VERONA PHARMA PLC You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSecurities and Exchange Commission onMarch 3, 2022 (the "2021 Form 10-K"). In addition to historical information, this Quarterly Report on Form 10-Q contains statements that constitute 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, although not all forward-looking statements contain these words. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including without limitation statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, the development of ensifentrine or any other product candidates, including statements regarding the expected initiation, timing, progress and availability of data from our clinical trials and potential regulatory approvals, research and development costs, timing and likelihood of success, potential collaborations, our estimates regarding expenses, future revenues, capital requirements, debt service obligations and our need for additional financing, the funding we expect to become available from cash receipts fromU.K. tax credits and under the$150.0 million debt facility secured inOctober 2022 , and the sufficiency of our cash and cash equivalents to fund operations, are forward-looking statements. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions and are based 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 are subject to a number of known and unknown risks, uncertainties, assumptions, and other important factors including, but not limited to, those set forth under Part II, Item 1A of this Quarterly Report on Form 10-Q under the heading "Risk Factors" and Part I, Item 1A of the 2021 Form 10-K under the heading "Risk Factors". Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. 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. We intend the forward-looking statements contained in this Quarterly Report on Form 10-Q to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 16 --------------------------------------------------------------------------------
Overview
We are a clinical-stage biopharmaceutical company focused on developing and
commercializing innovative therapeutics for the treatment of respiratory
diseases with significant unmet medical need. Our product candidate,
ensifentrine, is an investigational, potential first-in-class, inhaled, dual
inhibitor of the enzymes phosphodiesterase 3 and 4 ("PDE3" and "PDE4"), which is
designed to act as both a bronchodilator and an anti-inflammatory agent.
In the third quarter of 2020, we commenced our Phase 3 ENHANCE ("Ensifentrine as
a Novel inHAled Nebulized COPD thErapy") trials evaluating nebulized
ensifentrine for the maintenance treatment of chronic obstructive pulmonary
disease ("COPD"). In August 2022 , we announced positive top-line results from
the ENHANCE-2 trial. ENHANCE-2 successfully met its primary endpoint, as well as
secondary endpoints demonstrating improvements in lung function, and
significantly reduced the rate and risk of COPD exacerbations. Ensifentrine was
well tolerated with safety results similar to placebo.
We expect to report top-line results from ENHANCE-1 around the end of 2022.
Conditional upon positive results, we plan to submit a New Drug Application
("NDA") to the
We have incurred recurring losses and negative cash flows from operations since inception, and have an accumulated deficit of$322.4 million as ofSeptember 30, 2022 . We expect to incur additional losses and negative cash flows from operations until our product candidates potentially gain regulatory approval and reach commercial profitability, if at all.
We anticipate significant expenses in connection with our ongoing activities, as we:
•build out infrastructure and prepare for potential commercial launch;
•continue to invest in the clinical development of ensifentrine for the treatment of COPD or other indications;
•manufacture ensifentrine and engage in other Chemistry, Manufacturing and Controls activities; and
•maintain, expand and protect our intellectual property portfolio.
We believe that our cash and cash equivalents as ofSeptember 30, 2022 , together with expected cash receipts fromU.K. tax credits and additional funding expected to become available under the new Oxford Term Loan secured inOctober 2022 , will enable us to fund our planned operating expenses and capital expenditure requirements through at least the end of 2025, including the planned commercial launch of ensifentrine in theU.S. , if approved. The Oxford Term Loan advances are contingent upon achievement of certain clinical and regulatory milestones and other specified conditions. See "Indebtedness" for additional information. 17 --------------------------------------------------------------------------------
Clinical development update
ENHANCE-2
InAugust 2022 , we announced positive top-line results from our Phase 3 ENHANCE-2 clinical trial evaluating nebulized ensifentrine for the maintenance treatment of COPD. ENHANCE-2 successfully met its primary endpoint, as well as secondary endpoints demonstrating improvements in lung function, and significantly reduced the rate and risk of COPD exacerbations.
Highlights
•Study population (n=789):
•Subject demographics and disease characteristics were well balanced between
treatment groups.
•Approximately 52% of subjects received background COPD therapy, either a
long-acting muscarinic antagonist ("LAMA") or a long-acting beta-agonist
("LABA"). Additionally, approximately 15% of all subjects also received inhaled
corticosteroids ("ICS") with concomitant LAMA or LABA.
•Primary endpoint met (FEV1* AUC 0-12 hr):
•Placebo corrected, the change from baseline in average FEV1 area under the
curve 0-12 hours post dose at week 12 was 94 mL (p<0.0001) for ensifentrine.
•Statistically significant and clinically meaningful improvements with
ensifentrine demonstrated across all subgroups including gender, age, smoking
status, COPD severity, background medication, ICS use, chronic bronchitis, FEV1
reversibility, and geographic region.
