ITEOS THERAPEUTICS, INC. The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, 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 Annual Report on Form 10-K, 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 clinical-stage biopharmaceutical company pioneering the discovery and development of a new generation of immuno-oncology therapeutics for people living with cancer. We leverage our deep understanding of tumor immunology and immunosuppressive pathways to design novel product candidates with the aim of restoring the immune response against cancer. Our innovative pipeline includes two clinical-stage programs targeting novel, validated immuno-oncology pathways. Each of our therapies in development has optimized pharmacologic properties designed to improve clinical outcomes. Our lead antibody product candidate, EOS-448, is an antagonist of TIGIT, or T-cell immunoreceptor with lg and ITIM domains, an immune checkpoint with multiple mechanisms of action. EOS-448 was selected for its affinity for TIGIT, its potency and its potential to engage the Fc?R to activate dendritic cells, natural killer cells and macrophages and to promote cytokine release, activation of antigen presenting cells and ADCC activity. In 2020, we started an open-label Phase 1/2a clinical trial of EOS-448 in adult cancer patients with advanced solid tumors. InApril 2021 , we reported preliminary safety, pharmacokinetic, engagement and pharmacodynamic data, indicating target engagement and early evidence of clinical activity as a single agent. InSeptember 2021 , we dosed the first patients in a Phase 1/2 clinical trial of EOS-448 in combination with pembrolizumab and in combination with our A2AR antagonist inupadenant in patients with solid tumors. OnJune 11, 2021 , our wholly owned subsidiary, iTeosBelgium S.A. , and GSK executed the GSK Collaboration Agreement, which became effective onJuly 26, 2021 . Pursuant to the GSK Collaboration Agreement, we granted GSK a license under certain of our intellectual property rights to develop, manufacture, and commercialize products comprised of or containing EOS-448, which license is exclusive in all countries outside ofthe United States and co-exclusive, with iTeos, inthe United States . GSK and iTeos intend to develop EOS-448 in combination, including with other oncology assets of GSK, and iTeos and GSK will jointly own the intellectual property created under the GSK Collaboration Agreement that covers such combinations. In partnership with GSK, we are enrolling patients with first line NSCLC in a randomized Phase 2 trial assessing the doublet of GSK's anti-PD-1 (Jemperli (dostarlimab-gxly)) with EOS-448. In addition, we are enrolling patients with first-line advanced or metastatic head and HNSCC for the Phase 2 expansion part of the trial assessing the doublet of GSK's dostarlimab with EOS-448. We and GSK continue to explore two novel triplets in selected advanced solid tumors both in Phase 1b trials: EOS-448 with dostarlimab and GSK's investigational anti-CD96 antibody, and EOS-448 with dostarlimab and GSK's anti-PVRIG. Based on favorable preclinical data generated in collaboration withFred Hutchinson Cancer Research Center , we are also enrolling patients in an open-label dose-escalation/expansion Phase 1/2 trial evaluating the safety, tolerability and preliminary activity of EOS-448 as monotherapy and in combination with Bristol Myers Squibb's iberdomide - a novel, potent oral cereblon E3 ligase modulator (CELMoD®) compound with enhanced tumoricidal and immune-stimulatory effects compared with immunomodulatory (IMiD®) agents - with or without dexamethasone, in adults with relapsed or refractory multiple myeloma. We are also advancing inupadenant, a next-generation adenosine A2A receptor antagonist tailored to overcome the specific adenosine-mediated immunosuppression found in tumor microenvironment, into proof-of concept trials in several indications following encouraging single-agent activity in Phase 1. We are investigating inupadenant in an open-label multi-arm Phase 1/2a clinical trial in adult cancer patients with advanced solid tumors. The single-agent dose-escalation and expansion portions of our Phase 1/2a clinical trial of inupadenant have demonstrated durable monotherapy antitumor activity in some patients with advanced solid tumors and safety consistent with previously reported results. As part of this monotherapy assessment of inupadenant, we identified a potential predictive biomarker and we have completed enrolling patients in the biomarker cohort of the ongoing Phase 1b/2a trial. We confirmed a partial response using inupadenant in monotherapy in a patient who 62 -------------------------------------------------------------------------------- had the highest level of the biomarker that we have recorded. We are also enrolling patients in the dose ranging part (Part 1) of an ongoing two-part Phase 2 trial in post-IO metastatic non-squamous non-small cell lung cancer (NSCLC) to evaluate the combination of inupadenant with platinum-doublet chemotherapy compared to standard platinum-doublet chemotherapy. We have completed enrollment in the safety evaluation portion of the clinical trial of inupadenant in combination with chemotherapy and with pembrolizumab, as well as the monotherapy expansion cohort in prostate cancer. We have completed enrollment in the Phase 2a trial evaluating inupadenant in combination with pembrolizumab in post-PD-1 melanoma and have decided to prioritize development of inupadenant in our ongoing study in combination with platinum-doublet chemotherapy in patients with chemo-naïve NSCLC as we have determined that the post-PD-1 melanoma setting is not a path