FORTY SEVEN, INC. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our financial statements and related notes included in Part II, Item 8 of this Annual Report on Form 10-K.
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are identified by words such as "believe," "will," "may," "estimate," "continue," "anticipate," "intend," "should," "plan," "expect," "predict," "could," "potentially" or the negative of these terms or similar expressions. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other "forward-looking" information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this report in Part I, Item 1A - "Risk Factors," and elsewhere in this report. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments. We caution investors that our business and financial performance are subject to substantial risks and uncertainties. Overview We are a clinical-stage immuno-oncology company focused on developing novel therapies to activate macrophages in the fight against cancer. We founded Forty Seven based on the insight that blocking CD47, a key signaling molecule that is overexpressed on cancer cells, renders tumors susceptible to macrophages. By harnessing macrophages, we believe that our lead product candidate, magrolimab (formerly known as 5F9), can transform the treatment of cancer. Magrolimab has demonstrated promising activity in multiple Phase 1b/2 clinical trials in which we have treated over 400 cancer patients with solid or hematologic tumors. InMarch 2020 , Forty Seven entered into a definitive agreement to be acquired by Gilead Sciences, Inc., which is expected to close during the second quarter of 2020. We are also preparing to advance two additional investigational compounds into clinical testing. FSI-174, an anti-cKIT antibody, is being developed alone or in combination with magrolimab as a novel, all-antibody conditioning regimen to address the limitations of current stem cell transplantation conditioning regimens. FSI-189, an anti-SIRP? antibody, is being developed for the treatment of cancer, as well as certain non-oncology conditions, including transplantation conditioning. We focus our efforts on targeting the CD47 pathway as a way to engage macrophages in fighting tumors. Macrophages function as first responders, swallowing foreign and abnormal cells, including cancer cells, and mobilizing other components of the immune system including T cells and antibodies. Cancer cells use CD47, a "don't eat me" signal, in order to evade detection by the immune system and subsequent destruction by macrophages. Overexpression of CD47 is common to nearly all types of tumors including myelodysplastic syndrome, or MDS, acute myelogenous leukemia, or AML, Non-Hodgkin's lymphoma, or NHL, colorectal cancer, or CRC, gastric cancer, lung cancer, and ovarian cancer with overexpression correlating with poor prognosis in many of these cancers. Despite the central role of macrophages as cell-eating scavengers and first responders, the pharmaceutical industry is only beginning to bring this key group of cells into the fight against cancer. Our company was founded in 2014 by leading scientists atStanford University who uncovered the fundamental role of CD47 in cancer evasion. Preclinical work performed in the laboratory of our co-founder,Irving L. Weissman , atStanford University and at Forty Seven demonstrated that:
• Blocking the CD47 "don't eat me" signaling pathway leads to elimination
of many types of tumors and increased survival;
• Boosting an "eat me" signal found on cancer cells using therapeutic
antibodies results in a synergistic effect with blocking CD47;
73
--------------------------------------------------------------------------------
• Increasing "eat me" signal expression on cancer cells through cytotoxic
and chemotherapeutic agents like azacitidine, which is synergistic with
blocking CD47; and
• Macrophages digest cancer cells in a process called phagocytosis and
present tumor-specific antigens that can activate T cells against the
cancer, thus creating the potential for synergy with T cell checkpoint
inhibitors.
Our lead product candidate, magrolimab, is a humanized IgG4 subclass monoclonal
antibody against CD47 that is designed to interfere with recognition of CD47 by
the SIRP? receptor on macrophages, thus blocking the "don't eat me" signal. The
design of magrolimab, combined with our proprietary dosing regimen, overcomes
the toxicity limitations of previously tested anti-CD47 therapies developed by
others. Across all study populations, magrolimab has been well tolerated with no
maximum tolerated dose, or MTD, observed in any study despite dosing up to 45
mg/kg. The most common treatment-associated effects observed to date were the
expected CD47-mechanism-based effects on red blood cells, which led to a
temporary and reversible anemia. Other reported treatment-related adverse events
include infusion reactions, headache, fatigue, chills, fever and nausea. The
majority of these adverse events were mild to moderate in severity and were
generally easily managed. To date, there are no approved therapies that target
the CD47 checkpoint of the innate immune system.
The targeting of CD47 to make cancer cells susceptible to macrophages, a
component of the innate immune system, is analogous to the approach that has
been applied with checkpoint inhibitors and T cells, a component of the adaptive
immune system. Since their introduction in 2011, T cell checkpoint inhibitors
have become frontline therapies for certain cancers and we estimate that they
generated over $22 billion in sales in 2019. Despite the success of T cell
checkpoint inhibitors, these therapies have been shown to be effective only in a
subset of tumors, highlighting the need for additional therapies. Similar to the
way cancer cells overexpress programmed death-ligand 1, or PD-L1, to avoid
attack by T cells, cancer cells overexpress CD47 as a way to avoid destruction
by macrophages. We believe targeting CD47 represents a compelling and analogous
approach.