•Secondary endpoints of lung function met:
•Placebo corrected, increase in peak FEV1 of 146 mL (p<0.0001) 0-4 hours post
dose at week 12.
•Placebo corrected, increase in morning trough FEV1 of 49 mL (p=0.0017) at week
12, confirming twice daily dosing regimen.
•Exacerbation rate reduced:
•Subjects receiving ensifentrine demonstrated a 42% reduction in the rate of
moderate to severe COPD exacerbations over 24 weeks compared to those receiving
placebo (p=0.0109).
•Treatment with ensifentrine significantly decreased the risk of a
moderate/severe exacerbation as measured by time to first exacerbation when
compared with placebo by 42% (p=0.0088).
•COPD symptoms and Quality of Life ("QOL"):
•Daily symptoms and QOL as measured by E-RS** Total Score and SGRQ** Total Score
in the ensifentrine group improved from baseline to greater than the minimal
clinically important difference ("MCID") of -2 units and -4 units, respectively,
at week 24. Improvements in these measures were seen as early as 6 weeks and
showed continued improvement at 12 and 24 weeks, numerically exceeding placebo
at each measurement. Statistical significance was not achieved due to
improvements observed in the placebo group over time.
•Favorable safety profile:
•Ensifentrine was well tolerated with safety results similar to placebo,
including occurrence of pneumonia, gastrointestinal and cardiovascular adverse
events.
*FEV1: Forced Expiratory Volume in one second, a standard measure of lung function
**E-RS, Evaluating Respiratory Symptoms, and SGRQ, St. George's Respiratory Questionnaire, are validated patient reported outcome tools
InOctober 2022 , we announced positive additional analyses from the ENHANCE-2 trial demonstrating that ensifentrine reduced rates of exacerbation across all subgroups analyzed over 24 weeks, including background medication, ICS use, smoking status and geographic region. Results of the subgroup analyses confirmed positive effects consistent with the 42% reduction in the rate of moderate to severe exacerbations observed in the overall population. ENHANCE-2 was not powered for exacerbation rate.
We plan to release additional information from ENHANCE-2 at upcoming scientific conferences.
18
--------------------------------------------------------------------------------ENHANCE-1
InJune 2022 , we completed enrollment in our Phase 3 ENHANCE-1 clinical trial with more than 800 patients randomized. Based on our current models of study progress, we expect to report top-line data for ENHANCE-1 around the end of 2022. The two randomized, double-blind placebo-controlled studies (ENHANCE-1 and ENHANCE-2) evaluate the efficacy and safety of nebulized ensifentrine in subjects with COPD as monotherapy and added onto a single bronchodilator, either a LAMA or a LABA, compared to placebo, and up to approximately 20% of subjects may receive ICS. The two study designs replicate measurements of efficacy and safety data over 24 weeks and ENHANCE-1 also evaluates longer-term safety over 48 weeks. The primary endpoint of both studies is improvement in lung function, as measured by FEV1 area under curve ("AUC") 0-12 hours post dose at week 12. Key secondary endpoints comprise measurements of COPD symptoms and health-related quality of life measures, including SGRQ and E-RS. The design of the ENHANCE program was based on analysis of our two Phase 2b clinical trials, which each enrolled 400 subjects with moderate to severe COPD. The attributes of the patient population enrolled in the ENHANCE program are consistent with those enrolled in prior Phase 2b trials of ensifentrine including demographics and baseline COPD characteristics, including smoking history, lung function, symptoms and quality of life measures.
Nuance Pharma
InAugust 2022 , our development partner, Nuance Pharma, received clearance fromChina's Center for Drug Evaluation to begin Phase 1 and Phase 3 studies with ensifentrine for COPD in mainlandChina . In 2021, we entered into an agreement with Nuance Pharma with a potential value of up to$219 million , granting Nuance Pharma exclusive rights to develop and commercialize ensifentrine inGreater China . See "Significant Agreements" for additional information.
COVID-19 pandemic impact
Whilst the impact of the COVID-19 pandemic and government and other measures in response have substantially reduced, we continue to monitor the pandemic and any potential impact on our operations and clinical trials. In addition, we continue to follow guidance from the FDA and other health regulatory authorities regarding the conduct of clinical trials during the pandemic to ensure the safety of study participants, minimize risks to study integrity, and maintain compliance with good clinical practice.
We are conducting ENHANCE-1 at a number of clinical trial sites inRussia . The sanctions and other restrictions imposed by theU.S. and other countries as a result of the current conflict betweenRussia andUkraine are impacting our outsourced clinical research vendor's ability to pay the clinical trial sites and investigators inRussia and may impact our clinical trial activities at sites inRussia . Management is closely monitoring theRussia -Ukraine conflict and will provide an update if we become aware of any meaningful disruption to the completion of our Phase 3 program or our plans to submit an NDA for ensifentrine.
