CARISMA THERAPEUTICS, INC. The following discussion and analysis of our financial condition and results of operations, as well as other sections in this Quarterly Report on Form 10-Q, should be read in conjunction with our unaudited interim condensed consolidated financial statements and related notes thereto appearing elsewhere herein and our audited annual consolidated financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the year endedDecember 31, 2020 , included in our Annual Report on Form 10-K filed with theUnited States Securities and Exchange Commission ("SEC") onMarch 15, 2021 . In addition to historical financial information, some of the information contained in the following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). All statements other than statements of historical facts, including statements regarding our future results of operations and financial position, the impact of the COVID-19 pandemic, business strategy, current and prospective products, product approvals, research and development costs, current and prospective collaborations, timing and likelihood of success, plans and objectives of management for future operations and future results of current and anticipated products, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expect," "plan," "anticipate," "could," "intend," "target," "project," "contemplate," "believe," "estimate," "predict," "potential" or "continue" or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q include, among other things, statements about: •our plans and ability to resolve the issues identified in the complete response letter ("CRL") we received from theUS Food and Drug Administration ("FDA") regarding our Biologics License Application ("BLA") for Vicineum™ for the treatment of bacillus Calmette-Guérin ("BCG")-unresponsive non-muscle invasive bladder cancer ("NMIBC"); •our plans and ability to resolve the concerns identified in theEuropean Medicines Agency's ("EMA") Withdrawal Assessment Report related to our marketing authorization application ("MAA") for Vysyneum™ (the "EMA Withdrawal Report"); •the Company's belief that it has a clear understanding of what additional information regarding CMC is required for potential resubmission of the BLA for Vicineum; •the Company's ability to utilize Vicineum manufactured during process validation for any potential clinical trials needed to address issues raised in the CRL, and that any such potential clinical trials can proceed while addressing CMC issues; •the Type A meeting to discuss the recommendations specific to additional clinical/statistical data and analyses that the FDA raised in the CRL to discuss next steps for Vicineum for the treatment of BCG-unresponsive NMIBC (the "Clinical Type A Meeting") and the anticipated timing of any such meeting; •our expectation that we will need to conduct an additional clinical trial for Vicineum for the treatment of BCG-unresponsive NMIBC to address questions related to clinical matters raised in the CRL; •our intentions to use the information from the CMC Type A Meeting and the Clinical Type A Meeting to determine the appropriate path forward with regulators; •our plans and ability to resubmit the BLA for Vicineum for the treatment of BCG-unresponsive NMIBC to the FDA following the issuance of the CRL by the FDA, and if approved by the FDA, our ability to commercialize Vicineum for the treatment of BCG unresponsive NMIBC inthe United States ; •our plans and ability to resume pursuing regulatory approval of Vysyneum for the treatment of BCG-unresponsive NMIBC in theEuropean Union when there is more clarity from the FDA on next steps for Vicineum in the US; •our intentions to work closely with the FDA to understand next steps for Vicineum for the treatment of BCG-unresponsive NMIBC in the US; •our intentions to work closely with the EMA to understand next steps for Vysyneum for the treatment of BCG-unresponsive NMIBC in theEuropean Union ; •our ongoing voluntary internal review by outside counsel and other experts on the conduct of, and data generated from, the clinical trials of Vicineum for the treatment of BCG-unresponsive NMIBC, and the overall safety and effectiveness of Vicineum; •the potential impact of the COVID-19 pandemic on our business; •our expected future loss and accumulated deficit levels; •the difficulties and expenses associated with obtaining and maintaining regulatory approval of Vicineum for the treatment of BCG-unresponsive NMIBC inthe United States , theEuropean Union and other foreign jurisdictions, and the labeling under any approval we may obtain; •our expectation that the first wave of potential country approvals for Vicineum for the treatment of BCG-unresponsive NMIBC in the MENA region may occur as early as 2025; •our projected financial position and estimated cash burn rate; •our belief that we have sufficient future cash flows from additional geographic regions outside the US to support the value of our goodwill and EU IPR&D; 24 -------------------------------------------------------------------------------- Table of
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•our plans to continue to evaluate timelines for commercialization and probability of success of development of Vicineum for the treatment of BCG-unresponsive NMIBC; •our estimations regarding any remeasurement of contingent consideration liability in the future; •our estimations regarding any potential impairment to our goodwill and indefinite lived intangible assets in the future; •our estimates regarding expenses, future revenues, capital requirements and needs for, and ability to obtain, additional financing; •our need to raise substantial additional capital to fund our operations; •the success, cost and timing of our pre-clinical studies and clinical trials inthe United States and other foreign jurisdictions; •our dependence on third parties, including contract research organizations ("CROs") in the conduct of our pre-clinical studies and clinical trials; •the timing and costs associated with our manufacturing process and technology transfer toFUJIFILM Diosynth Biotechnologies U.S.A., Inc. ("Fujifilm") for the production of Vicineum drug substance, and our reliance on Fujifilm to perform under our agreement with Fujifilm; •the timing and costs associated with our manufacturing process and technology transfer toBaxter Oncology GmbH ("Baxter") for the production of Vicineum drug product, and our reliance on Baxter to perform under our agreement with Baxter; •the timing and costs associated with our manufacturing process and technology transfer toQilu Pharmaceutical Co., Ltd. ("Qilu") for the production of Vicineum drug substance and drug product, and our reliance on Qilu to perform under our agreement with Qilu; •market acceptance of our product candidates, including Vicineum for the treatment of BCG-unresponsive NMIBC, the size and growth of the potential markets for our product candidates, and our ability to serve those markets; •obtaining and maintaining intellectual property protection for our product candidates and our proprietary technology; •our strategic operating plan to sublicense Vicineum for the treatment of BCG-unresponsive NMIBC to business development partners in all regions outside the US, including the EU, to earn a potential combination of upfront, milestone, and royalty payments, and the business development partner to bear the majority of regulatory and commercialization costs; •our expectations regarding the amount and timing of milestone and royalty payments pursuant to our out-license agreements and business development partnership agreements, including our license agreement withF. Hoffmann-La Roche Ltd andHoffmann-La Roche Inc. (collectively, "Roche") and our exclusive license agreement with Qilu for the development, manufacture and commercialization of Vicineum inGreater China ; •our plans to seek additional business development partnerships; and •the success of competing therapies and products that are or become available. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and involve known and unknown risks, uncertainties, assumptions and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, among others, the following: •we may not be able to resolve the issues raised in the CRL we received from the FDA regarding our BLA for Vicineum for the treatment of BCG-unresponsive NMIBC; •we may not be able to resolve the concerns identified in the EMA Withdrawal Assessment Report; •after the CMC Type A Meeting and the Clinical Type A Meeting with the FDA to discuss our BLA for Vicineum for the treatment of BCG-unresponsive NMIBC, we may not have a viable path forward for continued clinical development of Vicineum, which would prevent us from resubmitting our BLA for Vicineum; •we may not achieve profitable operations or access needed capital; •clinical trials of Vicineum for the treatment of BCG-unresponsive NMIBC, or any of our other product candidates, may not demonstrate safety and efficacy to the satisfaction of the FDA, EMA or other foreign regulatory authorities or otherwise produce favorable results; •we may not obtain marketing approval of Vicineum for the treatment of BCG-unresponsive NMIBC inthe United States , theEuropean Union , or other foreign jurisdictions; •Vicineum may not gain market acceptance for the treatment of BCG-unresponsive NMIBC inthe United States , theEuropean Union or other foreign jurisdictions; •market opportunity for Vicineum may be limited to those patients who are ineligible for established therapies or for whom prior therapies have failed; •we may experience issues or delays with implementation of commercial-scale manufacturing of Vicineum; 25 -------------------------------------------------------------------------------- Table of
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•we may be unable to establish sales, marketing and distribution capabilities or scale up and validate external manufacturing capabilities of Vicineum (including completing the manufacturing process and technology transfer to any third-party manufacturers) for the treatment of BCG-unresponsive NMIBC inthe United States , if approved; •our competitors may discover, develop or commercialize products before, or more successfully than, we do; •we may be unable to obtain, maintain, defend and enforce patent claims and other intellectual property rights; •we may be unable to defend against pending or threatened litigation, which may be costly and time-consuming; •our ongoing voluntary internal review by outside counsel and other experts on the conduct of, and data generated from, the clinical trials of Vicineum for the treatment of BCG-unresponsive NMIBC, and the overall safety and effectiveness of Vicineum could result in significant expenses and other harm to our business; •we may fail to comply with all regulatory requirements or experience unanticipated problems with our products; •we may recognize impairment of our goodwill and indefinite lived intangible assets; •such other factors described in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K and in Item 1A. Risk Factors in this Quarterly Report on Form 10-Q. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for us to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise. Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to the "Company," "Sesen," "we," "us," and "our" includeSesen Bio, Inc. and its subsidiaries. 26 -------------------------------------------------------------------------------- Table of
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Overview
We are a late-stage clinical company advancing targeted fusion protein
therapeutics ("TFPTs") for the treatment of patients with cancer. We genetically
fuse the targeting antibody fragment and the cytotoxic protein payload into a
single molecule that is produced through our proprietary one-step, microbial
manufacturing process. We target tumor cell surface antigens with limited
expression on normal cells. Binding of the target antigen by the TFPT allows for
rapid internalization into the targeted cancer cell. We have designed our
targeted proteins to overcome the fundamental efficacy and safety challenges
inherent in existing antibody-drug conjugates ("ADCs") where a payload is
chemically attached to a targeting antibody.
Our most advanced product candidate, Vicineum, also known as VB4-845, is a
locally-administered targeted fusion protein composed of an anti-epithelial cell
adhesion molecule ("EpCAM") antibody fragment tethered to a truncated form of
Pseudomonas exotoxin A for the treatment of BCG-unresponsive NMIBC.