Since our inception in 2014, we have devoted most of our resources to
identifying and developing magrolimab, advancing our preclinical programs,
conducting clinical trials and providing general and administrative support for
these operations. To date, we have not generated any revenue from product sales.
In July 2019 , we recognized $15.7 million of license revenue under a license and
collaboration arrangement. We have funded our operations to date primarily from
the issuance and sales of our capital stock and the receipt of government and
private grants and licensing revenue. We are eligible to receive up to $22.4
million in grants from the California Institute for Regenerative Medicine , or
CIRM, and the Leukemia and Lymphoma Society , or LLS, of which $17.0 million has
been received through December 31, 2019 .
We have incurred net losses in each year since inception. Our net losses were
$87.6 and $70.4 million for the years ended December 31, 2019 and 2018,
respectively. As of December 31, 2019 , we had an accumulated deficit of $227.4
million . Substantially all of our net losses have resulted from costs incurred
in connection with our research and development programs and from general and
administrative costs associated with our operations. We expect to continue to
incur significant expenses and increasing operating losses over at least the
next several years. We expect our expenses will increase substantially in
connection with our ongoing activities, as we:
• advance product candidates through clinical trials;
• pursue regulatory approval of product candidates;
• operate as a public company;
• continue our preclinical programs and clinical development efforts;
• continue research activities for the discovery of new product candidates; and
• manufacture supplies for our preclinical studies and clinical trials.
74
--------------------------------------------------------------------------------
Merger Agreement
OnMarch 1, 2020 , we entered into the Merger Agreement with Gilead, pursuant to which we agreed to be acquired by Gilead in an all-cash transaction for an approximate value of$4.9 billion . OnMarch 10, 2020 , in accordance with the terms of the Merger Agreement, Purchaser commenced a tender offer, to acquire all of our outstanding shares of common stock,$0.0001 par value per share, at a price of$95.50 per share, to be paid net to the seller in cash, without interest and subject to any required withholding of taxes, upon the terms and conditions described in the Offer. The consummation of Purchaser's pending Offer is subject to certain conditions, including the tender of shares representing at least one more than 50% of the total number of our shares of common stock outstanding at the time of the expiration of the Offer, the expiration or termination of the waiting period (or any extension thereof) applicable to the Offer under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and other customary conditions. The Merger Agreement provides, among other things, that following the consummation of the Offer and subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement and in accordance with the relevant provisions of the DGCL and other applicable law, Purchaser will merge with and into the Company, the separate existence of Purchaser will cease and the Company will continue as the surviving corporation and as a wholly owned subsidiary of Parent. We expect the Merger to close during the second quarter of 2020, subject to the regulatory approvals and other customary closing conditions described above and in the Merger Agreement.
Additional information about the Proposed Transaction is set forth in our
filings with the
Components of Results of Operations
License Revenue
To date, we have not generated any revenue from product sales and do not expect to generate any revenue from product sales for the foreseeable future. Under the exclusive license and collaboration agreement with Ono Pharmaceutical Co., Ltd., or the Ono Agreement, we have recognized as revenue the upfront nonrefundable payment related to a license grant. Under the Ono Agreement, we are eligible to receive milestone payments. These milestone payments are fully constrained, and not recognized currently in revenue, due to the uncertainty in achieving the milestones. We are also eligible to receive royalty payments related to the Ono Agreement which would be recognized as the underlying product sales occur.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for the development of our lead product candidate, magrolimab, and other product candidates, which include:
• expenses incurred under agreements with third-party contract
organizations and investigative clinical trial sites that conductresearch and development activities on our behalf, and consultants;
• costs related to production of clinical materials, including fees paid
to contract manufacturers;
• laboratory and vendor expenses related to the execution of preclinical
and clinical trials;
• employee-related expenses, which include salaries, benefits and
stock-based compensation; and
• facilities and other expenses, which include expenses for rent and
maintenance of facilities, depreciation and amortization expense and
other supplies.
We expense all research and development costs in the periods in which they are
incurred. Costs for certain development activities are recognized based on an
evaluation of the progress to completion of specific tasks using information and
data provided to us by our vendors, collaborators and third-party service
providers. The costs of intangible assets that are purchased from others for a
particular research and development project and that have no alternative future
uses are considered research and development costs and are expensed when
incurred. Nonrefundable advance payments for goods or services to be received in
future periods for use in research and development activities are deferred and
capitalized. The capitalized amounts are then expensed as the related goods are
delivered and as services are performed.
