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, 2021 , included in our Annual Report on Form 10-K filed with theUnited States Securities and Exchange Commission ("SEC") onFebruary 28, 2022 . 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 proposed merger withCARISMA Therapeutics Inc. ("Carisma"), 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 ability to complete, on a timely basis or at all, the proposed merger withCarisma announced onSeptember 21, 2022 , pursuant to the terms and conditions of the Merger Agreement (as defined below);
•the receipt of any potential future payments to our stockholders under the CVR Agreement (as defined below);
•the strategy or future operations of the combined company following the closing
of the proposed merger with
•advancement of the combined company's product candidates and product pipeline, clinical development of the combined company's product candidates, including expectations regarding timing of initiation and results of clinical trials of the combined company;
•our intentions to seek a partner for the further development of Vicineum;
•the expected timing of implementing and completing our restructuring plan following the decision to voluntarily pause further development of Vicineum in the US (the "2022 Restructuring Plan");
•the expected timing for incurring costs associated with the 2022 Restructuring Plan;
•our ability to preserve capital during the pendency of the proposed merger withCarisma and while we seek a potential partner for the further development of Vicineum; •the potential impact of the COVID-19 pandemic on our ability to consummate the proposed merger withCarisma and seek a partner for the further development of Vicineum;
•our projected financial position;
•our ability to obtain and maintain intellectual property protection for our product candidates and our proprietary technology;
•our beliefs regarding key advantages of our targeted fusion protein therapeutics ("TFPT") platform; and
•our expectations regarding the amount of future milestone payments pursuant to our Asset Purchase Agreement withF. Hoffmann-La Roche Ltd andHoffmann-La Roche Inc. (collectively, "Roche"), (the "Roche Asset Purchase Agreement"). 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:
•the risk that the conditions to the closing of the proposed merger with
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•uncertainties as to the timing of the consummation of the proposed merger with
Carisma and the ability of each of us and Carisma to consummate the proposed
merger, including Carisma's completion the Carisma Pre-Closing Financing (as
defined below);
•risks related to our ability to correctly estimate our expected net cash at closing and our ability to correctly estimate and manage our respective operating expenses and expenses associated with the proposed merger;
•risks related to our continued listing on
•the risk that as a result of adjustments to the exchange ratio, as defined in the Merger Agreement, our stockholders could own less of the combined company than is currently anticipated;
•the risk that the conditions to payment under the CVR Agreement will not be met and may never deliver any value to our stockholders;
•risks associated with the possible failure to realize certain anticipated benefits of the proposed merger, including with respect to future financial and operating results; •uncertainties regarding the impact any delay in the closing of the proposed merger would have on the anticipated cash resources of the combined company upon closing of the proposed merger and other events and unanticipated spending and costs that could reduce the combined company's cash resources;
•the occurrence of any event, change or other circumstance or condition that could give rise to the termination of the Merger Agreement;
•the effect of the announcement, pendency or completion of the proposed merger
on our or
•costs related to the proposed merger;
•the outcome of any legal proceedings that may be instituted against us or any of our directors or officers related to the Merger Agreement or the transactions contemplated thereby;
•the ability of us or
•competitive responses to the proposed merger and changes in expected or existing competition;
•the success and timing of regulatory submissions and pre-clinical and clinical trials;
•regulatory requirements or developments;
•changes to clinical trial designs and regulatory pathways;
•changes in capital resource requirements;
•risks related to the inability of the combined company to obtain sufficient additional capital to continue to advance its product candidates and its preclinical programs;
•legislative, regulatory, political and economic developments, among other risks and uncertainties;
•the risk that we may not be successful in identifying a partner for the further development of Vicineum;
•the risk that we may become involved in disagreements or disputes with our licensees, licensors and other counterparties relating to the development and/or commercialization of Vicineum, in connection with our decision to voluntarily pause further development of Vicineum in the US;
•the risk that we may not be able to implement the 2022 Restructuring Plan as currently anticipated or within the timing currently anticipated;
•we may incur unanticipated charges as a result of the 2022 Restructuring Plan;
•the risk that the respective courts may not grant final approval of the settlements agreed to by the parties to the ongoing securities litigation and the derivative litigation;
•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; and
•such other factors described throughout Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations and in Part II, Item 1A. Risk Factors in this Quarterly Report on Form 10-Q and throughout Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and in Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 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 risks 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. 28 -------------------------------------------------------------------------------- Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to the "Company," "Sesen Bio ," "we," "us," and "our" includeSesen Bio, Inc. and its subsidiaries.
Overview
We are a late-stage clinical company focused on advancing targeted fusion protein therapeutics for the treatment of patients with cancer.
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 non-muscle invasive bladder cancer
("NMIBC").
On July 15, 2022 , we made the strategic decision to voluntarily pause further
development of Vicineum in the United States . The decision was based on a
thorough reassessment of Vicineum following recent discussions with the United
States Food and Drug Administration ("FDA"), which had implications on the size,
timeline and costs of an additional Phase 3 clinical trial, which the FDA
previously confirmed would be required for a potential resubmission of a
biologics license application ("BLA") for Vicineum for the treatment of NMIBC.
We continue to believe that Vicineum has benefits for patients and healthcare
providers that can be maximized through a company with a larger infrastructure,
and as such, intend to seek a partner that can execute further development to
realize the full potential of Vicineum. As a result of this decision, we have
turned our primary focus to the careful assessment of potential strategic
alternatives with the goal of maximizing shareholder value.
