MOLECULAR TEMPLATES, INC. The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties, including those set forth under the heading "Risk Factors" and elsewhere in this Annual Report on Form 10-K. Our actual results and the timing of selected events discussed below could differ materially from those expressed in, or implied by, these forward-looking statements.
Overview
• Molecular Templates is a clinical-stage biopharmaceutical company
focused on the discovery and development of targeted biologic
therapeutics. Our proprietary drug platform technology, known as
engineered toxin bodies, or ETBs, leverages the resident biology of agenetically engineered form of Shiga-like Toxin A subunit, or "SLTA" to
create novel therapies with potent and differentiated mechanisms of
action for cancer and other serious diseases.
Business
ETBs use a genetically engineered version of the SLTA. In its wild-type form, Shiga-like Toxin" or "SLT" is thought to induce its own entry into a cell when proximal to the cell surface membrane, self-route to the cytosol, and enzymatically and irreversibly shut down protein synthesis via ribosome inactivation. SLTA is normally coupled to its cognate Shiga-like Toxin B subunit, or SLTB, to target the CD77 cell surface marker, a non-internalizing glycosphingolipid. In our scaffold, a genetically engineered SLTA with no cognate SLTB component is genetically fused to antibody domains or fragments specific to a target, resulting in a biologic therapeutic that can identify the particular target and specifically kill the cell. The antibody domains may be substituted with other antibody domains having different specificities to allow for the rapid development of new drugs to selected targets in cancer and other serious diseases. ETBs combine the specificity of an antibody with SLTA's potent mechanism of cell destruction. Based on the disease setting, we have created ETBs that have reduced immunogenicity and are capable of delivering additional payloads into a target cell. Immunogenicity is the ability of a foreign substance to provoke an immune response in a host. ETBs have relatively predictable pharmacokinetic, or PK, and absorption, distribution, metabolism and excretion, or ADME, profiles and can be rapidly screened for desired activity in robust cell-based and animal-model assays. Because SLTA can induce internalization against non- and poorly-internalizing receptors, the universe of targets for ETBs should be substantially larger than that seen with antibody drug conjugates, or ADCs, which are not likely to be effective if the target does not readily internalize the ADC payload. ETBs have a differentiated mechanism of cell kill in cancer therapeutics (the inhibition of protein synthesis via ribosome destruction), and we have preclinical and clinical data demonstrating the utility of these molecules in chemotherapy-refractory cancers. ETBs have shown good tolerability in multiple animal models as well as a generally favorable tolerability profile in our clinical studies to date. We believe the target specificity of ETBs, their ability to self-internalize, their potent and differentiated mechanism of cell kill and their tolerability profile provide opportunities for the clinical development of these agents to address multiple cancer types. Our initial approach to drug development in oncology involves the selection of lead compounds to validated targets in cancer. We have developed ETBs for various targets, including CD20, CD38, HER2, and PD-L1. CD20 is central to B cell malignancies and is clinically validated as a target for the treatment of lymphomas and autoimmune disease. CD38 has been validated as a meaningful clinical target in the treatment of multiple myeloma. PD-L1 is central to immune checkpoint pathways and is a target expressed in a variety of solid tumor cancers. Our lead compound, MT-3724, is an ETB that recognizes CD20, a B cell marker and is currently in multiple Phase II studies. The dose escalation portion of the Phase I monotherapy clinical trial for MT-3724 was followed by the initiation of a Phase Ib expansion cohort. Results of the Phase I/Ib study were presented at theAmerican Society of Hematology (ASH) Annual Meeting,December 7-10, 2019 inOrlando, FL. Of the 13 serum rituximab negative ("RTX-neg") diffuse large B cell lymphoma, or DLBCL or mixed DLBCL/FL subjects, 5 responded (38% objective response rate) across the range of 5 to 100 ?g/kg doses. Of the 5 responses, 2 were complete responses ("CR"s) and 3 were partial responses (PRs) of which one was a complete metabolic response (CMR). Three subjects had stable disease (including 2 subjects with 49% and 47% tumor reductions) and 5 subjects had progressive disease. Of the 5 serum RTX-neg subjects with DLBCL who received MT-3724 at 50 ?g/kg, the maximum tolerated dose (MTD), 3 responded (2 CRs, 1 PR). 91
-------------------------------------------------------------------------------- In 2019, we initiated a Phase II cohort for the monotherapy trial with MT-3724. We also initiated a Phase II combination study with MT-3724 and chemotherapy (gemcitabine and oxaliplatin, or GemOx) in an earlier line of treatment for DLBCL and a second Phase II combination study with MT-3724 and Revlimid® (lenalidomide), also in an earlier line of DLBCL treatment. Interim results were presented at the virtual 25thCongress of theEuropean Hematology Association (EHA) inJune 2020 . This data demonstrated preliminary evidence of tolerability and efficacy with lenalidomide at standard doses and MT-3724. Among 7 evaluable subjects, 2 were CRs and 3 were PRs. While there were no permanent discontinuations due to adverse events, grade 2 capillary leak syndrome (CLS) occurred at 25 mcg/kg, leading to the opening of a new cohort at 20 mcg/kg. The study had a revised schedule of therapy with MT-3724 being dosed twice rather than three times weekly for the first two cycles and then on a weekly schedule thereafter. The combination study with GemOx has demonstrated preliminary evidence of efficacy but grade 2 innate immune adverse effects were seen with standard doses of gemcitabine and oxaliplatin and 10 ?g/kg doses of MT-3724. The study protocol has been amended to include a revised schedule where MT-3724 dosing is initially sequenced with GemOx dosing. OnNovember 4, 2020 , theU.S. Food and Drug Administration , or FDA, notified us that MT-3724 clinical studies have been placed on partial clinical hold following a fatality in one subject in the Phase II monotherapy study due to treatment-related CLS onOctober 20, 2020 . The fatality occurred in a diffuse large B-cell lymphoma (DLBCL) subject who had been treated with six prior lines of therapy including rapid progression through three lines of therapy in the six months prior to MT-3724 dosing (including most recently a first generation anti-CD19 CAR T-cell). The subject had transformed DLBCL from Waldenstrom's Macroglobulinemia and came onto the MT-3724 study with a CD4/CD8 T-cell ratio of 0.47. The subject did not have a radiographic assessment of response but an elevated LDH was thought by the principal investigator to represent disease progression. The subject initially had Grade 2 CLS following treatment with MT-3724, recovered after a dosing interruption, resumed dosing and then had CLS that was ultimately fatal. While Grade 1 and 2 CLS is an expected potential adverse reaction of MT-3724, this was the only subject in any MT-3724 study to date with CLS that was more severe than Grade 2. At such time, subjects already enrolled in MT-3724 clinical studies who were receiving clinical benefit were permitted to continue dosing but no new patients have been, or will be, enrolled in any MT-3724 study pending resolution of this matter. As part of our overall investigation into the partial clinical hold on MT-3724, we investigated MT-3724 product quality attributes. Based on our findings, we submitted a partial clinical hold response to the FDA inFebruary 2021 in which we proposed to implement new drug product manufacturing and release criteria. We have determined that the MT-3724 product that has been