to accelerated approval. In addition, we are evaluating a salt form of inupadenant in a Phase 1 study. InSeptember 2021 , we nominated a product candidate, EOS-984, which targets a new mechanism in the adenosine pathway for IND enabling studies. EOS-984 has the potential to fully reverse adenosine immune suppression, as a monotherapy and in combination with inupadenant and other standards of care. We expect to initiate clinical studies for EOS-984 in mid-2023. Since our inception inAugust 2011 , we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, conducting discovery and research activities, filing patent applications, identifying potential product candidates, undertaking preclinical studies and clinical trials and establishing arrangements with third parties for the manufacture of initial quantities of our product candidates and component materials. To date, we have financed our operations primarily through license and collaboration revenue generated through the GSK Collaboration Agreement and through our Initial Public Offering, or IPO. ThroughDecember 31, 2022 , we had raised an aggregate of$210.6 million of net proceeds from the IPO and$177.1 million from the sale of preferred stock and received an up-front payment of$625.0 million with respect to the GSK Collaboration Agreement. As ofDecember 31, 2022 , our principal sources of liquidity were cash and cash equivalents, which totaled$284.8 million and available-for-sale securities, which totaled$446.6 million .
We expect to continue to incur significant expenses in connection with ongoing development activities, particularly if and as we:
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continue preclinical studies and clinical trials and initiate new clinical trials for our product candidates;
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pursue regulatory approvals for our product candidates;
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advance the development of our product candidate pipeline;
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continue research activities as we seek to discover and develop additional product candidates;
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obtain, maintain, expand and protect our intellectual property portfolio;
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hire additional research and development, clinical and commercial personnel;
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scale up our clinical and regulatory capabilities; and
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add operational, financial and management information systems and personnel, including personnel to support our research and development programs, any future commercialization efforts and our transition to operating as a public company. We are also party to other collaboration and license agreements in addition to the GSK Collaboration Agreement pursuant to which we may be required to make future royalty and milestone payments. InJanuary 2017 , we entered into a collaboration agreement withAdimab, LLC , orAdimab , pursuant to which we paid$1.0 million in 2018 to exercise an option to acquire certain licenses fromAdimab . One of the antibodies licensed under this agreement is what we now refer to as EOS-448. InFebruary 2021 , we entered into an amendment to this agreement (the Amended Adimab Agreement). The Amended Adimab Agreement specifies different milestone payments for new products that are derived from research programs beginning afterFebruary 22, 2021 (the New Products). For New Products, on a per target basis, we may be required to pay development, regulatory and commercial milestone payments totaling up to an aggregate of$45.8 million for the first three products and additional milestone payments up to$14.5 million for each additional product. In 2022, the Company made a payment of$2.0 million due to reaching an additional milestone (dosing of first patient for Phase 2 clinical trial). As of the date of this Annual Report on Form 10-K, we have not pursued any additional targets under the Amended Adimab Agreement that could potentially result in such milestone payments. We will also payAdimab low to mid single-digit percentage royalties on a country-by-country and product-by-product basis on worldwide net sales of licensed products. ThroughDecember 31, 2022 , we have paid a total of$5.4 million toAdimab relating to milestones, option and other fees pursuant the Adimab Agreement. 63 -------------------------------------------------------------------------------- We are also party to a biologics master services agreement withWuXi Biologics Hong Kong Limited , or WuXi, pursuant to which we will pay WuXi, at our election, either a low single-digit percentage royalty on global net sales of manufactured products or a one-time milestone payment in the low tens of millions. OnDecember 10, 2019 , we entered into a Clinical Trial Collaboration and Supply Agreement (the MSD Agreement) withMSD International GmbH (MSD), a subsidiary of Merck & Co., Inc. Under the MSD Agreement, we sponsor a clinical trial in which both our compound and MSD's compound are dosed in combination. We conduct the research at our own cost and MSD contributes its compound towards the study at no cost to us. We will equally own the clinical data and inventions from the study, with the exception of inventions relating solely to each party's compound class. The MSD Agreement will expire upon the delivery of a written report on the results of the study, unless earlier terminated or agreed by the parties. We began receiving compounds from MSD onApril 1, 2020 and we began the research study in the third quarter of 2020.
