NGM BIOPHARMACEUTICALS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements that reflect our plans, estimates, expectations, assumptions and beliefs and involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those discussed in the section titled "Risk Factors" included under Part I, Item 1A and elsewhere in this Annual Report on Form 10-K. See "Special Note Regarding Forward-Looking Statements" in this Annual Report on Form 10-K. Overview of Our Business We are a biopharmaceutical company focused on discovering and developing novel therapeutics based on scientific understanding of key biological pathways underlying liver and metabolic diseases, retinal diseases and cancer. These diseases represent a significant burden for patients and healthcare systems and, in some cases, are leading causes of morbidity and mortality. Our strategy is to leverage a combination of interrogating human biology and engineering powerful biologics to discover and develop promising product candidates and seek to move them rapidly into proof-of-concept studies and late-stage development, with the goal of delivering impactful first-in-class or best-in-class treatments to underserved patients suffering from grievous diseases. Since the commencement of our operations in 2008, we have generated a robust portfolio of product candidates ranging from early discovery to late-stage development. We aspire to operate one of the most productive research and development engines in the biopharmaceutical industry.
Pipeline Programs and Operations Updates
Our discovery engine supports our ability to advance multiple product candidates
across our three key therapeutic areas. In 2020 and 2021 to date, we progressed
the development of our leading product candidates, achieving important
development milestones as described below:
• Liver and metabolic diseases.
o Aldafermin. Aldafermin is an engineered analog of human hormone
fibroblast growth factor 19, or FGF19, that is administeredthrough a
once-daily subcutaneous injection. Aldafermin is wholly-owned by us
and is in Phase 2b development for the treatment of patients with
non-alcoholic steatohepatitis, or NASH, with liver fibrosis stage 2, 3
or 4, or F2, F3 or F4. In 2020 and early 2021, we:
? Presented positive liver histology and biomarker data from the
final cohort, Cohort 4, in our adaptive Phase 2 clinical trial
of aldafermin in patients with NASH in February 2020 . Cohort 4
was a 24-week doubleblind, randomized,placebo-controlled Phase
2 trial and the data from this cohort demonstrated statistically
significant activity on the composite endpoint of both reversing
fibrosis and resolving NASH. In the study, aldafermin continued
to demonstrate a favorable tolerability profile. The results
observed in Cohort 4 were consistent with data from the three
previous cohorts.
? Completed enrollment in the Phase 2b ALPINE 2/3 clinical trial
of aldafermin in patients with NASH with F2 and F3 liver
fibrosis in September 2020 .
? Initiated the Phase 2b ALPINE 4 clinical trial of aldafermin in
patients with NASH with F4 liver fibrosis and well-compensated
cirrhosis in February 2020 .
? Looking forward: We expect to report topline results from the
ALPINE 2/3 trial in the second quarter of 2021. In the ALPINE 4
trial, we are continuing enrollment, with a goal of enrolling
approximately 160 patients across 70 sites in the United States ,
Europe , Hong Kong and Australia . We are leveraging the results
of Cohort 4 of our Phase 2 clinical trial, as well as guidance
from the U.S. Food and Drug Administration , or FDA, to inform
early Phase 3 planning and design. We expect that the ALPINE 2/3
trial results will
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provide further information to support our design of a pivotal
clinical trial program to enable a potential biologics license
application, or BLA, submission.
o MK-3655 (formerly NGM313). MK-3655 is an agonistic antibody discovered
by us that selectively activates fibroblast growth factor receptor
1c-beta-klotho, or FGFR1c/KLB, which regulates insulinsensitivity,
blood glucose and liver fat and is administered every four weeks
through a subcutaneous injection. MK-3655 is in Phase 2bdevelopment
for the treatment of NASH and was optioned by Merck Sharp & Dohme
Corp. , or Merck, under our collaboration with Merck described below.
In 2020, Merck:
? Initiated a worldwide Phase 2b trial of MK-3655 in patients with
NASH with F2 or F3 liver fibrosis in the fourth quarter of 2020
and is currently enrolling patients in that trial.
• Retinal diseases.
o NGM621. NGM621 is a humanized Immunoglobulin 1, or IgG1, monoclonal
antibody administered via intravitreal, or IVT, injection. NGM621 was
engineered to potently inhibit the activity of complement C3 with the
treatment goal of reducing disease progression in patients with
geographic atrophy, or GA. Merck has a one-time option to license
NGM621 upon completion of a proof-of-concept study in humans. In 2020
and early 2021, we:
? Completed a Phase 1 clinical trial of NGM621 testing the safety
and tolerability of single and multiple IVT injections in
patients with GA and, at the American Academy of Ophthalmology
2020 Virtual meeting in November 2020 , presented safety and
pharmacokinetics, or PK, data from the Phase 1 trial
demonstrating that NGM621 was well tolerated, with no patients
experiencing serious adverse events, or SAEs, drug-related
adverse events, or AEs, intraocular inflammation,
endophthalmitis or choroidal neovascularization. No dose-related
safety patterns or concerns were identified.
? In July 2020 , initiated the CATALINA Phase 2 clinical trial of
NGM621 in patients with GA to evaluate NGM621's effects on
disease progression when given every four weeks or every eight
weeks. The CATALINA trial was designed to be a Phase
3-supportive or -enabling clinical trial.
• Oncology.
o NGM120. NGM120, an antagonistic antibody that binds glial cell-derived
neurotrophic factor receptor alpha-like, or GFRAL, and inhibits growth
differentiation factor 15, or GDF15, signaling, for the potential
treatment of cancer and cancer anorexia/cachexia syndrome,referred to
as anti-cancer cachexia or CACS. We are currently conducting clinical
trials to assess NGM120's effect on cancer-related cachexia and on
cancer in patients with select advanced solid tumors andmetastatic
pancreatic cancer. Merck has a one-time option to licenseNGM120 upon
completion of a proof-of-concept study in humans. In 2020 and early
2021, we:
? Completed enrollment in two cohorts of a Phase 1a/1b
dose-finding clinical trial of NGM120 in November 2020 : a Phase
1a cohort evaluating NGM120 as a monotherapy in patients with
select advanced solid tumors and a Phase 1b cohort evaluating
NGM120 in combination with gemcitabine and Abraxane® (paclitaxel
protein bound) in patients with metastatic pancreatic cancer.
This trial is ongoing.
? In January 2021 , initiated a placebo-controlled expansion of the
Phase 1b portion of the trial testing NGM120 incombination with
gemcitabine and Abraxane as first-line treatment in patients
with metastatic pancreatic cancer to assess NGM120's effect on
both cancer and cancer-related cachexia, building upon our
experiences in the Phase 1a/1b trial.
