TERNS PHARMACEUTICALS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , which was filed with theSEC onMarch 30, 2021 . In addition to historical financial information, this discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Special Note Regarding Forward-Looking Statements" and "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q. Our fiscal year ends onDecember 31 each year.
Overview
We are a clinical-stage biopharmaceutical company developing a portfolio of small-molecule single-agent and combination therapy candidates for the treatment of non-alcoholic steatohepatitis, or NASH, and other chronic liver diseases. Our programs are based on clinically-validated and complementary mechanisms of action to address the multiple hepatic disease processes of NASH in order to drive meaningful clinical benefits for patients. The mechanisms of action targeted by our current drug candidates are the same mechanisms of action targeted by other drug candidates that have achieved clinical proof-of-concept in NASH clinical trials and have demonstrated significant improvements on histological and non-invasive markers of the disease, though no drug has been approved for the treatment of NASH inthe United States orEurope . Our most advanced program is TERN-101, a liver-distributed, non-bile acid Farnesoid X Receptor, or FXR, agonist that has demonstrated sustained liver FXR activation, as well as a favorable tolerability profile across multiple clinical trials. InJune 2021 , we announced positive top-line data from our Phase 2a LIFT Study of TERN-101 in NASH patients. In the LIFT Study, TERN-101 was generally well tolerated with a similar incidence of adverse events (AEs) across treatment groups. There were no treatment-related serious adverse events, and no patient discontinued TERN-101 due to any adverse event including pruritus. Multiple secondary and exploratory endpoints were also evaluated, including percent change from baseline in ALT levels and plasma pharmacokinetics of TERN-101, changes in liver fibro-inflammation measured by MRI corrected T1 (cT1), liver fat content by MRI proton density fat fraction (MRI-PDFF), pharmacodynamic parameters, and serum NASH biomarkers. We believe TERN-101 is the first FXR agonist product candidate to show significant improvements in cT1, an imaging marker of liver inflammation and fibrosis linked to clinical outcomes, in a 12-week placebo-controlled clinical trial. In light of the positive results, we plan to initiate a Phase 2a trial of TERN-101 in combination with TERN-501 in NASH patients in the first half of 2022. Our second clinical stage program, TERN-201, is a highly selective inhibitor of Vascular Adhesion Protein-1, or VAP-1. We initiated our Phase 1b AVIATION Trial of TERN-201 in NASH inJune 2021 , and we expect top-line data in the first half of 2022. We are also evaluating the potential to co-administer TERN-201 in combination with a metabolically active NASH treatment. Our third clinical stage program is TERN-501, a Thyroid Hormone Receptor beta, or THR-?, agonist with high metabolic stability, enhanced liver distribution and greater selectivity for THR-? compared to other THR-? agonists in development. InJanuary 2021 , the FDA cleared our investigational new drug application, or IND, for TERN-501. InMarch 2021 , we announced the initiation of our Phase 1 first-in-human clinical trial of TERN-501, and we expect top-line data in the fourth quarter of 2021. Since the commencement of our operations, we have devoted substantially all of our resources to research and development activities, organizing and staffing our company, business planning, raising capital, establishing and maintaining our intellectual property portfolio, conducting preclinical studies and clinical trials and providing general and administrative support for these operations. We do not have any single-agent or combination therapy candidates approved for commercial sale, and we have not generated any revenue from product sales. Our ability to generate product revenue sufficient to achieve profitability, if ever, will depend on the successful development and eventual commercialization of one or more of our single-agent or combination therapy candidates which we expect, if it ever occurs, will take a number of years. We will not generate any revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for one or more of our single-agent or combination therapy candidates. If we obtain regulatory approval for any of our single-agent or combination therapy candidates, we expect to incur significant expenses related to developing our internal commercialization capability to support product sales, marketing and distribution. We do not own or operate, and currently have no plans to establish, any manufacturing facilities. We rely, and expect to continue to rely, on third parties for the manufacture of our single-agent and combination therapy candidates for preclinical and clinical testing, as well as for commercial manufacturing if any of our single-agent and combination therapy candidates obtain marketing approval. We believe that this strategy allows us to maintain a more efficient infrastructure by eliminating the need for us to invest in our own manufacturing facilities, equipment and personnel while also enabling us to focus our expertise and resources on the development of our single-agent and combination therapy candidates. 20 -------------------------------------------------------------------------------- The coronavirus disease 2019, or COVID-19, pandemic is rapidly evolving. The COVID-19 pandemic continues to impact countries worldwide, includingthe United States andChina where we have business operations. The extent of the impact of the COVID-19 pandemic on our business, operations and development timelines and plans remains uncertain, and will depend on certain developments, including the duration and spread of the outbreak and its impact on our development activities, planned clinical trial enrollment, future trial sites, contract research organizations, or CROs, third-party manufacturers and other third parties with whom we do business, as well as its impact on regulatory authorities and our key scientific and management personnel. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel and with our employees working remotely. We will continue to actively monitor the rapidly evolving situation related to the COVID-19 pandemic and may take further actions that alter our operations, including those that may be required by federal, state or local authorities inthe United States andChina , or that we determine are in the best interest of our employees and other third parties with whom we do business. At this point, the extent to which the COVID-19 pandemic may affect our business, operations and development timelines and plans, including the resulting impact on our expenditures and capital needs, remains uncertain.
