CONCERT PHARMACEUTICALS, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. 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 II, Item 1A. of this Quarterly Report on Form 10-Q 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 biopharmaceutical company that is developing deuruxolitinib (which we previously referred to as CTP-543), a novel, deuterated, oral JAK1/2 inhibitor. We have successfully completed two Phase 3 clinical trials of deuruxolitinib for the treatment of adults with moderate to severe alopecia areata, a serious autoimmune dermatological disease, and intend to file an NDA with the FDA in the first half of 2023. We are conducting pre-commercial activities, with the intent of commercializing deuruxolitinib inthe United States ourselves or with the assistance of strategic partners. If we are successful in obtaining FDA approval for deuruxolitinib for the treatment of adults with moderate to severe alopecia areata, we intend to evaluate deuruxolitinib in younger patients with alopecia areata and explore expanding deuruxolitinib into additional indications. We are also assessing both internal and potential in-licensed candidates for pipeline expansion. Deuruxolitinib Deuruxolitinib Opportunity We believe that the market opportunity to treat alopecia areata withinthe United States is significant. Based on a recent large cross-sectional survey study, it is estimated that the current prevalence of alopecia areata inthe United States may be up to approximately 1.5 million persons (Benigno M. Clinical, Cosmetic and Investigational Dermatology 2020). The study also estimates that about 43% of the alopecia areata population inthe United States has 50% or greater loss of scalp hair. Given this prevalence and the substantial impact of alopecia areata on quality of life, the burden of alopecia areata withinthe United States is considerable. We believe that the market opportunity withinthe United States could support multiple approved treatments. Deuruxolitinib is an oral JAK1/2 inhibitor that we are developing for the treatment of moderate to severe alopecia areata. The FDA has granted deuruxolitinib Breakthrough Therapy designation for the treatment of adult patients with moderate to severe alopecia areata and Fast Track designation for the treatment of alopecia areata. We have successfully completed two Phase 3 clinical trials of deuruxolitinib and intend to file an NDA with the FDA in the first half of 2023. Patients who have experienced hair regrowth while taking a JAK inhibitor to treat their alopecia areata commonly experience hair loss after ceasing to take the JAK inhibitor (Hogan S. J Clin Aesthet Dermatol. 2019 and Ramírez-Marín H.A. DrugDes Devel Ther . 2022). As a result, if we are successful in obtaining FDA approval for deuruxolitinib, we expect that deuruxolitinib will need to be used continuously in order for patients to maintain the hair that has regrown.
Clinical Development of Deuruxolitinib
We have completed two Phase 3 clinical trials and multiple Phase 2 clinical trials of deuruxolitinib for the treatment of adults with moderate to severe alopecia areata.
Phase 3 clinical trials We have conducted two Phase 3 clinical trials of deuruxolitinib, THRIVE-AA1 and THRIVE-AA2. Both trials were double-blind, randomized, placebo-controlled Phase 3 clinical trials evaluating 8 mg twice-daily and 12 mg twice-daily doses of deuruxolitinib compared to placebo in adult patients with moderate to severe alopecia areata at sites inthe United States ,Canada andEurope . Patients enrolled in both trials were required to have at least 50 percent scalp hair loss due to alopecia areata, as measured by the Severity of Alopecia Tool, or SALT. A SALT score of 100 represents total scalp hair loss, whereas a score of 0 represents no scalp hair loss. THRIVE-AA1 enrolled 706 patients, and THRIVE-AA2 enrolled 517 patients. The primary efficacy endpoint for both trials was the percentage of patients achieving an absolute SALT score of 20 or less (meaning 20 percent or less scalp hair loss) at Week 24 of treatment. 