75
--------------------------------------------------------------------------------
The largest component of our operating expenses has historically been our
investment in research and development activities related to the clinical
development of our lead product candidate, magrolimab, as well as other product
candidates in preclinical development including FSI-189, an anti-SIRP? antibody,
and FSI-174, an anti-cKIT antibody. We recognize the funds from research and
development grants as a reduction of research and development expense when the
related eligible research costs are incurred. Research and development grants
received during 2019 and 2018 totaled $3.5 million and $7.6 million ,
respectively. In January 2018 , we entered into a clinical trial collaboration
and supply agreement with Ares Trading S.A , a subsidiary of Merck KGaA or Merck.
Reimbursement under this collaboration agreement is recorded as a reduction to
research and development expense. For the year ended December 31, 2019 and 2018,
we recognized $1.7 million and $1.2 million , respectively, as a reduction to
research and development expenses under this collaboration agreement. We entered
into the Ono Agreement in July 2019 and a research collaboration agreement with
bluebird bio, Inc., or bluebird in September 2019 . Reimbursement under both
collaboration agreements is recorded as a reduction to research and development
expense. For the year ended December 31, 2019 , we recognized $0.9 million and
$1.2 million as a reduction to research and development expenses under the Ono
Agreement and the bluebird agreement, respectively.
We expect our research and development expenses to increase substantially for
the foreseeable future as we continue to invest in research and development
activities related to developing our product candidates, as our product
candidates advance into later stages of development, and as we begin to conduct
larger clinical trials. The process of conducting the necessary clinical
research to obtain regulatory approval is costly and time-consuming, and the
successful development of our product candidates is highly uncertain. As a
result, we are unable to determine the duration and completion costs of our
research and development projects or when and to what extent we will generate
revenue from the commercialization and sale of any of our product candidates.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel-related costs, facilities costs, depreciation and amortization expenses and professional services expenses, including legal, human resources, audit and accounting services. Personnel-related costs consist of salaries, benefits and stock-based compensation. Facilities costs consist of rent and maintenance of facilities. We expect our general and administrative expenses to increase for the foreseeable future due to anticipated increases in headcount to advance our product candidates and as a result of operating as a public company, including expenses related to compliance with the rules and regulations of theSEC , the Nasdaq Global Select Market, additional insurance expenses, investor relations activities and other administrative and professional services.
Remeasurement Loss on Contingent Repayment Obligation
Under the LLS agreement, as amended, we are required to make contingent milestone payments dependent upon the outcome of our research and development activities. The contingent repayment obligation represents the probability-adjusted and discounted future contingent milestone payments and is subject to remeasurement on a recurring basis at each reporting period. Remeasurement gains or losses arise from the revaluation of our contingent repayment obligation.
Interest and Other Income, Net
Interest and other income, net consists of interest earned on our cash equivalents and short-term investments and foreign currency transaction gains and losses incurred during the period.
76--------------------------------------------------------------------------------
Results of Operations
Years Ended
Year Ended December 31,
Increase/
2019 2018 (Decrease)
(in thousands)
License revenue $ 15,678 $ - $ 15,678
Operating expenses:
Research and development 83,792 56,673 27,119
General and administrative 20,418 15,432 4,986
Total operating expenses 104,210 72,105 32,105
Loss from operations (88,532 ) (72,105 ) (16,427 )
Other income (expenses):
Remeasurement loss on contingent repayment
obligation (2,554 ) (331 ) (2,223 )
Interest and other income, net 3,465 2,066 1,399
Net loss $ (87,621 ) $ (70,370 ) $ (17,251 )
License Revenue
License revenue increased $15.7 million compared to the year ended December 31,
2018 . The increase in license revenue was due to the license granted under the
Ono Agreement.
Research and Development Expenses
The following tables summarize the period-over-period changes in research and development expenses for the periods indicated:
Year Ended December 31,
Increase/
2019 2018 (Decrease)
(in thousands)
Product-specific costs:
Magrolimab and other product candidates $ 57,617 $ 40,449 $ 17,168
Grant funding and cost share reimbursement (6,864 ) (9,179 ) 2,315
Non product-specific costs:
Stock-based compensation 1,874 1,193 681
Personnel-related 12,303 8,224 4,079
Other preclinical programs 18,249 7,162 11,087
License fees 613 8,824 (8,211 )
Total research and development expenses
Research and development expenses increased by$27.1 million , or 48%, to$83.8 million in 2019 from$56.7 million in 2018. The increase was primarily due to a$17.2 million increase in third party costs related to advancing our current clinical programs focused on our lead product candidate, magrolimab, and associated contract manufacturing costs, a$11.1 million increase in our other preclinical and discovery programs costs as we expanded our immuno-oncology efforts, a$4.8 million increase in personnel-related costs, including stock-based compensation, and a$2.3 million increase in expenses related to a decrease in grant funding reimbursement due to decreased funding recognized under the CIRM and LLS grants partially offset by increased cost share reimbursement under the Merck, bluebird and Ono collaboration agreements. These increases were partially offset by a$8.2 million decrease in our license fees primarily due to the upfront license fees related to the BliNK asset purchase and Synthon license agreements recognized in 2018. 77
--------------------------------------------------------------------------------
General and Administrative Expenses
General and administrative expenses increased by$5.0 million , or 32%, to$20.4 million in 2019 from$15.4 million in 2018. The increase was primarily due to a$3.0 million increase in personnel-related costs driven by an increase in headcount, a$1.0 million increase in accounting and consulting expenses incurred in connection with operating as a public company and a$0.9 million increase in directors and officer's insurance expense.