Impact of COVID-19
The COVID-19 pandemic has presented a substantial public health and economic challenge around the world. While the COVID-19 pandemic has not significantly impacted our business or results of operations, the future impact of the COVID-19 pandemic on our industry, the healthcare system, our development timelines for EOS-448 and inupadenant, our preclinical research and development, and our current and future operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted with confidence. Disruptions to the global economy, disruption of global healthcare systems, and other significant impacts of the COVID-19 pandemic could have a material adverse effect on our business, financial condition, results of operations and growth prospects. See "Risk factors" for a discussion of the potential adverse impact of COVID-19 on our business, results of operations and financial condition.
Components of our results of operations
Revenue
To date, our revenues have been derived from the upfront payment associated with the GSK Collaboration Agreement.
For all collaboration agreements, no development or commercial milestones were included in the transaction price at inception, as all milestone amounts were fully constrained. As part of our evaluation of the constraint, we considered numerous factors, including that receipt of the milestones is outside our control and contingent upon success in future clinical trials and the licensee's efforts. Any consideration related to sales-based milestones will be recognized when the related sales occur as they were determined to relate predominantly to the license granted to GSK and therefore have also been excluded from the transaction price. We are applying the royalty exception for sales-based royalties and will not recognize revenue until the subsequent sale of product occurs.
Research and development expenses
Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:
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costs to obtain licenses to intellectual property and related future payments should certain success, development and regulatory milestones be achieved;
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employee-related expenses, including salaries, benefits and stock-based compensation expense;
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expenses incurred under agreements with contract research organizations, or CROs, contract manufacturing organizations, or CMOs, and independent contractors that conduct research and development, preclinical and clinical activities on our behalf;
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costs of purchasing lab supplies and non-capital equipment used in our preclinical activities and in manufacturing clinical study materials through CMOs;
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consulting and professional fees related to research and development activities; and
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facility costs, depreciation, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance, and other supplies.
We expense research and development costs as incurred. We recognize costs for
certain development activities, such as preclinical studies and clinical trials,
based on an evaluation of the progress to completion of specific tasks using
information provided to us by our vendors, such as patient enrollment or
clinical site activations for services received and efforts expended.
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Research and development activities are central to our business model. We expect
research and development costs to increase significantly for the foreseeable
future as our current development programs progress and new programs are added.
Because of the numerous risks and uncertainties associated with product
development, we cannot determine with certainty the duration and completion
costs of the current or future preclinical studies and clinical trials or if,
when, or to what extent we will generate revenues from the commercialization and
sale of any product candidates that receive regulatory approval. We may never
succeed in achieving regulatory approval for our product candidates. The
duration, costs and timing of preclinical studies and clinical trials and
development of our product candidates will depend on a variety of factors, which
could all be impacted by the COVID-19 pandemic, including, but not limited to:
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successful enrollment in, and completion of, clinical trials;
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receipt of marketing approvals from applicable regulatory authorities;
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successful completion of preclinical studies and IND-enabling studies;
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establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;
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obtaining and maintaining patent and trade secret protection and non-patent exclusivity;
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launching commercial sales of the product, if and when approved, whether alone or in collaboration with others;
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acceptance of a product, if and when approved, by patients, the medical community and third-party payors;
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effectively competing with other therapies and treatment options;
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a continued acceptable safety profile following approval;
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enforcing and defending intellectual property and proprietary rights and claims; and
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achieving desirable medicinal properties for the intended indications.
A change in the outcome of any of these factors could mean a significant change
in the costs and timing associated with the development of our current and
future preclinical and clinical product candidates. For example, if the FDA or
comparable foreign regulatory authority were to require us to conduct clinical
trials beyond those that we currently anticipate will be required for the
completion of clinical development, or if we experience significant delays in
execution of or enrollment in any of our preclinical studies or clinical trials,
we could be required to expend significant additional financial resources and
time on the completion of preclinical and clinical development.
The following table summarizes our principal product development programs,
including direct research and development expenses allocated to each clinical
product candidate:
Year ended
December 31,
(in thousands) 2022 2021Direct research and development expenses by
program:
EOS-448$ 36,256 $ 14,641 Inupadenant 23,841 18,714 Other non-clinical programs 12,001 8,450
Indirect research and development expenses(1) 25,261 17,564
Total research and development expense
(1)
The substantial majority of these costs relate to the EOS-448 and inupadenant programs. The majority of these costs are payroll and related costs for our employees performing in-house research and development activities and the remainder represents other research and development costs.
65
--------------------------------------------------------------------------------General and administrative expenses
General and administrative expenses consist primarily of employee-related expenses, including salaries, benefits and stock-based compensation, for personnel in executive, finance, business development, facility operations and administrative functions. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to patent and corporate matters and fees for accounting, tax and consulting services.