30 -------------------------------------------------------------------------------- The key secondary endpoints for both trials were the percentage of responders on a Hair Satisfaction Patient Reported Outcome scale at Week 24 and the percentage of patients achieving absolute SALT scores of 20 or less at each of Weeks 20, 16, 12 and 8. THRIVE-AA1 InMay 2022 , we announced positive topline results from THRIVE-AA1. The primary efficacy endpoint and all key secondary endpoints for THRIVE-AA1 were met with statistical significance in both the 8 mg twice-daily and 12 mg twice-daily dose groups relative to placebo. Treatment with deuruxolitinib was generally well tolerated in THRIVE-AA1. The average baseline SALT score across all patients in THRIVE-AA1 was approximately 85.9 (corresponding to approximately 14% average scalp hair coverage). A statistically significant proportion of patients treated with either 8 mg twice-daily or 12 mg twice-daily of deuruxolitinib in THRIVE-AA1 experienced greater scalp regrowth compared to placebo. The proportion of patients achieving a SALT score of 20 or less at Week 24 of treatment was 41.5 percent in the 12 mg twice-daily dose group and 29.6 percent in the 8 mg twice-daily dose group, compared to 0.8 percent of patients in the placebo group. The treatment difference for both dose groups of deuruxolitinib relative to placebo was statistically significant (p<0.0001). The safety profile seen with deuruxolitinib in THRIVE-AA1 was consistent with previous studies. The most common (?5%) side effects in any dose group were headache, acne, upper respiratory infection, increased creatine kinase levels, COVID-19 infection and nasopharyngitis. Upper respiratory infections were greater in the placebo group than in either of the deuruxolitinib dose groups. No pulmonary embolisms or deep vein thromboses were observed in the trial. One patient treated with the 8 mg twice-daily dose and one patient treated with the 12 mg twice-daily dose developed herpes zoster (shingles). Serious adverse events were reported in nine patients, with only one patient (in the 8 mg twice-daily dose group) having events (2) that were assessed as possibly related to treatment. Four patients who reported serious adverse events were in the placebo group.
THRIVE-AA2
InAugust 2022 , we announced positive topline results from THRIVE-AA2. The primary efficacy endpoint and all key secondary endpoints for THRIVE-AA2 were met with statistical significance in both the 8 mg twice-daily and 12 mg twice-daily dose groups relative to placebo. Treatment with deuruxolitinib was generally well tolerated in THRIVE-AA2. The average baseline SALT score across all patients in THRIVE-AA2 was approximately 87.9 (corresponding to approximately 12% average scalp hair coverage). A statistically significant proportion of patients treated with either 8 mg twice-daily or 12 mg twice-daily of deuruxolitinib in THRIVE-AA2 experienced greater scalp regrowth compared to placebo. The proportion of patients achieving a SALT score of 20 or less at Week 24 of treatment was 38.3 percent in the 12 mg twice-daily dose group and 33.0 percent in the 8 mg twice-daily dose group, compared to 0.8 percent of patients in the placebo group. The treatment difference for both dose groups of deuruxolitinib relative to placebo was statistically significant (p<0.0001). The safety profile seen with deuruxolitinib in THRIVE-AA2 was consistent with previous studies. The most common (?5%) side effects in any dose group were COVID-19 infection, nasopharyngitis, increased creatine kinase levels, acne and headache. No pulmonary embolisms or deep vein thromboses were observed in the trial. Two patients treated with the 8 mg twice-daily dose and two patients treated with the 12 mg twice-daily dose developed herpes zoster (shingles). Five serious adverse events were reported in five patients, with only one event (in the 8 mg twice-daily dose group) that was assessed as possibly related to treatment.