? Looking forward: We expect to report topline data from the Phase
1a/1b trial in the second half of 2021.
o NGM707. NGM707 is a dual antagonist monoclonal antibody that inhibits
Immunoglobulin-like transcript 2, or ILT2, and Immunoglobulin-like
transcript 4, or ILT4. ILT2 and ILT4 are key myeloid and lymphoid
checkpoints that may restrict anti-tumor immunity, enable tumors to
evade
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immune detection and contribute to T-cell checkpoint resistance. Merck
has a one-time option to license NGM707 upon completion of a
proof-of-concept study in humans. In 2020 and early 2021, we:
? Completed all preclinical studies of NGM707 to enable an
investigational new drug application-, or IND-, submission.
? Looking forward: We expect to commence a first-in-human Phase 1
clinical trial of NGM707 in patients with advanced solid tumors
in mid-2021.
o NGM438. NGM438 is an antagonistic antibody that is designed to inhibit
leukocyte-associated immunoglobulin-like receptor 1, or LAIR1, and
promote immune detection and activation against advanced solid tumors.
Merck has a one-time option to license NGM438 upon completion of a
proof-of-concept study in humans. In 2020 and early 2021, we:
? Advanced preclinical IND-enabling studies of NGM438 and began
preparing an IND for a planned submission in the second half of
2021.
? Looking forward: We expect to commence a first-in-human Phase 1
clinical trial of NGM438 in patients with advanced solid tumors
in the fourth quarter of 2021.
We have additional undisclosed programs that are in various stages of development ranging from functional validation to preclinical development.
The success of each of our product candidates may be affected by numerous factors, including preclinical data, clinical data, competition, manufacturing capability, sales capability, collaboration partners, regulatory matters, third-party payor matters and commercial viability. We do not have any products approved for sale and do not anticipate generating revenue from product sales for the foreseeable future, if ever. Partnering has been and is expected to continue to be a key component of our strategy as we plan to continue to develop a broad portfolio of product candidates and, if approved, to commercialize the resulting products. Our existing research collaboration, product development and license agreement with Merck, or the Collaboration Agreement, which we entered into in 2015, has to date provided us with substantial financial support from Merck. The collaboration has also afforded us substantial freedom to pursue development efforts for our collaboration programs and product candidates. We are currently in discussions with Merck with respect to modifying certain terms of the collaboration, as described in more detail below. In addition, for any programs wholly-owned by us and not subject to the Merck collaboration, such as aldafermin, we may decide to pursue a strategic partner to progress, in whole or in part, the program or commercialize any resulting approved product. In addition, all of our manufacturing activities are outsourced to third-party contract development and manufacturing organizations or third-party contract manufacturing organizations, which we refer to collectively as CMOs, who are generally single source suppliers of the drug product or drug substance they are manufacturing for us. We also utilize third-party contract research organizations, or CROs, to carry out many of our clinical development activities. We expect to be reliant on CMOs and CROs for these activities for the foreseeable future. Significant portions of our research and development resources are focused, and will continue to be focused, on activities required to prepare aldafermin for potential regulatory approval for the treatment of NASH, including manufacturing of clinical trial materials and preparation for potential Phase 3 testing. If our CROs fail to satisfy their contractual duties to us or meet expected deadlines or if our CMOs experience difficulties in scaling production or experience product loss due to contamination, equipment failure, improper installation or operation of equipment, vendor or operator error, turnover of qualified staff or improper storage conditions, our ongoing and planned aldafermin trials would be delayed, perhaps substantially, which could materially and adversely affect our business. We seek to allocate our capital efficiently and strategically and fund our portfolio based on each program's scientific and other merits. Our discipline has been demonstrated by the suspension of development activities on multiple viable product candidates for portfolio management reasons in order to concentrate our resources on what we consider our most promising product candidates. For example, in 2020, we suspended development activities related to multiple metabolic disease product candidates in order to concentrate our resources on aldafermin and certain other product candidates subject to our Merck collaboration. Most recently, inDecember 2020 , based on the overall clinical experience with both NGM386 (a once-daily GDF15 agonist product candidate we suspended development of earlier in 2020) and NGM395 (a long-acting GDF15 agonist product 111
-------------------------------------------------------------------------------- candidate), we decided to suspend development of our GDF15 agonist program, including both NGM386 and NGM395, after we complete an ongoing Phase 1 clinical trial evaluating safety, tolerability and PK of NGM395 in obese but otherwise healthy adults. We remain interested in the potential applications of a GDF15 agonist, but we believe antagonizing the GDF15 receptor, GFRAL, with NGM120 in patients with cancer has a stronger near-term rationale for development. In mid-2020, we also suspended development of NGM217, an antibody binding an undisclosed target that is designed to restore pancreatic islet function and increase insulin production in patients with diabetes, after we completed a Phase 1 clinical trial of NGM217 assessing its safety, tolerability and PK in adults with autoimmune diabetes. This clinical trial demonstrated that NGM217 was well tolerated; however, we decided to suspend activities related to NGM217 to concentrate our resources on the development of other product candidates.
Merck Collaboration Update
The original research phase of the Collaboration Agreement with Merck was for five years. InMarch 2019 , Merck exercised its option to extend the research phase of the collaboration throughMarch 16, 2022 . Under the terms of the collaboration, Merck was required to notify us no later thanMarch 17, 2021 of its unilateral decision whether to exercise its option to extend the research phase of the collaboration for an additional two-year term throughMarch 16, 2024 . InMarch 2021 , Merck initiated discussions with us with respect to elements of the ongoing collaboration that might be optimized to better address the evolving interests and priorities of both NGM and Merck during the remainder of the current research phase throughMarch 16, 2022 and during any extension of the current research phase and any tail period after the end of the research phase. In this regard, the parties are negotiating in good faith certain modifications to the terms of the collaboration. Such modifications may include, among other things, focusing NGM's research and development under the collaboration on therapeutic areas of particular interest to Merck, while enabling NGM to conduct research and development outside of these therapeutic areas which would, if mutually agreed to, allow NGM to discover and develop product candidates on its own or with third parties in other areas of interest. In order to allow negotiations to proceed, the parties have agreed to extend theMarch 17, 2021 deadline for Merck to deliver its extension notification decision untilJune 30, 2021 . While we cannot predict whether or when Merck will elect to extend the research phase of the collaboration or on what terms, or whether or when we will reach agreement with Merck on the terms of a modified collaboration generally, we expect that any modified collaboration would result in a level of annual research support from Merck during any extension of the current research phase afterMarch 16, 2022 that is meaningfully lower than the annual research support Merck provided during the initial five-year term and is providing during the current two-year extension of the research phase. In this regard, we expect that under the terms of a modified collaboration, Merck will not provide research funding for certain of our product candidates. We also expect that if we are unable to reach agreement with Merck on modified terms, Merck will not elect to extend the research phase of the collaboration and will decide not to proceed with certain of our product candidates after the end of the research phase. In any event, we expect that our funding obligations with respect to the development of our current and potential future product candidates will substantially increase followingMarch 16, 2022 , the end of the current two-year extension of the research phase, regardless of whether we are able to reach agreement with Merck on modified terms.
