Our business is subject to numerous risks. The following important factors, among others, could cause our actual results to differ materially from those expressed in forward-looking statements made by us or on our behalf in this Annual Report on Form 10-K and other filings with the Securities and Exchange Commission, or the SEC, press releases, communications with investors and oral statements. Actual future results may differ materially from those anticipated in our forward-looking statements. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
We have incurred significant losses since inception, expect to incur losses for at least the next several years and may never sustain profitability.
Our ability to become and remain profitable depends on our ability to generate revenue. We do not expect to generate significant revenue unless and until we are, or one of our collaborators is, able to successfully commercialize one or more of our product candidates. ThisDoing so will require success in a range of challenging activities, including completing clinical trials of our product candidates, obtaining marketing approval for these product candidates, manufacturing, marketing and selling those products for which we, or our collaborators, may obtain marketing approval, satisfying any post-marketing requirements and obtaining reimbursement for our products from private insurance or government payors. We, and our collaborators, may never succeed in these activities and, even if we do, or one of our collaborators does, we may never generate revenues that are large enough for us to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our Companycompany and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our pipeline of product candidates or continue our operations. A decline in the value of our Companycompany could cause our stockholders to lose all or part of their investments in us.
We will need substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.
Developing pharmaceutical products, including conducting nonclinical studies and clinical trials, is a very time-consuming, expensive and uncertain process that takes years to complete. We expect our expenses to increase in connection with our ongoing activities, particularly as we initiate new clinical trials of, initiate new research and nonclinical development efforts for and seek marketing approval for our product candidates, or if we in-license or acquire product candidates. In addition, if we obtain marketing approval for any of our product candidates, we may incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution to the extent that such sales, marketing and distribution are not the responsibility of one of our collaborators. In particular, the costs that we may be required to incur for the manufacture of any product candidate that receives marketing approval may be substantial. Manufacturing a deuterated drug at commercial scale may require specialized facilities, processes and materials. Furthermore, we will continue to incur 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 attractiveacceptable terms, we may be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts.
Raising additional capital may cause dilution to our stockholders or require us to relinquish rights to our technologies or product candidates.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of public or private equity offerings, debt financings, additional collaborationscollaboration and licensing arrangements and other sources. We do not have any committed external source of funds, other than cash held in escrow pursuant to the Vertex asset purchase agreement and potential milestone payments under the asset purchase agreement with Vertex, as well as potential milestone payments and royalties under our existing license agreements, with Avanir, Celgene, and Jazz Pharmaceuticals, each of which is subject to the achievement of development, regulatory and/or sales-based milestones with respect to our product candidates. To the extent that we raise additional capital through the sale of common stock, convertible securities or other equity securities, the ownership interests of our stockholders may be materially diluted, and the terms of these securities could
include liquidation or other preferences and anti-dilution protections that could adversely affect the rights of our stockholders. For example, in November 2021, we issued to a select group of institutional investors, or the Investors, (i) 13,997 shares of Series X1 Preferred Stock, (ii) 2,253,000 shares of common stock, (iii) warrants to purchase up to 16,250 shares of Series X1 Preferred Stock and (iv) a portion of our right to receive potential future AVP-786 royalties under the Avanir Agreement. In addition, debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely impact our ability to conduct our business.
If we raise additional funds through collaborations or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Any future indebtedness could adversely affect our ability to operate our business.
We could in the future incur indebtedness containing financial obligations and restrictive covenants, which could have significant adverse consequences, including:
Any financial obligations or restrictive covenants could negatively impact our ability to conduct our business.
Clinical drug development involves a lengthy and expensive process with an uncertain outcome.
Clinical testing is expensive, time-consuming and uncertain as to outcome. We cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, if at all. The clinical development of our product candidates is susceptible to the risk of failure inherent at any stage of drug development, including failure to demonstrate efficacy in a clinical trial or across a broad or definable population of patients, the occurrence of severe or medically or commercially unacceptable adverse events, fraudulent conduct by clinical investigators, failure to comply with protocols, applicable regulatory requirements or other determinations made by the Food and Drug Administration, or FDA, or any comparable foreign regulatory authority that a drug product is not approvable. It is possible that even if one or more of our product candidates has a beneficial effect, that effect will not be detected during clinical evaluation as a result of one or more of a variety of factors, including the size, duration, design, measurements, conduct or analysis of our clinical trials. Conversely, as a result of the same factors, our clinical trials may indicate an apparent positive effect of a product candidate that is greater than the actual positive effect, if any. Similarly, in our clinical trials, we may fail to detect toxicity of or intolerability caused by our product candidates, or mistakenly believe that our product candidates are toxic or not well tolerated when that is not in fact the case.
In addition to the risk of failure inherent in drug development, certain of the deuterated compounds that we, and our collaborators, are developing and may develop in the future may be particularly susceptible to failure to the extent they are based on compounds that others have previously studied or tested, but did not progress in development due to safety,
tolerability or efficacy concerns or otherwise. Deuteration of these compounds may not be sufficient to overcome the problems experienced with the corresponding non-deuterated compound.
with sufficient quality, quantity and reproducibility to support clinical trials and potential future commercialization;
If we are unable to successfully develop, receive marketing approval for and commercialize our wholly ownedwholly-owned development programs, or experience delays as a result of any of these factors or otherwise, our business could be materially harmed.
If clinical trials of our product candidates fail to satisfactorily demonstrate safety and efficacy to the FDA and other regulators, we, or our collaborators, may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of these product candidates.
We, or our collaborators, must complete nonclinical development and then conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans in order to obtain marketing approval from regulatory authorities for the sale of our product candidates. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is inherently uncertain as to outcome. Further, the outcome of nonclinical studies and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. Moreover, nonclinical and clinical data are often susceptible to varying interpretations and analyses. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials after achieving positive results in earlier development, and we cannot be certain that we will not face similar setbacks.
Any inability to successfully complete nonclinical and clinical development could result in additional costs to us, or our collaborators, and impair our ability to generate revenues from product sales, regulatory and commercialization milestones and royalties. In addition, if (1)(i) we, or our collaborators, are required to conduct additional or larger clinical trials or other testing of our product candidates beyond the trials and testing that we, or they, contemplate, (2)(ii) we, or our collaborators, are unable to successfully complete clinical trials of our product candidates or other testing, (3)(iii) the results of these trials or tests are unfavorable, uncertain or are only modestly favorable or (4)(iv) there are unacceptable safety concerns associated with our product candidates, we, or our collaborators, in addition to incurring additional costs, may:
Even if we, or our collaborators, believe that the results of clinical trials for our product candidates warrant marketing approval, the FDA or comparable foreign regulatory authorities may disagree and may not grant marketing approval of our product candidates.
If we, or our collaborators, experience any of a number of possible unforeseen events in connection with clinical trials of our product candidates, potential marketing approval or commercialization of our product candidates could be delayed or prevented.
We, or our collaborators, may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent marketing approval of our product candidates, including:
side effects or other unexpected characteristics of the product candidate or findings of undesirable effects caused by a chemically or mechanistically similar drug or drug candidate;
Product development costs for us, or our collaborators, will increase if we, or they, experience delays in testing or pursuing marketing approvals and we, or they, may be required to obtain additional funds to complete clinical trials and prepare for possible commercialization of our product candidates. We, and our collaborators, do not know whether any nonclinical tests or clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant nonclinical or clinical trial delays also could shorten any periods during which we, or our collaborators, may have the exclusive right to commercialize our product candidates or allow our competitors, or the competitors of our collaborators, to bring products to market before we, or our collaborators, do and impair our ability, or the ability of our collaborators, to successfully commercialize our product candidates and may harm our business and results of operations. In addition, many of the factors
that cause, or lead to, clinical trial delays may ultimately lead to the denial of marketing approval of any of our product candidates.
If we, or our collaborators, experience delays or difficulties in the enrollment of patients in clinical trials, our, or their, receipt of necessary regulatorymarketing approvals could be delayed or prevented.
We, or our collaborators, may not be able to initiate or continue clinical trials for any of our product candidates if we, or they, are unable to locate and enroll a sufficient number of eligible patients to participate in clinical trials as required by the FDA or comparable foreign regulatory authorities, such as the European Medicines Agency. Patient enrollment is a significant factor in the timing of clinical trials and is affected by many factors, including:
Our inability, or the inability of our collaborators, to enroll a sufficient number of patients for our, or their, clinical trials could result in significant delays or may require us or them to abandon one or more clinical trials altogether. Enrollment delays in our, or their, clinical trials may result in increased development costs for our product candidates, delay or halt the development of and approval processes for our product candidates and jeopardize our, or our collaborators’, ability to commence sales of and generate revenues from our product candidates, which could cause the value of our Companycompany to decline and limit our ability to obtain additional financing, if needed.
Serious adverse events, undesirable side effects or other unexpected properties of our product candidates, including those that we have licensed to collaborators, may be identified during development that could delay or prevent the product candidate’s marketing approval.
All of our product candidates are in nonclinical and clinical development stages and their risk of failure is high. Serious adverse events or undesirable side effects caused by our product candidates, or competitor products with similar mechanisms of action, could cause us, one of our collaborators, an institutional review board,IRB, data monitoring committee or regulatory authorities to interrupt, amend, delay or halt clinical trials of one or more of our product candidates and could result in a more restrictive label or the delay or denial of marketing approval by the FDA or comparable foreign regulatory authorities. A dose of a deuterated compound could, in comparison to an equal dose of the corresponding non-deuterated compound, result in altered exposure levels, distribution and half-life in the body and alter the levels of particular metabolites that are present in the body. These changes may cause serious adverse events or undesirable side effects that we, or our collaborators, did not anticipate, whether based on the characteristics of the corresponding non-deuterated compound or otherwise. If any of our product candidates is associated with serious adverse events or undesirable side effects or have properties that are unexpected, we, or our collaborators, may need to abandon development or limit development of that product candidate to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. Many compounds that initially showed promise in clinical or earlier stageearlier-stage testing have later been found to cause undesirable or unexpected side effects that prevented further development of the compound. In addition, unexpected adverse clinical effects of a deuterated product candidate, including either those identified by us or deuterated analogs of approved drugs being developed by any third parties, may create general concerns regarding deuteration technology that could delay the development of our product candidates.
To the extent we, or our collaborators, market products that are deuterated analogs of generic drugs that are approved or will be approved while we market our products, our products may compete against these generic products and the sales of our products could be adversely affected.
We anticipate that some of the products that we, or our collaborators, may develop will be deuterated analogs of approved drugs that are or will then be available on a generic basis. In addition, if we develop a product that is a deuterated analog of a non-generic approved drug, the FDA or comparable foreign regulatory authorities may also approve generic versions of the corresponding non-deuterated drug. If approved, we expect that our deuterated products will compete against these generic non-deuterated compounds if they are used in the same indications. Even if the approved indications are different for the deuterated and non-deuterated drugs, the generic non-deuterated drug may be used off-label, negatively affecting sales of our product. Efforts to educate the medical community and third party payors on the benefits of any product that we develop as compared to the corresponding non-deuterated compound, or generic versions of it, may require significant resources and may not be successful. If physicians, rightly or wrongly, do not believe that a product that we, or our collaborators, develop offers substantial advantages over the corresponding non-deuterated compound, or generic versions of the corresponding non-deuterated compound, or that the advantages offered by our product as compared to the corresponding non-deuterated compound, or its generic versions, are not sufficient to merit the increased price over the corresponding non-deuterated compound, or its generic versions, that we, or our collaborators, would seek, physicians might not prescribe that product. In addition, third party payors may refuse to provide reimbursement for a product that we, or our collaborators, develop when the corresponding non-deuterated compound, or generic versions of the corresponding non-deuterated compound, offer a cheaper alternative therapy in the same indication, or may otherwise encourage use of the corresponding non-deuterated compound, or generic versions of the corresponding non-deuterated compound, over our product, even if our product possesses favorable pharmaceutical properties or is labeled for a different indication.
Competition that our product candidates may face from any generic non-deuterated product on which our product candidate is based or a later-approved generic version of a branded non-deuterated product on which our product is based, could materially and adversely impact our future revenue, profitability and cash flows and substantially limit our ability to obtain a return on the investments we have made in those product candidates.
Even if we, or our collaborators, are able to commercialize any product candidate that we, or they, develop, the product may become subject to unfavorable pricing regulations, third party payor reimbursement practices or healthcare reform initiatives that could harm our business.
The commercial success of our product candidates will depend substantially, both domestically and abroad, on the extent to which the costs of our product candidates will be paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or reimbursed by government health administration authorities, private health coverage insurers and other third party payors. Government authorities and third party payors, such as private health insurers and health maintenance organizations, decide which medications they will cover and establish reimbursement levels. The healthcare industry is acutely focused on cost containment, both in the United States and elsewhere. Government authorities and third party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications,
which could affect our ability or that of our collaborators to sell our product candidates profitably. These payors may not view our products, if any, as cost-effective, and coverage and reimbursement may not be available to our customers, or those of our collaborators, or may not be sufficient to allow our products, if any, to be marketed on a competitive basis. Cost-control initiatives could cause us, or our collaborators, to decrease the price we, or they, might establish for products, which could result in lower than anticipated product revenues. If reimbursement is not available, or is available only to limited levels, we, or our collaborators, may not be able to successfully commercialize our product candidates. Even if coverage is provided, the approved reimbursement amount may not be high enough to allow us, or our collaborators, to establish or maintain pricing sufficient to realize a sufficient return on our or their investments.
There is significant uncertainty related to third party payor coverage and reimbursement of newly approved drugs. Marketing approvals, pricing and reimbursement for new drug products vary widely from country to country. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we, or our collaborators, might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay commercial launch of the product, possibly for lengthy time periods, which may negatively impact the revenues we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability or the ability of our collaborators to recoup our or their investment in one or more product candidates, even if our product candidates obtain marketing approval.
Third party payor coverage of newly approved drugs may be more limited than the indications for which the drugs are approved by the FDA or comparable foreign regulatory authorities. Moreover, eligibility for reimbursement does not imply that any drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Reimbursement rates may vary, by way of example, according to the use of the drug and the clinical setting in which it is used. Reimbursement rates may also be based on reimbursement levels already set for lower cost drugs or may be incorporated into existing payments for other services.
In addition, increasingly, third party payors are requiring higher levels of evidence of the benefits and clinical outcomes of new technologies, requiring burdensome comparison studies with currently approved drugs and challenging the prices charged. We, and our collaborators, cannot be sure that coverage will be available for any product candidate that we, or they, commercialize and, if available, that the reimbursement rates will be adequate. Further, the net reimbursement for drug products may be subject to additional reductions if there are changes to laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. An inability to promptly obtain coverage and adequate payment rates from both government-funded and private payors for any our product candidates for which we, or our collaborators, obtain marketing approval could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.
We may not be successful in our efforts to identify or discover additional potential product candidates.
A significant portion of our research involves the development of new deuterated compounds using our DCE Platform. These efforts may not be successful in creating compounds that have commercial value or therapeutic utility beyond the corresponding non-deuterated compound, or at all. Our research programs may initially show promise in creating potential product candidates, yet fail to yield viable product candidates for clinical development for a number of reasons, including:
deuterated analogs of existing non-deuterated compounds or newly designed deuterated compounds may not demonstrate satisfactory efficacy or other benefits, such as convenience of dosing, increased tolerability, enhanced formation of desirable active metabolites or reduced formation of toxic metabolites;
potential product candidates may, on further study, be shown to have harmful side effects or other characteristics that indicate that they are unlikely to be products that will receive marketing approval and achieve market acceptance; and
pharmaceutical and biotechnology companies have begun to claim deuterated analogs of their compounds in patent filings, resulting in otherwise promising deuterated product candidates already being covered by patents or patent applications.
If we are unable to identify suitable additional compounds for nonclinical and clinical development, our ability to develop product candidates and obtain product revenues in future periods could be compromised, which could result in significant harm to our financial position and adversely impact our stock price.
Risks Related to Our Dependence on Third Parties
We rely on third parties to conduct our clinical trials and some aspects of our research and nonclinical testing. If they terminate their relationships with us or do not perform satisfactorily, our business may be materially harmed.
Product liability lawsuits against us could divert our resources, cause us to incur substantial liabilities and limit commercializationWe do not independently conduct clinical trials of any productsof our product candidates. We rely on third parties, such as contract research organizations, clinical data management organizations, medical institutions and clinical investigators, to conduct these clinical trials and expect to rely on these third parties to conduct clinical trials of any other product candidate that we develop. We also rely on third parties to conduct some aspects of our research and nonclinical testing and expect to rely on these third parties in the future. Any of these third parties may develop.terminate their engagements with us under certain circumstances. If any of our relationships with these third parties terminate, we may not be able to enter into arrangements with alternative third parties on commercially reasonable terms, or at all. Switching to or adding additional third parties would involve additional cost and require management time and focus. In addition, there is a natural transition period when a new third party commences work, which could result in delays in our product development activities. Although we seek to carefully manage our relationships with third parties, any such challenges or delays could have a material adverse impact on our business, financial condition and prospects.
We face an inherent riskOur reliance on these third parties for clinical development activities limits our control over these activities but we remain responsible for ensuring that each of product liability claims asour studies is conducted in accordance with the applicable protocol, legal and regulatory requirements and scientific standards. For example, notwithstanding the obligations of a resultcontract research organization for a trial of the clinical testingone of our product candidates, despite obtaining appropriate informed consents fromwe remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with GCPs for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants. We will face an even greater risk ifparticipants are protected. The FDA enforces these GCPs through periodic inspections of trial sponsors, principal investigators, clinical trial sites and IRBs. If we or our collaborators commercially sellthird-party contractors fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA may require us to perform additional clinical trials before approving our product candidates, which would delay the marketing approval process. We cannot be certain that, upon inspection, the FDA will determine that any product thatof our clinical trials comply with GCPs.
Furthermore, these third parties are not our employees, and except for remedies available to us under our agreements with such contractors, we cannot control whether or not they devote sufficient time, skill and resources to our ongoing development programs. These contractors may also have relationships with other commercial entities, including our competitors, which could impede their ability to devote appropriate time to our clinical programs. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct their services in accordance with our contracts, regulatory requirements or our stated protocols, we may not be able to obtain, or they may develop. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization ofdelayed in obtaining, marketing approvals for our product candidates. RegardlessIf that occurs, we will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates. In such an event, our financial results and the commercial prospects for any product candidates that we seek to develop could be harmed, our costs could increase and our ability to generate revenues could be delayed, impaired or foreclosed.
We also rely on other third parties to store, label and distribute drug supplies for our clinical trials. Any performance failure on the part of the meritsour distributors could delay clinical development or eventual outcome, liability claims may result in:
decreased demand formarketing approval of our product candidates or commercialization of any resulting products, that we may develop;producing additional losses and depriving us of potential product revenue.
injuryWe are also required to our reputationregister clinical trials and significant negative media attention;
withdrawalpost the results of completed clinical trial participants;
significant coststrials on a government-sponsored database, such as ClinicalTrials.gov, within certain timeframes. Failure to defend litigation;
distraction to our management diverting focus from business operations and strategy;
initiation of investigations by regulators;
product recalls, withdrawals or labeling, marketing or promotional restrictions;
substantial monetary awards to trial participants or patients;
loss of revenue; and
do so can result in the inability to commercialize any products that we may develop.report our clinical results in certain publications, fines, adverse publicity and civil and criminal sanctions.
Although we maintain product liability insurance coverage, it may not fully cover potential liabilities that we may incur. The cost of any product liability litigation or other proceeding, even if resolved in our favor, could be substantial. We will need to increase our insurance coverage if and when we begin selling any product candidate that receives marketing approval. In addition, insurance coverage is becoming increasingly expensive. If we are unable to obtain or maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against potential product liability claims, it could prevent or inhibit the development and commercial production and sale of our product candidates, which could adversely affect our business, financial condition, results of operations and prospects.
RISKS RELATED TO OUR DEPENDENCE ON THIRD PARTIES
We depend on collaborations with third parties for the development and commercialization of some of our product candidates and expect to continue to do so in the future. Our prospects with respect to those product candidates will depend in significant part on the success of those collaborations.
We have entered into collaborations with Avanir, Celgene and Jazz Pharmaceuticals for the development and commercialization of certain of our product candidates and expect to enter into additional collaborations in the future. We have limited control over the amount and timing of resources that our collaborators dedicate to the development or commercialization of our product candidates, and our ability to generate revenues from these arrangements will depend on our collaborators’ abilities to successfully perform the functions assigned to them in these arrangements. In addition, our collaborators have the right to abandon research or development projects and terminate applicable agreements, including funding obligations, prior to or upon the expiration of the agreed upon terms.
Collaborations involving our product candidates pose a number of risks, including:
•collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations;
•collaborators may not perform their obligations as expected;
•collaborators may not pursue development and commercialization of our product candidates or may elect not to continue or renew development or commercialization programs, based on clinical trial results, changes in the collaborators’ strategic focus or available funding or external factors, such as an acquisition, that divert resources or create competing priorities;
•collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;
•collaborators may conduct their clinical trials poorly or inadequately, harming our products, including our products’ development in other territories;
•product candidates developed in collaboration with us, including in particular product candidates based on deuteration of a collaborator’s marketed drugs or advanced clinical candidates, may be viewed by our collaborators as competitive with their own product candidates or products, which may cause collaborators to cease to devote resources to the commercialization of our product candidates;
•a collaborator with marketing and distribution rights to one or more products may not commit sufficient resources to the marketing and distribution of such product or products;
•disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the preferred course of development, might cause delays or termination of the research, development or commercialization of product candidates, might lead to additional responsibilities for us with respect to product candidates or might result in litigation or arbitration, any of which would be time-consuming and expensive;
•collaborators may steal our trade secrets or may hire valuable employees from us;
•collaborators may fail to protect our trade secrets;
•collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential litigation;
•collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability; and
•collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development or commercialization of the applicable product candidates.
Collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner or at all. If a collaborator of ours is involved in a business combination, it could decide to delay, diminish or terminate the development or commercialization of any product candidate licensed to it by us.
We expect to seek to establish additional collaborations, and if we are not able to establish them on commercially reasonable terms, we may have to alter our development and commercialization plans.
Our drug development programs and the potential commercialization of our product candidates will require substantial additional cash to fund expenses. We may seek one or more collaborators for the development and commercialization of one or more of our product candidates.
We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the potential differentiation of our product candidate from its corresponding non-deuterated analog, design or results of clinical trials, the likelihood of approval by the FDA or comparable foreign regulatory authorities and the regulatory pathway for any such approval, the potential market for the product candidate, the proposed collaborator’s perception of our freedom to operate in a particular market or markets without challenge, the costs and complexities of manufacturing and delivering the product to patients and the potential of competing products. The collaborator may also consider alternative product candidates or technologies that may be available for collaboration and whether such collaboration could be more attractive than the one with us for our product candidate.
Collaborations are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators. We are also restricted under the terms of certain of our existing collaboration agreements from entering into collaborations regarding or otherwise developing specified compounds that are similar to the compounds that are subject to those agreements and collaboration agreements that we enter into in the future may contain further restrictions on our ability to enter into potential collaborations or to otherwise develop specified compounds.
We may not be able to negotiate collaborations for our product candidates on a timely basis, on acceptable terms, or at all. If we are unable to do so, we may have to limit the development of the product candidate for which we are seeking to collaborate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we may not be able to further develop our product candidates or bring them to market and generate product revenue. In cases where we seek a collaborator for a product compound that is a deuterated analog of a compound that has been previously developed, failure to enter into a collaboration with the developer of the corresponding non-deuterated compound may result in a loss of the potential to obtain clearance from the FDA to follow expedited development programs that reference and rely on findings previously obtained from the developer’s prior nonclinical or clinical studies of the corresponding non-deuterated compound.
We rely on third partiesRisks Related to conduct our clinical trials and some aspects of our research and nonclinical testing. If they terminate their relationships with us or do not perform satisfactorily, our business may be materially harmed.
We do not independently conduct clinical trials of any of our product candidates. We rely on third parties, such as contract research organizations, clinical data management organizations, medical institutions and clinical investigators, to conduct these clinical trials and expect to rely on these third parties to conduct clinical trials of any other product candidate that we develop. We also rely on third parties to conduct some aspects of our research and nonclinical testing and expect to rely on these third parties in the future. Any of these third parties may terminate their engagements with us under certain circumstances. If any of our relationships with these third parties terminate, we may not be able to enter into arrangements with alternative third parties on commercially reasonable terms, or at all. Switching to or adding additional third parties would involve additional cost and require management time and focus. In addition, there is a natural transition period when a new third party commences work, which could result in delays in our product development activities. Although we seek to carefully manage our relationships with our contract research organizations, any such challenges or delays could have a material adverse impact on our business, financial condition and prospects.
Our reliance on these third parties for clinical development activities limits our control over these activities but we remain responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards. For example, notwithstanding the obligations of a contract research organization for a trial of one of our product candidates, we remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred to as current Good Clinical Practices, or GCPs, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. The FDA enforces these GCPs through periodic inspections of trial sponsors, principal investigators, clinical trial sites and institutional review boards. If we or our third party contractors fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA may require us to perform additional clinical trials before approving our product candidates, which would delay the marketing approval process. We cannot be certain that, upon inspection, the FDA will determine that any of our clinical trials comply with GCPs.
Furthermore, these third parties are not our employees, and except for remedies available to us under our agreements with such contractors, we cannot control whether or not they devote sufficient time, skill and resources to our ongoing development programs. These contractors may also have relationships with other commercial entities, including our competitors, which could impede their ability to devote appropriate time to our clinical programs. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct their services in accordance with our contracts, regulatory requirements or our stated protocols, we may not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates. If that occurs, we will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates. In such an event, our financial results and the commercial prospects for any product candidates that we seek to develop could be harmed, our costs could increase and our ability to generate revenues could be delayed, impaired or foreclosed.
We also rely on other third parties to store, label and distribute drug supplies for our clinical trials. Any performance failure on the part of our distributors could delay clinical development or marketing approval of our product candidates or commercialization of any resulting products, producing additional losses and depriving us of potential product revenue.
We are also required to register clinical trials and post the results of completed clinical trials on a government-sponsored database, such as ClinicalTrials.gov, within certain timeframes. Failure to do so can result in the inability to report our clinical results in certain publications, fines, adverse publicity and civil and criminal sanctions.
Because there are limited sources of deuterium, we, and our collaborators, are exposed to a number of risks and uncertainties associated with our deuterium supply.
We believe that all of the deuterium that we use in manufacturing our product candidates is currently derived, directly or indirectly, from deuterium oxide. For most of our deuterium supply, we rely on bulk supplies of deuterium oxide which we currently source from multiple suppliers, including two located in North America, one of which is in the United States.
In order to internationally transport any deuterium oxide that we purchase from our current or potential future foreign suppliers, we, or our suppliers, may be required to obtain an export license from the country of origin and we may be required to obtain an International Import Certificate or other governmental approvals or assurances from the country of destination. We are also required to obtain an export license from the Nuclear Regulatory Commission before shipping deuterium oxide from the United States to any contract manufacturer in another country. Export licenses and certain other required documents may specify the
maximum amount of deuterium oxide that we, or our suppliers, are permitted to either import or export. In order for us to obtain supplies of deuterium oxide from foreign suppliers, they may be required to obtain an export license from the country of origin and we may be required to obtain domestic governmental approvals or assurances. In addition, our current U.S. export licenses may be insufficient to meet our future requirements. We, or our suppliers, may not be able to obtain such licenses, approvals or assurances in a timely manner or at all.
Certain of our manufacturing processes for our product candidates incorporate deuterium by using deuterated chemical intermediates or reagents that are derived from deuterium oxide. For the deuterated chemical intermediates and reagents, we are not subject to the license requirements applicable to deuterium oxide; however the manufacturer of the deuterated chemical intermediate or reagent may themselves be required to obtain deuterium oxide under applicable licensing requirements. Most of the manufacturers of these deuterated chemical intermediates and reagents are not located in countries that produce bulk quantities of deuterium oxide. Therefore, our ability to source these deuterated chemical intermediates will depend on the ability of these manufacturers to obtain deuterium oxide from other countries. In the future we may arrange for supplies of deuterated chemical intermediates or reagents from manufacturers located in countries from which they can source deuterium oxide in bulk. However, contract manufacturers in these countries may not represent a viable alternative to our current suppliers. We do not have long-term agreements with our suppliers of deuterated chemical intermediates or reagents and we obtain some of these deuterated chemical intermediates or reagents from single sources, putting us at risk of uncontrolled cost increases or supply interruptions if we cannot establish alternative sourcing arrangements. Deuterated chemical intermediates may be expensive or difficult to obtain or may be produced by specialized techniques that are not widely practiced and we may not be able to enter into arrangements for larger scale supply of deuterated chemical intermediates on acceptable terms, or at all.
We estimate that our current sources of deuterium oxide will be sufficient to meet our anticipated requirements; however, we do not have long-term agreements with our current suppliers. If we are not able to establish or maintain supply arrangements, or any relevant foreign governments decide to withhold authorizations for the export of deuterium oxide that we seek, we may be unable to secure alternative sources. If we are unable to obtain sufficient supplies of deuterium oxide from our current suppliers or our potential future foreign supplier, we would be forced to either seek alternative suppliers of deuterium oxide, likely in other countries, or alternative sources of deuterium. Such alternative supplies may not be available to us on acceptable terms, or at all.
If we are unable to obtain sufficient supplies of deuterium, our ability to produce our product candidates would be impeded and our business, financial condition and prospects could be harmed. In particular, certain of our manufacturing processes are projected to require particularly large quantities of deuterium for late-stage clinical trials and for commercialization. Consequently, any adverse impact on our ability to obtain deuterium oxide from our current suppliers, import deuterium oxide into the United States or export deuterium oxide to our contract manufacturers could have a particularly severe impact on our ability to develop or commercialize those product candidates.
Similarly, to develop and commercialize any of our licensed product candidates, our collaborators will need to obtain supplies of deuterium and will be subject to risks and requirements in connection with sourcing deuterium that are similar to the ones that we face. In addition, if any of our product candidates is approved by the FDA, then the FDA will also have regulatory jurisdiction over the manufacture and use of deuterium oxide and deuterated chemical intermediates or reagents in such products. Any adverse impact on our, or our collaborators’, ability to obtain deuterium could delay or prevent the development or commercialization of our product candidates, which could have a material adverse effect on our business.
We contract with third parties for the manufacture and distribution of our product candidates for nonclinical and clinical testing and expect to continue to do so in connection with our future development and commercialization efforts. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.
We currently rely, and expect to continue to rely, on third party contractors to manufacture nonclinical and clinical supplies of our product candidates and to package, label and ship these supplies. We expect to rely on third party contractors to manufacture, formulate, package, label and distribute commercial quantities of any product candidate that we commercialize following approval for marketing by applicable regulatory authorities. Reliance on such third party contractors entails risks, including:
manufacturing delays, including if our third party contractors give greater priority to the supply of other products over our product candidates or if they otherwise do not satisfactorily perform according to the terms of the agreements between us and them;
the possible termination or nonrenewal of agreements by our third party contractors at a time that is costly or inconvenient for us;
potentially limited numbers of available contractors due to the need for uncommon equipment or expertise, or pre-existing conflicts of interest;
the possible breach by the third party contractors of our agreements with them;
possible theft of intellectual property or trade secrets;
possible theft of our materials, including starting materials, intermediates, active pharmaceutical ingredients, or drug products;
the failure of third party contractors to comply with applicable regulatory requirements;
the possible mislabeling of clinical supplies, potentially resulting in the wrong dose amounts being supplied or active drug or placebo not being properly identified;
possible contamination, or nonconformance with product or packaging specifications, of our product during or after its manufacture;
possible interruptions in our contractors’ operations, including departure of key personnel, disruption due to merger and acquisitions activities or supply chain disruptions;
the possibility of clinical supplies not being delivered to clinical sites on time, leading to clinical trial interruptions, or of drug supplies not being distributed to commercial vendors in a timely manner, resulting in lost sales; and
the possible misappropriation of our proprietary information, including our trade secrets and know-how.
If any of our product candidates are approved by any regulatory agency, we plan to enter into agreements with third party contract manufacturers for the commercial production and distribution of those products. It may be difficult for us to reach agreement with a contract manufacturer on satisfactory terms or in a timely manner, especially if the manufacturer believes it is uniquely suited to use our deuterium chemistry manufacturing processes or otherwise has unusual market power, or that our deuterium chemistry manufacturing processes bear greater production risks than manufacture of non-deuterated compounds. In addition, we may face competition for access to manufacturing facilities as there are a limited number of contract manufacturers operating under current good manufacturing practices, or cGMPs, that are capable of manufacturing our product candidates. Consequently, we may not be able to reach agreement with third party manufacturers on satisfactory terms, which could delay our commercialization efforts.
Third party manufacturers are required to comply with cGMPs and similar regulatory requirements outside the United States. Facilities used by our third party manufacturers must be approved by the FDA after we submit an NDA and before potential approval of the product candidate. Similar regulations apply to manufacturers of our product candidates for use or sale in foreign countries. We do not directly control the manufacturing process and are completely dependent on our third party manufacturers for compliance with the applicable regulatory requirements for the manufacture of our product candidates. If our manufacturers fail to consistently manufacture material that conforms to the strict regulatory requirements of the FDA and any applicable foreign regulatory authority, they will not be able to secure the applicable approval for their manufacturing facilities. If these facilities are not approved for commercial manufacture, we may need to find alternative manufacturing facilities, which could result in delays in obtaining approval for the applicable product candidate.
In addition, our manufacturers are subject to ongoing periodic inspections by the FDA and corresponding state and foreign agencies for compliance with cGMPs and similar regulatory requirements both prior to and following the receipt of marketing approval for any of our product candidates. Some of these inspections may be unannounced. Failure by any of our manufacturers to comply with applicable cGMPs or other regulatory requirements could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspensions or withdrawals of approvals, operating restrictions, interruptions in supply and criminal prosecutions, any of which could significantly and adversely affect supplies of our product candidates and have a material adverse impact on our business, financial condition and results of operations.
Our current and anticipated future dependence upon others for the manufacture of our product candidates may adversely affect our future profit margins and our ability to commercialize any products that receive marketing approval on a timely and competitive basis.
RISKS RELATED TO OUR INTELLECTUAL PROPERTYIntellectual Property
If we are unable to obtain and maintain sufficient patent protection for our product candidates, or if the scope of the patent protection is not sufficiently broad, our competitors could develop and commercialize products similar or identical to ours, and our ability to successfully commercialize our product candidates may be adversely affected.
Our success depends in large part on our ability to obtain and maintain patent protection in the United States and other countries with respect to our proprietary product candidates. If we do not adequately protect our intellectual property,
competitors may be able to erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability. To protect our proprietary position, we file patent applications in the United States and abroad related to our novel product candidates that are important to our business. The patent application and approval process is expensive, uncertain and time-consuming. We may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Neither deuterium itself, nor the general concept of selective substitution of deuterium for hydrogen in existing pharmaceutical compounds, is patentable; therefore, we usually seek patents on a compound-by-compound basis or on a relatively narrow genus of compounds. We are not guaranteed that patents will issue protecting any particular deuterated compound for which we seek patent protection. We also cannot guarantee that another company will not be able to find a
different pattern of deuterium substitution that is equally or more effective in improving the characteristics of a non-deuterated compound, then patenting that deuterated compound and competing with us.