Anticipated Merger with
Following an extensive process of evaluating strategic alternatives, including identifying and reviewing potential candidates for a strategic transaction, onSeptember 20, 2022 , we,Seahawk Merger Sub, Inc. , aDelaware corporation and our wholly-owned subsidiary ("Merger Sub"), andCarisma , entered into an Agreement and Plan of Merger and Reorganization (the "Merger Agreement"), pursuant to which, among other things, and subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, Merger Sub will merge with and intoCarisma , withCarisma continuing as our wholly-owned subsidiary and the surviving corporation of the merger (the "Merger"). Our board of directors unanimously approved the Merger Agreement and resolved to recommend that our stockholders approve the proposals described in the Merger Agreement. If the Merger is completed, the business ofCarisma will continue as the business of the combined company. The Merger is expected to close approximately two to three months from the date of this form 10-Q filing,November 7, 2022 . In connection with the Merger, we will seek the approval of our stockholders to, among other things, (a) issue the shares of our common stock issuable in connection with the Merger under the rules of Nasdaq, and (b) amend our certificate of incorporation to effect a reverse stock split of the outstanding shares of our common stock at a ratio as mutually agreed to by us andCarisma and approved by our board of directors prior to the closing of the Merger (clauses (a) and (b), collectively, the "Sesen Bio Voting Proposals"). Consummation of the Merger is subject to certain closing conditions, including, among other things, (a) approval by our stockholders of the Sesen Bio Voting Proposals as described in the Merger Agreement, (b) approval byCarisma's stockholders of, among other things, the adoption of the Merger Agreement, (c) Nasdaq's approval of the listing of the shares of our common stock to be issued in connection with the Merger, (d) the effectiveness of a registration statement on Form S-4 to register the shares of our common stock to be issued in connection with the Merger, and (e) our having net cash as of closing of the Merger greater than or equal to$100.0 million . The Merger Agreement contains certain termination rights of each of us andCarisma . Upon termination of the Merger Agreement under specified circumstances, we may be required to payCarisma a termination fee of$7.6 million and/or reimburseCarisma's expenses up to a maximum of$1.75 million , andCarisma may be required to pay us a termination fee of$5.49 million and/or reimburse our expenses up to a maximum of$1.75 million . Subject to the terms and conditions of the Merger Agreement, at the closing of the Merger, (a) each then outstanding share ofCarisma common stock andCarisma preferred stock (collectively, "Carisma capital stock") (including shares ofCarisma's common stock issued in connection with the pre-closing financing described below) will be converted into the right to receive a number of the shares of our common stock calculated in accordance with the Merger Agreement (the "Exchange Ratio"), and (b) each then outstandingCarisma stock option to purchaseCarisma's common stock will be assumed by us, subject to adjustment as set forth in the Merger Agreement. Concurrently with the execution and delivery of the Merger Agreement,Carisma entered into a subscription agreement with certain investors named therein, pursuant to which such investors have agreed, subject to the terms and conditions of such subscription agreement, to purchase prior to the consummation of the Merger shares ofCarisma's common stock for an aggregate purchase price of approximately$30.6 million (the "Carisma Pre-Closing Financing"). The consummation of the Carisma Pre-Closing Financing is conditioned on the satisfaction or waiver of the conditions set forth in the Merger Agreement. 29 --------------------------------------------------------------------------------
Shares of
Additionally, at or prior to the effective time of the Merger, we will enter into a Contingent Value Rights Agreement (the "CVR Agreement") with a rights agents (the "Rights Agent") pursuant to which we intend to declare a dividend payable to our stockholders of record as of a date agreed to by us andCarisma prior to the effective time of the Merger with respect to the receipt of one contingent value right (each, a "CVR"), for each outstanding share of our common stock held by such stockholders on such date. Each CVR will represent the contractual right to receive contingent cash payments upon the receipt by us of certain proceeds payable by Roche, if any, pursuant to the Roche Asset Purchase Agreement, upon the achievement by Roche of a specified milestone set forth in the Roche Asset Purchase Agreement, subject to certain customary deductions, including for expenses and taxes. The contingent payments under the CVR Agreement, if they become due, will be payable to the Rights Agent for subsequent distribution to the holders of the CVRs. In the event that no such proceeds are received, holders of the CVRs will not receive any payment pursuant to the CVR Agreement. There can be no assurance that any cash payment will be made or that any holders of CVRs will receive any amounts with respect thereto. Our future operations are highly dependent on the success of the Merger and there can be no assurances that the Merger will be successfully consummated. In the event that we do not complete the Merger withCarisma , we may continue to explore strategic alternatives, including, without limitation, another strategic transaction and/or pursue a liquidation and dissolution of our company.
Other Recent Events
2022 Restructuring Plan
OnJuly 15, 2022 , we approved a restructuring plan to reduce operating expenses and better align our workforce with the needs of our business following the decision to voluntarily pause further development of Vicineum inthe United States . Execution of the 2022 Restructuring Plan is expected to be substantially completed in connection with the closing of the Merger withCarisma , which is expected to occur approximately two to three months from the date of this form 10-Q filing,November 7, 2022 . The 2022 Restructuring Plan includes an incremental reduction in our workforce as well as additional cost-saving initiatives intended to preserve capital during the pendency of the Merger withCarisma and while we seek a potential partner for the further development of Vicineum. We also incurred one-time cash costs associated with the termination of certain contracts and all other activities under the 2022 Restructuring Plan.
Sale of Legacy Technology to Roche
OnJuly 15, 2022 , we executed the Roche Asset Purchase Agreement pursuant to which Roche purchased all patent rights and know-how related to the monoclonal antibody EBI-031 and all other IL-6 antagonist monoclonal antibody technology owned by us for up to$70 million . As a result of the Roche Asset Purchase Agreement, the exclusive license agreement between Roche and us was terminated resulting in no further diligence, milestone or royalty payment obligations under such license agreement. Pursuant to the Roche Asset Purchase Agreement, Roche made a$40 million payment to us upon execution of the Roche Asset Purchase Agreement. The Roche Asset Purchase Agreement also provides that Roche will make an additional$30 million payable to us upon Roche's initiation of a Phase 3 clinical trial with EBI-031 for a defined indication if initiated prior toDecember 31, 2026 . 2022 Retention Program OnAugust 28, 2022 , our board of directors and the compensation committee of the board of directors approved a retention program for certain employees pursuant to which we will provide a cash incentive designed to retain such employees. Pursuant to this retention program, certain of our employees, including certain executive officers, will receive a cash bonus award, which vests in full upon the earlier of the completion of a strategic transaction and termination without cause, subject to continued employment through that time.