Financial Highlights
Since inception, we have funded our operations primarily through:
• fees received from collaboration partners, primarily Merck, which
since inception through December 31, 2020 includes reimbursement of
research and development expenses of $400.6 million , upfront cash
licensing fees of $123.0 million , primarily from Merck, and a payment
of $20.0 million from Merck to license MK-3655 and related compounds;
• proceeds from a private placement of convertible preferred stock
prior to our initial public offering, or IPO, includingapproximately
$106.0 million of our Series E convertible preferred stock purchased by Merck; • net proceeds from our IPO in 2019 of approximately$107.8 million , together with proceeds from the concurrent private placement of shares of common stock to Merck of$65.9 million ; • net proceeds of$21.9 million from sales of 809,700 shares of our common stock at an average price of$27.94 per share in
under an Open Market Sale AgreementSM, or the Sales Agreement, we
entered into with Jefferies LLC , or Jefferies, in June 2020 ; and
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• net proceeds of approximately
5,324,074 shares of our common stock in January 2021 upon completion
of an underwritten public offering of our common stock, or the
follow-on offering, which included the full exercise by the
underwriters of their option to purchase additional shares.
At
We have incurred net losses each year since our inception. Our consolidated net losses were$102.5 million ,$42.8 million and$0.5 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively. As ofDecember 31, 2020 , we had an accumulated deficit of$298.6 million . Substantially all of our net losses have resulted from costs incurred in connection with our research and development, or R&D, programs and general and administrative costs associated with our operations. Our net losses may fluctuate significantly from quarter to quarter and year to year, depending on the timing of our clinical trials and our expenses on other R&D activities, and the amount of R&D funding we receive from collaboration partners, including Merck. For further discussion of our financial position and future sources of funding, see "Liquidity and Capital Resources" below. COVID-19 Business Update We are continuing to closely monitor the impact of the global COVID-19 pandemic on our business and have taken and continue to take proactive efforts designed to protect the health and safety of our patients, study investigators, clinical research staff and employees, while maintaining business continuity. Following guidance from federal, state and local authorities, we continue to operate with a primarily remote work model. Only individuals conducting essential in-person laboratory work and other essential business functions are working on site and only for work that cannot be conducted remotely. There have been relatively minor impacts on productivity overall, but future developments could more materially and adversely impact our productivity. In addition, in 2020, we experienced higher-than-normal employee turnover and an increased rate of hiring new employees. We cannot predict whether these trends will continue or be exacerbated, when we will be permitted to return to an office-based working model or whether we will be required to adopt a more restrictive work model. For patients enrolled in our clinical trials, we continue to work closely with clinical trial investigators and site staff with the goal of continuing treatment in a manner designed to uphold trial integrity, while allowing some flexibility in the manner and timing of patient visits, and to observe government and institutional guidelines designed to safeguard the health and safety of patients, clinical trial investigators and site staff. We have experienced, from time to time, a slower pace of clinical trial site initiation and clinical trial enrollment than originally anticipated in certain of our clinical trials, including the ALPINE 4, CATALINA and NGM120 trials, and we have experienced a higher dropout rate than anticipated in our ALPINE 2/3 trial after we completed enrollment, due to factors such as the vulnerability of our studied patient populations, clinical trial site suspensions, reallocation of medical resources and the challenges of working remotely due to shelter-in-place and similar government orders, among other factors. We have been proactively working to mitigate these and other effects of the COVID-19 pandemic by monitoring site initiations, patient enrollment and patient study adherence to provide support to patients and trial staff, often on a casebycase and/or patient-by-patient basis. For example, we have implemented additional study policies and procedures designed to help protect trial participants from exposure to COVID-19 as a result of their trial participation, which include the use of telemedicine visits, remote monitoring of patients and clinical trial sites and other measures, as appropriate, designed to ensure that data from clinical trials that may be disrupted as result of the pandemic are collected pursuant to the study protocol and consistent with current Good Clinical Practices, with any material protocol deviation reviewed and approved by the clinical trial site Institutional Review Boards. Most of our clinical trial sites, both within and outside ofthe United States , continue to screen patients in our clinical trials, and new patients are being enrolled when appropriate. While the COVID-19 pandemic has not yet resulted in a significant impact to our disclosed clinical development timelines and we believe the higher-than-planned enrollment we achieved in our ALPINE 2/3 trial has mitigated the effects of the increased dropout rate, as the pandemic continues, there may be continuing negative impacts on our ability to initiate new clinical trial sites, maintain enrollment of existing patients and enroll new patients, which may result in increased clinical trial costs and negatively impact our timelines and our ability to obtain regulatory approvals of our product candidates in a timely fashion, if at all. 113
-------------------------------------------------------------------------------- We also could see an adverse impact on our ability to report clinical trial results, or interact with regulators, institutional review boards and ethics committees or other important agencies due to limitations in regulatory authority employee resources or otherwise. Moreover, we rely on CROs and other third parties to assist us with clinical development activities, and we cannot guarantee that they will continue to perform their contractual duties in a timely and satisfactory manner as a result of the COVID-19 pandemic. In addition, while we have not experienced any disruption to drug or related component supply for our ongoing clinical trials, we could experience disruptions to our supply chain and operations due to the continuing pandemic, and associated delays in the manufacturing and supply of drug substance and drug product for our clinical trials, which could adversely affect our ability to conduct ongoing and future clinical trials of our product candidates. For example, our aldafermin drug product CMO has advised us that it could be required under orders of theU.S. government to allocate manufacturing capacity to the manufacture or distribution of COVID-19 vaccines. If any of our CMOs become subject to acts or orders ofU.S. or foreign government entities to allocate manufacturing capacity to the manufacture or distribution of COVID-19 vaccines or medical supplies needed to treat COVID-19 patients, this could also delay our clinical trials, perhaps substantially, particularly our ongoing and planned aldafermin trials, which could materially and adversely affect our business. Finally, we cannot predict how the evolving effects of the COVID-19 pandemic may influence the future decisions of Merck to license any programs available to it under the Collaboration Agreement, to exercise its remaining option to extend the research phase of the collaboration beyondMarch 16, 2022 or to reach agreement with us on the terms of a modified collaboration, if any. For additional information about risks and uncertainties related to the COVID-19 pandemic that may impact our business, financial condition and results of operations, see the section titled "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K. Financial Operations Overview
Collaboration Revenue
Our revenue to date has been generated primarily from recognition of license fees and R&D service funding pursuant to our Collaboration Agreement with Merck. Merck is also a significant stockholder and, as such, collaboration revenue from Merck is referred to as related party revenue.