On December 18, 2020 , we submitted our completed BLA for Vicineum for the
treatment of BCG-unresponsive NMIBC to the FDA. On February 12, 2021 , the FDA
notified us that it had accepted our BLA filing. The FDA also granted Priority
Review for the BLA and set a target PDUFA date for a decision on the BLA of
August 18, 2021 . On August 13, 2021 , we received a CRL from the FDA indicating
that the FDA had determined that it could not approve the BLA for Vicineum in
its present form, and provided recommendations specific to additional
clinical/statistical data and analyses in addition to CMC issues pertaining to a
recent pre-approval inspection and product quality. On August 20, 2021 , we
withdrew our MAA to the EMA for Vysyneum for the treatment of BCG-unresponsive
NMIBC in order to pause our plans to pursue regulatory approval of Vysyneum in
the European Union until there is more clarity from the FDA on next steps for
Vicineum in the United States . On October 20, 2021 , the EMA issued its
Withdrawal Assessment Report relating to our MAA for Vysyneum, as is consistent
with the EMA's standard practice when an MAA is withdrawn. The Assessment Report
reflects the initial assessment and corresponding questions from the EMA and
identifies major objections in the areas of Quality, Good Clinical Practice,
Efficacy and Safety. Due to the high concordance between FDA and European
Commission approvals, we believe that the probability of success of future
approval in the European Union for Vysyneum increases if FDA approval for
Vicineum has already been obtained. On
October 29, 2021 , we participated in a Type A meeting with the FDA to discuss
questions related to CMC raised in the CRL. During the CMC Type A Meeting, we
and the FDA reviewed issues related to CMC to be further discussed during the
review of the BLA for Vicineum upon potential resubmission. We believe we have a
clear understanding of what additional information regarding CMC is required for
resubmission of the BLA. Additionally, although not an issue raised in the CRL,
the FDA confirmed that Vicineum manufactured using the proposed commercial
process is comparable to Vicineum used in prior clinical trials. The FDA also
confirmed that we can utilize Vicineum manufactured during process validation
for any potential future clinical trials needed to address issues raised in the
CRL, and that these potential trials can proceed while addressing CMC issues. We
are preparing for a separate Type A Meeting to discuss the recommendations
specific to additional clinical/statistical data and analyses that the FDA
raised in the CRL, which we expect to occur later this year. We intend to use
information from the CMC Type A Meeting and the Clinical Type A Meeting to
determine the appropriate path forward with regulators.
In August 2019 , we reported updated preliminary efficacy data from our ongoing
single-arm, multi-center, open-label Phase 3 clinical trial of Vicineum as a
monotherapy in patients with BCG-unresponsive NMIBC (the "VISTA Trial"). As of
the May 29, 2019 data cutoff date, the preliminary complete response rates
("CRRs") in evaluable carcinoma in situ ("CIS") patients following three, six,
nine and 12 months of treatment in the clinical trial were consistent with those
observed in the previously completed Phase 1 and Phase 2 Vicineum clinical
trials for the treatment of NMIBC. The VISTA Trial completed enrollment in April
2018 with a total of 133 patients across three cohorts based on histology and
time to disease recurrence after adequate BCG treatment (under 2018 FDA guidance
on treatment of NMIBC, adequate BCG is defined as at least two courses of BCG
with at least five doses in an initial induction course of treatment, plus at
least two doses in a second course of treatment):
•Cohort 1 (n=86): Patients with CIS with or without papillary disease that were
determined to be refractory or recurred within six months of their last course
of adequate BCG;
•Cohort 2 (n=7): Patients with CIS with or without papillary disease that
recurred after six months, but less than 11 months, after their last course of
adequate BCG; and
•Cohort 3 (n=40): Patients with high-risk (Ta or T1) papillary disease without
CIS that was determined to be refractory or recurred within six months of their
last course of adequate BCG.
The primary endpoints of the VISTA Trial were CRR at 3 months in patients with
CIS (with or without papillary disease) whose disease is BCG-unresponsive and
duration of response ("DoR") for BCG-unresponsive CIS patients who experience a
complete response ("CR").
As of the May 29, 2019 data cutoff date, preliminary primary and secondary
endpoint data for each of the trial cohorts were as follows:
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Cohort 1 (n=86) Evaluable Population (n=82) Complete Response Rate, for CIS
Complete Response Rate
Time Point Evaluable Patients* (95% Confidence Interval)
3-months n=82 39% (28%-50%)
6-months n=82 26% (17%-36%)
9-months n=82 20% (12%-30%)
12-months n=82 17% (10%-27%)
* Response-evaluable population includes any modified intention-to-treat
("mITT") patient who completed the induction phase.
Cohort 2 (n=7) Evaluable Population (n=7) Complete Response Rate, for CIS
Complete Response Rate
Time Point Evaluable Patients* (95% Confidence Interval)
3-months n=7 57% (18%-90%)
6-months n=7 57% (18%-90%)
9-months n=7 43% (10%-82%)
12-months n=7 14% (0%-58%)
* Response-evaluable population includes any mITT patient who completed the
induction phase.
Pooled Cohorts 1 and 2 (n=93) Evaluable Population (n=89) Complete Response
Rate, for CIS
Complete Response Rate
Time Point Evaluable Patients* (95% Confidence Interval)
3-months n=89 40% (30%-51%)
6-months n=89 28% (19%-39%)
9-months n=89 21% (13%-31%)
12-months n=89 17% (10%-26%)
* Response-evaluable population includes any mITT patient who completed the
induction phase.
Phase 3 Pooled Complete Response Rate vs. Phase 2 Pooled Complete Response Rate
Preliminary Phase 3 Pooled CRR Phase 2 Pooled CRR
Time Point (95% Confidence Interval) (95% Confidence Interval)
3-months 40% (30%-51%) 40% (26%-56%)
6-months 28% (19%-39%) 27% (15%-42%)
9-months 21% (13%-31%) 18% (8%-32%)
12-months 17% (10%-26%) 16% (7%-30%)
Cohort 3 (n=40) Evaluable Population (n=38) Recurrence-Free Rate†
Recurrence-Free Rate
Time Point Evaluable Patients* (95% Confidence
Interval)
3-months n=38 71% (54%-85%)
6-months n=38 58% (41%-74%)
9-months n=38 45% (29%-62%)
12-months n=38 42% (26%-59%)
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† Recurrence-free rate is defined as the percentage of patients that are
recurrence-free at the given assessment time point.* Response-evaluable population includes any mITT patient who completed the
induction phase.
Duration of Response: The median DoR for patients in Cohort 1 and Cohort 2
combined (n=93) is 287 days (lower 95% confidence interval ("CI") = 154 days,
upper 95% confidence interval is not estimable ("NE") due to the limited number
of events occurring beyond the median), using the Kaplan-Meier method. The
Kaplan-Meier method is a non-parametric statistical analysis used to estimate
survival times and times to event when incomplete observations in data exist.
Additional ad hoc analysis of pooled data for all patients with CIS (Cohorts 1
and 2, n=93) shows that among patients who achieved a complete response at 3
months, 52% remained disease-free for a total of 12 months or longer after
starting treatment, using the Kaplan-Meier method. DoR is defined as the time
from first occurrence of complete response to documentation of treatment failure
or death.
We have conducted additional analyses for secondary endpoints based on the May
29, 2019 data cutoff date. These additional preliminary data include the
following:
•Time to Cystectomy: Across all 133 patients treated with Vicineum in the VISTA
Trial, greater than 75% of all patients are estimated to remain cystectomy-free
at 3 years, using the Kaplan-Meier method. Additional ad hoc analysis shows that
approximately 88% of responders are estimated to remain cystectomy-free at 3
years. Time to cystectomy is defined as the time from the date of first dose of
study treatment to surgical bladder removal. The first 2018 FDA guidance on
treatment of BCG-unresponsive NMIBC patients states that the goal of therapy in
such patients is to avoid cystectomy. Therefore, time to cystectomy is a key
secondary endpoint in the VISTA Trial.
•Time to Disease Recurrence: High-grade papillary (Ta or T1) NMIBC is associated
with higher rates of progression and recurrence. The median time to disease
recurrence for patients in Cohort 3 (n=40) is 402 days (95% CI, 170-NE), using
the Kaplan-Meier method. Time to disease recurrence is defined as the time from
the date of the first dose of study treatment to the first occurrence of
treatment failure or death on or prior to treatment discontinuation.
•Progression-Free Survival ("PFS"): 90% of all 133 patients treated with
Vicineum in the VISTA Trial are estimated to remain progression-free for 2 years
or greater, using the Kaplan-Meier method. PFS is defined as the time from the
date of first dose of study treatment to the first occurrence of disease
progression (e.g. T2 or more advanced disease) or death on or prior to treatment
discontinuation.
•Event-Free Survival: 29% of all 133 patients treated with Vicineum in the VISTA
Trial are estimated to remain event-free at 12 months, using the Kaplan-Meier
method. Event-free survival is defined as the time from the date of first dose
of study treatment to the first occurrence of disease recurrence, progression or
death on or prior to treatment discontinuation.
•Overall Survival ("OS"): 96% of all 133 patients treated with Vicineum in the
VISTA Trial are estimated to have an overall survival of 2 years or greater,
using the Kaplan-Meier method. OS is defined as the time from the date of first
dose of study treatment to death from any cause.
Data is as of May 29, 2019 data cut from the Phase III VISTA trial. The clinical
data shown are based on the data submitted in the BLA on December 18, 2020 .
Final numbers are pending. On August 13, 2021 , the FDA issued a CRL for the BLA,
which included requests for additional clinical and statistical data. We intend
to discuss these topics with the FDA at a Type A meeting we expect to occur
later this year.
Preliminary Safety Results
As of the May 29, 2019 data cutoff date, in patients across all cohorts (n=133)
of our Phase 3 VISTA Trial of Vicineum for the treatment of BCG-unresponsive
NMIBC, 88% experienced at least one adverse event, with 95% of adverse events
being Grade 1 or 2. The most commonly reported treatment-related adverse events
were dysuria (14%), hematuria (13%) and urinary tract infection (12%) - all of
which are consistent with the profile of bladder cancer patients and the use of
catheterization for treatment delivery. These adverse events were determined by
the clinical investigators to be manageable and reversible, and only four
patients (3%) discontinued treatment due to an adverse event. Serious adverse
events, regardless of treatment attribution, were reported in 14% of patients.