manufactured to date for use in the MT-3724 studies we plan to continue will not be consistent with the new criteria once it is implemented. Based upon our findings to date and after a thorough risk/benefit assessment, we have decided to discontinue dosing of subjects remaining on our Phase II combination study with MT-3724 and Revlimid® (lenalidomide). Additionally, following our decision to temporarily discontinue dosing for the remaining subject on our Phase II combination study with MT-3724 and chemotherapy (gemcitabine and oxaliplatin, or GemOx), the subject decided in collaboration with their physician to discontinue treatment. Although there have been no signs of capillary leak syndrome toxicity worse than grade 2 in either of these MT-3724 studies, our decision to discontinue dosing in these studies was taken out of an abundance of caution with the study subjects' health and safety in mind. Further, after a review of the current competitive landscape and following the last subject discontinuing treatment, we decided to discontinue our Phase II combination study with MT-3724 and chemotherapy (gemcitabine and oxaliplatin, or GemOx). We made this decision based upon our belief in the potential for more promising future combinations with our product candidates. Accordingly, there are currently no subjects being treated under any MT-3724 protocol. In connection with our other MT-3724 studies, we continue to work towards addressing the partial clinical hold and MT-3724 product lot information requests from the FDA and will then seek agreement from the FDA to remove the partial clinical hold. We submitted our partial clinical hold response to the FDA inFebruary 2021 . There can be no assurance with respect to our ability to remove the partial clinical hold, or the timing thereof. As we undertake these efforts, we are also actively evaluating whether to resume development of MT-3724 or discontinue the MT-3724 program. This decision will be made in the context of opportunities to advance the development of a next-generation CD20-targeted ETB or other program in addition to funding the development of our clinical stage next-generation ETB programs, including MT-5111, TAK-169, and MT-6402. Our trials and plans for our other ETB product candidates, including MT-5111, TAK-169, and MT-6402, which utilize next-generation ETB technology, are not affected by the partial clinical hold. Next-generation ETB scaffolds have been designed to reduce or eliminate the propensity for innate immunity, including CLS. To date, we have observed no cases of CLS (any grade) in human subjects who have been dosed with MT-5111. We cannot comment on clinical data from the TAK-169 Phase I study due to confidentiality obligations. We do not yet have clinical data with MT-6402 as the Phase I study of MT-6402 is expected to be initiated in the first half of 2021. We filed an IND for MT-5111, our ETB targeting HER2, inMarch 2019 and the IND was accepted inApril 2019 . We began dosing study subjects in a Phase I study of MT-5111 for the treatment of HER2-positive cancers in the fourth quarter of 2019. The ongoing Phase I study has two parts: Part 1 is dose escalation and Part 2 is dose expansion, which will begin when a maximum tolerated dose (MTD) or Recommended Phase II Dose (RP2D) is established in Part 1. We provided an update on this study inDecember 2020 . All of the following information on the Phase I study for MT-5111 was as of that update. 16 subjects, with a median of 4 prior lines of therapy and a median of 2 prior HER2-targeting regimens, have been treated with MT-5111; subjects with breast cancer received a median of 6 prior lines of therapy, 4 of which contained HER2- 92 -------------------------------------------------------------------------------- targeting agents (metastatic breast cancer n=6, metastatic biliary tract carcinoma n=6, metastatic pancreatic cancer n=2, and one each of metastatic colon adenocarcinoma and metastatic gastroesophageal junction adenocarcinoma). Five cohorts (0.5, 1.0, 2.0, 3.0, and 4.5 ?g/kg/week) have been successfully completed and the sixth cohort (6.75 ?g/kg) has been initiated. Pharmacokinetic (PK) data confirm the predicted human PK based on non-human primate studies. PK modeling has suggested that doses equal to or greater than 5.0 ?g/kg are likely needed for efficacy. Thus far, no dose limiting toxicities (DLTs) have been observed in any cohort and MT-5111 appears to be well tolerated, with no cardiotoxicity observed to date (cardiotoxicity is a known potential toxicity for HER2 targeted therapies). To date, we have observed no cases of CLS (any grade) in human subjects who have been dosed with MT-5111. As of ourDecember 2020 update, no cardiac AEs or abnormalities in cardiac biomarkers have been noted thus far. The most commonly reported AEs that may be causally related among the 4 dosing cohorts to date and for which source-verified data were available include the following: fatigue (n=3), AST increased (n=2) at 0.5 ?g/kg and 1 ?g/kg, and chills (n=2). These most commonly reported AEs were all of grade 1 or 2 severity. No cases of capillary leak syndrome (any grade) were observed. One subject with metastatic breast cancer in cohort 2 (1 µg/kg) remained on treatment for 10 cycles with stable disease; although she had unmeasurable disease by RECIST criteria, she had three sub-centimeter hepatic lesions that disappeared at the end of cycle 8 before she discontinued at cycle 10. This subject had received three prior HER-2 targeting regimens which initially included pertuzumab plus trastuzumab followed by trastuzumab and TDM1 as monotherapies. To date, 17 subjects have discontinued for disease progression and one subject is too early to evaluate. Cohort 6 (6.75 ?g/kg/dose) is open for enrollment with cohort 7 (10 ?g/kg) expected to open in the first half of 2021. The HER2- positive breast cancer expansion cohort is planned to begin in the first half of 2021 at a dose of 10 ?g/kg (anticipated to be a therapeutic dose level), pending adequate safety data. Dose escalation will continue to determine the recommended Phase II dose while the breast cancer expansion cohort collects efficacy and safety data. We are encouraged by the safety profile to date in these heavily pretreated subjects and believe the study has reached clinically active dose levels. We expect to present interim clinical results from the dose escalation portion of the Phase I study as ofDecember 2020 in the second quarter of 2021. MTEM expects to provide an update on additional data from both the dose escalation portion of the study and the HER2-positive breast cancer expansion cohort in the fourth quarter of 2021.Millennium Pharmaceuticals, Inc. , a wholly owned subsidiary of Takeda Pharmaceutical Company Ltd. ("Takeda") filed an IND for TAK-169, our jointly discovered ETB targeting CD38, inMay 2019 and the IND was accepted inJune 2019 . Phase I dosing for TAK-169 began in the first quarter of 2020, had been paused inMarch 2020 due to the COVID-19 pandemic and was re-initiated in the fourth quarter of 2020. We filed an IND for MT-6402, our ETB targeting PD-L1, inDecember 2020 and the IND was accepted inJanuary 2021 . A Phase 1 study of MT-6402 in PD-1/PD-L1 antibody relapsed/refractory patients is expected to be initiated in the first half of 2021. We anticipate filing an IND for our ETB targeting CTLA-4 in 2021. We are also conducting preclinical research on ETBs targeting SLAMF-7 and CD45. We have built up multiple core competencies around the creation and development of ETBs. We developed the ETB technology in-house and continue to make iterative improvements in the scaffold and identify new uses of the technology. We also developed the proprietary process for manufacturing ETBs under Current Good Manufacturing Process, or cGMP regulatory standards and continue to make improvements to its manufacturing processes.
We have conducted multiple cGMP manufacturing runs with our lead compound and believe this process is robust and could support commercial production with gross margins that are similar to those seen with antibodies.