Management update
Following the positive data from ENHANCE-2, we accelerated our commercial launch preparation activities. We are executing on our strategy and, in September andOctober 2022 , we added senior leadership across marketing, market access, commercial operations, IT, HR and finance. 19 --------------------------------------------------------------------------------
Significant agreements
Ligand agreement
In 2006 we acquired Rhinopharma and assumed contingent liabilities owed to
Ligand assigned to us all of its rights to certain patents and patent applications relating to ensifentrine and related compounds (the "Ligand Patents") and an exclusive, worldwide, royalty-bearing license under certain Ligand know-how to develop, manufacture and commercialize products (the "Ligand Licensed Products") developed using Ligand Patents, Ligand know-how and the physical stock of certain compounds. The contingent liability comprises a milestone payment (the "Milestone Payment") on obtaining the first approval of any regulatory authority for the commercialization of a Ligand Licensed Product, low single digit royalties based on the future sales performance of all Ligand Licensed Products and a portion equal to a mid-twenty percent of any consideration received from any sub-licensees for the Ligand Patents and for Ligand know-how. At time of the acquisition the contingent liability was not recognized as part of the acquisition accounting as it was immaterial. We will therefore record as a research and development expense the Milestone Payment or royalties when they are probable.
In
•we agreed to pay to Ligand (i)$2.0 million within five business days of the date of the Amendment and (ii)$15.0 million upon the first commercial sale of ensifentrine by us or a sub-licensee, which amount is payable in cash or, at the our discretion, by the issuance of Company equity of equivalent value, as determined based on the volume-weighted average price of the our American Depositary Shares on the Nasdaq Global Market over the ten (10) trading days including and prior to such milestone event;
•the Ligand Agreement shall expire on
• upon termination of the Ligand Agreement, any Sub-licensee (as defined in the Amendment) shall have the right to enter into a direct license agreement with Ligand for the portion of the Program IP (as defined in the Amendment) that was sub-licensed by such Sub-licensee;
•the Milestone Payment may be paid in cash or, at our discretion, by issuing to Ligand shares in the Company of equivalent value; and
•each party's right to terminate the Ligand Agreement is conditioned upon such party obtaining a final judgment of theEnglish High Court declaring that the other party is in material breach of its obligations under the Ligand Agreement.
Nuance agreement
We entered into a collaboration and license agreement (the "Nuance Agreement") withNuance Pharma Limited ("Nuance Pharma") effectiveJune 9, 2021 (the "Effective Date") under which we granted Nuance Pharma the exclusive rights to develop and commercialize ensifentrine inGreater China (China ,Taiwan ,Hong Kong andMacau ). In return, we received an unconditional right to consideration aggregating$40.0 million consisting of$25.0 million in cash and an equity interest valued at$15.0 million as of the Effective Date in Nuance Biotech, the parent company of Nuance Pharma. We are eligible to receive future milestone payments of up to$179.0 million , triggered upon achievement of certain clinical, regulatory, and commercial milestones as well as tiered double-digit royalties on net sales inGreater China . As ofSeptember 30, 2021 , the$25.0 million cash payment and$15.0 million equity interest had been received and the holding in Nuance Biotech was recorded as Equity Interest on our unaudited condensed consolidated balance sheet. The equity interest is recorded at the fair value indicated by the last observable transaction in Nuance Biotech's stock, which was a fund raising in November, 2020. As ofSeptember 30, 2022 , there had been no other observable transactions to indicate any price changes in the value of Nuance Biotech's stock, nor had there been any indications of impairment. The equity interest is therefore recorded at a value of$15.0 million .
Nuance Pharma will be responsible for all costs related to clinical development
and commercialization of ensifentrine in
20
--------------------------------------------------------------------------------
oversee and coordinate the overall conduct of such clinical development and
commercialization. We intend to use the joint steering committee to help ensure
the clinical development of ensifentrine in
Under the terms of the Nuance Agreement, at any time until three months prior to the expected submission of the first New Drug Application inGreater China , if (i) a third party is interested in partnering with us, either globally or in territory covering at leastthe United States orEurope , for the development and/or commercialization of ensifentrine or (ii) we undergo a change of control, we will have an exclusive option right to buy back the license granted to Nuance Pharma and all related assets. The price is agreed to be equal to the aggregate of (i) all prior amounts paid by Nuance Pharma to us in cash under the agreement and (ii) all development and regulatory costs incurred and paid by Nuance Pharma in connection with the development and commercialization of the ensifentrine under the Nuance Agreement multiplied by a single-digit factor range dependent upon achievement of certain milestones, subject to a specified maximum amount. The Nuance Agreement will continue on a jurisdiction-by-jurisdiction and product-by-product basis until the expiration of royalty payment obligations with respect to such product in such jurisdiction unless earlier terminated by the parties. Either party may terminate the Nuance Agreement for an uncured material breach or bankruptcy of the other party. Nuance Pharma may also terminate the Nuance Agreement at will upon 90 days' prior written notice.