Phase 2 clinical trials
InSeptember 2019 , we announced results from a Phase 2 double-blind, randomized, dose-ranging trial to evaluate three sequential doses of deuruxolitinib (4, 8 and 12 mg twice-daily) and a placebo control in 149 patients with moderate to severe alopecia areata. Patients treated with either 8 mg twice-daily or 12 mg twice-daily doses of deuruxolitinib met the primary efficacy endpoint with statistically significant differences (p <0.001) relative to placebo in the percentage of patients achieving a ? 50% relative change from baseline at 24 weeks. A numerically but not statistically greater percentage of patients treated with the 4 mg twice-daily dose of deuruxolitinib met the primary efficacy endpoint, and the 4 mg twice-daily dose was not studied further in our Phase 3 clinical trials. Treatment with deuruxolitinib was generally well tolerated. The most common side effects in the 8 mg twice-daily or 12 mg twice-daily dose groups were headache, nasopharyngitis, upper respiratory tract infection, acne, nausea and low-density lipoprotein increase. One serious adverse event was reported in the 12 mg twice-daily dose group as possibly related to treatment; however, after a brief interruption, treatment continued and this patient completed the trial. No thromboembolic events were reported during the trial. 31 -------------------------------------------------------------------------------- In addition, we completed two Phase 2 clinical trials evaluating twice-daily dosing of deuruxolitinib compared to once-daily dosing of deuruxolitinib. Based on the findings from those trials, we utilized the 8 mg twice-daily and 12 mg twice-daily doses in our Phase 3 clinical trials of deuruxolitinib. The 8 mg twice-daily and 12 mg twice-daily arms of those studies provided efficacy comparable to the 8 mg twice-daily and 12 mg twice-daily arms, respectively, of our Phase 2 dose-ranging trial.
Other clinical trials
Eligible patients from our efficacy and safety studies with deuruxolitinib may also enroll in one of our open label, long-term extension studies. InJuly 2021 , we provided an update showing that, relative to our Phase 2 clinical trials of deuruxolitinib, hair regrowth using the SALT score was maintained or improved in the great majority of patients through one year of continuous dosing with 12 mg twice-daily of deuruxolitinib.
Additional clinical trials of deuruxolitinib are also ongoing to support the submission of an NDA, which is currently planned for the first half of 2023.
Earlier-Stage Pipeline
We are currently assessing earlier-stage pipeline candidates as potential development candidates, including a once-daily, modified release formulation of deuruxolitinib.
COLLABORATION PRODUCT CANDIDATES
In addition to our wholly-owned development programs, we have entered into collaborative arrangements with companies to develop deuterium-modified versions of their marketed products. Our partners are currently responsible for all development and future commercialization activities under these arrangements. In each of these collaborations, the deuterium-modified compound was independently discovered by us. For example, inFebruary 2012 , we entered into a development and license agreement with Avanir for the worldwide rights to develop, manufacture and commercialize AVP-786. AVP-786 is a combination of deudextromethorphan hydrobromide (d6-DM) and quinidine sulfate (Q), a CYP2D6 inhibitor, being investigated for the treatment of neurologic and psychiatric disorders. In 2019, Avanir completed two Phase 3 clinical trials evaluating AVP-786 for the treatment of agitation associated with dementia of the Alzheimer's type. The second of the Phase 3 clinical trials did not meet its primary or key secondary endpoints; however, following additional data analysis, Avanir decided to continue developing AVP-786 for the treatment of agitation associated with dementia of the Alzheimer's type. Three additional Phase 3 clinical trials and an open label, long-term extension study for Alzheimer's agitation are ongoing. Additionally, Avanir is conducting a Phase 2/3 clinical trial evaluating AVP-786 for the treatment of negative symptoms of schizophrenia. Under the Avanir Agreement, we received an upfront payment of$2.0 million and have received milestone payments of$6.0 million . We are eligible to earn up to$37.0 million in regulatory and commercial launch milestone payments with respect to AVP-786 and up to$125.0 million in sales-based milestone payments. Avanir is also 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. The royalty rate is reduced, on a country-by-country basis, during any period within the royalty term when there is no patent claim covering the licensed product in the particular country. We sold a portion of our right to receive these royalties in connection with the 2021 Financing. Initially, the Investors collectively owned 35% of such royalties, with the percentage increasing incrementally up to 50% if all of the warrants issued in connection with the financing are exercised by the Investors. Based on the full exercise of the First Tranche Warrants, the Investors' collective ownership of such royalties increased to 42.5%.