Results of operations
The following table summarizes our results of operations for the three and six
months ended
Three Months Ended June 30, Six Months Ended June 30,
(in thousands) 2021 2020 Change 2021 2020 Change
Results of Operations
Operating expenses:
Research and development $ 5,961 $ 7,611 $ (1,650 ) $ 14,696 $ 14,855 $ (159 )
General and administrative 4,857 2,486 2,371 9,418 4,665 4,753
Total operating expenses 10,818 10,097 721 24,114 19,520 4,594
Loss from operations (10,818 ) (10,097 ) (721 ) (24,114 ) (19,520 ) (4,594 )
Other income:
Interest income 55 2 53 66 52 14
Other income, net 39 250 (211 ) 26 417 (391 )
Total other income, net 94 252 (158 ) 92 469 (377 )
Loss before income tax expense (10,724 ) (9,845 ) (879 ) (24,022 ) (19,051 ) (4,971 )
Income tax expense (14 ) - (14 ) (53 ) - (53 )
Net loss $ (10,738 ) $ (9,845 ) $ (893 ) $ (24,075 ) $ (19,051 ) $ (5,024 )
Revenue
To date, we have not generated, and do not expect to generate, any revenue from the sale of products for the foreseeable future.
Research and development expenses
Our research and development expenses are related primarily to discovery efforts and preclinical and clinical development of our single-agent and combination therapy candidates. The decrease in research and development expenses for the three months endedJune 30, 2021 , compared to the same period in 2020, was primarily due to a$2.3 million decrease related to our clinical programs partially offset by$0.4 million increase in employee-related expenses as higher headcount increased salaries, benefits, and stock-based compensation-related charges, and a$0.3 million increase due to higher allocated facility-related and depreciation expenses to research and development expenses. The decrease in research and development expenses for the six months endedJune 30, 2021 , compared to the same period in 2020, was primarily due to a$1.3 million decrease related to our clinical programs partially offset by a$0.6 million increase in employee-related expenses as higher headcount increased salaries, benefits, and stock-based compensation-related charges, and a$0.5 million increase due to higher allocated facility-related and depreciation expenses to research and development expenses. 21 --------------------------------------------------------------------------------
General and administrative expenses
General and administrative expenses consist primarily of personnel-related expenses, including salaries, benefits and stock-based compensation expense, for personnel in executive, finance, accounting, business development, legal, human resource and other administrative functions. The increase in general and administrative expenses for the three months endedJune 30, 2021 , compared to the same period in 2020, was primarily due to a$1.9 million increase in employee-related expenses as higher headcount increased salaries, benefits, and stock-based compensation-related charges and a$0.8 million increase in insurance, legal, IT and other professional services consulting. These increases were partially offset by a$0.3 million decrease due to higher allocated facility-related and depreciation expenses to research and development expenses. The increase in general and administrative expenses for the six months endedJune 30, 2021 , compared to the same period in 2020, was primarily due to a$3.3 million increase in employee-related expenses as higher headcount increased salaries, benefits, and stock-based compensation-related charges and a$2.0 million increase in insurance, legal, IT and other professional services consulting. These increases were partially offset by a$0.5 million decrease due to higher allocated facility-related and depreciation expenses to research and development expenses. Interest income
Interest income primarily consists of interest income on our marketable securities.
Interest income for the three months ended
Interest income for the six months ended
Other income, net
Other income, net for the three months endedJune 30, 2021 was less than$0.1 million of income, compared to$0.3 million of income for the same period in 2020.
Other income, net for the six months ended
Income tax expense
Income tax expense for the three months ended
Income tax expense for the six months ended
Liquidity and capital resources
Uses of cash
Our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures and general and administrative expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses. We expect to continue to incur net operating losses for at least the next several years, and we expect our research and development expenses, general and administrative expenses and capital expenditures will continue to increase. We expect our expenses and capital requirements will increase significantly in connection with our ongoing activities.
Sources of liquidity
We have principally funded our operations primarily through proceeds from the
sale of shares of our common stock in our IPO, convertible preferred stock and
sale of our convertible promissory notes. We have devoted substantially all of
our resources to research
22
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and development activities, organizing and staffing our company, raising capital, establishing and maintaining our intellectual property portfolio, conducting preclinical studies and clinical trials and providing general and administrative support for these operations.