Impact of COVID-19 InMarch 2020 , the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by theWorld Health Organization . It has impacted, and is continuing to impact, all aspects of society, including the operation of the healthcare system and other business and economic activity worldwide. The COVID-19 pandemic, and other similar outbreaks of contagious diseases, may adversely impact our business, financial condition, and results of operations. For example, we and the third-party clinical trial sites or investigators involved in our current and future clinical trials may experience significant interruptions or delays as a result of this pandemic, and these could impact the conduct of our clinical trials and our ability to complete them in a timely manner or at all, which in turn could delay and/or negatively impact the regulatory review and approval of our drug or biologic candidates. 93 -------------------------------------------------------------------------------- We are carefully and continually evaluating the potential individual patient risk associated with continuing to enroll in our existing clinical studies during the ongoing COVID-19 pandemic, in accordance with FDA and foreign regulatory authorities' recommendations for clinical trials. Our MT-5111 Phase 1 study remains open and able to treat enrolled subjects and screen new subjects. For our MT-3724 studies, which are currently on partial clinical hold as ordered by the FDA, we decided following the partial clinical hold going into effect, in collaboration with treating investigators and as permitted by the FDA, to allow existing subjects who were receiving clinical benefit to continue dosing, but no new patients were, or will be, enrolled in any MT- 3724 study pending resolution of the partial clinical hold. These decisions were predicated on the treating investigator determining that the potential benefit to the patient of investigational therapy outweighs the potential risk of contracting COVID-19 as the subjects enrolled in our trials had relapsed or refractory incurable malignancies with few or no standard-of-care therapeutic options and limited life expectancy. However, more recently and following the results of an investigation into MT-3724 product quality attributes as well as a thorough risk/benefit assessment, we decided to discontinue dosing of subjects remaining on our Phase II combination study with MT-3724 and Revlimid® (lenalidomide). Additionally, following our decision to temporarily discontinue dosing for the remaining subject on our Phase II combination study with MT-3724 and chemotherapy (gemcitabine and oxaliplatin, or GemOx), the subject decided in collaboration with their physician to discontinue treatment. Subsequently, after a review of the current competitive landscape and following the last subject discontinuing treatment, we decided to discontinue our Phase II combination study with MT-3724 and chemotherapy GemOx. We made this decision based upon our belief in the potential for more promising future combinations with our product candidates. Accordingly, there are currently no subjects being treated under any MT-3724 protocol. COVID-19 led to a significant slowdown in the pace of site initiations and patient enrollment into our clinical trials. The degree of disruption was, and continues to be, variable by geography and individual clinical site, with some sites closed to new enrollment, some screening and enrolling only subjects with an urgent need for treatment, and some attempting to operate as usual. The COVID-19 pandemic resulted in a significant slowdown in the pace of site initiations and patient enrollment across our MT-3724 Phase II programs prior to the partial clinical hold going into effect. As a CD20-targeting agent for the treatment of hematological malignancy, MT-3724 may impair the ability to generate humoral immunity to coronavirus infection. To date, screening and enrollment for the MT-5111 Phase I study has been less adversely affected than the MT-3724 studies were prior to the partial clinical hold. To date, we have been able to continue to work at our cGMP manufacturing facility and laboratories without significant interruption from COVID-19. As a result, manufacturing of product supply for clinical trials and research activities to support advancement of our preclinical pipeline (including partnered programs) have not been adversely affected by COVID-19 to date. The extent to which the COVID-19 pandemic may impact our business, financial condition and results of operations will depend on the manner in which this pandemic continues to evolve and future developments in response thereto, which are highly uncertain and cannot be predicted with confidence and which may include, among other things, the ultimate severity and duration of this pandemic? governmental, business or other actions that have been, or will be, taken in response to this pandemic, including restrictions on travel and mobility, business closures and imposition of social distancing measures? impacts of the pandemic on the vendors or distribution channels in our or our partners' supply chain and ability to continue to manufacture our investigational products? impacts of the pandemic on the conduct of our clinical trials, including with respect to enrollment rates, availability of investigators and clinical trial sites or monitoring of data? and impacts of the pandemic on the regulatory agencies with which we interact in the development, review, approval and commercialization of our therapeutic products.
Collaboration Agreements
Takeda Collaboration and Individual Project Agreements
InOctober 2016 , we entered into a collaboration and option agreement (the "Takeda Collaboration Agreement") withMillennium Pharmaceuticals, Inc. , a wholly owned subsidiary of Takeda Pharmaceutical Company Ltd. ("Takeda") to discover and develop CD38-targeting ETBs, which includes MT-4019, for evaluation by Takeda. Under the terms of the Takeda Collaboration Agreement, we are responsible for providing to Takeda (i) new ETBs generated using Takeda's proprietary antibodies targeting CD38 and (ii) MT-4019 for in vitro and in vivo pharmacological and anti-tumor efficacy evaluations. We granted Takeda an exclusive option to negotiate and obtain an exclusive worldwide license to develop and commercialize any ETB that might result from this collaboration, including MT-4019. We were entitled to receive up to$2.0 million in technology access fees and cost reimbursement associated with our performance and completion of our obligations under the Takeda Collaboration Agreement. To date, we have received$2.0 million under this Takeda Collaboration Agreement. 94 -------------------------------------------------------------------------------- In connection with the Takeda Collaboration Agreement, we entered into an Individual Project Agreement (the "Takeda Individual Project Agreement") with Takeda inJune 2018 that was amended and restated inJuly 2018 . Under the Takeda Individual Project Agreement, we are responsible to perform certain research and development services relating to Chemistry, Manufacturing, and Controls ("CMC") work for three potential lead ETBs targeting CD38. In consideration of these services, we were entitled to receive up to$2.2 million in compensation. To date, we have received$2.2 million under theTakeda Individual Project Agreement.
OnSeptember 18, 2018 , we entered into a development collaboration and exclusive license agreement (the "Takeda Development and License Agreement") with Takeda for the development and commercialization of products incorporating or comprised of one or more CD38 SLT-A fusion proteins ("Licensed Products") for the treatment of patients with diseases such as multiple myeloma. Pursuant to theTakeda Development and License Agreement, we will initially co-develop with Takeda one or more of the Licensed Products up to and including Phase Ia clinical trials, with us having an option to continue to co-develop the Licensed Products following Phase Ia clinical trials. Pursuant to the terms of theTakeda Development and License Agreement, Takeda will be responsible for all regulatory activities and commercialization of the Licensed Products. We have granted Takeda specified intellectual property licenses to enable Takeda to perform its obligations and exercise its rights under theTakeda Development and License Agreement, including exclusive license grants to enable Takeda to conduct development, manufacturing, and commercialization activities pursuant to the terms of theTakeda Development and License Agreement.The Takeda Development and License Agreement has a total transaction price of$29.8 million , consisting of (1) the$30.0 million upfront payment, (2) a$10.0 million development milestone payment which was received in the first quarter of 2020, (3) minus$10.2 million in expected co-share payments payable to Takeda duringEarly-Stage Development . InJuly 2019 , we exercised our co-development option and the agreed upon collaboration budget was increased to cover additional research and development activities whereby both parties will continue to cost share. If we continue our option to co-develop, we will be eligible to receive up to an additional$307.5 million in milestone payments upon the achievement of certain development and regulatory milestone events and up to an additional$325.0 million in milestone payments upon the achievement of certain sales milestone events. If we do not continue to exercise our co-development option, we may receive up to an additional$162.5 million in milestone payments upon the achievement of certain development and regulatory milestone events and up to an additional$175.0 million in milestone payments upon the achievement of certain sales milestone events. We will also be entitled to receive tiered royalties, subject to certain reductions, as percentages of annual aggregate net sales, if any, of Licensed Products. The royalty percentages would range from low double-digits to low twenties if we continue to exercise our option to co-develop, and from high-single digits to low teens if we do not continue to exercise our option to co-develop. InJuly 2019 , we exercised our co-development option and the agreed upon collaboration budget was increased to cover additional research and development activities whereby both parties will continue to cost share. The parties will share in co-development costs in accordance with the terms of theTakeda Development and License Agreement, and Takeda will be responsible for all costs incurred commercializing the Licensed Products. Unless earlier terminated, theTakeda Development and License Agreement will expire upon the expiration of the last-to-expire co-development royalty term (or royalty term, if applicable) for a Licensed Product. Takeda has the right to terminate the License Agreement at any time upon prior written notice to us. We, or Takeda may, subject to specified cure periods, terminate theTakeda Development and License Agreement in the event of the other party's uncured material breach, and either party may terminate theTakeda Development and License Agreement under specified circumstances relating to the other party's insolvency.