Regulatory Update
InDecember 2020 , we submitted our completed BLA for Vicineum for the treatment of BCG-unresponsive NMIBC to the FDA, which was accepted for filing by the FDA inFebruary 2021 . The FDA granted Priority Review for the BLA and set a target PDUFA date for a decision on the BLA ofAugust 18, 2021 . OnAugust 13, 2021 , we received the Complete Response Letter ("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 chemistry, manufacturing and controls ("CMC") issues pertaining to a recent pre-approval inspection and product quality. OnAugust 20, 2021 , we withdrew our marketing authorization application ("MAA") to theEuropean Medicines Agency (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 EU until there is more clarity from the FDA on next steps for Vicineum inthe United States . Vysyneum is the proprietary brand name that was conditionally approved by the EMA for oportuzumab monatox in the EU. InOctober 2021 , the 30 -------------------------------------------------------------------------------- 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 EMA Withdrawal 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. InOctober 2021 andDecember 2021 , we participated in a CMC Type A meeting and a Clinical Type A meeting, respectively, with the FDA to discuss issues raised in the CRL and design elements of an additional Phase 3 clinical trial for Vicineum, which the FDA confirmed would be required for a potential resubmission of a BLA. InMarch 2022 , we participated in a Type C meeting with the FDA. During the Type C meeting, the FDA agreed to a majority of our proposed protocol and statistical analysis plan design elements for an additional Phase 3 clinical trial. OnJuly 11, 2022 , we participated in a Type B meeting with the FDA to discuss outstanding items related to our proposed protocol and statistical analysis plan design elements for an additional Phase 3 clinical trial. OnJuly 15, 2022 , we made the strategic decision to voluntarily pause further development of Vicineum inthe United States . The decision was based on a thorough reassessment of Vicineum following recent discussions with the FDA, which had implications on the size, timeline and costs of an additional Phase 3 clinical trial which the FDA previously confirmed would be required for a potential resubmission of a BLA for Vicineum for the treatment of NMIBC. As a result of this decision, we no longer plan to pursue regulatory approval of Vysyneum for NMIBC in the EU. We continue to believe that Vicineum has benefits for patients and healthcare providers that can be maximized through a company with a larger infrastructure, and as such, we intend to seek a partner that can execute further development to realize the full potential of Vicineum. As a result of this decision, we have turned our primary focus to the careful assessment of potential strategic alternatives with the goal of maximizing shareholder value.
Prior Phase 3 Clinical Trial - VISTA Trial
In the third quarter of 2015 inthe United States andCanada , through our subsidiary Viventia, we commenced our single-arm, multi-center, open-label Phase 3 clinical trial ("VISTA Trial") in patients with BCG-unresponsive NMIBC who have received adequate BCG and whose disease is now BCG-unresponsive, and for whom the then-current standard of care was a radical cystectomy. Based on safety and efficacy data observed with the longer 12-week induction in our Phase 2 clinical trial, the FDA agreed to our plan to employ more frequent dosing in the VISTA Trial, in which the primary endpoints were complete response ("CR") and duration of response ("DoR") in patients with CIS whose disease is BCG-unresponsive. InNovember 2016 , the FDA issued draft guidance regarding appropriate clinical trial design for new drugs and biologics for BCG-unresponsive NMIBC, including the use of single-arm trials. The FDA finalized this guidance inFebruary 2018 and retained many of the recommendations from the 2016 draft guidance regarding clinical trial design, including the use of single-arm trials. We believe that our VISTA Trial design was consistent with these aspects of theFDA's guidance. InMay 2022 , we completed the follow-up phase of the VISTA Trial. The VISTA Trial completed enrollment inApril 2018 with a total of 133 patients across three cohorts based on histology and time to disease recurrence after adequate BCG treatment: •Cohort 1 (n=86): Patients with CIS with or without papillary disease that was 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 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 DoR for BCG-unresponsive CIS patients who experience a CR.
As of the
Cohort 1 (n=86) Evaluable Population (n=82) Complete Response Rate, for CIS:
Time Point Evaluable Patients* Complete Response Rate
(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%)
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*Response evaluable population includes any mITT patient who completed the
induction phase.
Cohort 2 (n=7) Evaluable Population (n=7) Complete Response Rate, for CIS:
Time Point Evaluable Patients* Complete Response Rate
(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:
Time Point Evaluable Patients* Complete Response Rate
(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:
Time Point Phase 3 Pooled CRR Phase 2 Pooled CRR
(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†:
Time Point Evaluable Patients* Recurrence-Free Rate
(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%)
†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 (95% CI, 154-NE), using the Kaplan-Meier method.
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. These additional 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
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--------------------------------------------------------------------------------such patients is to avoid cystectomy. Therefore, time to cystectomy was a key secondary endpoint in the VISTA Trial.
•Time to Disease Recurrence: High-grade papillary (Ta or T1) NMIBC is associated
with high 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 the
Safety Results
As of theMay 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 or death). There were no age-related increases in adverse events observed in the VISTA Trial.
Manufacturing
InOctober 2018 , we entered into a Master Bioprocessing Services Agreement withFujifilm Diosynth Biotechnologies U.S.A., Inc. ("Fujifilm") (the "Fujifilm MSA") for the manufacturing process and technology transfer of Vicineum drug substance production.
In
InJune 2021 , we entered into a Global Supply Agreement with Qilu pursuant to which Qilu will be part of the manufacturing network for, if approved, global commercial supply of Vicineum drug substance and drug product.
In connection with our decision to voluntarily pause further development of Vicineum, we terminated the Fujifilm MSA and Baxter CMSA and requested that Fujifilm and Baxter cease all work under the respective agreements and refrain from incurring any additional costs or expenses.