Remeasurement Loss on Contingent Repayment Obligation
Remeasurement loss on the contingent repayment obligation increased by$2.2 million to$2.5 million in 2019 from$0.3 million in 2018, primarily driven by a higher estimated probability of success related to our clinical programs in MDS, DLBCL, AML and other pipeline programs, such as FSI-174.
Interest and Other Income, Net
Interest and other income, net increased by$1.4 million to$3.4 million in 2019 from$2.0 million in 2018. The increase was due to a$1.0 million increase in interest income from the investment of the net proceeds from our public offerings, and a$0.4 million increase in foreign currency gains primarily related to gains arising from the Ono Agreement.
Liquidity, Capital Resources and Plan of Operations
To date, we have incurred significant net losses and negative cash flows from
operations. As of
In connection with our initial public offering, which closed onJuly 2, 2018 , we issued and sold an aggregate of 8,090,250 shares of common stock (inclusive of 1,055,250 shares of common stock from the exercise of the over-allotment option granted to the underwriters) at a price of$16.00 per share. We received proceeds from the offering of$116.3 million , net of underwriting discounts and commissions and estimated offering costs. InJuly 2019 , we completed an underwritten public offering of 10,781,250 shares of our common stock, including 1,406,250 shares sold pursuant to the underwriters' exercise of their option to purchase additional shares, at a public offering price of$8.00 per share. We received proceeds from the offering of$80.5 million , net of underwriting discounts and commissions and offering costs.
In
InDecember 2019 , we completed an additional underwritten public offering of 5,589,000 shares of our common stock, including 729,000 shares sold pursuant to the underwriters' exercise of their option to purchase additional shares, at a public offering price of$35.00 per share. We received proceeds from the offering of$183.6 million , net of underwriting discounts and commissions and offering costs. Our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures related to our lead product candidate, magrolimab, other product candidates, preclinical and discovery programs, and to a lesser extent, general and administrative expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses. Based upon our current operating plan and assumptions, we believe that our existing cash, cash equivalents and short-term investments, including the proceeds from our recently completed public offerings and upfront payment from Ono, will enable us to meet our financial needs into the first quarter of 2022. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. We will continue to require additional financing to advance our current product candidates through clinical development, to develop, acquire or in-license other potential product candidates and to fund operations for the foreseeable future. We will continue to seek funds through equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing. Adequate additional funding may not be available to us on acceptable terms, or at all. Any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. 78 -------------------------------------------------------------------------------- Further, our operating plans may change, and we may need additional funds to meet operational needs and capital requirements for clinical trials and other research and development activities. We currently have no credit facility or committed sources of capital. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated product development programs. If we need to raise additional capital to fund our operations, funding may not be available to us on acceptable terms, or at all. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of or suspend one or more of our clinical trials, research and development programs or commercialization efforts. We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings and collaborations or licensing arrangements. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders' rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we are unable to raise capital, we will need to delay, reduce or terminate planned activities to reduce costs. Doing so will likely harm our ability to execute our business plans.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Year Ended December 31,
2019 2018
(in thousands)
Cash used in operating activities $ (78,113 ) Cash provided by (used in) investing activities 13,777
(64,189 )
Cash provided by financing activities 267,313
116,626
Net increase (decrease) in cash and cash equivalents
Operating Activities In 2019, cash used in operating activities of$78.1 million was attributable to a net loss of$87.6 million , partially offset by$8.0 million in non-cash charges and a net change of$1.5 million in net operating assets and liabilities. The non-cash charges consisted primarily of stock-based compensation of$5.0 million , change in fair value of the LLS contingent repayment obligation of$2.6 million , amortization of right-of-use assets of$1.1 million and depreciation and amortization of$0.5 million , partially offset by$1.0 million related to the accretion of discounts on marketable securities. The change in operating assets and liabilities was due to a$3.9 million increase in accounts payable and accrued liabilities resulting from the timing of payments and a$1.0 million increase in deferred grant funding due to receipt of the research grant funding payments. These changes were partially offset by a$1.6 million increase in prepaid expense and other current assets driven by additional prepayments made for research and development activities and other receivables, a$1.2 million decrease in lease related liabilities due to lease payments and a$0.6 million increase in other noncurrent assets driven by timing of the research