Our ability to obtain and maintain patent protection for our product candidates may be limited if disclosures of non-deuterated compounds are held to anticipate or make obvious claims of deuterated analogs of the same or similar compounds in any given territory. In addition, several large pharmaceutical and biotechnology companies have begun to pursue patent protection for deuterated analogs of their products and product candidates, and may in the future obtain patent protection that covers deuterated analogs of those product candidates. If patents directed primarily to non-deuterated compounds are deemed to protect deuterated analogs of those compounds or patent claims on deuterated analogs of compounds become common in the biotechnology and pharmaceutical industries, these factors may substantially limit in part or in whole, our ability to seek and obtain patent protection for new product candidates based on deuterium modification of compounds. It may also limit in part or in whole, our ability to develop new product candidates based on deuterium modification of such compounds without obtaining a license from those patent holders. In certain cases, a company that owns the patent on a non-deuterated compound may be able to file a continuation or divisional patent on deuterated analogs of their compounds that successfully claims priority to the original filing date of the non-deuterated composition, causing their patent to have priority over ours, even if filed later than ours was.
The patent position of biotechnology and pharmaceutical companies generally is highly uncertain. No consistent policy regarding the breadth of claims allowed in biotechnology and pharmaceutical patents has emerged to date in the United States or in many foreign jurisdictions. In addition, the determination of patent rights with respect to pharmaceutical compounds commonly involves complex legal and factual questions, which has in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain.
Assuming the other requirements for patentability are met, currently, the first to file a patent application is generally entitled to the patent. However, prior to March 16, 2013, in the United States, the first to invent was entitled to the patent. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot be certain that we were the first to make the inventions claimed in our patents or pending patent applications, or that we were the first to file for patent protection of such inventions.
We may also become involved in opposition, derivation, reexamination, post grant review, inter partes reviewPGR, IPR or interference proceedings in the United States or elsewhere, challenging our patent rights or the patent rights of others. For example, in April 2017, Incyte Corporation filed an inter parties review, or IPR, petition with2018, the PTAB instituted an IPR brought against the '149 patent by Incyte. The '149 patent covers the composition of the U.S. PTO, challenging the validitymatter of U.S. Patent No. 9,249,149, which claims deuterium-modified versionsdeuterated analogs of ruxolitinib, including CTP-543. In October 2017,April 2019, the PTAB declinedissued a final written decision in connection with the IPR that held that the claims of the '149 patent were unpatentable as obvious. In January 2020, the Federal Circuit granted our motion to institutevacate and remand the IPR.PTAB final written decision in light of the Federal Circuit ruling on the Constitution’s Appointments Clause in Arthrex, Inc. v. Smith & Nephew, Inc. The PTO Director sought review of both Arthrex and the decision in our case in the Supreme Court. In November 2017, IncyteJune 2021, the Supreme Court decided that the remedy for a violation of the Appointments Clause should not be a hearing before a new panel of PTAB judges, but a remand to the PTO to allow the Director to consider whether to modify the decision of the PTAB. The Supreme Court remanded our case to the Federal Circuit in light of Arthrex, and the Federal Circuit granted our request for a remand to the PTO Director. We filed a request for reconsiderationto have the PTO Director review the final written decision; however, that request was denied in January 2022. As a result, we intend to proceed with our appeal to the Federal Circuit. The '149 patent remains valid and enforceable until any appeals by us have been exhausted.
In addition, in May 2021, the PTAB instituted a PGR brought against the '659 patent by Incyte. The '659 patent covers methods of treating hair loss, including alopecia areata, with certain doses of CTP-543. We expect the PTAB'sPTAB to issue a final written decision in connection with the PGR by May 2022. We intend to vigorously defend the '149 and '659 patents.
There can be no assurance that we will be successful in defending the '149 patent or the '659 patent. If both patents are found to be invalid, it could potentially shorten the timeframe during which remains pending. Anwe could prevent generic versions of CTP-543 from entering the market. In addition, adverse determinationdeterminations in any suchother submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology or product candidates and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third partythird-party patent rights.
Our pending and future patent applications may not result in patents being issued whichthat protect our product candidates, in whole or in part, or which effectively prevent others from commercializing competitive products. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection. In addition, the laws of foreign countries may not protect our rights to the same extent or in the
same manner as the laws of the United States. For example, European patent law restricts the patentability of methods of treatment of the human body more than United StatesU.S. law does.
Even if our patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our patents by developing similar or alternative technologies or products in a non-infringing manner. Our competitors may also seek approval to market their own products similar to or otherwise competitive with our products. Alternatively, our competitors may seek to market generic versions of any approved products by submitting ANDAs to the FDA in which they claim that patents owned or licensed by us are invalid, unenforceable or not infringed. In these circumstances, we may need to defend or assert our patents, or both, including by filing lawsuits alleging patent
infringement. In any of these types of proceedings, a court or other agency with jurisdiction may find our patents invalid or unenforceable, or that our competitors are competing in a non-infringing manner. In certain territories, losses to an infringing product may not be sufficiently great to justify the costs of challenging the infringer and asserting our rights. In some situations, governments have allowed or enabled the sale of competing products that infringe a company’s intellectual property. Thus, even if we have valid and nominally enforceable patents, these patents still may not provide protection against competing products or processes sufficient to achieve our business objectives.
The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our owned and licensed patents may be challenged in the courts or patent offices in the United States and abroad, including challenges through the U.S. Patent and Trademark Office post-grant review procedures.PTO’s PGR proceedings. Such challenges may result in loss of exclusivity or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. In addition, given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized.
If we are unable to protect the confidentiality of our trade secrets, the value of our technology could be materially adversely affected and our business would be harmed.
While we have obtained composition of matter patents with respect to our most advanced product candidates, our DCE Platform is not patented. In seeking to develop and maintain a competitive position through our DCE Platform and as to other aspects of our business, we rely on trade secrets, including unpatented know-how, technology and other proprietary information. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our consultants, independent contractors, advisors, corporate collaborators, outside scientific collaborators, contract manufacturers, suppliers and other third parties. We also enter into confidentiality and invention or patent assignment agreements with employees and certain consultants. Any party with whom we have executed such an agreement may breach that agreement and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, if any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent such third party, or those to whom they communicate such technology or information, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our business and competitive position could be harmed.
Third parties may sue us alleging that we are infringing their intellectual property rights, and such litigation could be costly and time consuming and could prevent or delay us from developing or commercializing our product candidates.
Our commercial success depends, in part, on our ability to develop, manufacture, market and sell our product candidates without infringing the intellectual property and other proprietary rights of third parties. Our CTP-543 compound is based, and potential future product candidates may be based, on products that are covered by issued patents or patent applications, the holders of which may attempt to assert claims against us. To date, we are not aware of any judicial decision holding that a patent that covers a non-deuterated compound should be construed to also cover deuterated analogs thereof, absent specific claims with respect to the deuterated analogs. However, any such judicial decision, or legal proceedings asserting such claims, could increase the likelihood of potential infringement claims being asserted against us. If any third partythird-party patents or patent applications are found to cover our product candidates or their methods of use, we may not be free to manufacture or market our product candidates as planned without obtaining a license, which may not be available on commercially reasonable terms, or at all.
For example, CTP-543 is a deuterium-modified versiondeuterated analog of ruxolitinib. Ruxolitinib is marketed in the U.S. by Incyte Corporation under the name Jakafi. Incyte hasowns patents covering ruxolitinib that may be unexpired if and when we seek marketing approval for CTP-543. Incyte also has USowns a U.S. patent 9,662,335 that broadly claims deuterated analogs of ruxolitinib. OnIn June 27, 2017, we filed a Post Grant ReviewPGR with the Patent Trial and Appeal Board, or PTAB seeking to invalidate all claims of Incyte'sIncyte’s U.S. Patent No. 9,662,335, which includes claims relating topatent that covers deuterated ruxolitinib analogs.analogs of ruxolitinib. In January 2018, the PTAB rejecteddid not grant our petition to challenge the validity of the '335Incyte’s patent. In May 2018, our request for reconsideration was denied.
In addition, Columbia University is the assignee of a patentpatents licensed to Aclaris Therapeutics, Inc. claiming the use of ruxolitinib, isotopic forms of ruxolitinib and other named JAK inhibitors for the treatment of hair loss disorders, including alopecia areata, which may be unexpired if and when we seek marketing approval for CTP-543. If we have to defend ourselves in a patent infringement suit, we may incur significant expenses in doing so. Such litigation could delay our ability to market, or prevent us from marketing, CTP-543.
There is a substantial amount of intellectual property litigation in the biotechnology and pharmaceutical industries, and we may become party to, or threatened with, litigation or other adversarial proceedings regarding intellectual property rights with respect to our products candidates, including interference proceedings before the U.S. Patent and Trademark Office.product candidates. Third parties may assert infringement claims against us based on existing or future intellectual property rights. The outcome of intellectual property litigation is subject to uncertainties that cannot be adequately quantified in advance. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our product candidates, products or methods either do not infringe the relevant patent claims or that these patent claims are invalid or unenforceable, and we may not be able to do this. Proving invalidity is difficult. For example, in the United States, proving invalidity under most circumstances requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents. We may also assert that a patent claim for a corresponding non-deuterated compound does not cover our product. Even if we are successful in these proceedings, we
may incur substantial costs and the time and attention of our management and scientific personnel could be diverted in pursuing these proceedings, which could have a material adverse effect on us. In addition, we may not have sufficient resources to bring these actions to a successful conclusion.
If we are found to infringe a third party’s intellectual property rights, we could be forced, including by court order, to cease developing, manufacturing or commercializing the infringing product candidate or product and could be required to pay potentially significant damages. Alternatively, we may be required to obtain a license from such third party in order to use the infringing technology and continue developing, manufacturing or marketing the infringing product candidate. However, we may not be able to obtain any required license on commercially reasonable terms, or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could materially harm our business. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business.
We may become involved in lawsuits to protect or enforce our patents or other intellectual property, which could be expensive, time consuming and unsuccessful.
Competitors may infringe our patents, trademarks, copyrights or other intellectual property. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming and divert the time and attention of our management and scientific personnel. In any patent infringement proceeding, there is a risk that a court will decide that a patent of ours is invalid or unenforceable, in whole or in part, and that we do not have the right to stop the other party from using the invention at issue. There is also a risk that, even if the validity and enforceability of such patents is upheld, the court will construe the patent’s claims narrowly or decide that we do not have the right to stop the other party from using the invention at issue on the grounds that our patent claims do not cover the invention. An adverse outcome in a litigation or proceeding involving our patents could limit our ability to assert our patents against those parties or other competitors, and may curtail or preclude our ability to exclude third parties from making and selling similar or competitive products. Any of these occurrences could adversely affect our competitive business position, business prospects and financial condition.
Even if we establish infringement, the court may decide not to grant an injunction against further infringing activity and instead award only monetary damages, which may or may not be an adequate remedy. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during litigation. Moreover, there can be no assurance that we will have sufficient financial or other resources to file and pursue such infringement claims, which typically last for years before they are concluded. Even if we ultimately prevail in such claims, the monetary cost of such litigation and the diversion of the attention of our management and scientific personnel could outweigh any benefit we receive as a result of the proceedings.
RISKS RELATED TO REGULATORY APPROVAL AND OTHER LEGAL COMPLIANCE MATTERSIf we are unable to protect the confidentiality of our trade secrets, the value of our technology could be materially adversely affected and our business would be harmed.
In seeking to develop and maintain a competitive position through our knowledge of deuterium chemistry and as to other aspects of our business, we rely on trade secrets, including unpatented know-how, technology and other proprietary information. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our consultants, independent contractors, advisors, corporate collaborators, outside scientific collaborators, contract manufacturers, suppliers and other third parties. We also enter into confidentiality and invention or patent assignment agreements with employees and certain consultants. Any party with whom we have executed such an agreement may breach that agreement and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, if any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent such third party, or those to whom they communicate such technology or information, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our business and competitive position could be harmed.
Risks Related to the Manufacturing of Our Product Candidates
We contract with third parties for the manufacture and distribution of our product candidates for nonclinical and clinical testing and expect to continue to do so in connection with our future development and commercialization efforts. This
reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or such quantities at an acceptable cost, or that the product candidates will not be of sufficient quality or reproducibility or produced on our desired schedule, which could delay, prevent or impair our development or commercialization efforts.
We currently rely, and expect to continue to rely, on third-party contractors to manufacture nonclinical and clinical supplies of our product candidates and to package, label and ship these supplies. We expect to rely on third-party contractors to manufacture, formulate, package, label and distribute commercial quantities of any product candidate that we commercialize following approval for marketing by applicable regulatory authorities. Reliance on such third-party contractors entails risks, including:
•manufacturing delays, including if our third-party contractors give greater priority to the supply of other products over our product candidates or if they otherwise do not satisfactorily perform according to the terms of the agreements between us and them;
•potentially incorrect data analysis, resulting in falsely-positive, falsely-negative or misleading or uninterpretable results;
•potential industrial accidents such as fires or explosions that compromise our product candidates or the ability of the contractors to timely deliver them;
•natural disasters, public health crises, pandemics and epidemics, including the COVID-19 pandemic;
•the possible termination or non-renewal of agreements by our third-party contractors at a time that is costly or inconvenient for us;
•potentially limited numbers of available contractors due to the need for uncommon equipment or expertise, or pre-existing conflicts of interest;
•the possible breach by the third-party contractors of our agreements with them;
•possible theft of intellectual property or trade secrets;
•possible theft of our materials, including starting materials, intermediates, active pharmaceutical ingredients or drug products;
•the failure of third-party contractors to comply with applicable regulatory requirements;
•the possible mislabeling of clinical supplies, potentially resulting in the wrong dose amounts being supplied or active drug or placebo not being properly identified;
•possible contamination, or non-conformance with product or packaging specifications, of our product during or after its manufacture;
•possible interruptions in our contractors’ operations, including departure of key personnel, disruption due to merger and acquisitions activities or supply chain disruptions;
•the possibility of clinical supplies not being delivered to clinical sites on time, leading to clinical trial interruptions, or of drug supplies not being distributed to commercial vendors in a timely manner, resulting in lost sales; and
•the possible misappropriation of our proprietary information, including our trade secrets and know-how.
In some cases, the technical skills required to manufacture our product candidates may be unique or proprietary to the original manufacturer and we may have difficulty, or there may be contractual restrictions prohibiting us from, transferring such skills to a back-up or alternate supplier, or we may be unable to transfer such skills at all. In addition, if we are required to change manufacturers for any reason, we will be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations. We will also need to verify, such as through a manufacturing comparability study, that any new manufacturing process will produce our product candidates according to the specifications previously submitted to the FDA or another regulatory authority. The delays associated with the verification of a new manufacturer could negatively affect our ability to develop product candidates or commercialize our products in a timely
manner or within budget. Furthermore, a manufacturer may possess technology related to the manufacture of our product candidates that such manufacturer owns independently. This would increase our reliance on such manufacturer or require us to obtain a license from such manufacturer in order to have another manufacturer manufacture our product candidates. In addition, changes in manufacturers often involve changes in manufacturing procedures and processes, which could require that we conduct bridging studies between our prior clinical supply used in our clinical trials and that of any new manufacturer. We may be unsuccessful in demonstrating the comparability of clinical supplies, which could require the conduct of additional clinical trials.
If any of our product candidates are approved by any regulatory agency, we plan to enter into agreements with third-party contract manufacturers for the commercial production and distribution of those products. It may be difficult for us to reach agreement with a contract manufacturer on satisfactory terms or in a timely manner, especially if the manufacturer believes it is uniquely suited to use our deuterium chemistry manufacturing processes or otherwise has unusual market power, or that our deuterium chemistry manufacturing processes bear greater production risks than manufacture of non-deuterated compounds. In addition, we may face competition for access to manufacturing facilities as there are a limited number of contract manufacturers operating under cGMPs that are capable of manufacturing our product candidates. Consequently, we may not be able to reach agreement with third-party manufacturers on satisfactory terms, which could delay our commercialization efforts.
Third-party manufacturers are required to comply with cGMPs and similar regulatory requirements outside the United States. Facilities used by our third-party manufacturers must be inspected by the FDA after we submit an NDA and before potential approval of the product candidate. Similar regulations apply to manufacturers of our product candidates for use or sale in foreign countries. We do not directly control the manufacturing process and are completely dependent on our third-party manufacturers for compliance with the applicable regulatory requirements for the manufacture of our product candidates. If our manufacturers fail to consistently manufacture material that conforms to the strict regulatory requirements of the FDA and any applicable foreign regulatory authority, or if they unacceptably deviate from standard operating procedures in the production of our product candidates, they will not be able to secure the applicable approval for or a regulatory authority may find deficiencies with their manufacturing facilities. If deficiencies are found at these facilities or if these facilities are not approved for commercial manufacture, we may need to find alternative manufacturing facilities, which could result in delays in obtaining approval for the applicable product candidate.
In addition, our manufacturers are subject to ongoing periodic inspections by the FDA and corresponding state and foreign agencies for compliance with cGMPs and similar regulatory requirements both prior to and following the receipt of marketing approval for any of our product candidates. Some of these inspections may be unannounced. Failure by any of our manufacturers to comply with applicable cGMPs or other regulatory requirements could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspensions or withdrawals of approvals, operating restrictions, interruptions in supply and criminal prosecutions, any of which could significantly and adversely affect supplies of our product candidates and have a material adverse impact on our business, financial condition and results of operations.
Our current and anticipated future dependence upon others for the manufacture of our product candidates may adversely affect our future profit margins and our ability to commercialize any products that receive marketing approval on a timely and competitive basis.
Because there are limited commercial suppliers of deuterated materials and the import/export of deuterated materials may be controlled by governments, we, and our collaborators, are exposed to a number of risks and uncertainties associated with our supply of deuterated materials.
When manufacturing our product candidates, we incorporate deuterium using either deuterium oxide or deuterated chemical reagents (which themselves are derived from deuterium oxide). As a result, we rely on being able to obtain and transport deuterated materials in order to manufacture our product candidates.
We rely on third parties to both supply deuterated materials and to manufacture our product candidates. However, our suppliers of deuterated materials are often located in different countries than the manufacturers of our product candidates, which would require the deuterated materials to be transported across country borders.
Transporting deuterated materials across country borders often requires licenses or other government approvals. The import and export of deuterated materials into or out of the United States is regulated and may require a license from the Nuclear Regulatory Commission or other government agency. Similarly, the import and export of deuterated materials into or out of other countries may require local government license or approvals. Licenses and certain other required documents may specify the maximum amount of deuterated materials that we, or our suppliers, are permitted to import or export per year. We, or our
suppliers, may not be able to obtain such licenses or approvals in a timely manner or at all. In addition, our current import and export licenses may be insufficient to meet our future requirements.
We estimate that our current sources of deuterated materials will be sufficient to meet our anticipated requirements; however, we do not currently have long-term agreements with our suppliers. If we are not able to establish or maintain supply arrangements, or any relevant foreign governments decide to withhold authorizations for the import or export of deuterated materials that we seek, we may be unable to secure alternative sources. If we are unable to obtain sufficient supplies of deuterated materials from our current suppliers, we would be forced to seek alternative suppliers of deuterated materials, likely in other countries. Such alternative supplies may not be available to us on acceptable terms, or at all.
If we are unable to obtain sufficient supplies of deuterated materials, our ability to produce our product candidates would be impeded and our business, financial condition and prospects could be harmed. Additionally, the inability to import or export deuterated materials to our third-party manufacturers could have a particularly severe impact on our ability to develop or commercialize our product candidates.
Similarly, to develop and commercialize any of our licensed product candidates, our collaborators will need to obtain supplies of deuterated materials and will be subject to risks and requirements in connection with sourcing deuterated materials that are similar to the ones that we face. Any adverse impact on our collaborators’ ability to obtain deuterated materials could delay or prevent the development or commercialization of our licensed product candidates, which could have a material adverse effect on our business.
Risks Related to Marketing Approval of Our Product Candidates
Even if we complete the necessary nonclinical studies and clinical trials, the marketing approval process is expensive, time consuming and uncertain and we may not obtain approvals for the commercialization of some or all of our product candidates. As a result, we cannot predict when or if, and in which territories, we, or our collaborators, will obtain marketing approval to commercialize a product candidate.
The research, testing, manufacturing, labeling, approval, selling, marketing, promotion and distribution of drug products are subject to extensive regulation by the FDA and comparable foreign regulatory authorities, which regulations differ from
country to country. Failure to obtain marketing approval for a product candidate in a given territory will prevent us, and our collaborators, from commercializing the product candidate in that territory. Our product candidates are in various stages of development and are subject to the risks of failure inherent in drug development. We, and our collaborators, have not submitted an application for or received marketing approval for any of our product candidates in the United States or in any other jurisdiction. We have limited experience in filing and supporting the applications necessary to gain marketing approvals.
The process of obtaining marketing approvals, both in the United States and abroad, is lengthy, expensive and uncertain. It may take many years, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved. This is the case even though the deuterated compounds that we produce and seek to develop can have similar pharmacological properties as their corresponding non-deuterated compounds. Even if, as a result of any such similarities, we, or our collaborators, obtain clearance from the FDA and other regulatory authorities to follow expedited development programs for some deuterated compounds that reference and rely on previous findings for non-deuterated compounds, the review and approval of our product candidates may still take a substantial period of time. Conversely, in certain countries regulators may consider our deuterated compounds to be equivalent to non-deuterated compounds that possess regulatory exclusivity and therefore refuse to approve our compounds until the expiration of that exclusivity.
In addition, changes in marketing approval policies during the development period, changes in or the enactment or promulgation of additional statutes, regulations or guidance or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application. Regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and require additional nonclinical, clinical or other studies. In addition, varying interpretations of the data obtained from nonclinical and clinical testing could delay, limit or prevent marketing approval of a product candidate. Any marketing approval we, or our collaborators, ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.
Any delay in obtaining or failure to obtain required approvals could materially adversely affect our ability, or that of our collaborators, to generate revenue from the particular product candidate, which likely would result in significant harm to our financial position and adversely impact our stock price.
Even if we, or our collaborators, obtain marketing approvals for our product candidates, the approved labeling may include significant safety warnings or use limitations, which could adversely affect the degree of market acceptance.
When the FDA approves a product, it also approves the label that is required to accompany the product. In some cases, the label may contain significant safety warnings, including boxed warnings, commonly referred to as “black box” warnings. Boxed warnings may be required based on safety data related to the approved product itself or safety data from other products with similar mechanisms of action, even if the safety events identified in the boxed warnings have not been reported with the approved product.
The JAK inhibitors tofacitinib, baricitinib and upadacitinib were all approved for use in rheumatoid arthritis with similar boxed warnings. In September 2021, the FDA issued a Drug Safety Communication regarding the risks associated with JAK inhibitors used to treat certain chronic inflammatory conditions. In this communication, the FDA announced that the boxed warnings for tofacitinib would be expanded based on an increased risk of serious heart-related events seen in a large, randomized safety clinical trial with tofacitinib in patients with rheumatoid arthritis. The FDA also announced that the expansion of the boxed warnings would apply to the other two JAK inhibitors, baricitinib and upadacitinib, even though those approved products have not been studied in similar large, randomized safety clinical trials. In addition, the FDA has limited the use of some JAK inhibitors in certain indications to those patients who have not responded to or cannot tolerate other approved products that have a different mechanism of action. In September 2021, the FDA approved a topical formulation of the JAK inhibitor ruxolitinib for mild to moderate atopic dermatitis with a label that includes the same boxed warnings and specifies short term use when other topical agents have failed. In January 2022, the FDA approved JAK inhibitors upadacitinib and abrocitinib in moderate to severe atopic dermatitis not controlled by other systemic agents, or when their use is inadvisable, with the same boxed warnings.
CTP-543 is an oral JAK inhibitor that we are developing for the treatment of alopecia areata, for which there are currently no treatments approved by the FDA. If we are successful in obtaining marketing approval for CTP-543, it is unknown whether the FDA will impose similar boxed warnings on CTP-543. If other products are approved for the treatment of alopecia areata that are not JAK inhibitors, it is also unknown whether the FDA will limit the use of CTP-543 to those patients who have not responded to or cannot tolerate the other approved products.
If the FDA approves any of our product candidates and imposes boxed warnings or use limitations, the market acceptance could be adversely affected.
Failure to obtain marketing approval in international jurisdictions would prevent our product candidates from being marketed abroad.
In order to market and sell our products in the European Union and many other jurisdictions, we, or our collaborators, must obtain separate marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ substantially from that required to obtain FDA approval. The marketing approval process outside the United States generally includes all of the risks associated with obtaining FDA approval. In addition, in many territories outside the United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that territory. Our products may not receive commercially feasible prices in any given territory, or the price offered for our products in a territory may have an adverse effect on their prices in other territories if we were to accept.accept such price. We, and our collaborators, may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA.
Even if we, or our collaborators, obtain marketing approvals for our product candidates, the terms of approvals and ongoing regulation of our products may limit how we, or they, manufacture and market our products, which could materially impair our ability to generate revenue.
Once marketing approval has been granted, an approved product and its manufacturer and marketer are subject to ongoing review and extensive regulation. We, and our collaborators, must therefore comply with requirements concerning advertising and promotion for any of our product candidates for which we or they obtain marketing approval. Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s approved labeling. Thus, we, and our collaborators, will not be able to promote any products we develop for indications or uses for which they are not approved.
In addition, manufacturers of approved products and those manufacturers’ facilities are required to comply with extensive FDA requirements, including ensuring that quality control and manufacturing procedures conform to cGMPs, which include
requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation and reporting requirements. We, our contract manufacturers, our collaborators and their contract manufacturers could be subject to periodic unannounced inspections by the FDA to monitor and ensure compliance with cGMPs.
Accordingly, assuming we, or our collaborators, receive marketing approval for one or more of our product candidates, we, and our collaborators, and our and their contract manufacturers will continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production, product surveillance and quality control.
If we, and our collaborators, are not able to comply with post-approval regulatory requirements, we, and our collaborators, could have the marketing approvals for our products withdrawn by regulatory authorities and our, or our collaborators’, ability to market any future products could be limited, which could adversely affect our ability to achieve or sustain profitability. Further, the cost of compliance with post-approval regulations may have a negative effect on our operating results and financial condition.
Any of our product candidates for which we, or our collaborators, obtain marketing approval in the future could be subject to post-marketing restrictions or withdrawal from the market and we, or our collaborators, may be subject to substantial penalties if we, or they, fail to comply with regulatory requirements or if we, or they, experience unanticipated problems with our products following approval.
Any of our product candidates for which we, or our collaborators, obtain marketing approval in the future, as well as the manufacturing processes, post-approval studies and measures, labeling, advertising and promotional activities for such product, among other things, will be subject to continual requirements of and review by the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration and listing requirements, requirements relating to manufacturing, quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. Even if marketing approval of a product candidate is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval, including the requirement to implement a Risk Evaluation and Mitigation Strategy, or REMS.
The FDA may also impose requirements for costly post-marketing studies or clinical trials and surveillance to monitor the safety or efficacy of a product. The FDA and other agencies, including the Department of Justice, closely regulate and monitor the post-approval marketing and promotion of products to ensure that they are manufactured, marketed and distributed only for the approved indications and in accordance with the provisions of the approved labeling. The FDA imposes stringent restrictions on manufacturers’ communications regarding off-label use and if we, or our collaborators, do not market any of our product candidates for which we, or they, receive marketing approval for only their approved indications, we, or they, may be subject to warnings or enforcement action for off-label marketing. Violation of the FDCA and other statutes, including the False Claims Act, relating to the promotion and advertising of prescription drugs may lead to investigations or allegations of violations of federal and state health carehealthcare fraud and abuse laws and state consumer protection laws.
In addition, later discovery of previously unknown adverse events or other problems with our products or their manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:
•restrictions on such products, manufacturers or manufacturing processes;
•restrictions on the indication, patient population or other parameters for which the drug is approved;
•restrictions on the labeling or marketing of a product;
•restrictions on product distribution or use;
•requirements to conduct post-marketing studies or clinical trials;
•warning letters or untitled letters;
•withdrawal of the products from the market;
•refusal to approve pending applications or supplements to approved applications that we submit;
•recall of products;
•fines, restitution or disgorgement of profits or revenues;
•reputational damage;
•suspension or withdrawal of marketing approvals;
•refusal to permit the import or export of products;
•product seizure; or
•injunctions or the imposition of civil or criminal penalties.
Risks Related to Commercialization and Market Acceptance of Our Product Candidates
We face substantial competition from other pharmaceutical and biotechnology companies and our operating results may suffer if we fail to compete effectively.
The development and commercialization of new drug products is highly competitive. We expect that we, and our collaborators, will face significant competition from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide with respect to our product candidates that we, or they, may seek to develop or commercialize in the future. Specifically, there are a number of large pharmaceutical and biotechnology companies that currently market and sell products or are pursuing the development of product candidates for the treatment of autoimmune disorders. Our competitors may succeed in developing, acquiring or licensing technologies and drug products that attain preferred reimbursement by payors or are more effective, simpler to use, have fewer or more tolerable side effects or are less costly than any product candidates that we are currently developing or that we may develop or acquire, or which are marketed more effectively, which could render our product candidates obsolete and noncompetitive.
We are developing CTP-543 as an oral agent for the treatment of moderate to severe alopecia areata. If CTP-543 receives marketing approval for this indication, it may face competition from a number of other product candidates that are being studied for alopecia areata. Other companies pursuing development of oral JAK inhibitors for the treatment of alopecia areata include Eli Lilly and Company and Pfizer Inc.
Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we, or our collaborators, may develop. Our competitors also may obtain FDA or other marketing approval for their products before we, or our collaborators, are able to obtain approval for ours, which could reduce our ability to utilize expedited regulatory pathways and could result in our competitors establishing a strong market position before we, or our collaborators, are able to enter the market.
Many of our existing and potential future competitors have significantly greater financial resources and expertise in research and development, manufacturing, nonclinical testing, conducting clinical trials, obtaining marketing approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.
Even if one of our product candidates receives marketing approval, it may fail to achieve the degree of market acceptance by physicians, patients, third-party payors and others in the medical community necessary for commercial success and the market opportunity for the product candidate may be smaller than we estimate.
Even if one of our product candidates, including those licensed to our collaborators, is approved by the appropriate regulatory authorities for marketing and sale, it may nonetheless fail to gain sufficient market acceptance by physicians, patients, third-party payors, formulary decision-makers and others in the medical or patient communities. For example, physicians are often reluctant to switch their patients from existing therapies even when new and potentially more effective or convenient treatments enter the market. Further, patients often acclimate to the therapy that they are currently taking and do not want to switch unless their physicians recommend switching products or they are required to switch therapies due to lack of reimbursement for
existing therapies. If any of our product candidates receive negative publicity, patients may choose not to request them even if approved, or may not comply with taking them as prescribed.
Efforts to educate the medical community, patients, formulary decision-makers and third-party payors on the benefits of our product candidates may require significant resources and may not be successful. If any of our product candidates is approved but does not achieve an adequate level of market acceptance, we may not generate significant revenues and we may not become profitable. The degree of market acceptance of our product candidates, including those licensed to our collaborators, if approved for commercial sale, will depend on a number of factors, including:
•the efficacy and safety of the product;
•the potential advantages of the product compared to alternative treatments;
•the prevalence and severity of any side effects;
•the clinical indications for which the product is approved;
•whether the product is designated under physician treatment guidelines as a first-line therapy or as a second- or third-line therapy;
•limitations or warnings, including distribution or use restrictions or burdensome prescription requirements contained in the product’s approved labeling;
•our ability, or the ability of our collaborators, to offer the product for sale at commercially acceptable prices;
•the product’s convenience and ease of administration compared to alternative treatments;
•the willingness of the target patient population to try, and of physicians to prescribe, the product;
•the strength of sales, marketing and distribution support;
•the approval of other new products for the same indications;
•the extent and success of counter-detailing efforts by our competitors;
•the pricing, extent of discounts or bundled products offered by our competitors;
•the organization stability of our collaborators, if any;
•changes in the standard of care for the targeted indications for the product;
•the timing of market introduction of our approved products as well as competitive products; and
•the availability and amount of reimbursement from government payors, managed care plans and other third-party payors.
The potential market opportunities for our product candidates are difficult to precisely estimate. Our estimates of the potential market opportunities are predicated on many assumptions, including industry knowledge and publications, third-party research reports and other surveys. While we believe that our internal assumptions are reasonable, these assumptions involve the exercise of significant judgment on the part of our management, are inherently uncertain and the reasonableness of these assumptions has not been assessed by an independent source. If any of the assumptions proves to be inaccurate, the actual markets for our product candidates could be smaller than our estimates of the potential market opportunities.
If any of our product candidates receives marketing approval and we, or others, later discover that the drug is less effective than previously believed, or causes undesirable side effects that were not previously identified or at a higher rate than was projected during clinical development, our ability to market the drug, or that of our collaborators, could be compromised.
Clinical trials of our product candidates are conducted in carefully defined subsets of patients who have agreed to enter into clinical trials. Consequently, it is possible that these individuals are not representative of the actual patient population or that
our clinical trials may indicate an apparent positive effect of a product candidate that is greater than the actual positive effect, if any, or alternatively fail to identify undesirable side effects. If, following approval of a product candidate, we, or others, discover that the drug is less effective than previously believed or causes undesirable side effects that were not previously identified, any of the following adverse events could occur:
•regulatory authorities may withdraw their approval of the drug and/or seize the drug;
•we, or our collaborators, may need to recall the drug or change the way the drug is administered;
•additional restrictions may be imposed on the marketing of, or the manufacturing processes for, the particular drug, including the addition of labeling statements, such as boxed warnings or a contraindication;
•we may be subject to fines, injunctions or the imposition of civil or criminal penalties;
•we, or our collaborators, may be required to operate under a REMS;
•we, or our collaborators, could be sued and held liable for harm caused to patients; and
•the drug may become less competitive.
Any of these events could have a material and adverse effect on our operations and business and could adversely impact our stock price.
If we are unable to establish sales, marketing and distribution capabilities or enter into sales, marketing and distribution arrangements with third parties, we may not be successful in commercializing any product candidates that we develop if and when those product candidates are approved.
We do not have a sales, marketing or distribution infrastructure and as a company have no experience in the sale, marketing or distribution of pharmaceutical products. To achieve commercial success for any approved product, we must either develop a sales and marketing organization or outsource these functions to third parties. We expect to use a combination of third-party collaboration, licensing and distribution arrangements and a focused in-house commercialization capability to sell any products that receive marketing approval.
We generally plan to seek to retain full commercialization rights for the United States for products that we can commercialize with a specialized sales force and to retain co-promotion or similar rights for the United States when feasible in indications requiring a larger commercial infrastructure. The development of sales, marketing and distribution capabilities will require substantial resources, will be time-consuming and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing and distribution capabilities is delayed or does not occur for any reason, we could have prematurely or unnecessarily incurred these commercialization costs. This may be costly, and our investment could be lost if we cannot retain or reposition our sales and marketing personnel. In addition, we may not be able to hire or retain a sales force in the United States that is sufficient in size or has adequate expertise in the medical markets that we plan to target. If we are unable to establish or retain a sales force and marketing and distribution capabilities, our operating results may be adversely affected. If a potential partner has development or commercialization expertise that we believe is particularly relevant to one of our products, then we may seek to collaborate with that potential partner even if we believe that we could otherwise develop and commercialize the product independently.
We currently expect to collaborate with third parties for commercialization in the United States of any products that require a large sales, marketing and product distribution infrastructure. We also expect to commercialize our product candidates outside the United States through collaboration, licensing and distribution arrangements with third parties, if at all. As a result of entering into arrangements with third parties to perform sales, marketing and distribution services, our product revenues or the profitability of these product revenues may be lower, perhaps substantially lower, than if we were to directly market and sell products in those markets. Furthermore, we may be unsuccessful in entering into the necessary arrangements with third parties or may be unable to do so on terms that are favorable to us. In addition, we may have little or no control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively, or may actively sell a competing product at the expense of selling ours.