In-License Agreements
We have a license agreement with theUniversity of Zurich ("Zurich") which grants us exclusive license rights, with the right to sublicense, to make, have made, use and sell under certain patents primarily directed to our targeting agent, including an EpCAM chimera and related immunoconjugates and methods of use and manufacture of the same (the "Zurich License Agreement"). These patents cover some key aspects of Vicineum. We have a License Agreement withMicromet AG ("Micromet"), now part of Amgen, Inc., which grants us nonexclusive rights, with certain sublicense rights, for know-how and patents allowing exploitation of certain single chain antibody products (the "Micromet License Agreement"). These patents cover some key aspects of Vicineum. We have a license agreement withXOMA Ireland Limited ("XOMA") which grants us non-exclusive rights to certain XOMA patent rights and know-how related to certain expression technology, including plasmids, expression strains, plasmid maps and 33 --------------------------------------------------------------------------------
production systems (the "XOMA License Agreement"). These patents and related know-how cover some key aspects of Vicineum.
Notwithstanding our decision to voluntarily pause further development of Vicineum inthe United States , we have not taken steps to terminate theZurich License Agreement, the Micromet License Agreement or the XOMA License Agreement as we intend to seek a partner for the further development of Vicineum.
OUS Business Development Partnering
In connection with our decision to voluntarily pause further development of Vicineum inthe United States , we have terminated our OUS business development partnerships in theMiddle East andNorth Africa region ("MENA") andTurkey by providing notice of termination for the MENA License Agreement and EIP License Agreement onJuly 20, 2022 .Greater China OnJuly 30, 2020 , we and our wholly-owned subsidiary,Viventia Bio, Inc. , entered into an exclusive license agreement withQilu Pharmaceutical Co., Ltd. ("Qilu") (the "Qilu License Agreement") 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 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 additional purchase price resulting from Qilu's obligation to pay us an amount equal to its recovery of VAT. OnJuly 20, 2021 we and Qilu announced the enrollment of the first patient inChina in a Phase 3 clinical trial to assess the efficacy and safety of Vicineum in patients with BCG-unresponsive NMIBC. The open-label, single-arm, multi-center bridging trial will evaluate the efficacy and safety of Vicineum in approximately 53 patients with carcinoma in situ (CIS) with or without papillary disease, high-grade Ta papillary disease or T1 papillary disease of any grade. Patients will be required to have failed previous treatment with BCG for inclusion in the trial. The primary endpoints are the complete response rate (for CIS patients) and the recurrence-free rate (for papillary patients) at six months, with the complete response rate and the recurrence-free rate at three months, safety and tolerability as the secondary endpoints. Based on the Qilu License Agreement, the trial is being run at the sole cost of Qilu. We and Qilu are in the process of negotiating a termination of the Qilu License Agreement. Upon the termination of the Qilu License Agreement, we will regain the rights to develop, manufacture and commercialize Vicineum inGreater China . 34 --------------------------------------------------------------------------------
Components of Our Results of Operations
License and Related Revenue
License revenue consists of revenue recognized pursuant to our OUS business development partnership agreements, including the Qilu License Agreement, and the Roche Asset Purchase Agreement, which is assessed under ASC Topic 606, Revenue. We have terminated all of our OUS business development partnership agreements other than the Qilu License Agreement, of which we and Qilu are in the process of negotiating a termination.
Research and Development
Research and development expenses consist primarily of costs incurred for the development of Vicineum for the treatment of NMIBC, which include:
•employee-related expenses, including salaries, benefits, travel and share-based compensation expense;
•expenses incurred under agreements with contract resource 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. 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 NMIBC and other expenses by category. We expect to significantly reduce our research and development expenses during the pendency of the proposed Merger withCarisma .
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,
2022 2021 2022 2021
Programs:
Vicineum for the treatment of NMIBC
Total direct program expenses 813 2,989
29,705 10,888
Personnel and other expenses:
Employee and contractor-related expenses 1,840 1,732
6,920 6,392
Platform-related lab expenses 5 19 100 133 Facility expenses 150 124 428 392 Other expenses 123 103 483 468 Total personnel and other expenses 2,118 1,978
7,931 7,385
Total Research and Development$ 2,931 $ 4,967
35
--------------------------------------------------------------------------------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, legal, business development and human resource functions. Other general and administrative expenses include facility-related costs, professional fees for legal, estimated payments to settle litigation, insurance, investment banking fees, patent, consulting and accounting services, and pre-commercialUnited States market research. We expect our general and administrative expenses to increase due to increases in professional and advisory fees during the pendency of the proposed Merger withCarisma .
Change in Fair Value of Contingent Consideration
In connection with the Viventia Acquisition inSeptember 2016 , we recorded contingent consideration pertaining to the amounts potentially payable to Viventia's shareholders pursuant to the terms of the Share Purchase Agreement among us, Viventia and the other signatories thereto and are based on regulatory approval in certain markets and 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, Net
Other income, net consists primarily of interest income earned on cash and cash equivalents and, to a lesser extent, any gains or losses on foreign exchange.
Provision for 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 non-US jurisdictions pursuant to our OUS business
development partnership agreements, including the Qilu License Agreement.
36
--------------------------------------------------------------------------------Our Results of Operations
Comparison of the three months ended
Three Months Ended
September 30, Increase/(Decrease)
2022 2021 Dollars Percentage
(in thousands, except percentages)
Revenue:
License and related revenue $ 40,000 $ - $ 40,000 -
Total revenue 40,000 - 40,000 -
Operating expenses:
Research and development $ 2,931 $ 4,967 $ (2,036) (41) %
General and administrative 8,141 8,699 (558) (6) %
Restructuring charge 10,947 5,522 5,425 98 %
Intangibles impairment charge - 31,700 (31,700) (100) %
Change in fair value of contingent consideration (1,800) (114,000) 112,200 (98) %
Total operating expenses 20,219 (63,112) 83,331 (132) %
Income from Operations 19,781 63,112 (43,331) (69) %
Other income:
Other income, net 676 1 675 67,500 %
Income Before Taxes $ 20,457 $ 63,113 $ (42,656) (68) %
Benefit from income taxes - 8,561 (8,561) (100) %
Net Income After Taxes $ 20,457 $ 71,674 $ (51,217) (71) %
License Revenue
Revenue for the three months ended September 30, 2022 was $40.0 million , which
was due to the execution of the Roche Asset Purchase Agreement for EBI-031 and
all other IL-6 antagonist monoclonal antibody technology. We did not record any
revenue for the three months ended September 30, 2021 .