Merck Collaboration
In 2015, we entered into the Collaboration Agreement with Merck, covering the discovery, development and commercialization of novel therapies across a range of therapeutic areas, including a broad, multi-year drug discovery and early development program financially supported by Merck, but scientifically directed by us with input from Merck. Merck generally has a one-time right to exercise its option to an exclusive, worldwide license for any collaboration product candidate and related program when a human proof-of-concept trial is completed. In 2018, Merck exercised its option to license MK-3655, which is a potential treatment for NASH. Under the current terms of the Collaboration Agreement, for a program that Merck licenses, we retain an option, when a product candidate has advanced to Phase 3 clinical trials, to participate in up to 50% of the economic return from that product candidate if it becomes an approved medicine by agreeing to share up to 50% of the costs of future development. If we do not elect this option, we will instead receive milestone and royalty payments and we will not be required to share in development costs.
The aldafermin program is not included in the Collaboration Agreement and it remains wholly-owned and controlled by us.
The term of the current research phase of the collaboration and a general description of the funding we have received and may in the future receive under the collaboration for research and development expenses is included in "Our Collaboration with Merck" in Part I, Item 1A of this Annual Report on Form 10-K and "Overview of Our Business -- Merck Collaboration Update" above. Since inception throughDecember 31, 2020 , Merck had paid us$495.8 million under the Collaboration Agreement. Due to the nature of our agreement with Merck and the timing of related revenue recognition, our revenue has fluctuated from period to period in the past and we expect that it will continue to fluctuate in future periods. We use the cost-based input method in accordance with Accounting Standards Codification 606, or ASC 606, to calculate the corresponding amount of revenue to recognize at each reporting period. In applying the cost-based input measure of revenue recognition, we measure actual costs incurred relative to budgeted costs to fulfill 114
-------------------------------------------------------------------------------- our performance obligation. We apply considerable judgment when we re-evaluate the estimate of expected costs to satisfy the performance obligation each reporting period and make adjustments for any significant changes. A significant change in the estimate of expected costs for the remainder of the current two-year extension period could have a material impact on revenue recognized (including the possible reversal of previously recognized revenue) at each reporting period.
The sources of our collaboration revenue were as follows (in thousands):
Year Ended December 31,
2020 2019(1) 2018
Related party revenue:
Collaboration service revenue $ 87,368 $ 103,544 $ 69,865
License revenue - - 20,000
Recognition of upfront fee - - 18,800
Totals $ 87,368 $ 103,544 $ 108,665 (1) We adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606),
and subsequent amendments, under the modified retrospective approach on
more details.
Research and Development Expenses
R&D efforts include drug discovery research activities and development activities relating to our product candidates, such as manufacturing drug substance, drug product and other clinical trial materials, conducting preclinical studies and clinical trials and providing support for these operations. Our R&D expenses consist of both internal and external costs. Our internal costs include employee, consultant, facility and other R&D operating expenses. Our external costs include fees paid to CROs and other service providers in connection with our clinical trials and preclinical studies, third-party license fees and CMO costs related to manufacturing drug substance, drug product and other clinical trial materials.
Our R&D expenses related to the development of aldafermin, MK-3655, NGM621, NGM120, NGM707 and NGM438 (and prior to suspending these programs, NGM386, NGM395 and NGM217) consist primarily of:
• fees paid to our CROs in connection with our clinical trials and other
related clinical trial fees, when applicable;
• costs related to acquiring and manufacturing drug substance, drug product
and clinical trial materials, including continued testing, such as process
validation and stability, of drug substance and drug product;
• costs related to toxicology testing and other research and preclinical
related studies;
• salaries and related overhead expenses, which include stock-based
compensation and benefits, for personnel in R&D functions;
• fees paid to consultants for R&D activities;
• R&D operating expenses, including facility costs and depreciation expenses;
and
• costs related to compliance with regulatory requirements.
Our clinical development efforts are spread across multiple programs, most of
which are subject to the Merck collaboration. For the foreseeable future, we
anticipate the majority of our financial resources, other than those received
from Merck and dedicated to Merck collaboration activities, will be dedicated to
activities required to prepare aldafermin for potential regulatory approval for
the treatment of NASH, including manufacturing of clinical trial materials and
preparation for a potential pivotal program.
In the future, we may devote financial resources to other programs in the event
Merck does not elect to license these programs upon completion of a
proof-of-concept study, in the event Merck elects to terminate its license to
any program it licenses or in the event we opt to co-develop any Merck-licensed
programs, or if Merck no longer funds such programs under modified terms of the
collaboration.
Our R&D efforts under the Merck collaboration are extensive and costly and are currently subject to reimbursement under our Merck collaboration during the current two-year extension up to the funding caps
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-------------------------------------------------------------------------------- provided in our Collaboration Agreement. If our R&D expenses for product candidates subject to the Merck collaboration, including the clinical development of product candidates subject to the Merck collaboration through completion of proof-of-concept studies, exceed the funding caps provided in the Collaboration Agreement, which happened in the fiscal year endedDecember 31, 2020 and could happen in the future, we will be required to devote our own financial resources toward the development of such product candidates or, if we are unwilling or unable to do so, pause or suspend such development to remain within the funding caps. In addition, while we cannot predict whether or when Merck will elect to extend the research phase of the collaboration throughMarch 16, 2024 or on what terms, or whether or when we will reach agreement with Merck on the terms of a modified collaboration generally, we expect that any modified collaboration would result in a level of annual research support from Merck during any extension of the current research phase afterMarch 16, 2022 that is meaningfully lower than the annual research support Merck provided during the initial five-year term and is providing during the current two-year extension of the research phase. In this regard, we expect that under the terms of a modified collaboration, Merck will not provide research funding for certain of our product candidates. We also expect that if we are unable to reach agreement with Merck on modified terms, Merck will not elect to extend the research phase of the collaboration and will decide not to proceed with certain of our product candidates after the end of the current research phase. In any event, we expect that our funding obligations with respect to the development of our current and potential future product candidates will substantially increase followingMarch 16, 2022 , the end of the current two-year extension of the research phase, regardless of whether we are able to reach agreement with Merck on modified terms. The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the remainder of the development of our product candidates. This is due to the numerous risks and uncertainties associated with developing medicines, including the uncertainty of:
• our ability to hire and retain key R&D personnel;
• manufacturing scale-up challenges, production shortages or other supply
disruptions for clinical trial materials;
• the evolving effects of the COVID-19 pandemic on our employees, patients,
clinical trial sites and our CROs, CMOs and other service providers;
• the timely and quality performance of our CROs, CMOs and other service
providers;
• whether Merck will elect to license, or to terminate its license, to any of
our programs and the timing of such election or termination;
• whether we exceed the current or any future funding caps provided in our
Collaboration Agreement and whether Merck decides not to proceed with
certain of our product candidates after the end of the research phase;
• the effect of products that may compete with our product candidates or other
market developments;
• our ability to expand and enforce our intellectual property portfolio;
• the scope, rate of progress, results and expense of our ongoing, as well as
any future, clinical trials and other R&D-related activities; and
• the impact and timing of any interactions with regulatory authorities.
