TARSUS PHARMACEUTICALS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our "Selected Financial Data" and our financial statements and the related notes to those statements included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those discussed under the section titled "Risk Factors" and elsewhere in this Annual Report on 10-K. See the section titled "Special Note Regarding Forward-Looking Statements" elsewhere in this Annual Report on Form 10-K. Overview Our Business We are a biopharmaceutical company focused on the development and commercialization of therapeutics, starting with eye care. Our lead product candidate, TP-03 (lotilaner ophthalmic solution, 0.25%), is a novel investigational eye drop to treat blepharitis caused by the infestation of Demodex mites, which is referred to as Demodex blepharitis. Blepharitis ("Blephar" is a reference to eyelid and "itis" is a reference to inflammation) is an ophthalmic lid margin disease characterized by inflammation of the eyelid margin, redness and ocular irritation, including a specific type of eyelash dandruff called collarettes, which are pathognomonic for Demodex blepharitis. Poorly controlled and progressive blepharitis can lead to corneal damage over time and, in extreme cases, blindness. There may be as high as approximately 25 million people in theU.S. who suffer from Demodex blepharitis. We designed TP-03 to target and eradicate the root cause of Demodex blepharitis - Demodex mite infestation. The API of TP-03, lotilaner, paralyzes and eradicates mites and other parasites through the inhibition of parasite-specific GABA-Cl channels. We intend to further advance our pipeline with lotilaner API to address several diseases across therapeutic categories in human medicine, including eye care, dermatology, and other diseases. We are developing product candidates to address targeted diseases with high unmet medical needs, which currently include TP-03 for the potential treatment of MGD, TP-04 for the potential treatment of rosacea, and TP-05 for potential Lyme disease prophylaxis and community malaria reduction. Recent Business Highlights TP-03 Demodex Blepharitis: To date, we have completed seven clinical trials that include a Phase 1 trial, four Phase 2 trials, a Phase 2b/3 Saturn-1 trial, and a Phase 3 Saturn-2 trial for TP-03 in Demodex blepharitis, all of which met their primary, secondary and/or certain exploratory endpoints, with the drug well tolerated. InNovember 2022 , we announced that the NDA submission package for TP-03 for the treatment of Demodex blepharitis was accepted by the FDA, with a PDUFA decision date ofAugust 25, 2023 . We believe TP-03 has the potential to be the first therapeutic approved by the FDA and become the definitive standard of care for the treatment of Demodex blepharitis. During 2022, we began the expansion of our commercial organization to support our business growth and the commercial leadership needed for TP-03 commercial launch readiness in the second half of 2023. We expect this commercial expansion to continue with a meaningful ramp during 2023 as part of our TP-03 commercial launch-readiness activities.
TP-03 Meibomian Gland Disease:
InAugust 2022 , we announced the enrollment of our first patient in the Ersa trial studying TP-03 for the treatment of MGD. We expect to report topline data during the second half of 2023.
TP-03 China Territory Out-License:
InMarch 2021 , we executed the China Out-License withLianBio , granting exclusive commercial rights to TP-03 for the treatment of Demodex blepharitis and MGD within the China Territory. InNovember 2022 ,LianBio announced the dosing of their first patient in the TP-03 Phase 3 LIBRA pivotal trial in Chinese patients for the treatment of Demodex blepharitis to support regulatory approval inChina . 90 -------------------------------------------------------------------------------- Table of Co ntents To date, we received contractual cash proceeds fromLianBio totaling$80.0 million , representing initial consideration of$15.0 million and$65.0 million for the achievement of specified milestone events. We also received equity inLianBio as part of our China Out-License, a portion of which remains subject to aChina -based regulatory vesting provision.
We are further eligible to receive:
•China-based development milestones totaling$25.0 million (includes$2.5 million for a milestone triggered inFebruary 2023 ); •Sales threshold milestones in the China Territory totaling$100.0 million ; and •Tiered low-to-high teen royalties on the net sales of TP-03 within theChina Territory. TP-04 Rosacea, Galatea Trial:
In
TP-05 Lyme Disease, Callisto and Carpo Trials:
InDecember 2022 , we announced positive topline results from the completed Phase 1 Callisto trial and enrollment of the first patient in the Phase 2a Carpo trial. The Callisto and Carpo trials are designed to evaluate TP-05, a novel investigative oral, non-vaccine pharmacological prophylactic for the potential prevention of Lyme disease. The Callisto Phase 1 trial was a randomized, double-blind, single and multiple-ascending dose trial that evaluated the safety, tolerability, and PK of TP-05 in healthy subjects. Results from the trial showed that TP-05 was well tolerated with no dose-related or drug-related serious adverse events. Pharmacokinetic data from the trial demonstrated rapid absorption and an extended half-life of TP-05 that potentially supports a convenient oral therapy regimen, supporting its potential as a rapid onset, prophylactic therapy for Lyme disease. Additionally, exploratory ex-vivo tick kill modeling utilizing a serum from TP-05 treated subjects demonstrated potent, rapid killing of adult and nymph ticks. The Carpo trial, evaluating TP-05 for the potential prevention of Lyme disease in humans, is a randomized, double-blind trial that will evaluate the efficacy of TP-05 in killing lab grown, non-disease carrying ticks after they have attached to the skin of healthy volunteers, as well as confirm the safety, tolerability, and blood concentration of TP-05. We expect to report topline data from the Phase 2a Carpo trial during the second half of 2023. We believe TP-05 is currently the only non-vaccine, drug-based, prophylaxis in development that targets the ticks, and potentially prevents Lyme disease transmission. It is designed to rapidly and durably provide systemic blood levels of lotilaner potentially sufficient to kill infected ticks attached to the human body before they can transmit the Borrelia bacteria that causes Lyme disease.