We reviewed the buy-back option and determined that because it is conditional on a third party we do not have the practical ability to exercise it and, accordingly, the contract is accounted for under ASC 606.
The transaction price at the Effective Date of the Nuance Agreement was$40.0 million consisting of the$25.0 million upfront cash payment and$15.0 million equity interest. Developmental and regulatory milestones, and the manufacture and supply of ensifentrine drug product, were not included in the transaction price as we determined that it is not probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Commercial milestones and sales royalties were also excluded and will be recognized when the milestones are achieved or the sales occur inGreater China . The performance obligations in the Nuance Agreement include the grant of the license (including the right to commercialize ensifentrine until the end of the term, the sharing of certain know how, and the sharing of certain clinical and regulatory data), and manufacture and supply of ensifentrine drug product. We have determined that the manufacturing and supply was not at a discount. We have determined that the license and the know how shared with Nuance Pharma constitutes functional intellectual property and that revenue relating to this should be recognized at a point in time. Consequently, we have determined that we fulfilled our obligations to Nuance Pharma when we delivered the know how that will allow Nuance Pharma to file an investigational new drug application inGreater China . We delivered this know-how in the year endedDecember 31, 2021 , and the$40.0 million revenue was therefore recognized as revenue in the year endedDecember 31, 2021 . Revenue relating to the manufacture and supply obligations will be recognized when the drug product is delivered. For additional information regarding the Nuance Agreement, see Note 6 to our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.
Warrants
OnJuly 29, 2016 , as part of a private placement we issued warrants to investors. The warrant holders could subscribe for an ordinary share at a per share exercise price of £1.7238. They could also opt for a cashless exercise of their warrants whereby they could choose to exchange the warrants held for a reduced number of warrants exercisable at nil consideration. If, after a transaction, should the warrants be exercisable for unlisted securities, the warrant holders were able to demand a cash payment instead of the delivery of the underlying securities. Accordingly, they were accounted for as a liability under ASC 480 "Distinguishing Liabilities from Equity" and recorded at fair value using the Black-Scholes valuation methodology, on recognition and at each reporting date. The warrants were exercisable by the holders untilMay 2, 2022 . None of the warrants were exercised prior to their expiration. Loan and security agreement InNovember 2020 , we andVerona Pharma Inc. entered into a term loan facility of up to$30.0 million withSilicon Valley Bank (the "SVB Term Loan"). Subsequent to the quarter end, onOctober 14, 2022 , we andVerona Pharma, Inc. entered into a term loan (the "Oxford Term Loan") of up to$150.0 million withOxford Finance Luxembourg 21 --------------------------------------------------------------------------------
S.À R.L. ("Oxford"). This Oxford Term Loan replaced the existing term loan with
Critical accounting estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in theU.S. ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, the recognition of revenue, the accrual and prepayment of research and development expenses, the fair value of share-based compensation, the carrying value of the equity interest in Nuance Pharma, research and development tax credit and the fair value of warrants. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from our estimates. The accounting policies considered to be critical to the judgments and estimates used in the preparation of our financial statements are disclosed in the Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2021 Form 10-K. There have been no material changes to that information disclosed in our 2021 Form 10-K during the nine months endedSeptember 30, 2022 .
Components of results of operations
We anticipate that our expenses will increase substantially if and as we:
•establish a sales, marketing and distribution infrastructure and scale-up manufacturing capabilities to potentially commercialize any products for which we may obtain regulatory approval;
•conduct our ongoing Phase 3 clinical trials for ensifentrine for the maintenance treatment of COPD;
•continue the clinical development of our DPI and pMDI formulations of ensifentrine and research and develop other formulations of or combinations with ensifentrine;
•initiate and conduct further clinical trials for ensifentrine for the treatment of acute COPD, CF or any other indication;
•initiate and progress pre-clinical studies relating to other potential indications of ensifentrine;
•seek to discover and develop additional product candidates;
•seek regulatory approvals for any of our product candidates that successfully complete clinical trials;
•maintain, expand and protect our intellectual property portfolio;
•add clinical, scientific, operational, financial and management information systems and personnel, including personnel to support our product development and potential future commercialization efforts and to support our continuing operations as aU.S. public company; or
•experience any delays or encounter any issues from any of the above, including but not limited to failed studies, complex results, safety issues or other regulatory challenges.
