MERSANA THERAPEUTICS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and the accompanying notes included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 filed with theSecurities and Exchange Commission (SEC) onFebruary 26, 2021 . Our actual results and the timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking statements. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in future periods. The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Quarterly Report on Form 10-Q, including those risks identified under Item 1A. Risk Factors. We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of theSEC , to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements. Overview We are a clinical-stage biopharmaceutical company focused on developing antibody drug conjugates, or ADCs, that offer a clinically meaningful benefit for cancer patients with significant unmet need. We have leveraged over 20 years of industry learning in the ADC field to develop proprietary and differentiated technology platforms that enable us to design ADCs to have improved efficacy, safety and tolerability relative to existing ADC therapies. We believe that our innovative platforms which include Dolaflexin and Dolasynthen, delivering our DolaLock payload, as well as Immunosynthen, delivering a novel stimulator of interferon genes, orSTING , agonist, comprise a highly-efficient product engine that has enabled a robust discovery pipeline for us and our partners. Our ADCs in preclinical and clinical studies include first-in-class molecules that target multiple tumor types with high unmet medical need and have exhibited improved safety and efficacy compared to ADCs developed using first-generation technology. Our goal is to become a leading oncology company by leveraging the potential of our innovative and differentiated ADC technologies and the experience and competencies of our management team to identify, acquire and develop promising ADC product candidates and to commercialize cancer therapeutics that are improvements over existing treatments. Upifitamab rilsodotin (UpRi, XMT-1536), our first-in-class ADC targeting the sodium-dependent phosphate transport protein NaPi2b, utilizes the Dolaflexin platform to deliver about 10 DolaLock payload molecules per antibody. The NaPi2b antigen is broadly expressed in ovarian cancer and non-small cell lung cancer, or NSCLC, adenocarcinoma with limited expression in normal tissue. InApril 2021 , we initiated a single-arm registration strategy in platinum-resistant ovarian cancer, UPLIFT. InJuly 2021 , we initiated UPGRADE, a Phase 1 combination dose escalation umbrella study to evaluate the safety and efficacy of UpRi in combination with other ovarian cancer therapies. The initial arm of this umbrella study is evaluating carboplatin in combination with UpRi followed by continuation of UpRi monotherapy in patients with recurrent platinum-sensitive ovarian cancer. We are continuing to study UpRi in the expansion portion of a Phase 1 proof-of-concept clinical study. 21
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Table of Contents XMT-1592 was created using our Dolasynthen platform and also targets NaPi2b. XMT-1592 comprises the same proprietary NaPi2b antibody and potent auristatin DolaLock payload with controlled bystander effect as UpRi, with the additional features of homogeneous, site-specific bioconjugation and precise drug-to-antibody ratio, or DAR. XMT-1592 is in a proof-of-concept Phase 1 dose escalation study in patients with ovarian cancer and NSCLC, adenocarcinoma. Our early stage programs include XMT-1660, a potentially first-in-class B7-H4-targeted Dolasynthen ADC, as well as XMT-2056, aSTING -agonist ADC developed using our novel Immunosynthen platform. Our objective in 2021 is to rapidly progress these candidates through IND-enabling studies and scale up manufacturing activities with third parties. We believe that these development candidates provide significant opportunities for development in areas of high unmet need such as breast cancer, NSCLC and ovarian cancer. In addition, we have established strategic research and development partnerships with Merck KGaA andAsana Biosciences for the development and commercialization of additional ADC product candidates against a limited number of targets selected by our partners based on our Dolaflexin platform. We believe the potential of our ADC technologies, supported by our world class management team and protected by our robust intellectual property portfolio, will allow us to discover and develop life-changing ADCs for patients fighting cancer. Since inception, our operations have focused on building our platforms, identifying potential product candidates, producing drug substance and drug product material for use in preclinical studies, conducting preclinical and toxicology studies, manufacturing clinical study material and conducting clinical studies, establishing and protecting our intellectual property, staffing our company and raising capital. We do not have any products approved for sale and have not generated any revenue from product sales. We have funded our operations primarily through our strategic partnerships, private placements of our convertible preferred stock and public offerings of our common stock. InApril 2020 , we sold approximately 10.9 million shares of common stock pursuant to an at-the-market, or ATM, equity offering program and received net proceeds of$63.0 million . In addition, inJune 