Credit Facility with Hercules Capital and
OnFebruary 2, 2022 we executed theCredit Facility Hercules Capital and SVB. OnJanuary 5, 2023 , the Company entered into an amendment to the loan and security agreement, which set a maximum interest rate, and updated the terms of prepayment under the Credit Facility and other certain specific conditions (see Note 10). As ofDecember 31, 2022 , the Credit Facility provides for a remaining aggregate principal amount of up to$135.0 million , with tranched availability as follows:$25.0 million upon NDA submission of TP-03 ,$35.0 million upon FDA approval of TP-03, and$75.0 million upon achievement of certain revenue thresholds and other conditions. OnMarch 15, 2023 , we made a$5.0 million draw (including SVB's commitment of$1.25 million ) from the$25.0 million tranche that became available upon submission of the NDA.
Capital draws, at our election, are in
Follow-On Public Offering:
InMay 2022 , we completed a follow-on public offering under our effective Form S-3 shelf registration statement through an initial underwritten sale of 5,600,000 shares of common stock at a price of$13.50 per share (the "Follow-On Public Offering"). We also granted the underwriters a 30-day option to purchase up to 840,000 additional shares of common stock at the public offering price, less discounts and commissions. InJune 2022 , the underwriters partially exercised this option by purchasing an additional 289,832 shares of common stock at$13.50 per share. 91 -------------------------------------------------------------------------------- Table of Co ntents After giving effect to the exercise of the underwriters' option, the total number of shares of our common stock sold in the Follow-On Public Offering was 5,889,832 shares which resulted in total gross proceeds of$79.5 million before underwriting discounts, commissions and other estimated offering expenses for total net proceeds of$74.3 million .
Impact of the COVID-19 Pandemic on our Operations
Efforts to contain the spread of COVID-19 in theU.S. (including inCalifornia where our corporate headquarters and laboratory facility are located) and other countries have included quarantines, shelter-in-place orders, and various other government restrictions in order to control the spread of this virus. We have been carefully monitoring the COVID-19 pandemic as it continues to progress and its potential impact on our business. We have taken important steps to ensure the workplace safety of our employees when working within our laboratory and administrative offices, or when traveling to our clinical trial sites. We have also implemented a vaccination policy and we may take further actions as may be required by federal, state or local authorities. To date, we have been able to continue our key business activities and advance our clinical programs. However, in the future, it is possible that our clinical development timelines and business plans could be adversely affected. We maintain regular communication with our vendors and clinical sites to appropriately plan for, and mitigate, the impact of the COVID-19 pandemic on our operations. Specifically, for our Phase 3 Saturn-2 trial, we have instituted various protocols for our sites, including increasing health screening of individuals and providing enhanced communication and training to staff regarding COVID-19. However, the ultimate effect from this pandemic on our development timelines for TP-03 and our other product candidates is inherently uncertain. See the section titled Risk Factors in this report for a further discussion of the potential adverse impact of COVID-19 on our business, results of operations and financial condition.
Corporate and Financial Overview
We were incorporated as aDelaware corporation inNovember 2016 , and our headquarters is located inIrvine, California . Since our inception, we have devoted substantially all of our resources to organizing and staffing our company, acquiring intellectual property, clinical development of our product candidates, building our research and development capabilities, raising capital, and enhancing our corporate infrastructure. To date we have financed our operations through private placements of preferred stock, convertible promissory notes, the net proceeds from issuance of common stock in our IPO and Follow-On Public Offering, cash proceeds from ourChina Out-License, and draw-downs from our Credit Facility. We have incurred significant net operating losses in every year since our inception and expect to continue to incur significant operating expenses and, other than the effect of license fee revenue and collaboration revenue from the China Out-License, increasing operating losses for the foreseeable future. Our net loss was$62.1 million and$13.8 million for the years endedDecember 31, 2022 and 2021, respectively. Our net losses may fluctuate significantly from quarter to quarter and year to year and could be substantial. We anticipate that our operating expenses will increase significantly as we:
•seek regulatory approvals for TP-03 and other product candidates that successfully complete clinical development, if any;
•advance the clinical development of TP-03 for the treatment of MGD, TP-04 for the potential treatment of rosacea and TP-05 for potential Lyme prophylaxis;
•establish our own sales force in the
•engage with contract manufacturers to ensure a sufficient supply chain capacity to provide commercial quantities of any products for which we may obtain marketing approval;
•maintain, expand and protect our intellectual property portfolio;
•hire additional staff, including clinical, scientific, technical, regulatory,
marketing, operations, financial, and other support personnel, to execute our
business plan; and
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•add information systems and personnel to support our product development and potential future commercialization efforts, and to enable us to operate as a public company.
We do not yet have revenue from product sales. Our reported revenue within license fees and collaboration revenue is from our China Out-License; we expect to report additional revenue under these captions in future periods.