Takeda Multi-Target Agreement
InJune 2017 , we entered into a Multi-Target Collaboration and License Agreement with Takeda ("Takeda Multi-Target Agreement") in which we agreed to collaborate with Takeda to identify and generate ETBs, against two targets designated by Takeda. Takeda designated certain targets of interest as the focus of the research. Each party granted to the other nonexclusive rights in its intellectual property for purposes of the conduct of the research, and we agreed to work exclusively with Takeda with respect to the designated targets. Under the Takeda Multi-Target Agreement, Takeda has an option during an option period to obtain an exclusive license under our intellectual property to develop, manufacture, commercialize and otherwise exploit ETBs against the designated targets. The option period for each target ends three months after the completion of the evaluation of such designated target. 95 -------------------------------------------------------------------------------- We received an upfront fee of$1.0 million and an additional$2.0 million following the designation of each of the two targets inDecember 2017 . As ofDecember 31, 2020 , we have received$5.0 million from Takeda pursuant to the Takeda Multi-Target Agreement. We may receive up to$30.0 million in aggregate through the exercise of the option to license ETBs. Additionally, we might also be entitled to receive clinical development milestone payments of up to approximately$397.0 million , for achievement of development milestones and regulatory approval of collaboration products under the Takeda Multi-Target Agreement. We might also be entitled to receive commercial milestone payments of up to$150.0 million , for achievement of pre-specified sales milestones related to net sales of all collaboration products under the Takeda Multi-Target Agreement. We are also entitled to tiered royalty payments of a mid-single to low-double digit percentage of net sales of any licensed ETBs, subject to certain reductions. Finally, we are entitled to receive up to$10.0 million in certain contingency fees. The Takeda Multi-Target Agreement will expire on the expiration of the option period (within three months after the completion of the evaluation of each designated target) for the designated targets if Takeda does not exercise its options, or, following exercise of the option, on the later of the expiration of patent rights claiming the licensed ETB or ten years from first commercial sale of a licensed ETB. The Takeda Multi-Target Agreement might be sooner terminated by Takeda for convenience or upon a change of control in our ownership, or by either party for an uncured material breach of the agreement.
Vertex Pharmaceuticals
OnNovember 18, 2019 , we entered into a Master Collaboration Agreement ("Vertex Collaboration Agreement") with Vertex Pharmaceuticals Incorporated ("Vertex"), in which we and Vertex agreed to enter into a strategic research collaboration to leverage our ETB technology platform to discover and develop novel targeted biologic therapies for applications outside of oncology. Pursuant to the Vertex Collaboration Agreement, Vertex paid us an upfront payment of$38.0 million , consisting of$23.0 million in cash and a$15.0 million equity investment pursuant to a Share Purchase Agreement (the "SPA"), described further below. In addition to the upfront payments, we might also receive an additional$22.0 million through the exercise of the options to license ETB products or to add an additional target. We shall provide, and Vertex will reimburse us for, certain mutually agreed manufacturing technology transfer activities. We might, for each target under the Vertex Collaboration Agreement, receive up to an additional$180.0 million in milestone payments upon the achievement of certain development and regulatory milestone events and up to an additional$70.0 million in milestone payments upon the achievement of certain sales milestone events. We will also be entitled to receive, subject to certain reductions, tiered mid-single digit royalties as percentages of calendar year net sales, if any, on any licensed product. We will be responsible for conducting the research activities through the designation, if any, of one or more development candidates. Upon the exercise by Vertex of its option for a development candidate, Vertex will be responsible for all development, manufacturing, regulatory and commercialization activities with respect to that development candidate. In connection with the Vertex Collaboration Agreement, we and Vertex entered into the SPA pursuant to which Vertex purchased 1,666,666 shares of our common stock, par value$0.001 per share, at a price per share of$9.00 . The issuance of these shares was pursuant to a private placement exemption from registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D thereunder. For more information concerning our collaboration agreements, refer to Note 3, "Research and Development Agreements" to our audited consolidated financial statements for the year endedDecember 31, 2020 , included in this Annual Report on Form 10-K.
Bristol Myers Squibb Company
OnFebruary 10, 2021 , we entered into a Collaboration Agreement ("BMS Collaboration Agreement") with Bristol Myers Squibb Company ("Bristol Myers Squibb"), in which we and Bristol Myers Squibb agreed to enter into a strategic research collaboration to leverage our ETB technology platform to discover and develop novel products containing ETBs directed to multiple targets. Pursuant to the BMS Collaboration Agreement, Bristol Myers Squibb paid us an upfront payment of$70.0 million . We might receive near term and development and regulatory milestone payments of up to an additional$874.5 million and will be eligible to receive up to an additional$450.0 million in milestone payments upon the achievement of certain sales milestone events. We will also be entitled to receive, subject to certain reductions, tiered royalties ranging from mid-single digits up to mid-teens as percentages of calendar year net sales, if any, on any licensed product. 96
-------------------------------------------------------------------------------- We will be responsible for conducting the research activities through the designation, if any, of one or more development candidates. Upon the exercise of its option for a development candidate, Bristol Myers Squibb will be responsible for all development, manufacturing, regulatory and commercialization activities with respect to that development candidate, subject to the terms and conditions of the BMS Collaboration Agreement. For more information concerning this collaboration agreement, refer to Note 16, "Subsequent Events", and for more information on our collaboration agreements generally, refer to Note 3, "Research and Development Agreements" to our audited consolidated financial statements for the year endedDecember 31, 2020 , included in this Annual Report on Form 10-K.
Grant Agreements
CPRIT Grant Contract
InSeptember 2018 , we entered into a Cancer ResearchGrant Contract (the "CD38 CPRIT Agreement") with theCancer Prevention and Research Institute of Texas ("CPRIT"), which was extended inOctober 2020 , in connection with a grant of approximately$15.2 million awarded by CPRIT to us inNovember 2016 to fund research of a cancer therapy involving an ETB that is targeting CD38 (the "Award"). Pursuant to the CD38 CPRIT Agreement, we might also use such funds to develop a replacement CD38 targeting ETB, with or without a partner. The Award is contingent upon funds being available during the term of the CD38 CPRIT Agreement and subject to CPRIT's ability to perform its obligations under the CD38 CPRIT Agreement as well as our progress towards achievement of specified milestones, among other contractual requirements.
In 2011, Private Molecular was awarded a
Subject to the terms of the CD38 CPRIT Agreement, full ownership of any CPRIT funded technology and CPRIT funded intellectual property rights developed pursuant to the CD38 CPRIT Agreement will be retained by us, our Collaborators (as defined in the CD38 CPRIT Agreement) and, to the extent applicable, any participating third party (the "Project Results"). With respect to any Project Results, we agreed to grant to CPRIT a nonexclusive, irrevocable, royalty-free, perpetual, worldwide license, solely for academic, research and other non-commercial purposes, under the Project Results and to exploit any necessary additional intellectual property rights, subject to certain exclusions. We will pay to CPRIT, during the term of the CD38 CPRIT Agreement, certain payments equal to a percentage of revenue ranging from the low- to mid-single digits. These payments will continue up to and until CPRIT receives an aggregate amount of 400% of the sum of all monies paid to us by CPRIT under the CD38 CPRIT Agreement. If we are required to obtain a license from a third party to sell any such product, the revenue sharing percentages might be reduced. In addition, once we pay CPRIT 400% of the monies we have received under the CD38 CPRIT Agreement, we will continue to pay CPRIT a revenue-sharing percentage of 0.5%. The CD38 CPRIT Agreement will terminate, with certain obligations extending beyond termination, on the earlier of (a)May 30, 2021 or (b) the occurrence of any of the following events: (i) by mutual written consent of the parties, (ii) by CPRIT for an Event of Default (as defined in the CD38 CPRIT Agreement) by us, (iii) by CPRIT if allocated funds should become legally unavailable during the term of the CD38 CPRIT Agreement and CPRIT is unable to obtain additional funds or (iv) by us for convenience. CPRIT might approve a no cost extension for the CD38 CPRIT Agreement for a period not to exceed six months after the termination date if additional time is required to ensure adequate completion of the approved project, subject to the terms and conditions of the CD38 CPRIT Agreement. For more information about our grant agreements, please see Note 3, "Research and Development Agreements" to our audited consolidated financial statements for the year endedDecember 31, 2020 , included in this Annual Report on Form 10-K.