Grant income
We have agreements with granting agencies whereby we receive funding under grants that partially or fully reimburse us for eligible research and development expenditures. Certain grant agreements require us to repay the funding depending on whether we decide to pursue commercial development or out-licensing of any drug candidate that is produced from the research program. The repayment provision includes a portion that is fixed (corresponding to 30% of the grant), payable in annual installments, which is effective unless we decide not to pursue commercial development or out licensing of the drug candidate. The repayment provision also includes a potential obligation to pay a royalty that is contingent upon achieving sales of a product developed through the program. The maximum amount payable to the granting agency under each grant, including the fixed repayments, the royalty on revenue and the interest thereon, is twice the amount of funding received.
Research and development tax credits
Our wholly owned subsidiary iTeosBelgium S.A. , as a Belgian biotechnology company, qualifies for a cash-based tax credit on research and development expenses. The credit is calculated based on a percentage of eligible research and development expenses defined by the Belgian government for each fiscal year (13.5% for 2022 and 2021) and then applying the effective tax rate to that result. The research and development tax credits are refundable to us if we are unable to use the credits to offset income taxes for the five subsequent tax years. We record a receivable and other income as the qualified expenses are incurred, as we are reasonably assured that the credit will be received, based upon our history of filing for the tax credits. Research and development tax credits receivable where we expect to receive refunds more than one year after the balance sheet date are classified as noncurrent in the consolidated balance sheet. Interest income
Interest income consists of interest earned on our available-for-sale securities, money market funds, and bank sweep accounts.
Other income, net
Other income, net includes income and expenses that do not fall within other categories of the statement of operations and comprehensive income. Items included are bank fees and gain or loss on foreign currency transactions.
Income taxes
We are subject to income taxes in theU.S. andBelgium .Belgium has a statutory tax rate different from theU.S. Accordingly, our effective tax rates will vary depending on the relative proportion of foreign toU.S. income, the utilization of foreign tax credits and changes in tax laws. Deferred tax assets are reduced through the establishment of a valuation allowance, if, based upon available evidence, it is determined that it is more likely than not that the deferred tax assets will not be realized. Income tax expense results from foreign minimum income tax and profit on a legal entity basis. For the first time since inception, we recognized income in 2021. Due to the revenue earned, we recognized income tax expense in 2021. As ofDecember 31, 2022 , we had foreign net operating loss carryforwards of$44.4 million with no expiration. As ofDecember 31, 2022 , we have fully utilized theU.S. net operating loss carryforwards and have$38.4 million of state net operating loss carryforwards. These net operating losses, along with temporary differences related primarily to capitalized research and development, or R&D expenses for tax purposes inBelgium and stock-based compensation in theU.S. , resulted in a net deferred tax asset of$45.4 million . We have concluded that it is more likely than not that we will not realize the benefits of the deferred tax asset, and accordingly, established a full valuation allowance as 66 --------------------------------------------------------------------------------
of
Results of operations
Comparison of the years ended
The following table summarizes our results of operations for the years ended
Year ended Period to
December 31, period
(in thousands) 2022 2021 change
Revenue:
License and collaboration revenue
267,630 344,775 (77,145 )
Operating expenses:
Research and development expenses 97,359 59,369 37,990
General and administrative expenses 43,947 40,505 3,442
Total operating expenses 141,306 99,874 41,432
Income from operations 126,324 244,901 (118,577 )
Other income:
Grant income 2,091 10,181 (8,090 )
Research and development tax credits 1,172 - 1,172
Interest income 11,361 78 11,283
Other income, net 7,788 1,304 6,484
Income before income taxes 148,736 256,464 (107,728 )
Income tax expense 52,084 41,943 10,141
Net income $ 96,652 $ 214,521 $ (117,869 ) License and collaboration revenue
License and collaboration revenue equaled$267.6 million for the year endedDecember 31, 2022 , resulting from a portion of the GSK upfront payment that was recognized during the year, compared to$344.8 million recognized for the year endedDecember 31, 2021 . The decrease was due to more than half of the revenue relating to the GSK upfront payment having been recognized in 2021.
Research and development expenses
Research and development expenses increased by$38.0 million to$97.4 million for the year endedDecember 31, 2022 , from$59.4 million for the year endedDecember 31, 2021 . This increase was primarily related to an increase of$3.5 million of payroll and related costs, a$29.4 million increase CRO/CMO fees and internal laboratory expenses, a$2.2 million increase in stock-based compensation, an increase of$0.7 million in professional fees and an increase of$1.7 million in collaboration milestones paid. The overall increase was due to an increase in activities related to EOS-448 and inupadenant clinical trials. In addition, there was an increase in spending related to our preclinical programs during the year endedDecember 31, 2022 .