Research and Development
Research and development expenses were$2.9 million for the three months endedSeptember 30, 2022 , compared to$5.0 million for the three months endedSeptember 30, 2021 . The decrease of$2.0 million was primarily due to a decrease in costs associated with manufacturing ($1.9 million ) and a decrease in other R&D related costs ($0.1 million ), driven by the strategic decision to voluntarily pause further development of Vicineum in the US in the third quarter of 2022. General and Administrative General and administrative expenses were$8.1 million for the three months endedSeptember 30, 2022 , compared to$8.7 million for the three months endedSeptember 30, 2021 . The decrease of$0.6 million was primarily due to a decrease in marketing and commercialization expenses, which were incurred in the third quarter of 2021 in preparation for potential commercial launch of Vicineum but were discontinued as a result of the Complete Response Letter from the FDA received inAugust 2021 ($2.3 million ) and a decrease in professional fees for accounting services ($0.4 million ). This was partially offset by an increase in legal expense ($1.3 million ), driven by legal fees associated with our assessment of strategic alternatives incurred in the third quarter of 2022 ($2.2 million ), partially offset by a decrease in legal fees associated with the internal review ($0.4 million ) and other legal expenses ($0.5 million ). Additionally, financial advisor fees increased due to financial advisor fees associated with our assessment of strategic alternatives incurred in the third quarter of 2022 ($0.8 million ). 37 --------------------------------------------------------------------------------
Restructuring Charge
Restructuring charges were$10.9 million for the three months endedSeptember 30, 2022 compared to$5.5 million for the three months endedSeptember 30, 2021 . The expense for the third quarter of 2022 consisted of severance and other employee-related costs ($6.9 million ) and termination of certain contracts and other associated costs ($4.0 million ) associated with our 2022 Restructuring Plan following the decision to voluntarily pause further development of Vicineum inthe United States . The expense for the third quarter of 2021 consisted of severance and other employee-related costs ($2.8 million ) and termination of certain contracts ($2.7 million ) associated with the restructuring plan we approved onAugust 30, 2021 to reduce operating expenses and better align our workforce with the needs of our business following the receipt of the CRL inAugust 2021 . Intangibles impairment Intangibles impairment charge for three months endedSeptember 30, 2022 was zero compared to$31.7 million in the three months endedSeptember 30, 2021 . InAugust 2021 , we received a CRL from the FDA regarding our BLA for Vicineum for the treatment of BCG-unresponsive NMIBC. As a result an impairment analysis was conducted, which concluded that the carrying value of our intangible asset of Vicineum US rights was fully impaired as ofSeptember 30, 2021 .
Change in Fair Value of Contingent Consideration
The non-cash change in fair value of contingent consideration was a gain of$1.8 million for the three months endedSeptember 30, 2022 , compared to a gain of$114.0 million for the three months endedSeptember 30, 2021 . The decrease in the fair value of contingent consideration of$1.8 million for the three months endedSeptember 30, 2022 was due to our conclusion that we no longer expect to owe any future earnout payments related to theGreater China region. Accordingly, we reduced our remaining$1.8 million of contingent consideration liabilities to zero as ofSeptember 30, 2022 . The change in fair value of contingent consideration was a gain of$114.0 million for the three months endedSeptember 30, 2021 . This was primarily 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 the time, we reassessed the underlying assumptions used to develop the revenue projections upon which the fair value of contingent consideration was 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 expected delays in the start of commercialization and estimated lower POS as a direct result of the CRL. We anticipated needing to conduct an additional clinical trial, which would lead to delays in the start of commercialization globally. We had assessed a range of commercialization timeline assumptions and applied a probability to each outcome based on management's best estimate. In addition, we assumed a lower POS in achieving certain clinical and regulatory milestones in the range of approximately 45% to 55% globally. 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 was 7.5% as ofSeptember 30, 2021 . The discount rate applied to the 2% earnout payment due on forecasted Vicineum revenues was derived from our estimated weighted-average cost of capital ("WACC"), and this WACC-derived discount rate was 8.6% as ofSeptember 30, 2021 .
Benefit (Provision) from Income Taxes
We did not record a benefit or loss for the three months endedSeptember 30, 2022 . In the third quarter of 2021, we determined that the fair value of the Vicineum US rights was zero, which resulted in an impairment charge of$31.7 million . In connection with this impairment charge, in the third quarter of 2021, we reduced the associated deferred tax liability which resulted in an$8.6 million income tax benefit. Net income For the three months endedSeptember 30, 2022 , net income was$20.5 million , compared to$71.7 million for the three months endedSeptember 30, 2021 . In the third quarter of 2022, we recorded revenue of$40.0 million related to the execution of the Roche Asset Purchase Agreement and non-cash income of$1.8 million related to changes in the fair value of contingent consideration, partially offset by operating expenses of$22.0 million . In the third quarter of 2021 we recorded non-cash income of$90.9 million , which includes changes in the fair value of contingent consideration, income tax benefit and intangible impairment charge. Additionally, we recorded R&D, G&A and restructuring charges of$19.2 million . 38 --------------------------------------------------------------------------------
Our Results of Operations
Comparison of the nine months ended
Nine Months Ended
September 30, Increase/(Decrease)
2022 2021 Dollars Percentage
(in thousands, except percentages)
Revenue:
License and related revenue $ 40,000 $ 6,544 $ 33,456 511 %
Total revenue 40,000 6,544 33,456 511 %
Operating expenses:
Research and development $ 37,636 $ 18,273 $ 19,363 106 %
General and administrative 32,705 20,797 11,908 57 %
Restructuring charge 10,947 5,522 5,425 98 %
Intangibles impairment charge 27,764 31,700 (3,936) (12) %
Change in fair value of contingent consideration (52,000) (52,240) 240 - %
Total operating expenses 57,052 24,052 33,000 137 %
Loss from Operations (17,052) (17,508) 456 (3) %
Other income (expense), net 867 (45) 912 (2,027) %
Loss Before Taxes $ (16,185) $ (17,553) $ 1,368 (8) %
Benefit from income taxes 3,875 8,273 (4,398) (53) %
Net Loss After Taxes $ (12,310) $ (9,280) $ (3,030) 33 %
License Revenue
Revenue for the nine months ended September 30, 2022 was $40.0 million , which
was due to the execution of the Roche Asset Purchase Agreement. 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 Qilu and
license revenue for additional purchase price due to the recovery of VAT by
Qilu.