If we do not establish sales and marketing capabilities, either on our own or in collaboration with third parties, we will not be successful in commercializing any of our product candidates that receive marketing approval.
If the FDA or comparable foreign regulatory authorities approve generic versions of any of our products that receive marketing approval, or such authorities do not grant our products appropriate periods of data exclusivity before approving generic versions of our products, the sales of our products could be adversely affected.
Once an NDA is approved, the product covered thereby becomes a "reference listed drug" in the FDA’s publication, “Approved Drug Products with Therapeutic Equivalence Evaluations.” Manufacturers may seek approval of generic versions of reference listed drugs through submission of ANDAs in the United States. In support of an ANDA, a generic manufacturer need not conduct clinical studies. Rather, the applicant generally must show that its product has the same active ingredient(s), dosage form, strength, route of administration and conditions of use or labeling as the reference listed drug and that the generic version is bioequivalent to the reference listed drug, meaning it is absorbed in the body at the same rate and to the same extent. Generic products may be significantly less costly to bring to market than the reference listed drug and companies that produce generic products are generally able to offer them at lower prices. Thus, following the introduction of a generic drug, a significant percentage of the sales of any branded product or reference listed drug is typically lost to the generic product.
The FDA may not approve an ANDA for a generic product until any applicable period of non-patent exclusivity for the reference listed drug has expired. The FDCA provides a period of five years of non-patent exclusivity for a new drug containing a new chemical entity. Specifically, in cases where such exclusivity has been granted, an ANDA may not be filed with the FDA until the expiration of five years unless the submission is accompanied by a Paragraph IV certification that a patent covering the reference listed drug is either invalid or will not be infringed by the generic product, in which case the applicant may submit its application four years following approval of the reference listed drug. While we believe that our product candidates contain active ingredients that would be treated as new chemical entities by the FDA and, therefore, if approved, should be afforded at least five years of data exclusivity, the FDA may disagree with that conclusion and may approve generic products after a period that is less than five years. Manufacturers may seek to launch these generic products following the expiration of the applicable marketing exclusivity period, even if we still have patent protection for our product.
Competition that our products may face from generic versions of our products could materially and adversely impact our future revenue, profitability and cash flows and substantially limit our ability to obtain a return on the investments we have made in those product candidates.
To the extent we, or our collaborators, market products that are deuterated analogs of generic drugs that are approved or will be approved while we market our products in territories in which the generic drug is available, our products may compete against these generic products and the sales of our products could be adversely affected.
We anticipate that some of the products that we, or our collaborators, may develop will be deuterated analogs of approved drugs that are or will then be available on a generic basis. In addition, if we develop a product that is a deuterated analog of a non-generic approved drug, the FDA or comparable foreign regulatory authorities may also approve generic versions of the corresponding non-deuterated drug. If approved, we expect that our deuterated products will compete against these generic non-deuterated compounds if they are used in the same indications. Even if the approved indications are different for the deuterated and non-deuterated drugs, the generic non-deuterated drug may be used off-label, negatively affecting sales of our product. Efforts to educate the medical community and third-party payors on the benefits of any product that we develop as compared to the corresponding non-deuterated compound, or generic versions of it, may require significant resources and may not be successful. If physicians, rightly or wrongly, do not believe that a product that we, or our collaborators, develop offers substantial advantages over the corresponding non-deuterated compound, or generic versions of the corresponding non-deuterated compound, or that the advantages offered by our product as compared to the corresponding non-deuterated compound, or its generic versions, are not sufficient to merit the increased price over the corresponding non-deuterated compound, or its generic versions, that we, or our collaborators, would seek, physicians might not prescribe that product. In addition, third-party payors may refuse to provide reimbursement for a product that we, or our collaborators, develop when the corresponding non-deuterated compound, or generic versions of the corresponding non-deuterated compound, offer a cheaper alternative therapy in the same indication, or may otherwise encourage use of the corresponding non-deuterated compound, or generic versions of the corresponding non-deuterated compound, over our product, even if our product possesses favorable pharmaceutical properties or is labeled for a different indication.
Competition that our product candidates may face from any generic non-deuterated product on which our product candidate is based or a later-approved generic version of a branded non-deuterated product on which our product is based, could materially and adversely impact our future revenue, profitability and cash flows and substantially limit our ability to obtain a return on the investments we have made in those product candidates.
Even if we, or our collaborators, are able to commercialize any product candidate that we, or they, develop, the product may become subject to unfavorable pricing regulations, third-party payor reimbursement practices or healthcare reform initiatives that could harm our business.
The commercial success of our product candidates will depend substantially, both domestically and abroad, on the extent to which the costs of our product candidates will be paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations or reimbursed by government health administration authorities, private health coverage insurers and other third-party payors. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will cover and establish reimbursement levels. The healthcare industry is acutely focused on cost containment, both in the United States and elsewhere. Government authorities and third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications, which could affect our ability or that of our collaborators to sell our product candidates profitably. These payors may not view our products, if any, as cost-effective, and coverage and reimbursement may not be available to our customers, or those of our collaborators, or may not be sufficient to allow our products, if any, to be marketed on a competitive basis. Cost-control initiatives could cause us, or our collaborators, to decrease the price we, or they, might establish for products, which could result in lower than anticipated product revenues. If reimbursement is not available, or is available only to limited levels, we, or our collaborators, may not be able to successfully commercialize our product candidates. Even if coverage is provided, the approved reimbursement amount may not be high enough to allow us, or our collaborators, to establish or maintain pricing sufficient to realize a sufficient return on our, or their, investments.
There is significant uncertainty related to third-party payor coverage and reimbursement of newly approved drugs. Marketing approvals, pricing and reimbursement for new drug products vary widely from country to country. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we, or our collaborators, might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay commercial launch of the product, possibly for lengthy time periods, which may negatively impact the revenues we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability, or the ability of our collaborators, to recoup our, or their, investment in one or more product candidates, even if our product candidates obtain marketing approval.
Third-party payor coverage of newly approved drugs may be more limited than the indications for which the drugs are approved by the FDA or comparable foreign regulatory authorities. Moreover, eligibility for reimbursement does not imply that any drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Reimbursement rates may vary, by way of example, according to the use of the drug and the clinical setting in which it is used. Reimbursement rates may also be based on reimbursement levels already set for lower cost drugs or may be incorporated into existing payments for other services.
In addition, increasingly, third-party payors are requiring higher levels of evidence of the benefits and clinical outcomes of new technologies, requiring burdensome comparison studies with currently approved drugs and challenging the prices charged. We, and our collaborators, cannot be sure that coverage will be available for any product candidate that we, or they, commercialize and, if available, that the reimbursement rates will be adequate. Further, the net reimbursement for drug products may be subject to additional reductions if there are changes to laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. An inability to promptly obtain coverage and adequate payment rates from both government-funded and private payors for any product candidates for which we, or our collaborators, obtain marketing approval could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.
Governments outside the United States tend to impose strict price controls, which may adversely affect our revenues, if any.
In some countries, such as the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we, or our collaborators, may be required to conduct a clinical trial that compares the cost-effectiveness of our product to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be materially harmed.
Product liability lawsuits against us could divert our resources, cause us to incur substantial liabilities and limit commercialization of any products that we may develop.
We face an inherent risk of product liability claims as a result of the clinical testing of our product candidates despite obtaining appropriate informed consents from our clinical trial participants. We will face an even greater risk if we, or our collaborators, commercially sell any product that we may, or they may, develop. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Regardless of the merits or eventual outcome, liability claims may result in:
•decreased demand for our product candidates or products that we may develop;
•injury to our reputation and significant negative media attention;
•withdrawal of clinical trial participants;
•significant costs to defend litigation;
•distraction to our management diverting focus from business operations and strategy;
•initiation of investigations by regulators;
•product recalls, withdrawals or labeling, marketing or promotional restrictions;
•substantial monetary awards to trial participants or patients;
•loss of revenue; and
•the inability to commercialize any products that we may develop.
Although we maintain product liability insurance coverage, it may not fully cover potential liabilities that we may incur. The cost of any product liability litigation or other proceeding, even if resolved in our favor, could be substantial. We will need to increase our insurance coverage if and when we begin selling any product candidate that receives marketing approval. In addition, insurance coverage is becoming increasingly expensive. If we are unable to obtain or maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against potential product liability claims, it could prevent or inhibit the development and commercial production and sale of our product candidates, which could adversely affect our business, financial condition, results of operations and prospects.
Risks Related to Healthcare Regulations
Recently enacted and future legislation may increase the difficulty and cost for us and our collaborators to obtain marketing approval of and commercialize our product candidates and affect the prices we, or they, may obtain.
In the United States and some foreignother jurisdictions, there have been, and we expect there will continue to be, a number of legislative and regulatory changes and proposed changes regardingto the healthcare system that could prevent or delay marketing approval of our product candidates,
restrict or regulate post-approval activities and affect our ability, orfuture results of operations. In particular, there have been and continue to be a number of initiatives at the abilityU.S. federal and state levels that seek to reduce healthcare costs and improve the quality of our collaborators, to profitably sell any products for which we, or they, obtain marketing approval.
Inhealthcare. Individual states in the United States have also increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures and, in some cases, designed to encourage importation from other countries and bulk purchasing. See the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the MMA, changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for physician administered drugs. In addition, this legislation provided authority for limiting the number of drugs that will be coveredsection entitled “Healthcare Reform” contained in any therapeutic class. Cost reduction initiatives and other provisionsPart I, Item 1. of this legislation could decrease the coverage and price that we receive for any approved products. While the MMA only addresses drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the MMA may result in a similar reduction in payments from private payors.Annual Report on Form 10-K.
In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or collectively the PPACA.
Among the provisions of the PPACA of potential importance to our product candidates are the following:
an annual, non-deductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic agents;
an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;
expansion of healthcare fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute, new government investigative powers and enhanced penalties for noncompliance;
a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices;
extension of manufacturers’ Medicaid rebate liability;
expansion of eligibility criteria for Medicaid programs;
expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program new requirements to report financial arrangements with physicians and teaching hospitals;
a new requirement to annually report drug samples that manufacturers and distributors provide to physicians; and
a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.
In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. These changes included aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, reduced Medicare payments to several providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other healthcare funding.
Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the United StatesU.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us and our collaborators to more stringent product labeling and post-marketing testing and other requirements.
We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the extent to which state and federal governments cover particular healthcare products and services and could limit the amounts that the federal and state governments will pay for healthcare products and services. This could result in reduced demand for any product candidate we develop or could result in additional pricing pressures.
In markets outside of the United States, reimbursement and healthcare payment systems vary significantly by country, and many countries have instituted price ceilings on specific products and therapies. The price control regulations outside of the United States can have a significant impact on the profitability of a given market, and further uncertainty is introduced if and when these laws change.
Our future relationships with customers and third partythird-party payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.
Healthcare providers, physicians and third partythird-party payors will play a primary role in the recommendation and prescription of any products for which we obtain marketing approval. Our future arrangements with third partythird-party payors and customers, if any, will subject us to broadly applicable fraud and abuse and other healthcare laws and regulations. The laws and regulations may constrain the business or financial arrangements and relationships through which we market, sell and distribute any products for which we obtain marketing approval. Restrictions under applicable federalSee the sections entitled “Healthcare Reform” and state healthcare laws“Healthcare Law and regulationsRegulation” contained in the U.S. include the following:
Anti-Kickback Statute. The federal healthcare anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in
kind, to induce or reward, or in return for, either the referralPart I, Item 1. of an individual for, or the purchase, order or recommendation or arranging of, any good or service, for which payment may be made under a federal healthcare program such as Medicare and Medicaid;
False Claims Act. The federal False Claims Act imposes criminal and civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities for, among other things, knowingly presenting, or causing to be presented false or fraudulent claims for payment by a federal healthcare program or making a false statement or record material to payment of a false claim or avoiding, decreasing or concealing an obligation to pay money to the federal government, with potential liability including mandatory treble damages and significant per-claim penalties, currently set at $5,500 to $11,000 per false claim;
HIPAA. The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services, and, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, also imposes obligations, including mandatory contractual terms and technical safeguards, with respect to maintaining the privacy, security and transmission of individually identifiable health information;
Transparency Requirements. Federal laws require applicable manufacturers of covered drugs to report payments and other transfers of value to physicians, other healthcare providers and teaching hospitals, as well as ownership and investment interests held by physicians and other healthcare providers and their immediate family members;
Controlled Substances Act. The CSA regulates the handling of controlled substances such as JZP-386; and
Analogous State and Foreign Laws. Analogous state and foreign fraud and abuse laws and regulations, such as state anti-kickback and false claims laws can apply to sales or marketing arrangements and claims involving healthcare items or services. In addition, some state laws require pharmaceutical companies to comply with the pharmaceutical industry's voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other health care providers or marketing expenditures and govern the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
this Annual Report on Form 10-K.Some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government and require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures. State and foreign laws also govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not pre-empted by HIPAA, thus complicating compliance efforts.
Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion of products from government funded healthcare programs, such as Medicare and Medicaid and the curtailment or restructuring of our operations. If any of the physicians or other healthcare providers or entities with whom we expect to do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.
Risks Related to Legal Compliance Matters
If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on our business.
We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. From time to time, our operations may involve the use of hazardous materials, including chemicals and biological materials, and may also produce hazardous waste products. Even if we contract with third parties for the disposal of these materials and waste products, we cannot completely eliminate the risk of contamination or injury resulting from these materials. In the event of contamination or injury resulting from the use or disposal of our hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties for failure to comply with such laws and regulations.
We maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials, but this insurance may not provide adequate coverage against
potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us.
In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations.regulations, including any laws and regulations that may be imposed as a result of the COVID-19 pandemic. Current or future environmental laws and regulations may impair our research, development or production efforts, which could adversely affect
our business, financial condition, results of operations or prospects. In addition, failure to comply with these laws and regulations may result in substantial fines, penalties or other sanctions.
Governments outsideThe increasing use of social media platforms presents risks and challenges.
The increasing use of social media platforms presents risks and challenges. Social media increasingly is being used by third parties to communicate about our product candidates and the diseases they are designed to treat. We believe that members of the alopecia areata community may be more active on social media as compared to other patient populations due to the demographics of this patient population. Social media practices in the pharmaceutical and biotechnology industries are evolving, which creates uncertainty and risk of noncompliance with regulations applicable to our business. For example, patients in clinical trials may use social media platforms to comment on the effectiveness of, or adverse experiences with, a product candidate, which could result in reporting obligations. In addition, there is a risk of inappropriate disclosure of sensitive information or negative or inaccurate posts or comments about us on any social networking website. If any of these events were to occur or we otherwise fail to comply with applicable regulations, we could incur liability, face restrictive regulatory actions or incur other harm to our business.
Risks Related to Data Protection and Cybersecurity
Our failure to comply with data protection laws and regulations could lead to government enforcement actions, private litigation and/or adverse publicity and could negatively affect our operating results and business.
We are subject to data protection laws and regulations that address privacy and data security. The legislative and regulatory landscape for data protection continues to evolve, and in recent years there has been an increasing focus on privacy and data security issues. In the United States, tendnumerous federal and state laws and regulations, including state data breach notification laws, state health information privacy laws and federal and state consumer protection laws govern the collection, use, disclosure and protection of health-related and other personal information. Failure to impose strict price controls,comply with data protection laws and regulations could result in government enforcement actions, which may adverselycould include civil or criminal penalties, private litigation and/or adverse publicity and could negatively affect our revenues,operating results and business. In addition, we may obtain health information from third parties that are subject to privacy and security requirements under HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act. We could be subject to criminal penalties if any.we knowingly obtain or disclose individually identifiable health information in a manner that is not authorized or permitted.
In some countries, such asThe collection and use of personal health data in the countriesEuropean Union is governed by the provisions of the General Data Protection Regulation, or the GDPR, which came into effect in May 2018. This regulation imposes several requirements relating to the consent of the individuals to whom the personal data relates, the information provided to the individuals, notification of data processing obligations to the competent national data protection authorities and the security and confidentiality of the personal data. The GDPR also imposes strict rules on the transfer of personal data out of the European Union to the pricingUnited States. Failure to comply with the requirements of prescription pharmaceuticalsthe GDPR and the related national data protection laws of the European Union Member States may result in significant fines and other administrative penalties.
Significant disruptions of information technology systems or security breaches could adversely affect our business.
We are increasingly dependent upon information technology systems, infrastructure and data to operate our business. In the ordinary course of business, we collect, store and transmit large amounts of confidential information (including, among other things, trade secrets or other intellectual property, proprietary business information and personal information). It is subjectcritical that we do so in a secure manner to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time aftermaintain the receiptconfidentiality and integrity of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we, or our collaborators, may be required to conduct a clinical trial that compares the cost-effectivenesssuch confidential information. We also have outsourced elements of our productoperations to other available therapies. If reimbursementthird parties, and as a result we manage a number of third-party vendors who may or could have access to our confidential information. The size and complexity of our products is unavailableinformation technology systems, and those of third-party vendors with whom we contract, and the large amounts of confidential information stored on those systems, make such systems vulnerable to service interruptions or limitedto security breaches from inadvertent or intentional actions by our employees, consultants, third-party vendors, and/or business partners, or from cyber-attacks by malicious third parties. Cyber-attacks are increasing in scopetheir frequency, sophistication and intensity, and have become increasingly difficult to detect. Cyber-attacks could include the deployment of harmful malware, ransomware, denial-of-service attacks, social engineering and other means to affect service reliability and threaten the confidentiality, integrity and availability of information. Cyber-attacks could also include phishing attempts or amount,e-mail fraud to cause payments or if pricing is set at unsatisfactory levels,information to be transmitted to an unintended recipient.
Significant disruptions of our information technology systems, or those of our third-party vendors, or security breaches could adversely affect our business operations and/or result in the loss, misappropriation and/or unauthorized access, use or disclosure of, or the prevention of access to, confidential information, including, among other things, trade secrets or other intellectual
property, proprietary business information and personal information, and could result in financial, legal, business and reputational harm to us. For example, any such event that leads to unauthorized access, use or disclosure of personal information, including personal information regarding our patients or employees, could harm our reputation, require us to comply with federal and/or state breach notification laws and foreign law equivalents, and otherwise subject us to liability under laws and regulations that protect the privacy and security of personal information. Security breaches and other inappropriate access can be materially harmed.difficult to detect, and any delay in identifying them may lead to increased harm of the type described above. While we have implemented security measures to protect our information technology systems and infrastructure, there can be no assurance that such measures will prevent service interruptions or security breaches that could adversely affect our business.
RISKS RELATED TO EMPLOYEE MATTERS AND MANAGING GROWTHRisks Related to Employee Matters and Managing Growth
Our future success depends on our ability to retain our Chief Executive Officer and other key executivesemployees and to attract, retain and motivate qualified personnel.
Our industry has experienced a high rate of turnover of management personnel in recent years. Our ability to compete in the highly competitive biotechnology and pharmaceuticals industries depends upon our ability to attract and retain highly qualified managerial, scientific, clinical and medicaldevelopment personnel. We are highly dependent on the pharmaceutical research and development and business development expertise of Roger D. Tung, our President and Chief Executive Officer, as well as the other principal members of our management, scientific and development team.teams. Although we have formal employment agreements with our executive officers, these agreements do not prevent them from terminating their employment with us at any time. In addition, although we maintain a key-man insurance policy with respect to Dr. Tung, we do not carry key-man insurance on any of our other executive officers or employees and may not carry any key-man insurance in the future.
If we lose one or more of our executive officers or other key employees, our ability to implement our business strategy successfully could be seriously harmed. Furthermore, replacing executive officers or other key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to develop, gain marketing approval of and commercialize products successfully. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these additional key personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific, clinical and clinical personnel from universities and research institutions.development personnel. In addition, we rely on consultants and advisors, including scientific and clinical advisors to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us. If we are unable to continue to attract and retain high quality personnel, our ability to develop and commercialize product candidates will be limited.
We expect to grow our organization and, as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.
As our pipeline grows and matures, we expect to experience significant growth in the number of our employees and the scope of our operations, including in the areas of drug manufacturing, regulatory affairs and sales, clinical development, marketing and distribution. Our management may need to divert a disproportionate amount of its attention away from our day-to-day activities to devote time to managing these growth activities. To manage these growth activities, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources and the limited experience of our management team in managing a company with such anticipated growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. Moreover, the expected expansion of our operations may lead to significant costs and may divert our business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.
RISKS RELATED TO OUR COMMON STOCKRisks Related to an Investment in Our Common Stock
The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for purchasers of our common stock.
The trading price of our comment stock has been, and may continue to be, volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. The stock market in general and the market for smaller pharmaceutical and biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The market price for our common stock may be influenced by many factors, including:
•the success or failure of existing or new competitive products or technologies;
•the timing, advancement of and results of nonclinical studies and clinical trials of any of our product candidates;
•commencement or termination of collaborations for our development programs;
•failure, delays, changes to or discontinuation of any of our development programs;
•regulatory or legal developments in the United States and other countries;
•regulatory actions relating to our product candidates;
•developments or disputes concerning patent applications, issued patents or other proprietary rights;
•the recruitment or departure of key personnel;
•disclosures by our collaborators relating to our product candidates or competitive programs;
•merger or acquisition activity of our collaborators;
•the level of expenses related to any of our product candidates or clinical development programs;
•the results of our efforts to develop additional product candidates or products;
•actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;
•announcement or expectation of additional financing efforts;
•receipt or expectation of receipt of revenues such as milestones, royalties, grants and license fees;
•sales of our common stock by us, our insiders or other stockholders;
•programmed trading based on technical stock chart or other inputs;
•portfolio restructuring by large shareholders;stockholders or decisions by stockholders to rapidly acquire or sell our shares;
•addition or removal of our stock from stock indices;
•variations in our financial results or those of companies that are perceived to be similar to us;
•changes in estimates or recommendations by securities analysts that cover our stock;
•actions by short-sellers or supporters of our stock, including social media postings or reports;
•changes in the structure of healthcare payment systems;
•market conditions in the pharmaceutical and biotechnology sectors;
•legalization or the anticipation of possible legalization of drug reimportation from other countries;
•actual or anticipated changes in FDA practices;
•general economic, industry and market conditions; and
•the other factors described in this “Risk Factors” section.
An active trading market for our common stock may not be sustained.
Although we have listed our common stock on The NASDAQthe Nasdaq Global Market, an active trading market for our common stock may not be sustained. In the absence of an active trading market for our common stock, investors may not be able to sell their common stock at or above the price at which they acquired their shares or at the times that they would like to sell. An inactive trading market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.
We have broad discretion in the use of our cash reserves and may not use them effectively.
Our management has broad discretion to use our cash reserves and could use our cash reserves in ways that do not improve our results of operations or enhance the value of our common stock. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business, cause the price of our common stock to decline and delay the development of our product candidates. Pending their use, we may invest our cash reserves in a manner that does not produce income or that loses value.
We are an “emerging growtha “smaller reporting company,” and the reduced disclosure requirements applicable to emerging growthsmaller reporting companies may make our common stock less attractive to investors.
We are an “emerging growtha smaller reporting company” as defined in the JOBS Act, and may remain an emerging growth company for up to five years from the date of our initial public offering. under applicable SEC regulations. For so long as we remain an emerging growtha smaller reporting company, we are permitted and plan to rely on exemptions from certain disclosure requirements that are applicable to other public companies, that are not emerging growth companies. These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or SOX Section 404, not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements,including reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.compensation. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we are subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
We will continue to incur increased costssignificant expenses as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives and corporate governance practices.company.
As a public company, we are incurring and expect to continue to incur additional significant legal, accounting and other expenses that we did not incur as a private company. We expect that these expenses will further increase after we are no longer an “emerging growth company.” Theexpenses.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or SOX, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of The NASDAQ Global Market and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. We expect that we will need to hire additional personnel to comply with the requirements of being a public company, and our management and other personnel will need to devote a substantial amount of time towards maintaining compliance with these requirements. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
Pursuant to SOX Section 404 we are required to evaluate the effectiveness of our internal control over financial reporting as of the end of each fiscal year and to report on this evaluation in our Annual Report on Form 10-K for the year. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. We will need to continue to dedicate internal resources, potentially engage outside consultants and adoptmaintain a detailed work plan to assess and document the adequacy of our internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implementmaintain a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that in the future we will not be able to conclude that our internal control over financial reporting is effective as required by SOX Section 404. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
A significant portion of our total outstanding shares may be sold into the market in the near future, which could cause the market price of our common stock to decline significantly, even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common stock.
In addition, as of February 26, 2018,28, 2022, there were 4,085,209were:
•6,495,214 shares of common stock subject to outstanding options and restricted stock units, or RSUs, under our equity compensation plans, all of which shares we haveare registered under the Securities Act on a registration statement on Form S-8.of 1933, as amended, or the Securities Act. These shares of common stock will be able to be freely sold in the public market upon exercise, as permitted by any applicable vesting requirements, except to the extent they are held by our affiliates, in which case such shares will become eligible for sale in the
public market as permitted by Rule 144 under the Securities Act. Furthermore, asAct;
•13,997 shares of February 26, 2018, there were 132,069Series X1 Preferred Stock issued and outstanding, which are convertible into 13,997,000 shares of common stock. The Series X1 Preferred Stock is equivalent to common stock in all respects except that it is non-voting and is convertible into common stock at the holder’s election, subject to an beneficial ownership limitations. The shares of Series X1 Preferred Stock and the shares of common stock issuable upon conversion of the Series X1 Preferred Stock are registered under the Securities Act;
•outstanding warrantwarrants to purchase 16,250 shares of Series X1 Preferred Stock, which, upon exercise, are convertible into 16,250,000 shares of common stock. Thesestock; and
•outstanding warrants to purchase 1,861,273 shares of common stock, 1,800,000 shares of which are registered under the Securities Act. The remaining 61,273 shares will become eligible for sale in the public market, to the extent such warrant is exercised, as permitted by Rule 144 under the Securities Act. Moreover, holders of a substantial portion of our outstanding common stock have rights, subject to conditions, to require us to file registration statements covering their shares or, along with the holder of our outstanding warrant to purchase common stock, to include their shares in registration statements that we may file for ourselves or other stockholders.
We do not anticipate paying any cash dividends on our capital stock in the foreseeable future, accordingly, stockholders must rely on capital appreciation, if any, for any return on their investment.
We have never declared or paid cash dividends on our capital stock. We currently plan to retain all of our future earnings, if any, to finance the operation, development and growth of our business. Furthermore, any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for our stockholders for the foreseeable future.
Our executive officers, directors and principal stockholders, if they choose to act together, have the ability to substantially influence all matters submitted to stockholders for approval.
As of December 31, 2017, ourOur executive officers and directors, combined with our stockholders who ownedown more than 5% of our outstanding common stock, and all affiliates, in the aggregate, beneficially owned shares representing approximately 38.5%own a substantial percentage of our capital stock. As a result, if these stockholders were to choose to act together, they would be able to substantially influence all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, would substantially influence the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of ownership control may:
•delay, defer or prevent a change in control;
•entrench our management or the board of directors; or
•impede a merger, consolidation, takeover or other business combination involving us that other stockholders may desire.
Future sales of a substantial number of our common shares by our principal stockholders could depress the trading price of our common stock.
If our principal stockholders sell substantial amounts of shares of our common stock in the public market or if the market anticipates that these sales could occur, the market price of shares of our common stock could decline. These sales may make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate, or to use equity as consideration for future acquisitions.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our share price and trading volume could decline.
The trading market for our common stock depends on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. There can be no assurance that analysts will cover us, or provide favorable coverage. If one or more analysts downgrade our stock or change their opinion of our stock, our share price may decline. In addition, if one or more analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
Risks Related to Our Charter and By-Laws
Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our corporate charter and our bylawsby-laws may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our
board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions:
•establish a classified board of directors such that all members of the board of directors are not elected at one time;
•allow the authorized number of our directors to be changed only by resolution of our board of directors;
•limit the manner in which stockholders can remove directors from the board;
•establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on at stockholder meetings;
•require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by written consent;
•limit who may call a special meeting of stockholders;
•authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors; and
•require the approval of the holders of at least 75% of the votes that all our stockholders would be entitled to cast to amend or repeal certain provisions of our charter or bylaws.
by-laws.
Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. This could discourage, delay or prevent someone from acquiring us or merging with us, whether or not it is desired by, or beneficial to, our stockholders.
If securitiesOur by-laws designate specific courts as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
Pursuant to our by-laws, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for state law claims for (i) any derivative action or industry analysts do not publish researchproceeding brought on our behalf, (ii) any action asserting a claim of breach of or publish inaccuratebased on a fiduciary duty owed by any of our current or unfavorable research about our business, our share price and trading volume could decline.
The trading market for our common stock depends on the research and reports that securitiesformer directors, officers or industry analysts publish aboutother employees to us or our business. We do notstockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law or our charter or by-laws, (iv) any action to interpret, apply, enforce or determine the validity of our charter or by-laws or (v) any action asserting a claim governed by the internal affairs doctrine of the State of Delaware. In addition, pursuant to our by-laws, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States will be the sole and exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. These forum selection clauses in our by-laws may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
Risks Related to Income Taxes
Changes in tax law could adversely affect our business and financial condition or holders of our common stock.
The rules dealing with U.S. federal, state and local income taxation are constantly under review by persons involved in the legislative process and by the Internal Revenue Service, or IRS, and Treasury Department. Changes to tax laws (which changes may have any control over these analysts. There can be no assurance that analysts will coverretroactive application) could adversely affect us or provide favorable coverage. If one or more analysts downgrade our stock or change their opinionholders of our stock, our share price may decline.common stock. In addition, if one or more analysts cease coverage of our Company or failrecent years, many such changes have been made and changes are likely to regularly publish reports on us, we could lose visibilitycontinue to occur in the financial markets, which could cause our share price or trading volume to decline.
RISKS RELATED TO ASSET SALE
The asset purchase agreement exposes us to contingent liabilities thatfuture. Future changes in tax laws could have a material adverse effect on our business, cash flow, financial condition.
We have agreed to indemnify Vertex for damages resulting fromcondition or arising out of any inaccuracy or breach of our representations, warranties or covenants in the asset purchase agreement, any and all of our liabilities not assumed by Vertex in the asset sale and for certain other matters. Significant indemnification claims by Vertex could have a material adverse effect on our financial condition. In the event that claims for indemnification exceed certain thresholds set forth in the asset purchase agreement, we will be obligated to indemnify Vertex for any damages or loss resulting from such breach for up to $16 million, or in some cases, the entire purchase price paid to us by Vertex, including any milestone payments. Any event that results in a right for Vertex to seek indemnity from us could result in a substantial payment from us to Vertex and could adversely affect our results of operations. We urge stockholders to consult with their legal and tax advisers regarding the implications of potential changes in tax laws on an investment in our common stock.
ITEM 1B. Unresolved Staff Comments
NoneNone.
ITEM 2. Properties
We lease our principal facilities, which consist of approximately 50,000 square feet of office, research and laboratory space located at 99 Hayden Avenue, Lexington, Massachusetts. The leases covering this space expire on September 30, 2018.
In December 2017, we entered into an agreement to lease approximately 55,50056,000 square feet of office and laboratory space in a new locationlocated at 65 Hayden Avenue, Lexington, Massachusetts. We expect to relocate offices in the third quarter of 2018.The lease expires on January 1, 2029. We believe that the newour facilities are sufficient for our current needs for the foreseeable future.
ITEM 3. Legal ProceedingsProceedings
In April 2018, the PTAB instituted an IPR brought against the '149 patent by Incyte. In April 2019, the PTAB issued a final written decision in connection with the IPR that held that the claims of the '149 patent were unpatentable as obvious. In January 2020, the Federal Circuit granted our motion to vacate and remand the PTAB final written decision in light of the Federal Circuit ruling on the Constitution’s Appointments Clause in Arthrex, Inc. v. Smith & Nephew, Inc. The PTO Director sought review of both Arthrex and the decision in our case in the Supreme Court. In June 2021, the Supreme Court decided that the remedy for a violation of the Appointments Clause should not be a hearing before a new panel of PTAB judges, but a remand to the PTO to allow the Director to consider whether to modify the decision of the PTAB. The Supreme Court remanded our case to the Federal Circuit in light of Arthrex, and the Federal Circuit granted our request for a remand to the PTO Director. We are not currentlyfiled a partyrequest to have the PTO Director review the final written decision; however, that request was denied in January 2022. As a result, we intend to proceed with our appeal to the Federal Circuit. The '149 patent remains valid and enforceable until any material legal proceedings.appeals by us have been exhausted.
ITEM 4. Mine Safety Disclosures
Not applicable.
Part II
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| | | | |
| ITEM 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and IssuersIssuer Purchases of Equity Securities |
MARKET INFORMATION
Our common stock has been publicly traded on the NASDAQNasdaq Global Market under the symbol “CNCE” since February 13, 2014. Prior to that time, there was no public market for our common stock. Set forth below is the quarterly information with respect to the high and low prices for our common stock for the most recent fiscal year.
|
| | | | | | | | |
| | | High | | Low |
| Year Ended December 31, 2017 | | | | |
| First Quarter | | $ | 18.43 |
| | $ | 8.85 |
|
| Second Quarter | | 16.95 |
| | 12.01 |
|
| Third Quarter | | 16.10 |
| | 13.28 |
|
| Fourth Quarter | | 29.05 |
| | 13.96 |
|
| Year Ended December 31, 2016 | | | | |
| First Quarter | | $ | 19.69 |
| | $ | 12.16 |
|
| Second Quarter | | 15.53 |
| | 9.80 |
|
| Third Quarter | | 12.28 |
| | 9.47 |
|
| Fourth Quarter | | 10.53 |
| | 7.11 |
|
HOLDERS
As of January 31, 2018,February 28, 2022, there were 1712 holders of record of our common stock. This number does not include beneficial owners whose shares are held by nominees in street name.
DIVIDENDS
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. We do not intend to pay any cash dividends to the holders of our common stock in the foreseeable future.
PERFORMANCE GRAPHEQUITY COMPENSATION PLANS
The following performance graph and related information shall not be deemed to be “soliciting material” or to be “filed” with the SEC for purposesrequired by Item 5 of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liabilities under that Section, nor shall such information beForm 10-K regarding equity compensation plans is incorporated herein by reference into any future filing under the Exchange Act or the Securities Actto Part III, Item 12. of 1933, as amended, or the Securities Act, except to the extent that we specifically incorporate it by reference into such filing.
The following graph compares the performance of our common stock to The NASDAQ Composite Index and to The NASDAQ Biotechnology Index from February 13, 2014 (the first date that shares of our common stock were publicly traded) through December 31, 2017. The comparison assumes $100 was invested after the market closed on February 13, 2014 in our common stock and in each of the foregoing indices, and it assumes reinvestment of dividends, if any. The stock price performance included in this graph is not necessarily indicative of future stock price performance.
PURCHASE OF EQUITY SECURITIES
We did not purchase any of our registered equity securities during the period covered by this Annual Report on Form 10-K.
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| ITEM 6. | Selected Financial Data[Reserved] |
The following tables set forth our selected consolidated financial data and have been derived from our audited consolidated financial statements. You should read the following selected consolidated financial data together with our consolidated financial statements and accompanying notes appearing elsewhere in this Annual Report on Form 10-K and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Annual Report on Form 10-K. Our historical results for any prior period are not necessarily indicative of the results that may be expected in any future period.
