NGM BIOPHARMACEUTICALS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis contains forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors that could impact our business, including those set forth in the section titled "Risk Factors" under Part II, Item 1A in this Quarterly Report on Form 10-Q. In some cases, you can identify forward-looking statements by terminology such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "plan," "potentially," "predict," "should," "will" or the negative of these terms or other similar expressions. In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate we have conducted exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
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. We currently have five ongoing Phase 2 and Phase 2b programs. In 2021 to date, we have continued to progress the development of our leading product candidates as described below:
•Liver and metabolic diseases. •Aldafermin. Aldafermin is an engineered analog of human hormone fibroblast growth factor 19, or FGF19, that is administered through 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. To date in 2021, we: ?completed treatment of patients in our Phase 2b ALPINE 2/3 clinical trial of aldafermin in patients with NASH with F2 and F3 liver fibrosis and ?continued enrollment in our Phase 2b ALPINE 4 clinical trial of aldafermin in patients with NASH with F4 liver fibrosis and compensated cirrhosis, with a goal of enrolling approximately 160 patients across 70 sites inthe United States ,Europe ,Hong Kong andAustralia . ?Looking forward: We expect to report topline results from the ALPINE 2/3 trial in the second quarter of 2021. We are leveraging the results of our completed clinical trials of aldafermin, as well as guidance from theU.S. Food and Drug Administration , or FDA, to support our design of a pivotal clinical trial program to enable a potential biologics license application, or BLA, submission. 23
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•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 insulin sensitivity, blood glucose and liver fat and is administered every four weeks through a subcutaneous injection. MK-3655 is in Phase 2b development for the treatment of NASH and was optioned byMerck Sharp & Dohme Corp. , or Merck, under our collaboration with Merck described below. To date in 2021, Merck: ?continued the worldwide 52-week randomized, double-blind Phase 2b trial of MK-3655 in patients with NASH with F2 or F3 liver fibrosis that it initiated in the fourth quarter of 2020. •Retinal diseases. •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. To date in 2021, we: ?continued enrollment in the Phase 2 CATALINA 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. ?Looking forward: Subject to any future impact of the COVID-19 pandemic on enrollment, we expect to complete enrollment in the CATALINA trial in mid-2021. •Oncology. •NGM120. NGM120 is 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-related cachexia. 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 and metastatic pancreatic cancer. Merck has a one-time option to license NGM120 upon completion of a proof-of-concept study in humans. To date in 2021, we: ?initiated a Phase 2 placebo-controlled component of the ongoing Phase 1/2 clinical trial of NGM120 described below. This portion of the trial is testing NGM120 in combination with gemcitabine and Abraxane® (paclitaxel protein bound) as first-line treatment in patients with metastatic pancreatic cancer to assess NGM120's effect on both cancer and cancer-related cachexia. ?Looking forward: In the second half of 2021, we expect to report interim data from two Phase 1 dose-finding cohorts of the ongoing Phase 1/2 trial of NGM120: 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 in patients with metastatic pancreatic cancer. •NGM707. NGM707 is a dual antagonist monoclonal antibody that inhibits Immunoglobulin-like transcript 2, or ILT2 (also known as LILRB1), and Immunoglobulin-like transcript 4, or ILT4 (also known as LILRB2). ILT2 and ILT4 are key myeloid and lymphoid checkpoints that may restrict anti-tumor immunity, enable tumors to evade 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. ?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. •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 2021, we: ?advanced the preparation of an investigational new drug, or IND, application for a planned submission in the second half of 2021. 24
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?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 procuring raw materials or components 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. Status of Merck Collaboration The original research phase of our existing research collaboration, product development and license agreement with Merck, or the Collaboration Agreement, 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 continue to negotiate potential 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 agreed to extend theMarch 17, 2021 deadline for Merck to deliver its extension notification decision untilJune 30, 2021 . While we do not know 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, 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 25
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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 followingMarch 16, 2022 , the end of the current two-year extension of the research phase, funding from Merck will substantially decrease and our funding for the development of our current and potential future product candidates will substantially increase 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, which since inception throughMarch 31, 2021 includes reimbursement of research and development expenses of$423.7 million and 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 private placements of convertible preferred stock prior to our initial public offering, or IPO, including approximately$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 inDecember 2020 under an Open Market Sale AgreementSM, or the Sales Agreement, we entered into withJefferies LLC , or Jefferies, inJune 2020 ; and •net proceeds of$134.6 million from the sale of 5,324,074 shares of our common stock inJanuary 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. AtMarch 31, 2021 , we had$412.7 million in cash, cash equivalents and short-term marketable securities. We have incurred net losses each year since our inception. As ofMarch 31, 2021 , we had an accumulated deficit of$326.2 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 continue 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 substantially remote work model. Employees working on site continue to be primarily those individuals conducting essential in-person laboratory work and other business functions considered essential under COVID-19 regulations and guidance, and we are still encouraging all other individuals to work remotely where feasible. There have been relatively minor impacts on productivity overall, but future developments could more materially and adversely impact our productivity. In addition, in 2020 and early 2021, 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, and whether we will, return to a fully office-based working model or whether we will be required to adopt a more restrictive work model as the implications of the pandemic evolve. 