A change in the outcome of any of the risks and uncertainties associated with
the development of a product candidate could mean a significant change in the
costs and timing associated with the development of that product candidate. For
example, if the FDA or another regulatory authority were to require us to
conduct clinical trials beyond those that we currently anticipate will be
required for the completion of clinical development of a product candidate, or
if we experience significant delays in enrollment in any of our clinical trials,
we could be required to expend significant additional financial resources and
time on the completion of clinical development. For additional discussion of the
risks and uncertainties associated with our R&D efforts, see "Risk Factors-Risks
Related to Our Business and Industry," "-Risks Related to Our Dependence on
Merck and Other Third Parties," and "-Risks Related to Regulatory Approvals" in
Part I, Item 1A of this Annual Report on Form 10-K.
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General and Administrative Expenses
General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation and benefits. Other significant costs include legal fees relating to patent and corporate matters, facility costs not otherwise included in R&D expenses and fees for accounting and other consulting services. We anticipate that our general and administrative expenses will increase in the future to support our continued R&D activities. These increases will likely include increased costs related to the hiring of additional personnel, as well as fees paid to outside consultants, lawyers and accountants, among other expenses. Additionally, we anticipate continued increased costs associated with being a public company, including expenses related to services associated with maintaining compliance with Nasdaq listing rules and relatedSEC requirements and costs related to insurance, investor relations and SOX 404 compliance. In addition, we may incur expenses associated with building a commercial organization in connection with, and prior to, potential future regulatory approval of our product candidates. Results of Operations
Our results of operations were as follows (in thousands):
Year Ended December 31, Change
2020 2019 2018 2020 vs 2019 2019 vs 2018
Related party revenue $ 87,368 $ 103,544 $ 108,665 $ (16,176 ) $ (5,121 )
Operating expenses:
Research and development 163,972 129,253 95,714 34,719 33,539
General and administrative 27,229 23,631 17,265 3,598 6,366
Total operating expenses 191,201 152,884 112,979 38,317 39,905
Loss from operations (103,833 ) (49,340 ) (4,314 ) (54,493 ) (45,026 )
Interest income 1,939 6,692 3,622 (4,753 ) 3,070
Other income (expense), net (593 ) (147 ) 199 (446 ) (346 )
Net loss $ (102,487 ) $ (42,795 ) $ (493 ) $ (59,692 ) $ (42,302 ) Related Party Revenue from Merck
Revenue decreased$16.2 million in the year endedDecember 31, 2020 compared to the same period in 2019 primarily due to a decrease of$14.9 million related to the recognition of a portion of the initial upfront payment received from Merck that was included within the transaction price and recognized over the initial five-year term of our Collaboration Agreement using the cost-based input model. The initial five-year term ended in the first quarter of 2020. Revenue decreased$5.1 million in the year endedDecember 31, 2019 compared to the same period in 2018 primarily due to license revenue of$20.0 million received in 2018 due to Merck's exercise of its option for MK-3655, partially offset by an increase of$9.7 million in reimbursable costs related to research personnel and R&D activities and an increase of$5.2 million in revenue associated with the change in revenue recognition methodology under ASC 606, which was effectiveJanuary 1, 2019 . 117
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Research and Development Expenses
Our R&D expenses by program were as follows (in thousands):
Year Ended December 31,
2020 2019 2018
External R&D expenses:
Aldafermin (FGF19 analog) $ 50,553 $ 32,001
NGM621 (C3 inhibitor) 13,126 4,420 6,791
NGM120 (GFRAL antagonist) 5,606 3,414 3,442
NGM707 (Anti-ILT2/ILT4 dual antagonist) 4,817 2,295
-
NGM438 (LAIR1 antagonist) 3,586 1,302 -
NGM395 (GDF15 analog) 2,102 585 701
MK-3655 (FGFR1c/KLB agonist) 624 2,009 3,544
Other external R&D expenses 6,852 10,791 3,412
Total external R&D expenses 87,266 56,817 33,249
Personnel-related expenses 43,811 38,171 30,908
Internal and unallocated R&D expenses (1) 32,895 34,265
31,557
Total R&D expenses $ 163,972 $ 129,253 $ 95,714 (1) Internal and unallocated R&D expenses consist primarily of research supplies
and consulting fees, which we deploy across multiple R&D programs.
R&D expenses increased$34.7 million in the year endedDecember 31, 2020 compared to the same period in 2019 primarily due to a$31.0 million increase in external expenses driven by our manufacturing activities and ongoing clinical trials of aldafermin, NGM621, NGM120 and NGM395. The increase in R&D expenses in 2020 also included increases of$5.6 million in personnel-related expenses and$4.8 million in costs associated with pre-clinical IND-enabling studies for NGM707 and NGM438. These increases were partially offset by a decrease of$3.9 million in clinical trial materials and$1.4 million in unallocated R&D expenses related to multiple R&D programs. R&D expenses increased$33.5 million in the year endedDecember 31, 2019 compared to the same period in 2018 primarily due to increases of$16.6 million in external expenses driven by ongoing clinical trials of aldafermin,$7.4 million related to clinical trial materials,$7.3 million in personnel-related expenses and$2.7 million in unallocated R&D expenses related to early research testing. We expect R&D expenses in 2021 will increase compared to 2020 due to our ongoing activities, particularly as we advance our clinical development of aldafermin. In addition, we may be required to develop and implement additional clinical study policies and procedures to mitigate the evolving effects of the COVID-19 pandemic, which could significantly increase our R&D expenses.
General and Administrative Expenses
General and administrative expenses increased$3.6 million in the year endedDecember 31, 2020 compared to the same period in 2019 primarily due to an increase in personnel-related expenses due to increased headcount. General and administrative expenses increased$6.4 million in the year endedDecember 31, 2019 compared to the same period in 2018 primarily due to a$3.4 million increase in personnel-related expenses due to increased headcount and the implementation of our employee stock purchase plan and a$2.0 million increase in consulting expenses. We anticipate general and administrative expenses in 2021 will increase compared to 2020 due to an increase in compensation-related expenses driven by higher headcount and other expenses related to the expansion and support of our business.
