ELIEM THERAPEUTICS, INC. You should read the following discussion and analysis together with our consolidated financial statements and related notes included in "Item 8. Financial Statements and Supplementary Data." in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that involve risks and uncertainties. For a complete discussion of forward-looking statements, see the section above titled "Special Note Regarding Forward Looking Statements." Our actual results could differ materially from those expressed or implied in any forward-looking statements as a result of various factors, including those set forth under the caption "Item 1A. Risk Factors."
Overview
We are a biotechnology company focused on developing novel therapies for neuronal excitability disorders to address unmet needs in psychiatry, epilepsy, chronic pain, and other disorders of the peripheral and central nervous systems. These disorders often occur when neurons are overly excited or inhibited, leading to an imbalance, and our focus is on restoring homeostasis. We are developing clinically differentiated product candidates focused on validated mechanisms of action with broad therapeutic potential to deliver improved therapeutics for patients with these disorders.
Our lead program is ETX-123, a Kv7.2/3 potassium channel opener. Kv7.2/3 has
been clinically validated as a therapeutic target for both epilepsy and pain,
with further encouraging clinical data in depression. The first generation Kv7
channel opener, ezogabine (Potiga), was approved for refractory focal onset
seizures in 2011 in both
We have incurred significant operating losses since inception, as we have
devoted substantially all of our resources to organizing and staffing our
company, identifying potential product candidates, business planning, raising
capital, undertaking research, executing preclinical studies and clinical
development trials, and providing general and administrative support for
business activities. We incurred net losses of
Since our inception, we have funded our operations with an aggregate of
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We expect to continue to incur substantial expenses and operating losses over the foreseeable future, largely driven by our ongoing activities as we:
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initiate and continue research and development, including preclinical, clinical and discovery efforts for ETX-123 and any future product candidates;
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hire and retain additional personnel, such as clinical, manufacturing, quality control, scientific, commercial and administrative personnel;
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maintain, expand and protect our intellectual property portfolio;
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establish sales, marketing, distribution, manufacturing, supply chain and other commercial infrastructure in the future to commercialize various products for which we may obtain regulatory approval; and
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add equipment and physical infrastructure to support our research and development and personnel; acquire or in-license other product candidates and technologies.
We do not have any products approved for sale and have not generated any revenue from product sales since our inception. Our ability to generate product revenue will depend on the successful development, regulatory approval and eventual commercialization of one or more of our product candidates, if approved. We cannot assure you that we will ever be profitable or generate positive cash flow from operating activities.
We will require substantial additional funding to support our continuing
operations and further the development of our product candidates. Until such
time as we can generate significant revenue from product sales, if ever, we
expect to finance our operations through the sale of equity, debt financings or
other capital sources, which could include income from collaborations, strategic
partnerships or other strategic arrangements. To a lesser extent, we also expect
to continue to rely on
2023 Restructuring
On
We estimate that we will incur approximately
Components of Operating Results
Operating Expenses
Our operating expenses consist of (i) research and development expenses and (ii) general and administrative expenses.
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Research and Development
Our research and development expenses consist primarily of direct and indirect costs incurred in connection with our discovery efforts, preclinical studies, and clinical trial activities related to our pipeline, including our lead product candidate ETX-123, our recently paused product candidate ETX-155 and our discontinued product candidate ETX-810.
Our direct research and development costs include:
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expenses incurred in connection with research, laboratory consumables and preclinical and clinical trial activities;
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the cost to manufacture drug products for use in our preclinical studies and clinical trials; and
• consulting fees
Our indirect research and development costs include:
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personnel-related expenses such as salaries, bonuses, benefits, and stock-based compensation expense, for our scientific personnel performing research and development activities; and
• facility rent.