There were four treatment-related serious adverse events reported in three
patients including acute kidney injury (Grade 3), pyrexia (Grade 2), cholestatic
hepatitis (Grade 4) and renal failure (Grade 5). There were no age-related
increases in adverse events observed in the VISTA Trial.
Other Vicineum Activity
On December 18, 2020 , we submitted the completed BLA, including Module 3 (CMC),
to the FDA.
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OnFebruary 12, 2021 , the FDA notified us that it had accepted our BLA filing. The FDA also granted Priority Review for the BLA and a target PDUFA date for a decision on the BLA ofAugust 18, 2021 . OnMarch 5, 2021 , we submitted our MAA to the EMA for Vicineum (oportuzumab monatox) for the treatment of BCG-unresponsive NMIBC under the EMA's centralized procedure. We received notice onMarch 25, 2021 from the EMA that our MAA for Vicineum was found to be valid and that the review procedure had officially started. OnMarch 31, 2021 , we were informed that the Committee for Medicinal Products for Human Use of the EMA had conditionally accepted the proprietary brand name Vysyneum for our product candidate, oportuzumab monatox, in theEuropean Union . The name Vysyneum has identical pronunciation to theU.S. proprietary brand name Vicineum and was developed in accordance with the criteria outlined in the EMA's Guideline on the acceptability of names for human medicinal products. OnJuly 13, 2021 , we participated in a productive Late-Cycle Meeting with the FDA regarding the BLA for Vicineum for the treatment of BCG-unresponsive NMIBC. In the meeting, the FDA confirmed that there was no Advisory Committee meeting planned at that time, and that no post-marketing requirements, including a confirmatory trial, had been identified at that time. Also in the meeting, we and the FDA discussed remaining questions related to manufacturing facilities inspection, product quality information requests and additional information related to CMC, and a timeline to submit additional supporting information was agreed upon. OnAugust 13, 2021 , we received a CRL from the FDA indicating that the FDA had determined that it could not approve our BLA for Vicineum in its present form and provided recommendations specific to additional clinical/statistical data and analyses in addition to CMC issues pertaining to a recent pre-approval inspection and product quality. OnAugust 20, 2021 , we withdrew our MAA to the EMA for Vysyneum for the treatment of BCG-unresponsive NMIBC in order to pause our plans to pursue regulatory approval of Vysyneum in theEuropean Union until there is more clarity from the FDA on the next steps for Vicineum inthe United States . OnSeptember 17, 2021 , we disclosed that we have voluntarily engaged outside counsel and other experts to conduct a review focusing on the conduct of, and data generated from, the clinical trials of Vicineum for the treatment of BCG-unresponsive NMIBC, and the overall safety and effectiveness of Vicineum. We expect to incur substantial costs in conducting this internal review, but because the internal review is ongoing, we cannot predict the duration, scope, or result of the review. OnOctober 20, 2021 , the EMA issued its Withdrawal Assessment Report relating to our MAA for Vysyneum, as is consistent with the EMA's standard practice when an MAA is withdrawn. The Assessment Report reflects the initial assessment and corresponding questions from the EMA and identifies major objections in the areas of Quality, Good Clinical Practice, Efficacy and Safety. Due to the high concordance between FDA andEuropean Commission approvals, we believe that the probability of success of future approval in theEuropean Union for Vysyneum increases if FDA approval for Vicineum has already been obtained. We intend to use information from the CMC Type A Meeting and the Clinical Type A Meeting to determine the appropriate path forward with regulators. OnOctober 27, 2021 , the FDA published a Warning Letter (the "FDA Warning Letter") issued to a former study investigator in our VISTA trial for Vicineum arising from a 2021 FDA inspection related to the review of our BLA for Vicineum for the treatment of BCG-unresponsive NMIBC. We discontinued use of the clinical site and the study investigator over four years ago when we learned of professional misconduct by the study investigator that was unrelated to the VISTA trial. The FDA Warning Letter indicates that the study investigator did not comply with applicable statutory requirements and applicable regulations regarding conduct of clinical investigations. The study investigator operated a clinical site that was previously part of the VISTA trial, which was closed by us onMay 26, 2017 . The study investigator's medical license was temporarily suspended onMay 29, 2017 due to inaccurate recordkeeping, which was unassociated withSesen Bio and the patients in the VISTA trial. We notified the FDA of the misconduct at that time. When the clinical site was closed, five patients had completed treatment and were in post-treatment follow-up. There was no evidence found that patients were harmed by the study investigator's actions. We included the corresponding patient data from the clinical site in its BLA submission to the FDA, which were thoroughly analyzed and discussed during the BLA review. OnOctober 29, 2021 , we participated in a Type A meeting with the FDA to discuss questions related to CMC raised in the CRL. During the CMC Type A Meeting, we and the FDA reviewed issues related to CMC to be further discussed during the review of the BLA for Vicineum upon potential resubmission. We believe we have a clear understanding of what additional information regarding CMC is required for resubmission of the BLA. We are preparing for a separate Type A Meeting to discuss the recommendations specific to additional clinical/statistical data and analyses that the FDA raised in the CRL, which we expect to occur later this year. Manufacturing InOctober 2018 , we entered into a Master Bioprocessing Services Agreement with Fujifilm (the "Fujifilm MSA") for the manufacturing process and technology transfer of Vicineum drug substance production. InApril 2019 , the first full, commercial-scale current Good Manufacturing Practice ("cGMP") run was completed at Fujifilm. Full quality release testing was completed and all Phase 3 release specifications were met, supporting Fujifilm's ability to 30 -------------------------------------------------------------------------------- Table of
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produce the bulk drug substance form of Vicineum for commercial purposes if we receive regulatory approval to market Vicineum for the treatment of BCG-unresponsive NMIBC. InNovember 2019 , we entered into a Commercial Manufacturing and Supply Agreement with Baxter for the manufacturing process and technology transfer of Vicineum drug product production. InFebruary 2020 , manufacturing of the pre-process performance qualification ("pre-PPQ") cGMP batch was completed at Fujifilm. Full quality release testing of the drug substance was completed and all quality acceptance criteria were met. OnAugust 4, 2020 , we completed manufacturing of the drug substance PPQ batches at Fujifilm and inSeptember 2020 , we successfully completed the final of three drug product PPQ batches at Baxter. All of the completed drug substance PPQ batches and drug product PPQ batches met all quality acceptance criteria. InDecember 2020 , we received and analyzed all of the analytical comparability test results from the drug substance and drug product PPQ batches. For analytical comparability, we conducted testing across four categories: release testing, biophysical characterization, forced degradation studies, and stability studies. This approach is in alignment with requirements of the FDA, the EMA and theInternational Council for Harmonisation of Technical Requirements for Pharmaceuticals for Human Use . The test results for product intended for commercial use were found to be highly comparable to our clinical supply of Vicineum. The comparability data from the PPQ campaigns for both drug substance and drug product were the final material components of our completed BLA, which was submitted to the FDA onDecember 18, 2020 . InDecember 2020 , we entered into a commercial manufacturing and supply framework agreement with Qilu (the "Qilu Framework Agreement") for Qilu to be a contract manufacturer for the global commercial supply of Vicineum. InJanuary 2021 , we signed a Scope of Work (" SOW #10") with Fujifilm under the Fujifilm MSA for the manufacturing of commercial batches of Vicineum in 2021. InJune 2021 , we amended and replaced the Qilu Framework Agreement and entered into a Global Supply Agreement with Qilu pursuant to which Qilu will be part of the manufacturing network for global commercial supply of Vicineum drug substance and drug product. OnOctober 29, 2021 , at the CMC Type A Meeting, the FDA confirmed that Vicineum manufactured using the proposed commercial process is comparable to Vicineum used in prior clinical trials. The FDA also confirmed that we can utilize Vicineum manufactured during process validation for any potential future clinical trials needed to address issues raised in the CRL, and that these potential trials can proceed while addressing CMC issues. Outside ofUnited States ("OUS") Business Development PartneringGreater China OnJuly 30, 2020 , we and our wholly-owned subsidiary,Viventia Bio, Inc. , entered into an exclusive license agreement withQilu Pharmaceutical, Co., Ltd. ("Qilu") pursuant to which we granted Qilu an exclusive, sublicensable, royalty-bearing license, under certain intellectual property owned or exclusively licensed by us, to develop, manufacture and commercialize Vicineum for the treatment of BCG-unresponsive NMIBC and other types of cancer inChina ,Hong Kong ,Macau andTaiwan ("Greater China"). We also granted Qilu a non-exclusive, sublicensable, royalty-bearing sublicense, under certain other intellectual property licensed by us to develop, manufacture and commercialize Vicineum inGreater China . We retain (i) development and commercialization rights in the rest of the world excludingGreater China , theMiddle East andNorth Africa region ("MENA") andTurkey and (ii) manufacturing rights with respect to Vicineum in the rest of the world excludingGreater China . During 2020, we received a total of$10 million in net proceeds associated with the Qilu License Agreement. We are also entitled to receive up to an additional$23 million upon the achievement