General and administrative expenses
General and administrative expenses increased by$3.4 million to$43.9 million for the year endedDecember 31, 2022 from$40.5 million for the year endedDecember 31, 2021 . The increase was primarily attributable to an increase of$2.7 million of payroll and related costs resulting from additional executives and finance and administrative employees added to enable us to operate as a public company, a$5.5 million increase in stock-based compensation, an increase of$0.6 million in recruiting fees, and an increase of$0.4 million related to facilities. In addition, there was also a$0.8 million increase related to various other general and administrative expenses. These increases were partially offset by a$6.6 million decrease in professional fees primarily due to$6.3 million in one-time advisor and legal fees incurred by us in connection with the GSK Collaboration Agreement in 2021. 67 --------------------------------------------------------------------------------
Grant income
Grant income decreased by$8.1 million to$2.1 million for the year endedDecember 31, 2022 from$10.2 million for the year endedDecember 31, 2021 . The overall decrease in grant income, driven by spending on qualified research and development activities, was primarily attributable to certain grant programs reaching their maturity. For the year endingDecember 31, 2022 , grant income relating to the EOS-448 and inupadenant programs decreased by$4.6 million and grant income relating to preclinical activities decreased by$3.5 million .
Research and development tax credits
Research and development tax credits increased by$1.2 million as no research and development tax credits were recognized as income for the year endedDecember 31, 2021 , as the research and development tax credits were utilized in the income tax return to reduce the 2021 taxes due inBelgium . In 2022, a portion of the research and development tax credits are expected to be utilized in the income tax return to reduce the 2022 taxes due inBelgium .
Interest income
Interest income increased by
Other income, net
The
Income tax expense
Year ended December 31,
(in thousands) 2022 2021
Income before income taxes $ 148,736 $ 256,464
Income tax expense 52,084 41,943
Effective tax rate 35.0 % 16.4 %
Our effective tax rate increased from 16.4% to 35.0% in the year ended December
31, 2022 as compared to the year ended December 31, 2021 , primarily due to the
impact of capitalized research and development expenses under Section 174 of the
Internal Revenue Code. Section 174 of the Internal Revenue Code was amended on
January 1, 2022 , in connection with certain provisions of the 2017 Tax Cuts and
Jobs Act, Public Law 115-97-Dec. 22, 2017 becoming effective. As a result of the
amendment, research and development expenses must now be capitalized and
amortized for tax purposes over either five years for work performed in the U.S.
and fifteen years for work performed outside of the U.S. Previously, research
and development expenses were available to offset taxable income for tax
purposes in the year incurred. Although this represents a temporary difference,
the related deferred tax asset is fully reserved for under the valuation
allowance as of December 31, 2022 . In addition, there was a further increase in
the liability related to uncertain tax positions in 2022. The Company recorded
an additional $22.2 million liability during the year ended December 31, 2022
relating to an uncertain tax position regarding the Company's allocation of
revenue from the GSK Collaboration Agreement between Belgium and the U.S. These
factors also caused the 2022 effective tax rate to be higher than the federal
and foreign statutory rates of 21% and 25%, respectively. The 2021 effective tax
rate was lower than the federal and foreign statutory rates of 21% and 25%,
respectively, primarily due to the mix of income between the U.S. and Belgium ,
the Innovation Income Deduction in Belgium , which excludes 85% of the net
revenue generated from qualifying intellectual property from taxation and the
taxation in the U.S. from the inclusion of foreign earnings under the Global
Intangible Low-Taxed Income ("GILTI") regime. The liability balance was $39.2
million and $17.0 million as of December 31, 2022 and December 31, 2021 ,
respectively.
See Note 9, Income Taxes, to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further details.