Not applicable.
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| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| (in thousands, except per share data) | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Results of Operations | | | | | | | | | | |
| Total revenue | | $ | 143,891 |
| | $ | 174 |
| | $ | 66,729 |
| | $ | 8,576 |
| | $ | 25,408 |
|
| Operating expenses: | | | | | | | | | | |
| Research and development | | $ | 30,223 |
| | $ | 36,983 |
| | $ | 28,885 |
| | $ | 27,474 |
| | $ | 21,790 |
|
| General and administrative | | 21,019 |
| | 14,358 |
| | 13,056 |
| | 11,700 |
| | 8,028 |
|
| Total operating expenses | | 51,242 |
| | 51,341 |
| | 41,941 |
| | 39,174 |
| | 29,818 |
|
| Income (Loss) from operations | | 92,649 |
| | (51,167 | ) | | 24,788 |
| | (30,598 | ) | | (4,410 | ) |
| Interest and other income (expense), net | | 2,690 |
| | 447 |
| | (185 | ) | | (1,101 | ) | | (1,646 | ) |
| (Benefit) Provision for income taxes | | (300 | ) | | — |
| | 429 |
| | — |
| | — |
|
| Net income (loss) | | $ | 95,639 |
| | $ | (50,720 | ) | | $ | 24,174 |
| | $ | (31,699 | ) | | $ | (6,056 | ) |
| Net income (loss) applicable to common stockholders - basic | | $ | 95,195 |
| | $ | (50,720 | ) |
| $ | 24,174 |
| | $ | (31,754 | ) | | $ | (6,452 | ) |
| Net income (loss) applicable to common stockholders - diluted | | $ | 95,210 |
| | $ | (50,720 | ) | | $ | 24,174 |
| | $ | (31,754 | ) | | $ | (6,452 | ) |
| Earnings Per Share | | | | | | | | | | |
| Net income (loss) per share applicable to common stockholders - basic | | $ | 4.20 |
| | $ | (2.28 | ) | | $ | 1.14 |
| | $ | (2.00 | ) | | $ | (4.99 | ) |
| Net income (loss) per share applicable to common stockholders - diluted | | $ | 4.06 |
| | $ | (2.28 | ) | | $ | 1.09 |
| | $ | (2.00 | ) | | $ | (4.99 | ) |
| Weighted-average number of common shares used in net income (loss) per share applicable to common stockholders - basic | | 22,641 |
| | 22,233 |
| | 21,152 |
| | 15,842 |
| | 1,292 |
|
| Weighted-average number of common shares used in net income (loss) per share applicable to common stockholders - diluted | | 23,442 |
| | 22,233 |
| | 22,267 |
| | 15,842 |
| | 1,292 |
|
| Financial Condition | | | | | | | | | | |
| Cash and cash equivalents | | $ | 27,665 |
| | $ | 40,555 |
| | $ | 92,510 |
| | $ | 13,396 |
| | $ | 9,638 |
|
| Investments, available for sale | | 175,500 |
| | 55,630 |
| | 49,680 |
| | 65,836 |
| | 23,039 |
|
| Working capital | | 199,289 |
| | 92,159 |
| | 137,481 |
| | 63,102 |
| | 18,128 |
|
| Total assets | | 211,736 |
| | 100,395 |
| | 146,932 |
| | 84,454 |
| | 39,773 |
|
| Deferred revenue | | 10,301 |
| | 10,050 |
| | 10,170 |
| | 15,821 |
| | 19,631 |
|
| Loan payable, net of discount | | — |
| | — |
| | — |
| | 7,101 |
| | 14,919 |
|
| Redeemable convertible preferred stock | | — |
| | — |
| | — |
| | — |
| | 112,244 |
|
| Total stockholders’ equity (deficit) | | 196,432 |
| | 85,594 |
| | 130,635 |
| | 54,825 |
| | (112,104 | ) |
|
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| ITEM 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve significant risks and uncertainties. You should read the “Risk Factors” section in Part 1—I, Item 1A. of this reportAnnual Report on Form 10-K for a discussion of important factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
OVERVIEW
We are a late-stage clinical stage biopharmaceutical company applyingthat is developing CTP-543, a JAK 1/2 inhibitor that we discovered through the application of our extensive knowledge of deuterium chemistry to discover and develop novel small molecule drugs. Selective incorporation of deuterium into known molecules has the potential, on a case-by-case basis, to provide better pharmacokinetic or metabolic properties, thereby enhancing their clinical safety, tolerability or efficacy. Our approach typically starts with previously studied compounds, including approved drugs, which we believe may be improved with deuterium substitution. Our technology provides the opportunity to develop products that may compete with the non-deuterated drug in existing markets or to leverage its known activity to expand into new indications. Our deuterated chemical entity platform, or DCE Platform®, has broad potential across numerous therapeutic areas.Platform. As discussed in detail in the “Business” section in Part I, Item 1 above,1. of this Annual Report on Form 10-K, we haveare evaluating CTP-543 in a robust pipelinePhase 3 clinical program for the treatment of wholly owned and collaboration programs.alopecia areata, a serious autoimmune dermatological condition. If these trials are successful, we intend to file an NDA with the FDA in the first half of 2023. There are currently no FDA-approved treatments for alopecia areata.
Since our inception in 2006, we have devoted substantially all of our resources to our research and development efforts, including activities to develop our deuterated chemical entity platform, or DCE Platform, and our core capabilities in deuterium chemistry, identify potential product candidates, undertake nonclinical studies and clinical trials, manufacture clinical trial material in compliance with current good manufacturing practices,cGMPs, provide general and administrative support for these operations and establish our intellectual property. We have generated an accumulated deficit of $76.2$349.5 million since inception through December 31, 20172021 and will require substantial additional capital to fund our research and development.development activities. We do not have any products approved for sale and have not generated any revenue from product sales.
We have fundedfinanced our operations to date primarily through the public offering and private placement of our equity, debt financing, and funding from collaborations and patent assignments, asset sales and other arrangements. In March 2015,February 2014, we completed our initial public offering, whereby we sold 3,300,0006,649,690 shares of common stock at a price to the public of $14.00 per share, raising aggregate net proceeds of $83.1 million. In March 2015, we sold 3,300,000 shares of common stock through an underwritten public offering at a price to the public of $15.15 per share, resulting inraising aggregate net proceeds to us of $46.7 million, after deductingmillion. In January 2020, we sold 5,735,283 shares of common stock through an underwritten public offering at a price to the underwriting discounts, commissions and offering-related transaction costs.public of $9.92 per share. At the same time, we sold to a certain existing investor pre-funded warrants to purchase up to an aggregate of 1,800,000 shares of common stock at a purchase price of $9.919 per pre-funded warrant, which represents the per share public offering price for the common stock less the $0.001 per share exercise price for each pre-funded warrant. The aggregate net proceeds from the January 2020 offering, or the 2020 Financing, were $70.1 million.
On March 3,In July 2017, we entered into an Asset Purchase Agreement (the "Asset Purchase Agreement") with Vertex Pharmaceuticals, Inc., through Vertex Pharmaceuticals (Europe) Limited ("Vertex"), pursuantcompleted the sale of worldwide development and commercialization rights to which we agreed to sell and assign CTP-656, now known as VX-561, and other assets related to the treatment of cystic fibrosis assetsto Vertex pursuant to the Vertex Agreement. We received $160.0 million in cash upon closing, with $16.0 million initially held in escrow, which was released to us in February 2019. Pursuant to the Vertex Agreement, if VX-561 was approved as part of a combination regimen to treat cystic fibrosis, we were eligible to receive up to $90.0 million in the form of two additional milestones based on marketing approval in the United States and agreement for reimbursement in the first of the Company, for upUnited Kingdom, Germany or France. In May 2021, we entered into the Vertex Amendment, pursuant to $250 million subject to the satisfaction of certain closing conditions. On July 25, 2017, the Asset Purchase Agreement closed andwhich Vertex paid us $160$32.0 million in cash consideration, with $16 millionin exchange for the removal of the Milestone Obligation. As a result of the Vertex Amendment, we are not entitled to be held in escrow until January 2019.receive any further payments pursuant to the Vertex Agreement. Additional information concerning the sale of CTP-656 is discussed further in Note 14 in12 to the consolidated financial statements and Item 1A., each appearing elsewhere in this Annual Report on Form 10-K.
In March 2019, we entered into an Open Market Sale Agreement, or the ATM Agreement, with Jefferies LLC, or Jefferies. As of December 31, 2021, we had sold 2,209,687 shares of our common stock pursuant to the ATM Agreement for aggregate net proceeds of $25.2 million, after payment of cash commissions of 3.0% of the gross proceeds to Jefferies.
In November 2021, we closed a financing, or the 2021 Financing, raising $64.4 million in aggregate net proceeds. The Company's2021 Financing consisted of the sale of (i) 13,997 shares of Series X1 Preferred Stock, (ii) 2,253,000 shares of common stock, (iii) warrants to purchase up to 16,250 shares of Series X1 Preferred Stock and (iv) a portion of our right to receive potential future AVP-786 royalties under the Avanir Agreement. If the warrants issued in connection with the 2021 Financing are exercised in full, we would receive additional gross proceeds of $103.1 million.
Our operating results may fluctuate significantly from year to year, depending on the timing and magnitude of cash payments received pursuant to collaboration and licensing arrangements and other agreements and the timing and magnitude of clinical trial and other development activities under our current development programs. We generated net incomelosses of $95.6$80.1 million and $74.8 million for the yearyears ended December 31, 2017, a net loss of $50.7 million for the year ended December 31, 2016,2021 and net income of $24.2 million for the year ended December 31, 2015. The net income generated during the year ended December 31, 2017 was primarily the result of the Asset Purchase Agreement with Vertex, discussed above and in further detail in Note 14 in the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. The net income generated during the year ended December 31, 2015 was primarily the result of a $50.2 million one-time payment from Auspex Pharmaceuticals, Inc., or Auspex, as discussed further in Note 13 in the consolidated financial statements.2020, respectively.
We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We expect our expenses will increase substantially in connection with our ongoing activities as we continue research and development efforts, and develop and conduct additional nonclinical studies and clinical trials with respect toand seek marketing approval for our product candidates.
We do not expect to generate revenue from product sales unless and until we, or our collaborators, obtain marketing approval for one or more of our product candidates, which we expect will take a number of years and is subject to significant uncertainty. If we obtain, or believe that we are likely to obtain, marketing approval for any product candidates for which we retain
commercialization rights, and intend to commercialize a product, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. We expect to seek to fund our operations through a combination of equity offerings, debt financings, additional collaborationscollaboration and licensing arrangements and other sources for at least the next several years. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would force us to delay, limit, reduce or terminate our research and development programs and could have a material adverse effect on our financial condition and our ability to develop our products. We will need to generate significant revenues to achieve sustained profitability, and we may never do so.
COLLABORATIONS
We have entered into a number of collaborations for the research, development and commercialization of deuterated compounds. To date, our collaborations have provided us with significant funding for both our specificresearch and development programs and our DCE Platform.programs. Our collaborators also have applied their considerable scientific, development, regulatory and commercial capabilities to the development of our compounds. In addition, in some instances, where we develop and seek to collaborate with respect to deuterated analogs of marketed drugs or of drug candidates that are more advanced in clinical trials, our collaborators may be eligible for an expedited development or regulatory pathway by relying on previous clinical data regarding their corresponding non-deuterated compound. We believe that our collaborations have contributed to our ability to progress our product candidates and build our DCE Platform. We have established the following keycandidates.
Our collaborations which are discussed further in Note 12 into the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
AvanirASSET PURCHASE AGREEMENT
In February 2012,July 2017, we entered into acompleted the sale of worldwide development and license agreement with Avanir under which we granted Avanir an exclusive worldwide licensecommercialization rights to develop, manufactureCTP-656, now known as VX-561, and commercialize deuterated dextromethorphan analogs, including d6-dextromethorphan, or deudextromethorphan. Avanir is currently focused on developing AVP-786, which is a combination of deudextromethorphan and an ultra- low dose of quinidine, forother assets related to the treatment of neurologic and psychiatric disorders. In January 2015, Avanir was acquired by Otsuka Pharmaceutical Co., Ltd. and it is now a wholly owned subsidiary of Otsuka America, Inc.
Under the agreement, we received a non-refundable upfront payment of $2.0 million and have received milestone payments of $6.0 million. We have the potentialcystic fibrosis to earn up to $162.0 million in additional development, regulatory and sales-based milestone payments, of which $21.5 million in development and regulatory milestone payments are associated with the first indication. The next anticipated milestone payments that we may be entitled to receive are $5.0 million upon acceptance for filing of a NDA, $3.0 million upon acceptance for filing of a MAA, and $1.5 million upon acceptance for filing of a NDA by the Ministry of Health, Labour, and Welfare, or MHLW, related to AVP-786. Avanir also is required to pay us royalties at defined percentages ranging from the mid-single digits to low double digits below 20% on net sales of licensed products on a country-by-country basis.
Celgene
In April 2013, we entered into a master development and license agreement with Celgene, which is primarily focused on the research, development and commercialization of specified deuterated compounds targeting inflammation or cancer. While the collaboration has the potential to encompass multiple programs, it is initially focused on one program, CTP-730, which is deuterated apremilast.
We were responsible for conducting and funding research and early development activities for the CTP-730 program pursuant to mutually agreed upon development plans. This included the completion of single and multiple ascending dose Phase 1 clinical trials. Celgene is responsible for any development of CTP-730 beyond the completed Phase 1 clinical trials. If Celgene exercises its rights with respect to any additional program and pays us the applicable exercise fee, we are responsible for conducting research and development activities at our own expense pursuant to mutually agreed upon development plans until the completion of the first Phase 1 clinical trial, which will be defined in each development plan on a program-by-program basis. In addition, if Celgene exercises its rights with respect to the option program and pays us the applicable exercise fee, we are responsible for seeking to generate a deuterated compound for clinical development in the selected option program at our own expense.
Under the agreement, we received a non-refundable upfront payment of $35.0 million and received an $8.0 million development milestone in October 2015 upon completion of clinical evaluation for CTP-730. In addition, we have the potential to earn up to $312.5 million in additional development, regulatory and sales-based milestone payments with respect to
CTP-730. The next milestone that we may be entitled to receive is $15.0 million upon the first dosing in a Phase 3 clinical trial or, if earlier, acceptance for filing a new drug application, or NDA, related to CTP-730. If Celgene exercises its rights under any additional program, we may be eligible for milestone payments for each additional program. In addition, with respect to each program, Celgene is required to pay us royalties on worldwide net sales of each licensed product at defined percentages ranging from the mid-single digits to low double digits below 20%.
Jazz Pharmaceuticals
In February 2013, we entered into a development and license agreement with Jazz Pharmaceuticals to research, develop and commercialize products containing a deuterated sodium oxybate analog, or D-SXB. Jazz Pharmaceuticals is initially focused on developing one analog, designated as JZP-386 for the treatment of narcolepsy. Under the terms of the agreement, we granted Jazz Pharmaceuticals an exclusive, worldwide, royalty-bearing license under intellectual property controlled by us to develop, manufacture and commercialize D-SXB products including, but not limited to, JZP-386.
We, together with Jazz Pharmaceuticals, have conducted certain development activities for Phase 1 clinical trials with respect to JZP-386 pursuant to an agreed upon development plan. We were responsible under the development plan for conducting the Phase 1 clinical trials with respect to JZP-386. Thereafter, our obligations to conduct further development activities are subject to mutual agreement. Jazz Pharmaceuticals has assumed all manufacturing and development responsibilities relating to JZP-386.
Under the agreement, we received a non-refundable upfront payment of $4.0 million and are eligible to earn an aggregate of up to $113.0 million in development, regulatory and sales-based milestone payments. The next milestone payment that we may be entitled to receive is $4.0 million related to initiation of the first Phase 2 clinical trial of JZP-386. In addition, Jazz Pharmaceuticals is required to pay us royalties at defined percentages ranging from the mid-single digits to low double digits below 20% on worldwide net sales of licensed products.
ASSET PURCHASE AGREEMENT
On March 3, 2017, we entered into an Asset Purchase Agreement with Vertex pursuant to which we sold and assigned CTP-656 and other cystic fibrosis assets of the Company to Vertex. On July 25, 2017, the transaction contemplated by the Asset Purchase Agreement closed, and Vertex paid us $160Agreement. We received $160.0 million in cash considerationupon closing, with $16$16.0 million to beinitially held in escrow, as describedwhich was released to us in Note 14 in the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
February 2019. Additionally, upon the achievement of certain milestone events, Vertex has agreed to pay us an aggregate of up to $90$90.0 million. Of this amount, $50$50.0 million willwould have become payable to us upon receipt of FDA marketing approval for a combination treatment regimen containing CTP-656, now known as VX-561 for patients with cystic fibrosis, and $40$40.0 million willwould have become payable to us upon completion of a pricing and reimbursement agreement in the first of the United Kingdom, Germany or France with respect to a combination treatment regimen containing CTP-656VX-561 for patients with cystic fibrosis.
PATENT ASSIGNMENT AGREEMENT
In September 2011,May 2021, we entered into a patent assignment agreement with Auspex Pharmaceuticals, Inc., or Auspex,the Vertex Amendment, pursuant to which Vertex paid us $32.0 million in cash in exchange for the removal of the Milestone Obligation. As a result of the Vertex Amendment, we assignedare not entitled to Auspex a U.S. patent application relatingreceive any further payments pursuant to deuterated pirfenidone analogs as describedthe Vertex Agreement. Additional information concerning the sale of CTP-656 is discussed in Note 13 in12 to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. Among other things,
COVID-19 PANDEMIC
The COVID-19 pandemic continues to evolve. We could be materially and adversely affected by the patent assignment agreement provides that if Auspex is acquired in a change in control transaction at any time while it,risks, or anythe public perception of its affiliates, own certain patents or patent applicationsthe risks, related to deuterated pirfenidone, we will receive within a specified period followingan epidemic, pandemic or other public health crisis, such as the closingCOVID-19 pandemic, including but not limited to potential delays in our clinical trials. The ultimate extent of the transaction 1.44%impact of any proceeds payable as consideration forepidemic, pandemic or other public health crisis on our business, financial condition and results of operations will depend on future developments,
which are highly uncertain and subject to change and will depend on future developments, which cannot be accurately predicted, including the change in control transaction, including any amounts paid to stockholders and certain equity holdersduration of Auspex. Any such change in control payment to us is credited to Auspex as a deduction against certain future paymentsthe pandemic, additional or modified government actions, variants or new information that may become due underemerge concerning the agreement, such that Auspex will not be required to make further payments to us until the aggregate amountseverity of such payments otherwise due exceedsepidemic, pandemic or other public health, among others. Accordingly, we cannot predict the amountextent to which our business, financial condition and results of operations may be affected by the change in control payment.
Pursuant toCOVID-19 pandemic, but we are monitoring the agreement, we became eligible to receive a one-time payment of $50.2 million, which was received in June 2015, due to Teva Pharmaceutical Industries Ltd.’s acquisition of Auspex in May 2015.
situation closely.
FINANCIAL OPERATIONS OVERVIEW
Revenue
We have not generated any revenue from the sales of products. All of our revenue to date has been generated through collaboration, license and research arrangements with collaborators and nonprofit organizations for the development and commercialization of product candidates, a patent assignment agreement and an asset sale.sales.
The terms of these agreements may include one or more of the following types of payments: non-refundable license fees, payments for research and development activities, payments based uponon the achievement of specified milestones, payment of license exercise or option fees relating to product candidates and royalties on any net product sales. To date, we have received non-refundable upfront payments, several milestone payments, payments for research and development services provided to our collaborators, a change in control payment pursuant to a patent assignment agreement and a paymentpayments for the sale of an asset.assets. However, we have not yet earned any license exercise or option fees, sales-based milestone payments or royalty revenue as a result of product sales.
In the future, we will seek to generate revenue from a combination of product sales and milestone payments and royalties on product sales in connection with our current collaborations with Avanir, Celgene, and Jazz Pharmaceuticals, our asset sale with Vertex, or other collaborations we may enter into.
Research and development expenses
Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:
•employee-related expenses, including salary, benefits, travel and stock-based compensation expense;
•expenses incurred under agreements with contract research organizations and investigative sites that conduct our clinical trials;
•the cost of acquiring, developing and manufacturing clinical trial materials;
•facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies;
•platform-related lab expenses, which includes costs related to synthesis, analysis and in vitro and in vivo characterization of deuterated compounds to support the selection and progression of potential product candidates;
•expenses related to consultants and advisors; and
•costs associated with nonclinical activities and regulatory operations.
Research and development costs are expensed as incurred. Costs for certain development activities are recognized 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.
A significant portion of our research and development costs have been external costs, which we track on a program-by-program basis. These external costs include fees paid to investigators, consultants, central laboratories and contract research organizations in connection with our clinical trials, and costs related to acquiring and manufacturing clinical trial materials. Our internal research and development costs are primarily personnel-related costs, depreciation and other indirect costs. We do not track our internal research and development expenses on a program-by-program basis, as they are deployed across multiple projects under development.
The successful development of any of our product candidates is highly uncertain. As such, at this time, we cannot reasonably predict with certainty the duration and completion costs of the current or future clinical trials of any of our product candidates or if, when or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain marketing approval. We may never succeed in achieving regulatorymarketing approval for any of our product candidates. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including:
•the scope and rate of progress of our ongoing as well as any additional clinical trials and other research and development activities;
•successful enrollment in and completion of clinical trials, including on account of the COVID-19 pandemic and its impact on clinical trial sites;
•conduct of and results from ongoing as well as any additional clinical trials and research and development activities;
•significant and changing government regulation;
•the terms and timing and receipt of any regulatorymarketing approvals;
•the performance of our collaborators;
•our ability to manufacture any of our product candidates that we are developing or may develop in the future; and
•the expense and success of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, including potential claims that we infringe other parties'parties’ intellectual property.
A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costscost and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials or other research and development activities beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, due to the increased size and duration of later-stage clinical trials and the manufacturing that is typically required for those later-stage clinical trials. We expect research and development costs to increase significantly for the foreseeable future as our product candidate development programs progress, but we do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans.
General and administrative expenses
General and administrative expenses consist primarily of salaries and related costs for personnel, including stock-based compensation and travel expenses for our employees in executive, operational, finance, legal, investor relations, business development and human resource functions. Other general and administrative expenses include facility-related costs, depreciation and other expenses not allocated to research and development expense and professional fees for directors, accounting and legal services and expenses associated with obtaining and maintaining patents. In 2017,both 2021 and 2020, we also incurred expenses responding to the Federal Trade Commission's requests for information and documentation in connection with their review of the transaction contemplated by the Vertex Asset Purchase Agreement as well as intellectual property matters related to CTP-543.
We anticipate that our general and administrative expenses will increase in the future as our pipeline grows and matures. Additionally, if and when we believe that a regulatorymarketing approval of the first product candidate that we intend to commercialize on our own appears likely, we anticipate an increase in payroll and related expenses as a result of our preparation for commercial operations, especially as it relates to the sales, marketing and distribution of our product candidates.
Investment income
Investment income consists of interest income earned on cash equivalents and investments. The amount of investment income earned in any particular period may vary primarily as a result of the amount of cash equivalents and investments held during the period and the types of securities included in our portfolio during the period. Our current investment policy is to maintain a diversified investment portfolio of U.S. government-backed securities and money market mutual funds consisting of U.S. government-backed securities.
Interest and other expenseUnrealized loss on marketable equity securities
Interest and other expenseUnrealized loss on marketable equity securities consists primarily of interest expense on amounts outstanding under our prior debt facilities with Hercules Technology Growth Capital,changes in the fair value of shares of common stock of Processa Pharmaceuticals, Inc., or Hercules, and amortization of debt discount. On October 1, 2015, we made a final payment to Hercules, thereby fulfilling all obligations under our 2011 debt facility. On June 8, 2017, we entered into a loan agreement with Hercules in the amount of $30.0 million which we then paid off on September 7, 2017 in the amount of $30.8 million pursuant to a payoff letter. All our outstanding indebtedness and obligations owed to Hercules were paid in full, and the loan agreement was terminated. Additional information regarding the debt facility is availableProcessa, held by us, as discussed further in Note 15 of12 to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
Unrealized loss on warrant liabilities
Unrealized loss on warrant liabilities consists of changes in the fair value of warrant liabilities resulting from the 2021 Financing, as discussed further in Note 14 to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
Income Taxestaxes
We record a provision or benefit for income taxes on pre-tax income or loss based on our estimated effective tax rate for the year. We recorded $0.3had a pre-tax net loss of $80.1 million inand did not record an income tax benefit and $0.4 million in income tax expense during the years ended December 31, 2017 and 2015, respectively. No tax provision was recorded during the year ended December 31, 2016 due to the2021. We had a pre-tax net loss
generated. The of $74.9 million and recorded $85 thousand in income tax benefit realized in fiscalduring the year 2017 is the result of the enactment of the Tax Cuts and Jobs Act (TCJA) that changed corporate alternative minimum tax ("AMT"), resulting in a an expected refund for AMT paid in fiscal year 2015. As ofended December 31, 2015, the U.S. federal tax code limited the use of net operating loss carryforwards to ninety percent of AMT income resulting in an effective tax rate of approximately two percent.
Loss on extinguishment of debt
In connection with the loan agreement entered into with Hercules on June 8, 2017 and subsequently remitted on September 7, 2017, we recognized a loss on the extinguishment of debt for $1.4 million. Additional information regarding the debt facility is available in Note 15 of the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.2020.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES
Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.principles, or GAAP. The preparation of these financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates, if any, will be reflected in the consolidated financial statements prospectively from the date of change in estimates.
While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies used in the preparation of our financial statements require the most significant judgments and estimates:
•revenue recognition;
•prepaid and accrued research and development expense;expenses; and
•stock-based compensation; and
income taxes.compensation.
Revenue recognition
We have primarily generated revenue through arrangements with collaborators for the development and commercialization of product candidates. In fiscal year 2017, we generated
We account for revenue through an Asset Purchase Agreement with Vertex, which was treated consistently with our other multiple-element arrangements.
Collaboration revenue
The terms of our collaboration and license agreements have typically contained multiple elements, or deliverables, which have included licenses, or optionsaccording to obtain licenses, to product candidates, referred to as exclusive licenses, as well as research and development activities to be performed by us on behalf of the collaborator related to the licensed product candidates. Payments that we may receive under these agreements include non-refundable upfront license fees, payment for research and development activities, payments based upon achievement of specified milestones, payment upon exercise of license rights or options to license product candidates and royalties on any resulting product sales.
Multiple-Element Arrangements. Our collaborations primarily represent multiple-element arrangements. We analyze multiple-element arrangements based on the guidance in Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 605-25, Revenue Recognition-Multiple-Element Arrangements, or ASC 605-25. Pursuant to the guidance in ASC 605-25, we evaluate multiple-element arrangements to determine the deliverables included in the arrangement and whether the individual deliverables represent separate units of accounting or whether they must be accounted for as a combined unit of accounting. This evaluation involves subjective determinations and requires us to make judgments about the individual deliverables and whether such deliverables are separable from the other aspects of the contractual relationship. Deliverables are considered separate units of accounting provided that: (1) the delivered item(s) has value to the customer on a standalone basis and (2) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. In assessing whether a delivered item(s) has standalone value, we consider whether the collaboration partner can use the delivered item(s) for its intended purpose without the receipt of the remaining element(s), whether the value of the deliverable is dependent on the undelivered
item(s) and whether there are other vendors that can provide the undelivered element(s). In making these assessments, we consider factors such as the research, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. The terms of our collaboration and licensing arrangements do not contain general rights of return that would preclude recognition of revenue.
Arrangement consideration that is fixed or determinable is allocated among the separate units of accounting using the relative selling price method. We determine the selling price of a unit of accounting following the hierarchy of evidence prescribed by ASC 605-25. Accordingly, we determine the estimated selling price for units of accounting within each arrangement using vendor-specific objective evidence of selling price, if available, third-party evidence of selling price if vendor-specific objective evidence is not available, or best estimate of selling price if neither vendor-specific objective evidence nor third-party evidence is available. We typically use best estimate of selling price to estimate the selling price for exclusive licenses and research and development services, since we generally do not have vendor-specific objective evidence or third-party evidence of selling price for these items. Determining the best estimate of selling price for a unit of accounting requires significant judgment. In developing the best estimate of selling price for a unit of accounting, we consider applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. We validate the best estimate of selling price for units of accounting by evaluating whether changes in the key assumptions used to determine the best estimate of selling price will have a significant effect on the allocation of arrangement consideration between multiple units of accounting.
Our multiple-element revenue arrangements may include the following:
Option Arrangements. An option to obtain an exclusive license is considered substantive if, at the inception of the arrangement, we are at risk as to whether the collaboration partner will choose to exercise the option. Factors that we consider in evaluating whether an option is substantive include the overall objective of the arrangement, the benefit the collaborator might obtain from the arrangement without exercising the option, the cost to exercise the option and the likelihood that the option will be exercised. For arrangements under which an option is considered substantive, we do not consider the item underlying the option to be a deliverable at the inception of the arrangement and the associated option fees are not included in allocable arrangement consideration, assuming the option is not priced at a significant and incremental discount. Conversely, for arrangements under which an option is not considered substantive, we would consider the item underlying the option to be a deliverable at the inception of the arrangement and a corresponding amount would be included in the allocable arrangement consideration. A significant and incremental discount included in an otherwise substantive option is considered to be a separate deliverable at the inception of the arrangement.
Exclusive Licenses. We recognize arrangement consideration allocated to each unit of accounting when all of the revenue recognition criteria included in ASC Topic 605 Revenue Recognition are satisfied for that particular unit of accounting. We will recognize as revenue arrangement consideration attributed to exclusive licenses that have standalone value from the other deliverables to be provided in an arrangement upon delivery. We will recognize as revenue arrangement consideration attributed to exclusive licenses that do not have standalone value from the other deliverables to be provided in an arrangement over our estimated performance period as the arrangement would be accounted for as a single, combined unit of accounting.
Research and Development Services. We recognize revenue associated with research and development services over the associated period of performance. If there is no discernible pattern of performance and/or objectively measurable performance measures do not exist, then we recognize revenue on a straight-line basis over the period we are expected to complete our performance obligations. Conversely, if the pattern of performance in which the service is provided to the customer can be determined and objectively measurable performance measures exist, then we recognize revenue under the arrangement using the proportional performance method, which requires us to make certain estimates when determining the proportion of services rendered in relation to the total services expected to be rendered.
Milestone Revenue. At the inception of an arrangement that includes milestone payments, we evaluate whether each milestone is substantive and at risk to both parties on the basis of the contingent nature of the milestone. This evaluation includes an assessment of whether:
the consideration is commensurate with either our performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from our performance to achieve the milestone;
the consideration relates solely to past performance; and
the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement.
We evaluate factors such as the scientific, clinical, regulatory, commercial and other risks that must be overcome to achieve the respective milestone and the level of effort and investment required to achieve the respective milestone in making this assessment. There is considerable judgment involved in determining whether a milestone satisfies all of the criteria required to conclude that a milestone is substantive. We have concluded that all of the development and regulatory milestones included in our current collaboration arrangements are substantive. Accordingly, in accordance with FASB ASC Topic 605-28, Revenue Recognition-Milestone Method, revenue from development and regulatory milestone payments will be recognized in their entirety upon successful accomplishment of the milestone, assuming all other revenue recognition criteria are met. Milestones that are not considered substantive would be recognized as revenue over the remaining period of performance, assuming all other revenue recognition criteria are met. Revenue from sales-based milestone payments will be accounted for as royalties and recognized as revenue upon achievement of the milestone, assuming all other revenue recognition criteria are met.
Royalty Revenue. We will recognize royalty revenue in the period of sale of the related product(s), based on the underlying contract terms, provided that the reported sales are reliably measurable and we have no remaining performance obligations, assuming all other revenue recognition criteria are met.
Adoption of ASU 2014-09 (Topic 606)
In May 2014, the Financial Accounting Standard Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers (Topic 606), and all related amendments, which is also referred to as Accounting Standards Codification, or ASU 2014-09, which stipulatesASC, 606. We adopted ASC 606 effective January 1, 2018. ASC 606 is a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The revenue standard is based on the principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update will be effective for us beginning inThe revenue standard also requires additional disclosure about the first quarternature, amount, timing and uncertainty of fiscal 2018.revenue and cash flows arising from customer contracts and costs to obtain or fulfill contracts. We applied ASC 606 on January 1, 2018 to all contracts using the modified retrospective approach. For additional details regarding our adoption of this authoritative guidance,ASC 606 and our associated accounting policies, see NoteNotes 2 inand 12 to the accompanying consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
AccruedPrepaid and accrued research and development expenses
As part of the process of preparing our financial statements, we are required to estimate our accrued expenses as of each balance sheet date. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include fees paid to:
•contract research organizations in connection with clinical trials;
•investigative sites in connection with clinical trials;
•vendors in connection with nonclinical development activities; and
•vendors related to product manufacturing, development and distribution of clinical supplies.
We generally accrue expenses related to research and development activities based on the services receivedprovided and efforts expended pursuant to contracts with multiple contract research organizations that conduct and manage clinical trials on our behalf as well as other vendors that provide research and development services. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of subjects and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid accordingly. Non-refundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made.
Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, we may report amounts that are too high or too low in any particular period. To date, there have been no material differences from our estimates to the amounts actually incurred.
Stock-based compensation
Stock-Based Compensation
Since our inception in MayApril 2006, we have applied the fair value recognition provisions of Financial Accounting Standards Board Accounting Standards CodificationASC Topic 718, Compensation-Stock Compensation, which we refer to as ASC 718, to account for stock-based compensation arrangements with our employees. Stock-based compensation arrangements with non-employees has not been significant. We use the Black-Scholes-Merton option pricing model for determining the estimated fair value for stock-based awards on the date of grant, which requires the use of subjective and complex assumptions to determine the fair value of stock-based awards, including the fair value of the common stock underlying stock-based compensation awards (for periods prior to our IPO), the award’s expected term and the price volatility of the underlying stock. We recognize the value of the portion of the awards that is ultimately expected to vest as expense over the requisite vesting periods on a ratable basis for the entire award. Our stock option awards granted to employees generally have a ten yearten-year term and typically vest over a fourfour-year period.
Prior to the year period.
Expectedended December 31, 2020, expected volatility was estimated using a weighted-averageweighted average of our historical volatility of our common stock and the historical volatility of the common stock of a representative group of publicly tradedpublicly-traded companies from the biopharmaceutical industry with similar characteristics as us, including stage of product development and therapeutic focus. We will continueHaving accumulated sufficient historical trading data, we transitioned to apply this process until a sufficient amount ofcalculating expected volatility for the year ended December 31, 2020 based on the historical information regarding the volatility of only our own stock price becomes available.common stock.
The expected term of awards represents the period of time that the awards are expected to be outstanding. We use the simplified method as prescribed by the Securities and Exchange CommissionSEC Staff Accounting Bulletin, or SAB, No. 107, Share-Based Payment, as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term of stock options granted to employees.