of certain technology transfer, development and regulatory milestones, as well as a 12% royalty based upon annual net sales of Vicineum inGreater China . The royalties are payable upon the first commercial sale of Vicineum in a region and continuing until the latest of (i) twelve years after the first commercial sale of Vicineum in such region, (ii) the expiration of the last valid patent claim covering or claiming the composition of matter, method of treatment, or method of manufacture of Vicineum in such region, and (iii) the expiration of regulatory or data exclusivity for Vicineum in such region. The royalty rate is subject to reduction under certain circumstances, including when there is no valid claim of a licensed patent that covers Vicineum in a particular region or no data or regulatory exclusivity of Vicineum in a particular region. The Investigational New Drug application ("IND") for Vicineum submitted by Qilu to theCenter for Drug Evaluation of theChina National Medical Products Administration was accepted for review inJanuary 2021 and approved inMarch 2021 , resulting in a$3 million milestone payment from Qilu, the first milestone payment out of the$23 million in potential milestone payments. We recorded$2.8 million (net of VAT) as license revenue during the three-month period endedMarch 31, 2021 . InJune 2021 , the Qilu License Agreement was recognized byShandong Province ,Bureau of Science and Technology as "Technology Transfer". An agreement that is designated as a Technology Transfer shall be entitled to a tax incentive of value-added tax ("VAT") recovery. As such, we recorded$0.9 million of revenue during the three months endedJune 30, 2021 for 31 -------------------------------------------------------------------------------- Table of
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additional purchase price resulting from Qilu's obligation to pay Sesen an amount equal to its recovery of VAT. We will not be subject to VAT on future potential milestone payments. MENA OnNovember 30, 2020 , we entered into an exclusive license agreement with Hikma Pharmaceuticals LLC ("Hikma") (the "Hikma License Agreement") pursuant to which we grantedHikma an exclusive, sublicensable, royalty-bearing license, under certain intellectual property owned or exclusively licensed by us, to commercialize Vicineum in the MENA region. We retain development and commercialization rights in the rest of the world excludingGreater China and MENA. In consideration for the rights granted by us,Hikma agreed to pay to us an upfront payment, sales related milestones payments, and royalties and on net sales in the MENA region for the term of the Hikma License Agreement. We continue to work closely with our partner, Hikma Pharmaceuticals, to submit marketing authorization applications for Vicineum in 2021 in seven key markets in the region: theKingdom of Saudi Arabia ,Jordan ,Morocco ,Egypt ,Lebanon ,Kuwait andAlgeria . These seven markets represent a significant opportunity in the MENA region, asSaudi Arabia ,Jordan andMorocco have some of the most advanced healthcare systems in the region whileEgypt is the second largest economy inAfrica . We anticipate the first wave of potential country approvals for Vicineum in the MENA region as early as 2025.Turkey OnAugust 5, 2021 , we entered into an exclusive license agreement with Eczacibasi Pharmaceuticals Marketing ("EIP") pursuant to which we granted EIP an exclusive license to register and commercialize Vicineum for the treatment of BCG-unresponsive NMIBC inTurkey andNorthern Cyprus . Under the terms of the licensing agreement, we are entitled to receive an upfront payment of$1.5 million , which we agreed to defer the payment of this amount until the conclusion of our Type A meetings with the FDA. We are also eligible to receive additional regulatory and commercial milestone payments of$2.0 million and are entitled to receive a 30% royalty on net sales inTurkey andNorthern Cyprus . We have deferred the upfront payment due from EIP until conclusion of the Type A meetings with the FDA which are expected to be completed by the end of 2021.National Cancer Institute InJune 2017 , we entered into aCooperative Research and Development Agreement ("CRADA") with theNational Cancer Institute ("NCI") for the development of Vicineum in combination with AstraZeneca's immune checkpoint inhibitor durvalumab for the treatment of BCG-unresponsive NMIBC. Vicineum is believed to work via a dual mechanism of action to directly kill cancer cells and activate a local inflammatory process that stimulates T-cells, which then proliferate and destroy the cancer cells. Because of this second mechanism, there may be potential for a synergistic effect when given in combination with checkpoint inhibitors. This hypothesis is being tested by the NCI in a Phase 1 clinical trial in patients with BCG-unresponsive NMIBC to evaluate the safety, efficacy and biological correlates of Vicineum in combination with durvalumab ("NCI Trial"). This Phase 1 clinical trial is open and actively recruiting patients. 32 -------------------------------------------------------------------------------- Table of
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Components of Our Results of Operations
License and Related Revenue
License revenue consists of revenue recognized pursuant to our OUS business
development partnership agreements which is assessed under ASC 606. In the
future, we may generate revenue from a combination of up-front payments,
milestone payments and royalties in connection with our OUS business development
partnership agreements.
Research and Development
Research and development expenses consist primarily of costs incurred for the
development of Vicineum for the treatment of BCG-unresponsive NMIBC, which
include:
•the nature and scope of activities required to resolve the CRL issued by the
FDA in response to our BLA for Vicineum for the treatment of BCG-unresponsive
NMIBC and the concerns identified in the EMA Withdrawal Assessment Report, which
we expect will include the completion of an additional clinical trial;
•employee-related expenses, including salaries, benefits, travel and share-based
compensation expense;
•expenses incurred under agreements with contract research organizations
("CROs") and investigative sites that conduct our clinical trials;
•expenses associated with developing manufacturing capabilities;
•expenses associated with transferring manufacturing capabilities to contract
manufacturing organizations ("CMOs") for commercial-scale production;
•facilities, depreciation and other expenses, which include direct and allocated
expenses for rent and maintenance of facilities, insurance and other supplies;
•expenses associated with regulatory activities; and
•expenses associated with license milestone fees
We expense research and development costs as incurred. We recognize external
development costs based on an evaluation of the progress to completion of
specific tasks using information and data provided to us by our vendors and our
clinical sites.
The successful development and commercialization of Vicineum for the treatment
of BCG-unresponsive NMIBC is highly uncertain. This is due to the numerous risks
and uncertainties associated with product development and commercialization,
including the uncertainty of:
•the scope, progress, outcome and costs of our clinical trials and other
research and development activities, including future clinical trials for
Vicineum for the treatment of BCG-unresponsive NMIBC;
•the efficacy and potential advantages of Vicineum for the treatment of
BCG-unresponsive NMIBC compared to alternative treatments, including any
standard of care;
•the market acceptance of Vicineum for the treatment of BCG-unresponsive NMIBC;
•the cost and timing of the implementation of commercial-scale manufacturing of
Vicineum;
•obtaining, maintaining, defending and enforcing patent claims and other
intellectual property rights;
•significant and changing government regulation;
•the impact of the COVID-19 pandemic; and
•the timing, receipt and terms of any marketing approvals.
A change in the outcome of any of these variables with respect to the
development of Vicineum for the treatment of BCG-unresponsive NMIBC could mean a
significant change in the costs and timing associated with the development of
Vicineum for the treatment of BCG-unresponsive NMIBC. For example, we expect
needing to conduct an additional clinical trial to address clinical issues
raised in the CRL from the FDA. If the FDA, EMA or another regulatory authority
were to require us to conduct clinical trials or other testing to complete the
clinical development of Vicineum for the treatment of BCG-unresponsive NMIBC, we
could be required to expend significant additional financial resources and time
on the completion of clinical development of Vicineum for the treatment of
BCG-unresponsive NMIBC. We expect our research and development costs to relate
to Vicineum for the foreseeable future as we seek to resolve the CRL issued by
the FDA with regard to our BLA for Vicineum for the treatment of
BCG-unresponsive NMIBC and the EMA Withdrawal Assessment Report, and obtain
regulatory approval for Vicineum in the US and the European Union , and if
successful in obtaining such regulatory approvals, advance Vicineum through the
commercialization scale-up, clinical and other activities.
We allocate direct research and development expenses, consisting principally of
external costs, such as fees paid to investigators, consultants, central
laboratories and CROs in connection with our clinical trials, costs related to
manufacturing or purchasing clinical trial materials and technology transfer and
license milestone fees, to specific product programs. We do not allocate
employee and contractor-related costs, costs associated with our platform and
facility expenses, including depreciation or other indirect costs, to specific
product programs because these costs may be deployed across multiple product
programs under research and development and, as such, are separately classified.
The table below provides research and development expenses incurred for Vicineum
for the treatment of BCG-unresponsive NMIBC and other expenses by category. We
have
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deferred further development of Vicineum for the treatment of squamous cell
carcinoma of the head and neck and VB6-845d in order to focus our efforts and
our resources on our ongoing development and, if approved, commercialization of
Vicineum for the treatment of BCG-unresponsive NMIBC.