Interest Income
Interest income decreased$4.8 million in the year endedDecember 31, 2020 compared to the same period in 2019 primarily due to the decrease in market interest rates and a reduction in our cash balance. Interest income increased$3.1 million in the year endedDecember 31, 2019 compared to the same period in 2018 118
-------------------------------------------------------------------------------- primarily due to an increase in our cash and investments balance subsequent to the completion of our IPO and concurrent private placement to Merck inApril 2019 . Liquidity and Capital Resources Funding Requirements We have incurred net losses every year since our inception. We have spent, and expect to continue to spend, significant resources to fund R&D of, and seek regulatory approvals for, our product candidates, particularly aldafermin. These activities require us to incur substantial costs related to research, development, manufacturing, preclinical studies, clinical trial and related activities, as well as to cover other expenses related to our ongoing operations. For example, we will require substantial additional capital to achieve our development and commercialization goals for our aldafermin program that is being conducted outside of the Merck collaboration or for any other programs in the event Merck does not elect to license these programs upon completion of a proof-of-concept study, in the event Merck elects to terminate its license to any program it licenses or in the event we opt to co-develop any Merck-licensed programs, or if Merck no longer funds such programs under modified terms of the collaboration. In addition, while we cannot predict whether or when Merck will elect to extend the research phase of the collaboration throughMarch 16, 2024 or on what terms, we expect that any modified collaboration would result in a level of annual research support from Merck during any extension of the current research phase afterMarch 16, 2022 that is meaningfully lower than the annual research support Merck provided during the initial five-year term and is providing during the current two-year extension of the research phase. See ""Overview of Our Business - Merck Collaboration Update" above. As a result, we expect to incur significant and increasing operating losses. We have no products approved for commercial sale, have not generated any revenue from product sales to date and we are not and may never be profitable. We have incurred losses in each year since commencing operations. Our consolidated net losses were$102.5 million ,$42.8 million and$0.5 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively. As ofDecember 31, 2020 , we had an accumulated deficit of$298.6 million and we expect our accumulated deficit will increase significantly over time. The size of our future net losses will depend, in part, on the rate of future growth of our expenses, how much revenue, if any, continues to be generated under the Merck collaboration and our ability to generate revenue outside of the Merck collaboration. In addition, if our R&D expenses for product candidates subject to the Merck collaboration exceed the funding caps provided in our current Collaboration Agreement, which happened in the fiscal year endedDecember 31, 2020 and could happen in the future, or if Merck no longer funds such programs under modified terms of the collaboration, we will be required to devote our own financial resources toward the development of such product candidates or, if we are unwilling or unable to do so, pause or suspend such development to remain within the funding caps or to proceed with development of unfunded programs.
Sources of Liquidity
Merck Collaboration
The revenue we receive under our Collaboration Agreement with Merck is our only source of revenue. The original research phase of the Collaboration Agreement was for five years. As described in greater detail in "Overview of Our Business - Merck Collaboration Update" above, the parties are negotiating in good faith certain modifications to the terms of the collaboration. While we cannot predict whether or when Merck will elect to extend the research phase of the collaboration or on what terms, or whether or when we will reach agreement with Merck on the terms of a modified collaboration generally, we expect that any modified collaboration would result in a level of annual research support from Merck during any extension of the current research phase afterMarch 16, 2022 that is meaningfully lower than the annual research support Merck provided during the initial five-year term and is providing during the current two-year extension of the research phase. In this regard, we expect that under the terms of a modified collaboration, Merck will not provide research funding for certain of our product candidates. We also expect that if we are unable to reach agreement with Merck on modified terms, Merck will not elect to extend the research phase of the collaboration and will decide not to proceed with certain of our product candidates after the end of the research phase. In any event, we expect that our funding obligations with respect to the development of our current and potential future product candidates will substantially increase followingMarch 16, 2022 , the end of the current two-year extension of the research phase, regardless of whether we are able to reach agreement with Merck on modified terms. Accordingly, we will require significant additional capital in order to proceed with development and commercialization of our current and potential future product candidates, 119
-------------------------------------------------------------------------------- including any product candidate that had been subject to the Merck collaboration but Merck decides not to proceed with under the terms of a modified collaboration or after the end of the research phase, or we will need to enter into additional collaboration or license agreements in order to fund such development and commercialization. Neither may be possible and as a result, we may be required to delay, scale back or discontinue development of such product candidates. Other Sources of Liquidity InJune 2020 , we entered into the Sales Agreement with Jefferies relating to the sale of shares of our common stock. In accordance with the terms of the Sales Agreement, we may offer and sell shares of our common stock having an aggregate offering price of up to$150.0 million from time to time through Jefferies, acting as our sales agent. InDecember 2020 , under the Sales Agreement, we sold 809,700 shares of our common stock at an average price of$27.94 per share for net proceeds of$21.9 million , after deducting$0.7 million in sales commissions. As ofDecember 31, 2020 ,$127.4 million of our common stock remained available to be sold under the Sales Agreement, subject to certain conditions as specified in the Sales Agreement.
As of
InJanuary 2021 , we sold 5,324,074 shares of common stock (inclusive of shares sold pursuant to the full exercise of the option to purchase additional shares granted to the underwriters in connection with the offering) through an underwritten public offering at a price of$27.00 per share for aggregate net proceeds of approximately$134.7 million . We intend to use the net proceeds from this offering for working capital and other general corporate purposes, which may include funding our pipeline of development programs, general and administrative activities and capital expenditures. We believe that our existing cash, cash equivalents and short-term marketable securities will be sufficient to fund our operations for at least the next twelve months. 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. In addition, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially as a result of a number of factors, including the factors discussed under "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K. We plan to finance our future cash needs through public or private equity or debt offerings, including under the Sales Agreement, government or other third-party funding, product collaborations, strategic alliances, licensing arrangements or a combination of these. Additional capital may not be available in sufficient amounts, on reasonable terms or when we need it, if at all, and our ability to raise additional capital may be adversely impacted by worsening global economic conditions and the disruptions to, and volatility in, the credit and financial markets inthe United States and worldwide resulting from, among other things, the evolving effects of the COVID-19 pandemic. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Debt financing, if available, may involve restrictive covenants. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. Furthermore, any securities that we may issue may have rights senior to those of our common stock and could contain covenants or protective rights that would lead to restrictions on our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. If we are unable to raise adequate additional capital, we may be prevented from pursuing development and commercialization efforts, which will have a material adverse effect on our business, operating results and prospects. 120
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Cash Flow Activity
The following table summarizes our cash flow activity (in thousands):
Year Ended December 31,
2020 2019 2018Net cash provided by (used in):
Operating activities$ (83,496 ) $ (41,174 ) $ (7,597 ) Investing activities (50,998 ) 48,723 38,729 Financing activities 35,538 180,751 198
Net increase (decrease) in cash and cash
equivalents$ (98,956 ) $ 188,300
Cash Used in Operating Activities
Cash used in operating activities in 2020 was$83.5 million , which consisted of a net loss of$102.5 million , adjusted for non-cash charges of$22.3 million and net cash used in operating assets and liabilities of$3.3 million . The non-cash charges consisted primarily of stock-based compensation expense of$15.7 million and depreciation expense of$6.6 million . The change in operating assets and liabilities was mainly driven by increases in accrued expenses of$6.2 million , prepaid expenses and other current assets of$1.9 million , accounts payable of$0.9 million and a related party contract asset of$6.1 million . These increases were offset by a decrease in deferred rent of$2.8 million . Cash used in operating activities in 2019 was$41.2 million , which consisted of a net loss of$42.8 million , adjusted for non-cash charges of$19.6 million and net cash used in operating assets and liabilities of$17.9 million . The non-cash charges consisted primarily of stock-based compensation expense of$12.9 million and depreciation expense of$7.6 million . The change in operating assets and liabilities was mainly driven by increases in the related party receivable of$1.5 million , prepaid expenses and other current assets of$2.0 million , accounts payable of$3.6 million and accrued expenses and other current liabilities of$8.9 million . These increases were offset by decreases in deferred rent of$2.7 million and contract liabilities of$24.2 million , which was primarily due to the adoption of ASC 606 and the timing of advance payments from Merck related to the reimbursement of costs associated with research and development activities. Cash used in operating activities in 2018 was$7.6 million , which consisted of a net loss of$0.5 million , adjusted for non-cash charges of$16.5 million and cash used in operating assets and liabilities of$23.6 million . The non-cash charges consisted primarily of stock-based compensation expense of$9.9 million and depreciation expense of$7.2 million . The change in operating assets and liabilities was primarily due to increases in the related party receivable of$3.7 million , prepaid expenses and other current assets of$4.4 million , accounts payable of$3.5 million and accrued expenses and other current liabilities of$4.1 million . These increases were offset by decreases in deferred rent and contract liabilities of$2.0 million and$21.1 million , respectively. The decrease in contract liabilities is primarily due to the recognition of upfront fees from Merck and the timing of advance payments from Merck related to the reimbursement of costs associated with research and development activities.