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 experienced a higher dropout rate in our ALPINE 2/3 trial than we had anticipated based on our previous trials in patients with NASH. We 26
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believe this may be 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. 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 siteInstitutional Review Board . 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. 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 health 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 II, Item 1A of this Quarterly Report on Form 10-Q. Financial Operations Overview Related Party 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 27
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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. For a more detailed description of the current terms of the Collaboration Agreement and the status of the collaboration, see "Our Collaboration with Merck" in Part I, Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2020 and "Overview of Our Business - Status of Merck Collaboration" above. Since inception throughMarch 31, 2021 , Merck had paid us$518.5 million under the Collaboration Agreement. Due to the nature of our agreement with Merck and the timing of related revenue recognition, our revenue has fluctuated from period to period in the past and we expect that it will continue to fluctuate in future periods. We use the cost-based input method in accordance with Accounting Standards Codification 606, or ASC 606, to calculate the corresponding amount of revenue to recognize at each reporting period. In applying the cost-based input measure of revenue recognition, we measure actual costs incurred relative to budgeted costs to fulfill our performance obligation. We apply considerable judgment when we re-evaluate the estimate of expected costs to satisfy the performance obligation each reporting period and make adjustments for any significant changes. A significant change in the estimate of expected costs for the remainder of the current two-year extension period could have a material impact on revenue recognized (including the possible reversal of previously recognized revenue) at each reporting period. Our related party revenue was as follows (in thousands): Three Months Ended March 31, 2021 2020 Related party revenue$ 21,575 $ 24,364 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. 28
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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 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 do not know 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, 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 followingMarch 16, 2022 , the end of the current two-year extension of the research phase, funding from Merck will substantially decrease and our funding for the development of our current and potential future product candidates will substantially increase, 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 health 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 II, Item 1A of this Quarterly Report on Form 10-Q. 29
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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 relatedSecurities and Exchange Commission , orSEC , 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):
Three Months Ended
March 31,
2021 2020 Change
Related party revenue $ 21,575 $ 24,364 $ (2,789)
Operating expenses:
Research and development 40,699 38,439 2,260
General and administrative 8,721 6,595 2,126
Total operating expenses 49,420 45,034 4,386
Loss from operations (27,845) (20,670) (7,175)
Interest income 114 1,175 (1,061)
Other income, net 187 380 (193)
Net loss $ (27,544) $ (19,115) $ (8,429) Related Party Revenue from Merck
Revenue decreased
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Research and Development Expenses
Our R&D expenses by program were as follows (in thousands):
Three Months Ended
March 31,
2021 2020
External R&D expenses:
Aldafermin (FGF19 analog) $ 9,598 $ 14,151
NGM621 (C3 inhibitor) 3,686 1,298
NGM120 (GFRAL antagonist) 1,361 1,365
NGM707 (Anti-ILT2/ILT4 dual antagonist) 1,165 760
NGM438 (LAIR1 antagonist) 1,515 42
NGM395 (GDF15 analog) 235 476
MK-3655 (FGFR1c/KLB agonist) 35 129
Other external R&D expenses 708 1,935
Total external R&D expenses 18,303 20,156
Personnel-related expenses 14,269 10,818Internal and unallocated R&D expenses(1) 8,127 7,465 Total R&D expenses
$ 40,699 $ 38,439 (1)Internal and unallocated research and development expenses consist primarily of research supplies and consulting fees, which we deploy across multiple research and development programs. R&D expenses increased$2.3 million in the three months endedMarch 31, 2021 compared to the same period in 2020 primarily due to a$3.5 million increase in personnel-related expenses and an increase in external expenses driven by our ongoing clinical and preclinical studies of NGM621, NGM438 and NGM707. These increases were partially offset by decreases of$4.6 million in expenses for our manufacturing activities and our ongoing clinical trials of aldafermin and$1.2 million in external expenses related to our other development programs. We expect R&D expenses for the remainder of 2021 to 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$2.1 million in the three months endedMarch 31, 2021 compared to the same period in 2020 primarily due to an increase in personnel-related expenses due to increased headcount and an increase in stock-based compensation expense primarily related to the increase in our stock price. We anticipate general and administrative expenses for the remainder of 2021 to 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 including expenses related to SOX 404 compliance.