We did not allocate research and development expenses to any other specific
product program during the periods presented (in thousands):
Three Months ended Nine Months ended
September 30, September 30,
2021 2020 2021 2020
Programs:
Vicineum for the treatment of BCG-unresponsive NMIBC
$ 8,506 $ 10,888 $ 19,005 Total direct program expenses 2,989 8,506 10,888 19,005 Personnel and other expenses: Employee and contractor-related expenses 1,732 1,314 6,392 3,688 Platform-related lab expenses 19 184 133 264 Facility expenses 124 109 392 322 Other expenses 103 83 468 346 Total personnel and other expenses 1,978 1,690 7,385 4,620Total Research and Development$ 4,967
General and Administrative General and administrative expenses consist primarily of salaries and related costs for personnel, including share-based compensation and benefits, in executive, operational, finance, business development and human resource functions. Other general and administrative expenses include facility-related costs, professional fees for legal, insurance, investment banking fees, patent, consulting and accounting services, pre-commercialUnited States market research and pre-launch market readiness for the potential launch of Vicineum. Restructuring Charge OnAugust 30, 2021 , we approved a restructuring plan to reduce operating expenses and better align our workforce with the needs of our business following receipt of the CRL from the FDA regarding the BLA for Vicineum for the treatment of BCG-unresponsive NMIBC (the "Restructuring Plan"). The Restructuring Plan includes a reduction in our workforce by 18 positions (or approximately 35% of our workforce) as well as additional cost-saving initiatives intended to preserve capital while we continue development of Vicineum. Restructuring costs related to the Restructuring Plan were recorded in operating expenses in our Condensed Consolidated Statements of Income (Operations) and Comprehensive Income (Loss) in the three months endedSeptember 30, 2021 . We expect that substantially all of the accrued restructuring costs as ofSeptember 30, 2021 will be paid in cash by the end ofSeptember 2022 . Intangibles Impairment Charge Our intangible assets consist of indefinite-lived, acquired in-process research and development ("IPR&D") worldwide product rights to Vicineum as a result of the acquisition of Viventia in 2016. IPR&D assets acquired in a business combination are considered indefinite-lived until the completion or abandonment of the associated research and development efforts. We recognize an impairment loss when and to the extent that the estimated fair value of an intangible asset is less than its carrying value. In addition, on a quarterly basis, we perform a qualitative review of our business operations to determine whether events or changes in circumstances have occurred which could indicate that the carrying value of our intangible assets was not recoverable. If an impairment indicator is identified, an interim impairment assessment is performed. The fair value of the acquired intangible asset for theU.S. and E.U. rights of Vicineum is determined using a risk-adjusted discounted cash flow approach, which includes probability adjustments for projected revenues and operating expenses based on the success rates assigned to each stage of development for each geographical region; as well as discount rates applied to the projected cash flows. . InAugust 2021 , we received a CRL from the FDA regarding its BLA for Vicineum for the treatment of NMIBC, our lead product candidate. In the CRL, the FDA determined that it could not approve the BLA for Vicineum in its present form and provided recommendations specific to additional clinical/statistical data and analyses in addition to CMC issues pertaining to a recent pre-approval inspection and product quality. We participated in a Type A Meeting with the FDA onOctober 29, 2021 to discuss questions related to CMC raised in the CRL, and expect to engage in a Type A meeting with the FDA in the fourth quarter of 2021 to discuss the clinical issues raised in the CRL. Both meetings are intended to help us determine the appropriate path forward for Vicineum. Given the inherent uncertainty at this time in the development plans for Vicineum as a result of the CRL, an impairment analysis was conducted, which concluded that the carrying value of our intangible assets of Vicineum United States rights was fully impaired as ofSeptember 30, 2021 . The$31.7 million of impairment charges for the period endedSeptember 30, 2021 are due to delays in the expected start of commercialization and lower probabilities of success, combined with higher operating expenses expected to be incurred prior to commercialization, resulting in lower 34 -------------------------------------------------------------------------------- Table of
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expected future cash flows estimated in the US market as ofSeptember 30, 2021 . However, while similar delays in timelines and reduced probabilities of success also affected the estimated fair value of our intangible assets of Vicineum E.U. rights, this asset was not impaired as ofSeptember 30, 2021 . At this time, management has assessed that the carrying value of the Vicineum EU rights is not at significant risk of impairment in the future within the current range of commercialization timelines and POS assumptions. This is primarily due to the fact that the EU asset is burdened with significantly less expense than the US asset, as our strategic operating plan is to sublicense Vicineum to business development partners in all regions outside the US, including the EU, with the Company earning a potential combination of upfront, milestone, and royalty payments, and the business development partner bearing the majority of regulatory and commercialization costs. Change in Fair Value of Contingent Consideration In connection with the acquisition ofViventia Bio, Inc. ("Viventia") inSeptember 2016 , we recorded contingent consideration pertaining to the amounts potentially payable to the former shareholders of Viventia pursuant to the terms of the Share Purchase Agreement among us, Viventia and the other signatories thereto (the "Share Purchase Agreement") and are based on launch timing in certain markets, probabilities of clinical and regulatory success, which are used to estimate future revenue levels. The fair value of contingent consideration is assessed at each balance sheet date and changes, if any, to the fair value are recognized in earnings (or loss) for the period. Other Income (Expense), Net Other income (expense), net consists primarily of interest income earned on cash and cash equivalents and, to a lesser extent, any gains or losses on foreign exchange. Benefit (Provision) from Income Taxes Benefit for income taxes is driven by the intangible impairment charge, changing the value of deferred tax liabilities. Provision for income taxes consists of income taxes incurred to foreign jurisdictions pursuant to our OUS business development partnership agreements, including the Qilu License Agreement. 35 -------------------------------------------------------------------------------- Table of
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Our Results of Operations Comparison of the Three Months endedSeptember 30, 2021 and 2020 Three Months ended September 30, Increase/(Decrease) 2021 2020 Dollars Percentage (in thousands, except percentages) License and related revenue $ -$ 11,236 $ (11,236) (100) % Operating expenses: Research and development$ 4,967 $ 10,196 $ (5,229) (51) % General and administrative 8,699 4,115 4,584 111 % Restructuring charge 5,522 - 5,522 - % Intangibles impairment charge 31,700 - 31,700 - % Change in fair value of contingent consideration (114,000) 18,400 (132,400) (720) % Total operating expenses (63,112) 32,711 (95,823) (293) % Income (Loss) from Operations 63,112 (21,475) 84,587 (394) % Other income (expense), net: Other income (expense), net 1 (1) 2 (200) % Income (Loss) Before Taxes$ 63,113 $ (21,476) $ 84,589 (394) % Benefit (provision) from income taxes$ 8,561 $ (1,132) $ 9,693 (856) %
Net Income (Loss) and Comprehensive Income (Loss) After
$ (22,608) $ 94,282 (417) % Taxes License and Related Revenue We had no revenue for the three months endedSeptember 30, 2021 . Revenue for the three months endedSeptember 30, 2020 was$11.2 million , which was due to the recognition of revenue pursuant to the license agreement with our OUS business development partner forGreater China . Research and Development Research and development expenses were$5.0 million for the three months endedSeptember 30, 2021 compared to$10.2 million for the three months endedSeptember 30, 2020 . The decrease of$5.2 million was due primarily to lower costs associated with technology transfer and manufacturing ($6.3 million ), partially offset by increased license fees related to a milestone payment to theUniversity of Zurich triggered by the receipt of the CRL ($0.5 million ), regulatory fees triggered by withdrawal of our MAA to the EMA for Vysyneum ($0.3 million ) and regulatory consultant fees ($0.2 million ). We anticipate that R&D expenses may increase beginning in 2022 due to additional clinical trial activity costs. General and Administrative General and administrative expenses were$8.7 million for the three months endedSeptember 30, 2021 compared to$4.1 million for the three months endedSeptember 30, 2020 . The increase of$4.6 million was due primarily to increases in sales and marketing expense for Vicineum pre-commercial launch planning ($2.4 million ), employee-related compensation driven by increased headcount as part of the commercial build ($1.3 million ) and professional fees for accounting services ($0.2 million ). The majority of these expenses were incurred prior to receipt of the CRL inAugust 2021 . Additionally, legal fees increased due to legal proceedings and the on-going independent review related to Vicineum ($0.9 million ). Such increase was partially offset by certain other decreases in G&A expenses, none of which were individually material ($0.2 million ) Restructuring Charge Restructuring expenses were$5.5 million for the three months endedSeptember 30, 2021 compared to no restructuring expenses for the three months endedSeptember 30, 2020 . The increase of$5.5 million was due to one-time costs associated with the Restructuring Plan of approximately$2.7 million associated with the termination of certain contracts and severance and other employee-related costs of approximately$2.8 million . Intangibles Impairment Charge Intangibles impairment charge for three months endedSeptember 30, 2021 was$31.7 million compared to no impairment in the three month endedSeptember 30, 2020 . InAugust 2021 , we received a CRL from the FDA regarding our BLA for Vicineum for the treatment of NMIBC, our lead product candidate. In the CRL, the FDA determined that it could not approve the BLA for 36 -------------------------------------------------------------------------------- Table of
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Vicineum in its present form and has provided recommendations specific to additional clinical/statistical data and analyses in addition to CMC issues pertaining to a recent pre-approval inspection and product quality. We participated in a Type A meeting with the FDA onOctober 29, 2021 to discuss questions related to CMC raised in the CRL, and expect to engage in a Type A meeting to discuss clinical issues raised in the CRL later this year. Both meetings are intended to help us determine the appropriate path forward for Vicineum. Given the inherent uncertainty at this time in the development plans for Vicineum as a result of the CRL, an impairment analysis was conducted, which concluded that the carrying value of our intangible assets of Vicineum United States rights was fully impaired as ofSeptember 30, 2021 . The$31.7 million of impairment charges for the period endedSeptember 30, 2021 are due to delays in the expected start of commercialization and lower probabilities of success, combined with higher operating expenses expected to be incurred prior to commercialization, resulting in lower expected future cash flows estimated in the US market at this time. Fair Value of Contingent Consideration The non-cash change in fair value of contingent consideration was income of$114.0 million for the three months endedSeptember 30, 2021 compared to an$18.4 million loss for the three months endedSeptember 30, 2020 . The decrease in the fair value of contingent consideration of$114.0 million for the three months endedSeptember 30, 2021 was driven by the receipt of a CRL from the FDA, in which the FDA determined that it cannot approve the BLA for Vicineum in its present form. Due to the inherent uncertainty in the path forward for Vicineum at this time, we reassessed the underlying assumptions used to develop the revenue projections upon which the fair value of its contingent consideration is based. The most significant and impactful assumptions in our revenue projection models are timing of product launch and probabilities of clinical and regulatory success (POS); we expect delays in the start of commercialization and estimate lower POS as a direct result of the CRL. We anticipate needing to conduct an additional clinical trial, which will lead to delays in the start of commercialization globally. We have assessed a range of commercialization timeline assumptions and applied a probability to each outcome based on management's best estimate. In addition, we now assumes a lower POS in achieving certain clinical and regulatory milestones in the range of approximately 45% to 55% globally. We participated in a Type A Meeting with the FDA onOctober 29, 2021 to discuss questions related to CMC raised in the CRL, and expect to engage in a Type A meeting with the FDA in the fourth quarter of 2021 to discuss the clinical issues raised in the CRL. Both meetings are intended to help us determine the appropriate path forward for Vicineum. Any changes in these assumptions and estimates as a result of these meetings, or other information obtained, may have a significant impact on the remeasurement of the contingent consideration liability in the future. The milestone payments constitute debt-like obligations, and the high-yield debt index rate applied to the milestones in order to determine the estimated fair value decreased from 14.5% as ofJune 30, 2020 , to 11.8% as ofSeptember 30, 2020 and from 6.6% as ofJune 30, 2021 to 7.5% as ofSeptember 30, 2021 . The discount rate applied to the 2% earnout payment due on forecasted Vicineum revenues is derived from our estimated weighted-average cost of capital ("WACC"), and this WACC-derived discount rate decreased from 13.2% as ofJune 30, 2020 to 9.4% as ofSeptember 30, 2020 and increased from 6.8% as ofJune 30, 2021 to 8.Hi Nora6% as ofSeptember 30, 2021 . The change in the fair value of contingent consideration was an$18.4 million loss for the three months endedSeptember 30, 2020 . This was primarily attributable to lower discount rates, based on prevailing market conditions as ofSeptember 30, 2020 , and to a lesser extent by refinement of timelines in certain OUS markets. Other (Expense) Income, Net Other expense, net was de minimis during the three months endedSeptember 30, 2020 andSeptember 30, 2021 . Benefit (Provision) from Income Taxes For the three months endedSeptember 30, 2021 , we recorded a benefit from income taxes of$8.6 million . In the third quarter of 2021, we determined that the fair value of the Vicineum United States rights were zero, which resulted in an impairment charge of$31.7 million . In connection with this impairment charge, in the third quarter of 2021, we wrote-down the associated deferred tax liability by$8.6 million as a benefit. Please refer to Note 6, "Intangible Assets andGoodwill ," for further information regarding the impairment charge. For the three months endedSeptember 30, 2020 , we recorded a provision for income taxes of$1.1 million . This provision consisted of income taxes paid to foreign jurisdictions pursuant to the License Agreement with Qilu. 37
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Comparison of the Nine Months ended
Nine Months ended
September 30, Increase/(Decrease)
2021 2020 Dollars Percentage
(in thousands, except percentages)
License and related revenue $ 6,544 $ 11,236 $ (4,692) (42) %
Operating expenses:
Research and development $ 18,273 $ 23,625 $ (5,352) (23) %
General and administrative 20,797 10,882 9,915 91 %
Restructuring charge 5,522 - 5,522 - %
Intangibles impairment charge 31,700 - 31,700 - %
Change in fair value of contingent consideration (52,240) (16,820) (35,420) 211 %
Total operating expenses 24,052 17,687 6,365 36 %
Loss from Operations (17,508) (6,451) (11,057) 171 %
Other (expense) income, net:
Other income (expense), net (45) 195 (240) (123) %
Loss Before Taxes $ (17,553) $ (6,256) $ (11,297) 181 %
Benefit (provision) from income taxes $ 8,273 $ (1,132) $ 9,405 (831) %
Net Loss and Comprehensive Loss After Taxes $ (9,280) $ (7,388) $ (1,892) 26 %
License and Related Revenue
Revenue for the nine months ended September 30, 2021 was $6.5 million , which was
due to achieving the IND milestone in China pursuant to the Qilu License
Agreement, clinical supply revenue resulting from the delivery of drug product
to our OUS partner for Greater China , and license revenue for additional
purchase price due to the recovery of VAT by our OUS business development
partner for Greater China . Revenue for the nine months ended September 30, 2020
was $11.2 million , which was due to the recognition of revenue pursuant to the
license agreement with our OUS business development partner for Greater China .