Since our inception, we have not generated any revenue from product sales, and we have incurred significant operating losses and negative cash flows from our operations. As ofJune 30, 2021 , we had an accumulated deficit of$156.0 million , a net loss of$24.1 million , negative cash flows from operations of$23.1 million , and cash, cash equivalents and marketable securities of$185.1 million .
In
InDecember 2020 , we issued and sold shares of our convertible preferred stock for gross proceeds of$87.4 million (including conversion of the$15.0 million of 2020 Notes and effective conversion of the$1.8 million bridge loan, plus accrued interest). InFebruary 2021 , we completed our initial public offering of 8,625,000 shares of our common stock, including the exercise in full by the underwriters of their option to purchase additional shares of common stock. The net proceeds from this offering were$133.0 million after deducting underwriting discounts and commissions and offering expenses.
We believe that the net proceeds from these transactions, together with our existing cash and cash equivalents, will be sufficient to fund our operating expenses and capital expenditure requirements into 2024. We will need substantial additional funding to support our operating activities.
Future funding requirements
We expect to incur significant expenses and operating losses for the foreseeable future as we advance the preclinical and clinical development of our single-agent and combination therapy candidates. We expect that our research and development and general and administrative costs will increase in connection with conducting additional preclinical studies and clinical trials for our current and future research programs and single-agent and combination therapy candidates, contracting with CROs and contract manufacturing organizations, or CMOs, to support preclinical studies and clinical trials, expanding our intellectual property portfolio, and providing general and administrative support for our operations. As a result, we will need additional capital to fund our operations, which we may obtain from additional equity or debt financings, collaborations, licensing arrangements or other sources.
Our primary uses of cash are to fund our research and development activities, business planning, establishing, and maintaining our intellectual property portfolio, hiring personnel, raising capital and providing general and administrative support for these operations.
We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research and development of, continue or initiate clinical trials of, and seek marketing approval for, our single-agent and combination therapy candidates. In addition, if we obtain marketing approval for our single-agent and combination therapy candidates, we expect to incur significant commercialization expenses related to any approved products, marketing, manufacturing, and distribution to the extent that such sales, marketing and distribution are not the responsibility of potential collaborators. Furthermore, we expect to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce, or eliminate our research and development programs or future commercialization efforts. Identifying potential single-agent and combination therapy candidates and conducting preclinical studies and clinical trials is a time-consuming, expensive, and uncertain process that takes many years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our single-agent and combination therapy candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of single-agent and combination therapy candidates that we do not expect to be commercially available for many years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all. Cash flows Operating activities Net cash used in operating activities during the six months endedJune 30, 2021 was$23.1 million and consisted primarily of our net loss of$24.1 million as well as a$3.2 million decrease from changes in operating assets and liabilities. This was partially offset by non-cash expenses of$3.7 million of stock-based compensation,$0.3 million of depreciation and$0.2 million of net amortization on marketable securities. 23 -------------------------------------------------------------------------------- Net cash used in operating activities during the six months endedJune 30, 2020 was$16.1 million and consisted primarily of our net loss of$19.1 million . This was partially offset by non-cash adjustments from$0.4 million of stock-based compensation,$0.1 million change in deferred taxes and uncertain tax positions, and$0.2 million of depreciation expense, as well as a$2.2 million increase from changes in operating assets and liabilities.
Investing activities
Net cash used in investing activities during the six months endedJune 30, 2021 was$117.7 million and consisted primarily of a$137.6 million purchase of investments. This was partially offset by proceeds from the sale and maturity of investments of$19.9 million . Net cash provided by investing activities during the six months endedJune 30, 2020 was$6.7 million and consisted primarily of$8.0 million in proceeds from the sale and maturity of investments. This was partially offset by$0.7 million in purchases of investments and$0.5 million in purchases of property and equipment.
Financing activities
Net cash provided by financing activities during the six months endedJune 30, 2021 was$133.6 million and consisted primarily of$136.4 million in proceeds from the issuance of common stock upon closing of the IPO inFebruary 2021 and$0.1 million of proceeds from stock option exercises, partially offset by$2.7 million in payments of deferred offering costs and a$0.2 million net payment on loans payable. Net cash provided by financing activities during the six months endedJune 30, 2020 was$16.8 million consisted primarily of$16.9 million from proceeds from the issuance of loans payable.
Critical Accounting Policies and Estimates
There have been no material changes to our critical accounting policies and use of estimates from those disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . For a discussion of our critical accounting policies and use of estimates, refer to Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Significant Estimates in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2020 .
Recent Accounting Pronouncements
We are subject to several recently issued accounting pronouncements. Note 1 - Organization, Basis of Presentation, and Summary of Significant Accounting Policies - Recent Accounting Pronouncements which is contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, describes these new accounting pronouncements and is incorporated herein by reference.
Off-balance sheet arrangements
We do not have any off-balance sheet arrangements (as defined by applicable regulations of theSEC ) that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
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