Research and Development
Research and development expenses were$37.6 million for the nine months endedSeptember 30, 2022 , compared to$18.3 million for the nine months endedSeptember 30, 2021 . The increase of$19.4 million was primarily due to the expense of prepaid balances related to consumables and manufacturing reservations as the balances were deemed to have no future value ($25.2 million ) in the second quarter of 2022. Additionally, employee-related compensation increased, primarily due to the retention programs implemented in the fourth quarter of 2021 and third quarter of 2022 ($2.6 million ). The increase was partially offset by decreased costs associated with manufacturing ($6.1 million ), clinical and manufacturing related consulting fees ($2.0 million ), and other individually immaterial R&D costs ($0.3 million ), driven by the strategic decision to voluntarily pause further development of Vicineum in the US in the third quarter of 2022. General and Administrative General and administrative expenses were$32.7 million for the nine months endedSeptember 30, 2022 , compared to$20.8 million for the nine months endedSeptember 30, 2021 . The increase of$11.9 million was primarily due to an increase in legal expense ($14.6 million ) driven by the preliminary settlements of the securities and derivative litigation net of expected insurance recovery ($8.2 million ) and legal fees associated with our assessment of strategic alternatives ($2.6 million ). Additionally, legal fees related to the internal review ($2.8 million ), securities litigation counseling ($0.9 million ) and other legal expenses ($0.1 million ) increased during the nine months endedSeptember 30, 2022 . In addition, employee-related compensation increased, primarily driven by the retention programs implemented in the fourth quarter of 2021 and third quarter of 2022 ($1.3 million ). This was partially offset by decreases in marketing and commercial expenses ($4.0 million ), which were 39 --------------------------------------------------------------------------------
incurred during the first half of 2021 in preparation for potential commercial
launch of Vicineum but were discontinued as a result of the CRL received in
Restructuring Charge
Restructuring charges were$10.9 million for the nine months endedSeptember 30, 2022 compared to$5.5 million for the nine months endedSeptember 30, 2021 . The expense for the nine months endedSeptember 30, 2022 consisted of severance and other employee-related costs ($6.9 million ) and termination of certain contracts and other associated costs ($4.0 million ) following the decision to pause further development of Vicineum in the US. The expense for the nine months endedSeptember 30, 2021 consisted of severance and other employee-related costs ($2.8 million ) and termination of certain contracts ($2.7 million ) following the receipt of the CRL inAugust 2021 .
Change in Fair Value of Contingent Consideration
The non-cash change in fair value of contingent consideration was a gain of$52.0 million for the nine months endedSeptember 30, 2022 , compared to a gain of$52.2 million for the nine months endedSeptember 30, 2021 . The decrease in the fair value of contingent consideration of$52.0 million for the nine months endedSeptember 30, 2022 was driven by our strategic decision to voluntarily pause further development of Vicineum in the US and our conclusion that we no longer expect to owe any future earnout payments related to theGreater China region. The decision was based on a thorough reassessment of Vicineum following recent discussions with the FDA, which had implications for the size, timeline and costs for an additional Phase 3 clinical trial for the treatment of NMIBC. Additionally, during the second quarter of 2022, we observed an evolution of the current market treatment paradigm in NMIBC, with substantial uptake of intravesical chemotherapy (monotherapy and combination therapy) during the ongoing BCG shortage. We continue to believe that Vicineum has benefits for patients and healthcare providers that can be maximized through a company with a larger infrastructure, and as such, intend to seek a partner that can execute further development to realize the full potential of Vicineum. We expect that any partner who acquires Vicineum from us will be obligated to make any payments to the former shareholders of Viventia under the Share Purchase Agreement The change in fair value of contingent consideration was a gain of$52.2 million for the nine months endedSeptember 30, 2021 . This was primarily driven by the receipt of a CRL inAugust 2021 , 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 the 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 POS; we expected delays in the start of commercialization and estimate lower POS as a direct result of the CRL. We anticipated needing to conduct an additional clinical trial, which would lead to delays in the start of commercialization globally. We had assessed a range of commercialization timeline assumptions and applied a probability to each outcome based on management's best estimate. In addition, we assumed a lower POS in achieving certain clinical and regulatory milestones in the range of approximately 45% to 55% globally. 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 was 7.5% as ofSeptember 30, 2021 . The discount rate applied to the 2% earnout payment due on forecasted Vicineum revenues was derived from our estimated WACC, and this WACC-derived discount rate was 8.6% as ofSeptember 30, 2021 . Provision for Income Taxes For the nine months endedSeptember 30, 2022 , we recorded a benefit from income taxes of$3.9 million . In the second quarter of 2022, we determined that the fair value of the Vicineum EU rights was zero, which resulted in an impairment charge of$14.7 million . In connection with this impairment charge, in the second quarter of 2022, we reduced the associated deferred tax liability to zero, which resulted in a$4.0 million income tax benefit, partially offset by$0.1 million income tax paid to foreign jurisdictions pursuant to the Qilu License Agreement. Please refer to Note 8, "Intangible Assets andGoodwill ," in the Notes to Condensed Consolidated Financial Statements in our Quarterly Report on Form 10-Q for the quarter endedJune 30, 2022 for further information regarding the impairment charge. 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 reduced the associated deferred tax liability which resulted in an$8.6 million income tax benefit.