Research and Development
Research and development expense was $18.3 million for the nine months ended
September 30, 2021 compared to $23.6 million for the nine months ended September
30, 2020 . The decrease of $5.3 million was primarily due to lower costs
associated with technology transfer and manufacturing costs ($9.7 million ). This
was partially offset by increases in regulatory consulting fees ($1.8 million ),
employee-related compensation driven by the anticipated commercial launch ($0.9
million ), license fees related to a milestone payment to Amgen triggered by
filing of the MAA ($0.6 million ), and a milestone payment to the University of
Zurich triggered by the receipt of the CRL ($0.5 million ), and withdrawal of our
MAA to the EMA for Vysyneum ($0.3 million ). We anticipate that R&D expenses may
increase beginning in 2022 due to additional clinical trial activity costs.
General and Administrative
General and administrative expenses were $20.8 million for the nine months ended
September 30, 2021 compared to $10.9 million for the nine months ended September
30, 2020 . The increase of $9.9 million was primarily due to increases in
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marketing and commercial expenses of$4.0 million in preparation for the commercial launch, prior to the issuance of the CRL inAugust 2021 . Additionally, increases in employee compensation and benefits ($3.4 million ), legal expense ($1.6 million ), professional fee ($0.3 million ), insurance expense ($0.3 million ) and other expenses ($0.3 million ) contributed to the increase. Restructuring Charge Restructuring expenses were$5.5 million for the nine months endedSeptember 30, 2021 compared to no restructuring expenses for the nine months endedSeptember 30, 2020 . The increase of$5.5 million was due to one-time costs associated with the Restructuring Plan of approximately$2.7 million associated with the termination of certain contracts and severance and other employee-related costs of approximately$2.8 million . Intangibles Impairment Charge Intangibles impairment charge was$31.7 million for the nine months endedSeptember 30, 2021 compared to no impairment for the nine months endedSeptember 30, 2020 . InAugust 2021 , we received a CRL from the FDA regarding our BLA for Vicineum for the treatment of NMIBC, our lead product candidate, in which the FDA determined that it could not approve the BLA for Vicineum in its present form. The$31.7 million of impairment charges for the period endedSeptember 30, 2021 are due to expected delays in the start of commercialization and lower probabilities of success, combined with higher operating expenses expected to be incurred prior to commercialization, resulting in lower expected future cash flows estimated in the US market at this time. Fair Value of Contingent Consideration The non-cash change in fair value of contingent consideration was income of$52.2 million for the nine months endedSeptember 30, 2021 , compared to income of$16.8 million for the nine months endedSeptember 30, 2020 . The decrease in the fair value of contingent consideration of$52.2 million for the nine months endedSeptember 30, 2021 was driven by the receipt of a CRL from the FDA, in which the FDA determined that it could not approve the BLA for Vicineum in its present form. Due to the inherent uncertainty in the path forward for Vicineum at this time, we reassessed the underlying assumptions used to develop the revenue projections upon which the fair value of its contingent consideration is based. The most significant and impactful assumptions in our revenue projection models are timing of product launch and probabilities of clinical and regulatory success (POS); we expect delays in the start of commercialization and estimates lower POS as a direct result of the CRL. We anticipate needing to conduct an additional clinical trial, which will lead to delays in the start of commercialization globally. We have assessed a range of commercialization timeline assumptions and applied a probability to each outcome based on management's best estimate. In addition, we now assumes a lower POS in achieving certain clinical and regulatory milestones in the range of approximately 45% to 55% globally. We participated in a Type A Meeting with the FDA onOctober 29, 2021 to discuss questions related to CMC raised in the CRL, and expect to engage in a Type A meeting with the FDA in the fourth quarter of 2021 to discuss the clinical issues raised in the CRL. Both meetings are intended to help us determine the appropriate path forward for Vicineum. Any changes in these assumptions and estimates as a result of these meetings, or other information obtained, may have a significant impact on the remeasurement of the contingent consideration liability in the future. The milestone payments constitute debt-like obligations, and the high-yield debt index rate applied to the milestones in order to determine the estimated fair value remained 11.8% as ofDecember 31, 2019 andSeptember 30, 2020 and decreased from 8.4% as ofDecember 31, 2020 to 7.5% as ofSeptember 30, 2021 . The discount rate applied to the 2% earnout payment due on forecasted Vicineum revenues is derived from our estimated WACC, and this WACC-derived discount rate fluctuated from 5.6% as ofDecember 31, 2019 to 9.4% as ofSeptember 30, 2020 and from 8.8% as ofDecember 31, 2020 to 8.6% as ofSeptember 30, 2021 . The change in fair value of contingent consideration was income of$16.8 million for the nine months endedSeptember 30, 2020 . This was primarily attributable to significantly higher discount rates as a result of financial market conditions as ofSeptember 30, 2020 , offset by changes to the competitive landscape. Other (Expense) Income, Net Other expense, net was de minimis for the nine months endedSeptember 30, 2021 , compared to$0.2 million for the nine months endedSeptember 30, 2020 . The decrease of$0.2 million was due primarily to lower interest income. Benefit (Provision) from Income Taxes For the nine months endedSeptember 30, 2021 , we recorded a benefit from income taxes of$8.3 million . In the third quarter of 2021, we determined that the fair value of the Vicineum United States rights were zero, which resulted in an impairment charge of$31.7 million . In connection with this impairment charge, in the third quarter of 2021, we wrote-down the associated deferred tax liability by$8.6 million as a benefit. Please refer to Note 6, "Intangible Assets andGoodwill ," for further information regarding the impairment charge. For the nine months endedSeptember 30, 2020 , we recorded a provision for income taxes of$1.1 million . This provision consisted of income taxes paid to foreign jurisdictions pursuant to the License Agreement with Qilu. Liquidity and Capital Resources Overview 39 -------------------------------------------------------------------------------- Table of
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As ofSeptember 30, 2021 , we had cash and cash equivalents of$175.2 million , net working capital of$187.9 million and an accumulated deficit of$325.2 million . We incurred negative cash flows from operating activities of$30.8 million for the year endedDecember 31, 2020 and$56.3 million for the nine months endedSeptember 30, 2021 . We believe that our cash and cash equivalents of$175.2 million as ofSeptember 30, 2021 , are sufficient to fund our operating plan through 2023. Since our inception, we have received no revenue from sales of our products, and we anticipate that operating losses will continue for the foreseeable future as we seek to address the issues raised in the CRL we received for our BLA for Vicineum for the treatment of BCG-unresponsive NMIBC and the concerns identified in the EMA Withdrawal Assessment Report, complete the follow-up stage of our ongoing Phase 3 VISTA Trial of Vicineum for the treatment of BCG-unresponsive NMIBC, complete any additional clinical trials for Vicineum, and seek marketing approval from the FDA and theEuropean Commission and, if approved, commercialize Vicineum. We have financed our operations to date primarily through private placements of our common stock, preferred stock, common stock warrants and convertible bridge notes, venture debt borrowings, our IPO, follow-on public offerings, sales effected in ATM offerings, our OUS business development partnerships and license agreements and, to a lesser extent, from a collaboration. InNovember 2019 , we entered into an Open Market Sale Agreement SM (the "Sale Agreement") withJefferies LLC ("Jefferies"), under which we may issue and sell shares of our common stock, par value$0.001 per share from time to time for an aggregate sales price of up to$35 million through Jefferies (the "ATM Offering"). InOctober 2020 andFebruary 2021 , we entered into Amendments No. 1 and No. 2 to the Sale Agreement, respectively. Amendments No. 1 and No.2 modified the Sale Agreement to reflect that we may issue and sell shares of our common stock from time to time for an aggregate sales price of up to an additional$50.0 million and$34.5 million , respectively. InJune 2021 , we entered into Amendment No. 3 to the Sale Agreement, which modified the Sale Agreement to remove the maximum dollar amount of shares of common stock that may be sold pursuant to the Sale Agreement. In June andJuly 2021 , we filed prospectus supplements with theSEC in connection with the offer and sale of up to an aggregate of$200 million of our common stock pursuant to the Sale Agreement. Sale of common stock under the Sale Agreement are made by any method that is deemed to be an ATM offering as defined in Rule 415(a)(4) of the Securities Act of 1933, including but not