Financial Operations Overview
Revenue
To date, we have not generated any revenue from product sales to customers. We do not expect to receive any revenue from any ETB candidates that we develop, including MT-3724, MT-5111, TAK-169, MT-6402 and other pre-clinical ETB candidates, until we obtain regulatory approval and commercialize such drugs. Our revenue consists principally of collaboration revenue and grant revenue.
Research and Development revenue primarily relates to our collaboration agreements with Takeda and Vertex which are accounted for using the percentage-of-completion cost-to-cost method.
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Grant revenue relates to our CPRIT grants for a CD20 ETB (MT-3724) and a CD38
ETB (TAK-169). CPRIT grant funds for MT-3724 are provided to us in advance as
conditional cost reimbursement where revenue is recognized as allowable costs
are incurred. Amounts collected in excess of revenue recognized are recorded as
deferred revenue. CPRIT grant funds for TAK-169 are provided to us in arrears as
cost reimbursement where revenue is recognized as allowable costs are incurred.
Revenue recognized in excess of amounts collected are recorded as unbilled
revenue.
For more information about our revenue recognition policy, please see Note 1,
"Organization and Summary of Significant Accounting Policies" to our audited
consolidated financial statements for the year ended December 31, 2020 , included
in this Annual Report on Form 10-K.
Research and Development Expenses
Research and development expenses consist principally of:
• salaries for research and development staff and related expenses,
including stock-based compensation expenses;
• costs for current good manufacturing practices, or cGMP, manufacturing of
drug substances and drug products by contract manufacturers;
• fees and other costs paid to clinical trials sites and clinical research
organizations, ("CROs"), in connection with the performance of clinical
trials and preclinical testing;
• costs for consultants and contract research;
• costs of laboratory supplies and small equipment, including maintenance; and
• depreciation of long-lived assets.
Our research and development expenses may vary substantially from period to period based on the timing of our research and development activities, including the initiation and enrollment of subjects in clinical trials and manufacture of drug or biologic materials for clinical trials. We expect research and development expenses to increase as we advance the clinical development of MT-3724, MT-5111, TAK-169 and/or MT-6402 and further advance the research and development of our pre-clinical ETB candidates, and other earlier stage drugs or biologics. The successful development of our ETB candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing and estimated costs of the efforts that will be necessary to complete the development of, or the period, if any, in which material net cash inflows may commence from any of our ETB candidates. This is due to numerous risks and uncertainties associated with developing drugs, including the uncertainty of:
• the scope, rate of progress and expense of our research and development
activities;
• clinical trials and early-stage results;
• the terms and timing of regulatory approvals; and
• the ability to market, commercialize and achieve market acceptance for
MT-3724, MT-5111, TAK-169, MT-6402 or any other ETB candidate that we or
our collaboration partners may develop in the future.
Any of these variables with respect to the development of MT-3724, co-development of TAK-169, or any other ETB candidate that we may develop could result in a significant change in the costs and timing associated with the development of MT-3724, co-development of TAK-169, or such other ETB candidates. For example, if the FDA theEuropean Medicines Agency ("EMA") or other regulatory authority were to require us to conduct pre-clinical and clinical studies beyond those which we currently anticipate will be required for the completion of clinical development or if we experience significant delays in enrollment in any clinical trials, we could be required to expend significant additional financial resources and time on the completion of our clinical development programs.
General and Administrative Expenses
Our general and administrative expenses consist principally of:
• salaries for employees other than research and development staff,
including stock-based compensation expenses;
• professional fees for auditors and other consulting expenses related to
general and administrative activities;
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• professional fees for legal services related to the protection and
maintenance of our intellectual property and regulatory compliance;
• cost of facilities, communication and office expenses;
• information technology services; and
• depreciation of long-lived assets.
We expect that our general and administrative costs will increase in the future
as our business expands and we increase our headcount to support the expected
growth in our operating activities. Additionally, we expect these expenses will
also increase in the future as we incur additional costs associated with
operating as a public company. These increases will likely include additional
legal fees, accounting and audit fees, management board and supervisory board
liability insurance premiums and costs related to investor relations. In
addition, we expect to grant stock-based compensation awards to key management
personnel and other employees.
Other Income (Expense)
Other income (expense) mainly includes interest income earned on our cash and marketable securities balances held, and interest expense on our outstanding borrowings.
Change in fair value of warrant liability
Change in fair value of warrant liability relates to the change in fair value of our warrants categorized as liabilities.
Results of Operations
Revenues
The table below summarizes our revenues as follows (in thousands):
Years ended December 31,
2020 2019 Change ($) Change (%)
Research and development revenue,
related party $ 6,567 $ 19,499 $ (12,932 ) -66 %
Research and development revenue, other 9,068 - 9,068 100 %
Grant revenue 3,210 2,771 439 16 %
Total revenue $ 18,845 $ 22,270 $ (3,425 ) -15 %
Research and Development Revenue - from related party
The decrease in research and development revenue - from related parties for the year endedDecember 31, 2020 was primarily due to research and development revenues that were recognized from the services provided under theTakeda Development and License Agreement (TAK-169) which was entered into inSeptember 2018 .
For more information about our collaboration agreements, please see Note 3,
"Research and Development Agreements" to our audited consolidated financial
statements for the year ended
Research and Development Revenue - other
The increase in research and development revenue - other is a result of recognizing revenue associated with the Vertex Collaboration Agreement. For more information about our collaboration agreements, please see Note 3, "Research and Development Agreements" to our audited consolidated financial statements for the year endedDecember 31, 2020 , included in this Annual Report on Form 10-K. 99
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Grant Revenue
The increase in grant revenue for the year endedDecember 31, 2020 was primarily due to the Company incurring additional expenses for the CD38 CPRIT Agreement grant during the year. Operating Expenses The table below summarizes our operating expenses as follows (in thousands): Years endedDecember 31, 2020 2019
Change ($) Change (%)
Research and development expenses
84 %
General and administrative expenses 26,722 20,077
6,645 33 % Loss on impairment of in-process research and development - 22,123 (22,123 ) -100 % Total operating expenses$ 119,687 $ 92,719 $ 26,968 29 %
Research and Development Expenses
The table below summarizes our research and development expenses as follows (in
thousands):
Years ended December 31,
2020 2019 Change ($) Change (%)
Program costs $ 45,367 $ 25,026 $ 20,341 81 %
Employee compensation 33,640 15,998 17,642 110 %
Laboratory costs 4,397 3,486 911 26 %Other research and development costs 9,561 6,009
3,552 59 %
Total research and development expenses
84 %
Research and development ("R&D") expenses increased $42.4 million during the
year ended December 31, 2020 compared to the year ended December 31, 2019
primarily due to increase in program costs and headcount related to the
discovery and development of our ETBs. Additionally, we are party to multiple
collaboration agreements with a related party, which can also contribute to
increased research and development expense.
Program costs increased $20.3 million during the year ended December 31, 2020
compared to the year ended December 31, 2019 . The programs driving the increase
were $5.5 million for TAK-169, $5.5 million for Other Projects, $5.3 million for
MT-3724, $2.5 million for PD-L1, $1.3 million for HER2 and $0.3 million for
Evofosfamide.