We do not expect to generate revenues from product sales unless and until we successfully complete clinical development and obtain regulatory approval for a product candidate and commercially launch such product. Until such time as we can generate significant revenue from product sales and achieve profitability, if ever, we expect to finance our operations through private or public equity or debt financings, or collaborations, strategic alliances, or licensing arrangements with third parties. Adequate funding may not be available to us when needed on acceptable terms, or at all. If we raise additional funds through collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish valuable rights to our intellectual property, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional capital or enter into such agreements as and when needed, we could be forced to significantly delay, scale back, or discontinue our product development and/or commercialization plans, which would negatively and adversely affect our financial condition. Because of the numerous risks and uncertainties associated with drug product development, we are unable to accurately predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenue from product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels.
As of
Components of our Results of Operations
License Fees and Collaboration Revenue
We recognize license fees and collaboration revenue as identified performance obligations are satisfied or other events occur, specifically related to (i) TP-03 pivotal trial completion and the delivery of associated clinical data and reports to our licensee, (ii) achievement of certain clinical and regulatory events in the China Territory, (iii) milestone achievement of a drug supply agreement execution, and (iv) royalties and milestones from our licensee's product sales of TP-03 in the China Territory.
Cost of License Fees and Collaboration Revenue
Cost of license fees and collaboration revenue includes (i) the proportion of expense recognized under the terms of the China Out-License payable under the terms of our in-license agreement for lotilaner, and (ii) valuation adjustments to the equity warrants andLianBio common stock for the portion contractually due under ourJanuary 2019 in-license agreement.
Research and Development Expenses
Research and development expenses consist of expenses incurred in connection with the development of our product candidates, including:
•fees paid to third parties to conduct certain research and development activities on our behalf, including under agreements with CROs;
•payments under licensing agreements, such as our upfront in-license fee for lotilaner;
•consulting costs and certain allocated payroll and employee-related expenses (including stock-based compensation and salaries) for personnel engaged in research and development functions;
•costs related to compliance with clinical regulatory requirements;
•costs of procuring drug products for use in our preclinical studies and clinical trials; and
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•facilities expenses, which include direct and allocated expenses for rent of our laboratory.
We expense both internal and external research and development expenses as incurred or as certain upfront or milestone payments become contractually due to licensors upon achievement of clinical or regulatory events. We recognize external research and development costs based on an evaluation of the progress-to-completion of (i) specific tasks performed or deliverables provided by CROs and CMOs and (ii) patient visits for dosing or other follow-up. To estimate period expense for recognition, we use information provided to us by our service providers and we then apply the corresponding fee schedule. We track our external research and development expenses on a program-by-program basis, such as fees paid to CROs, CMOs, and research laboratories in connection with our pre-clinical development, process development, manufacturing and clinical development activities. However, we do not currently track employee time on a program-by-program basis. For the years endedDecember 31, 2022 and 2021, the vast majority of our external and internal research and development expenses are attributable to our TP-03 program for Demodex blepharitis. We expect our research and development expenses to increase substantially in the future, as we seek to initiate and progress additional clinical trials for our product candidates, including TP-03 for the potential treatment of MGD, TP-04 for the potential treatment of rosacea, and TP-05 for potential Lyme prophylaxis. We expect to complete our clinical programs for these product candidates, and as appropriate, pursue regulatory approval and prepare for the possible commercialization for each.
General and Administrative Expenses
General and administrative expenses consist of personnel-related costs including payroll, benefits, and stock-based compensation for our executive, finance, sales and marketing, and other administrative functions. Other general and administrative expenses include sales and marketing costs to support our anticipated commercial launch, consulting fees, legal services, rent and other facilities costs, and other general operating expenses not otherwise classified as research and development expenses. We expect that our general and administrative expenses will increase substantially in the future as a result of expanding our operations, including hiring personnel, preparing for potential commercialization of our product candidates, and additional facility occupancy costs, as well various incremental costs associated with being a public company (including increased legal and accounting fees, regulatory costs associated with maintaining compliance with the rules of theNasdaq Stock Market andSEC regulations, investor relations activities, directors and officers liability insurance premiums, and other accompanying compliance and governance costs).
Other Income (Expense), Net
Other income (expense), net primarily consists of (i) interest income earned on our cash, cash equivalents, and marketable securities, (ii) interest expense on the Credit Facility executed inFebruary 2022 , and (iii) the change in estimated fair value of theLianBio equity warrants andLianBio common stock we received as part of our China Out-License inMarch 2021 .
Income Tax Benefit (Provision)
Since our inception, we have not recorded anyU.S. federal or state income tax benefits for the net operating losses we have incurred in each year, or for our earned research and development tax credits, due to our uncertainty of realizing a benefit from either. As a result of the Tax Cuts and Jobs Act of 2017, net operating losses (forU.S. income tax purposes) generated prior toDecember 31, 2017 can be carried forward for up to 20 years, while net operating losses generated afterDecember 31, 2017 can be carried forward indefinitely, but are limited to 80% utilization against taxable income. OurCalifornia net operating losses will begin to expire in 2037. The federal research and development tax credits begin to expire in 2040 unless previously utilized, and theCalifornia credit carryforwards are available indefinitely. 94
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Results of Operations
Comparison of the Years Ended
The following table summarizes our results of operations for the periods
indicated:
Year Ended
December 31,
2022 2021 Change
(in thousands)
Revenues:
License fees $ 23,893 $ 53,067 $ (29,174)
Collaboration revenue 1,923 3,960 (2,037)
Total revenues 25,816 57,027 (31,211)
Operating expenses:
Cost of license fees and collaboration revenue 955 2,075 (1,120)
Research and development 42,624 41,712 912
General and administrative 44,949 25,397 19,552
Total operating expenses 88,528 69,184 19,344
Loss from operations before other income (expense) and income taxes
(62,712) (12,157) (50,555)
Other income (expense):
Interest income 3,499 36 3,463
Interest expense (2,199) - (2,199)
Other income (expense), net 86 (73) 159
Unrealized loss on equity investments (268) (591) 323
Change in fair value of equity warrants issued by licensee (501)
(987) 486
Total other income (expense), net 617 (1,615) 2,232
Loss from operations before income taxes (62,095) (13,772) (48,323)
Benefit (provision) for income taxes 4 (55) 59
Net loss $ (62,091) $ (13,827) $ (48,264) License Fees and Collaboration Revenue
License fees and collaboration revenue was$25.8 million for the year endedDecember 31, 2022 . This amount represents the contractual milestones achieved or allocated under the China Out-License that have been fully or partially completed byDecember 31, 2022 . These allocated amounts represented the satisfaction of the transfer of license rights toLianBio and the completion of clinical-related performance obligations.