limited to sales made directly on or through the Nasdaq Global Market or any other existing trading market for our common stock. We may sell shares of our common stock efficiently from time to time, but have no obligation to sell any of our common stock and may at any time suspend offers under the Sale Agreement or terminate the Sale Agreement. Subject to the terms and conditions of the Sale Agreement, Jefferies will use its commercially reasonable efforts to sell common stock from time to time, as the sales agent, based upon our instructions, which include a prohibition on sales below a minimum price set by us from time to time. We have provided Jefferies with customary indemnification rights, and Jefferies is entitled to a commission at a fixed rate equal to 3.0% of the gross proceeds for each sale of common stock under the Sale Agreement. We raised$175.0 million of net proceeds from the sale of 56.9 million shares of common stock at a weighted-average price of$3.17 per share during the nine months endedSeptember 30, 2021 , including$38.2 million of net proceeds from the sale of 9.8 million shares of common stock at a weighted-average price of$4.01 per share during the three months endedSeptember 30, 2021 . We raised$16.2 million of net proceeds from the sale of 16.8 million shares of common stock at a weighted-average price of$0.99 per share during the nine months endedSeptember 30, 2020 , including$8.2 million of net proceeds from the sale of 7 million shares of common stock at a weighted-average price of$1.21 per share during the three months endedSeptember 30, 2020 . Share issue costs, including sales agent commissions, related to the ATM Offering totaled$1.2 million and$5.4 million for the three and nine months endedSeptember 30, 2021 compared to$0.3 million and$0.5 million for the three and nine months endedSeptember 30, 2020 , respectively. We continue to monitor the effect of the outbreak of COVID-19. We are proactively executing risk mitigation strategies to attenuate the impact of COVID-19 on us, and at this time, we have not yet experienced any business disruptions as a result of the pandemic. We are continually assessing the effect of the COVID-19 pandemic on our operations and we are monitoring the spread of COVID-19 and the actions implemented to combat the virus throughout the world. Funding Requirements Our future success is dependent on our ability to develop, and if approved, commercialize our product candidates, including Vicineum for the treatment of BCG-unresponsive NMIBC, and ultimately upon our ability to attain profitable operations. In order to commercialize our product candidates, including Vicineum for the treatment of BCG-unresponsive NMIBC, we need to complete clinical development and comply with comprehensive regulatory requirements. We are subject to a number of risks similar to other late-stage clinical companies, including, but not limited to, successful discovery and development of our product candidates, raising additional capital, development and commercialization by our competitors of new technological innovations, protection of proprietary technology and market acceptance of our products. The successful discovery, development and, if approved, commercialization of product candidates, including Vicineum for the treatment of BCG-unresponsive NMIBC, requires substantial working capital, and we expect to seek additional funds through equity or debt financings or through additional OUS business development partnerships, collaborations, licensing transactions or other sources. We may be unable to obtain equity or debt financings or enter into additional OUS business development partnerships, collaborations or licensing transactions at favorable terms, or at all, and, if necessary, we may be required to implement cost reduction strategies. We will incur substantial expenses if and as we: 40 -------------------------------------------------------------------------------- Table of
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•address the issues identified in the CRL we received from the FDA for our BLA
for Vicineum for the treatment of BCG-unresponsive NMIBC and the concerns
identified in the EMA Withdrawal Assessment Report, which we expect will include
the completion of an additional clinical trial;
•seek marketing approvals for Vicineum for the treatment of BCG-unresponsive
NMIBC;
•establish and implement sales, marketing and distribution capabilities and
scale up and validate external manufacturing capabilities (including completing
the manufacturing process and technology transfer to any third-party
manufacturers) to commercialize Vicineum for the treatment of BCG-unresponsive
NMIBC, if approved;
•maintain, expand and protect our intellectual property portfolio;
•add equipment and physical infrastructure to support our research and
development;
•hire additional clinical, regulatory, quality control, scientific and
management personnel;
•expand our operational, financial and management systems and personnel;
•conduct research and pre-clinical and clinical development of Vicineum for the
treatment of BCG-unresponsive NMIBC, less-than-adequate BCG and our other
product candidates;
•seek to discover and develop additional product candidates; and
•in-license or acquire the rights to other products, product candidates or
technologies.
Our future capital requirements will depend on many factors, including:
•the scope, initiation, progress, timing, costs and results of pre-clinical
development and laboratory testing and clinical trials for Vicineum for the
treatment of BCG-unresponsive NMIBC and our other product candidates;
•the ongoing COVID-19 pandemic and its impact on our business;
•our ability to establish additional OUS business development partnerships,
collaborations or licensing arrangements on favorable terms, if at all,
particularly manufacturing, marketing and distribution arrangements for our
product candidates;
•the costs and timing of the implementation of commercial-scale manufacturing
activities, including those associated with the manufacturing process and
technology transfer to third-party manufacturers to facilitate such
commercial-scale manufacturing of Vicineum;
•the costs and timing of establishing and implementing sales, marketing and
distribution capabilities for Vicineum for the treatment of BCG-unresponsive
NMIBC, if approved;
•the costs and timing of preparing, filing and prosecuting patent applications,
maintaining and enforcing our intellectual property rights and defending any
intellectual property-related claims;
•our obligation to make milestone, royalty and other payments to third-party
licensors under our licensing agreements;
•the extent to which we in-license or acquire rights to other products, product
candidates or technologies;
•the outcome, timing and cost of regulatory review by the FDA, EMA and
comparable foreign regulatory authorities for Vicineum for the treatment of
BCG-unresponsive NMIBC, including the potential for the FDA, EMA or comparable
foreign regulatory authorities to require that we perform more studies than
those that we currently expect to perform;
•our ability to achieve certain future regulatory, development and
commercialization milestones under our out-license and OUS business development
partnership agreements
•the effect of competing technological and market developments; and
•the revenue, if any, received from commercial sales of Vicineum for the
treatment of BCG-unresponsive NMIBC, if approved.
Until such time, if ever, as we can generate substantial product revenues from
commercial sales, we expect to finance our cash needs through a combination of
equity offerings, debt financings, government or other third-party funding,
strategic collaborations, OUS business development partnership agreements,
partnerships, alliances, and licensing arrangements. We do not have any
committed external source of funds other than the amounts payable under the
License Agreement with Roche and the License Agreement with Qilu. To the extent
that we raise additional capital through the sale of equity or convertible debt
securities, the ownership interests of existing stockholders will be diluted,
and the terms of these securities may include liquidation or other preferences
that adversely affect the rights of existing stockholders. Debt financing, if
available, may involve agreements that include liens or other restrictive
covenants limiting our ability to take specific actions, such as incurring
additional debt, making capital expenditures or declaring dividends. If we raise
additional funds through government or other third-party funding, strategic OUS
business development partnerships, collaborations, alliances or licensing
arrangements, we may have to relinquish valuable rights to our technologies,
future revenue streams, research programs or product candidates or grant
licenses on terms that may not be favorable to us. If we are unable to raise
additional funds when needed, we may be required to delay, limit, reduce or
terminate our product development or future commercialization efforts or grant
rights to develop and market products or product candidates that we would
otherwise prefer to develop and market ourselves.
The COVID-19 pandemic has negatively impacted the global economy, disrupted
business operations and created significant volatility and disruption to
financial markets. Significant uncertainty remains as to the potential impact of
the COVID-19 pandemic on our operations, and on the global economy as a whole.
The extent and duration of the pandemic could continue to disrupt global markets
and may affect our ability to raise additional capital in the future.