and development prepayments. In 2018, cash used in operating activities of$66.0 million was attributable to a net loss of$70.4 million , partially offset by a net change of$1.0 million in net operating assets and liabilities, and a net change of$3.4 million in non-cash charges. The non-cash charges consisted primarily of stock-based compensation of$3.4 million , depreciation and amortization of$0.4 million , a change in fair value of the contingent repayment obligation of$0.3 million , offset by the net accretion of discount on marketable securities of$0.7 million . The change in operating assets and liabilities was primarily due to a$5.1 million increase in accounts payable and accrued liabilities resulting from increases in our research and development activities and accrued compensation. This was partially offset by a$2.4 million increase in prepaid expense and other current assets and a$0.7 million increase in other assets, driven by the timing of prepayments made for research and development activities, and a$1.0 million decrease in deferred grant funding due to research grant awards being recognized as eligible research costs were incurred. 79
--------------------------------------------------------------------------------
Investing Activities
In 2019, net cash provided by investing activities was$13.8 million related to the proceeds from maturities of investments of$176.2 million and the proceeds from the sale of investments of$4.0 million , partially offset by purchases of investments of$166.0 million and purchases of property and equipment of$0.4 million . In 2018, cash used in investing activities was$64.2 million related to purchases of short-term investments of$142.0 million and purchases of property and equipment of$0.4 million , partially offset by the maturity of investments of$78.2 million . Financing Activities In 2019, cash provided by financing activities was$267.3 million , and was primarily related to the net proceeds from public offerings of our common stock of$264.3 million , the proceeds received from the exercise of stock options of$2.1 million and the proceeds received from the issuance of common stock upon ESPP purchase of$0.9 million . In 2018, cash provided by financing activities was$116.6 million related to the net proceeds of$116.3 million received from the initial public offering and$0.3 million from the issuance of common stock in connection with stock option exercises.
Contractual Obligations and Commitments
The following table summarizes our commitments to settle contractual obligations as ofDecember 31, 2019 : Payments Due By Period Less than More than Total 1 Year 1-3 Years 3-5 Years 5 Years (in thousands) Financial Assets Operating lease obligation$ 2,449 $ 1,585 $ 864 $ - $ - Contract manufacturing obligations 15,400 10,250 5,150 - - Total$ 17,849 $ 11,835 $ 6,014 $ - $ - We enter into agreements in the normal course of business with contract research organizations for clinical trials and with vendors for preclinical studies and other services and products for operating purposes which are cancelable at any time by us, generally upon 30 days prior written notice. These payments are not included in this table of contractual obligations. In addition, we have not included the potential contingent payment obligations from the following agreements described below in this table of contractual obligations because the timing and likelihood of such payments is not known. These payments generally become due and payable only upon achievement of certain development, regulatory or commercial milestones.
Asset Purchase Agreement
InJune 2018 , we entered into an asset purchase agreement with BliNK Biomedical SAS, or BliNK, pursuant to which we acquired all of BliNK's assets relating to its research and development program for antibodies directed against CD47. These assets predominately consist of certain patents and patent applications of BliNK and BliNK's opposition at the EPO against the third-party patent European Patent No. EP 2 282 772 as an acquired business asset. We paid BliNK an initial upfront payment of$2.0 million and an additional$1.0 million upon the completion of certain agreed activities by BliNK relating to the transfer of the assets to us. For each product incorporating a program antibody that satisfies certain clinical and commercial milestones inthe United States , theEuropean Union andJapan , we will be required to make milestone payments of up to$43.0 million . Until we receive marketing approval for the first product, or for so long as we continue development of product candidates related to the acquired intellectual property, we are required to pay BliNK a minimum annual fee of$0.3 million . In addition, we will pay BliNK a royalty of a tiered single digit percentage on net sales of any approved products. We have the right to buy out our royalty obligations in full by paying BliNK an agreed lump sum amount prior to the occurrence of certain defined events. 80
--------------------------------------------------------------------------------
License Agreements