We will recognize additional license fees and collaboration revenue to the extent other events occur, specifically related to (i) milestone achievement of a drug supply agreement execution, (ii) milestone achievement of regulatory events in the China Territory, and (iii) royalties and milestones from our licensee's product sales of TP-03 in the China Territory.
Cost of License Fees and Collaboration Revenue
Cost of license fees and collaboration revenue was
Research and Development Expenses
Research and development expenses increased by$0.9 million for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . The increase was primarily due to (i)$7.3 million of increased payroll and personnel-related costs (including stock-based compensation), for 22 employee additions year-over-year to drive our product development initiatives, (ii)$1.0 million of increased regulatory and consulting costs related to our NDA filing for TP-03, (iii)$0.5 million of licensing milestone expense upon enrollment of the first patient in the first Phase 2a Carpo trial for the treatment of Lyme disease inDecember 2022 , and (iv)$0.3 million of increased product manufacturing and formulation costs. These increases were partially offset by$0.8 million of decreased clinical expenses primarily related to the completion of our Saturn-2 trial during the first half of 2022, and other non-recurring contractual costs in the prior year period including (i) a payment in March 95 -------------------------------------------------------------------------------- Table of Co ntents 2021 through the issuance of 187,500 shares of our common stock (then valued at$5.5 million to extend the period of our All Human Uses Elanco Agreement), and (ii) a payment of$2.0 million under the Eye and Derm Elanco Agreement for the commencement of our Saturn-2 trial.
General and Administrative Expenses
General and administrative expenses increased by$19.6 million for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . The increase was primarily due to (i)$10.4 million of increased payroll and personnel-related costs (including stock-based compensation) for 19 employee additions year-over-year to support our business growth and commercialization efforts, (ii)$9.7 million of increased commercial and market research costs as we continue our commercial expansion and prepare for the potential launch of TP-03 in the second half of 2023, and (iii)$0.4 million of increased IT application expenses to support the continued growth and expansion of our corporate infrastructure. These increases were partially offset by$1.0 million of decreased professional and legal fees. We expect sales and marketing headcount and associated vendor spend to meaningfully increase during 2023 as part of our TP-03 commercial launch-related activities.
Other Income (Expense), Net
Other income (expense), net increased$2.2 million for the year endedDecember 31, 2022 . The increase primarily consists of (i)$3.5 million of increased interest income earned on our cash, cash equivalents and marketable securities, (ii)$0.5 million change in estimated fair value of theLianBio equity warrants we received as part of our China Out-License inMarch 2021 , and (iii)$0.3 million change in fair value of theLianBio common stock (after our exercise of the first and second warrant tranches). These increases were partially offset by$2.2 million of interest expense on the Credit Facility executed inFebruary 2022 .
Liquidity and Capital Resources
Sources of Liquidity
Overview
As ofDecember 31, 2022 , we had cash, cash equivalents and marketable securities of$217.0 million . Since our inception, our operations have been substantially financed by cash proceeds of private placements of preferred stock, IPO proceeds from the issuance of common stock, China Out-License consideration, Credit Facility draw, and the Follow-On Public Offering of common stock.
IPO and Follow-On Public Offering
In connection with ourOctober 2020 IPO, we sold 6,325,000 shares of our common stock (inclusive of the full exercise of the underwriters' option to purchase 825,000 shares of common stock). After deducting underwriting discounts, commissions and other related expenses, our IPO proceeds were$91.7 million . InMay 2022 , we completed the Follow-On Public Offering. We also granted the underwriters a 30-day option to purchase up to 840,000 additional shares of common stock at the public offering price, less underwriting discounts and commissions. InJune 2022 , the underwriters partially exercised their option to purchase an additional 289,832 shares of common stock at the offering price of$13.50 per share, before underwriting discounts and commissions. After giving effect to the exercise of the underwriters' option, we sold 5,889,832 shares for total gross proceeds of$79.5 million , before underwriting discounts, commissions and other estimated offering expenses for total net proceeds received of$74.3 million .
China Out-License
As ofDecember 31, 2022 , we have received$80.0 million of total proceeds in connection with our China Out-License, inclusive of 2022 milestone receipts of$25.0 million for the achievement of two development milestones. We expect to receive an additional$5.0 million during 2023 for the achievement of a development milestone, for cumulative milestone receipts of$85.0 million throughDecember 2023 . The remaining$120.0 million of available milestones under this arrangement will potentially be received upon future regulatory and sales achievements all within the China Territory.