We utilize a dividend yield of zero based on the fact that we have never paid cash dividends and have no current intention of paying cash dividends. The risk-free interest rate was estimated using an average of treasury bill interest rates over a period commensurate with the expected term of the option at the time of grant. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
We have computed the fair value of employee stock options at the date of grant using the following weighted-average assumptions:
| | | | | | | | | | | | | | | | |
| | | Year ended December 31, | | |
| | | 2021 | | 2020 | | |
| Expected volatility | | 69.83% | | 68.60% | | |
| Expected term | | 6.0 years | | 6.0 years | | |
| Risk-free interest rate | | 0.60% | | 1.31% | | |
| Expected dividend yield | | —% | | —% | | |
|
| | | | | | | | | |
| | | Year ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Expected volatility | | 78.15 | % | | 78.29 | % | | 73.38 | % |
| Expected term | | 6.0 years |
| | 6.0 years |
| | 6.0 years |
|
| Risk-free interest rate | | 2.07 | % | | 1.36 | % | | 1.69 | % |
| Expected dividend yield | | — | % | | — | % | | — | % |
We have also granted restricted stock units and performance stock units to our employees and members of our senior management team.directors. We recognize compensation expense for restricted stock units ratably over the required service period. For awards with performance conditions in which the award does not vest unless the performance condition is met, we recognize expense only if we estimate that achievement of the performance condition is probable. If we conclude that vesting is probable, we recognize expense from the date that we reach this conclusion through the estimated vesting date.
Income Taxes
We record income taxes under the liabilitydate using an accelerated attribution method. Deferred tax assets and liabilities reflect our estimation of the future tax consequences of temporary differences between the carrying amounts of assets and liabilities for book and tax purposes. We determine deferred income taxes based on the differences in accounting methods and timing between financial statement and income tax reporting. Accordingly, we determine the deferred tax asset or liability for each temporary difference based on the enacted tax rates expected to be in effect when we realize the underlying items of income and expense. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent earnings experience, expectations of future taxable income, and the carryforward periods available to us for tax reporting purposes, as well as other relevant factors. We establish a valuation allowance to reduce deferred tax assets to the amount we believe is more likely than not to be realized. Due to inherent complexities arising from the nature of our business, future changes in income tax law, or variances between our actual and anticipated operating results, we make certain judgments and estimates, including our ability
to realize our deferred tax assets and our ability to use our operating loss carryforwards and tax credits to offset taxable income. Therefore, actual income taxes could materially vary from these estimates.
Our ability to use our operating loss carryforwards and tax credits to offset taxable income is subject to restrictions under Sections 382 and 383 of the United States Internal Revenue Code (the “Internal Revenue Code”). Net operating loss and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50 percent, as defined under Sections 382 and 383 of the Internal Revenue Code. Such changes would limit our use of operating loss carryforwards and tax credits. In such a situation, we may be required to pay income taxes, even though significant operating loss carryforwards and tax credits exist. In determining the tax provisions for fiscal years 2017 and 2015, we assessed our ability to use our net operating loss carryforwards in accordance with Sections 382 and 383 of the Internal Revenue Code, discussed further in Note 10 in the accompanying notes to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (“TCJA”). This legislation makes broad and complex changes to the U.S. tax code, including, but not limited to, (i) reducing the U.S. federal statutory tax rate from 35% to 21%; (ii) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; (iii) modifying the officer’s compensation limitation, and (iv) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
As a result of the enacted law, we were required to revalue deferred tax assets and liabilities existing as of December 31, 2017 from the 35% federal rate in effect through the end of 2017, to the new 21% rate. Furthermore, we recorded a reduction to our deferred tax assets and a corresponding reduction to our valuation allowance. Accordingly, there was no impact to our income statement due to the reduction in the U.S. corporate tax rate. Due to the changes to corporate AMT, we recorded an AMT benefit in fiscal year 2017 due to the expected refund for AMT paid in fiscal year 2015 and the lack of provision required for 2017.
Our preliminary estimate of the TCJA and the remeasurement of our deferred tax assets and liabilities is subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the TCJA, changes to certain estimates and the filing of our tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the TJCA may require further adjustments and changes in our estimates. The final determination of the TCJA and the remeasurement of our deferred assets and liabilities will be completed as additional information becomes available, but no later than one year from the enactment of the TCJA. We expect to complete our analysis within the measurement period in accordance with Staff Accounting Bulletin No. 118, or SAB 118.
For additional details regarding our accounting for income taxes, see Note 10 in the accompanying consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
PENDING AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
For detailed information regarding recently issued accounting pronouncements and the actual and expected impact on our consolidated financial statements, see Note 2 into the accompanying consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
ComparisonDiscussion of the yearsyear ended December 31, 2017 and 20162021
The following table summarizes our results of operations for the yearsyear ended December 31, 2017 and 2016, together with the changes in those items in dollars.2021.
|
| | | | | | | | | | | | |
| | | Year ended December 31, | | |
| (in thousands) | | 2017 | | 2016 | | Change |
| Revenue: | | | | | | |
| License and research and development revenue | | $ | 62 |
| | $ | 174 |
| | $ | (112 | ) |
| Other revenue | | 143,829 |
| | — |
| | 143,829 |
|
| Total revenue | | 143,891 |
| | 174 |
| | 143,717 |
|
| Operating expenses: | | | | | | |
| Research and development | | 30,223 |
| | 36,983 |
| | (6,760 | ) |
| General and administrative | | 21,019 |
| | 14,358 |
| | 6,661 |
|
| Total operating expenses | | 51,242 |
| | 51,341 |
| | (99 | ) |
| Income (Loss) from operations | | 92,649 |
| | (51,167 | ) | | 143,816 |
|
| Investment income | | 1,336 |
| | 447 |
| | 889 |
|
| Other income | | 3,601 |
| | — |
| | 3,601 |
|
| Interest and other expense | | (815 | ) | | — |
| | (815 | ) |
| Loss on extinguishment of debt | | (1,432 | ) | | — |
| | (1,432 | ) |
| Income (Loss) before income taxes | | 95,339 |
| | (50,720 | ) | | 146,059 |
|
| (Benefit) Provision for income taxes | | (300 | ) | | — |
| | (300 | ) |
| Net income (loss) | | $ | 95,639 |
| | $ | (50,720 | ) | | $ | 146,359 |
|
License and Research and Development Revenue
| | | | | | | | | | | | |
| | Year ended December 31, | | | | |
| (in thousands) | | 2021 | | | | |
| Revenue: | | | | | | |
| License and research and development revenue | | $ | 39 | | | | | |
| Other revenue | | 32,539 | | | | | |
| | | | | | |
| Total revenue | | 32,578 | | | | | |
| Operating expenses: | | | | | | |
| Research and development | | 87,555 | | | | | |
| General and administrative | | 22,531 | | | | | |
| Total operating expenses | | 110,086 | | | | | |
| Loss from operations | | (77,508) | | | | | |
| Investment income | | 46 | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Unrealized loss on marketable equity securities | | (506) | | | | | |
| Unrealized loss on warrant liabilities | | (2,083) | | | | | |
| | | | | | |
| | | | | | |
| Net loss | | $ | (80,051) | | | | | |
Revenue
Total revenue was $62 thousand$32.6 million for the year ended December 31, 2017 as2021, an increase of $24.7 million compared to $174 thousand for the prior year period, a decrease of $112 thousand. The decrease in license and research and development revenue in the 2017 period was primarily due to a decrease$7.9 million in revenue recognized for services performed under our Celgene and Jazz Pharmaceuticals collaboration agreements of $58 thousand and $54 thousand, respectively. These changes were attributable to the completion of clinical conduct under these programs in 2015.
Other Revenue
Other revenue recognized during the year ended December 31, 2017 of $143.8 million2020. The revenue recognized in 2021 was primarily attributable to the closing$32.0 million in cash received from Vertex in exchange for the removal of the transaction contemplated byMilestone Obligation.
As of December 31, 2021, we had deferred revenue of $2.8 million related to a payment received from GlaxoSmithKline, or GSK, and $4.8 million related to the Asset Purchasepotential future AVP-786 royalties under the Avanir Agreement that we sold in the 2021 Financing, of which $2.2 million is associated with Vertex, discussed in detail in NoteRA Capital Healthcare Fund, L.P., or RA Capital, a related party. For additional details related to our contract liabilities and the 2021 Financing, see Notes 12 and 14, inrespectively, to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
As ofResearch and development expenses
The following table summarizes our research and development expenses for the year ended December 31, 2017, we had deferred revenue of:2021, with our external research expenses separately classified by program and our internal research expenses separately classified by category.
$7.2 | | | | | | | | | | | | |
| | Year ended December 31, | | |
| (in thousands) | | 2021 | | | | |
| CTP-543 external costs | | $ | 57,571 | | | | | |
| CTP-692 external costs | | 2,116 | | | | | |
| External costs for other programs | | 1,215 | | | | | |
| Employee and contractor-related expenses | | 21,234 | | | | | |
| Facility and other expenses | | 5,419 | | | | | |
| Total research and development expenses | | $ | 87,555 | | | | | |
Research and development expenses were $87.6 million for the year ended December 31, 2021. CTP-543 external costs increased by $39.6 million from $18.0 million for the year ended December 31, 2020 to $57.6 million for the year ended December 31, 2021 primarily due to increased activity in the two ongoing Phase 3 clinical trials. CTP-692 external costs decreased by $15.2 million from $17.3 million for the year ended December 31, 2020 to $2.1 million for the year ended December 31, 2021 due to the cessation of development activities following the results of the Phase 2 clinical trial. External costs for other programs consisted of costs incurred to develop our research pipeline. Employee and contractor-related expenses consisted primarily of cash and non-cash stock-based compensation expenses. Facility and other expenses consisted primarily of rent and maintenance of our premises.
General and administrative expenses
The following table summarizes our general and administrative expenses for the year ended December 31, 2021.
| | | | | | | | |
| | Year ended December 31, |
| (in thousands) | | 2021 |
| Employee salaries and benefits | | $ | 11,713 | |
| External professional service expenses | | 6,195 | |
| Facility, technology and other expenses | | 4,340 | |
| Depreciation and amortization | | 283 | |
| Total general and administrative expenses | | $ | 22,531 | |
General and administrative expenses for the year ended December 31, 2021 consisted primarily of salaries and related to our collaboration with Celgene, $1.1costs for personnel, including non-cash stock-based compensation. Other general and administrative expenses included accounting and legal services, office and facility-related costs. Total general and administrative expenses were $22.5 million offor the year ended December 31, 2021, which is attributablean increase of $3.6 million compared to $18.9 million for the year ended December 31, 2020 primarily due to an increase in external professional service expenses and non-cash stock-based compensation expense.
Investment income
Investment income was $46 thousand for the year ended December 31, 2021 and consisted of interest income earned on cash equivalents and investments. Investment income decreased $1.2 million for the year ended December 31, 2021 compared to December 31, 2020 due to the CTP-730 program and $6.1decrease in our holdings of available-for-sale securities in order to maintain liquidity requirements.
Unrealized loss on marketable equity securities
We recorded an unrealized loss on marketable equity securities of $0.5 million during the year ended December 31, 2021. Unrealized loss on marketable equity securities consisted of which is attributable to two additional license programs,changes in the fair value of shares of common stock of Processa held by us, as discussed further in Note 12 to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K;10-K.
$39 thousand related to our collaboration with Jazz Pharmaceuticals and associated with research and development services to be performed;Unrealized loss on warrant liabilities
$2.8We recorded an unrealized loss on warrant liabilities of $2.1 million related to a payment received from GSK; and
$0.3 million related to our Asset Purchase Agreement with Vertex for transition services.
Research and development expenses
The following table summarizes our external research and development expenses, by program, for the years ended December 31, 2017 and 2016, with our internal research expenses separately classified by category. Because Avanir is conducting the clinical development of AVP-786 at its expense, we made no investment in the program during these periods. External research and development expenses related to CTP-692 were immaterial during the fiscal year ended December 31, 2017.
|
| | | | | | | | |
| | | Year ended December 31, |
| (in thousands) | | 2017 | | 2016 |
| | | | | |
| CTP-543 external costs | | $ | 6,299 |
| | $ | 7,603 |
|
| CTP-656 external costs | | 3,076 |
| | 9,592 |
|
| CTP-730 external costs | | 19 |
| | 31 |
|
| JZP-386 external costs | | — |
| | 19 |
|
| External costs for other programs | | 1,481 |
| | 1,732 |
|
| Employee and contractor-related expenses | | 15,685 |
| | 14,523 |
|
| Facility and other expenses | | 3,663 |
| | 3,483 |
|
| Total research and development expenses | | $ | 30,223 |
| | $ | 36,983 |
|
Research and development expenses were $30.2 million for the year ended December 31, 2017, compared to $37.0 million for the prior year period, a decrease of $6.8 million. This decrease was primarily due to a decrease of $6.5 million and $1.3 million in direct external expenses associated with CTP-656 and CTP-543, respectively. The decrease in CTP-656 expenses in 2017 was attributable to costs incurred related to the Phase 1 clinical testing and Phase 2 manufacturing activities during the year ended December 31, 2016, compared to costs incurred2021. Unrealized loss on warrant liabilities consisted of changes in the fair value of warrant liabilities related to the Phase 2 clinical testing through July 2017 when the sale of CTP-656 to Vertex under the Asset Purchase Agreement closed.
The decrease in CTP-543 external expenses was driven by the timing to initiate the Phase 2a clinical trial. The decrease in external costs for other programs of $0.2 million was due to decreased consulting expenses for outsourced research development. The increase in employee and contractor-related expenses was primarily attributable to increased non-cash stock-based compensation expenses.
General and administrative expenses
General and administrative expenses were $21.0 million for the year ended December 31, 2017, compared to $14.4 million for the prior year. The increase of $6.6 million was attributable to a $4.1 million increase in consulting and professional fees associated with the CTP-656 Asset Purchase Agreement and intellectual property matters related to CTP-543, and a $2.5 million increase in staffing costs, primarily due to an increase in non-cash stock-based compensation expenses.
Investment income
Investment income was $1.3 million for the year ended December 31, 2017, compared to $0.4 million for the prior year period. The increase is attributable to an increase in investments which is due to the upfront payment from Vertex2021 Financing, as a result of the closing of the transaction contemplated by the Asset Purchase Agreement, discussed further in Note 14 ofto the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
Other income
Other income was $3.6 million duringDiscussion of the year ended December 31, 2017 due to the disgorgement2020
The following table summarizes our results of short-swing profits arising from sales of the Company's stock by a 10% stockholder pursuant to Section 16(b) of the Securities and Exchange Act of 1934.
Interest and other expense
Interest expense recorded duringoperations for the year ended December 31, 2017 is attributable2020.
| | | | | | | | | | | | |
| | Year ended December 31, | | | | |
| (in thousands) | | 2020 | | | | |
| Revenue: | | | | | | |
| License and research and development revenue | | $ | 7,902 | | | | | |
| | | | | | |
| | | | | | |
| Total revenue | | 7,902 | | | | | |
| Operating expenses: | | | | | | |
| Research and development | | 61,624 | | | | | |
| General and administrative | | 18,925 | | | | | |
| Total operating expenses | | 80,549 | | | | | |
| Loss from operations | | (72,647) | | | | | |
| Investment income | | 1,202 | | | | | |
| | | | | | |
| | | | | | |
| Unrealized loss on marketable equity securities | | (3,406) | | | | | |
| Loss before income taxes | | (74,851) | | | | | |
| Income tax benefit | | 85 | | | | | |
| Net loss | | $ | (74,766) | | | | | |
License and research and development revenue
License and research and development revenue was $7.9 million for the year ended December 31, 2020. The revenue recognized in 2020 was primarily due to the interest that was dueexpiration of two licensing options under our loan facilityprevious collaboration agreement with HerculesCelgene Corporation, or Celgene, and amortizationthe satisfaction of obligations to perform research and development services and to supply nonclinical and clinical trial material in connection with the termination of the loan discount. Allagreement with Celgene. We recognized $7.8 million in revenue associated with this arrangement for the year ended December 31, 2020.
As of December 31, 2020, we had deferred revenue of $2.8 million related to a payment received from GSK. For additional details related to our outstanding indebtedness and obligations owedcontractual liabilities, see Note 12 to Hercules were paid in full, and the loan agreement was terminated in September 2017. Additional information regarding the debt facility is available in Note 15 of the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
Loss on extinguishment of debt
As a result of the prepayment of the debt facility with Hercules, we recognized a loss on the extinguishment of debt of $1.4 million. All our outstanding indebtedness and obligations owed to Hercules were paid in full on September 7, 2017, and the loan agreement was terminated.
Provision for income taxes
We recorded a tax benefit of $0.3 million during the year ended December 31, 2017. The tax benefit recorded in fiscal year 2017 is the result of the alternative minimum tax ("AMT") paid in fiscal year 2015, which is refundable under the Tax Cuts and Jobs Act of 2017. Income taxes that would otherwise have been due on the 2017 taxable income were offset with the tax benefit of net operating loss carryforwards which had previously had a full valuation allowance, except for $1.9 million of AMT incurred due to the limitation on use of net operating loss carryforwards when determining AMT. However, the 2017 AMT is also refundable under the Tax Cuts and Jobs Act of 2017 and thus we have not recorded a tax provision for this amount. The total amount of refundable AMT credits of $2.2 million is reflected as income tax receivable in the accompanying consolidated balance sheet as of December 31, 2017. No tax benefit or provision was recorded during the year ended December 31, 2016 due to the net loss generated.
We provide a full valuation allowance for any tax benefit related to net operating losses due to the uncertainty of the ability to realize such benefits.
Comparison of the years ended December 31, 2016 and 2015
The following table summarizes our results of operations for the years ended December 31, 2016 and 2015, together with the changes in those items in dollars.
|
| | | | | | | | | | | | |
| | | Year ended December 31, | | |
| (in thousands) | | 2016 | | 2015 | | Change |
| Revenue: | | | | | | |
| License and research and development revenue | | $ | 174 |
| | $ | 6,574 |
| | $ | (6,400 | ) |
| Other revenue | | — |
| | 50,155 |
| | (50,155 | ) |
| Milestone revenue | | — |
| | 10,000 |
| | (10,000 | ) |
| Total revenue | | 174 |
| | 66,729 |
| | (66,555 | ) |
| Operating expenses: | | | | | | |
| Research and development | | 36,983 |
| | 28,885 |
| | 8,098 |
|
| General and administrative | | 14,358 |
| | 13,056 |
| | 1,302 |
|
| Total operating expenses | | 51,341 |
| | 41,941 |
| | 9,400 |
|
| (Loss) Income from operations | | (51,167 | ) | | 24,788 |
| | (75,955 | ) |
| Investment income | | 447 |
| | 124 |
| | 323 |
|
| Interest and other expense | | — |
| | (309 | ) | | 309 |
|
| (Loss) Income before income taxes | | (50,720 | ) | | 24,603 |
| | (75,323 | ) |
| Provision for income taxes | | — |
| | 429 |
| | (429 | ) |
| Net (loss) income | | $ | (50,720 | ) | | $ | 24,174 |
| | $ | (74,894 | ) |
License and Research and Development Revenue
License and research and development revenue was $0.2 million for the year ended December 31, 2016 as compared to $6.6 million for the prior year period, a decrease of $6.4 million. The decrease in revenue in the 2016 period was primarily due to a decrease in revenue recognized for services performed under our Celgene and Jazz Pharmaceuticals collaboration agreements of $5.5 million and $0.8 million, respectively. These changes were attributable to the completion of clinical conduct under these programs in 2015.
Other Revenue
Other revenue recognized during the year ended December 31, 2015 was attributable to our patent assignment agreement with Auspex, whereby we received a one-time change in control payment of $50.2 million from Auspex, which was acquired by Teva Pharmaceutical Industries Ltd. in May 2015.
Milestone Revenue
Milestone revenue recognized during the year ended December 31, 2015 was attributable to an $8.0 million milestone payment earned upon completion of Phase 1 clinical evaluation for CTP-730 as well as a $2.0 million milestone payment earned as a result of the initial dosing in a Phase 3 clinical trial of AVP-786.
Research and development expenses
The following table summarizes our external research and development expenses by program, for the yearsyear ended December 31, 20162020, with our external research expenses separately classified by program and 2015, with our internal research expenses separately classified by category. Because Avanir is conducting the clinical development of AVP-786 at its expense, we made minimal investment in the program during these periods.
|
| | | | | | | | |
| | | Year ended December 31, |
| (in thousands) | | 2016 | | 2015 |
| | | | | |
| CTP-656 external costs | | $ | 9,592 |
| | $ | 3,759 |
|
| CTP-543 external costs | | 7,603 |
| | 2,064 |
|
| CTP-730 external costs | | 31 |
| | 2,711 |
|
| JZP-386 external costs | | 19 |
| | 1,084 |
|
| External costs for other programs | | 1,732 |
| | 2,622 |
|
| Employee and contractor-related expenses | | 14,523 |
| | 13,507 |
|
| Facility and other expenses | | 3,483 |
| | 3,138 |
|
| Total research and development expenses | | $ | 36,983 |
| | $ | 28,885 |
|
| | | | | | | | | | | | |
| | Year ended December 31, | | |
| (in thousands) | | 2020 | | | | |
| CTP-543 external costs | | $ | 18,006 | | | | | |
| CTP-692 external costs | | 17,295 | | | | | |
| External costs for other programs | | 972 | | | | | |
| Employee and contractor-related expenses | | 20,012 | | | | | |
| Facility and other expenses | | 5,339 | | | | | |
| Total research and development expenses | | $ | 61,624 | | | | | |
Research and development expenses were $37.0$61.6 million for the year ended December 31, 2016, compared2020. CTP-543 external costs primarily related to $28.9 millionclinical development, including preparations for the prior year period, an increase of $8.1 million. This increase wasPhase 3 clinical trial that we initiated in November 2020. CTP-692 external costs primarily due to an increase of $5.8 million and $5.5 million in direct external expenses associated with CTP-656 and CTP-543, respectively, which were partially attributablerelated to the conductPhase 2 clinical trial. External costs for other programs consisted of Phase 1 clinical testing duringcosts incurred to develop our research pipeline. Employee and contractor-related expenses consisted primarily of cash and non-cash stock-based compensation expenses. Facility and other expenses consisted primarily of rent and maintenance of our premises.
General and administrative expenses
The following table summarizes our general and administrative expenses for the year ended December 31, 2016, as well as costs incurred to support the advancement of CTP-656 and CTP-543 into Phase 2 clinical testing. The increase in employee and contractor-related expenses of $1.0 million was attributable to higher compensation expenses as compared to the 2015 period, primarily due to an increase in headcount.2020.
The decrease in CTP-730 and JZP-386 expenses in the 2016 period of $2.7 million and $1.1 million, respectively, was attributable to the completion of clinical conduct under these programs in 2015. The decrease of $0.9 million in external costs for other programs in the 2016 period was primarily attributable to the discontinuation of our CTP-354 program and the completion of clinical evaluation of the CTP-499 program.
General and administrative expenses
| | | | | | | | |
| | Year ended December 31, |
| (in thousands) | | 2020 |
| Employee salaries and benefits | | $ | 10,939 | |
| External professional service expenses | | 3,669 | |
| Facility, technology and other expenses | | 4,016 | |
| Depreciation and amortization | | 301 | |
| Total general and administrative expenses | | $ | 18,925 | |
General and administrative expenses were $14.4for the year ended December 31, 2020 consisted primarily of salaries and related costs for personnel, including non-cash stock-based compensation. Other general and administrative expenses included accounting and legal services, office and facility-related costs.
Investment income
Investment income was $1.2 million for the year ended December 31, 2016, compared2020 and consisted of interest income earned on cash equivalents and investments.
Unrealized loss on marketable equity securities
We recorded an unrealized loss on marketable equity securities of $3.4 million during the year ended December 31, 2020. Unrealized loss on marketable equity securities consisted of changes in the fair value of shares of common stock of Processa held by us, as discussed further in Note 12 to $13.1 million for the prior year. The increaseconsolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
Income tax benefit
We recognized a tax benefit of $1.3 million was primarily attributable to a $1.2 million increase in non-cash stock-based compensation expense.
Investment income
Investment income was $0.4$0.1 million for the year ended December 31, 2016, compared to $0.1 million for2020 upon the prior year period. The increase is attributable to higher yielding investments, resulting in higher interest earned onutilization of state research and development tax credits when filing our investments.
Interest and other expense
On October 1, 2015, our 2011 debt facility with Hercules Technology Growth Capital, Inc., or Hercules, matured. We fulfilled all obligations under the 2011 debt facility as of the maturity date, and as a result, no interest expense was recorded during the twelve months ended December 31, 2016, as compared to $0.3 million recorded during the twelve months ended December 31, 2015.
Provision for income taxes
No2019 Massachusetts state tax provision was recorded during the year ended December 31, 2016 due to the net loss generated. We recorded a tax provision of $0.4 million during the year ended December 31, 2015. The tax provision of $0.4 million is attributable to the federal limitation on alternative minimum tax net operating loss carryforwards.return.
LIQUIDITY, AND CAPITAL RESOURCES AND GOING CONCERN
We have incurred cumulative losses and negative cash flows from operations since our inception in April 2006, and as of December 31, 2017,2021, we had an accumulated deficit of $76.2$349.5 million. Although we generated net income in fiscal year 2017 and 2015 due to the one-time payments from Vertex and Auspex, respectively, weWe anticipate that we will continue to incur losses for at least the next several years. We expect that our research and development and general and administrative expenses will continue to increase and, as a result, we will need additional capital to fund our operations, which we may raise through a combination of equity offerings, debt financings, additional collaborationscollaboration and licensing arrangements and other sources.
As of December 31, 2021, we had cash, cash equivalents and investments of $141.6 million. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Currently, our funds are held in money market mutual funds consisting of U.S. government-backed securities.
We have financed our operations to date primarily through the public offering and private placement of our equity, debt financing, and funding from collaborations and patent assignments. Duringassignments, asset sales and other arrangements. In February 2014, we completed our initial public offering, or IPO, whereby we sold 6,649,690 shares of common stock at a price to the public of $14.00 per share, raising aggregate net proceeds of $83.1 million. DuringIn March 2015, we sold 3,300,000 shares of common stock through an underwritten public offering at a price to the public of $15.15 per share, raising aggregate net proceeds of $46.7 million. In January 2020, we sold 5,735,283 shares of common stock through an underwritten public offering at a price to the public of $9.92 per share. At the same time, we sold to a certain existing investor pre-funded warrants to purchase up to an aggregate of 1,800,000 shares of common stock at a purchase price of $9.919 per pre-funded warrant, which represents the per share public offering price for the common stock less the $0.001 per share exercise price for each pre-funded warrant. The aggregate net proceeds from the 2020 Financing was $70.1 million.
In June 2015,July 2017, we received proceedscompleted the sale of $50.2worldwide development and commercialization rights to CTP-656, now known as VX-561, and other assets related to the treatment of cystic fibrosis to Vertex pursuant to the Vertex Agreement. We received
$160.0 million in connectioncash upon closing, with the change$16.0 million initially held in control payment from Auspex, relatingescrow, which was released to Teva Pharmaceutical Industries Ltd.’s acquisition of Auspex, discussed furtherus in Note 13 in the consolidated financial statements.
On July 25, 2017,February 2019. In May 2021, we entered into the Vertex Asset Purchase Agreement, discussed furtherAmendment and received an additional $32.0 million in cash. For additional information concerning the revenue arrangement with Vertex, see Note 1412 to the consolidated financial statements appearing elsewhere in this Annual reportReport on Form 10-K, was completed and Vertex paid us $16010-K.
In March 2019, we entered into the ATM Agreement with Jefferies. As of December 31, 2021, we had sold 2,209,687 shares of our common stock pursuant to the ATM Agreement for aggregate net proceeds of $25.2 million, after payment of cash commissions of 3.0% of the gross proceeds to Jefferies.
In November 2021, we closed the 2021 Financing, raising $64.4 million in cash consideration,aggregate net proceeds. The 2021 Financing consisted of the sale of (i) 13,997 shares of Series X1 Preferred Stock, (ii) 2,253,000 shares of common stock, (iii) warrants to purchase up to 16,250 shares of Series X1 Preferred Stock and (iv) a portion of our right to receive potential future AVP-786 royalties under the Avanir Agreement. If the warrants issued in connection with $16 millionthe 2021 Financing are exercised in full, we would receive additional gross proceeds of such consideration to initially be held in escrow.$103.1 million.
As of December 31, 20172021, we had net working capital of $134.2 million. We have incurred cumulative net losses of $349.5 million since inception and require capital to continue future development activities. We do not have any products approved for sale and have not generated any revenue from product sales. We have financed our operations primarily through the public offering and private placement of our equity, debt financing, funding from collaborations and patent assignments, asset sales and other arrangements. We expect our expenses to increase in connection with our ongoing activities, particularly as we conduct our Phase 3 clinical program of CTP-543 in alopecia areata and seek marketing approval for CTP-543. For information regarding our recently completed equity financings, see Notes 13-15 to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
We are subject to risks common to companies in the biotechnology industry, including, but not limited to, risks of failure or unsatisfactory results of nonclinical studies and clinical trials, the need to obtain additional financing to fund the future development of our pipeline, the need to obtain marketing approval for our product candidates, the need to successfully commercialize and gain market acceptance of our product candidates, dependence on key personnel, protection of proprietary technology, compliance with government regulations, development by competitors of technological innovations and ability to transition from pilot-scale manufacturing to large-scale production of products.
Under ASC Topic 205-40, Presentation of Financial Statements - Going Concern, management is required at each reporting period to evaluate whether there are conditions and events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. This evaluation initially does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date the financial statements are issued. When substantial doubt exists, management evaluates whether the mitigating effect of our plans sufficiently alleviates the substantial doubt about our ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (i) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued and (ii) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. Generally, to be considered probable of being effectively implemented, the plans must have been approved by our board of directors before the date that the financial statements are issued.
Successful completion of our development programs and, ultimately, the attainment of profitable operations are dependent upon future events, including obtaining adequate financing to support our cost structure and operating plan. Our plans to alleviate our financing requirements include, among other things, pursuing one or more of the following steps to raise additional capital, none of which can be guaranteed or are entirely within our control:
•raise funding through the sale of our common or preferred stock;
•raise funding through debt financing; and
•establish collaborations with potential partners to advance our product pipeline.
Based on our current operating plan, we believe that our current cash, and cash equivalents and investments will allow us to meet our liquidity requirements into the fourth quarter of $203.2 million. Cash2022. Our history of significant losses, our negative cash flows from operations, our limited liquidity resources currently on hand and our dependence on our ability to obtain additional financing to fund our operations after the current resources are exhausted, about which there can be no certainty, have resulted in excessour assessment that there is substantial doubt about our ability to continue as a going concern for a period of immediate requirementsat least twelve months from the issuance date of this Annual Report on Form 10-K. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business, and do not include any adjustments that may result from the outcome of this uncertainty.
If we are unable to raise capital when needed or on acceptable terms, or if we are unable to procure collaboration arrangements to advance our programs, we would be forced to discontinue some of our operations or develop and implement a plan to further extend payables, reduce overhead or scale back our current operating plan until sufficient additional capital is invested in accordance with our investment policy, primarily withraised to support further operations. There can be no assurance that such a view to liquidity and capital preservation. Currently, our funds are held in U.S. government-backed securities and money market mutual funds consisting of U.S. government-backed securities.plan would be successful.
Cash flows
The following table sets forth the primary sources and uses of cash for each of the periods set forth below:presented:
| | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, | | |
| (in thousands) | | 2021 | | 2020 | | | | |
| Net cash (used in) provided by: | | | | | | | | |
| Operating activities | | $ | (55,154) | | | $ | (69,037) | | | | | |
| Investing activities | | 52,458 | | | 344 | | | | | |
| Financing activities | | 67,130 | | | 92,852 | | | | | |
| Net increase in cash, cash equivalents and restricted cash | | $ | 64,434 | | | $ | 24,159 | | | | | |
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| Net cash provided by (used in): | | | | | | |
| Operating activities | | $ | 102,927 |
| | $ | (45,343 | ) | | $ | 23,061 |
|
| Investing activities | | (121,307 | ) | | (7,213 | ) | | 14,569 |
|
| Financing activities | | 5,490 |
| | 601 |
| | 41,484 |
|
| Net (decrease) increase in cash and cash equivalents | | $ | (12,890 | ) | | $ | (51,955 | ) | | $ | 79,114 |
|
ComparisonDiscussion of the years ended December 31, 2017, 20162021 and 20152020
Operating activities. The cash provided by or used forin operating activities generally approximates our net income (loss)loss adjusted for non-cash items and changes in operating assets and liabilities. The cash provided by operating activities duringDuring the year ended December 31, 20172021, our operating activities used cash of $55.2 million as compared to cash used by operating activities of $69.0 million during the prior year. The cash used during 2021 was primarily the result of the receipt of $144 million upon the closing of the CTP-656 asset sale to Vertex in July 2017, partially offsetlargely driven by our development activities associated with CTP-656,CTP-543, whereas the cash used during 2020 was largely driven by our development activities associated with CTP-543 and research. The cashCTP-692.
Cash used duringin operating activities for the year ended December 31, 2016 was largely driven by Phase 1 clinical studies and other development activities associated with CTP-656 and CTP-543. The2021 includes $32 million in cash received from Vertex in exchange for the removal of the Milestone Obligation, as discussed further in Note 12 to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
Investing activities. Net cash provided by operatinginvesting activities duringconsisted of proceeds from the maturity of investments, purchases of investments and purchases of fixed assets. We did not purchase investments for the year ended December 31, 2015 was due to2021, whereas the receipt of $50.2 million from Auspex for a change in control payment partially offset by research and development and general and administrative operating expenses during the year.
Investing activities. Net cash used in investing activities consisted of purchases of investments, purchases of fixed assets, and proceeds from the maturity of investments. Netnet cash used to purchase investments for the yearsyear ended December 31, 2017, 2016 and 20152020 was $206.2 million, $132.3 million and $163.0 million, respectively.$156.7 million. Net cash provided by maturities of investments for the years ended December 31, 2017, 20162021 and 20152020 was $85.8 million, $125.9$52.7 million and $178.5$157.2 million, respectively. Purchases of fixed assets for the years ended December 31, 2017, 20162021 and 2015 was $0.9 million, $0.82020 were $0.3 million and $0.9$0.2 million, respectively. The increase in the purchase of investments during the 2020 period is primarily due to the management of funds received from the 2020 Financing, as discussed further in Note 15 to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
Financing activities. During the years ended December 31, 2017, 2016,2021 and 2015,2020, our financing activities providedgenerated cash of $5.5 million, $0.6$67.1 million and $41.5$92.9 million, respectively. DuringCash generated during the 2017 period, cash provided by financing activities was largely driven by theyear ended December 31, 2021 consisted of $64.4 million of aggregate net proceeds from the 2021 Financing, $2.6 million of $29.7aggregate net proceeds pursuant to the ATM Agreement and $0.1 million under our Loan Agreement with Hercules in June 2017 andof proceeds from the exercise of stock options of $6.6 million, partially offset by the prepayment of our Loan Agreement with Hercules in September 2017. The cash provided by financing activitiesoptions. Cash generated during the year ended December 31, 2016 was attributable2020 consisted of $70.1 million of aggregate net proceeds from the 2020 Financing, $22.0 million of aggregate net proceeds pursuant to the ATM Agreement and $0.8 million of proceeds from the exercise of stock options of $0.6 million. The cash provided by financing activities during the year ended December 31, 2015 was primarily due to the receipt of net public offering proceeds of $47.0 million in March 2015 and proceeds from the exercise of stock options of $1.8 million, offset by the repayment of the Hercules debt facility entered into in December 2011.
Credit Facilities
In December 2011, we executed a Loan and Security Agreement with Hercules, which provided for up to $20.0 million in funding, to be made available in two tranches. We borrowed the first tranche of $7.5 million in December 2011 and the second tranche of $12.5 million in March 2012. On October 1, 2015, we made our final payment to Hercules, thereby fulfilling all obligations under the Loan and Security Agreement. Through the maturity date on October 1, 2015, each advance had an interest rate of 8.5%.