InJuly 2018 , we entered into a settlement and license agreement withSynthon Biopharmaceuticals B.V. , or Synthon. Under the agreement, we agreed to discontinue our ongoing oppositions and challenges at theEuropean Patent Office , or the EPO, and theU.S. Patent and Trademark Office , or the USPTO, directed towards certain patents licensed by Synthon fromStichting Sanquin Bloedvoorziening , or SSB, that relate to the use of anti-CD47 products in combination with other antibodies to treat cancer. We also agreed to request the withdrawal of such proceedings with the USPTO and EPO. In return Synthon agreed to grant us a non-exclusive, worldwide sublicense to certain patents they have licensed from SSB, including the SSB patents we were opposing at the USPTO and EPO to commercialize a single anti-CD47 product (such as magrolimab or an alternate anti-CD47 product) to treat cancer in combination with other antibodies. InDecember 2016 andApril 2017 , we filed third party observations in an opposition proceeding in the EPO with respect to European Patent No. EP 2 282 772 and inJanuary 2018 , petitioned for inter partes review ofU.S. Patent No. 9,352,037 in the USPTO, each of which is related to the treatment of cancer with an anti-CD47 antibody or an anti-SIRP? antibody in combination with certain other antibodies. The opposition proceeding was rejected by the EPO and the original opponent appealed the decision. OnJune 4, 2018 , we acquired the opposition against this European patent from the original opponent. Pursuant to the agreement, we and Synthon have each agreed to release the other party (and we have agreed to release SSB) from all claims and liabilities relating to the USPTO and EPO proceedings. The sublicense grant was subject to specified conditions, which have now been met. These conditions included our withdrawal of the proceedings opposing the above-mentioned SSB U. S. and European patents and the termination of these proceedings by the USPTO and the EPO. In connection with the release of claims by Synthon and us, SSB agreed to release us from all claims and liabilities under the USPTO and EPO proceedings and to grant us a direct license to the sublicensed patents in the event the license between SSB and Synthon is terminated. Our sublicense includes the right to further sublicense the applicable patent rights to our collaborators, corporate partners and service providers and covers one named product, which is magrolimab. In addition, we have the right to replace magrolimab with a different anti-CD47 product in the event of a development failure of magrolimab. We will also have an option to expand our rights to cover a follow-on anti-CD47 product in exchange for a specified option exercise fee. Synthon retains the right to use the licensed patents and to grant other third parties the right to do so. In exchange, for these sublicenses and option rights, we agreed to pay Synthon an aggregate of up to approximately40.0 million Euros comprising an upfront payment upon the grant of the sublicense and the achievement of future regulatory and commercial milestones which comprise the significant majority of the aggregate payments. If we exercise our option right, we will pay Synthon additional amounts upon the achievement of certain regulatory and commercial milestones related to such follow-on anti-CD47 product. In addition, we will be required to pay Synthon an annual license fee and a royalty of a tiered, low single digit percentage on net sales of any approved licensed products. We have the right to buy out our royalty obligations for each licensed product in full by paying Synthon specified lump sum amounts prior to the occurrence of certain defined events.
License and Collaboration Agreements
InSeptember 2019 , we entered into a research collaboration with bluebird to pursue clinical proof-of-concept for our novel antibody-based conditioning regimen, FSI-174 (anti-cKIT antibody) plus magrolimab (anti-CD47 antibody), with bluebird's ex vivo lentiviral vector hematopoietic stem cell (LVV HSC) gene therapy platform. This collaboration will focus initially on diseases that have the potential to be corrected with transplantation of autologous gene-modified blood-forming stem cells. Pursuant to the agreement, each party will be responsible for 50% of the cost of the study. As ofDecember 31, 2019 , we recorded a receivable of$0.7 million from bluebird for reimbursement of research and development costs incurred. InJanuary 2018 , we entered into a clinical trial collaboration and supply agreement with Merck, to evaluate magrolimab combined with Merck's cancer immunotherapy, avelumab, in a Phase 1b clinical trial in patients with ovarian cancer. Pursuant to the agreement, the parties will jointly pay for the cost of the study. As ofDecember 31, 2019 , we recorded a receivable of$0.3 million from Merck for reimbursement of research and development costs incurred. 81 -------------------------------------------------------------------------------- InNovember 2017 , we entered into a master clinical trial collaboration agreement withGenentech to evaluate the safety, tolerability and preliminary efficacy of magrolimab combined withGenentech's cancer immunotherapy, atezolizumab, a fully humanized monoclonal antibody targeting PD-L1, in two separate Phase 1b clinical trials (in patients with bladder cancer and AML, respectively). Pursuant to the agreement, we will supply magrolimab for the studies and will partially reimburseGenentech for its costs in connection with the bladder cancer study, andGenentech will supply atezolizumab for the studies and be solely responsible for all of its costs in connection with the AML study. InNovember 2015 , we entered into a technology license agreement withStanford under whichStanford granted us exclusive licenses under certain patents and other intellectual property rights relating to our current product candidates, including magrolimab and non-exclusive licenses under certain other patents and other intellectual property rights to develop, manufacture and commercialize products for use in certain licensed fields, including oncology. We are required to make milestone payments up to$5.6 million in respect of the first three licensed products that successfully satisfy certain clinical and regulatory milestones inthe United States , major European countries andJapan . The first such milestone payment of$75,000 was paid toStanford inFebruary 2018 . In addition, we are required to payStanford a minimum annual fee and a royalty of a tiered single digit percentage on net sales of licensed products, reimburse patent-related expenses and share any non-royalty sublicensing income received related to the licensed technology.