Net Loss
For the nine months endedSeptember 30, 2022 net loss was$12.3 million , compared to net loss of$9.3 million , for the nine months endedSeptember 30, 2021 . The increase of$3.0 million was due to an increase in operating expense ($33.0 million ), primarily driven by the reduction of our prepaid balances related to consumables and manufacturing reservations in the second quarter of 2022 ($25.2 million ) and the preliminary settlements of the securities and derivative litigation net of expected insurance recovery ($8.2 million ). Additionally, the benefit from income taxes decreased ($4.4 million ) in 2022 compared to 40 --------------------------------------------------------------------------------
2021. This was partially offset by increased revenue (
Liquidity and Capital Resources
Overview
As ofSeptember 30, 2022 , we had cash, cash equivalents and marketable securities of$184.9 million , net working capital of$157.7 million and an accumulated deficit of$328.6 million . We incurred cash flows from operating activities of$22.2 million for the nine months endedSeptember 30, 2022 , compared to negative cash flows of$56.3 million for the nine months endedSeptember 30, 2021 . We believe that, based on our current operating plans and financial forecasts, our cash, cash equivalents and marketable securities of$184.9 million as ofSeptember 30, 2022 , are sufficient to fund our current operating plan for at least twelve months from the date of this Form 10-Q filing,November 7, 2022 . Following an extensive process of evaluating strategic alternatives, including identifying and reviewing potential candidates for a strategic transaction, onSeptember 20, 2022 , we entered into the Merger Agreement withCarisma and Merger Sub, pursuant to which, among other things, and subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, Merger Sub will merge with and intoCarisma , withCarisma continuing as our wholly-owned subsidiary and the surviving corporation of the Merger. Our board of directors unanimously approved the Merger Agreement and resolved to recommend that our stockholders approve the proposals described in the Merger Agreement. If the Merger is completed, the business ofCarisma will continue as the business of the combined company. The Merger is expected to close approximately two to three months from the date of this form 10-Q filing,November 7, 2022 . Consummation of the Merger is subject to certain closing conditions, including, among other things, (a) approval by our stockholders of the proposals described in the Merger Agreement, (b) approval byCarisma's stockholders of, among other things, the adoption of the Merger Agreement, (c) Nasdaq's approval of the listing of the shares of our common stock to be issued in connection with the Merger, (d) the effectiveness of a registration statement on Form S-4 to register the shares of our common stock to be issued in connection with the Merger, and (e) our having net cash as of closing of the Merger greater than or equal to$100.0 million . The Merger Agreement contains certain termination rights of each of us andCarisma . Upon termination of the Merger Agreement under specified circumstances, we may be required to payCarisma a termination fee of$7.6 million and/or reimburseCarisma's expenses up to a maximum of$1.75 million , andCarisma may be required to pay us a termination fee of$5.49 million and/or reimburse our expenses up to a maximum of$1.75 million . Our future operations are highly dependent on the success of the Merger and there can be no assurances that the Merger will be successfully consummated. In the event that we do not complete the Merger withCarisma , we may continue to explore strategic alternatives, including, without limitation, another strategic transaction and/or pursue a liquidation and dissolution of our company. 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. 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, sale of assets, and, to a lesser extent, from a collaboration. We have entered into an Open Market Sale Agreement withJefferies LLC ("Jefferies") datedNovember 29, 2019 , as amended by Amendment No. 1 datedOctober 30, 2020 , Amendment No. 2 datedFebruary 17, 2021 and Amendment No. 3, datedJune 1, 2021 (as amended, the "Sale Agreement"), under which we may issue and sell shares of our common stock, par value$0.001 per share from time to time through Jefferies (the "ATM Offering"). 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 of which$97.8 million of common shares remain available for future issuance as ofSeptember 30, 2022 . Sales 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 theNasdaq Stock 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 did not sell any shares of common stock pursuant to the Sale Agreement during the nine months endedSeptember 30, 2022 . 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 , 41 -------------------------------------------------------------------------------- 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 . 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 , respectively.
Funding Requirements
Our future funding requirements will depend on the outcome of the proposed
Merger with
We are subject to a number of risks similar to other clinical companies that have determined to focus primarily on pursuing a strategic transaction, including, but not limited to, those which are described under Part II Item 1A. Risk Factors of this Quarterly Report on Form 10-Q.
We will incur substantial expenses if and as we:
•address our ongoing securities litigation and derivative litigation;
•maintain, expand and protect our intellectual property portfolio;
•reduce our personnel and incur related severance and employee-related costs;
•wind down activities with our CMOs;
•terminate our property leases; and
•explore, evaluate and pursue any strategic alternatives if the Merger is not completed.
Our future capital requirements will depend on many factors, including:
•the outcome and the timing of the proposed Merger with
•the outcome and timing of any pending or future litigation involving us or our business;
•the costs and timing of maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims; and
•our obligation to make milestone, royalty and other payments to third-party licensors under our licensing agreements.
Until such time, if ever, as we can generate substantial revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, or government or other third-party funding. 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 are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our assessment of strategic alternatives. If we do not successfully consummate the proposed Merger withCarisma , our board of directors may decide to explore other strategic alternatives, including, without limitation, another strategic transaction and/or a liquidation and dissolution of our company
Contractual and Other Obligations
For information related to our cash requirements from known contractual and other obligations, see the description of Contingent Consideration in Note 5 "Fair Value Measurement and Financial Instruments," the information in Note 10 "Commitments and Contingencies", our leases in Note 11 "Leases", and the description of our license agreements in Note 17, "License Agreements" of Part I - Item 1. Financial Statements - Notes to Condensed Consolidated Financial Statements.
Cash Flows
The following table sets forth a summary of our cash flows for the nine months
ended
Nine Months Ended
September 30,
2022 2021
Net Cash Provided by (Used in) Operating Activities $ 22,214 $ (56,278)
Net Cash Used in Investing Activities (113,733) (4)
Net Cash Provided by Financing Activities - 176,129
Net (Decrease) Increase in Cash, Cash Equivalents and Restricted
Cash $ (91,519) $ 119,847
42--------------------------------------------------------------------------------
Net cash provided by operating activities was$22.2 million for the nine months endedSeptember 30, 2022 and consisted primarily of a net loss of$12.3 million , adjusted for non-cash items including, a decrease in the fair value of contingent consideration ($52.0 million ), intangible impairment charge ($27.8 million ), share-based compensation ($5.9 million ), and a net increase in operating assets and liabilities ($52.9 million ). 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 certain of our out-license agreements, adjusted for non-cash items, including share-based compensation ($3.4 million ), a decrease in the fair value of contingent consideration ($52.2 million ), increase in impairment charge ($31.7 million ), and a net decrease in operating assets and liabilities of ($29.9 million ).