ASSET PURCHASE AGREEMENT WITH VERTEX PHARMACEUTICALS FOR CTP-656
InJuly 2017 , we completed the sale of worldwide 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 cash. Additionally, upon the achievement of certain milestone events, Vertex agreed to pay us an aggregate of up to$90.0 million . InMay 2021 , we entered into 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 are not entitled to receive any further payments pursuant to the Vertex Agreement, as amended by the Vertex Amendment. 32 --------------------------------------------------------------------------------
COVID-19 PANDEMIC
The COVID-19 pandemic continues to evolve. We could be materially and adversely affected by the risks, or the public perception of the risks, related to an epidemic, pandemic or other public health crisis, such as the COVID-19 pandemic, including, but not limited to, potential delays in our clinical trials or submission of an NDA. Although restrictions inthe United States due to the COVID-19 pandemic have been lifted, the ultimate extent of the impact of any epidemic, 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 will depend on future developments, which cannot be accurately predicted. Accordingly, we cannot predict the extent to which our business, financial condition and results of operations may be affected by the COVID-19 pandemic, such as the emergence of new variants.
LIQUIDITY AND GOING CONCERN
As ofSeptember 30, 2022 , we had cash, cash equivalents and investments of$148.9 million and net working capital of$139.8 million . We have incurred cumulative net losses of$440.1 million since our 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 seek marketing approval for deuruxolitinib and conduct our open label, long-term extension studies and other clinical trials to support the submission of our NDA. For information regarding our recently completed equity financings, see Notes 12, 13 and 14 in the consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. 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. We are also subject to larger macroeconomic risks, including stock market disruptions, rising inflation and interest rates, and other macroeconomic factors that may affect the cost or availability of raising additional capital. 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 the 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, cash
equivalents and investments will allow us to meet our liquidity requirements
through the second quarter of 2023. 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 our
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assessment that there is substantial doubt about our ability to continue as a
going concern for a period of at least twelve months from the issuance date of
this Quarterly Report on Form 10-Q. 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 raised to support further
operations. There can be no assurance that such a plan would be successful.
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--------------------------------------------------------------------------------FINANCIAL OPERATIONS OVERVIEW
Since our inception in 2006, we have devoted substantially all of our resources to our research and development efforts, including activities to develop 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, or cGMPs, provide general and administrative support for these operations and establish our intellectual property. We have generated an accumulated deficit of$440.1 million since inception throughSeptember 30, 2022 and will require substantial additional capital to fund our ongoing activities. We do not have any products approved for sale and have not generated any revenue from product sales. We have financed our operations to date primarily through the public offering and private placement of our equity, debt financing, funding from collaborations and patent assignments, asset sales and other arrangements. 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. Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We expect our expenses to increase in connection with our ongoing activities, particularly as we seek marketing approval for deuruxolitinib and conduct our open label, long-term extension studies and other clinical trials to support the submission of our NDA. 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, collaboration 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.
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 asset 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 on 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 payments for the sale of 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 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;
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•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 marketing 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 marketing 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' 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 cost
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 development programs and plans.
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--------------------------------------------------------------------------------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 both 2022 and 2021, we incurred expenses for intellectual property matters related to deuruxolitinib. We anticipate that our general and administrative expenses will increase in the future as our pipeline grows and matures and we seek marketing approval for and prepare to commercialize our product candidates. In particular, we anticipate an increase in payroll and related expenses as we seek marketing approval for deuruxolitinib and prepare for commercial operations, especially as it relates to the sales, marketing and distribution of deuruxolitinib.
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, the types of securities included in our portfolio and prevailing interest rates during the period. Our current investment policy is to maintain a diversified investment portfolio ofU.S. government-backed securities and money market mutual funds consisting ofU.S. government-backed securities.
Unrealized (loss) gain on marketable equity securities
Unrealized (loss) gain on marketable equity securities consists of changes in the fair value of shares of common stock of Processa Pharmaceuticals, Inc., or Processa, held by us.
Unrealized gain on warrant liabilities
Unrealized gain on warrant liabilities consists of changes in the fair value of warrant liabilities resulting from the 2021 Financing, as discussed further in Note 13 in the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Income taxes
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. As ofSeptember 30, 2022 , we forecast an ordinary pre-tax loss for the year endedDecember 31, 2022 and, since we maintain a full valuation allowance on our deferred tax assets, we did not record an income tax benefit for the nine months endedSeptember 30, 2022 .