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Cash Flows The following table sets forth a summary of our cash flows for the nine months endedSeptember 30, 2021 and 2020 (in thousands): Nine Months ended September 30, 2021 2020 Net Cash Used in Operating Activities$ (56,278) $ (22,328) Net Cash Used in Investing Activities (4) (8) Net Cash Provided by Financing Activities 176,129 16,184
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash
Net Cash Used in Operating Activities Net cash used in operating activities was$56.3 million for the nine months endedSeptember 30, 2021 and consisted primarily of a net loss of$9.3 million , which includes$6.5 million of revenue recognized pursuant to our license agreements, adjusted for non-cash items, including share-based compensation of$3.4 million , a decrease in the fair value of contingent consideration of$52.2 million , increase in impairment charge of$31.7 million and a net decrease in operating assets and liabilities of$29.9 million . Net cash used in operating activities was$22.3 million for the nine months endedSeptember 30, 2020 and consisted primarily of net loss of$7.4 million , which includes$11.2 million of revenue recognized pursuant to the License Agreement with Qilu, adjusted for non-cash items, including share-based compensation of$1.4 million , a decrease in the fair value of contingent consideration of$16.8 million and a net increase in operating assets and liabilities of$0.4 million .Net Cash Used in Investing Activities Net cash used in investing activities was de minimis during the nine months endedSeptember 30, 2020 andSeptember 30, 2021 . Net Cash Provided by Financing Activities Net cash provided by financing activities was$176.1 million and$16.2 million for the nine months endedSeptember 30, 2021 andSeptember 30, 2020 , respectively, and consisted, primarily, of net proceeds from the sale of common stock under the ATM Offering and, with respect to the nine months endedSeptember 30, 2020 , sales of common stock under our 2014 ESPP. Critical Accounting Policies and Use of Estimates The preparation of our consolidated financial statements in accordance withUnited States generally accepted accounting principles and the rules and regulations of theSEC require the use of estimates and assumptions, based on complex judgments considered reasonable, and affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting period. Our critical accounting policies are those policies which require the most significant judgments and estimates in the preparation of our consolidated financial statements. Management has determined that our most critical accounting policies are those relating to the fair value of intangible assets, goodwill and contingent consideration; income taxes (including the valuation allowance for deferred tax assets); research and development costs; revenue recognition and going concern considerations. Indefinite-Lived Intangible Assets Our intangible assets consist of indefinite-lived, acquired in-process research and development ("IPR&D") worldwide product rights to Vicineum as a result of the acquisition of Viventia in 2016. IPR&D assets acquired in a business combination are considered indefinite-lived until the completion or abandonment of the associated research and development efforts. Amortization over the estimated useful life will commence at the time of Vicineum's launch in the respective markets, if approved. If regulatory approval to market Vicineum for the treatment of BCG-unresponsive NMIBC is not obtained, we will immediately expense the related capitalized cost. Indefinite-lived intangible assets are quantitatively tested for impairment at least annually during the fourth quarter of the fiscal year, or more often if indicators of impairment are present. Impairment testing of indefinite-lived intangible assets requires management to estimate the future discounted cash flows of an asset using assumptions believed to be reasonable, but which are unpredictable and inherently uncertain. Actual future cash flows may differ from the estimates used in impairment testing. We recognize an impairment loss when and to the extent that the estimated fair value of an intangible asset is less than its carrying value. In addition, on a quarterly basis, we perform a qualitative review of our business operations to determine whether events 42 -------------------------------------------------------------------------------- Table of
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or changes in circumstances have occurred which could indicate that the carrying value of our intangible assets was not recoverable. If an impairment indicator is identified, an interim impairment assessment is performed. InAugust 2021 , we received a CRL from the FDA regarding its BLA for Vicineum for the treatment of NMIBC, our lead product candidate. In the CRL, the FDA determined that it could not approve the BLA for Vicineum in its present form and provided recommendations specific to additional clinical/statistical data and analyses in addition to CMC issues pertaining to a recent pre-approval inspection and product quality. We participated in a Type A Meeting with the FDA onOctober 29, 2021 to discuss questions related to CMC raised in the CRL, and expect to engage in a Type A meeting with the FDA in the fourth quarter of 2021 to discuss the clinical issues raised in the CRL. Both meetings are intended to help us determine the appropriate path forward for Vicineum. Given the inherent uncertainty at this time in the development plans for Vicineum as a result of the CRL, an impairment analysis was conducted, which concluded that the carrying value of our intangible assets of Vicineum United States rights was fully impaired as ofSeptember 30, 2021 . The$31.7 million of impairment charges for the period endedSeptember 30, 2021 are due to delays in the expected start of commercialization and lower probabilities of success, combined with higher operating expenses expected to be incurred prior to commercialization, resulting in lower expected future cash flows estimated in the US market as ofSeptember 30, 2021 . However, while similar delays in timelines and reduced probabilities of success also affected the estimated fair value of our intangible assets of Vicineum E.U. rights, this asset was not impaired as ofSeptember 30, 2021 . At this time, management has assessed that the carrying value of the Vicineum EU rights is not at significant risk of impairment in the future within the current range of commercialization timelines and POS assumptions. This is primarily due to the fact that the EU asset is burdened with significantly less expense than the US asset, as our strategic operating plan is to sublicense Vicineum to business development partners in all regions outside the US, including the EU, with our earning a potential combination of upfront, milestone, and royalty payments, and the business development partner bearing the majority of regulatory and commercialization costs.Goodwill Goodwill on our condensed consolidated balance sheets is the result of our acquisition of Viventia inSeptember 2016 and represents the difference between the purchase price and the fair value of the identifiable tangible and intangible net assets acquired under the acquisition method of accounting.Goodwill is not amortized; rather than recording periodic amortization, goodwill is quantitatively tested for impairment at least annually during the fourth quarter of the fiscal year, or more often if indicators of impairment are present. Impairment testing of goodwill requires management to estimate the future discounted cash flows of a reporting unit using assumptions believed to be reasonable, but which are unpredictable and inherently uncertain. Actual future cash flows may differ from the estimates used in impairment testing. If the fair value of the equity of a reporting unit exceeds the reporting unit's carrying value, including goodwill, then goodwill is considered not to be impaired. We recognize a goodwill impairment when and to the extent that the fair value of the equity of a reporting unit is less than the reporting unit's carrying value, including goodwill. We have only one reporting unit. In addition, on a quarterly basis, we perform a qualitative review of our business operations to determine whether events or changes in circumstances have occurred which could have a material adverse effect on the estimated fair value of each reporting unit and thus indicate a potential impairment of the goodwill carrying value. If an impairment indicator is identified, an interim impairment assessment is performed. Given the inherent uncertainty at this time in the development plans for Vicineum as a result of the CRL, an impairment analysis was conducted. While an impairment was recognized in one of our intangible assets, VicineumU.S. Rights, we concluded that the carrying value of our goodwill of$13.1 million was not impaired as ofSeptember 30, 2021 . We believe we have sufficient future cash flows from additional geographic regions outside the US to support the value of its goodwill. We project future cash flows based on various timeline assumptions and applies a probability to each outcome based on management's best estimate. In addition, probabilities of success in achieving certain clinical and regulatory success can also have a material effect on the estimated fair value of the equity of its reporting unit as of the impairment assessment date. We will continue to evaluate our timelines for commercialization and probability of success of development of Vicineum for the treatment of NMIBC. We have requested two separate Type A meetings with the FDA. The CMC Type A Meeting was held onOctober 29, 2021 . The clinical Type A Meeting is expected to occur later this year. As a result of the CMC Type A Meeting, we do not believe any changes to the key assumptions are required and therefore management determined there is no impact to the evaluation of goodwill impairment. We also expect to assess the outcome of the Clinical Type A Meeting to determine if further impairment testing is required. Further reductions to estimated probabilities of success, additional development delays or increases in underlying discount rates have the potential to result in future goodwill impairment. Contingent Consideration Contingent consideration on our condensed consolidated balance sheet is the result of our acquisition of Viventia inSeptember 2016 and represents the discounted present value of future launch milestones and net sales royalties due to the former shareholders of Viventia pursuant to the Share Purchase Agreement. For additional information, see "Item 1. Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 1. Description of Business" of this Quarterly Report on Form 10-Q. Contingent consideration is measured at its estimated fair value on a recurring basis at each reporting period, with fluctuations in value resulting in a non-cash charge to earnings (or loss) during the period. The estimated fair value measurement is based on significant unobservable inputs (Level 3 within the fair value hierarchy), including internally developed financial forecasts, probabilities of success and timing of certain milestone events and achievements, which are unpredictable and inherently uncertain. Actual future cash flows may differ from the assumptions used to estimate the fair value of contingent consideration. The valuation of contingent consideration requires the use of significant assumptions and judgments, which management believes are consistent with those that would be made by a market participant. Management 43 -------------------------------------------------------------------------------- Table of
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reviews its assumptions and judgments on an ongoing basis as additional market and other data is obtained, and any future changes in the assumptions and judgments utilized by management may cause the estimated fair value of contingent consideration to fluctuate materially, resulting in earnings volatility. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and research and development credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. A valuation allowance is recorded to the extent it is more likely than not that some portion or all of the deferred tax assets will not be realized. As ofSeptember 30, 2021 , we reduced our deferred tax liabilities by$8.6 million as a result of intangibles impairment charge, driven by the CRL. Unrecognized income tax benefits represent income tax positions taken on income tax returns that have not been recognized in the financial statements. We recognize the benefit of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit is recognized. The tax benefits recognized are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We recognize accrued interest and penalties related to uncertain tax positions as income tax expense in our consolidated statements of operations. As ofSeptember 30, 2021 andDecember 31, 2020 , we did not have any uncertain tax positions. Revenue We record revenue from our out-license agreements and OUS business development partnership agreements, including the License Agreement with Roche and our OUS partnerships. Under each of these agreements, we granted the counterparty an exclusive license to develop and commercialize the underlying licensed product. These agreements contain up-front license fees, development and regulatory milestone payments, sales-based milestone payments, and sales-based royalty payments. We determine whether our out-license agreements and OUS business development partnership agreements are in scope of ASC 606, which we adopted as ofJanuary 1, 2018 . Under ASC 606, in determining the appropriate amount of revenue to be recognized as we fulfill our obligations under these agreements, we perform the following steps: 1) Identification of the contract? 2) Determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract? 3) Measurement of the transaction price, including the constraint on variable consideration? 4) Allocation of the transaction price to the performance obligations? 5) Recognition of revenue when or as the Company satisfies each performance obligation. Development and Regulatory Milestones and Other Payments At the inception of an arrangement that includes development milestone payments, we evaluate whether the development milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated development milestone value is included in the transaction price. Development milestone payments that are not within our control or the licensee's control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. For payments pursuant to sales milestones and royalty payments, we will note recognize revenue until the subsequent sale of a licensed product occurs. For arrangements with one than one performance obligations, the milestones are generally allocated entirely to the license performance obligation, as (1) the terms of milestone and royalty payments relate specifically to the license and (2) allocating milestones and royalties to the license performance obligation is consistent with the overall allocation objective, because management's estimate of milestones and royalties approximates the standalone selling price of the license. Research and Development Costs Research and development activities are expensed in the period incurred. Research and development expenses consist of both internal and external costs associated with all basic research activities, clinical development activities and technical efforts required to develop a product candidate. Internal research and development consist primarily of personnel costs, including salaries, benefits and share-based compensation, facilities leases, research-related overhead, pre-approval regulatory and clinical trial costs, manufacturing and other contracted services, license fees and other external costs. 44 -------------------------------------------------------------------------------- Table of
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In certain circumstances, we are required to make advance payments to vendors for goods or services that will be received in the future for use in research and development activities. In such circumstances, the advance payments are recorded as prepaid assets and expensed when the activity has been performed or when the goods have been received. Recently Issued Accounting Standards Recently issued accounting standards are discussed in "Item 1. Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 4. Recent Accounting Pronouncements" of this Quarterly Report on Form 10-Q. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of theSEC .
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