22
--------------------------------------------------------------------------------Operating expenses
Research and development costs
Research and development costs consist of salary and personnel related costs and third party costs for our research and development activities for ensifentrine. Personnel related costs include a share-based compensation charge relating to our stock option plan. The largest component of third party costs is for clinical trials, as well as manufacturing for clinical supplies and associated development, and pre-clinical studies. Research and development costs are expensed as incurred. As the Phase 3 ENHANCE program is nearing completion, we expect our research and development costs to decrease over the next several quarters until we add new compounds or develop ensifentrine further in other delivery methods or indications. Due to the nature of research and development, the expected costs are inherently uncertain and may vary significantly from our current expectations.
Selling, general and administrative costs
Selling, general and administrative costs consist of salary and personnel related costs, including share-based compensation, expenses relating to operating as a public company, including professional fees, insurance and commercial related costs, as well as other operating expenses.
We expect commercial costs to increase as we continue to develop our commercial operations, prepare for a potential launch and, in the event of successful regulatory approval, incur sales force, marketing and other launch related costs. As we develop our knowledge of the market and refine our commercialization plans, expected costs may vary significantly from our current expectations. Other income/(expense) Other income/(expense) are driven by interest income and expense, the fair value movement of the warrant liability until they expired onMay 2, 2022 , foreign exchange movements on cash and cash equivalents and taxes receivable, and theU.K. research and development tax credits. We participate in the U.K. Small andMedium Enterprises research and development tax relief program. The tax credits are calculated as a percentage of qualifying research and development expenditure and are payable in cash by theU.K. government to us. Credits recorded in the 2021 financial year are expected to be received in the fourth quarter of 2022.
Taxation
We are subject to corporate taxation inthe United States and theUnited Kingdom . We have generated losses since inception and have therefore not paidUnited Kingdom corporation tax. The income taxes presented in our consolidated statements of operations and comprehensive loss represents the tax impact from our operating activities inthe United States , which generates taxable income based on intercompany service arrangements.United Kingdom losses may be carried forward indefinitely to be offset against future taxable profits, subject to various utilization criteria and restrictions. The amount that can be offset each year is limited to £5.0 million plus an incremental 50% ofU.K. taxable profits. 23 --------------------------------------------------------------------------------
Results of operations for the three months ended
The following table shows our statements of operations for the three months
ended
Three months ended September
30,
2022 2021 Change
Revenue $ - $ 40,000 $ (40,000)
Gross profit - 40,000 (40,000)
Operating expenses
Research and development 9,838 22,560 (12,722)
Selling, general and administrative 5,290 10,883 (5,593)
Total operating expenses 15,128 33,443 (18,315)
Operating (loss)/profit (15,128) 6,557 (21,685)
Other (expense)/income
Research and development tax credit 2,127 4,749 (2,622)
Interest income 779 4 775
Interest expense (116) (86) (30)
Fair value movement on warrants - 40 (40)
Foreign exchange loss (3,245) (86) (3,159)
Total other (expense)/income, net (455) 4,621 (5,076)
(Loss)/profit before income taxes (15,583) 11,178 (26,761)
Income tax expense (64) (127) 63
Net (loss)/profit $ (15,647) $ 11,051 $ (26,698)
Revenue
Revenue of
Research and development costs
Research and development costs were$9.8 million for the three months endedSeptember 30, 2022 , compared to$22.6 million for the three months endedSeptember 30, 2021 , a decrease of$12.8 million . This decrease was primarily due to a$12.5 million decrease in clinical trial and other development costs, as we progressed to later stages of our Phase 3 ENHANCE program and a$0.6 million decrease in share-based compensation.