Interest Income
Interest income decreased
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,
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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 do not know 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, 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 - Status of Merck Collaboration" 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. As ofMarch 31, 2021 , we had an accumulated deficit of$326.2 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 - Status of Merck Collaboration" above, the parties continue to negotiate potential modifications to the terms of the collaboration. While we do not know 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, 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 followingMarch 16, 2022 , the end of the current two-year extension of the research phase, funding from Merck will substantially decrease and our funding with respect to the development of our current and potential future product candidates will substantially increase, 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, 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. As ofMarch 31, 2021 ,$127.4 million of our common stock remained available to be sold under the Sales Agreement, subject to conditions specified in the Sales Agreement. 32
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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 to the public of$27.00 per share for aggregate net proceeds to the Company of$134.6 million , or the follow-on offering. As ofMarch 31, 2021 , we had cash and cash equivalents of$148.1 million , short-term marketable securities of$264.5 million , working capital of$385.5 million and an accumulated deficit of$326.2 million . 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 II, Item 1A of this Quarterly Report on Form 10-Q. 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. Cash Flow Activity The following table summarizes our cash flow activity (in thousands): Three Months Ended March 31, 2021 2020 Net cash provided by (used in): Operating activities (22,225) (19,110) Investing activities (117,156) 26,873 Financing activities 140,477 3,591
Net increase in cash and cash equivalents
Cash Used in Operating Activities
During the three months ended
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increase in accrued expenses of$3.0 million . These increases were partially offset by a decrease in related party receivable from our Merck collaboration of$4.5 million , a decrease in accounts payable of$5.3 million , a decrease in deferred rent of$0.7 million and a decrease in deferred revenue of$4.9 million primarily attributable to the timing of advance payments from Merck related to the reimbursement of costs associated with R&D activities. Cash Provided by (Used in) Investing Activities During the three months endedMarch 31, 2021 , cash used in investing activities was$117.2 million , which consisted of purchases of marketable securities of$145.0 million with net proceeds from our follow-on offering, partially offset by$28.0 million in net proceeds on maturity of marketable securities. During the three months endedMarch 31, 2020 , cash provided by investing activities was$26.9 million , which consisted of$56.8 million in net proceeds on maturity of marketable securities, partially offset by purchases of marketable securities of$29.4 million and purchases of property and equipment of$0.5 million . Cash Provided by Financing Activities During the three months endedMarch 31, 2021 cash provided by financing activities was$140.5 million and consisted of net proceeds from the follow-on offering of$134.6 million and proceeds from employee equity incentive plans of$5.9 million . During the three months endedMarch 31, 2020 , cash provided by financing activities was$3.6 million and consisted of proceeds from employee equity incentive plans. 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
During the three months ended
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results
of operations is based on our condensed consolidated financial statements, which
we have prepared in accordance with
Newly Issued Accounting Pronouncements
Except as described in Note 2 to the condensed consolidated financial statements
under the headings "Recently Adopted Accounting Pronouncements" and "Recent
Accounting Pronouncements Not Yet Adopted," there have been no new accounting
pronouncements or changes to accounting pronouncements during the three months
ended
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