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES
Our critical accounting policies are those policies which require the most significant judgments and estimates in the preparation of our condensed consolidated financial statements.
There have been no material changes to our critical accounting policies as
detailed in our Annual Report on Form 10-K for the fiscal year ended
PENDING AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
For detailed information regarding recently issued accounting pronouncements and the actual and expected impact on our condensed consolidated financial statements, see Note 2 in the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS
Discussion of the three and nine months ended
The following table summarizes our results of operations for the three and nine
months ended
Three Months Ended Nine Months Ended
September 30, September 30,
(Amounts in thousands) 2022 2022
Revenue:
License and research and development revenue $ 8 $ 29 Operating expenses: Research and development 24,364 75,708 General and administrative 5,250 15,639 Total operating expenses 29,614 91,347 Loss from operations (29,606) (91,318) Investment income 785 951 Unrealized loss on marketable equity securities (164) (788) Unrealized gain on warrant liabilities 81 975 Net loss $ (28,904) $ (90,180)
Research and development expenses
The following table summarizes our research and development expenses for the three and nine months endedSeptember 30, 2022 , with our external research expenses separately classified by program and our internal research expenses separately classified by category. Three Months Ended Nine Months Ended September 30, September 30, (Amounts in thousands) 2022 2022 Deuruxolitinib external expenses $ 18,687 $ 58,164 External expenses for other programs 127 294 Employee and contractor-related expenses 4,220 13,254 Facility and other expenses 1,330 3,996 Total research and development expenses $ 24,364 $ 75,708 Research and development expenses were$24.4 million and$75.7 million for the three and nine months endedSeptember 30, 2022 , respectively. Deuruxolitinib external expenses increased$3.7 million and$21.0 million for the three and nine months endedSeptember 30, 2022 , respectively, compared to the three and nine months endedSeptember 30, 2021 primarily due to our Phase 3 clinical program and open label, long-term extension studies. External expenses for other programs consisted of costs incurred to develop our research pipeline. Employee and contractor-related expenses for the three and nine months endedSeptember 30, 2022 decreased by$0.9 million and$3.0 million , respectively, compared to the three and nine months endedSeptember 30, 2021 primarily due to decreases in cash compensation and non-cash stock-based compensation expenses. Facility and other expenses consisted primarily of rent and maintenance of the Premises. 38 --------------------------------------------------------------------------------
General and administrative expenses
The following table summarizes our general and administrative expenses for the
three and nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
(Amounts in thousands) 2022 2022
Employee salaries and benefits $ 2,505 $ 7,631
External professional service expenses 1,549 4,402
Facility, technology and other expenses 1,133 3,407
Depreciation and amortization 63 199
Total general and administrative expenses $ 5,250 $ 15,639
General and administrative expenses were $5.3 million and $15.6 million for the
three and nine months ended September 30, 2022 , respectively. General and
administrative expenses decreased $0.2 million and $0.9 million for the three
and nine months ended September 30, 2022 , respectively, as compared to the three
and nine months ended September 30, 2021 primarily due to decreases in non-cash
stock-based compensation expenses.
Investment income
Investment income was$0.8 million and$1.0 million for the three and nine months endedSeptember 30, 2022 , respectively, and consisted of interest income earned on cash equivalents and investments. Investment income increased$0.8 million and$0.9 million for the three and nine months endedSeptember 30, 2022 , respectively, as compared to the three and nine months endedSeptember 30, 2021 due to the purchase of short-term investments during 2022.
Unrealized loss on marketable equity securities
Unrealized loss on marketable equity securities was$0.2 million and$0.8 million for the three and nine months endedSeptember 30, 2022 , respectively. The unrealized loss on marketable equity securities consisted of changes in the fair value of shares of common stock of Processa held by us.