Selling, general and administrative costs
Selling, general and administrative costs were$5.3 million for the three months endedSeptember 30, 2022 , compared to$10.9 million for the three months endedSeptember 30, 2021 , a decrease of$5.6 million , primarily due to a$4.0 million broker fee relating to the Nuance Agreement in 2021 and a$1.6 million decrease in share-based compensation. Other (expense)/income The research and development tax credit for the three months endedSeptember 30, 2022 was$2.1 million compared to$4.7 million for the three months endedSeptember 30, 2021 , a decrease of$2.6 million . This decrease was primarily due to a reduction in clinical trial and other development costs, as we progressed to later stages of our Phase 3 ENHANCE program. Foreign exchange loss for the three months endedSeptember 30, 2022 was$3.2 million compared to$0.1 million for the three months endedSeptember 30, 2021 , an increase of$3.1 million . This loss was primarily due to a fall in the value of the British pound against theU.S. dollar affecting pound sterling bank balances and the R&D tax credit receivable. 24 --------------------------------------------------------------------------------
Net loss
Net loss was
25
--------------------------------------------------------------------------------
Results of operations for the nine months ended
The following table shows our statements of operations for the nine months ended
Nine months ended September 30,
2022 2021 Change
Revenue $ - $ 40,000 $ (40,000)
Gross profit - 40,000 (40,000)
Operating expenses
Research and development $ 42,445 $ 56,697 $ (14,252)
Selling, general and administrative 18,256 28,150 (9,894)
Total operating expenses 60,701 84,847 (24,146)
Operating loss (60,701) (44,847) (15,854)
Other (expense)/income
Research and development tax credit 8,838 10,655 (1,817)
Interest income 959 11 948
Interest expense (291) (255) (36)
Fair value movement on warrants - 2,244 (2,244)
Foreign exchange (loss)/gain (6,830) 117 (6,947)
Total other income, net 2,676 12,772 (10,096)
Loss before income taxes (58,025) (32,075) (25,950)
Income tax expense (225) (232) 7
Net loss $ (58,250) $ (32,307) $ (25,943)
Revenue
Revenue of
Research and development costs
Research and development costs were$42.4 million for the nine months endedSeptember 30, 2022 , compared to$56.7 million for the nine months endedSeptember 30, 2021 , a decrease of$14.3 million . This decrease was primarily due to a$11.1 million decrease in clinical trial and other development costs and a$4.3 million decrease in share-based compensation charges partially offset by a$1.1 million increase in consultant costs mainly relating to an increase in clinical trial site audit and NDA filing preparation costs.
Selling, general and administrative costs
Selling, general and administrative costs were$18.3 million for the nine months endedSeptember 30, 2022 compared to$28.2 million for the nine months endedSeptember 30, 2021 , a decrease of$9.9 million . This decrease was driven primarily by a$7.3 million decrease in share-based compensation charges and a$2.0 million decrease due to a$4.0 million broker fee relating to the Nuance Agreement in 2021 offset by a$2.0 million charge related to the modification of the Ligand Agreement in 2022.
Other income/(expense)
The research and development tax credit for the nine months endedSeptember 30, 2022 was$8.8 million compared to$10.7 million for the nine months endedSeptember 30, 2021 , a decrease of$1.9 million . This decrease is attributable to lower qualifying research and development expenditures in the nine months endedSeptember 30, 2022 , compared to the comparative 2021 period. We recorded no income in the nine months endedSeptember 30, 2022 , compared to an income of$2.2 million in the comparative period relating to the fair value movements of the warrants. In the nine months endedSeptember 30, 2021 , there was a reduction in liability due to a decrease in the share price in that period and reduced volatility. 26 -------------------------------------------------------------------------------- Foreign exchange loss for the nine months endedSeptember 30, 2022 was$6.8 million compared to a gain of$0.1 million gain for the nine months endedSeptember 30, 2021 , an increase of$6.9 million . This loss was primarily due to a fall in the value of the British pound against theU.S. dollar affecting pound sterling bank balances and the R&D tax credit receivable.
Net loss
Net loss was
Cash flows
The following table summarizes our cash flows for the nine months ended
Nine months
ended
2022 2021 Change
Cash and cash equivalents at beginning of the period
$ 187,986 $ (39,606) Net cash used in operating activities (52,124) (15,931) (36,193) Net cash used in investing activities (29) (11) (18) Net cash provided by/(used in) financing activities 138,204 (5,216) 143,420 Effect of exchange rate changes on cash and cash equivalents (2,730) (281) (2,449) Cash and cash equivalents at end of the period$ 231,701 $ 166,547 $ 65,154 Operating activities Net cash used in operating activities was$52.1 million in the nine months endedSeptember 30, 2022 , compared to$15.9 million during the nine months endedSeptember 30, 2021 , an increase of$36.2 million . In 2021, as part of the Nuance Agreement, we received$25.0 million cash. In 2022, clinical trial and other development costs decreased as we progressed to later stages of our Phase 3 ENHANCE program.
Financing activities
Net cash provided by financing activities was$138.2 million in the nine months endedSeptember 30, 2022 , compared to$5.2 million net cash used in the nine months endedSeptember 30, 2021 . This increase in net cash received is driven primarily by the net proceeds from theAugust 2022 follow-on equity offering. 27 --------------------------------------------------------------------------------
Liquidity and capital resources
We do not currently have any approved products and have never generated any revenue from product sales. To date, we have financed our operations primarily through the issuances of our equity securities, including warrants, from borrowings under term loan facilities and from upfront payments from the Nuance Agreement. See "Significant Agreements" and "Indebtedness" for additional information. We have incurred recurring losses since inception, including net losses of$58.3 million for the nine months endedSeptember 30, 2022 , and$55.6 million for the year endedDecember 31, 2021 . As ofSeptember 30, 2022 , we had an accumulated deficit of$322.4 million . We expect to continue to generate operating losses for the foreseeable future. We have no ongoing material financing commitments, such as lines of credit or guarantees, that are expected to affect our liquidity over the next five years, other than leases and the Term Loan with Oxford. See "Indebtedness" for details on the Term Loan.