Cash Provided by (Used in) Investing Activities
Cash used in investing activities in 2020 was$51.0 million , which consisted of purchases of marketable securities of$177.7 million and purchases of property and equipment of$1.9 million partially offset by net proceeds on maturity of marketable securities of$128.5 million . Cash provided by investing activities in 2019 was$48.7 million , which consisted of net proceeds on maturity of marketable securities of$186.5 million partially offset by purchases of marketable securities of$134.3 million and purchases of property and equipment of$3.5 million . Cash provided by investing activities in 2018 was$38.7 million , which consisted of net proceeds on maturity of marketable securities of$178.2 million partially offset by purchases of marketable securities of$133.6 million and purchases of property and equipment of$5.8 million . 121
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Cash Provided by Financing Activities
Cash provided by financing activities in 2020 was$35.5 million and primarily related to net proceeds from the Sales Agreement of$21.9 million and proceeds from employee equity incentive and purchase plans of$14.2 million . Cash provided by financing activities in 2019 was$180.8 million and primarily related to net proceeds from our IPO of$110.0 million , proceeds from a concurrent private placement with Merck of$65.9 million and proceeds from employee equity incentive and purchase plans of$4.8 million . Cash provided by financing activities in 2018 was$0.2 million and primarily related to proceeds from employee equity incentive plans of$2.6 million partially offset by deferred IPO costs of$2.2 million . Off-Balance Sheet Arrangements We currently have not entered into and do not have any relationships with unconsolidated entities or financial collaborations, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purpose. Contractual Obligations
The following table sets out, as of
Payments due by period
Less than 1 to 3 4 to 5 More than
1 year years years 5 years Total
Contractual obligations:
Operating lease obligations(1)
- $ 15,890 Total contractual obligations
- $ 15,890 (1) Consists of our corporate headquarters lease encompassing approximately
122,000 square feet of office and laboratory space that expires in December
2023.
We enter into agreements in the normal course of business with CROs, CMOs and
other vendors for preclinical studies and other services and products for
operating purposes that are generally cancelable at any time by us, upon prior
written notice, and may or may not include cancellation fees. Given that the
amount and timing related to such payments are uncertain, they have not been
included in the contractual obligations table above.
We are obligated to make future payments to third parties under in-license
agreements, including sublicense fees, low single-digit royalties and payments
that become due and payable on the achievement of certain development and
commercialization milestones. As the amount and timing of sublicense fees and
the achievement and timing of these milestones are not probable and estimable,
such commitments have not been included on our consolidated balance sheets or in
the contractual obligations table above.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results
of operations is based on our consolidated financial statements, which we have
prepared in accordance with U.S. generally accepted accounting principles, or
U.S. GAAP. The preparation of our consolidated financial statements requires us
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of our consolidated financial statements, as well as revenue and expenses during
the reported periods. We evaluate these estimates and judgments on an ongoing
basis. We base our estimates on historical experience and on various other
factors that we believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ materially from these estimates under different assumptions or
conditions.
Our significant accounting policies are described in Note 2 to our consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K.
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We believe that the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations.
Revenue Recognition
OnJanuary 1, 2019 , we adopted Accounting Standards Update, or ASU, 2014-09, Revenue from Contracts with Customers (Topic 606), and subsequent amendments, using the modified retrospective transition method applied to those contracts that were not completed as ofJanuary 1, 2019 . ASC 606 supersedes all prior revenue recognition guidance. Results for operating periods beginning afterJanuary 1, 2019 are presented under ASC 606, while prior period amounts have not been adjusted and continue to be reported in accordance with previous accounting rules under ASC 605. Prior to the adoption of ASC 606, our revenue from collaboration agreements was recognized when we determined that persuasive evidence of an arrangement existed, services had been rendered, the price was fixed or determinable and collectability was reasonably assured. We would record amounts received prior to satisfying the above revenue recognition criteria as contract liabilities until all applicable revenue recognition criteria were met. Revenue allocated to research activities was generally recognized in the period the services were performed, and revenue allocated to licenses was generally recognized on a straight-line basis over the contractual term. Allocations to non-contingent elements were based on the relative selling price of each element using vendor-specific objective evidence or third-party evidence, where available. In the absence of either of these measures, we used the best estimate of selling price for that deliverable. The most significant change to our policies upon the adoption of ASC 606 was the estimation of an arrangement's total transaction price, which includes unconstrained variable consideration, and the recognition of that transaction price based on a cost-based input method that requires estimates to determine, at each reporting period, the percentage of completion based on the estimated total effort required to complete the project and the total transaction price. Given the differences in revenue recognition policies, the revenue recognized in years prior to 2019 is not strictly comparable to revenue recorded in the year endingDecember 31, 2019 or in future periods (see "Recently Adopted Accounting Pronouncements" in our consolidated financial statements). The core principle in ASC 606 requires an entity to recognize revenue upon the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We apply the following five-step revenue recognition model outlined in ASC 606 to adhere to this core principle: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) we satisfy a performance obligation. All of our revenue to date has been generated from collaboration agreements, primarily the Collaboration Agreement. The terms of these agreements generally require us to provide (i) license options for our product candidates, (ii) R&D services and (iii) non-mandatory services in connection with participation in research or steering committees. Payments received under these arrangements may include non-refundable upfront license fees, partial or complete reimbursement of R&D costs, contingent consideration payments based on the achievement of defined collaboration objectives and royalties on sales of commercialized products. In some agreements, the collaboration partner is solely responsible for meeting defined objectives that trigger contingent or royalty payments. Often the partner only pursues such objectives subsequent to exercising an optional license on compounds identified as a result of the R&D services performed. We assess whether the promises in our arrangements, including any options provided to the customer, are considered distinct performance obligations that should be accounted for separately. Judgment is required to determine whether the license to a compound is distinct from R&D services or participation in steering committees, as well as whether options create material rights in the contract. The transaction price in each arrangement is generally comprised of a non-refundable upfront fee and unconstrained variable consideration related to the performance of R&D services. We typically submit a budget for the R&D services to the customer in advance of performing the services. The transaction price is allocated to the identified performance obligations based on the standalone selling price, or SSP, of each distinct performance obligation. Judgment is required to determine SSP. In instances where SSP is not directly observable, such as when a license or service is not sold separately, SSP is determined using information that may include market conditions and other observable inputs. We utilize judgment to assess the nature of our performance obligations 123
-------------------------------------------------------------------------------- to determine whether they are satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress toward completion. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. Our collaboration agreements may include contingent payments related to specified development and regulatory milestones or contingent payments for royalties based on sales of a commercialized product. Milestones can be achieved for such activities in connection with progress in clinical trials, regulatory filings in various geographical markets and marketing approvals from regulatory authorities. Sales-based royalties are generally related to the volume of annual sales of a commercialized product. At the inception of each agreement that includes such payments, we evaluate whether the milestones are considered probable of being achieved and estimate the amount to be included in the transaction price by using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our or our customer's control, such as those related to regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation based on a relative SSP basis. At the end of each subsequent reporting period, we re-evaluate the probability of achievement of each such milestone and any related constraint and, if necessary, adjust our estimate of the overall transaction price. Pursuant to the guidance in ASC 606, sales-based royalties are not included in the transaction price. Instead, royalties are recognized at the later of when the performance obligation is satisfied or partially satisfied, or when the sale that gives rise to the royalty occurs.