Liquidity and capital resources
In June, 2021, the Company's wholly owned subsidiary, iTeosBelgium S.A. , and GSK executed the GSK Collaboration Agreement, pursuant to which we agreed to grant GSK a license under certain of our intellectual 68 --------------------------------------------------------------------------------
property rights to develop, manufacture, and commercialize products comprised of
or containing our antibody product, EOS-448. Under the GSK Collaboration
Agreement, GSK made an upfront payment of
To date, we have funded our operations primarily with proceeds from the IPO, the sales of preferred stock, grants and licenses and the upfront payment from the GSK Collaboration Agreement. As ofDecember 31, 2022 , we had$284.8 million in cash and cash equivalents and$446.6 million in available-for-sale securities. To date we have not generated any revenue from product sales and do not expect to generate revenue from the sales of products for the foreseeable future. In addition, in the event that we receive revenue from products or services related to the intellectual property developed arising from the programs, we must pay to theWalloon Region a 0.33% royalty on revenue related to the inupadenant grant and a 0.15% royalty on revenue on the EOS-448 grant (increased from 0.12% effectivelyDecember 2021 ). The maximum amount payable to theWalloon Region under each grant, including the fixed annual repayments, the royalty on revenue, and the interest thereon, is twice the amount of grant received. The Company recorded a royalty accrual of$0.8 million as ofDecember 31, 2022 , due to the upfront payment received pursuant to the GSK Collaboration Agreement. The following is a summary of our contractual obligations as ofDecember 31, 2022 : More than More than Less than 1 year and 3 years and More than Contractual Obligation Total 1 year less than 3 less than 5 5 years (In thousands) Operating lease obligation (1)$ 5,349 $ 1,059 $ 2,051 $ 1,469 $ 770 Grants repayable (2) 7,486 449 765 1,190 5,082 Totals$ 12,835 $ 1,508 $ 2,816 $ 2,659 $ 5,852 (1) During the year endedDecember 31, 2021 , we entered into two amendments to extend theBelgium lease and increase the office and lab space, effectiveFebruary 2021 andOctober 2021 , both with a termination date ofJanuary 2030 . TheFebruary 2021 amendment increased the office and laboratory space by 201 square meters and theNovember 2021 amendment increased the office and laboratory space by 453 square meters. InNovember 2021 , we entered into a new lease for 9,068 square feet of office space inWatertown, Massachusetts , which terminates inFebruary 2027 . (2) We have entered into two arrangements with theWalloon Region ofBelgium , whereby theWalloon Region would provide us with up to$24.7 million for our EOS-448 ($4.6 million ) and inupadenant ($20.1 million ) research and development programs. As ofDecember 31, 2022 , we have received$4.6 million under the EOS-448 grant and$20.1 million under the inupadenant grant. We must repay 30% of the amount received under the grants in annual installments from 2023 to 2042 unless we decide not to pursue development and commercialization of the intellectual property developed arising from the program, apply for a waiver from theWalloon Region justifying our decision based upon the failure of the program, and return the intellectual property to theWalloon Region . The table above does not include potential milestone and success fees, sublicense fees, royalty fees, licensing maintenance fees and reimbursement of patent maintenance costs that we may be required to pay under agreements we have entered into with certain institutions to license intellectual property. Our agreements to license intellectual property include potential milestone payments that are dependent upon the development of products using the intellectual property licensed under the agreements and contingent upon the achievement of development or regulatory approval milestones, as well as commercial and success payment milestones. We have not included such potential obligations in the table above because they are contingent upon the occurrence of future events and the timing, likelihood and amount of such potential obligations are not known with certainty. The table above does not include any required expenditures part of the GSK Collaboration Agreement as part of the Global Development Plan, the Company and GSK agree to spend an aggregate amount of at least$900 million . GSK is responsible for 60% of the cost, while the Company is responsible for the remaining 40% of the cost related to the Global Development Plan. We have not included such potential expenditures, as the timing of the obligations are not known with certainty. 69 -------------------------------------------------------------------------------- We enter into contracts in the normal course of business with CROs and clinical sites for the conduct of clinical trials, professional consultants for expert advice and other vendors for clinical supply manufacturing or other services. These contracts are not included in the table above as they provide for termination on notice, and therefore are cancelable contracts and do not include any minimum purchase commitments.
Cash flows
The following table provides information regarding our cash flows for the years
ended
Year ended
December 31,
(in thousands) 2022 2021
Net cash (used in) provided by:
Operating activities $ (111,193 ) $ 513,140
Investing activities (446,062 ) (1,242 )
Financing activities 1,984 3,659Effects of exchange rate changes on cash, cash
equivalents and restricted cash (8,526 ) (3,176 ) Net (decrease) increase in cash, cash equivalents and restricted cash$ (563,797 ) $ 512,381
Net cash (used in) provided by operating activities
Net cash used in operating activities was$111.2 million during the year endedDecember 31, 2022 . The increase in cash used in comparison to the cash inflow during the prior year was primarily due to the$625.0 million upfront payment from GSK which was received in 2021.
Net cash used in investing activities
Net cash used in investing activities was$446.1 million for the year endedDecember 31, 2022 compared to$1.2 million for year endedDecember 31, 2021 . The increase in cash used in investing activities was primarily due to the purchase of$445.0 million of available-for-sale securities during the year endedDecember 31, 2022 .
Net cash provided by financing activities
Net cash provided by financing activities was$2.0 million during the year endedDecember 31, 2022 . This was due to the proceeds received from the exercise of stock options, equaling$0.9 million , during the year. We also received proceeds of$1.1 million from grants received from the Walloon region for which a portion is repayable. Net cash provided by financing activities was$3.7 million during the year endedDecember 31, 2021 , primarily driven by$3.0 million in proceeds received from the exercise of stock options. Additionally, the Company received$0.7 million in proceeds from grant programs with a potential obligation for repayment.