OnAugust 15, 2022 , we completed an upsized public offering of 14,260,000 ADSs, each representing eight of our ordinary shares, nominal value £0.05 per share, at a price to the public of$10.50 per ADS, which includes the exercise in full by the underwriters of their option to purchase an additional 1,860,000 ADSs. The aggregate net proceeds from the offering were approximately$140.1 million after deducting underwriting discounts and offering expenses.
Open market sale agreement
InMarch 2021 , we entered into an open market sale agreement withJefferies LLC ("Jefferies") to sell shares of our ordinary shares, in the form of ADSs, with aggregate gross sales proceeds of up to$100.0 million , from time to time, through an "at the market" equity offering program under which Jefferies will act as sales agent (the "ATM Program"). During the nine months endedSeptember 30, 2022 , we sold 80,696 ordinary shares (equivalent to 10,087 ADSs) under the ATM Program, at an average price of approximately$0.86 per share (equivalent to$6.86 per ADS), raising aggregate net proceeds of approximately$0.1 million after deducting issuance costs. As ofSeptember 30, 2022 ,$99.2 million of ordinary shares, in the form of ADSs, remained available for sale under the ATM Program.
Indebtedness
InNovember 2020 , we andVerona Pharma, Inc. entered into a term loan facility of up to$30.0 million withSilicon Valley Bank , which we refer to as the Term Loan, consisting of term loan advances in an aggregate amount of$5.0 million funded at closing, a term loan advance of an aggregate amount of$10.0 million available subject to certain terms and conditions and the achievement of a specific clinical milestone, and a term loan advance of an aggregate amount of$15.0 million contingent upon achievement of a specific clinical development milestone and other specified conditions. As ofSeptember 30, 2022 , we had$5.0 million principal outstanding under the Term Loan. Additional detail surrounding the Term Loan is included under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 Form 10-K. There have been no material changes to that information disclosed in our 2021 Form 10-K during the nine months endedSeptember 30, 2022 . Subsequent to the quarter end, onOctober 14, 2022 (the "Effective Date"), we andVerona Pharma, Inc. ("VeronaU.S. " and together with us, the "Borrowers") entered into the Debt Facility with Oxford Finance Luxembourg S.À R.L. ("Oxford") for an aggregate amount of up to$150.0 million (the "Oxford Term Loan"). The Oxford Term Loan provides for an initial term loan advance in an aggregate amount of$10.0 million to be funded on the Effective Date (the "Oxford Term A Loan"), and up to four additional term loan advances in an aggregate amount of$140.0 million , which are available as described below and subject to terms of the loan and security agreement ("Loan Agreement"). The proceeds from the Oxford Term Loan will be used for general corporate and working capital purposes, and a portion of the proceeds of the Oxford Term A Loan are being used to repay in full the existing outstanding indebtedness owed to SVB as discussed in Note 5 - Term Loan. The Oxford Term Loan has a maturity date ofOctober 1, 2027 . The four additional term loan advances under the Oxford Term Loan consists of a$10.0 million term loan advance (the "Oxford Term B Loan") which is available at the option of Company from the Effective Date up to and includingMarch 31, 2023 ; a$20.0 million term loan advance (the "Oxford Term C Loan") available during the period commencing on the later ofJanuary 1, 2024 and the date on which we receive positive ENHANCE-1 data in 28 -------------------------------------------------------------------------------- the Phase 3 clinical trial for ensifentrine sufficient to support the submission of a New Drug Application ("NDA") with theUnited States Food and Drug Administration (the "FDA") for ensifentrine through and includingMarch 29, 2024 ; a$60.0 million term loan advance (the "Oxford Term D Loan") available during the period commencing on the later ofOctober 1, 2024 and the date on which we receive final approval from the FDA for our NDA for ensifentrine up to and includingDecember 31, 2024 ; and a$50.0 million term loan advance (the "Oxford Term E Loan") available during the interest-only period at our request and at Oxford's sole discretion. Each advance under the Oxford Term Loan accrues interest at a floating per annum rate equal to (a) the greater of (i) the 1-Month CME Term SOFR reference rate on the last business day of the month that immediately precedes the month in which the interest will accrue and (ii) 2.38%, plus (b) 5.50% (the "Basic Rate"). In no event shall the Basic Rate (x) for the Term A Loan be less than 7.88% and (y) for each other term loan be less than the Basic Rate on the business day immediately prior to the funding date of such term loan. The Basic Rate for the Term A Loan for the period from the Effective Date through and includingOctober 31, 2022 shall be 8.54205% and the Basic Rate for each Term Loan shall not increase by more than 2.00% above the applicable Basic Rate as of the funding date of each such term loan. The Oxford Term Loan provides for interest-only payments on a monthly basis until the payment date immediately precedingDecember 1, 2025 , if the Term D Loan is not made, andDecember 1, 2026 , if the Term D Loan is made. Thereafter, amortization payments will be payable monthly in equal installments of principal plus accrued interest. Upon repayment, whether at maturity, upon acceleration or by