Unrealized gain on warrant liabilities
Unrealized gain on warrant liabilities was$0.1 million and$1.0 million for the three and nine months endedSeptember 30, 2022 , respectively. The unrealized gain on warrant liabilities consisted of changes in the fair value of warrant liabilities related to the 2021 Financing, as discussed further in Note 13 in the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. 39 --------------------------------------------------------------------------------
Discussion of the three and nine months ended
The following table summarizes our results of operations for the three and nine
months ended
Three Months Ended Nine Months Ended
September 30, September 30,
(Amounts in thousands) 2021 2021
Revenue:
License and research and development revenue $ 4 $ 26 Other revenue 539 32,539 Total revenue 543 32,565 Operating expenses: Research and development 21,876 60,560 General and administrative 5,462 16,561 Total operating expenses 27,338 77,121 Loss from operations (26,795) (44,556) Investment income 4 44 Unrealized gain on marketable equity securities 113 590 Net loss $ (26,678) $ (43,922) Revenue Total revenue was$0.5 million and$32.6 million for the three and nine months endedSeptember 30, 2021 , respectively. The revenue for the nine months endedSeptember 30, 2021 was primarily attributable to the$32.0 million in cash received from Vertex in exchange for the removal of the Milestone Obligation.
Research and development expenses
The following table summarizes our research and development expenses for the three and nine months endedSeptember 30, 2021 , with our external research expenses separately classified by program and our internal research expenses separately classified by category. Three Months Ended Nine Months Ended September 30, September 30, (Amounts in thousands) 2021 2021 Deuruxolitinib external expenses $ 14,997 $ 37,121 CTP-692 external expenses 12 2,064 External expenses for other programs 392 960 Employee and contractor-related expenses 5,122 16,304 Facility and other expenses 1,353 4,111 Total research and development expenses $ 21,876 $ 60,560 Research and development expenses were$21.9 million and$60.6 million for the three and nine months endedSeptember 30, 2021 , respectively. Deuruxolitinib external expenses primarily related to clinical development, including two Phase 3 clinical trials. CTP-692 external expenses were primarily attributable to the Phase 2 clinical trial, although development activities related to CTP-692 were discontinued following such trial failing to meet the primary or other secondary endpoints. External expenses for other programs consisted of costs incurred to develop our research pipeline. Employee and contractor-related expenses consisted primarily of cash compensation and non-cash stock-based compensation expenses. Facility and other expenses consisted primarily of rent and maintenance of the Premises. 40 --------------------------------------------------------------------------------
General and administrative expenses
The following table summarizes our general and administrative expenses for the
three and nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
(Amounts in thousands) 2021 2021
Employee salaries and benefits $ 2,763 $ 8,822
External professional service expenses 1,488 4,338
Facility, technology and other expenses 1,142 3,179
Depreciation and amortization 69 222
Total general and administrative expenses $ 5,462 $ 16,561
Investment income
Investment income was $4 thousand and $44 thousand for the three and nine months
ended September 30, 2021 , respectively, and consisted of interest income earned
on cash equivalents.
Unrealized gain on marketable equity securities
Unrealized gain on marketable equity securities was
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--------------------------------------------------------------------------------LIQUIDITY AND CAPITAL RESOURCES
We have incurred cumulative losses and negative cash flows from operations since our inception inApril 2006 , and as ofSeptember 30, 2022 , we had an accumulated deficit of$440.1 million . We anticipate that we will continue to incur losses for at least the next several years. We expect our expenses to increase in connection with our ongoing activities, particularly as we seek marketing approval for deuruxolitinib and conduct our open label, long-term extension studies and other clinical trials to support the submission of our NDA. As a result, we will need additional capital to fund our operations, which we may raise through a combination of equity offerings, debt financings, collaboration and licensing arrangements and other sources. As ofSeptember 30, 2022 , we had cash, cash equivalents and investments of$148.9 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 inU.S. government-backed securities and money market mutual funds consisting ofU.S. government-backed securities. We have financed our operations to date primarily through the public offering and private placement of our equity, debt financing, funding from collaborations and patent assignments, asset sales and other arrangements. InFebruary 2014 , we completed our initial public offering 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 . InMarch 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 . InJanuary 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 theJanuary 2020 financing was$70.1 million . InJune 2022 , we sold 11,500,000 shares of common stock through an underwritten public offering at a price to the public of$4.75 per share, raising aggregate