Effects of exchange rate changes on cash, cash equivalents and restricted cash
The$8.5 million in the effects of exchange rate changes on cash, cash equivalents and restricted cash for the year endedDecember 31, 2022 was primarily caused by the decrease in the euro to dollar exchange rate betweenDecember 31, 2021 and 2022. The$3.2 million increase for the year endedDecember 31, 2021 was also primarily related to a decrease in the euro to dollar exchange rate betweenDecember 31, 2020 andDecember 31, 2021 .
Funding requirements
We expect our expenses to increase in connection with our ongoing activities,
particularly as we continue our Phase 1/2 trials for both EOS-448 and
inupadenant and move to larger randomized and registration-directed trials for
both programs, advance the development of pipeline programs, initiate new
research and preclinical development efforts and seek marketing approval for any
product candidates that we successfully develop. In addition, if we obtain
marketing approval for any of our product candidates, we expect to incur
significant
70
--------------------------------------------------------------------------------commercialization expenses related to establishing sales, marketing, distribution and other commercial infrastructure to commercialize such products.
In June, 2021, the Company's wholly owned subsidiary, iTeosBelgium S.A. , and GSK executed the GSK Collaboration Agreement, pursuant to which we agreed to grant GSK a license under certain of our intellectual property rights to develop, manufacture, and commercialize products comprised of or containing our antibody product, EOS-448. Under the GSK Collaboration Agreement, GSK made an upfront payment of$625.0 million onAugust 5, 2021 . Additionally, we are eligible to receive up to$1.45 billion in milestone payments, contingent upon the EOS-448 program achieving certain development and commercial milestones. As ofDecember 31, 2022 , we had cash and cash equivalents of$284.8 million and available-for-sale securities of$446.6 million . We believe our existing cash and cash equivalents and available-for-sale securities will enable us to fund our operating expenses and capital expenditure requirements into 2026. We have based our projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all of our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with the development and commercialization of EOS-448 and inupadenant, and the research, development and commercialization of other potential product candidates, we are unable to estimate the exact amount of our operating capital requirements. Our future capital requirements will depend on many factors, including:
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the scope, progress, timing, costs and results of clinical trials of product candidates;
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research and preclinical development efforts for any future product candidates that we may develop;
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our ability to enter into and the terms and timing of any collaborations, licensing agreements or other arrangements;
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the number of future product candidates that we pursue and their development requirements;
•
the outcome, timing and costs of seeking regulatory approvals;
•
the costs of commercialization activities for any of our product candidates that receive marketing approval to the extent such costs are not the responsibility of any future collaborators, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities;
•
subject to receipt of marketing approval, revenue, if any, received from commercial sales of our current and future product candidates;
•
our headcount growth and associated costs as we expand our research and development and establish a commercial infrastructure;
•
the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against intellectual property related claims;
•
the costs of operating as a public company; and
•
the emergence of competing therapies and other adverse market developments.
Critical accounting policies and significant judgments and estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance withU.S. generally accepted accounting principles. We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as critical because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates-which also would have been reasonable-could have been used. On an ongoing basis, we evaluate our estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are 71 --------------------------------------------------------------------------------
not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in the notes to our financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements.
Revenue Recognition
We generate revenue from our GSK Collaboration Agreement. We recognize revenue in accordance with ASC 606, which applies to all contracts with customers, except for contracts that are within the scope of other standards. Under ASC 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform the following five steps:
(i)
identify the contract(s) with a customer;
(ii)
identify the performance obligations in the contract;
(iii)
determine the transaction price;
(iv)
allocate the transaction price to the performance obligations in the contract; and
(v)
recognize revenue when (or as) the entity satisfies a performance obligation.
We only apply the five-step model to contracts when it is probable that the entity will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. We do not include a financing component in our estimated transaction price at contract inception unless we estimate that certain performance obligations will not be satisfied within one year. Additionally, we recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that we otherwise would have recognized is one year or less.
Research and development expenses
As part of the process of preparing our financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed for us and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time, which we periodically confirm with the service providers and make adjustments if necessary. Examples of accrued research and development expenses include fees paid to:
•
CROs in connection with clinical trials;
•
CMOs with respect to clinical materials, intermediates, drug substance and drug product;
•
vendors in connection with research and preclinical development activities; and
•
vendors related to manufacturing, development and distribution of clinical supplies.
We must develop assumptions that require judgment to determine whether the
individual promises should be accounted for as separate performance obligations
or as a combined performance obligation, and to determine the stand-alone
selling price for each performance obligation identified in the contract. Since
the upfront license was bundled with other promises, we utilized judgment to
assess the nature of the combined performance obligation and determined that the
combined performance obligation is satisfied over time. Revenue is recognized
using a percent complete method based on costs incurred compared with the total
expected costs to be incurred (cost to cost measure of progress). There are no
outputs from the performance obligation. As a result, an input method was
appropriate. A cost to cost measure of progress provides a faithful depiction of
the transfer of services to the customer since the predominant inputs to the
performance obligation are labor costs, research
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--------------------------------------------------------------------------------and development supplies and manufacturing supplies related to the Phase 1 Study, clinical manufacturing and know-how transfer.