Total direct costs and indirect costs are as follows (in thousands):
Year Ended
December 31,
2022 2021
Direct costs $ 24,471 $ 25,166
Indirect costs 8,426 4,752
Research and development tax credits (6,683 ) (6,596 )
Total research and development expenses
We expense research and development costs as incurred. Non-refundable advance
payments for goods and services that will be used over time for research and
development are capitalized and recognized as goods are delivered or as the
related services are performed. We categorize costs by stage of development
clinical or preclinical. Given our stage of development and the utilization of
our resources across our various programs, we have not historically tracked our
research and development costs by program. Research and development expenses are
presented net of reimbursement received for refundable research and development
tax credits from the
Research and development costs by stage of development are as follows (in
thousands):
Year Ended
December 31,
2022 2021
Clinical $ 22,199 $ 19,538
Preclinical 10,698 10,380
Research and development tax credits (6,683 ) (6,596 )
Total research and development expenses
Research and development activities are central to our business model. We expect to continue to incur substantial research and development expenses for the foreseeable future as we advance our current and future product candidates. Our research and development expenses may vary significantly based on factors such as:
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the number and scope of preclinical and IND-enabling studies;
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the number and scope of clinical studies needed for regulatory approval;
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the phases of development of our product candidates;
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the progress and results of our research and development activities;
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the length of time required to enroll eligible subjects and initiate clinical trials;
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the number of subjects that participate in the clinical trials;
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potential additional safety monitoring requested by regulatory agencies;
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the duration of subject participation in the trials and follow-up;
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the cost and timing of manufacturing of our product candidates;
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the timing, receipt and terms of any marketing approvals from applicable regulatory authorities;
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the hiring and retention of research and development personnel;
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the degree to which we obtain, maintain, defend and enforce our intellectual property rights; and
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the extent to which we establish collaborations, strategic partnerships or other strategic arrangements and the performance of any related third parties.
A change in the outcome of any of these 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.
General and Administrative
Our general and administrative expenses consist primarily of personnel-related expenses such as salaries, bonuses, benefits, and stock-based compensation, for our personnel in executive, finance and accounting, human resources, business development and other administrative functions. Other significant general and administrative expenses include legal fees relating to intellectual property and corporate matters, professional fees for accounting, audit, regulatory, tax and consulting services, insurance costs, as well as investor and public relations costs.
We expect to continue to incur substantial general and administrative expenses for the foreseeable future to support our continued research and development activities and, if any product candidates receive marketing approval, commercialization activities, as well as to support our operations generally.
Other Income (Expense)
Change in Fair Value of Redeemable Convertible Preferred Tranche Liability
Our redeemable convertible preferred stock tranche lability was accounted for at fair value at inception, with changes in the fair value recorded in earnings at each reporting period through settlement. Refer to Note 6 of the consolidated financial statements.
Foreign Currency Loss
Our foreign currency loss consists of foreign exchange losses resulting from
remeasurement and foreign currency transactions between the British Pound and
the
Interest Income, net
Our interest income consists of interest earned on our cash, cash equivalents and short-term investments and adjustments related to amortization of purchase premiums and accretion of discounts of short-term investments.
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Results of Operations
The following table summarizes our results of operations for the years ended
Year Ended
December 31, Change
2022 2021 $ %
Operating expenses:
Research and development $ 26,214 $ 23,322 $ 2,892 12.4 %
General and administrative 18,921 12,350 6,571 53.2 %
Total operating expenses 45,135 35,672 9,463 26.5 %
Loss from operations (45,135 ) (35,672 ) (9,463 ) 26.5 %
Other income (expense):
Change in fair value of redeemable
convertible
preferred stock tranche liability - (11,718 ) 11,718 (100.0 )%
Foreign currency loss (1,484 ) (170 ) (1,314 ) *
Interest income, net 1,375 80 1,295 *
Total other income (expense) (109 ) (11,808 ) 11,699 (99.1 )%
Net loss $ (45,244 ) $ (47,480 ) $ 2,236 (4.7 )%
* - % Not meaningful
Comparison of the Years Ended
Operating Expenses
Research and Development
Research and development expenses increased 12.4% from
This increase was driven by a
General and Administrative
General and administrative expenses increased 53.2% from
Other Income (Expense)
Change in Fair Value of Redeemable Convertible Preferred Tranche Liability
For the year ended
Foreign Currency Loss
Foreign currency loss increased from a
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Interest Income, net
Interest income, net increased from
Liquidity and Capital Resources
Sources of Liquidity
We primarily generate cash and cash equivalents from the sale of our equity
securities, including common stock and redeemable convertible preferred stock,
and to a lesser extent from cash received pursuant to
Funding Requirements
We have experienced recurring net losses since inception. Our transition to
profitability is dependent upon the successful development, approval and
commercialization of our product candidates and achieving a level of revenue
adequate to support our cost structure. We do not expect to achieve such revenue
and expect to continue to incur losses for the foreseeable future. We believe
our cash, cash equivalents and marketable securities of
We expect to continue to incur substantial research and development expenses for the foreseeable future as we advance our current and future product candidates. As a result, we will need significant additional capital to fund our operations, which we may obtain through one or more equity offerings, debt financings or other third-party funding, including potential strategic alliances and licensing or collaboration arrangements. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amount of increased capital we will need to raise to support our operations and the outlays and operating expenditures necessary to complete the development of our product candidates and build additional manufacturing capacity, and we may use our available capital resources sooner than we currently expect.