In connection with the December 2011 borrowing under the Loan and Security Agreement, we issued to Hercules a warrant to purchase an aggregate of 200,000 shares of Series C preferred stock with an exercise price of $2.50 per share. In connection with the March 2012 borrowing under the Loan and Security Agreement, the warrant we issued to Hercules automatically became exercisable for an additional 200,000 shares of Series C preferred stock. Upon completion of our IPO in February 2014 the warrant became exercisable for an aggregate of 70,796 shares of our common stock at an exercise price of $14.13 per share and the related warrant liability was reclassified to additional paid-in capital.
On June 8, 2017, we entered into a Loan Agreement with Hercules, which provided for up to $30.0 million in funding, through a single advance. We incurred $0.3 million in loan issuance costs paid directly to the lenders, which was offset against the loan proceeds as a loan discount. The advance under the Loan and Security Agreement bore interest at a variable rate of the greater of 8.55% and an amount equal to 8.55% plus the prime rate of interest minus 4.50%.
Pursuant to the Loan Agreement, we had the option to prepay the principal of the Loan Agreement at any time subject to a prepayment charge; however the prepayment charge was waived upon the completion of the sale of CTP-656 to Vertex, discussed further in Note 14, and the prepayment of the Term Loan Facility after the 90th day following the closing date of the Loan Agreement but prior to the six month anniversary of the closing date of the Loan Agreement.
On September 7, 2017, we paid a total of $30.8 million to Hercules, representing the principal, accrued and unpaid interest, fees, costs and expenses outstanding under the Loan Agreement. Upon the payment of the $30.8 million pursuant to a payoff letter between the Company and Hercules, all outstanding indebtedness and obligations of the Company owed to Hercules under the Loan Agreement were paid in full, and the Loan Agreement was terminated.
In connection with the entry into the Loan Agreement, we issued warrants (the "Warrants") to certain entities affiliated with Hercules, exercisable for an aggregate of 61,273 shares of the Company’s common stock at an exercise price of $12.24 per share. The Warrants have a five year term, expiring June 8, 2022, and may be exercised on a cashless basis. The Hercules Warrants had a total relative fair value of $0.5 million upon issuance and were recorded as a debt discount.options.
Operating capital requirements
We do not anticipate commercializing any of our product candidates for several years. Although we generated net income in 2017 and 2015 due to one-time payments from Vertex and Auspex, respectively, weuntil 2024 at the earliest. We anticipate that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek regulatory
marketing approvals for, our product candidates, and begin to commercialize any approved products for which we retain commercialization rights. We are subject to all of the risks incident in the development of new drug products, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business, as well as additional risks stemming from the unproven nature of deuterated drugs.
Based on our current expectations, including with respect to our development plans, we believe our existing cash and cash equivalents and investments as of December 31, 2017 will enable us to fund our operating expenses and capital expenditure requirements into 2021. However, we will require additional capital for the further development of our existing product candidates and may also need to raise additional funds sooner to pursue other development activities related to additional product candidates.
To date, we have not generated any revenue from product sales. We do not expect to generate significant revenue from product sales unless and until we, or our collaborators, obtain marketing approval of and commercialize one of our current or future product candidates. Because our product candidates are in various stages of development and the outcome of these efforts is
uncertain, we cannot estimate the actual amounts necessary to successfully complete development and commercialization of our product candidates or whether or when we will achieve profitability. We anticipate that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek marketing approvals for, our product candidates, and begin to commercialize any approved products for which we retain commercialization rights.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, and additional collaborations, strategic alliancescollaboration and licensing arrangements and other arrangements.sources. Except for any obligations of our collaborators to reimburse us for research and development expenses or to make milestone payments under our agreements with them, we do not have any additional committed external sources of funds. Additional capital may not be available on reasonable terms, if at all. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. If we raise additional funds through the issuance of additional debtequity or equitydebt securities, it could result in dilution to our existing stockholders, increased fixed payment obligations and thesethe issuance of securities may havewith rights senior to those of our common stock. We may become subject to covenants under any future indebtedness that could limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, which could adversely impact our ability to conduct our business.
Our expectation with respect to the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including those discussed in the “Risk Factors”"Risk Factors" section in Part I, Item 1A. of this Annual Report on Form 10-K. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. If we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financial condition and results of operations could be materially adversely affected.
Contractual obligations
The following table summarizes our contractual obligations at December 31, 2017:
|
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Total | | Less than 1 year | | 1 to 3 years | | 3 to 5 years | | More than 5 years |
Operating lease obligations(1) | | $ | 1,208 |
| | $ | 1,208 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Operating lease obligations(2) | | 31,348 |
| | — |
| | 8,104 |
| | 9,376 |
| | 13,868 |
|
| Total contractual obligations | | $ | 32,556 |
| | $ | 1,208 |
| | $ | 8,104 |
| | $ | 9,376 |
| | $ | 13,868 |
|
| |
(1) | Consists of future lease payments under the operating lease for our office and laboratory space at 99 Hayden Avenue, Lexington, Massachusetts. The operating lease expires on September 30, 2018. |
| |
(2) | Consists of future lease payments under the new operating lease signed on December 21, 2017 for our office and laboratory at 65 Hayden Avenue, Lexington, Massachusetts. The operating lease expires ten years after the Base Rent Commencement Date, defined in the lease, with two optional extension terms of five years each. |
We have an obligation to make a payment to GSK of up to $2.8 million if we commercialize CTP-499 or if we receive cash proceeds from re-licensing or transferring the rights to our CTP-499 program.
We enter into contracts in the normal course of business with contract research organizations for clinical and nonclinical research studies, manufacturing, research supplies and other services and products for operating purposes. These contracts generally provide for termination on notice, and therefore are cancelable contracts and not included in the table of contractual obligations and commitments.
OFF-BALANCE SHEET ARRANGEMENTS
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
|
| | | | |
| ITEM 7A. | Quantitative and Qualitative Disclosures About Market Risk |
We are exposeda smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to market risk related to changes in interest rates. Our current investment policy is to maintain a diversified investment portfolio in U.S. government-backed securities and money market mutual funds consisting of U.S. government-backed securities. Our cash is deposited in and invested through highly rated financial institutions in North America. As of December 31, 2017 and 2016, we had $203.2 million and $96.2 million of cash, cash equivalents and investments, respectively. The fair value of cash equivalents and short-term investments is subject to change as a result of potential changes in market interest rates. Due toprovide the short-term maturities of our cash equivalents and the low risk profile of these investments, an immediate 100 basis point change in interest rates at levels as of December 31, 2017 would not have a material effect on the fair market value of our cash equivalents and short term investments.information required by this Item.
We contract with suppliers of raw materials and contract manufacturers internationally. Transactions with these providers are predominantly settled in U.S. dollars and, therefore, we believe that we have only minimal exposure to foreign currency exchange risks. We do not hedge against foreign currency risks.
Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation had a material effect on our business, financial condition or results of operations during the years ended December 31, 2017, 2016 or 2015.
|
| | | | |
| ITEM 8. | Financial Statements and Supplementary Data |
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Concert Pharmaceuticals, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Concert Pharmaceuticals, Inc. (the “Company“(“the Company”) as of December 31, 20172021 and 2016,2020, the related consolidated statements of operations and comprehensive income (loss),loss, stockholders’ equity and cash flows for each of the threetwo years in the period ended December 31, 2017,2021, and the related notes (collectively(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20172021 and 2016,2020, and the results of its operations and its cash flows for each of the threetwo years in the period ended December 31, 2017,2021, in conformity with U.S. generally accepted accounting principles.
The Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company‘sCompany’s management. Our responsibility is to express an opinion on the Company‘sCompany’s financial statements based on our audits.audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditsaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our auditsaudit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our auditsaudit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures includeincluded examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our auditsaudit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| | | | | | | | |
| | Prepaid and Accrued Contract Research and Development Expenses |
Description of the Matter | | The Company’s total accrued expenses were $12.4 million as of December 31, 2021, which included the obligation for contract research and development expenses incurred as of December 31, 2021 but not paid as of that date. In addition, the Company’s total prepaid expenses were $7.0 million as of December 31, 2021, which included amounts that were paid in advance of services provided in connection with its contract research and development. As discussed in Note 2 of the consolidated financial statements, the Company contracts with service providers to conduct research and development on its behalf, and the amount of expense recorded in the consolidated financial statements is based in part on third-party information which includes the services provided and efforts expended under these arrangements. Given the nature and significance of contract research and development expenses, subjective auditor judgement was required to evaluate the evidence obtained to support the amounts accrued and prepaid for costs associated with the services provided.
|
| How We Addressed the Matter in Our Audit | | To evaluate the evidence obtained to support the amounts accrued and prepaid for costs associated with services provided for contract research and development as of December 31, 2021, our audit procedures included, among others, testing the accuracy and completeness of the data used to derive the recorded amounts. We also inquired of the Company’s research and development personnel overseeing the contract research and development regarding the progress of clinical trials and evaluated the completeness and valuation of the prepaid and accrued contract research and development expenses. We compared invoices received by the Company subsequent to December 31, 2021 to the total costs recognized by the Company as of that date, and we inspected significant contracts, including any pending change orders, between the Company and service providers conducting research and development on its behalf. |
| | Accounting for 2021 Sale of Common and Preferred Stock, Warrants and Royalty Interest |
Description of the Matter | | As described in Note 14 to the consolidated financial statements, in November 2021, the Company entered into the 2021 sale of common and preferred stock, warrants and royalty interest (the “2021 Financing”), which was a structured financing consisting of a securities purchase agreement, warrant agreements and a royalty purchase agreement. Pursuant to the 2021 Financing, the Company received aggregate gross proceeds of $65 million in exchange for the sale of 13,997 shares of Series X1 Preferred Stock, 2,253,000 shares of common stock, warrants to purchase up to 16,250 shares of Series X1 Preferred Stock and a portion of the Company’s right to receive certain potential future royalties.
Auditing the Company’s accounting for the 2021 Financing was complex due to the judgment that was required in determining the balance sheet classification of the elements of the 2021 Financing. Additionally, a detailed analysis of the terms of the 2021 Financing was required to determine the existence of any derivatives that may require separate accounting under applicable accounting guidance. |
| How We Addressed the Matter in Our Audit | | To test the initial accounting for the 2021 Financing, our audit procedures included, among others, inspection of the agreements underlying the 2021 Financing and testing management's application of the relevant accounting guidance, including the determination of the balance sheet classification of each element of the 2021 Financing and the identification of any derivatives included in the arrangements. We involved professionals with specialized skill and knowledge to assist in evaluating the appropriateness of the accounting for the elements of the 2021 Financing, including conclusions reached with respect to the balance sheet classification of each of the elements as well as the identification of embedded features or derivatives that require separate accounting. |
/s/ Ernst & Young LLP
We have served as the Company'sCompany’s auditor since 2007.
Boston, Massachusetts
March 1, 2018
3, 2022
CONCERT PHARMACEUTICALS, INC. CONSOLIDATED BALANCE SHEETS |
| | | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| | | (Amounts in thousands, except share and per share data) |
| Assets | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 27,665 |
| | $ | 40,555 |
|
| Investments, available for sale | | 175,500 |
| | 55,630 |
|
| Interest receivable | | 628 |
| | 164 |
|
| Accounts receivable | | 155 |
| | 27 |
|
| Prepaid expenses and other current assets | | 1,786 |
| | 1,353 |
|
| Total current assets | | 205,734 |
| | 97,729 |
|
| Property and equipment, net | | 2,165 |
| | 2,199 |
|
| Restricted cash | | 1,557 |
| | 400 |
|
| Other assets | | 34 |
| | 67 |
|
| Income taxes receivable | | 2,246 |
| | — |
|
| Total assets | | $ | 211,736 |
| | $ | 100,395 |
|
| Liabilities and stockholders’ equity | | | | |
| Current liabilities: | | | | |
| Accounts payable | | $ | 658 |
| | $ | 545 |
|
| Accrued expenses and other liabilities | | 4,299 |
| | 3,853 |
|
| Income taxes payable | | 46 |
| | — |
|
| Deferred revenue, current portion | | 1,442 |
| | 1,172 |
|
| Total current liabilities | | 6,445 |
| | 5,570 |
|
| Deferred revenue, net of current portion | | 8,859 |
| | 8,878 |
|
| Deferred lease incentive, net of current portion | | — |
| | 249 |
|
| Deferred rent, net of current portion | | — |
| | 104 |
|
| Total liabilities | | 15,304 |
| | 14,801 |
|
| Commitments (Note 11) | |
| |
|
| Stockholders’ equity: | | | | |
| Preferred stock, $0.001 par value per share; 5,000,000 shares authorized; no shares issued and outstanding in 2017 and 2016, respectively | | — |
| | — |
|
| Common stock, $0.001 par value per share; 100,000,000 shares authorized; 23,147,779 and 22,319,516 shares issued and 23,140,378 and 22,316,982 outstanding in 2017 and 2016 , respectively | | 23 |
| | 22 |
|
| Additional paid-in capital | | 273,059 |
| | 257,461 |
|
| Accumulated other comprehensive loss | | (407 | ) | | (7 | ) |
| Accumulated deficit | | (76,243 | ) | | (171,882 | ) |
| Total stockholders’ equity | | 196,432 |
| | 85,594 |
|
| Total liabilities and stockholders’ equity | | $ | 211,736 |
| | $ | 100,395 |
|
| | | | | | | | | | | | | | |
CONCERT PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS |
| | | December 31, |
| | | 2021 | | 2020 |
| | | (Amounts in thousands, except
share and per share data) |
| Assets | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 141,636 | | | $ | 77,202 | |
| Investments, available for sale | | — | | | 52,766 | |
| Marketable equity securities | | 1,463 | | | 1,969 | |
| Interest receivable | | — | | | 145 | |
| Deferred offering costs | | 15 | | | — | |
| Accounts receivable | | 218 | | | 686 | |
| Income taxes receivable, current | | — | | | 2,346 | |
| Prepaid expenses and other current assets | | 6,997 | | | 7,610 | |
| Total current assets | | 150,329 | | | 142,724 | |
| Property and equipment, net | | 5,242 | | | 6,363 | |
| Restricted cash | | 1,157 | | | 1,157 | |
| Other assets | | 3 | | | 51 | |
| | | | |
| Operating lease right-of-use assets, long-term | | 8,585 | | | 8,968 | |
| Total assets | | $ | 165,316 | | | $ | 159,263 | |
| Liabilities and stockholders’ equity | | | | |
| Current liabilities: | | | | |
| Accounts payable | | $ | 2,606 | | | $ | 230 | |
| Accrued expenses and other liabilities, current portion | | 12,359 | | | 9,017 | |
| | | | |
| | | | |
| Lease liability, current portion | | 1,155 | | | 931 | |
| Total current liabilities | | 16,120 | | | 10,178 | |
| Accrued expenses, net of current portion | | 28 | | | 108 | |
| Deferred revenue, long-term | | 7,595 | | | 2,750 | |
| Lease liability, net of current portion | | 13,910 | | | 15,065 | |
| Warrant liabilities, long-term (Note 14) | | 15,438 | | | — | |
| Total liabilities | | 53,091 | | | 28,101 | |
| Commitments (Note 11) | | 0 | | 0 |
| Stockholders’ equity: | | | | |
| Preferred stock, $0.001 par value per share; 5,000,000 shares authorized; 32,500 shares designated as Series X1; 13,997 shares of Series X1 issued and outstanding as of December 31, 2021; and no shares issued and outstanding as of December 31, 2020 | | — | | | — | |
| Common stock, $0.001 par value per share; 100,000,000 shares authorized; 34,939,628 and 32,062,799 shares issued and 34,739,027 and 31,862,198 outstanding as of December 31, 2021 and 2020, respectively | | 34 | | | 31 | |
| Additional paid-in capital | | 461,765 | | | 400,636 | |
| Accumulated other comprehensive loss | | (76) | | | (58) | |
| Accumulated deficit | | (349,498) | | | (269,447) | |
| Total stockholders’ equity | | 112,225 | | | 131,162 | |
| Total liabilities and stockholders’ equity | | $ | 165,316 | | | $ | 159,263 | |
| | | | |
| | | | |
See accompanying notes.
| | | | | | | | | | | | | | |
CONCERT PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS |
| | | Year ended
December 31, |
| | | 2021 | | 2020 |
| | | (Amounts in thousands, except per
share data) |
| Revenue: | | | | |
| License and research and development revenue | | $ | 39 | | | $ | 7,902 | |
| Other revenue | | 32,539 | | | — | |
| | | | |
| Total revenue | | 32,578 | | | 7,902 | |
| Operating expenses: | | | | |
| Research and development | | 87,555 | | | 61,624 | |
| General and administrative | | 22,531 | | | 18,925 | |
| Total operating expenses | | 110,086 | | | 80,549 | |
| Loss from operations | | (77,508) | | | (72,647) | |
| Investment income | | 46 | | | 1,202 | |
| | | | |
| | | | |
| | | | |
| | | | |
| Unrealized loss on marketable equity securities | | (506) | | | (3,406) | |
| Unrealized loss on warrant liabilities (Note 14) | | (2,083) | | | — | |
| Loss before income taxes | | (80,051) | | | (74,851) | |
| Income tax benefit | | — | | | 85 | |
| Net loss | | $ | (80,051) | | | $ | (74,766) | |
| Other comprehensive income: | | | | |
| Unrealized loss on investments, available for sale | | (18) | | | (27) | |
| Comprehensive loss | | $ | (80,069) | | | $ | (74,793) | |
| | | | |
| Net loss attributable to common stockholders - basic and diluted | | $ | (80,051) | | | $ | (74,766) | |
| | | | |
| Net loss per share attributable to common stockholders - basic and diluted | | $ | (2.33) | | | $ | (2.40) | |
| | | | |
| Weighted-average number of common shares used in net loss per share attributable to common stockholders - basic and diluted | | 34,405 | | | 31,200 | |
| | | | |
See accompanying notes.
CONCERT PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) |
| | | | | | | | | | | | |
| | | Year ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| | | (Amounts in thousands, except per share data) |
| Revenue: | | | | | | |
| License and research and development revenue | | $ | 62 |
| | $ | 174 |
| | $ | 6,574 |
|
| Other revenue (Note 14 and Note 13) | | 143,829 |
| | — |
| | 50,155 |
|
| Milestone revenue | | — |
| | — |
| | 10,000 |
|
| Total revenue | | 143,891 |
| | 174 |
| | 66,729 |
|
| Operating expenses: | | | | | | |
| Research and development | | 30,223 |
| | 36,983 |
| | 28,885 |
|
| General and administrative | | 21,019 |
| | 14,358 |
| | 13,056 |
|
| Total operating expenses | | 51,242 |
| | 51,341 |
| | 41,941 |
|
| Income (Loss) from operations | | 92,649 |
| | (51,167 | ) | | 24,788 |
|
| Investment income | | 1,336 |
| | 447 |
| | 124 |
|
| Other income (Note 16) | | 3,601 |
| | — |
| | — |
|
| Interest and other expense | | (815 | ) | | — |
| | (309 | ) |
| Loss on extinguishment of debt (Note 15) | | (1,432 | ) | | — |
| | — |
|
| Income (Loss) before income taxes | | 95,339 |
| | (50,720 | ) | | 24,603 |
|
| (Benefit) Provision for income taxes | | (300 | ) | | — |
| | 429 |
|
| Net income (loss) | | $ | 95,639 |
| | $ | (50,720 | ) | | $ | 24,174 |
|
| Other comprehensive (loss) income: | | | | | | |
| Unrealized (loss) income on investments, net of tax | | (400 | ) | | 11 |
| | (4 | ) |
| Comprehensive income (loss) | | $ | 95,239 |
| | $ | (50,709 | ) | | $ | 24,170 |
|
| | | | | | | |
| Net income (loss) attributable to common stockholders: | |
|
| |
|
| |
|
|
| Basic | | $ | 95,195 |
|
| $ | (50,720 | ) |
| $ | 24,174 |
|
| Diluted | | $ | 95,210 |
| | $ | (50,720 | ) | | $ | 24,174 |
|
| | | | | | | |
| Net income (loss) per share attributable to common stockholders: | | | | | | |
| Basic | | $ | 4.20 |
| | $ | (2.28 | ) | | $ | 1.14 |
|
| Diluted | | $ | 4.06 |
| | $ | (2.28 | ) | | $ | 1.09 |
|
| | | | | | | |
| Weighted-average number of common shares used in net income (loss) per share attributable to common stockholders: | | | | | | |
| Basic | | 22,641 |
| | 22,233 |
| | 21,152 |
|
| Diluted | | 23,442 |
| | 22,233 |
| | 22,267 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
CONCERT PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY |
| | | Preferred Stock | | Common Stock | | Additional paid-in capital | | Accumulated other comprehensive loss | | Accumulated deficit | | Total stockholders’ equity |
| | | Issued | | Amount | | Issued | | In Treasury | | Amount | |
| | | (in thousands) |
| Balance at December 31, 2019 | | — | | | $ | — | | | 24,066 | | | 200 | | | $ | 24 | | | $ | 296,145 | | | $ | (31) | | | $ | (194,681) | | | $ | 101,457 | |
| Exercise of stock options | | — | | | — | | | 117 | | | — | | | — | | | 833 | | | — | | | — | | | 833 | |
| Release of restricted stock units | | — | | | — | | | 136 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Unrealized loss on short-term investments | | — | | | — | | | — | | | — | | | — | | | — | | | (27) | | | — | | | (27) | |
| Stock-based compensation expense | | — | | | — | | | — | | | — | | | — | | | 11,113 | | | — | | | — | | | 11,113 | |
| Proceeds from at-the-market offering, net of issuance costs | | — | | | — | | | 2,008 | | | — | | | 2 | | | 22,486 | | | — | | | — | | | 22,488 | |
| Sale of common stock and pre-funded warrants (2020 Financing), net of underwriters’ discount and costs | | — | | | — | | | 5,735 | | | — | | | 5 | | | 70,059 | | | — | | | — | | | 70,064 | |
| Net loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (74,766) | | | (74,766) | |
| Balance at December 31, 2020 | | — | | | $ | — | | | 32,062 | | | 200 | | | $ | 31 | | | $ | 400,636 | | | $ | (58) | | | $ | (269,447) | | | $ | 131,162 | |
| Exercise of stock options | | — | | | — | | | 24 | | | — | | | — | | | 138 | | | — | | | — | | | 138 | |
| Release of restricted stock units | | — | | | — | | | 434 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Unrealized loss on short-term investments | | — | | | — | | | — | | | — | | | — | | | — | | | (18) | | | — | | | (18) | |
| Stock-based compensation expense | | — | | | — | | | — | | | — | | | — | | | 12,572 | | | — | | | — | | | 12,572 | |
| Proceeds from at-the-market offering, net of issuance costs | | — | | | — | | | 165 | | | — | | | — | | | 2,042 | | | — | | | — | | | 2,042 | |
| Sale of common and preferred stock, warrants and royalty interest (2021 Financing), net of issuance costs | | 14 | | | — | | | 2,253 | | | — | | | 3 | | | 46,377 | | | — | | | — | | | 46,380 | |
| Net loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (80,051) | | | (80,051) | |
| Balance at December 31, 2021 | | 14 | | | $ | — | | | 34,938 | | | 200 | | | $ | 34 | | | $ | 461,765 | | | $ | (76) | | | $ | (349,498) | | | $ | 112,225 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
See accompanying notes.
CONCERT PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | Additional paid-in capital | | Accumulated other comprehensive income | | Accumulated deficit | | Total stockholders’ equity |
| | | Issued | | In Treasury | | Amount | |
| | | (in thousands) |
| Balance at December 31, 2014 | | 18,234 |
| | — |
| | $ | 18 |
| | $ | 200,157 |
| | $ | (14 | ) | | $ | (145,336 | ) | | $ | 54,825 |
|
| Proceeds from public offering of common stock, net of underwriting discounts and offering expenses | | 3,300 |
| | — |
| | 3 |
| | 46,682 |
| | — |
| | — |
| | 46,685 |
|
| Exercise of stock options | | 633 |
| | 2 |
| | 1 |
| | 1,843 |
| | — |
| | — |
| | 1,844 |
|
| Unrealized loss on short-term investments | | — |
| | — |
| | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
| Stock-based compensation expense | | — |
| | — |
| | — |
| | 2,981 |
| | — |
| | — |
| | 2,981 |
|
| Income tax benefit from option exercises | | | | | | | | 130 |
| | | | | | 130 |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 24,174 |
| | 24,174 |
|
| Balance at December 31, 2015 | | 22,167 |
| | 2 |
| | $ | 22 |
| | $ | 251,793 |
| | $ | (18 | ) | | $ | (121,162 | ) | | $ | 130,635 |
|
| Exercise of stock options | | 153 |
| | 1 |
| | — |
| | 601 |
| | — |
| | — |
| | 601 |
|
| Unrealized gain on short-term investments | | — |
| | — |
| | — |
| | — |
| | 11 |
| | — |
| | 11 |
|
| Stock-based compensation expense | | — |
| | — |
| | — |
| | 5,067 |
| | — |
| | — |
| | 5,067 |
|
| Net loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (50,720 | ) | | (50,720 | ) |
| Balance at December 31, 2016 | | 22,320 |
| | 3 |
| | $ | 22 |
| | $ | 257,461 |
| | $ | (7 | ) | | $ | (171,882 | ) | | $ | 85,594 |
|
| Exercise of stock options | | 828 |
| | 5 |
| | 1 |
| | 6,586 |
| | — |
| | — |
| | 6,587 |
|
| Unrealized loss on short-term investments, net of tax | | — |
| | — |
| | — |
| | — |
| | (400 | ) | | — |
| | (400 | ) |
| Stock-based compensation expense | | — |
| | — |
| | — |
| | 8,500 |
| | — |
| | — |
| | 8,500 |
|
| Stock warrants | | | | | | | | 512 |
| | — |
| | — |
| | 512 |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 95,639 |
| | 95,639 |
|
| Balance at December 31, 2017 | | 23,148 |
| | 8 |
| | $ | 23 |
| | $ | 273,059 |
| | $ | (407 | ) | | $ | (76,243 | ) | | $ | 196,432 |
|
| | | | | | | | | | | | | | | | | | |
CONCERT PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | | Year ended December 31, | | | | |
| | | 2021 | | 2020 | | | | |
| | | | |
| Operating activities | | (in thousands) | | |
| Net loss | | $ | (80,051) | | | $ | (74,766) | | | | | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
| Depreciation and amortization | | 1,479 | | | 1,605 | | | | | |
| Stock-based compensation expense | | 12,572 | | | 11,113 | | | | | |
| Amortization of premiums on investments | | 35 | | | 48 | | | | | |
| Non-cash lease expense | | 383 | | | 284 | | | | | |
| Unrealized loss on marketable equity securities | | 506 | | | 3,406 | | | | | |
| Unrealized loss on warrant liabilities | | 2,083 | | | — | | | | | |
| Loss (gain) on disposal of asset | | 6 | | | (2) | | | | | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | (65) | | | (81) | | | | | |
| | | | | | | | |
| | | | | | | | |
| Interest receivable | | 145 | | | 115 | | | | | |
| Prepaid expenses and other current assets | | 613 | | | (3,043) | | | | | |
| Other assets | | 48 | | | 45 | | | | | |
| Accounts payable | | 2,264 | | | (651) | | | | | |
| Accrued expenses and other liabilities | | 3,413 | | | 929 | | | | | |
| Income taxes receivable | | 2,346 | | | 12 | | | | | |
| | | | | | | | |
| Operating lease liability | | (931) | | | (268) | | | | | |
| Deferred revenue | | — | | | (7,783) | | | | | |
| Net cash used in operating activities | | (55,154) | | | (69,037) | | | | | |
| Investing activities | | | | | | | | |
| Purchases of property and equipment | | (255) | | | (210) | | | | | |
| Purchases of investments | | — | | | (156,671) | | | | | |
| Maturities of investments | | 52,713 | | | 157,225 | | | | | |
| Net cash provided by investing activities | | 52,458 | | | 344 | | | | | |
| Financing activities | | | | | | | | |
| Proceeds from at-the-market offering, net of issuance costs | | 2,575 | | | 21,955 | | | | | |
| | | | | | | | |
| | | | | | | | |
| Proceeds from exercise of stock options | | 138 | | | 833 | | | | | |
| Proceeds from common stock and pre-funded warrants sold (2020 Financing), net of underwriters’ discount and costs | | — | | | 70,064 | | | | | |
| Proceeds from common and preferred stock, warrants and royalty interest sold (2021 Financing), net of issuance costs | | 64,417 | | | — | | | | | |
| Net cash provided by financing activities | | 67,130 | | | 92,852 | | | | | |
| Net increase in cash, cash equivalents and restricted cash | | 64,434 | | | 24,159 | | | | | |
| Cash, cash equivalents and restricted cash at beginning of period | | 78,359 | | | 54,200 | | | | | |
| Cash, cash equivalents and restricted cash at end of period | | $ | 142,793 | | | $ | 78,359 | | | | | |
| Supplemental cash flow information: | | | | | | | | |
| | | | | | | | |
| Purchases of property and equipment unpaid at period end | | $ | 112 | | | $ | 3 | | | | | |
| Public offering costs unpaid at period end | | $ | 300 | | | $ | — | | | | | |
| Cash paid included in measurement of lease liabilities | | $ | 2,969 | | | $ | 2,406 | | | | | |
| Warrants issued | | $ | 13,355 | | | $ | 16,736 | | | | | |
See accompanying notes.
CONCERT PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | | | | | | | | | | | |
| | | Year ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| | | (in thousands) |
| Operating activities | | | | | | |
| Net income (loss) | | $ | 95,639 |
| | $ | (50,720 | ) | | $ | 24,174 |
|
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |
| |
| |
|
| Depreciation and amortization | | 1,008 |
| | 893 |
| | 785 |
|
| Stock-based compensation expense | | 8,500 |
| | 5,067 |
| | 2,981 |
|
| Accretion of premiums and discounts on investments | | 90 |
| | 504 |
| | 715 |
|
| Amortization of discount on loan payable | | 166 |
| | — |
| | 74 |
|
| Amortization of deferred financing costs | | — |
| | — |
| | 29 |
|
| Amortization of deferred lease incentive | | (324 | ) | | (315 | ) | | (308 | ) |
| Loss on disposal of asset | | 46 |
| | 2 |
| | 4 |
|
| Loss on extinguishment of debt | | 1,432 |
| | — |
| | — |
|
| Changes in operating assets and liabilities: | | | | | | |
| Accounts receivable | | (107 | ) | | 43 |
| | 951 |
|
| Interest receivable | | (464 | ) | | 17 |
| | 81 |
|
| Prepaid expenses and other current assets | | (433 | ) | | 314 |
| | (491 | ) |
| Restricted cash | | (1,157 | ) | | — |
| | — |
|
| Other assets | | 33 |
| | 11 |
| | 23 |
|
| Accounts payable | | 113 |
| | 44 |
| | (90 | ) |
| Accrued expenses and other liabilities | | 436 |
| | (957 | ) | | (223 | ) |
| Income taxes receivable | | (2,246 | ) | | — |
| | — |
|
| Income taxes payable | | 46 |
| | (75 | ) | | 75 |
|
| Deferred rent | | (102 | ) | | (51 | ) | | (68 | ) |
| Deferred revenue | | 251 |
| | (120 | ) | | (5,651 | ) |
| Net cash provided by (used in) operating activities | | 102,927 |
| | (45,343 | ) | | 23,061 |
|
| Investing activities | | | | | | |
| Purchases of property and equipment | | (947 | ) | | (770 | ) | | (868 | ) |
| Purchases of investments | | (206,207 | ) | | (132,344 | ) | | (163,025 | ) |
| Maturities of investments | | 85,847 |
| | 125,901 |
| | 178,462 |
|
| Net cash (used in) provided by investing activities | | (121,307 | ) | | (7,213 | ) | | 14,569 |
|
| Financing activities | | | | | | |
| Proceeds from loan, net | | 29,659 |
| | — |
| | — |
|
| Repayment of loan | | (30,745 | ) | | — |
| | (7,175 | ) |
| Proceeds from public offering of common stock, net of underwriting discounts and commissions | | — |
| | — |
| | 46,995 |
|
| Proceeds from exercise of stock options | | 6,576 |
| | 601 |
| | 1,844 |
|
| Income tax benefit from exercise of stock options | | — |
| | — |
| | 130 |
|
| Payment of public offering costs | | — |
| | — |
| | (310 | ) |
| Net cash provided by financing activities | | 5,490 |
| | 601 |
| | 41,484 |
|
| Net (decrease) increase in cash and cash equivalents | | (12,890 | ) | | (51,955 | ) | | 79,114 |
|
| Cash and cash equivalents at beginning of period | | 40,555 |
| | 92,510 |
| | 13,396 |
|
| Cash and cash equivalents at end of period | | $ | 27,665 |
| | $ | 40,555 |
| | $ | 92,510 |
|
| Supplemental cash flow information: | | | | | | |
| Cash paid for income taxes | | $ | 1,900 |
| | $ | 75 |
| | $ | 225 |
|
| Cash paid for interest | | $ | 648 |
| | $ | — |
| | $ | 287 |
|
| Purchases of property and equipment unpaid at period end | | $ | 65 |
| | $ | 20 |
| | $ | 42 |
|
| Issuance of stock warrants | | $ | 512 |
| | $ | — |
| | $ | — |
|
81
See accompanying notes.
CONCERT PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
Concert Pharmaceuticals, Inc., or Concert or the Company, was incorporated on April 12, 2006 as a Delaware corporation withand has its operations based in Lexington, Massachusetts. The Company is a late-stage clinical stage biopharmaceutical company that appliesis developing CTP-543, a JAK 1/2 inhibitor that it discovered through the application of its extensive knowledgeDCE Platform. The Company is evaluating CTP-543 in a Phase 3 clinical program for the treatment of deuterium chemistry to discover and develop novel small molecule drugs. The Company’s approach starts with previously studied compounds, including approved drugs, thatalopecia areata, a serious autoimmune dermatological condition. If these trials are successful, the Company believes can be improvedintends to file an NDA with deuterium substitutionthe FDA in the first half of 2023. There are currently no FDA-approved treatments for alopecia areata.
Liquidity and Going Concern
In February 2014, the Company completed its initial public offering, whereby the Company sold 6,649,690 shares of common stock at a price to provide better pharmacokinetic or metabolic properties, enhancing clinical safety, tolerability or efficacy. The Company believes this approach may enable drug discovery and clinical development that is more efficient and less expensive than conventional small molecule drug research and development. The Company’s pipeline includes multiple clinical-stage candidates and a numberthe public of preclinical compounds that it is currently assessing.
$14.00 per share, raising aggregate net proceeds of $83.1 million. In March 2015, the Company sold 3,300,000 shares of common stock in athrough an underwritten public offering at a price to the public of $15.15 per share, resulting inraising aggregate net proceeds of $46.7 million. In January 2020, the Company sold 5,735,283 shares of common stock through an underwritten public offering at a price to the public of $9.92 per share. At the same time, the Company sold to a certain existing investor pre-funded warrants to purchase up to an aggregate of approximately $46.7 million after deducting underwriting discounts and commissions and1,800,000 shares of common stock at a purchase price of $9.919 per pre-funded warrant, which represents the per share public offering expenses. price for the common stock less the $0.001 per share exercise price for each pre-funded warrant. The aggregate net proceeds the Company received from the 2020 Financing was $70.1 million.