The preceding estimates and judgments materially affect our recognition of revenue. Changes in our estimates of forecasted development costs could impact percentage complete and could have a material effect on revenue recorded in the period in which we determine that change occurs.
Stock-based compensation expense
The fair value of stock options and Employee Stock Purchase Plan awards we grant is estimated using the Black Scholes option pricing model. This option pricing model based on certain subjective assumptions, including (i) the expected stock price volatility, (ii) the expected term of the award, (iii) the risk-free rate of interest, and (iv) expected dividends. The fair value of our common stock utilized in the model is determined based on the quoted market price of our common stock. There were no significant changes to assumptions used to value options using the Black Scholes option pricing model in 2022, with the exception of the stock and exercise prices.
The fair value of restricted stock units we grant is based on the quoted market price of our common stock on the date of grant.
Government grant funding and potential repayment commitments under recoverable cash advance grants (RCAs)
We have agreements with granting agencies whereby we receive funding under grants, which partially or fully reimburse us for eligible research and development expenditures. Certain grant agreements require us to repay the funding wherein the repayment provision of the grants are predicated on whether we decide to pursue commercial development or out licensing of the drug candidate that is produced from the results of the research program. The repayment provision includes a portion that is fixed (corresponding to 30% of the grant) which is effective after we decide to pursue commercial development or out licensing of the drug candidate. The repayment provision also includes a potential obligation to pay a royalty that is contingent upon achieving sales of a product developed through the program. The maximum amount payable to the granting agency under each grant, including the fixed repayments, the royalty on revenue, and the interest thereon, is twice the amount of funding received. Grant funding for research and development received under grant agreements where there is a repayment provision is recognized as other income to the extent there is no potential obligation to repay this funding. We record the present value of the liability as a grant repayable in the accompanying consolidated balance sheets. The grant repayable is subsequently recorded at amortized cost. There were no significant changes to assumptions in 2022.
Income taxes
We are subject to taxes in theU.S. andBelgium . Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We make these estimates and judgments about our future taxable income that are based on assumptions that are consistent with our future plans. Tax laws, regulations and administrative practices may be subject to change due to economic or political conditions including fundamental changes to the tax laws applicable to corporate multinationals. TheU.S. and many countries in theEuropean Union are actively considering changes in this regard. As ofDecember 31, 2022 and 2021, we had recorded a full valuation allowance on our net deferred tax assets because we expect that it is more likely than not that our deferred tax assets will not be realized. Should the actual amounts differ from our estimates, the amount of our valuation allowance could be materially impacted. Furthermore, significant judgment is required in evaluating our tax positions. In the ordinary course of business, there are many transactions and calculations for which the ultimate tax settlement is uncertain. As a result, we recognize the effect of this uncertainty on our tax attributes or taxes payable based on our estimates of the eventual outcome. These effects are recognized when, despite our belief that our tax return positions are supportable, we believe that it is more likely than not that some of those positions may not be fully sustained upon review by tax authorities. We are required to file income tax returns in theU.S. andBelgium , which requires us to interpret the applicable tax laws and regulations in effect in such jurisdictions. Such returns are subject to audit by the various federal, state and foreign taxing authorities, who may disagree with respect to our tax positions. We believe that our consideration is adequate for all open audit years based on our assessment of many factors, including past experience and interpretations of tax law. We review and update our estimates in light of changing 73 -------------------------------------------------------------------------------- facts and circumstances, such as the closing of a tax audit, the lapse of a statute of limitations or a change in estimate. To the extent that the final tax outcome of these matters differs from our expectations, such differences may impact income tax expense in the period in which such determination is made. The eventual impact on our income tax expense depends in part on if we still have a valuation allowance recorded against our deferred tax assets in the period that such determination is made.
Recent accounting pronouncements
Refer to Note 2, "Summary of Significant Accounting Policies," in the accompanying notes to the consolidated financial statements for a discussion of recent accounting pronouncements.
Emerging growth company and smaller reporting company status
The Jumpstart Our Business Startups Act of 2012 permits an "emerging growth company" such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected not to "opt out" of this provision and, as a result, we will adopt new or revised accounting standards at the time private companies adopt the new or revised accounting standard and will do so until such time that we either (i) irrevocably elect to "opt out" of such extended transition period or (ii) no longer qualify as an emerging growth company. We have, however, elected to early-adopt certain new or revised accounting standards as of dates that may or may not coincide with the effective dates of private companies.
As of
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