Headcount increased in R&D by 55% from December 31, 2019 to December 31, 2020 in
support of increased clinical trials and ramp up of cGMP manufacturing
facilities and support staff. This staffing increase resulted in an increase in
employee compensation costs of $17.6 million for the year ended December 31,
2020 compared to the year ended December 31, 2019 , respectively.
Laboratory costs increased by $0.9 million during the year ended December 31,
2020 compared to the year ended December 31, 2019 , which is due to the expansion
of lab facilities. The increase in expense reflects the costs of outfitting,
supplying and maintaining these facilities.
Other R&D costs increased by $3.6 million during the year ended December 31,
2020 compared to the year ended December 31, 2019 . The increase was driven by
third party consulting and recruiting fees.
General and Administrative Expenses
General and administrative expenses increased$6.6 million during the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The main driver of this increase being payroll and related costs due to increased headcount. 100
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Loss on impairment of In-process research and development related to legacy program, Evofosfamide
The loss on impairment of long-lived assets relates to the impairment of in-process research and development relating to the Company's legacy program, Evofosfamide, which was acquired fromThreshold Pharmaceuticals in 2017. The loss on impairment of long-lived assets is primarily due to the decrease in future projected cashflows of the in-process research and development relating to this program. The Company obtained a fair value estimate, from a third-party specialist as ofAugust 1, 2019 , and determined the asset was impaired and the value was not recoverable. The Company recognized impairment of$22.1 million during the year endedDecember 31, 2019 and it was sold during the year endedDecember 31, 2020 . See Note 15, "In-Process Research and Development" for further details on the asset.
Nonoperating activities
The table below summarizes our nonoperating activities as follows (in
thousands):
Years ended December 31,
2020 2019 Change ($) Change (%)
Interest and other income, net $ 1,028 $ 2,323 $ (1,295 ) -56 %
Interest expense (1,705 ) (1,298 ) (407 ) 31 %
Loss on extinguishment of debt (1,237 ) - (1,237 ) 100 %
Loss on disposal of assets (2,155 ) - (2,155 ) 100 %
Change in fair value of warrant liabilities - 3 (3 ) -100 %
Total nonoperating activities $ (4,069 ) $ 1,028 $ (5,097 ) -496 %
Interest and Other Income and Interest Expense
The decrease in interest and other income for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 was primarily due to lower interest related to our marketable securities. The increase in interest expense for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 was primarily due to interest paid for our debt holdings, which mature inJune 2024 .
Debt Extinguishment
In connection with the repayment of the Perceptive Credit Facility, the Company recognized a total loss on extinguishment of debt in the amount of$1.2 million for the year endedDecember 31, 2020 .
Asset Loss
In connection with theDecember 2020 sale of Evofosfamide, the Company recorded a loss on assets held for sale of$2.0 million which is the difference between the carrying value and the consideration received. Additionally, we disposed of fixed assets of$0.2 million .
Liquidity and Capital Resources
Sources of Funds
We have devoted substantially all of our resources to developing our ETB
candidates and platform technology, building our intellectual property
portfolio, developing our supply chain, conducting business planning, raising
capital and providing for general and administrative support for these
operations. We plan to increase our research and development expenses for the
foreseeable future as we or our collaboration partners continue to advance
MT-3724, MT-5111, TAK-169, MT-6402 and our earlier-stage pre-clinical programs.
At this time, due to the inherently unpredictable nature of preclinical and
clinical development and given the early stage of our programs and drug or
biologic candidates, we cannot reasonably estimate the costs we will incur and
the timelines that will be required to complete development, obtain marketing
approval and commercialize our drugs or biologics, if and when approved. For the
same reasons, we are also unable to predict when, if ever, we will generate
revenue from product sales or whether, or when, if ever, we may achieve
profitability. Clinical and preclinical development timelines, the probability
of success, and development costs can differ materially from expectations.
In addition, we cannot forecast which drugs or biologics, if and when approved,
may be subject to future collaborations, when such arrangements will be secured,
if at all, and to what degree such arrangements would affect our development
plans and capital requirements.
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We expect to incur substantial additional losses in the future as we expand our
research and development cost-sharing activities with our collaboration
partners. We believe such investment is strategically aligned with increasing
the value of our technology. For the years ended December 31, 2020 and
December 31, 2019 , we incurred net losses of $104.9 million and $69.4 million ,
respectively. At December 31, 2020 , we had an accumulated deficit of $269.0
million .
To date, we have financed our operations through public offerings of common and
preferred stock, private placements of equity securities, a reverse merger, and
upfront and milestone payments received from our collaboration agreements, as
well as funding from governmental bodies and bank and bridge loans.
In May 2020 , we entered into a debt financing facility for up to $45.0 million
with K2 HealthVentures, a healthcare-focused specialty finance company (the "K2
Loan and Security Agreement"). The K2 Loan and Security Agreement consists of
three tranches, and we received the first tranche of $15.0 million upon closing,
a portion of which was used to repay the remaining Perceptive Credit Facility.
Two subsequent tranches totaling up to $30.0 million will become available at
our option between March 1, 2021 and June 30, 2021 , upon the achievement of
certain clinical milestones with respect to the second tranche and, subject to
lender consent and certain additional conditions prior to December 31, 2021 with
respect to the third tranche. The principal accrues interest at an annual rate
of equal to the greater of 8.45% or the sum of the Prime Rate plus 5.2% and
commenced on July 1, 2020 . Payments are interest only until July 1, 2022 ,
provided, however, that if no event of default has occurred and the second
tranche has been fully funded payments will be interest only until July 1, 2023 .
In July 2020 , we raised gross proceeds of approximately $50.0 million through
at-the-market sales ("ATM") of our common stock pursuant to our ATM facility. We
sold approximately 3.6 million shares of our common stock at a purchase price of
$12.00 per share and 0.5 million shares at a purchase price of $12.70 , in each
case the market price at the time of sale. These sales constituted the full
available dollar amount under our current ATM facility and, with such
completion, our current ATM facility has been terminated.
On August 7, 2020 , we filed a universal shelf registration statement on Form S-3
(Registration No. 333-242078) with the SEC , which was declared effective on
August 17, 2020 . In August 2020 , we entered into a sales agreement (the "Sales
Agreement') with Cowen and Company, LLC ("Cowen"), pursuant to which we may
offer and sell to or through Cowen acting as agent and/or principal shares of
our common stock having an aggregate offering price of up to $100,000,000 . Under
the Sales Agreement, Cowen may sell the shares by any method permitted by law
and deemed to be an "at the market" offering as defined in Rule 415 of the
Securities Act. To date, we have not sold any shares under the Sales Agreement.
In February 2021 , we completed a public offering of 6,000,000 shares of common
stock at an offering price of $12.65 per share. We received net proceeds of
approximately $71.0 million , after deducting underwriting discounts, commissions
and estimated offering expenses payable by us.
We expect to incur significant expenses and operating losses for the foreseeable
future as we advance our lead ETB candidates through clinical trials, progress
our pipeline ETB candidates from discovery through pre-clinical development, and
seek regulatory approval and pursue commercialization of our ETB candidates. In
addition, if we obtain regulatory approval for any of our ETB candidates, we
expect to incur significant commercialization expenses related to product
manufacturing, marketing, sales and distribution. In addition, we may incur
expenses in connection with the in-license or acquisition of additional
technology to augment or enable development of future ETB candidates.
Furthermore, we expect to incur additional costs associated with operating as a
public company, including significant legal, accounting, investor relations and
other expenses that we did not incur as a private company.