2020 , we sold 9.2 million shares of common stock in a follow-on offering and received net proceeds of$164.0 million . During the three months endedJune 30, 2021 , we sold approximately 2.3 million shares of common stock at an average price of approximately$15 per share pursuant to an ATM equity offering program and received net proceeds of$33.3 million . Since inception, we have incurred significant cumulative operating losses. For the six months endedJune 30, 2021 , the net loss was$75.6 million , compared to net loss of$36.7 million in the six months endedJune 30, 2020 . As ofJune 30, 2021 , we had an accumulated deficit of$356.0 million . We expect to continue to incur significant expenses and operating losses over the next several years. We anticipate that our expenses will increase significantly in connection with our ongoing activities, as we: •continue clinical development activities for our clinical product candidates UpRi and XMT-1592; •develop a diagnostic development effort for the NaPi2b biomarker; •complete IND-enabling studies for our preclinical development candidates XMT-2056 and XMT-1660; •continue activities to discover, validate and develop additional product candidates; •maintain, expand and protect our intellectual property portfolio; and •hire additional research, development and general and administrative personnel. 22
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Table of Contents Impact of COVID-19 on Our Business We are continuing to monitor the impact of the COVID-19 pandemic on our operations and ongoing clinical and preclinical development, as well as discovery efforts. Mitigation activities to minimize COVID-19-related operation disruptions are ongoing and include: •We are currently enrolling patients at investigational sites in different geographic areas around the world in the UpRi Phase 1/2 studies, including UPLIFT and UPGRADE, and withinthe United States in the XMT-1592 Phase 1 dose escalation study. We are in the process of initiating additional clinical sites both inside and outsidethe United States to increase enrollment, which could additionally mitigate potential regional impacts from COVID-19. Consistent with FDA guidance, we issued an administrative letter to allow for remote patient monitoring and remote testing, when possible. •To the best of our knowledge, our contract manufacturing partners continue to operate their manufacturing facilities at or near normal levels, though sourcing of raw materials that are globally being utilized for COVID-related vaccines and therapies has become an increasing challenge for our contract manufacturers. If such raw material sourcing challenges continue, we may experience associated delays in our manufacturing, although we have not experienced any such delays to date. We believe we currently have sufficient inventory of UpRi and XMT-1592 to support our ongoing clinical studies. We have planned manufacturing runs to address all currently anticipated future needs. At this time, and subject to further COVID-19 implications, we continue to monitor our clinical supply and ongoing operations of our contract manufacturers. The ultimate impact of the coronavirus pandemic on our business operations is highly uncertain and subject to change and will depend on future developments, which cannot be accurately predicted. While the pandemic did not materially affect our financial results and business operations in the second quarter endedJune 30, 2021 , we are unable to predict the impact that COVID-19 will have on our financial position and operating results in future periods due to numerous uncertainties. Management is actively monitoring this situation and the possible effects on our financial condition, operations, suppliers, industry, and our employees. For additional information about risks and uncertainties related to the COVID-19 pandemic that may impact our business, our financial condition or our results of operations, see "Part II, Item 1A-Risk Factors" below. Financial operations overview Revenue To date, we have not generated any revenue from the sale of products. All of our revenue has been generated from strategic partnerships. InJune 2014 , we entered into an agreement with Merck KGaA for the development and commercialization of ADC product candidates utilizing Fleximer for up to six target antigens. Merck KGaA is responsible for generating antibodies against the target antigens and we are responsible for generating Fleximer and our proprietary payloads and conjugating this to the antibody to create the ADC product candidates. Merck KGaA has the exclusive right to and is responsible for the further development and commercialization of these ADC product candidates. InMay 2018 , we entered into a supply agreement with Merck KGaA for the supply of materials that could be used for IND-enabling studies and clinical trials. For each of the three and six months endedJune 30, 2021 , we recognized an immaterial amount of revenue related to the Merck KGaA Agreements. For the three and six months endedJune 30, 2020 , we recognized$0.8 million revenue related to the Merck KGaA Agreements. We have provided limited services toAsana BioSciences . We did not record any revenue related to these services in the three and six months endedJune 30, 2021 or 2020. 23