prepayment or otherwise, we shall make a final payment to the lenders in an amount ranging from 1.30% to 3.00% of the aggregate principal balance, depending on the advances received under the Oxford Term Loan. We may prepay the Oxford Term Loan in full, or in part, in accordance with the terms of the Loan Agreement, which is subject to a prepayment fee of up to 2.00%, depending on the timing of the prepayment. The Oxford Term Loan is secured by a lien on substantially all our assets, other than intellectual property, but including any rights to payments and proceeds from the sale, licensing or disposition of intellectual property. We have also granted Oxford a negative pledge with respect to our intellectual property. The Loan Agreement contains customary covenants and representations, including but not limited to financial reporting obligations and limitations on dividends, dispositions, indebtedness, collateral, investments, distributions, transfers, mergers or acquisitions, taxes, corporate changes, deposit accounts, transactions with affiliates and subsidiaries. The Loan Agreement also contains other customary provisions, such as expense reimbursement, non- disclosure obligations as well as indemnification rights for the benefit of Oxford.
Funding requirements
We believe that our cash and cash equivalents as ofSeptember 30, 2022 , together with, expected cash receipts fromU.K. tax credits and additional funding expected to become available under the Oxford Term Loan, will enable us to fund our planned operating expenses and capital expenditure requirements through at least the end of 2025, including the planned commercial launch of nebulized ensifentrine for COPD maintenance treatment in theU.S. Future advances under the Oxford Term Loan are contingent upon achievement of certain clinical and regulatory milestones and other specified conditions. We may require additional capital to commercialize ensifentrine, to continue the clinical development of our DPI and pMDI formulations of ensifentrine and to research and develop additional formulations of or with ensifentrine. In addition, we may seek to initiate or conduct preclinical or clinical studies with ensifentrine in additional indications or to discover or in-license and develop additional product candidates. We may need to seek additional funding through public or private financings, debt financing, collaboration or licensing agreements and other arrangements. However, there is no guarantee that we will be successful in securing additional capital on acceptable terms, or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our shareholders and ADS holders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect such holders' rights as a shareholder or ADS holder. Any future debt financing or preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and may require the issuance of warrants, which could potentially dilute our security holders' ownership interests.
If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product
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candidates or grant licenses on terms that may not be favorable to us. If we are
unable to raise additional funds through equity or debt financings when needed,
we may be required to delay, limit, reduce or terminate our product development
programs or any future commercialization efforts or grant rights to develop and
market product candidates that we would otherwise prefer to develop and market
ourselves.
Our future capital requirements for ensifentrine or any future product candidates will depend on many factors, including:
•the progress, timing and completion of pre-clinical testing and clinical trials for ensifentrine or any future product candidates and the potential that we may be required to conduct additional clinical trials for ensifentrine;
•the number of potential new product candidates we decide to in-license and develop;
•the costs involved in growing our organization to the size needed to allow for the research, development and potential commercialization of ensifentrine or any future product candidates;
•the costs involved in filing patent applications and maintaining and enforcing patents or defending against claims or infringements raised by third parties;
•the time and costs involved in obtaining regulatory approvals for ensifentrine or any future product candidate we develop and any delays we may encounter as a result of evolving regulatory requirements or adverse results with respect to ensifentrine or any future product candidates;
•any licensing or milestone fees we might have to pay during future development of ensifentrine or any future product candidates;
•selling and marketing activities undertaken in connection with the anticipated commercialization of ensifentrine or any future product candidates, if approved, and costs involved in the creation of an effective sales and marketing organization; and
•the amount of revenue, if any, we may derive either directly or in the form of royalty payments from future sales of ensifentrine or any future product candidates, if approved.
Our commercial revenue, if any, will be derived from sales of products that we do not expect to be commercially available for several years, if ever. Accordingly, we may need to obtain substantial additional funds to achieve our business objectives.
Recent accounting pronouncements
For a discussion of pending and recently adopted accounting pronouncements, see Note 2 to our consolidated financial statements included in the 2021 Form 10-K.
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