As a result, we will need additional financing to support our continuing
operations. Until such time as we can generate significant revenue from product
sales, if ever, we expect to finance our operations through a combination of
public or private equity and debt financings or other sources, which may include
collaborations with third parties. Adequate additional financing may not be
available to us on acceptable terms, or at all. Our inability to raise capital
as and when needed would have a negative impact on our financial condition and
our ability to pursue our business strategy. We will need to generate
significant revenue to achieve profitability, and we may never do so.
At December 31, 2020 and December 31, 2019 , we had cash, cash equivalents and
marketable securities of $93.9 million and $126.6 million , respectively. Based
on such cash and cash equivalents as of December 31, 2020 , and with the addition
of the $70.0 million upfront payment in connection with the Bristol Myers Squibb
collaboration received in the first quarter of 2021 and the proceeds of the
public offering completed in February 2021 , we expect to able to fund our
operating expenses and capital expenditure requirements into the second half of
2023. We have based this estimate on assumptions that may prove to be wrong, and
we may use our available capital resources sooner than we currently expect.
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Cash Flows
Comparison of Years Ended
The table below summarizes our cash flows for the years endedDecember 31, 2020 and 2019: Years ended December 31, 2020 2019 Change
($) Change (%)
Net cash used in operating activities
232 %
Net cash used in investing activities (34,663 ) (39,724 ) 5,061
-13 %
Net cash provided by financing
activities 58,895 65,698 (6,803 ) -10 %
Net increase (decrease) in cash, cash
equivalents and restricted cash
The increase in net cash used in operating activities for the year ended
The decrease in net cash used in investing activities for the year ended
The decrease in net cash provided by financing activities was primarily due to
the repayment of the Perceptive Credit Facility which was partially offset by
proceeds from the K2 Loan and Security Agreement and proceeds from the
at-the-market sales ("ATM") of our common stock during the year ended
December 31, 2020 .
Operating and Capital Expenditure Requirements
We have not achieved profitability since our inception and had an accumulated deficit of$269.0 million atDecember 31, 2020 . We expect to continue to incur significant operating losses for the foreseeable future as we continue our research and development efforts and seek to obtain regulatory approval and commercialization of our ETB candidates. We expect our expenses to increase substantially in connection with our ongoing development activities related to MT-3724, MT-5111 and MT-6402, co-development activities related to TAK-169, collaborations with Vertex and Bristol Myers Squibb, our pre-clinical programs, and expanding our operating capabilities. In addition, we expect to incur additional costs associated with operating as a public company. We anticipate that our expenses will increase substantially if and as we:
• support the Phase II clinical trials of MT-3724, our lead ETB candidate
and/or the development of other CD20-targeted molecules;
• co-develop TAK-169 with Takeda;
• support the ongoing Phase I study of MT-5111;
• support the PD-L1 program including the upcoming Phase I study for MT-6402;
• continue the research and development of our other ETB candidates, such as
other CD20 targeted molecules, including completing pre-clinical studies
and commencing clinical trials;
• research activities through the designation of the development
candidate(s) with Vertex;
• research activities through the designation of the development
candidate(s) with Bristol Myers Squibb;
• seek to enhance our technology platform using our antigen-seeding
technology approach to immuno-oncology;
• seek regulatory approvals for any ETB candidates that successfully
complete clinical trials;
• potentially establish a sales, marketing and distribution infrastructure
and scale up manufacturing capabilities to commercialize any drugs for
which we may obtain regulatory approval;
• add clinical, scientific, operational, financial and management
information systems and personnel, including personnel to support our
product development and potential future commercialization efforts and to
support our increased operations;
• experience any delays or encounter any issues resulting from any of the
above, including but not limited to failed studies, complex results,
safety issues or other regulatory challenges;
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• service long-term debt; and
• complete the expansion of the Company's research and development spaces.
Payments on the Perceptive Credit Facility commencedApril 2018 and were interest only, paid quarterly for the first 24 months. Upon the second anniversary of the closing date of the Perceptive Credit Facility, principal payments of$0.2 million were due each calendar quarter. The Perceptive Credit Facility was paid off inMay 2020 , using proceeds from the K2 Loan and Security Agreement. See Note 8, "Borrowing Arrangements" to our audited consolidated financial statements for the year endedDecember 31, 2020 , included in this Annual Report on Form 10-K for additional information regarding the Perceptive Credit Facility and the K2 Loan and Security Agreement. Because of the numerous risks and uncertainties associated with the development of MT-3724, co-development of TAK-169, collaborations with Vertex and Bristol Myers Squibb and our other pre-clinical programs, and because the extent to which we may enter into collaborations with third parties for development of these ETB candidates is unknown, we are unable to estimate the amount of increased capital outlays and operating expenses associated with completing the research and development of our ETB candidates. Our future capital requirements for MT-3724, MT-5111, TAK-169, MT-6402 or our other pre-clinical programs will depend on many factors, including:
• the progress, timing and completion of pre-clinical testing and clinical
trials for our current or any future ETB candidates;
• the number of potential new ETB candidates we identify and decide to develop;
• the costs involved in growing our organization to the size needed to allow
for the research, development and potential commercialization of our
current or any future ETB candidates;
• the costs involved in filing patent applications and maintaining and
enforcing patents or defending against claims or infringements raised by
third parties;
• the time and costs involved in obtaining regulatory approval for our ETB
candidates and any delays we may encounter as a result of evolving
regulatory requirements or adverse results with respect to any of these
ETB candidates;
• any licensing or milestone fees we might have to pay during future
development of our current or any future ETB candidates;
• selling and marketing activities undertaken in connection with the
anticipated commercialization of our current or any future ETB candidates
and costs involved in the creation of an effective sales and marketing
organization; and
• the amount of revenues, if any, we may derive either directly or in the
form of royalty payments from future sales of our ETB candidates, if
approved.
Identifying potential ETB candidates and conducting pre-clinical testing and
clinical trials is a time-consuming, expensive and uncertain process that takes
years to complete, and we may never generate the necessary data or results
required to obtain marketing approval and achieve product sales. In addition,
our ETB candidates, if approved, may not achieve commercial success. Our
commercial revenues, if any, will be derived from sales of drugs or biologics
that we do not expect to be commercially available for many years, if ever.
Accordingly, we will need to obtain substantial additional funds to achieve our
business objectives.
Adequate additional funds may not be available to us on acceptable terms, or at
all. To the extent that we raise additional capital through the sale of equity
or convertible debt securities, stockholders' ownership interest will be
diluted, and the terms of these securities may include liquidation or other
preferences that adversely affect their rights as stockholders. Additional debt
financing and equity financing, if available, may involve agreements that
include covenants limiting or restricting our ability to take specific actions,
such as incurring additional debt, making capital expenditures or declaring
dividends and may require the issuance of warrants, which could potentially
dilute stockholders' ownership interest.
If we raise additional funds through collaborations, governmental grants,
strategic alliances or licensing arrangements with third parties, we may have to
relinquish valuable rights to our technologies, future revenue streams, research
programs or ETB candidates or 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 product development programs or any future commercialization efforts or
grant rights to develop and market ETB candidates that we would otherwise prefer
to develop and market ourselves.
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Critical Accounting Policies and Use of Estimates
The 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. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses for the periods presented. Management makes estimates and exercises judgment in income taxes, revenue recognition, research and development expenses, stock-based compensation and preferred stock. Judgments must also be made about the disclosure of contingent liabilities. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We periodically evaluate our estimates and judgments, including those described in greater detail below, in light of changes in circumstances, facts and experience. We have identified the following accounting policies that we believe require application of management's most subjective judgments, often requiring the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Our actual results could differ from these estimates and such differences could be material.
Revenue Recognition
Our revenue has consisted principally of research and development revenue from collaboration partners and grant revenue.