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Table of Contents For the foreseeable future, we expect substantially all of our revenue to be generated from our collaboration agreements with Merck KGaA andAsana BioSciences . Given the uncertain nature and timing of clinical development, we cannot predict when or whether we will receive further milestone payments or any royalty payments under these collaborations. Operating expenses Research and development expenses Research and development expenses include our drug discovery efforts, manufacturing, and the development of our product candidates, which consist of: •employee-related expenses, including salaries, benefits and stock-based compensation expense; •costs of funding research and development performed by third parties that conduct research, preclinical activities, manufacturing and clinical studies on our behalf; •laboratory supplies; •facility costs, including rent, depreciation and maintenance expenses; and •upfront and milestone payments under our third-party licensing agreements. Research and development costs are expensed as incurred. Costs of certain activities, such as manufacturing and preclinical and clinical studies, are generally recognized based on an evaluation of the progress to completion of specific tasks. Costs for certain development activities, such as clinical studies, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations and information provided to us by the third parties with whom we contract. Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials and manufacturing costs. We expect that our total future research and development costs will continue to increase over current levels, depending on the progress of our clinical development programs. There are numerous factors associated with the successful development and commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at our current stage of development. Additionally, future commercial and regulatory factors beyond our control may impact our clinical development programs and plans. A significant portion of our research and development costs have been external costs, which we track on a program-by-program basis following nomination as a product candidate. We have not historically tracked all of our internal research and development expenses on a program-by-program basis as they are deployed across multiple projects under development. The following table summarizes our external research and development expenses, by program, following nomination as a clinical candidate for the three and six months endedJune 30, 2021 and 2020. All external research and development expenses not attributable to the UpRi and XMT-1592 programs are captured within preclinical and discovery costs. These costs relate to XMT-1592 prior to its designation in early 2020 as well as our preclinical development candidates XMT-1660 and XMT-2056, additional earlier discovery stage programs and certain unallocated costs. Our internal research and development costs are primarily personnel-related costs, stock-based compensation costs, and facility costs, including depreciation, and lab consumables. 24
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Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2021 2020 2021 2020
UpRi external costs $ 10,671 $ 3,535 $ 20,049 $ 5,905
XMT-1592 external costs 1,676 2,672 4,144 3,845
Preclinical and discovery costs 7,346 2,022 11,859 3,530
Internal research and development costs 12,262 7,184 23,318 14,352
Total research and development costs
The successful development of our product candidates is highly uncertain. As
such, we cannot reasonably estimate or know the nature, timing and estimated
costs of the efforts that will be necessary to complete the remainder of the
development of our product candidates. We are also unable to predict when, if
ever, we will generate revenue from commercialization and sale of any of our
product candidates that obtain regulatory approval. This is due to the numerous
risks and uncertainties associated with developing drugs, including the
uncertainty of:
•successful completion of preclinical studies and IND-enabling studies;
•successful enrollment in and completion of clinical studies;
•receipt of marketing approvals from applicable regulatory authorities;
•establishing commercial manufacturing capabilities or making arrangements with
third-party manufacturers;
•obtaining and maintaining patent and trade secret protection and regulatory
exclusivity for our product candidates;
•commercializing the product candidates, if and when approved, whether alone or
in collaboration with others; and
•continued acceptable safety profile of the drugs following approval.
A change in the outcome of any of these variables with respect to the
development, manufacture or commercialization of any of our product candidates
would significantly change the costs, timing and viability associated with the
development of that product candidate.
General and administrative expenses
General and administrative expenses consist primarily of salaries and other
employee-related costs, including stock-based compensation, for personnel in
executive, finance, accounting, business development, legal operations,
information technology and human resources 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 and consulting services.
We anticipate that our general and administrative expenses will increase in the
future to support continued research and development activities, including
increased costs related to the hiring of additional personnel, fees to outside
consultants and patent costs, among other expenses.