Net cash used in investing activities was
Net cash used in investing activities consisted of de minimis purchases and
sales or property and equipment during the nine months ended
Net Cash Provided by Financing activities
Net cash provided by financing activities was zero for the nine months ended
Net cash provided by financing activities was$176.1 million for the nine months endedSeptember 30, 2021 and consisted primarily of$175.0 million net proceeds from the sale of common stock under the ATM Offering.
Critical Accounting Policies and Use of Estimates
The preparation of our condensed consolidated financial statements in accordance with GAAP 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 condensed consolidated financial statements and the reported amounts of expenses during the reporting period. Our critical accounting policies are those policies which involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. Management has determined that our most critical accounting policies are those relating to the fair value of indefinite-lived intangible assets, goodwill; contingent consideration; revenue recognition; development and regulatory milestone payments and other costs; and research and development costs.
Fair Value of Indefinite-Lived Intangible Assets
Our intangible assets consist of indefinite-lived, acquired 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. 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 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. During the second quarter of 2022, we observed an evolution of the current market treatment paradigm in NMIBC, with substantial uptake of intravesical chemotherapy (monotherapy and combination therapy) during the ongoing BCG shortage. We have also experienced a sustained decline in share price and a resulting decrease in our market capitalization. OnJuly 15, 2022 , we made the strategic decision to voluntarily pause further development of Vicineum inthe United States . The decision was based on a thorough reassessment of Vicineum following recent discussions with the FDA, which had implications on the size, timeline and costs of an additional Phase 3 clinical trial for the treatment of NMIBC Management updated the discounted cash flow model using the market participant approach and considered preliminary terms of potential partnering deal to conclude the fair value of our intangible asset of Vicineum EU rights. We concluded that the carrying value of our intangible asset of Vicineum EU rights of$14.7 million was fully impaired as ofJune 30, 2022 and was reduced to zero in the second quarter of 2022. 43 --------------------------------------------------------------------------------
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. During the second quarter of 2022, we observed continued trends in our market capitalization as compared to the carrying value of our single reporting unit as well as changes in certain assumptions in the fair value of the business including market share, size, length and cost of a clinical trial, and time to potential market launch. We identified these changes as potential impairment indicators and performed a quantitative impairment analysis in advance of our typical annual assessment date ofOctober 1 . We reassessed the underlying assumptions used to develop our revenue projections, which were then used as significant inputs to determine the fair value of equity. We updated our revenue forecast models based on further expected launch delays in both US and OUS regions. We also recently observed an evolution of the current treatment paradigm in NMIBC, with substantial uptake of intravesical chemotherapy (monotherapy and combination therapy) during the ongoing BCG shortage resulting in lower projected peak market share for Vicineum. We also considered other factors including the preliminary valuations of strategic alternatives during the fair value assessment. As a result of the interim impairment test, we concluded that the carrying value of our goodwill of$13.1 million was fully impaired as ofJune 30, 2022 . Contingent Consideration Contingent consideration on our condensed consolidated balance sheets is the result of our acquisition of Viventia inSeptember 2016 and represents the discounted present value of future commercial launch milestones and net sales earnout payments due to the former shareholders of Viventia pursuant to the Share Purchase Agreement. 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 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. The estimated fair value of our contingent consideration was determined using probabilities of successful achievement of regulatory milestones and commercial sales, the period in which these milestones and sales were expected to be achieved through 2033, the level of commercial sales of Vicineum forecasted for the US,Europe ,Japan ,China and other potential markets. Earnouts were determined using an earnout rate of 2% on all commercial net sales of Vicineum throughDecember 2033 . The discount rate applied to the 2% earnout was derived from our estimated weighted-average cost of capital, which has fluctuated from 9.3% as ofDecember 31, 2021 . Milestone payments constitute debt-like obligations, and therefore a high-yield debt index rate was applied to the milestones in order to determine the estimated fair value. This index rate was 8.0% as ofDecember 31, 2021 . OnJuly 15, 2022 , we made the strategic decision to voluntarily pause further development of Vicineum inthe United States . The decision was based on a thorough reassessment of Vicineum following recent discussions with the FDA, which had implications on the size, timeline and costs of an additional Phase 3 clinical trial for the treatment of NMIBC. We continue to believe that Vicineum has benefits for patients and healthcare providers that can be maximized through a company with a larger infrastructure, and as such, we intend to seek a partner for the further development of Vicineum. Accordingly, during the second quarter of 2022, we concluded that we are no longer expected to pay related milestone and earnout payments to the former shareholders of Viventia, with the exception of the potential 2% earnout payment related to theGreater China region since those territory rights had been out-licensed. Qilu held the exclusive license to develop Vicineum in theGreater China 44 --------------------------------------------------------------------------------
region, and accordingly, the
We and Qilu are in the process of negotiating a termination of the Qilu License Agreement. Upon the termination of the Qilu License Agreement, we will regain the rights to develop, manufacture and commercialize Vicineum inGreater China . However, we do not plan to develop or commercialize Vicineum in that region or any other, as we are pursuing the Merger withCarisma . We are also seeking to sell or out-license Vicineum and all the related obligations related to Vicineum. We expect that any partner who acquires or licenses Vicineum from us will be obligated to make any payments, including those related to sales in theGreater China region (if any), that become payable to the former shareholders of Viventia under the Share Purchase Agreement. If a sale or license of Vicineum has not occurred at the time the Merger is completed,Carisma has indicated it may continue to seek a sale or license of Vicineum and has no plans to develop Vicineum. Accordingly, as ofSeptember 30, 2022 , we concluded that we no longer expect to owe any future earnout payments related to theGreater China region and reduced our remaining$1.8 million of contingent consideration liabilities to zero as ofSeptember 30, 2022 .
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. 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 condensed consolidated statements of operations. As ofSeptember 30, 2022 andDecember 31, 2021 , we did not have any uncertain tax positions.
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. 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.
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