Credit Facility
InFebruary 2022 , we drew$20.0 million from our Credit Facility with Hercules and SVB. Capital draws, at our election, are in$5.0 million increments. This Credit Facility was amended inJanuary 2023 . The Credit Facility, as amended, 96 -------------------------------------------------------------------------------- Table of Co ntents includes an extended period to draw down the tranche associated with the NDA submission, fromMarch 15, 2023 toMarch 15, 2024 provided at least$5 million is drawn on or beforeMarch 15, 2023 and at least an additional$5 million is drawn on or beforeSeptember 15, 2023 . OnMarch 15, 2023 we made a$5.0 million draw (including SVB's commitment of$1.25 million ) from the$25.0 million tranche associated with the NDA submission of TP-03. This Credit Facility includes a four-year period of interest-only payments and is extendable for a fifth year toFebruary 2027 maturity, upon our expected achievement of required conditions. We currently have no other financing commitments, such as lines of credit or guarantees.
As of the date of this filing, we have
•$20.0 million upon the NDA submission of TP-03 inSeptember 2022 ; •$35.0 million upon FDA approval of TP-03; •$50.0 million upon achievement of certain quarterly revenue thresholds; and •$25.0 million available with lender approval.
Funding Requirements
Cash Runway
Our operating expenditures currently consist of research and development costs (including activities within our preclinical, clinical, regulatory, and drug manufacturing initiatives) and general and administrative costs. Our use of cash is impacted by the timing and extent of payments for each of these activities and other business requirements. We believe that our cash and investments of$217.0 million as ofDecember 31, 2022 is sufficient to fund our current and planned operations for at least the next twelve months from the date of filing this Annual Report on Form 10-K. These funds, in combination with our expected milestone proceeds through 2025 from our China Out-License of$20.0 million ($5 million of which is expected to be received during 2023), and total draws from our Credit Facility of$60.0 million or less, are anticipated to fully fund our planned requirements for commercial launch, pipeline development, operating expenses, and capital expenditures at least into the second half of 2026. We anticipate having at least$60.0 million of availability for new draws under our Credit Facility byDecember 2023 and$75.0 million of additional tranched availability throughDecember 2024 . The Credit Facility requires interest-only debt service payments that are expected to remain through its maturity inFebruary 2027 and its remaining tranches are subject to undrawn expiry in eitherMarch 2024 orDecember 2024 (see Note 10).
Our cash runway estimate is predicated on current assumptions for future revenue, operating expenses, and debt availability and may require future adjustments. Accordingly, we may be required to raise additional capital earlier than we currently expect based on our cash requirements and market dynamics.
Shelf Registration Statement
OnNovember 1, 2021 , we filed a shelf registration statement on Form S-3 that was declared effective by theSEC onNovember 5, 2021 (the "Shelf Registration Statement"), which permitted us to offer up to$300.0 million of common stock, preferred stock, debt securities and warrants in one or more offerings and in any combination, including in units from time to time. We have approximately$220 million remaining under our Shelf Registration Statement, after giving effect to the Follow-On Public Offering (but inclusive of the sales agreement prospectus described below). Our Shelf Registration Statement is intended to provide us with additional flexibility to access capital markets for general corporate expenses and acquisitions of complementary products, technologies, or businesses. We completed the Follow-On Public Offering under this Shelf Registration Statement. Also, as part of this Shelf Registration Statement, we concurrently filed a sales agreement prospectus covering the sale of up to$100.0 million of our common stock pursuant to an Open Market Sale AgreementSM (the "ATM Agreement") withJefferies LLC . Through the date of this filing, we have not sold any shares of our common stock under the ATM Agreement.
Other Liquidity Risks
To date, we have not generated revenue from any product sales, though we have
recognized revenue and cash receipts from our China Out-License. We do not
expect to report any product revenue unless and until we (1) complete
development of any of our product candidates; (2) obtain applicable regulatory
approvals; and then (3) successfully commercialize our product candidates or
enter into other collaborative agreements for our product candidates with third
parties. We do not know with certainty when, or if, any of these items will
ultimately occur.
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We expect to incur significant operating losses for the foreseeable future, and for these losses to further increase, as we expand our clinical development programs and as we prepare for the potential commercial launch of TP-03. We may also encounter unforeseen expenses, difficulties, complications, delays and other currently unknown factors that could adversely affect our business. We may require additional capital to fully develop our product candidates and to execute our business strategy. Our requirements of a future capital raise will depend on many factors, including: •the scope, timing, rate of progress and costs of our drug discovery efforts, preclinical development activities, laboratory testing and clinical trials for our product candidates;
•the number and scope of clinical programs we decide to pursue;
•the cost, timing and outcome of preparing for and undergoing regulatory review of our product candidates;
•the scope and costs of development and commercial manufacturing activities;
•the cost and timing associated with commercializing our product candidates, if they receive marketing approval;
•the amount of revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval;
•the achievement of milestones or occurrence of other developments that trigger payments under any collaboration agreements we might have at such time and availability of our Credit Facility;
•the extent to which we acquire or in-license other product candidates and technologies;
•the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;
•our ability to establish and maintain collaborations on favorable terms, if at all;
•our efforts to enhance operational systems and our ability to attract, hire and retain qualified personnel, including personnel to support the development of our product candidates and, ultimately, the sale of our products, following FDA approval;
•our implementation of various computerized information systems;
•impact of health epidemics, including COVID-19, on our clinical development or operations; and
•the costs associated with being a public company.