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Table of Contents Other income (expense) Other income (expense) consists primarily of interest income earned on cash equivalents and marketable securities. Interest expense is related to borrowings under the credit facility that we entered into inMay 2019 and amended inAugust 2020 . These borrowings bear a floating per annum rate interest, as well as a final payment of 5.5% of the amounts drawn, that is being recorded as interest expense over the term through the maturity date using the effective-interest method. Also included in interest expense is the amortization of the deferred financing costs and the accretion of debt discount relating to the credit facility. Results of Operations Comparison of the three months endedJune 30, 2021 and 2020 The following table summarizes our results of operations for the three months endedJune 30, 2021 and 2020, together with the changes in those items: Three Months Ended June 30, (in thousands) 2021 2020 Dollar Change Collaboration revenue$ 11 $ 796 $ (785) Operating expenses: Research and development 31,955 15,413 16,542 General and administrative 8,883 5,171 3,712 Total operating expenses 40,838 20,584 20,254 Other income (expense): Interest income 9 89 (80) Interest expense (95) (87) (8) Total other income (expense), net (86) 2 (88) Net loss$ (40,913) $ (19,786) $ (21,127) Collaboration Revenue Collaboration revenue was immaterial during the three months endedJune 30, 2021 and$0.8 million during the three months endedJune 30, 2020 . For the three months endedJune 30, 2020 we recognized$0.8 million of revenue as a result of the completion of research services associated with a target included in the Merck KGaA Agreement, driving the decrease in collaboration revenue. Research and Development Expense Research and development expense increased by$16.6 million from$15.4 million for the three months endedJune 30, 2020 to$32.0 million for the three months endedJune 30, 2021 . The increase in research and development expense was primarily attributable to the following: •an increase of$6.5 million related to manufacturing, clinical and regulatory activities for UpRi; •an increase of$4.3 million related to manufacturing for the preclinical and discovery stage programs XMT-1660 and XMT-2056; •an increase of$3.2 million related to employee compensation (excluding stock-based compensation), primarily due to an increase in headcount supporting the growth of our research and development activities; 26
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Table of Contents •an increase of$1.5 million related to our diagnostic development effort; and •an increase of$0.2 million related to clinical and regulatory activities for XMT-1592. These increased costs were partially offset by a decrease of$0.8 million related to manufacturing activities for XMT-1592. Stock-based compensation expense included in research and development expenses increased by$1.7 million , related to an increase in headcount and the increased valuation of stock-based awards granted as a result of stock price appreciation. We expect our research and development expenses to increase as we continue our clinical development of XMT-1536 and XMT-1592 and continue to advance our preclinical product candidate pipeline and invest in improvements in our ADC technologies. General and Administrative Expense General and administrative expense increased by$3.7 million from$5.2 million during the three months endedJune 30, 2020 to$8.9 million during the three months endedJune 30, 2021 . The increase in general and administrative expense was primarily attributable to an increase of$1.7 million related to consulting and professional fees and an increase of$0.8 million related to employee compensation (excluding stock-based compensation), related to an increase in headcount. Stock-based compensation increased$1.2 million due to increased headcount and the increased valuation of stock-based awards as a result of stock price appreciation. We expect that our general and administrative expense will increase in future periods as we expand our operations. These increases will likely include legal, auditing and filing fees, additional insurance premiums and general compliance and consulting expenses. Total Other Income (Expense), net Total other expense was$0.1 million for the three months endedJune 30, 2021 and total other income was immaterial for the three months endedJune 30, 2020 . Other income consists primarily of interest income on cash equivalents and short-term marketable securities. Interest expense is related to our outstanding borrowings under the credit facility in both periods. 27
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Comparison of the six months ended
Six Months Ended
June 30,
(in thousands) 2021 2020 Dollar Change
Collaboration revenue $ 21 $ 807 $ (786)
Operating expenses:
Research and development 59,370 27,632 31,738
General and administrative 16,090 10,106 5,984
Total operating expenses 75,460 37,738 37,722
Other income (expense):
Interest income 21 394 (373)
Interest expense (188) (175) (13)
Total other income (expense), net (167) 219 (386)
Net income (loss) $ (75,606) $ (36,712) $ (38,894)
Collaboration Revenue
Collaboration revenue was immaterial during the six months ended June 30, 2021
and $0.8 million during the six months ended June 30, 2020 . For the six months
ended June 30, 2020 we recognized $0.8 million of revenue as a result of the
completion of research services associated with a target included in the Merck
KGaA Agreement, driving the decrease in collaboration revenue.
Research and Development Expense
Research and development expense increased by $31.8 million from $27.6 million
for the six months ended June 30, 2020 to $59.4 million for the six months ended
June 30, 2021 .
