
•maintain, expand, protect, and enforce our intellectual property portfolio; and
•expand our operational, financial, and management systems and increase
personnel, including to support our clinical development and commercialization
efforts and our operations as a public company, including international
operations in Europe and other potential geographies.
As we continue to seek regulatory approval for our drug and drug candidates,
including QINLOCK for the treatment of second-line GIST patients, 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. We may not be successful
in our commercialization of QINLOCK. 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 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
as, and when, needed, we may be required to significantly delay, limit, reduce,
or discontinue our research, product development, or commercialization efforts
of our drug or one or more of our drug candidates, or grant rights to develop
and market our drug or 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,
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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 our license
agreement with Zai), 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 on a continuing basis, then we
may be unable to continue our operations at planned levels and be forced to
reduce or terminate our operations. The timing and amount of our operating
expenditures will depend largely on:
•the costs and timing of commercialization activities, including product
manufacturing, marketing, sales, and distribution, for QINLOCK, including our
planned commercial launch of QINLOCK in Europe, if approved, and any of our drug
candidates for which we obtain marketing approval;
•the timing and progress of preclinical and clinical development activities;
•successful enrollment in and completion of clinical trials;
•the timing and outcome of regulatory review of our drug and drug candidates;
•the success of our commercialization efforts and market acceptance for QINLOCK
or any of our future approved drugs;
•our ability to establish and manage agreements with third-party manufacturers
for clinical supply for our clinical trials and commercial manufacturing;
•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;
•the legal and patent costs involved in prosecuting patent applications and
enforcing patent claims and other intellectual property claims;
•the cost to develop companion diagnostics as needed for each of our drug
candidates;
•addition and retention of key research and development and commercial,
including sales and marketing, personnel; and
•our efforts to enhance operational, financial, and information management
systems and hire additional personnel to support the business.
We believe that our cash, cash equivalents, and marketable securities as of
June 30, 2021 of $451.0 million, together with anticipated product and royalty
revenues, but excluding any potential future milestone payments or other
payments under our collaboration or license agreements, if any, will enable us
to fund our operating expenses and capital expenditure requirements into the
first half of 2023. 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, 2021, 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, 2020.
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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