As part of the process of preparing these consolidated financial statements, we are required to estimate and accrue expenses, the largest of which are R&D expenses. This process involves:
• identifying services that have been performed on our behalf by third-party
vendors 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 actual cost;
• estimating and accruing expenses in our consolidated financial statements as
of each balance sheet date based on facts and circumstances known to us at
the time; and
• periodically confirming the accuracy of our estimates with selected service
providers and making adjustments, if necessary.
Examples of estimated R&D expenses that we accrue include:
• fees paid to CROs in connection with preclinical studies and clinical trials;
• fees paid to investigative sites in connection with clinical trials;
• fees paid to CMOs in connection with the production of clinical trial
materials and to procure raw materials and components for manufacture; and
• professional service fees for consulting and other services.
We base our expense accruals related to clinical trials on our estimates of the
services received and efforts expended pursuant to contracts with multiple
research institutions and CROs that conduct and manage clinical trials on our
behalf. The financial terms of these agreements vary from contract to contract
and may result in uneven payment flows. Payments under some of these contracts
depend on factors such as the successful enrollment of patients and the
completion of clinical study milestones. Our service providers generally invoice
us monthly in arrears for services performed. 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 we do not identify costs that we have
begun to incur or if we underestimate or overestimate the level of services
performed or the costs of these services, our actual expenses could differ from
our estimates.
All of our clinical trials have been executed with support from CROs and other
vendors. We accrue costs for clinical trial activities performed by CROs based
upon the estimated amount of work completed on each trial. For clinical trial
expenses, the significant factors used in estimating accruals include the number
of patients enrolled, the activities to be performed for each patient, the
number of active clinical sites and the duration for which the patients will be
enrolled in the trial. We monitor patient enrollment levels and related
activities to the
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-------------------------------------------------------------------------------- extent possible through internal reviews, correspondence with CROs and review of contractual terms. We base our estimates on the best information available at the time. To date, we have not experienced significant changes in our estimates of accrued R&D expenses after a reporting period. However, due to the nature of estimates, we cannot assure that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our clinical trials and other research activities.
Stock-Based Compensation
Stock-based compensation expense represents the grant-date fair value of employee stock option granted under our 2008 Equity Incentive Plan and our 2018 Equity Incentive Plan and rights to acquire stock granted under our 2019 Employee Stock Purchase Plan recognized over the requisite service period of the awards (usually the vesting period) on a straight-line basis, net of estimated forfeitures. OnJanuary 1, 2019 , we adopted ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Non-Employee Share-Based Payment Accounting. Subsequent to the adoption of ASU 2018-07, stock-based compensation expense for non-employee stock-based awards is also measured based on the fair value on grant date with its estimated fair value recorded over the requisite service period of the awards (usually the vesting period) on a straight-line basis, net of estimated forfeitures. We calculate the fair value of stock-based compensation awards using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the use of subjective assumptions, including stock price volatility, the expected life of stock options, risk-free interest rate and the fair value of the underlying common stock on the date of grant. The expected volatility is based on the historical volatility of the stock of similar entities within our industry over periods commensurate with our expected term assumption. The expected term of stock option grants represents the weighted-average period the options are expected to remain outstanding and is based on the "simplified" method where the expected term is the midpoint between the vesting date and the end of the contractual term for each option. We base the risk-free interest rate on the interest rate payable onU.S. Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected option term. In reference to the expected dividend yield assumption, we have not historically paid and do not expect for the foreseeable future to pay, a dividend. We recorded stock-based compensation expense related to employees, directors and nonemployees of$15.7 million ,$12.9 million and$9.9 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively. As ofDecember 31, 2020 , we had unrecognized stock-based compensation cost related to options granted to employees and directors of$29.6 million , net of forfeitures, which is expected to be recognized as expense over a period of approximately 2.75 years. Prior to the closing of our IPO, the fair value of the common stock underlying our share-based awards was estimated on each grant date by our board of directors. In order to determine the fair value of our common stock underlying option grants, our board of directors considered, among other things, timely valuations of our common stock prepared by an unrelated third-party valuation firm in accordance with the guidance provided by theAmerican Institute of Certified Public Accountants , or AICPA, Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Given the absence of a public trading market for our common stock historically, our board of directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of our common stock, including our stage of development; progress of our research and development efforts; the rights, preferences and privileges of our convertible preferred stock relative to those of our common stock; equity market conditions affecting comparable public companies; and the lack of marketability of our common stock. After our IPO, the fair market value of each share of underlying common stock is determined based on the closing price of our common stock as reported by the Nasdaq Global Select Market on the date of grant. JOBS Act Accounting Election We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012, as amended, the JOBS Act. Under the JOBS Act, emerging growth companies may delay the adoption of new or 125
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revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards would otherwise apply to private companies.
The JOBS Act permits an "emerging growth company" such as us to take advantage of an extended transition time to comply with new or revised accounting standards as applicable to public companies. We have elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. We will remain an emerging growth company until the earlier to occur of (1) (a)December 31, 2024 , (b) the last day of the fiscal year in which our annual gross revenue is$1.07 billion or more or (c) the date on which we are deemed to be a "large-accelerated filer," under the rules of theSEC , which means the market value of our equity securities that is held by non-affiliates exceeds$700 million as of the priorJune 30th , and (2) the date on which we have issued more than$1.0 billion in non-convertible debt during the prior three-year period. Recent Accounting Pronouncements See Note 2 to our consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K for a description of recent accounting pronouncements applicable to our business.
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