net proceeds of$51.0 million . InJuly 2017 , we completed the transaction contemplated by 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 inFebruary 2019 . InMay 2021 , we entered into the Vertex Amendment and received an additional$32.0 million in cash. InMarch 2019 , we entered into the ATM Agreement with Jefferies. As ofSeptember 30, 2022 , we had sold 2,209,687 shares of our common stock pursuant to the ATM Agreement for aggregate net proceeds of$25.2 million . InNovember 2021 , we closed the 2021 Financing, raising aggregate net proceeds of$64.4 million . The 2021 Financing consisted of the sale of (i) 2,253,000 shares of common stock, (ii) 13,997 shares of Series X1 Preferred 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. InJune 2022 , the First Tranche Warrants were amended and a portion was exercised, resulting in proceeds of$18.9 million . InAugust 2022 , the remaining First Tranche Warrants were exercised, resulting in proceeds of$20.9 million . Management does not believe that our cash, cash equivalents and investments of$148.9 million as ofSeptember 30, 2022 are sufficient to fund our current operating plan for at least twelve months after the issuance of this Quarterly Report on Form 10-Q. Based on our current operating plan, we anticipate having sufficient capital to fund our operations through the second quarter of 2023. Our history of significant losses, negative cash flows from operations, limited liquidity resources currently on hand and dependence on our ability to obtain additional financing to fund our operations after the current capital resources are exhausted, about which there can be no certainty, raises substantial doubt about our ability to continue as a going concern. The interim consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q were prepared under the assumption that we will continue as a going concern and do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty. 42 --------------------------------------------------------------------------------
Cash flows
The following table sets forth the primary sources and uses of cash for each of
the periods set forth below:
Nine Months Ended September 30,
(Amounts in thousands) 2022 2021
Net cash (used in) provided by:
Operating activities $ (83,185) $ (28,676)
Investing activities (54,113) 52,474
Financing activities 90,851 2,664Net (decrease) increase in cash, cash equivalents and restricted cash
$ (46,447) $ 26,462
Operating activities. The cash used for operating activities generally approximates our net loss adjusted for non-cash items and changes in operating assets and liabilities. During the nine months endedSeptember 30, 2022 , our operating activities used cash of$83.2 million as compared to cash used in operating activities of$28.7 million during the nine months endedSeptember 30, 2021 . Cash used in operating activities during both the nine months endedSeptember 30, 2022 and 2021 was primarily driven by our development activities associated with deuruxolitinib. Cash used in operating activities during the nine months endedSeptember 30, 2021 also includes$32.0 million in cash received from Vertex in exchange for the removal of the Milestone Obligation. Investing activities. Net cash used in or provided by investing activities consisted of purchases of investments, proceeds from the maturity of investments and purchases of fixed assets. Net cash used in purchases of investments for the nine months endedSeptember 30, 2022 was$103.3 million . There were no purchases of investments for the nine months endedSeptember 30, 2021 . Net cash provided by maturities of investments for the nine months endedSeptember 30, 2022 and 2021 was$49.5 million and$52.7 million , respectively. Purchases of fixed assets for the nine months endedSeptember 30, 2022 and 2021 was$0.3 million and$0.2 million , respectively. Financing activities. Financing activities provided cash of$90.9 million and$2.7 million for the nine months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. The cash provided by financing activities during the nine months endedSeptember 30, 2022 was primarily attributable to the$51.0 million in net proceeds from the 2022 Financing and$39.8 million in net proceeds from the exercise of First Tranche Warrants. The cash provided by financing activities during the nine months endedSeptember 30, 2021 was attributable to the$2.6 million in net proceeds from our at-the-market offering program and$0.1 million in proceeds from the exercise of stock options.
Operating capital requirements
We do not anticipate commercializing any of our product candidates until 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 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.
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.
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, collaboration and licensing arrangements and other 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 or on favorable terms, we may
be required to delay, limit, reduce or terminate our product development or
future commercialization efforts or grant rights to
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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 equity or debt securities, it could result in dilution to our
existing stockholders, increased fixed payment obligations and the issuance of
securities with 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"
section of this Quarterly Report on Form 10-Q. 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.
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