Grant Funding Agreements
InMarch 2017 , we entered into an agreement with LLS regarding our NHL rituximab combination clinical trial, as amended inJune 2018 to include an additional study. The LLS research grant stipulated various milestone-based payments with a total award of$4.2 million throughDecember 2019 which we had received as ofDecember 31, 2019 . We are required to pay LLS certain development and regulatory approval milestone payments, as well as a low single digit percentage royalty on net sales, up to a maximum of$13.7 million in the aggregate. InJuly 2019 , we entered into an amendment to our agreement with LLS to further advance the treatment of MDS. Under the amendment, we are eligible for up to$3.0 million in additional grant funding based on milestone payments from LLS upon the achievement of certain clinical or regulatory milestones in addition to the$4.2 million award that we received pursuant to theMarch 2017 agreement, as amended. As ofDecember 31, 2019 , we had not received any funding related to this grant. Pursuant to the amendment, we could be required in the future to pay amounts to LLS upon reaching certain development and regulatory approval milestones on the additional funding, up to a maximum of$6.0 million in the aggregate. We concluded that the contingent milestone payments in our agreement with LLS, as amended, represents a contingent repayment obligation. As ofDecember 31, 2019 , there was a liability for the contingent repayment obligation of approximately$2.9 million . InJanuary 2017 , we were awarded a research grant from CIRM supporting our CRC trial. The CIRM grant stipulates various milestone-based payments to us with the total award of$10.2 million over a period of four years. As ofDecember 31, 2019 , we had received$9.2 million under the award. InNovember 2017 , we were awarded a second research grant from CIRM for a separate clinical trial study in AML. The total amount of the research grant awarded was$5.0 million in various milestone-based payments over a period of five years. During 2018, the award was amended to$3.2 million in various-milestone payments over a period of five years, as was provided for under the terms of the original award because we opted not to expand the patient population participating in the study. InJuly 2019 , the award was further amended to include the patient population expansion that we previously opted out of in 2018. In connection with the same, the award was reinstated to$5.0 million consistent with the original award amount. As ofDecember 31, 2019 , we had received$3.6 million under the award. 82 -------------------------------------------------------------------------------- Under the terms of the CIRM grants, we are obligated to pay royalties and licensing fees based on a low single digit royalty percentage on net sales of CIRM-funded product candidates or CIRM-funded technology. We have the option to decline any and all amounts awarded by CIRM. As an alternative to revenue sharing, we have the option to convert each award to a loan, which option must be exercised on or before ten business days after the FDA notifies us that it has accepted our application for marketing authorization. In the event we exercise our right to convert an award to a loan, we will be obligated to repay the loan within ten business days of making such election, including interest at the rate equal to the three-month LIBOR rate (1.91% as ofDecember 31, 2019 ) plus zero to 30% per annum that varies depending on the stage of the research and the stage of development at the time the election is made. In the event that we terminate a CIRM-funded clinical trial, we will be obligated to repay the remaining CIRM funds on hand.
Off-Balance Sheet Arrangements
During 2019 and 2018, we did not have any off-balance sheet arrangements as defined in Item 303 of Regulation S-K.
Critical Accounting Policies
Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance withUnited States generally accepted accounting principles, orU.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the assumptions and estimates associated with accrued research and development expenditures, stock-based compensation and revenue recognition have the most significant impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
We record accrued expenses for estimated preclinical study and clinical trial expenses. Estimates are based on the services performed pursuant to contracts with research institutions and contract research organizations and clinical manufacturing organizations that conduct and manage preclinical studies and clinical trials on our behalf based on actual time and expenses incurred by them. Further, we accrue expenses related to clinical trials based on the level of patient enrollment and activity according to the related agreement. We monitor patient enrollment levels and related activity to the extent reasonably possible and make judgments and estimates in determining the accrued balance in each reporting period. If we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates. To date, we have not experienced significant changes in our estimates of preclinical studies and clinical trial accruals.