A change in the outcome of any of these or other variables with respect to the
development of any of our product candidates could significantly change the
costs and timing associated with the development of that product candidate.
Furthermore, our operating plans may change in the future, and we will continue
to require additional capital to meet operational needs and capital requirements
associated with such operating plans. If we raise additional funds by issuing
equity securities, our stockholders may experience dilution. Any future debt
financing into which we enter may impose upon us additional covenants that
restrict our operations, including limitations on our ability to incur liens or
additional debt, pay dividends, repurchase our common stock, make certain
investments or engage in certain merger, consolidation or asset sale
transactions. Any debt financing or additional equity that we raise may contain
terms that are not favorable to us or our stockholders.
Adequate funding may not be available to us on acceptable terms or at all. Our
potential inability to raise capital when needed could have a negative impact on
our financial condition and our ability to pursue our business strategies. If we
are unable to raise additional funds as required, we may need to delay, reduce,
or terminate some or all development programs and clinical trials. We may also
be required to sell or license our rights to product candidates in certain
territories or indications that we would otherwise prefer to develop and
commercialize ourselves. If we are required to enter into collaborations and
other arrangements to address our liquidity needs, we may have to give up
certain rights that limit our ability to develop and commercialize our product
candidates or may have other terms that are not favorable to us or our
stockholders, which could
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materially and adversely affect our business and financial prospects. See the section of this Annual Report on Form 10-K titled "Risk Factors" for additional risks associated with our substantial capital requirements.
Contractual Obligations and Commitments
We have entered into arrangements that contractually obligate us to make payments that will affect our liquidity and cash flows in future periods. Such arrangements include those related to the contractual obligations described below:
Lease Commitments
Our operating lease commitments reflect payments due for our active lease
agreements in
Purchase Obligations
We enter contracts in the normal course of business with CROs for our clinical trials and CMOs for contract manufacturing activities. As ofDecember 31, 2022 , our contractual commitments for such obligations were$10.8 million . We also enter contracts with contract manufacturers for pre-clinical and clinical drug supply, regulatory consultants and various other vendors in operating our business. These contracts generally provide for termination provisions with notice.
Milestone Obligations
Milestone obligations are contingent upon our achievement of specified development, regulatory and sales milestones. Given the unpredictability of the drug development process, and the infeasibility of predicting the success of current and future clinical trials and the timing of achievement (if at all) of sales milestones, these values assume that all development, regulatory, and sales milestones under our Eye and Derm Elanco Agreement and All Human Uses Elanco Agreement are successfully met. Assuming the milestones are met, the total future expected payment value aggregates$158.0 million .
Summary Statement of Cash Flows
The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below:
Year Ended
December 31,
2022 2021
(in thousands)
Net cash (used in) provided by:
Operating activities $ (49,030) $ 3,748
Investing activities (144,629) (586)
Financing activities 93,987 21
Net (decrease) increase in cash and cash equivalents
Net cash used in operating activities was$49.0 million for the year endedDecember 31, 2022 , which primarily consisted of our net loss of$62.1 million partially offset by stock-based compensation of$13.5 million . In the current year, our cash payments to vendors for our operating activities totaled$53.4 million and payroll-related cash payments (inclusive of 2021 bonus payouts) totaled$19.1 million . In addition, we made payments to Elanco of$1.5 million for future TP-04 and TP-05 licensing milestones (see Note 8(b)). These cash payments were partially offset by$25.0 million of cash received (of the$25.8 million recognized in revenue during 2022) in connection with theChina Out-License transaction. Net cash provided by operating activities was$3.7 million for the year endedDecember 31, 2021 , which was primarily attributable to$55.0 million of cash (of the$57.0 million recognized in revenue during 2021) in connection with the China Out-License transaction. This cash provided by operating activities was partially offset by cash payments to vendors totaling$42.5 million for our operating activities and payroll-related cash payments (inclusive of 2020 bonus payouts) totaling$9.4 million . In addition, we made contractual payments of$4.5 million to Elanco (see Note 8(b)). 99
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Net cash used in investing activities was$144.6 million for the year endedDecember 31, 2022 , and primarily relates to$149.4 million of purchased marketable securities and$0.5 million of purchased office equipment and leasehold improvements for our laboratory and administrative offices. This cash used in investing activities was partially offset by$5.3 million of proceeds received from sales of our marketable securities. Net cash used in investing activities was$0.6 million for the year endedDecember 31, 2021 , which consisted of leasehold improvements for our laboratory and administrative offices and various purchases of computer hardware/software and office equipment.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was$94.0 million for the year endedDecember 31, 2022 which consisted primarily of (i)$74.4 million of net proceeds from the issuance of common stock in our Follow-On Public Offering, (ii)$20.0 million of proceeds from our Credit Facility, partially offset by$0.9 million of issuance costs, (iii)$0.5 million of proceeds from our employee stock purchase plan, and (iv)$0.1 million of proceeds from the exercise of vested employee stock options. Net cash provided by financing activities was$21 thousand for the year endedDecember 31, 2021 which consisted of (i)$0.2 million of proceeds from our employee stock purchase plan, and (ii)$0.1 million of proceeds from the exercise of vested employee stock options. These increases in cash were partially offset by payments of$0.3 million related to the deferred offering costs associated with our Shelf Registration Statement filed onNovember 1, 2021 .