The increase in research and development expense was primarily attributable to
the following:
•an increase of $13.6 million related to manufacturing, clinical and regulatory
activities for UpRi;
•an increase of $7.3 million related to manufacturing for the preclinical and
discovery stage programs XMT-1660 and XMT-2056;
•an increase of $5.4 million related to employee compensation (excluding
stock-based compensation), primarily due to an increase in headcount supporting
the growth of our research and development activities;
•an increase of $1.5 million related to diagnostic development efforts; and
•an increase of $0.8 million related to manufacturing, clinical and regulatory
activities for XMT-1592.
Stock-based compensation expense included in research and development expenses
increased by $3.2 million , primarily related to and increase in headcount and
the increased valuation of stock-based awards granted to employees as a result
of stock price appreciation.
We expect our research and development expenses to increase as we continue our
clinical development of XMT-1536 and XMT-1592 and continue to advance our
preclinical product candidate pipeline and invest in improvements in our ADC
technologies.
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Table of Contents General and Administrative Expense General and administrative expense increased by$6.0 million from$10.1 million during the six months endedJune 30, 2020 to$16.1 million during the six months endedJune 30, 2021 . The increase in general and administrative expense was primarily attributable to an increase of$2.4 million related to consulting and professional fees and an increase of$1.4 million related to employee compensation (excluding stock-based compensation), primarily related to an increase in headcount. Stock-based compensation increased$2.2 million due to the valuation of stock-based awards granted to employees as a result of stock price appreciation. We expect that our general and administrative expense will increase in future periods as we expand our operations. These increases will likely include legal, auditing and filing fees, additional insurance premiums and general compliance and consulting expenses. Total Other Income (Expense), net Total other expense was$0.2 million for the six months endedJune 30, 2021 and total other income was$0.2 million for the six months endedJune 30, 2020 . Other income consists primarily of interest income on cash equivalents and short-term marketable securities. Interest expense was related to our outstanding borrowings under the credit facility in both periods. Liquidity and Capital Resources Sources of Liquidity We have financed our operations primarily with the proceeds from our initial public offering, our follow-on public offerings in 2019 and 2020, the use of our ATM equity offering program, and our strategic partnerships. In July of 2018 we established an ATM, or the 2018 ATM, pursuant to which we were able to offer and sell up to$75.0 million of our common stock from time to time at prevailing market prices. InApril 2020 , we sold approximately 10.9 million shares of common stock and received net proceeds of$63.0 million pursuant to our 2018 ATM. In addition, inJune 2020 , we sold 9.2 million shares of common stock in a follow-on public offering and received net proceeds of approximately$164.0 million . InMay 2020 , we terminated the 2018 ATM and established a new ATM, or the 2020 ATM, pursuant to which we are able to sell up to$100.0 million of our common stock from time to time at prevailing market prices. In the second quarter of 2021, we sold 2.3 million shares of common stock under the 2020 ATM for net proceeds of$33.3 million . As of the end of the quarter, we had$66.0 million of availability under the program. OnMay 8, 2019 , we entered into a term loan agreement withSilicon Valley Bank , or SVB, which was subsequently amended onAugust 28, 2020 . Pursuant to the amendment, we may be subject to certain conditions, borrow term loans in an aggregate amount of up to$30.0 million , of which$5.2 million were funded upon execution of the amendment. These proceeds were used to repay the existing balance and satisfy our existing obligations to SVB. No additional amounts have been drawn since the initial draw of$5.2 million . As ofJune 30, 2021 , we had cash and cash equivalents of$227.4 million . 29
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Table of Contents Cash Flows The following table provides information regarding our cash flows for the six months endedJune 30, 2021 and 2020: Six Months Ended June 30, (in thousands) 2021 2020 Net cash used in operating activities$ (61,490) $ (37,181) Net cash provided by (used in) investing activities (447) 34,410 Net cash provided by financing activities 34,388 228,796
Increase (decrease) in cash, cash equivalents and restricted cash
$ (27,549) $ 226,025 Net Cash Used in Operating Activities Net cash used in operating activities was$61.5 million for the six months endedJune 30, 2021 and primarily consisted of a net loss of$75.6 million adjusted for changes in our net working capital and other non-cash items including stock-based compensation of$8.6 million and depreciation of$0.4 million . Net cash used in operating activities was$37.2 million for the six months endedJune 30, 2020 and primarily consisted of a net loss of$36.7 million adjusted for non-cash items including stock-based compensation of$3.3 million and depreciation of$0.5 million , as well as change in our net working capital. Net Cash Provided by (Used in) Investing Activities Net cash used in investing activities was$0.4 million during the six months endedJune 30, 2021 and consisted of purchases of equipment. Net cash provided by investing activities was$34.4 million during the six months endedJune 30, 2020 and consisted primarily of maturities of marketable securities. Net Cash Provided by Financing Activities Net cash provided by financing activities was$34.4 million during the six months endedJune 30, 2021 as compared to net cash provided by financing activities of$228.8 