In June 2015, the Company received a one-time payment of $50.2 million from Auspex Pharmaceuticals, Inc., or Auspex, pursuant to a patent assignment agreement between Concertthe Company and Auspex. ConcertThe Company became eligible to receive the payment due to a change of control of Auspex, which was acquired by Teva Pharmaceutical Industries Ltd. in May 2015 (see Note 13).2015.
On March 3,In July 2017, the Company entered into an Asset Purchase Agreement (the "Asset Purchase Agreement") with Vertex Pharmaceuticals, Inc., through Vertex Pharmaceuticals (Europe) Limited ("Vertex"), pursuantcompleted the sale of worldwide development and commercialization rights to which the Company agreed to sell and assign CTP-656, now known as VX-561, and other assets related to the treatment of cystic fibrosis assets of the Company, for up to $250 million subjectVertex pursuant to the satisfaction of certain closing conditions. On July 25, 2017, the transaction contemplated by the Asset Purchase Agreement closed and Vertex paid theAgreement. The Company $160received $160.0 million in cash consideration,upon closing, with $16$16.0 million to beinitially held in escrow. Additional information concerningescrow, which was released to the sale of CTP-656 is discussed furtherCompany in Note 14.
On June 8, 2017,February 2019. In May 2021, the Company entered into a Loanthe Vertex Amendment and Security Agreement ("Loan Agreement") with Hercules Capital, Inc., ("Hercules"), pursuant to which Hercules agreed to make available to the Company a secured term loan facilityreceived an additional $32.0 million in the amount of $30 million ("Term Loan Facility") subject to certain terms and conditions. On September 7, 2017, the Company paid off the outstanding obligation in full resulting in the termination of the Loan Agreement. Additionalcash. For additional information concerning the prepaymentrevenue arrangement with Vertex, see Note 12.
In March 2019, the Company entered into the ATM Agreement with Jefferies. As of December 31, 2021, the Company had sold 2,209,687 shares of its common stock pursuant to the ATM Agreement for aggregate net proceeds of $25.2 million, after payment of cash commissions of 3.0% of the Loangross proceeds to Jefferies. For additional information on the ATM Agreement, is discussed furthersee Note 13.
In November 2021, the Company closed the 2021 Financing, raising $64.4 million in Note 15.aggregate net proceeds. The 2021 Financing consisted of the sale of (i) 13,997 shares of Series X1 Preferred Stock, (ii) 2,253,000 shares of common stock, (iii) warrants to purchase up to 16,250 shares of Series X1 Preferred Stock and (iv) a portion of the Company’s right to receive potential future AVP-786 royalties under the Avanir Agreement. If the warrants issued in connection with the 2021 Financing are exercised in full, the Company would receive additional gross proceeds of $103.1 million.
TheAs of December 31, 2021, the Company had cash, and cash equivalents and investments of $203.2$141.6 million at December 31, 2017.and net working capital of $134.2 million. The Company believes that its cashhas incurred cumulative net losses of $349.5 million since inception and cash equivalents and investments at December 31, 2017 will be sufficientrequires capital to allow the Company to fund its current operating plan for at least the next twelve months from the date of issuance of the financial statements.continue future development activities. The Company may pursue additional cash resources through public or private financingsdoes not have any products approved for sale and by establishing collaborations with or licensing its technology to other companies and through other arrangements.
Since its inception, thehas not generated any revenue from product sales. The Company has generated an accumulated deficitfinanced its operations primarily through the public offering and private placement of $76.2 million through December 31, 2017. The Company's operating results may fluctuate significantlyits equity, debt financing, funding from year to year, depending on the timingcollaborations and magnitude of clinical trialpatent assignments, asset sales and other development activities underarrangements. The Company expects its current development programs. Substantially all the Company's net losses have resulted from costs incurredexpenses to increase in connection with its researchongoing activities, particularly as it conducts its Phase 3 clinical program of CTP-543 in alopecia areata and development programs and from general and administrative costs associated with its operations. The Company expects to continue to incur significant expenses and increasing operating lossesseeks marketing approval for at leastCTP-543. For information regarding the next several years.
Company’s recently completed equity financings, see Notes 13-15.
The Company is subject to risks common to companies in the biotechnology industry, including, but not limited to, risks of failure or unsatisfactory results of nonclinical studies and clinical trials, the need to obtain additional financing to fund the future development of its pipeline, the need to obtain marketing approval for its product candidates, the need to successfully commercialize and gain market acceptance of its product candidates, dependence on key personnel, protection of proprietary
CONCERT PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
technology, compliance with government regulations, development by competitors of technological innovations and ability to transition from pilot-scale manufacturing to large-scale production of products.
Unless otherwise indicated, all amountsUnder ASC Topic 205-40, Presentation of Financial Statements - Going Concern, management is required at each reporting period to evaluate whether there are conditions and events, considered in thousands except sharethe aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. This evaluation initially does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date the financial statements are issued. When substantial doubt exists, management evaluates whether the mitigating effect of its plans sufficiently alleviates the substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (i) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued and per share amounts.(ii) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Generally, to be considered probable of being effectively implemented, the plans must have been approved by the Company’s board of directors before the date that the financial statements are issued.
Successful completion of the Company’s development program and, ultimately, the attainment of profitable operations are dependent upon future events, including obtaining adequate financing to support the Company’s cost structure and operating plan. Management’s plans to alleviate its financing requirements include, among other things, pursuing one or more of the following steps to raise additional capital, none of which can be guaranteed or are entirely within the Company’s control:
•raise funding through the sale of the Company’s common or preferred stock;
•raise funding through debt financing; and
•establish collaborations with potential partners to advance the Company’s product pipeline.
Based on the Company’s current operating plan, management believes that its current cash, cash equivalents and investments will allow the Company to meet its liquidity requirements into the fourth quarter of 2022. The Company’s history of significant losses, its negative cash flows from operations, its limited liquidity resources currently on hand and its dependence on its ability to obtain additional financing to fund its operations after the current resources are exhausted, about which there can be no certainty, have resulted in management’s assessment that there is substantial doubt about the Company’s ability to continue as a going concern for a period of at least twelve months from the issuance date of this Annual Report on Form 10-K. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business, and do not include any adjustments that may result from the outcome of this uncertainty.
If the Company is unable to raise capital when needed or on acceptable terms, or if it is unable to procure collaboration arrangements to advance its programs, the Company would be forced to discontinue some of its operations or develop and implement a plan to further extend payables, reduce overhead or scale back its current operating plan until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan would be successful.
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally acceptedGAAP. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision maker is the United States of America, or GAAP. Management has determined thatChief Executive Officer. The Company and the Chief Executive Officer view the Company operates in one’s operations and manage its business as 1 operating segment: the development of pharmaceutical products on its own behalf or in collaboration with others. All material long-lived assets of the Company reside in the United States. The Company does use contract research organizations and research institutions located outside the United States. Some of these expenses are subject to collaboration reimbursement, which is presented as a component of license and research and development revenue in the consolidated statements of operations and comprehensive loss.
The accompanying consolidated financial statements include the accounts of Concert Pharmaceuticals, Inc. and its wholly ownedwholly-owned subsidiaries. All intercompany transactions and balances have been eliminated.
The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.
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Unless otherwise indicated, all amounts in the following tables are in thousands except share and per share amounts.
Use of Estimates and UncertaintiesSummary of Significant Accounting Policies
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenue, expenses and the disclosure of contingent assets and liabilities and the Company'sCompany’s ability to continue as a going concern. In preparing the consolidated financial statements, management used estimates in the following areas, among others: revenue recognition for multiple-element revenue arrangements; income tax expense;recognition; prepaid and accrued research and development expenses; stock-based compensation expense; accrued expenses;fair value of warrant liabilities; and the evaluation of the existence of conditions and events that raise substantial doubt regarding the Company’s ability to continue as a going concern. Actual results could differ from those estimates.
Cash, Cash Equivalents and Investments
Cash equivalents include all highly liquid investments maturing within 90 days from the date of purchase. Investments consist of securities with original maturities greater than 90 days when purchased. The Company classifies these investments as available-for-saleavailable for sale and records them at fair value in the accompanying consolidated balance sheets. Unrealized gains or losses are included in accumulated other comprehensive income (loss). Premiums or discounts from par value are amortized or accreted to investment income over the life of the underlying investment.
Although available to be sold to meet operating needs or otherwise, securities are generally held through maturity. The Company classifies all marketable investments as current assets, as these assets are readily available for use in current operations. The cost of securities sold is determined based on the specific identification method for purposes of recording realized gains and losses. During 20172021 and 2016,2020, there were no realized gains or losses on sales of investments, and no investments were adjusted for other than temporaryother-than-temporary declines in fair value.
The Company reviews available-for-sale securities for other-than-temporary impairment whenever the fair value of an available-for-sale security is less than the amortized cost and evidence indicates that an available-for-sale security’s carrying amount is not recoverable within a reasonable period of time. Other-than-temporary impairments of investments are recognized in the consolidated statements of operations if the Company has experienced a credit loss, has the intent to sell the security or if it is more likely than not that the Company will be required to sell the security before recovery of the amortized cost basis. Evidence considered in this assessment includes reasons for the impairment, compliance with the Company’s investment policy, the severity and the duration of the impairment and changes in value subsequent to the end of the period.
Marketable Equity Securities
Marketable equity securities consist of the fair value of shares of common stock of Processa held by the Company, as discussed further in Note 12. The Company recognizes the effects of changes in fair value of equity securities within net income.
The Company reviews investments in marketable securities for other-than-temporary impairment whenever the fair value of the investment is less than the cost and evidence indicates that an investment’s carrying amount is not recoverable within a reasonable period of time. To determine whether an impairment is other-than-temporary, the Company considers whether it has an intent to sell, or whether it is more likely than not that the Company will be required to sell, the investment before recovery of the investment’s cost basis. Evidence considered in this assessment includes reasons for the impairment, the severity and duration of the impairment and changes in value subsequent to year-end.
Deferred Offering Costs
Costs incurred in the course of preparing for a capital raise, such as legal, accounting and other professional fees, are deferred on the balance sheet as deferred offering costs. At the time of the completion of the offering, the costs are reclassified as a reduction of the proceeds of the capital raise as part of additional paid-in capital. Should the offering be terminated, deferred offering costs are charged to operations during the period in which the offering is terminated.
Fair Value of Financial Measurements
The Company has certain financial assets and liabilities that are recorded at fair value which have been classified as Level 1, 2 or 3 within the fair value hierarchy as described in the accounting standards for fair value measurements:
•Level 1—quoted prices for identical instruments in active markets;
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•Level 2—quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
•Level 3—valuations derived from valuation techniques in which one or more significant value drivers are unobservable.
For additional information related to fair value measurements, please readsee Note 3 to the consolidated financial statements.3.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of money market funds, investments (including interest receivable) and accounts receivable. The Company’s current investment policy is to maintain a diversified investment portfolio in U.S. government-backed securities and money market mutual funds consisting of U.S. government-backed securities. The Company’s cash is deposited in and invested through highly rated financial institutions in North America.
The Company has not experienced any credit losses
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in these accounts and does not believe it is exposed to any significant credit risk on these funds. The Company has no foreign exchange contracts, option contracts or other foreign exchange hedging arrangements.
AtAs of December 31, 20172021 and 2016,2020, substantially all of the Company’s cash was deposited in accounts at two2 financial institutions, thus limiting the amount of credit exposure to any one financial institution. These amounts at times may exceed federally insured limits.
Accounts receivable generally represent amounts due from collaboration partners.partners, from rebates with vendors and from sales under the at-the-market offering program discussed in Note 13. The Company monitors economic conditions to identify facts or circumstances that may indicate that any of its accounts receivable are at risk of collection.
Property and Equipment
Property and equipment are recognized at cost and depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized over the shorter of their useful life or the related lease term. Repair and maintenance costs are expensed as incurred, whereas major improvements are capitalized as additions to property and equipment. Potential impairment is assessed when there is evidence that events or circumstances indicate that the carrying amount of an asset may not be recovered. No such impairment losses have been recorded throughfor the year ended December 31, 2017.2021 and 2020.
Rent Expense
Rent expense for the years ended December 31, 2021 and 2020 consists of the Company’s facility at 65 Hayden Avenue, Lexington, Massachusetts. The Company’s operating lease for its existing Lexington, Massachusettsthis facility provides for scheduled annual rent increases throughout the lease term. The Company recognizes the effects of the scheduled rent increases on a straight-line basis over the full term, of the lease, which expires in 2018.on January 1, 2029. Additionally, the Company has received certain lease incentives, in connection with its existing Lexington, Massachusetts facility lease, which are recognized as a reduction to rent expense over the remaining lease term. Refer to Note 11 forFor additional details regarding the Company’s operating leases.
Rent expense for the years ended December 31, 2017, 2016, and 2015 was $1.1 million, $1.2 million, and $1.2 million, respectively.lease, see Note 11.
Contingencies
The Company records liabilities for legal and other contingencies when information available to the Company indicates that it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Legal costs in connection with legal and other contingencies are expensed as costs are incurred. No liabilities for legal and other contingencies were accrued as of December 31, 20172021 and 2016.2020.
Revenue Recognition
The Company has generated revenue through arrangements with collaborators and nonprofit organizations for the development and commercialization of product candidates. Most recently, the Company completed an Asset Purchase Agreement with Vertex for the sale of CTP-656, now known as VX-561, and other cystic fibrosis assets.
The Company recognizes revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 605, Revenue Recognition (ASC 605). Accordingly, revenue is recognized when all of the following criteria are met:
Persuasive evidence of an arrangement exists;
Delivery has occurred or services have been rendered;
The seller’s price to the buyer is fixed or determinable; and
Collectability is reasonably assured.
Amounts received prior to satisfying the revenue recognition criteria are recognized as deferred revenue in the Company’s consolidated balance sheets. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date of December 31, 2017 are classified as deferred revenue, current portion. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date of December 31, 2017 are classified as deferred revenue, net of current portion. Amounts recorded as deferred revenue and the timing of recognition of those amounts may change upon the Company's adoption of ASC 606 in the first quarter of fiscal year 2018.
The Company’s revenue is currently generated through collaborative research and development, licensing agreements,candidates, a patent assignment agreement and asset sales.
The terms of these agreements typically contain multiple elements, or deliverables,Company accounts for revenue according to the FASB ASU, 2014-09, Revenue from Contracts with Customers,and all related amendments, which may include licenses, oris also referred to as ASC 606. ASC 606 is a single comprehensive model to account for revenue arising from contracts with customers and is based on the principle that an entity should recognize revenue to depict the transfer
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optionsof goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, the Company applies the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when, or as, the entity satisfies a performance obligation. ASC 606 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts and costs to obtain licenses, to product candidates, referred to as exclusive licenses, as well as research and development activities to be performed by the Company on behalf of the collaboration partner related to the licensed product candidates. The terms of these agreements may include payments to the Company of one or more of the following: a nonrefundable, upfront payment; milestone payments; payment of license exercise or option fees with respect to product candidates; fees for research and development services rendered; and royalties on commercial sales of licensed product candidates, if any. To date, the Company has received upfront payments, several milestone payments and certain research and development service payments but has not received any license exercise or option fees or earned royalty revenue as a result of product sales.
When evaluating multiple element arrangements, the Company considers whether the deliverables under the arrangement represent separate units of accounting. This evaluation requires subjective determinations and requires management to make judgments about the individual deliverables and whether such deliverables are separable from the other aspects of the contractual relationship. In determining the units of accounting, management evaluates certain criteria, including whether the deliverables have standalone value, based on the consideration of the relevant facts and circumstances for each arrangement. The consideration received is allocated among the separate units of accounting using the relative selling price method, and the applicable revenue recognition criteria are applied to each of the separate units.
The Company determines the estimated selling price for deliverables within each agreement using vendor-specific objective evidence, or VSOE, of selling price, if available, third-party evidence, or TPE, of selling price if VSOE is not available, or best estimate of selling price, or BESP, if neither VSOE nor TPE is available. Determining the BESP for a deliverable requires significant judgment. The Company has used its BESP to estimate the selling price for licenses to the Company’s proprietary technology, since the Company does not have VSOE or TPE of selling price for these deliverables. In those circumstances where the Company utilizes BESP to determine the estimated selling price of a license to the Company’s proprietary technology, the Company considers market conditions as well as entity-specific factors, including those factors contemplated in negotiating the agreement, estimated development costs, and the probability of success and the time needed to commercialize a product candidate pursuant to the license. In validating the Company’s BESP, the Company evaluates whether changes in the key assumptions used to determine the BESP will have a significant effect on the allocation of arrangement consideration between multiple deliverables.
The Company’s multiple-element revenue arrangements may include the following:
Exclusive Licenses. The deliverables under the Company’s collaboration agreements generally include exclusive licenses to develop, manufacture and commercialize one or more deuterated compounds. To account for this element of the arrangement, management evaluates whether the exclusive license has standalone value from the undelivered elements based on the consideration of the relevant facts and circumstances of each arrangement, including the research and development capabilities of the collaboration partner. The Company may recognize the arrangement consideration allocated to licenses upon delivery of the license if facts and circumstances indicate that the license has standalone value from the undelivered elements, which generally include research and development services. The Company defers arrangement consideration allocated to licenses if facts and circumstances indicate that the delivered license does not have standalone value from the undelivered elements.
When management believes the license does not have stand-alone value from the other deliverables to be provided in the arrangement, the Company generally recognizes revenue attributed to the license on a straight-line basis over the Company’s contractual or estimated performance period, which is typically the term of the Company’s research and development obligations. If management cannot reasonably estimate when the Company’s performance obligation ends, then revenue is deferred until management can reasonably estimate when the performance obligation ends. The periods over which revenue should be recognized are subject to estimates by management and may change over the course of the research and development and licensing agreement. Such a change could have a material impact on the amount of revenue the Company records in future periods.
Research and Development Services. The deliverables under the Company’s collaboration and license agreements may include deliverables related to research and development services to be performed by the Company on behalf of the collaboration partner.
Payments or reimbursements resulting from the Company’s research and development efforts are recognized as the services are performed and presented on a gross basis because the Company is the principal for such efforts, so long as there is persuasive evidence of an arrangement, the fee is fixed or determinable, and collection of the related amount is reasonably assured. If there is no discernible pattern of performance and/or objectively measurable performance measures do not exist, then the Company recognizes revenue on a straight-line basis over the period it is expected to complete its performance obligations. Conversely, if the pattern of performance in which the service is provided to the customer can be determined and objectively measurable performance measures exist, then the Company recognizes revenue under the arrangement using the proportional performance
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method. Revenue recognized is limited to the lesser of the cumulative amount of payments received or the cumulative amount of revenue earned as of the period end date.
Option Agreements. The Company’s arrangements may provide a collaborator with the right to select a deuterated compound for licensing within an initial pre-defined selection period. Under these agreements, a fee would be due to the Company upon the exercise of an option to acquire a license. The accounting for option arrangements is dependent on the nature of the option granted to the collaboration partner. An option is considered substantive if, at the inception of the arrangement, the Company is at risk as to whether the collaboration partner will choose to exercise the option to secure exclusive licenses. Factors that the Company considers in evaluating whether an option is substantive include the overall objective of the arrangement, the benefit the collaborator might obtain from the arrangement without exercising the option, the cost to exercise the option relative to the total upfront consideration and thefulfill contracts. For additional financial commitments or economic penalties imposed on the collaborator as a result of exercising the option. For arrangements under which an option to secure a license is considered substantive, the Company does not consider the license underlying the option to be a deliverable at the inception of the arrangement. For arrangements under which the option to secure a license is not considered substantive, the Company considers the license underlying the option to be a deliverable at the inception of the arrangement and, upon delivery of the license, would apply the multiple-element revenue arrangement criteria to the license and any other deliverables to determine the appropriate revenue recognition. A significant and incremental discount included in an otherwise substantive option is considered to be a separate deliverable at the inception of the arrangement.
Milestone Revenue. The Company’s collaboration agreements generally include contingent milestone payments related to specified development milestones, regulatory milestones and sales-based milestones. Development milestones are typically payable when a product candidate initiates or advances in clinical trial phases or achieves defined clinical events such as proof-of-concept. Regulatory milestones are typically payable upon submission for marketing approval with regulatory authorities or upon receipt of actual marketing approvals for a compound, approvals for additional indications, upon commercial launch or upon the first commercial sale. Sales-based milestones are typically payable when annual sales reach specified levels.
At the inception of each arrangement that includes milestone payments, the Company evaluates whether each milestone is substantive and at risk to both parties on the basis of the contingent nature of the milestone. This evaluation includes an assessment of whether (a) the consideration is commensurate with either (i) the entity’s performance to achieve the milestone or (ii) the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the entity’s performance to achieve the milestone; (b) the consideration relates solely to past performance; and (c) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. The Company evaluates factors such as the scientific, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required to achieve the respective milestone and whether the milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement in making this assessment. Milestones that are not considered substantive are accounted for as license payments and recognized on a straight-line basis over the remaining period of performance.information, see Note 12.
Research and Development Costs
Research and development costs are expensed as incurred.
Research and development expenses are comprised of costs incurred in providing research and development activities, including salaries and benefits, facilities costs, overhead costs, contract research and development services and other outside costs. NonrefundableNon-refundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made.
External research and development expenses associated with the Company’s programs include clinical trial site costs, research compounds and clinical manufacturing costs, costs incurred for consultants and other outside services, such as data management and statistical analysis support and materials and supplies used in support of the clinical and nonclinical programs. Internal costs of the Company’s clinical program include salaries, benefits, stock basedstock-based compensation and an allocation of the Company’s facility costs. When third-party service providers’ billing terms do not coincide with the Company’s period-end, the Company is required to make estimates of its obligations to those third parties, including clinical trial and pharmaceutical development costs, contractual services costs and costs for supply of its drug candidates, incurred in a given accounting period and record accruals at the end of the period. The Company bases its estimates on its knowledge of the research and development programs, services performed for the period, past history for related activities and the expected duration of the third-party service contract, where applicable.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting for Stock-Based Compensation
The Company issues stock options and RSUs to certain employees, officers and directors. The Company accounts for stock compensation using the fair value method, which results in the recognition of compensation expense over the vesting period of the awards. SeeFor additional information, see Note 8 for additional information.
8.
Income Taxes
Income taxes are recorded in accordance with ASC Topic 740, Income Taxes, or ASC 740, which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. The Company provides deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the Company’s financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates expected to be in effect in the years in which the differences are expected to reverse. A valuation allowance is provided to reduce the deferred tax assets to the amount that will more likely than not be realized.
The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. The Company evaluates tax positions taken, or expected to be taken, in the course of preparing its tax returns to determine whether the tax positions are “more likely than not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recognized as a tax expense.
On December 22, 2017, the President As of the United States signed into law the Tax Cuts and Jobs Act (“TCJA”). This legislation makes broad and complex changes to the U.S. tax code, including, but not limited to, (i) reducing the U.S. federal statutory tax rate from 35% to 21%; (ii) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; (iii) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017,2021 and (iv) modifying2020, the officer’s compensation limitation. The Company recognizes the effects of changes indid not have any significant uncertain tax law, including the TCJA, in the period the law is enacted. Accordingly, the effects of the TCJA have been recognized in the financial statements for the year ended December 31, 2017.
positions.
For additional details regarding ourthe accounting for income taxes, see Note 10 in the accompanying consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.10.
Guarantees
As permitted under Delaware law, the Company indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The term of the indemnification is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make is
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
unlimited; however, the Company has directors’ and officers’ insurance coverage that limits its exposure and enables it to recover a portion of any future amounts paid.
The Company leases office space under a non-cancelable operating leaseslease, which areis further described in Note 11. The Company has standard indemnification arrangements under the leaseslease that requiresrequire it to indemnify the landlordslandlord against all costs, expenses, fines, suits, claims, demands, liabilities and actions directly resulting from any breach, violation or non-performance of any covenant or condition of the Company’s leases.
Pursuant to the Asset Purchase Agreement, discussed further in Note 14, the Company has agreed to indemnify Vertex for certain matters, including breaches of specified representations and warranties, covenants included in the Asset Purchase Agreement and specified tax claims. Representations and warranties, other than certain fundamental representations and warranties, survive for a period of eighteen months following the Closing and the maximum liability of the Company for claims by Vertex related to the breaches of such representations and warranties, with limited exceptions, is limited to the escrow amount, or $16 million. In no event will the aggregate liability of the Company for indemnification exceed the purchase price paid by Vertex, including any milestone payments. Eighteen months after the Closing, any remaining balance in the escrow account not subject to indemnity claims by Vertex will be released to the Company.lease.
As of December 31, 20172021 and 2016,2020, the Company had not experienced any material losses related to these indemnification obligations, and no material claims with respect thereto were outstanding. The Company does not expect significant claims related to these indemnification obligations and, consequently, concluded that the fair value of these obligations is negligible, and no related reserves were established.
Other IncomeComprehensive Loss
InComprehensive loss is defined as the fiscal year ended December 31, 2017, the Company received $3.6 million due tochange in equity of a disgorgementbusiness enterprise during a period from transactions, other events and circumstances from non-owner sources. Comprehensive loss consists of short-swing profits arisingnet loss and other comprehensive loss, which includes certain changes in equity that are excluded from sales of the Company's stock by a 10% stockholder pursuant to Section 16(b) of the Securities and Exchange Act
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of 1934. The Companynet loss. Comprehensive loss has classified the proceeds from the disgorgement as other incomebeen disclosed in the accompanying consolidated financial statements in fiscal year 2017.
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net income (loss)operations and comprehensive loss. Accumulated other comprehensive income or loss. Other comprehensive income or loss is presented separately on the consolidated balance sheets and consists entirely of unrealized gains andholdings losses on investments.investments as of December 31, 2021 and 2020.
Recently Adopted Accounting Pronouncements
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, or ASU 2014-15. ASU 2014-15 amends FASB Accounting Standards Codification, or ASC, 205-40, Presentation of Financial Statements – Going Concern, by providing guidance on determining when and how reporting entities must disclose going-concern uncertainties in their financial statements, including requiring management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date of issuance of the entity’s financial statements and providing certain disclosures if there is substantial doubt about the entity’s ability to continue as a going concern. The Company was required to apply the requirements of ASU 2014-15 in its annual financial statements fordid not adopt any accounting pronouncements during the year ended December 31, 2016 and its interim financial statements beginning in the first quarter of fiscal 2017. With respect to the annual financial statements as of December 31, 2017, the Company did not identify any conditions or events that raise substantial doubt about its ability to continue as a going concern within one year after the date the financial statements are issued.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation-Improvements to Employee Share-Based Payment Accounting, or ASU 2016-09. This update simplifies several aspects of the accounting for share-based compensation arrangements, including accounting for income taxes, forfeitures and statutory tax withholding requirements as well as classification of related amounts on the statement of cash flows. The Company adopted this ASU on January 1, 2017 and it did not have a material effect on the consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15—Classification of Certain Cash Receipts and Cash Payments. The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities that are required to present a statement of cash flows under FASB Accounting Standards Codification (ASC) 230, Statement of Cash Flows. The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption during an interim period. The Company early adopted this update for the interim period ended September 30, 2017 as the treatment of debt extinguishment payments as a financing activity more clearly presents the cash outflow of the extinguishment transaction. No prior period amounts require retrospective adjustments as no debt extinguishments occurred in the prior year. The adoption of ASU 2016-15 resulted in classification of cash payments related to the debt prepayment as cash outflows for financing activities. Additional information concerning the prepayment of the Loan Agreement is discussed further in Note 15.2021.
Pending Accounting Pronouncements
In May 2014, the Financial Accounting Standard Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09, which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, ASU 2014-09 provides that an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. This update will be effective for the Company beginning in the first quarter of fiscal 2018 as a result of the FASB’s one year deferral of the effective date for this standard. The amendments may be applied retrospectively to each prior period (full retrospective) or retrospectively with the cumulative effect recognized as of the date of initial application (modified retrospective). Previously, the Company disclosed that it intended to apply ASU 2014-09 using the full retrospective approach. Due to the additional adoption efforts required of issuers under the full retrospective approach, the Company now intends to adopt ASU 2014-09 in the first quarter of 2018 using the modified retrospective approach. Under the modified retrospective approach, the cumulative effect of applying the standard would be recognized at the date of initial application within retained earnings.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is currently evaluating the effect of adopting the requirements of ASU 2014-09 as it relates to the accounting for its collaboration arrangements with Celgene Pharmaceuticals, Inc., Jazz Pharmaceuticals plc, Glaxo Group Limited and Avanir Pharmaceuticals, Inc., its patent assignment agreement with Auspex Pharmaceuticals, Inc., and its Asset Purchase Agreement with Vertex Pharmaceuticals, Inc.
While the Company is currently evaluating the effect of adopting the requirements of ASU 2014-09, the Company expects, in certain circumstances, that the timing of recognition of contingent payments that may be received under these agreements may change. Contingent payments, including milestone payments and amounts held in escrow under the Asset Purchase Agreement, are treated as variable consideration in accordance with the overall model of ASU 2014-09. Variable consideration may be recognized earlier under ASU 2014-09 than under the current revenue recognition standards, based on an assessment at each reporting date of the probability of achievement of the underlying milestone event or resolution of the related contingency. This assessment may, in certain circumstances, result in the recognition of revenue related to a contingent payment before the underlying milestone event has been achieved or the underlying contingency has been fully resolved.
In comparison to current revenue recognition standards, ASU 2014-09 also requires more robust disclosures, including disclosures related to disaggregation of revenue into appropriate categories, performance obligations, the judgments made in revenue recognition determinations, adjustments to revenue which relate to activities from previous quarters or years, any significant reversals of revenue, and costs to obtain or fulfill contracts.
In connection with the adoption of ASU 2014-09, the Company is evaluating the need for additional internal controls, including controls to monitor the probability of achievement of contingent payments and the pattern of performance of certain performance obligations.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), or ASU 2016-02. ASU 2016-02 requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. ASU 2016-02 also will require certain qualitative and quantitative disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 will be effective for the Company on January 1, 2019. The Company is currently evaluating the impact ASU 2016-02 will have on its financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. The new.This standard requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. As a smaller reporting company, ASU 2016-13 will become effective for the Company for fiscal years beginning after December 15, 2019, with2022, and early adoption is permitted. The Company is currently evaluating the impact that ASU 2016-13 will have on its financial statements and related disclosures.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows - Restricted Cash (Topic 230). This new standard requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance is effective for annual and interim reporting periods beginning after December 15, 2017, and requires retrospective application. The Company is currently assessing the impact that adopting ASU 2016-18 will have on its consolidated financial statements and related disclosures.
3. Fair Value Measurements
The tables below present information about the Company’s financial assets and liabilities that are measured and carried at fair value as of December 31, 20172021 and 2016 (in thousands)2020 and indicate the level within the fair value hierarchy where each measurement is classified. The carrying amounts reflected in the consolidated balance sheets for cash, prepaid expenses and other current assets, restricted cash, accounts payable and accrued expenses approximate their fair values due to their short-term nature.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| December 31, 2021 | | | | | | | | |
| Cash equivalents: | | | | | | | | |
| Money market funds | | $ | 132,850 | | | $ | — | | | $ | — | | | $ | 132,850 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Marketable equity securities: | | | | | | | | |
| Corporate equity securities | | 1,463 | | | — | | | — | | | 1,463 | |
| Total | | $ | 134,313 | | | $ | — | | | $ | — | | | $ | 134,313 | |
| | | | | | | | |
| Warrant liabilities (Note 14) | | $ | — | | | $ | 15,438 | | | $ | — | | | $ | 15,438 | |
|
| | | | | | | | | | | | | | | | |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
| December 31, 2017 | | | | | | | | |
| Cash equivalents: | | | | | | | | |
| Money market funds | | $ | 8,108 |
| | $ | — |
| | $ | — |
| | $ | 8,108 |
|
| Investments, available for sale: | | | | | | | | |
| U.S. Treasury obligations | | 53,910 |
| | — |
| | — |
| | 53,910 |
|
| Government agency securities | | 88,651 |
| | 32,939 |
| | — |
| | 121,590 |
|
| Total | | $ | 150,669 |
| | $ | 32,939 |
| | $ | — |
| | $ | 183,608 |
|
CONCERT PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| December 31, 2020 | | | | | | | | |
| Cash equivalents: | | | | | | | | |
| Money market funds | | $ | 69,928 | | | $ | — | | | $ | — | | | $ | 69,928 | |
| | | | | | | | |
| | | | | | | | |
| Investments, available for sale: | | | | | | | | |
| U.S. Treasury obligations | | 25,528 | | | — | | | — | | | 25,528 | |
| Government agency securities | | 8,737 | | | 18,501 | | | — | | | 27,238 | |
| Marketable equity securities: | | | | | | | | |
| Corporate equity securities | | 1,969 | | | — | | | — | | | 1,969 | |
| Total | | $ | 106,162 | | | $ | 18,501 | | | $ | — | | | $ | 124,663 | |
4. Cash, Cash Equivalents, Investments and Marketable Equity Securities
Cash, cash equivalents, available-for-sale investments and marketable equity securities consisted of the following as of December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Amortized
cost | | Unrealized
gains | | Unrealized
losses | | Fair
value |
| December 31, 2021 | | | | | | | | | | |
| Cash | | | | $ | 8,786 | | | $ | — | | | $ | — | | | $ | 8,786 | |
| Money market funds | | | | 132,850 | | | — | | | — | | | 132,850 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Cash and cash equivalents | | | | $ | 141,636 | | | $ | — | | | $ | — | | | $ | 141,636 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| December 31, 2021 | | | | Acquisition value | | Unrealized gains | | Unrealized losses | | Fair value |
| Marketable equity securities | | | | $ | 10,451 | | | $ | — | | | $ | (8,988) | | | $ | 1,463 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Average
maturity | | Amortized
cost | | Unrealized
gains | | Unrealized
losses | | Fair
value |
| December 31, 2020 | | | | | | | | | | |
| Cash | | | | $ | 7,274 | | | $ | — | | | $ | — | | | $ | 7,274 | |
| Money market funds | | | | 69,928 | | | — | | | — | | | 69,928 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Cash and cash equivalents | | | | $ | 77,202 | | | $ | — | | | $ | — | | | $ | 77,202 | |
| | | | | | | | | | |
| U.S. Treasury obligations | | 70 days | | $ | 25,523 | | | $ | 5 | | | $ | — | | | $ | 25,528 | |
| Government agency securities | | 82 days | | 27,225 | | | 13 | | | — | | | 27,238 | |
| Investments, available for sale | | | | $ | 52,748 | | | $ | 18 | | | $ | — | | | $ | 52,766 | |
| | | | | | | | | | |
| December 31, 2020 | | | | Acquisition value | | Unrealized gains | | Unrealized losses | | Fair value |
| Marketable equity securities | | | | $ | 10,451 | | | $ | — | | | $ | (8,482) | | | $ | 1,969 | |
|
| | | | | | | | | | | | | | | | |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
| December 31, 2016 | | | | | | | | |
| Cash equivalents: | | | | | | | |
|
|
| Money market funds | | $ | 26,257 |
| | $ | — |
| | $ | — |
| | $ | 26,257 |
|
| U.S. Treasury obligations | | — |
| | 1,001 |
| | — |
| | 1,001 |
|
| Investments, available for sale: | | | | | | | | |
| U.S. Treasury obligations | | 10,034 |
| | 5,503 |
| | — |
| | 15,537 |
|
| Government agency securities | | 24,545 |
| | 15,548 |
| | — |
| | 40,093 |
|
| Total | | $ | 60,836 |
| | $ | 22,052 |
| | $ | — |
| | $ | 82,888 |
|
CONCERT PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Cash, Cash Equivalents and Investments, Available for Sale
Cash, cash equivalents and investments, available for sale included the following at December 31, 2017 and December 31, 2016 (in thousands):
|
| | | | | | | | | | | | | | | | | | |
| | | Average maturity | | Amortized cost | | Unrealized gains | | Unrealized losses | | Fair value |
| December 31, 2017 | | | | | | | | | | |
| Cash | | | | $ | 19,557 |
| | $ | — |
| | $ | — |
| | $ | 19,557 |
|
| Money market funds | | | | 8,108 |
| | — |
| | — |
| | 8,108 |
|
| Cash and cash equivalents | | | | $ | 27,665 |
| | $ | — |
| | $ | — |
| | $ | 27,665 |
|
| | | | | | | | | | | |
| U.S. Treasury obligations | | 184 days | | $ | 54,004 |
| | $ | — |
| | $ | (94 | ) | | $ | 53,910 |
|
| Government agency securities | | 229 days | | 121,903 |
| | — |
| | (313 | ) | | 121,590 |
|
| Investments, available for sale | | | | $ | 175,907 |
| | $ | — |
| | $ | (407 | ) | | $ | 175,500 |
|
|
| | | | | | | | | | | | | | | | | | |
| | | Average maturity | | Amortized cost | | Unrealized gains | | Unrealized losses | | Fair value |
| December 31, 2016 | | | | | | | | | | |
| Cash | | | | $ | 13,297 |
| | $ | — |
| | $ | — |
| | $ | 13,297 |
|
| Money market funds | | | | 26,257 |
| | — |
| | — |
| | 26,257 |
|
| U.S. Treasury obligations | | 31 days | | 1,001 |
| | — |
| | — |
| | 1,001 |
|
| Cash and cash equivalents | | | | $ | 40,555 |
| | $ | — |
| | $ | — |
| | $ | 40,555 |
|
| | | | | | | | | | | |
| U.S. Treasury obligations | | 125 days | | $ | 15,534 |
| | $ | 4 |
| | $ | (1 | ) | | $ | 15,537 |
|
| Government agency securities | | 140 days | | 40,103 |
| | 1 |
| | (11 | ) | | 40,093 |
|
| Investments, available for sale | | | | $ | 55,637 |
| | $ | 5 |
| | $ | (12 | ) | | $ | 55,630 |
|
5. Restricted Cash
At December 31, 2017 and 2016, restricted cash was $1.6 million and $0.4 million, respectively. The restrictedRestricted cash as of December 31, 20172021 and 2016 is2020 was held as collateral for stand-by letters of credit issued by the Company to its landlordslandlord in connection with the leases of the Company'scurrent lease for its principal facilities located at 65 Hayden Avenue, Lexington, Massachusetts facilities.Massachusetts. For additional information regarding the Company's leases, please referenceCompany’s lease, see Note 11. Cash, cash equivalents and restricted cash consisted of the following as of December 31, 2021 and 2020:
CONCERT PHARMACEUTICALS, INC. | | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| Cash and cash equivalents | $ | 141,636 | | | $ | 77,202 | |
| Restricted cash | 1,157 | | | 1,157 | |
| Total cash, cash equivalents and restricted cash shown in the statements of cash flows | $ | 142,793 | | | $ | 78,359 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Property and Equipment
Property and equipment consistsconsisted of the following atas of December 31, 20172021 and 2016 (in thousands):2020:
| | | | | Estimated useful life (in years) | | December 31, 2017 | | December 31,
2016 | | Estimated useful life
(in years) | | December 31,
2021 | | December 31,
2020 |
| Laboratory equipment | | 5 | | $ | 2,674 |
| | $ | 2,128 |
| Laboratory equipment | | 5 | | $ | 2,857 | | | $ | 3,352 | |
| Computer, telephone and office equipment | | 3 | | 147 |
| | 207 |
| Computer, telephone and office equipment | | 3 | | 149 | | | 881 | |
| Software | | 3 | | 160 |
| | 192 |
| Software | | 3 | | 286 | | | 187 | |
| Leasehold improvements | | Lesser of useful life or remaining lease term | | 6,551 |
| | 6,548 |
| Leasehold improvements | | Lesser of useful life or remaining lease term | | 6,060 | | | 5,943 | |
| | | 9,532 |
| | 9,075 |
| | 9,352 | | | 10,363 | |
| Less accumulated depreciation and amortization | | (7,367 | ) | | (6,876 | ) | Less accumulated depreciation and amortization | | (4,110) | | | (4,000) | |
| | | $ | 2,165 |
| | $ | 2,199 |
| | $ | 5,242 | | | $ | 6,363 | |
Depreciation and amortization expense was charged to operations in the amounts of $1.0 million, $0.9$1.5 million and $0.8$1.6 million for the years ended December 31, 2017, 2016,2021 and 2015,2020, respectively.
7. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consistconsisted of the following (in thousands):as of December 31, 2021 and 2020:
| | | | | | | | | | | | | | |
| | December 31,
2021 | | December 31,
2020 |
| Accrued professional fees and other | | $ | 1,094 | | | $ | 709 | |
| Employee compensation and benefits | | 3,617 | | | 3,690 | |
| Research and development expenses | | 7,648 | | | 4,618 | |
| Accrued expenses and other liabilities | | $ | 12,359 | | | $ | 9,017 | |
| | | | |
| Employee compensation and benefits, net of current portion | | $ | 28 | | | $ | 108 | |
| Accrued expenses and other liabilities, net of current portion | | $ | 28 | | | $ | 108 | |
|
| | | | | | | | |
| | | December 31, 2017 | | December 31,
2016 |
| Accrued professional fees and other | | $ | 628 |
| | $ | 487 |
|
| Employee compensation and benefits | | 2,797 |
| | 2,010 |
|
| Research and development expenses | | 521 |
| | 930 |
|
| Deferred lease incentive, current portion | | 249 |
| | 324 |
|
| Deferred rent, current portion | | 104 |
| | 102 |
|
| | | $ | 4,299 |
| | $ | 3,853 |
|
8. StockStock-Based Compensation
Stock incentive plans
The Company previously sponsored an Amended and Restated 2006 Stock Option and Grant Plan, or the 2006 Plan, which provided for the issuance of shares of common stock in the form of incentive stock options, nonstatutory stock options, awards of stock and direct stock purchase opportunities to directors, officers, employees and consultants of the Company. The 2006 Plan was replaced by the Company’s 2014 Stock Incentive Plan, or the 2014 Plan, which became effective in February 2014. The 2014 Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock awards, restricted stock units, stock appreciation rights and other stock-based awards. In addition, the 2014 Plan includes an “evergreen
CONCERT PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
provision” that allows for an annual increase in the number of shares of common stock available for issuance under the 2014 Plan. Effective January 1, 2018, 925,6152022, 1,389,561 shares were addedadded to the 2014 Plan for future issuance pursuant to this evergreen provision.
The 2006 Plan has no shares remaining available for grant, although existing stock options granted under the 2006 Plan remain outstanding. As of December 31, 2017, 1,312,8062021, 1,463,441 shares were available for future grant under the 2014 Plan.
Stock options
Stock options are granted with an exercise price equal to the closing market price of the Company’s common stock on the date of grant. Stock options generally vest ratably over one, three or four years and have contractual terms of ten years. Stock options are valued using the Black-Scholes-Merton option valuation model, and compensation cost is recognized based on such fair value over the period of vesting.
CONCERT PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides certain information related to the Company'sCompany’s outstanding stock options:options as of December 31, 2021 and 2020:
| | | | | | | | | | | Year ended December 31, | |
| | | Year ended December 31, | | | 2021 | | 2020 | |
| | | 2017 | | 2016 | | 2015 | |
| | | (in thousands, except per share data) | |
| Weighted average fair value of options granted, per option | | $ | 7.67 |
| | $ | 10.42 |
| | $ | 10.27 |
| |
| Weighted-average fair value of options granted, per option | | Weighted-average fair value of options granted, per option | | $ | 7.09 | | | $ | 6.53 | | |
| Aggregate grant date fair value of options vested during the year | | $ | 6,212 |
| | $ | 4,614 |
| | $ | 3,470 |
| Aggregate grant date fair value of options vested during the year | | $ | 8,046 | | | $ | 8,506 | | |
| Total cash received from exercises of stock options | | $ | 6,576 |
| | $ | 601 |
| | $ | 1,844 |
| Total cash received from exercises of stock options | | $ | 138 | | | $ | 833 | | |
| Total intrinsic value of stock options exercised | | $ | 8,692 |
| | $ | 1,160 |
| | $ | 9,126 |
| |
| Total intrinsic market value of stock options exercised | | Total intrinsic market value of stock options exercised | | $ | 45 | | | $ | 452 | | |
The weighted averageweighted-average fair value of options granted in the years ended December 31, 2017, 20162021 and 2015,2020 reflect the following weighted-average assumptions:
| | | | | | | | | | | | | | | | | |
| | | Year ended December 31, | | |
| | | 2021 | | 2020 | | | |
| Expected volatility | | 69.83% | | 68.60% | | | |
| Expected term | | 6.0 years | | 6.0 years | | | |
| Risk-free interest rate | | 0.60% | | 1.31% | | | |
| Expected dividend yield | | —% | | —% | | | |
|
| | | | | | | | | |
| | | Year ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Expected volatility | | 78.15 | % | | 78.29 | % | | 73.38 | % |
| Expected term | | 6.0 years |
| | 6.0 years |
| | 6.0 years |
|
| Risk-free interest rate | | 2.07 | % | | 1.36 | % | | 1.69 | % |
| Expected dividend yield | | — | % | | — | % | | — | % |
Expected volatility. For the yearyears ended December 31, 2017,2021 and 2020, expected volatility was estimated using a weighted-average of the Company's historical volatility of its common stock andcalculated based on the historical volatility of the Company’s common stock of a representative group of publicly traded companies from the biopharmaceutical industry with similar characteristics as the Company, including stage of product development and therapeutic focus. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.stock.
For year ended December 31, 2016 and 2015, the Company estimated expected volatility using only the historical volatility from a representative group of publicly traded companies from the biopharmaceutical industry with similar characteristics including stage of product development and therapeutic focus.
Expected term. The expected term of awards represents the period of time that the awards are expected to be outstanding. The expected term was determined using the simplified method as prescribed by the Securities and Exchange Commission Staff Accounting BulletinSAB No. 107, Share-Based Payment,as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term of stock options granted to employees.
Risk-free interest rate. For the years ended December 31, 2017, 20162021 and 2015,2020, the risk-free interest rate was estimated using an average of treasury bill interest rates over a period commensurate with the expected term of the option at the time of grant.
Expected dividend yield. The expected dividend yield is zero, as the Company has not paid any dividends to date and has no current intention of paying cash dividends.
Forfeiture rate. The Company elected to estimate potential forfeiture of stock grants and adjust compensation cost recorded accordingly. The estimate of forfeitures is adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up in the period of change and impact the amount of stock compensation expense to be recognized in future periods. For the years ended December 31, 2017, 20162021 and 2015,2020, the Company assumed forfeiture rates of approximately 7%, 6%, and 6%, respectively..
CONCERT PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of stock option activity underfor the 2006 Planyear ended December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of
Option Shares | | Weighted
Average
Exercise
Price per
Share | | Weighted
Average
Remaining
Contractual
Term | | Aggregate
Intrinsic Market
Value |
| | | | | | | (in years) | | |
| Outstanding at December 31, 2020 | | 4,652,870 | | | $ | 14.48 | | | | | |
| Granted | | 861,143 | | | $ | 11.57 | | | | | |
| Exercised | | (24,146) | | | $ | 5.72 | | | | | |
| Forfeited or expired | | (292,547) | | | $ | 11.48 | | | | | |
| Outstanding at December 31, 2021 | | 5,197,320 | | | $ | 14.21 | | | 6.05 | | $ | 1 | |
| Exercisable at December 31, 2021 | | 3,911,142 | | | $ | 14.81 | | | 5.32 | | $ | 1 | |
Vested and expected to vest at December 31, 2021 (1) | | 5,099,993 | | | $ | 14.25 | | | 6.01 | | $ | 1 | |
(1)Represents the number of vested stock option shares as of December 31, 2021, plus the number of unvested stock option shares that the Company estimated as of December 31, 2021 would vest, based on the unvested stock option shares as of December 31, 2021 and 2014 Plan:an estimated forfeiture rate of 7%.
|
| | | | | | | | | | | | |
| | | Number of Option Shares | | Weighted Average Exercise Price per Share | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value |
| | | | | | | (In years) | | (In thousands) |
| Outstanding at December 31, 2016 | | 2,953,961 |
| | $ | 10.49 |
| | | | |
| Granted | | 1,065,500 |
| | $ | 11.25 |
| | | | |
| Exercised | | (828,263 | ) | | $ | 8.06 |
| | | | |
| Forfeited or expired | | (301,476 | ) | | $ | 12.48 |
| | | | |
| Outstanding at December 31, 2017 | | 2,889,722 |
| | $ | 11.25 |
| | 7.06 | | 42,241 |
|
| Exercisable at December 31, 2017 | | 1,607,015 |
| | $ | 10.11 |
| | 6.09 | | 25,320 |
|
| Vested and expected to vest at December 31, 2017 (1) | | 2,784,591 |
| | $ | 11.21 |
| | 7.01 | | 40,826 |
|
| |
(1) | This represents the number of vested stock option shares as of December 31, 2017, plus the number of unvested stock option shares that the Company estimated as of December 31, 2017 would vest, based on the unvested stock option shares at December 31, 2017 and an estimated forfeiture rate of 7%. |
As of December 31, 20172021, there was $9.9$8.5 million of total unrecognized compensation cost related to stock options that are expected to vest. Total unrecognized compensation cost will be adjusted for future changes in forfeitures. The stock option costs are expected to be recognized over a weighted-average remaining vesting period of 2.32.1 years.
Restricted Stockstock units
On July 6, 2017,August 15, 2019, or the 2019 RSU grant date, the Company granted 0.50.4 million RSUs, or the 2019 RSUs, to executivescertain officers and employees. The awardsAll of the 2019 RSUs are service-based and vest annually over two years. 35% of the 2019 RSUs vested on the first anniversary of the 2019 RSU grant date, and the remainder vested on the second anniversary of the 2019 RSU grant date.
On February 14, 2020, or the 2020 RSU grant date, the Company granted 0.4 million RSUs, or the 2020 RSUs, to certain officers and employees. All of the 2020 RSUs are service-based and vest ratably over three years, with one third of the 2020 RSUs vesting on each anniversary of the 2020 RSU grant date through February 14, 2023.
On January 5, 2021, or the January 2021 RSU grant date, the Company granted 0.3 million RSUs, or the January 2021 RSUs, to officers and employees. All of the January 2021 RSUs are service-based and vest ratably over three years, with one third of the January 2021 RSUs vesting on each anniversary of the January 2021 RSU grant date through January 5, 2024.
On June 10, 2021, or the June 2021 RSU grant date, the Company granted 0.2 million RSUs, or the June 2021 RSUs, to employees and directors. All of the June 2021 RSUs are service-based, whereas the awards granted to executives are a blend of service-based and performance-based. Assuming all service and performance conditions are achieved, fifty percentwith half of the RSUs will vest on March 31, 2018,grants to employees vesting six months after the June 2021 RSU grant date and the remaining fifty percentremainder vesting on the first anniversary of the RSUs will vestJune 2021 RSU grant date, and the grants to directors vesting on March 31, 2019. Certain executive awards are subjectthe earlier of the first anniversary of the June 2021 RSU grant date or one day prior to the achievementCompany’s 2022 annual meeting of defined performance criteria prior to March 31, 2018, including the closing of the transaction contemplated by the Asset Purchase Agreement with Vertex Pharmaceuticals, Inc. and the institution by the Patent Trial and Appeal Board ("PTAB") of the Post Grant Review ("PGR") petition filed by the Company against Incyte Corporation. The Company is using the accelerated attribution method to recognize expense over the required service period based on its estimate of the number of performance-based awards that will vest. Upon the closing of the transaction contemplated by the Asset Purchase Agreement with Vertex, the Company deemed the corresponding performance criteria achieved and recognized expense over the remaining vesting period. In January 2018, the PTAB decided not to institute a PGR petition proceeding against Incyte and, as a result, the corresponding performance criteria is considered unachieved as of December 31, 2017. No stock compensation expense was taken on these awards. If there is a change in the estimate of the number of performance-based awards that are probable of vesting, the Company will cumulatively adjust compensation expense in the period that the change in estimate is made.
stockholders.
RSUs are not included in issued and outstanding common stock until the shares arehave vested and released.settled. As of December 31, 2017, no2021, all of the 2019 RSUs had vested, 0.1 million of the 2020 RSUs had vested and 0.1 million of the June 2021 RSUs granted to employees had vested. The fair value of an RSU is measured based on the market price of the underlying common stock as of the date of grant, reduced by the purchase price of $0.001 per share. For the year ended December 31, 2017, the weighted-average grant date fair value of RSUs is $13.87.grant.
CONCERT PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of RSU activity including both time-based and performance-based restricted stock units for the year ended December 31, 2017:
|
| | | | | | |
| | Number of RSU Shares | | Weighted Average Grant Date Fair Value |
| | | | |
| Outstanding at December 31, 2016 | — |
| | $ | — |
|
| Granted | 520,500 |
| | $ | 13.87 |
|
| Released | — |
| | $ | — |
|
| Forfeited | (3,200 | ) | | $ | 13.87 |
|
| Outstanding at December 31, 2017 | 517,300 |
| | $ | 13.87 |
|
2021: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of
RSUs | | Weighted
Average
Grant Date Fair Value | | | | |
| Outstanding at December 31, 2020 | | 661,033 | | | $ | 10.64 | | | | | |
| Granted | | 486,643 | | | $ | 9.74 | | | | | |
| Released | | (434,360) | | | $ | 9.56 | | | | | |
| Forfeited | | (85,124) | | | $ | 10.01 | | | | | |
| Outstanding at December 31, 2021 | | 628,192 | | | $ | 10.78 | | | | | |
As of December 31, 2017,2021, there was $3.8$4.3 million of unrecognized compensation cost related to restricted stock unitsRSUs that are expected to vest. This amount excludes compensation cost related to restricted stock units where the performance conditions are not considered probable of being satisfied. The RSU costs from restricted stock units likely to vest are expected to be recognized over a weighted averageweighted-average remaining vesting period of 1.0 year.1.4 years.
Stock-based compensation expense
Total stock-based compensation cost recognized forexpense related to all stock-based compensationoptions and awards recognized in the consolidated statements of operations and comprehensive income (loss)loss is as follows (in thousands):
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Research and development | | $ | 3,708 |
| | $ | 2,147 |
| | $ | 1,251 |
|
| General and administrative | | 4,792 |
| | 2,920 |
| | 1,730 |
|
| Total stock-based compensation expense | | $ | 8,500 |
| | $ | 5,067 |
| | $ | 2,981 |
|
CONCERT PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Earnings (Loss) Per Share
The Company has outstanding warrants, including those issued in connection with the Loan and Security Agreement described in Note 15, that are deemed to be participating securities. Accordingly, the Company applied the two-class method to calculate basic and diluted net earnings per share of common stock for the year ended December 31, 2017. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders. The two-class method was not applied for the years ended December 31, 20162021 and 2015 as the Company’s participating securities do not have any obligation to absorb net losses and the effect did not have a material impact on the earnings per share.2020:
| | | | | | | | | | | | | | |
| | For the Year Ended December 31, | | |
| | 2021 | | 2020 | | | |
| Research and development | $ | 6,607 | | | $ | 5,800 | | | | |
| General and administrative | 5,965 | | | 5,313 | | | | |
| Total stock-based compensation expense | $ | 12,572 | | | $ | 11,113 | | | | |
9. Loss Per Share
Basic net earnings (loss)loss per common share is calculated by dividing net income (loss)loss allocable to common stockholders by the weighted-average common shares outstanding during the period, without consideration of stock options, RSUs or preferred stock as common stock equivalents.
For periods with net income, diluted net earnings per share is calculated by either (i) adjusting the The weighted-average common shares outstanding for the dilutive effectas of December 31, 2021 and 2020 includes pre-funded warrants to purchase up to an aggregate of 1.8 million shares of common stock equivalents, including warrants, stock options and restricted stock units outstanding forthat were issued in connection with the period2020 Financing, as determined using the treasury stock method or (ii) the two-class method considering common stock equivalents, whichever is more dilutive.
discussed in Note 15. For purposes of the diluted net loss per share calculation, common stock equivalents are excluded from the calculation if their effect would be anti-dilutive. As such, basic and diluted net loss per share applicable to common stockholders are the same for periods with a net loss.
The following table illustrates the determination of earnings (loss)loss per share for each period presented.the years ended December 31, 2021 and 2020:
| | | | | | | | | | | | | | | |
| | For the Year Ended December 31, | | |
| | 2021 | | 2020 | | | | |
| Numerator: | | | | | | | |
| Net loss applicable to common stockholders - basic and diluted | $ | (80,051) | | | $ | (74,766) | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Denominator: | | | | | | | |
| Weighted-average shares outstanding - basic and diluted | 34,405 | | | 31,200 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Net loss per share applicable to common stockholders - basic and diluted | $ | (2.33) | | | $ | (2.40) | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Anti-dilutive potential common stock equivalents excluded from the calculation of net loss per share: | | | | | | | |
| Stock options | 5,197 | | 4,653 | | | | |
| Restricted stock units | 628 | | 661 | | | | |
| Warrants | 16,311 | | 61 | | | | |
| Series X1 Preferred Stock | 13,997 | | — | | | | |
CONCERT PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Basic Earnings per Share | (in thousands, except per share amounts) |
| Numerator: | | | | | |
| Net income (loss) | $ | 95,639 |
| | $ | (50,720 | ) | | $ | 24,174 |
|
| Income attributable to participating securities - basic | 444 |
| | — |
| | — |
|
| Income (loss) attributable to common stockholders - basic | 95,195 |
| | (50,720 | ) | | 24,174 |
|
| | | | | | |
| Denominator: | | | | | |
| Weighted average shares outstanding | 22,641 |
| | 22,233 |
| | 21,152 |
|
| Net income (loss) per share applicable to common stockholders - basic | $ | 4.20 |
| | $ | (2.28 | ) | | $ | 1.14 |
|
| | | | | | |
| Diluted Earnings per Share | | | | | |
| Numerator: | | | | | |
| Net income (loss) | 95,639 |
| | (50,720 | ) | | 24,174 |
|
| Income attributable to participating securities - diluted | 429 |
| | — |
| | — |
|
| Income (loss) attributable to common stockholders - diluted | 95,210 |
| | (50,720 | ) | | 24,174 |
|
| | | | | | |
| Denominator: | | | | | |
| Weighted average shares outstanding | 22,641 |
| | 22,233 |
| | 21,152 |
|
| | | |
|
| |
|
|
| Dilutive impact from: | | |
|
| |
|
|
| Stock options | 688 |
| | — |
| | 1,105 |
|
| Warrants | — |
| | — |
| | 10 |
|
| Restricted stock units | 113 |
| | — |
| | — |
|
| Weighted average shares outstanding - diluted | 23,442 |
| | 22,233 |
| | 22,267 |
|
| Net income (loss) per share applicable to common stockholders - diluted | $ | 4.06 |
| | $ | (2.28 | ) | | $ | 1.09 |
|
| | | | | | |
| Anti-dilutive potential common stock equivalents excluded from the calculation of net income (loss) per share: | | | | | |
| Stock options | 1,833 |
| | 620 |
| | 429 |
|
| Restricted stock units | 408 |
| | — |
| | — |
|
| Warrants | — |
| | 71 |
| | 61 |
|
CONCERT PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Income Taxes
New Tax Legislation
On December 22, 2017,During the President of the United States signed into law the Tax Cuts and Jobs Act (“TCJA”). This legislation makes broad and complex changes to the U.S. tax code, including, but not limited to, (i) reducing the U.S. federal statutory tax rate from 35% to 21%; (ii) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; (iii) modifying the officer’s compensation limitation, and (iv) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning afteryear ended December 31, 2017. Specifically, the TCJA limits the amount2021, the Company is able to deduct forrecorded a net operating loss carryforwards generated in taxable years beginning after December 31, 2017 to 80%before taxes of taxable$80.1 million and, since it maintains a full valuation allowance on its deferred tax assets, the Company did not record an income however these net operating loss carryforwards can be carried forward indefinitely.
The Company recognizes the effects of changes in tax law, including the TCJA, in the period the law is enacted. Accordingly, the effects of the TCJA have been recognized in the financial statementsbenefit for the year ended December 31, 2017.2021.
On July 25, 2017, the transaction contemplated by the Vertex Agreement was completed, as discussed further in Note 12, and Vertex paid the Company $160.0 million in cash, with $16.0 million initially held in escrow. For income tax purposes, the $16.0 million held in escrow was recognized under the installment method and therefore deferred until the cash was received by the Company in February 2019. Under Section 453A of the U.S. Internal Revenue Code, or the Code, the Company is required to recognize interest on the deferred tax liability with respect to the portion of the installment sale outstanding as of the close of each taxable year that exceeds $5.0 million. As a result, of the change in law, the Company recordedaccrued interest of $0.2 million for 2018. The $16.0 million initially held in escrow was released to the Company in February 2019, and the Company recognized no interest for 2019. During 2020, the Company was able to utilize $0.1 million of state research and development tax credits with its Massachusetts state tax return for the year ending December 31, 2019. The Company has established a reduction to its deferred tax assets of $8.6 million and a corresponding reduction to itsfull valuation allowance dueagainst these credits, and as such the Company booked a discrete benefit of $0.1 million in 2020 for the utilization of these credits against its Massachusetts state liability.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, was signed into law, making several changes to the reductionCode. The changes include, among other things, increasing the limitation on the amount of deductible interest expense, allowing companies to carryback certain net operating losses and increasing the amount of net operating loss carryforwards that companies can use to offset taxable income. The tax law changes in the U.S. federal statutory rate from 35% to 21%.CARES Act did not have a material impact on the Company’s income tax provision.
In addition, the new legislation has alsoThe Tax Cuts and Jobs Act, or TCJA, repealed the corporate Alternative Minimum Tax (“AMT”)alternative minimum tax, or AMT, for years after 2017. CorporationsCompanies that were previously subject to the AMT and therefore have AMT tax credit carryforwards as of December 31, 2017 are eligible for a refund of these credits for tax years beginning after 2017 and before 2022. The Company iswas subject to AMT in the amount of $1.9 million in 2017. Since the AMT payable inpaid on its 2017 will generatetax return generated an AMT credit that will be refundable between 2018 and 2022, the Company has recorded a $1.9 million income tax receivable rather than a tax expense for 2017. Further, the Company also hashad a deferred tax asset for its AMT credit carryforward related to its AMT liability paid in 2015 in the amount of $0.3 million. This deferred tax asset was previously offset by a full valuation allowance. As a result of the change in law, the Company has reclassified the 2015 AMT credit carryforward from deferred tax assets to income tax receivable. The Company has recorded a current period tax benefitreceivable during 2017. As of $0.3 million related to the reversal of the valuation allowance on its 2015 AMT credit carryforward as this amount is now refundable.
At December 31, 2017,2020, the Company has not completed its accounting for the tax effects of the enactment of the TCJA; however in certain cases we have madehad a reasonable estimate of the effects of the TCJA. For the items for which we were able to determine a reasonable estimate, we recorded an $8.6$2.3 million reduction to deferred tax assets with an offset to valuation allowance and recognized a provisional benefit for income taxes of $0.3 million for the year ended December 31, 2017. The Company’s preliminary estimate of the effects TCJA, including the remeasurement of deferred tax assets and liabilities and the recognition of an income tax benefitreceivable related to AMT tax credit carryforwards, is subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the TCJA and the filing of the Company’s tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the TCJA may require further adjustments and changestaxes in our estimates.prior years. The final determination of the effects of the TCJA will be completed as additional information becomes available, but no later than one year from the enactment of the TCJA. In all cases, we will continue to make and refine our calculations as additional analysis is completed. In addition, our estimates may also be affected as we gain a more thorough understanding of the tax law.
Income Taxes
During the year ended December 31 2017, the Company recorded net income before taxes of $95.3 million. As a result of the enactment of the TCJA, which allows for AMT to bereceived these refundable the Company recorded a tax receivable of $2.2 million as of December 31, 2017 and a $0.3 million income tax benefitcredits during the year ended December 31, 2017. The tax benefit is the result of the removal of its valuation allowance on its AMT credit carryforward as previously described. Income taxes that would otherwise have been due on the 2017 taxable income were offset with the tax benefit of net operating loss carryforwards which had previously had a full valuation allowance, except for $1.9 million of AMT incurred due to the limitation on use of net operating loss carryforwards when determining AMT. However, the 2017 AMT is also refundable under the Tax Cuts and Jobs Act of 2017 and thus we have not recorded a tax provision for this amount. The total amount of refundable AMT credits of $2.2 million is reflected as income tax receivable in the accompanying consolidated balance sheet as of December 31, 2017. We provide a full valuation allowance for any tax benefit related to net operating losses due to the uncertainty of the ability to realize such benefits.
CONCERT PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2016, the Company recorded a net loss of $50.7 million and, since it maintained a full valuation allowance on its deferred tax assets, the Company did not record an income tax benefit for the year ended December 31, 2016. The Company recorded $0.4 million in income tax expense during the year ended December 31, 2015. The tax expense is the result of alternative minimum tax (“AMT”) which, in accordance with the U.S. federal tax code as of December 31, 2015, limited the use of net operating loss carryforwards to ninety percent of AMT income resulting in an effective tax rate of approximately two percent.2021.
The Company’s ability to use its operating loss carryforwards and tax credit carryforwards to offset taxable income is subject to restrictions under Sections 382 and 383 of the United States Internal Revenue Code (the “Internal Revenue Code”).Code. Net operating loss and tax credit carryforwards are subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholdersstockholders over a three-year period in excess of 50 percent,50%, as defined under Sections 382 and 383 of the Internal Revenue Code. Such changes would limit the Company’s use of its operating loss and tax credit carryforwards. In such a situation, the Company may be required to pay income taxes, even though significant operating loss and tax credit carryforwards exist. Additionally, any future financing could result in a change in control, as defined by Sections 382 and 383 of the Code, which could further limit the Company'sCompany’s use of its operating loss and tax credit carryforwards. In determining the tax provisions for fiscal years 2017 and 2015, we assessed our ability to use our net operating loss carryforwards in accordance with Sections 382 and 383 of the Internal Revenue Code.
A reconciliation of the federal statutory income tax rate and the Company’s effective income tax rate is as follows:follows for the years ended December 31, 2021 and 2020:
| | | | | Year ended December 31, | | Year ended December 31, | |
| | | 2017 | | 2016 | | 2015 | | 2021 | | 2020 | |
| Federal statutory income tax rate | | (35.0 | )% | | 34.0 | % | | (34.0 | )% | Federal statutory income tax rate | | 21.0 | % | | 21.0 | % | |
| State income taxes | | (5.1 | )% | | 4.5 | % | | (5.3 | )% | State income taxes | | 6.4 | % | | 6.6 | % | |
| Change in valuation allowance | | 46.2 | % | | (40.3 | )% | | 32.6 | % | Change in valuation allowance | | (30.0) | % | | (30.3) | % | |
| Research and development and other credits | | 2.5 | % | | 3.1 | % | | 7.8 | % | Research and development and other credits | | 4.6 | % | | 3.5 | % | |
| Permanent items | | 0.8 | % | | (1.0 | )% | | (0.3 | )% | Permanent items | | (2.0) | % | | (0.7) | % | |
| Alternative minimum tax | | — | % | | — | % | | (1.7 | )% | |
| Other | | — | % | | (0.3 | )% | | (0.8 | )% | |
| Federal rate change | | (9.1 | )% | | — | % | | — | % | |
| | Effective income tax rate | | 0.3 | % | | — | % | | (1.7 | )% | Effective income tax rate | | — | % | | 0.1 | % | |
The significant components of the Company’s net deferred tax assets consist of the following (in thousands):as of December 31, 2021 and 2020:
CONCERT PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | December 31, | |
| | December 31, | | 2021 | | 2020 | |
| | 2017 | | 2016 | |
| Deferred tax assets: | | Deferred tax assets: | | | | | |
| Net operating loss carryforwards | $ | 11,670 |
| | $ | 53,809 |
| Net operating loss carryforwards | | $ | 73,794 | | | $ | 57,057 | | |
| Deferred revenue | 2,733 |
| | 3,948 |
| Deferred revenue | | 2,075 | | | 751 | | |
| Research and development and other credit carryforwards | 13,399 |
| | 10,791 |
| Research and development and other credit carryforwards | | 25,836 | | | 21,546 | | |
| Lease liability | | Lease liability | | 4,116 | | | 4,370 | | |
| Other | 3,811 |
| | 3,851 |
| Other | | 12,106 | | | 10,585 | | |
| | 31,613 |
| | 72,399 |
| | 117,927 | | | 94,309 | | |
| Valuation allowance | (31,613 | ) |
| (72,399 | ) | Valuation allowance | | (114,470) | | | (90,446) | | |
| Total deferred tax assets, net of valuation allowance | | Total deferred tax assets, net of valuation allowance | | $ | 3,457 | | | $ | 3,863 | | |
| Deferred tax liabilities: | | Deferred tax liabilities: | | | | | |
| Fixed assets | | Fixed assets | | $ | 1,112 | | | $ | 1,413 | | |
| Right of use asset | | Right of use asset | | 2,345 | | | 2,450 | | |
| | Total deferred tax liabilities | | Total deferred tax liabilities | | $ | 3,457 | | | $ | 3,863 | | |
| Net deferred tax assets | $ | — |
| | $ | — |
| Net deferred tax assets | | $ | — | | | $ | — | | |
Realization of the future tax benefits is dependent on many factors, including the Company’s ability to generate taxable income within the carryforward period. The Company currently has deferred tax assets in excess of its deferred tax liabilities, resulting in the Company having net deferred tax assets. The Company has evaluated the positive and negative evidence bearing upon the realizability of its net deferred tax assets and concluded that it is more likely than not that the Company will not realize the benefit of its net deferred tax assets. As a result, the net deferred tax assets have been fully reserved atas of December 31, 20172021 and 2016.2020.
Interest and penalty charges, if any, related to unrecognized tax benefits would be classified as income tax expense in the accompanying statement of operations. As of December 31, 2017,2021, the Company had no accrued interest related to uncertain tax positions.
The Company is currently open to examination under the statute of limitations by the Internal Revenue ServiceIRS and state jurisdictions for the tax years ended 20142018 through 2016.2020. Carryforward tax attributes generated in years prior to 20112018 may still be adjusted upon future examination if they have or will be used in a future period. The Company is currently not under examination by the Internal Revenue ServiceIRS or any other jurisdictions for any tax years. Since the Company is in a loss carryforward position, the Company is generally subject to examination by the U.S. federal, state and local income tax authorities for all tax years in which a loss carryforward is available.
The Lease provides for annual base rent of approximately $2.8 million in the first year following the Base Rent Commencement Date of January 1, 2019, which increases on a yearly basis by 3.0% (subject to an abatement of base rent of approximately $0.5 million at the beginning of the second year of the Lease term iflease term). There are no variable payments, exercise purchase options, penalties, fees or residual value guarantees under the Lease. The Company is not in default under the Lease). The Company will also be obligated to pay the Landlordlandlord for certain costs, taxes and operating expenses related to the Premises, subject to certain exclusions. The Company is recognizing rental expense on a straight-line basis, beginning on the lease commencement date of January 1, 2018, over the term of the lease with corresponding rent differential accounted for as deferred rent.