Critical Accounting Policies, Significant Judgments and Use of Estimates
Our management's discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.
While our significant accounting policies are described in the notes to our financial statements also included in this Annual Report on Form 10-K, we believe these critical accounting policies are the most important to understanding and evaluating our reported financial results.
Revenue Recognition for Out-License Arrangements
Overview
We currently only have the China Out-License arrangement that allows a licensee
to market our TP-03 product (representing functional intellectual property) in
certain territories for a certain field of use and for a stated term. The
accounting and reporting of revenue for out-license arrangements requires
significant judgment for: (a) identification of performance obligations within
the contract, (b) the contract's transaction price for allocation to the
identified performance obligations (including variable consideration) (c) the
stand-alone selling price for each identified performance obligation, and (d)
the timing and amount of revenue recognition in each period.
The China Out-License arrangement was analyzed under GAAP to determine whether
the promised goods or services are distinct or must be accounted for as part of
a combined performance obligation. In making these assessments, we consider
factors such as the stage of development of the underlying intellectual property
and the capabilities of the customer to develop the intellectual property on
their own, and/or whether the required expertise is readily available. If the
license is not distinct, the license is combined with other promised goods or
services as a combined performance obligation for revenue recognition.
The China Out-License arrangement included the following forms of consideration:
(i) non-refundable upfront cash payment, (ii) equity-based consideration, (iii)
sales-based royalties, (iv) sales-based threshold milestones, (v) drug supply
agreement milestone, (vi) development milestone payments, and (vii) regulatory
milestone payments. Revenue is recognized in proportion to the allocated
transaction price when (or as) the respective performance obligation is
satisfied. We evaluate the
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progress related to each milestone at each reporting period and, if necessary,
adjusts the probability of achievement and related revenue recognition. The
measure of progress, and thereby periods over which revenue is recognized, is
subject to estimation by management and may change over the course of the
agreement.
Contractual Terms for Receipt of Payments
A performance obligation is a promise in a contract to transfer a distinct good or service and is the unit of accounting. A contract's transaction price is allocated among each distinct performance obligation based on relative standalone selling price and recognized when, or as, the applicable performance obligation is satisfied. The contractual terms that establish our right to collect specified amounts from our customers and that require contemporaneous evaluation and documentation under GAAP for the corresponding timing and amount of revenue recognition, are as follows: (1) Upfront License Fees: We determine whether non-refundable license fee consideration is recognized at the time of contract execution (i.e., when the license is transferred to the customer and customer is able to use and benefit from the license) or over the actual (or implied) contractual period of the out-license. We also evaluate whether it has any other requirements to provide substantive services that are inseparable from the performance obligation of the license transfer to determine whether any combined performance obligation is satisfied over time or at a point in time. Upfront payments may require deferral of revenue recognition to a future period until we perform obligations under these arrangements. (2) Development Milestones: We utilize the most likely amount method to estimate the amount of consideration to which it will be entitled for achievement of development milestones as these represent variable consideration. For those payments based on development milestones (e.g., patient dosing in a clinical study or the achievement of statistically significant clinical results), we assess the probability that the milestone will be achieved, including its ability to control the timing or likelihood of achievement, and any associated revenue constraint. Given the high degree of uncertainty around the occurrence of these events, we determined the milestone and other contingent amounts to be constrained until the uncertainty associated with these payments is resolved. At each reporting period, we re-evaluate this associated revenue recognition constraint. Any resulting adjustments are recorded to revenue on a cumulative catch-up basis and reflected in the financial statements in the period of adjustment. (3) Regulatory Milestones: We utilize the most likely amount method to estimate the consideration to which it will be entitled and recognizes revenue in the period regulatory approval occurs (the performance obligation is satisfied) as these represent variable consideration. Amounts constrained as variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. We evaluate whether the milestones are considered probable of being reached and not otherwise constrained. Accordingly, due to the inherent uncertainty of achieving regulatory approval, associated milestones are constrained for revenue recognition until achievement. (4) Royalties: Under the sales-or-usage-based royalty exception we recognize revenue based on the contractual percentage of the licensee's sales of products to its customers at the later of (i) the occurrence of the related product sales or (ii) the date upon which the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied. To date, we have not recognized any royalty revenue from our out-licensing arrangements. (5) Sales Threshold Milestones: Similar to royalties, applying the sales-or-usage-based royalty exception, we recognize revenue from sales threshold milestones at the later of (i) the period the licensee achieves the one-time annual product sales levels in their territories for which we are contractually entitled to a specified lump-sum receipt, or (ii) the date upon which the performance obligation to which some or all of the milestone has been allocated has been satisfied or partially satisfied. To date, we have not recognized any sales threshold milestone revenue from out-licensing arrangements.
We will re-evaluate an out-license transaction price as determined by us in each reporting period as uncertain events are resolved and other changes in circumstances occur.
Research and Development Expenses
Research and development costs are expensed as incurred or as certain upfront or
milestone payments become contractually due to licensors upon the achievement of
clinical or regulatory events. Research and development expenses include
internal costs directly attributable to in-development programs, including costs
of certain salaries and other employee-related costs (including stock-based
compensation), and costs to conduct nonclinical studies, clinical trials and
contract manufacturing activities. We accrue for these costs based on factors
such as estimates of the work completed and in accordance with agreements
established with third-party service providers under the service agreements. As
it relates to clinical trials, the
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financial terms of these contracts are subject to negotiations which vary from
contract to contract and may result in payment flows that do not match the
periods over which materials or services are provided under such contracts.