Grant revenue relates to the grants we have received from governmental bodies
that are conditional cost reimbursement grants, and we recognize revenue as
allowable costs are incurred. Amounts collected in excess of revenue recognized
are recorded as deferred revenue.
The Company analyzes its collaboration arrangements to assess whether they are
within the scope of ASC 808, Collaborative Arrangements ("ASC 808") to determine
whether such arrangements involve joint operating activities performed by
parties that are both active participants in the activities and exposed to
significant risks and rewards. This assessment is performed throughout the life
of the arrangement based on changes to the arrangements. For collaboration
arrangements within the scope of ASC 808 the Company may analogize to ASC 606
for certain elements.
We identify the goods or services promised within each collaboration agreement
and assesses whether each promised good or service is distinct for the purpose
of identifying the performance obligations in the contract. This assessment
involves subjective determinations and requires management to make judgments
about the individual promised goods or services and whether such are separable
from the other aspects of the contractual relationship. Promised goods and
services are considered distinct provided that: (i) the customer can benefit
from the good or service either on its own or together with other resources that
are readily available to the customer and (ii) the entity's promise to transfer
the good or service to the customer is separately identifiable from other
promises in the contract. In assessing whether a promised good or service is
distinct, we consider factors such as the research, manufacturing and
commercialization capabilities of the collaboration partner and the availability
of the associated expertise in the general marketplace. If a promised good or
service is not distinct, an entity is required to combine that promised good or
service with other promised goods or services until it identifies a bundle of
goods or services that is distinct.
The allocation of the transaction price to the performance obligations in
proportion to their standalone selling prices is determined at contract
inception. If the consideration promised in a contract includes a variable
amount, we estimate the amount of consideration to which we will be entitled in
exchange for transferring the promised goods or services to a customer. We
determine the amount of variable consideration by using the expected value
method or the most likely amount method. The Company includes the unconstrained
amount of estimated variable consideration in the transaction price. The amount
included in the transaction price is the amount for which it is probable that a
significant reversal of cumulative revenue recognized will not occur. At the end
of each subsequent reporting period, we re-evaluate the estimated variable
consideration included in the transaction price and any related constraint, and
if necessary, adjust our estimate of the overall transaction price. Any such
adjustments are recorded on a cumulative catch-up basis in the period of
adjustment.
In determining the transaction price, we adjust consideration for the effects of the time value of money if there is a significant benefit of financing. We assessed its collaboration agreements and concluded that no significant financing components were present.
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If an arrangement contains customer options that allow the customer to acquire
additional goods or services, including an exclusive license to our intellectual
property, the goods and services underlying the customer options are evaluated
to determine whether they are deemed to represent a material right. In
determining whether the customer option has a material right, we assess whether
there is an option to acquire additional goods or services at a discount. If the
customer option is determined not to represent a material right, the option is
not considered to be performance obligations at the outset of the arrangement.
If the customer option is determined to represent a material right, the material
right is recognized as a separate performance obligation at the outset of the
arrangement. We allocate the transaction price to material rights based on the
relative standalone selling price, which is determined based on the identified
discount and the probability that the customer will exercise the option. Amounts
allocated to a material right are not recognized as revenue until the option is
exercised.
We recognize as revenue the amount of the transaction price that is allocated to
the respective performance obligation as each performance obligation is
satisfied over time, with progress toward completion measured based on actual
costs incurred relative to total estimated costs to be incurred over the life of
the contract. Recorded revenue and costs are subject to revision as the contract
progresses. Such revisions may result in increases or decreases to revenue and
income and are reflected in the consolidated financial statements in the periods
in which they are first identified. Estimating costs under our collaboration
agreements is complex and involves significant judgment. Factors that must be
considered in making estimates include labor productivity and availability, the
nature and technical complexity of the work to be performed, potential
performance delays, availability and timing of funding from the customer and
progress toward completion. Adjustments to original estimates are often required
as work progresses and additional information becomes known, even though the
scope of the work required under the contract may not change. Any adjustment as
a result of a change in estimates is made when facts develop, events become
known, or an adjustment is otherwise warranted, such as in the case of contract
change orders. We have procedures and processes in place to monitor the actual
progress of a project against estimates and our estimates are updated if
circumstances are warranted.
Performance obligations may include research and development services to be
performed by us on behalf of the collaboration partner. Revenue is recognized on
research and development efforts as the services are performed and presented on
a gross basis, since we are the principal.
Under collaboration agreements, the timing of revenue recognition and contract
billings may differ and result in contract assets and contract liabilities.
Contract assets represent revenues recognized in excess of amounts billed under
collaboration agreements and are transferred to accounts receivable when billed
or billing rights become unconditional. Contract liabilities represent billings
in excess of revenues recognized under collaboration agreements.
For further information regarding our revenue recognition, please see Note 1,
"Organization and Summary of Significant Accounting Policies" to our audited
consolidated financial statements for the year ended December 31, 2020 , included
in this Annual Report on Form 10-K.
Research and Development Expenses
As part of the process of preparing our financial statements, we are required to
estimate our accrued expenses as of each balance sheet date. This process
involves reviewing open contracts and purchase orders, communicating with our
staff to identify services that have been performed on our behalf 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 based on facts and circumstances
known to us at that time. We periodically confirm the accuracy of our estimates
with the service providers and make adjustments, if necessary. The significant
estimates in our accrued research and development expenses include the costs
incurred for services performed by our vendors and clinical trial sites in
connection with research and development activities for which we have not yet
been invoiced.
We record our expenses related to research and development activities based on
our estimates of the services received and efforts expended pursuant to quotes
and contracts with vendors that conduct research and development on our behalf.
The financial terms of these agreements are subject to negotiation, vary from
contract to contract and may result in uneven payment flows. There may be
instances in which payments made to our vendors will exceed the level of
services provided and result in a prepayment of the research and development
expenses. In accruing service fees, we estimate the time period over which
services will be performed and the level of effort to be expended in each
period. If the actual timing of the performance of services or the level of
effort varies from our estimate, we adjust the accrual or prepaid expense
accordingly. Non-refundable advance payments for goods and services that will be
used in future research and development activities are expensed when the
activity has been performed or when the goods have been received rather than
when the payment is made.
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-------------------------------------------------------------------------------- Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in our reporting amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred.
Income Taxes
We account for income taxes under the asset and liability method. We record deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as for operating loss and tax credit carryforwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect to recover or settle those temporary differences. We recognize the effect of a change in tax rates on deferred tax assets and liabilities in the results of operations in the period that includes the enactment date. We assess the likelihood that deferred tax assets will be realized, and we recognize a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction. To date, we have provided a valuation allowance against our deferred tax assets as we believe the objective and verifiable evidence of our historical pretax net losses outweighs any positive evidence of our forecasted future results. Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgment. We will continue to monitor the positive and negative evidence and will adjust the valuation allowance as sufficient objective positive evidence becomes available. We account for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon technical merits, it is more likely than not that the position will be sustained upon examination. We recognize potential accrued interest and penalties associated with unrecognized tax positions within our global operations in income tax expense.
Stock-Based Compensation
We account for stock-based compensation expense related to stock options granted to employees, non-employees, and members of our board of directors under our 2018 Equity Incentive Plan, the 2014 Equity Incentive Plan, as amended, and the 2004 Amended and Restated Equity Incentive Plan, by estimating the fair value of each stock option or award on the date of grant using the Black-Scholes model. We recognize stock-based compensation expense on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.
Recent Accounting Pronouncements Not Yet Adopted
For a discussion of recently issued accounting pronouncements and interpretations not yet adopted by us, please see Note 1, "Organization and Summary of Significant Accounting Policies" to our audited financial statements for the year endedDecember 31, 2020 , included in this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of theSEC .
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