million during the six months endedJune 30, 2020 . During the six months endedJune 30, 2021 , cash provided by financing activities consisted primarily of proceeds from the use of our ATM of$33.3 million and from the exercise of stock options of$1.0 million , offset by$0.3 million from the payment of employee tax obligations related to vesting of restricted stock units. During the six months endedJune 30, 2020 cash provided by financing activities consisted primarily of$164.2 million related to the follow-on public offering inMay 2020 and the proceeds from the use of the ATM of$63.1 million inApril 2020 , as well as proceeds from exercise of stock options of$1.4 million , offset by the payment of$0.2 million of debt issuance costs. Funding Requirements We expect our cash expenditures to increase in connection with our ongoing activities, particularly as we continue the research and development of, initiate clinical studies of, and seek marketing approval for our product candidates. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to drug sales, marketing, manufacturing and distribution to the extent that such sales, marketing and distribution are not the responsibility of potential collaborators. 30
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Table of Contents We believe our currently available funds will be sufficient to fund our current operating plan commitments for approximately the next two years. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors. 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. Our future capital requirements will depend on many factors, including: •the scope, progress, results and costs of drug discovery, preclinical development, laboratory testing and clinical studies for our product candidates; •the scope, prioritization and number of our research and development programs; •the costs, timing and outcome of regulatory review of our product candidates; •our ability to establish and maintain collaborations on favorable terms, if at all; •the achievement of milestones or occurrence of other developments that trigger payments under any collaboration agreements we obtain; •the extent to which we are obligated to reimburse, or entitled to reimbursement of, clinical study costs under future collaboration agreements, if any; •the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; •the extent to which we acquire or in-license other product candidates and technologies; •the costs of securing manufacturing arrangements for clinical and commercial production; and •the costs of establishing or contracting for sales and marketing capabilities if we obtain regulatory approvals to market our product candidates. Identifying potential product candidates and conducting preclinical testing and clinical studies is a time-consuming, expensive and uncertain process that takes many years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve drug sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of drugs that we do not expect to be commercially available for many years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, strategic partnerships and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our common stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. We currently have access to an additional line of credit under the credit facility with SVB, along with funds to potentially be earned in connection with our agreements with Merck KGaA andAsana BioSciences , if development activities are successful under those agreements. Future additional debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. 31
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Table of Contents If we raise funds through additional strategic partnerships or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our drug development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. Off-Balance Sheet Arrangements We did not have, during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under applicableSecurities and Exchange Commission rules. Critical accounting policies and significant judgments and estimates Our management's discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates, if any, will be reflected in the financial statements prospectively from the date of change in estimates. There were no material changes to our critical accounting policies as reported in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , which was filed with theSEC onFebruary 26, 2021 . Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risk related to changes in interest rates. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level ofU.S. interest rates, particularly because our investments, including cash equivalents and marketable securities are invested inU.S. Treasury obligations, commercial paper and corporate bonds. However, we believe that due to the short-term duration of our investment portfolio and low-risk profile of our investments, an immediate 100 basis points change in interest rates would not have a material effect on the fair market value of our investments portfolio. We are currently not exposed to market risk related to changes in foreign currency exchange rates, but we may contract with vendors that are located inAsia andEurope and may be subject to fluctuations in foreign currency rates at that time. Item 4. Controls and Procedures Management's Evaluation of our Disclosure Controls and Procedures We maintain "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in theSEC's rules and forms and (ii) accumulated and communicated to our management, including our principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives. 32
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Table of Contents Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as ofJune 30, 2021 , the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of such date. Changes in Internal Control over Financial Reporting There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter endedJune 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 33
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