Payments made prior to the receipt of goods or services to be used in research
and development are capitalized until the goods or services are received. Such
payments are evaluated for current or long-term classification based on when
they will be realized. Our objective is to reflect the appropriate expense in
our financial statements by matching those expenses with the period in which the
services and efforts are expended. We account for these expenses according to
the progress of the trial as measured by patient progression and the timing of
various aspects of the trial taking into consideration discussions with
applicable personnel and outside service providers. In this manner, our clinical
trial accrual is dependent in part upon the timely and accurate reporting of
progress and efforts incurred from CROs, contract manufacturers and other
third-party vendors. Although we expect our estimates to be materially
consistent with actual amounts incurred, our understanding of the status and
timing of services performed relative to the actual status and timing of
services performed can vary and may result in our reporting changes in estimates
in any particular period. We make significant judgments and estimates in
determining the accrued liabilities balance at each reporting period. As actual
costs become known, we adjust our accrued liabilities. To date, there have been
no material differences between our estimates of such expenses and the amounts
actually incurred.
Stock-Based Compensation
We recognize stock-based compensation expense for equity awards granted to
employees, consultants, and members of our Board of Directors. The Black-Scholes
pricing model is used to estimate the fair value of stock option awards as of
the date of grant. The fair value of restricted stock units is representative of
the closing share price preceding the date of grant.
For stock-based awards that vest subject to the satisfaction of a service
requirement, the related expense is recognized on a straight-line basis over
each award's actual or implied vesting period. For stock-based awards that vest
subject to a performance condition, we recognize related expense on an
accelerated attribution method, if and when it concludes that it is highly
probable that the performance condition will be achieved. At each reporting
period, we reassess the probability of the achievement of the performance
vesting conditions. As applicable, we reverse previously recognized expense in
the same period of the forfeiture of unvested awards.
The measurement of the fair value of stock-based awards and recognition of
stock-based compensation expense requires assumptions to be estimated by
management that involve inherent uncertainties and the application of
management's judgment, including (a) the fair value of our common stock on the
date of option grant for all awards granted prior to the IPO (b) the expected
term of the stock option until its exercise by the recipient, (c) our assumed
stock price volatility through a designated peer group of publicly-traded
companies for a period equal to the expected option term, (d) the prevailing
risk-free interest rate over the expected term, and (d) any expected dividend
payments over the expected term. If any of these assumptions change, our
stock-based compensation expense for future grants could materially differ.
Expected Term - The expected term is calculated using the simplified method
which is used when there is insufficient historical data about exercise patterns
and post-vesting employment termination behavior. The simplified method is based
on the vesting period and the contractual term for each grant, or for each
vesting-tranche for awards with graded vesting. The mid-point between the
vesting date and the maximum contractual expiration date is used as the expected
term under this method. For awards with multiple vesting-tranches, the times
from grant until the mid-points for each of the tranches may be averaged to
provide an overall expected term.
Expected Volatility - We estimate the volatility of our common stock on the date
of grant based on our designated peer group of publicly-traded companies for a
look-back period, as of the date of grant, that corresponds with the expected
term of the awarded stock option.
Expected Dividend Rate - We have an expected dividend yield of zero because we have never paid cash dividends and do not expect to for the foreseeable future.
Risk-Free Interest Rate - We estimate the risk-free interest rate based upon theU.S. Department of the Treasury yields in effect at award grant for a period equaling the expected term of the stock option.
Common Stock Valuations
Prior to the IPO, given the absence of a public trading market, our Board of
Directors, with input from management, considered numerous objective and
subjective factors to determine the fair value of its common stock. The factors
included: (i) third-party valuations of our common stock; (ii) our stage of
development; (iii) the status of research and development efforts; (iv) the
rights, preferences and privileges of our preferred stock relative to common
stock; (v) our
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operating results and financial condition, including our levels of available
capital resources; (vi) equity market conditions affecting comparable public
companies; (vii) general U.S. market conditions; and (viii) the lack of current
marketability of our common stock. The assumptions underlying these valuations
represented management's best estimate, which involved inherent uncertainties
and the application of management's judgment. As a result, if we had used
different assumptions or estimates, the fair value of our common stock and our
stock-based compensation expense could have been materially different.
Subsequent to the IPO, the fair value of our common stock is based on the closing quoted market price of our common stock as reported by the Nasdaq Global Select Market on the date of grant.
Recent Accounting Pronouncements
A description of recent accounting pronouncements that may potentially impact our financial position, results of operations or cash flows is disclosed in the notes to which they relate within our financial statements.
Indemnification Agreements
As permitted underDelaware law and in accordance with our bylaws, we indemnify our officers and directors for certain events or occurrences while the officer or director is or was serving in such capacity. We are also party to indemnification agreements with our officers and directors. We believe the fair value of the indemnification rights and agreements is minimal. Accordingly, we have not recorded any liabilities for these indemnification rights and agreements as ofDecember 31, 2022 .
JOBS Act Accounting Election
The JOBS Act permits an emerging growth company such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have irrevocably elected to opt out of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. We will remain an emerging growth company until the earliest of (1) the last day of our first fiscal year (a) following the fifth anniversary of the completion of our IPO, (b) in which we have total annual gross revenues of at least$1.235 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds$700 million of the priorJune 30th and (2) the date on which we have issued more than$1.0 billion in non-convertible debt securities during the prior three-year period. 103
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