Contingent Repayment Obligation
We enter into research and license agreements that may include contingent milestone payments that are based upon reaching certain development and regulatory approval milestones. With respect to our agreement with the LLS, as amended, we have concluded that the contingent milestone payments result in a contingent repayment obligation. We estimate the fair value of the contingent repayment obligation using a valuation model designed to estimate the probability of the occurrence of such contingent milestone payments based on various assumptions and incorporating estimated success rates. Estimated payments are then discounted using present value techniques to arrive at an estimated fair value. The contingent repayment obligation is subject to revaluation at each balance sheet date, with revaluations recognized as a component of other income (expenses) in the Company's statements of operations and comprehensive loss. The portion of the contingent repayment obligation that is subject to revaluation has a current cap of$4.2 million . The other portion of the contingent repayment obligation which is dependent upon future product sales is not included in the measurement as ofDecember 31, 2019 . 83 -------------------------------------------------------------------------------- Changes in the fair value of the contingent repayment obligation can result from changes to one or multiple inputs, including adjustments to the discount rate, changes in the assumed achievement or timing of development milestones, changes in the probability of the successful completion of stages of clinical trials, and changes in the probability of regulatory approval. These fair value measurements are based on significant inputs not observable in the market. Substantial judgment is used in determining these assumptions. Changes in assumptions could have a material impact on the recorded value and associated expense in any given period. InDecember 2019 , the Company released positive clinical data which led to a change in estimate of the probability of success and the timing of achievement of regulatory milestones. This change in the estimate resulted in an increase of$2.5 million in the contingent repayment obligation. Stock-Based Compensation We recognize compensation costs related to stock-based awards granted, including stock options and employee stock purchase plan, based on the estimated fair value of the awards on the date of grant. We estimate the grant date fair value, and the resulting stock-based compensation, using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. The Black-Scholes option-pricing model requires the use of highly subjective assumptions to determine the fair value of stock-based awards. These assumptions include:
• Expected Term-The expected term represents the period that stock-based
awards are expected to be outstanding. The expected term for option
grants is determined using the simplified method, as we do not have
sufficient historical data to use any other method to estimate expected
term. The simplified method deems the expected term to be the midpointbetween the vesting date and the contractual life of the stock-based
awards.
• Expected Volatility-Since we have limited trading history for our common
stock due to our short trading history, the expected volatility was
estimated based on the average volatility for comparable publicly traded
biotechnology companies over a period equal to the expected term of thestock option grants. The comparable companies were chosen based on their
similar size, stage in the life cycle or area of specialty.
• Risk-Free Interest Rate-The risk-free interest rate is based on the
corresponding with the expected term of option.
• Expected Dividend-We have never paid dividends on our common stock and
have no plans to pay dividends on our common stock. Therefore, we used
an expected dividend yield of zero.
We will continue to use judgment in evaluating the expected volatility and expected term utilized for our stock-based compensation calculations on a prospective basis.
Revenue Recognition
We enter into collaborative arrangements with partners that fall under the scope
of Accounting Standards Codification Topic 808, Collaborative Arrangements (ASC
808). We analyze these collaboration arrangements to assess whether they are
within the scope of ASC 808 to determine whether such arrangements involve joint
operating activities performed by parties that are both active participants in
the activities and exposed to significant risks and rewards dependent on the
commercial success of such activities. This assessment is performed throughout
the life of the arrangement based on changes in the responsibilities of all
parties in the arrangement. The accounting for some of the activities under
collaboration arrangements may be analogized to Accounting Standards
Codification Topic 606, Revenue from Contracts with Customers (ASC 606) for
distinct units of account that are reflective of a vendor-customer relationship.
For units of account under the collaboration agreements which are not in the
scope of ASC 606, we record the cost sharing or reimbursement activities as an
adjustment or reduction to the research and development expenses.
84
--------------------------------------------------------------------------------
In determining the appropriate amount of revenue to be recognized as we fulfill
our obligations under each of its agreements, we perform the following steps:
(i) identification of the promised goods or services in the contract; (ii)
determination of whether the promised goods or services are performance
obligations including whether they are distinct in the context of the contract;
(iii) measurement of the transaction price, including the constraint on variable
consideration; (iv) allocation of the transaction price to the performance
obligations based on estimated selling prices; and (v) recognition of revenue
when (or as) we satisfy each performance obligation.
If these arrangements contain a license to our intellectual property, we must
use judgement to determine if the license is distinct from the other performance
obligations identified in the arrangement. If the license is determined to be
distinct, we recognize revenues attributed to the license when the license is
transferred to the customer and the customer is able to use and benefit from the
license. The transaction price may include non-refundable, upfront license fees,
and potential development milestone payments. For the milestone payments, we
must estimate whether the milestones are considered probable of being reached
and estimate the amount, if any, to be included in the transaction price.
Recent Accounting Pronouncements Not Yet Adopted
Please refer to Note 2 to our financial statements appearing under Part II, Item 8 for a discussion of new accounting standards updates that may impact us.
© Edgar Online, source