Our future capital requirements will depend on many factors, including:
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the progress of our current and future product candidates through preclinical and clinical development;
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potential delays in our preclinical studies and clinical trials, whether current or planned, or other factors;
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continuing our research and discovery activities;
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initiating and conducting additional preclinical, clinical, or other studies for our product candidates;
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changing or adding additional contract manufacturers or suppliers;
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seeking regulatory approvals and marketing authorizations for our product candidates;
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establishing sales, marketing, and distribution infrastructure to commercialize any products for which we obtain approval;
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acquiring or in-licensing product candidates, intellectual property and technologies;
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making milestone, royalty, or other payments due under any current or future collaboration or license agreements;
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obtaining, maintaining, expanding, protecting, and enforcing our intellectual property portfolio;
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attracting, hiring and retaining qualified personnel;
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potential delays or other issues related to our operations;
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meeting the requirements and demands of being a public company;
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defending against any product liability claims or other lawsuits related to our products; and
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the impact of the ongoing COVID-19 pandemic, which may exacerbate the magnitude of the factors discussed above.
We believe that our existing cash, cash equivalents and marketable securities will enable us to fund our operating expenses and capital expenditure requirements into 2027. We have based our estimates as to how long we expect we will be able to fund our operations on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect, in which case, we would be required to obtain additional financing sooner than currently projected, which may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.
We will need substantial additional funding to support our continuing operations and pursue our development strategy. Until such time as we can generate significant revenue from sales of our product candidates, if ever, we expect to finance our operations through the sale of equity, debt financings or other capital sources, including potential collaborations with other companies or other strategic transactions. Adequate funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back, or discontinue the development and commercialization of our product candidates or delay our efforts to expand our product pipeline. We may also be required to sell or license to other parties' rights to develop or commercialize our product candidates that we would prefer to retain.
Cash Flows
The following table summarized our cash flows (in thousands):
Year Ended
'December 31,
2022 2021
Net cash used in operating activities $ (37,369 ) $ (36,072 ) Net cash provided by (used in) investing activities 34,440 (114,970 ) Net cash provided by financing activities
- 177,232
Operating activities
In 2022, net cash used in operating activities was
In 2021, net cash used in operating activities was
Investing activities
In 2022, net cash provided by investing activities was
In 2021, net cash used in investing activities was
Financing activities
In 2021, net cash provided by financing activities was
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Contractual Commitments and Obligations
In the normal course of business, we enter into contracts with contract research organizations (CROs), contract development and manufacturing organizations (CDMOs), and other third parties for preclinical studies and clinical trials, research and development supplies, and other testing and manufacturing services. These contracts do not contain material minimum purchase commitments and generally provide us the option to cancel, reschedule and adjust our requirements based on our business needs, prior to the delivery of goods or performance of services. However, it is not possible to predict the maximum potential amount of future payments under these agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each agreement.
We lease various operating spaces in the
Off Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of
Critical Accounting Policies and Estimates
A summary of the significant accounting policies is provided in Note 2 to our consolidated financial statements.
Our management's discussion and analysis of our financial condition and results
of operations is based on our consolidated financial statements, which have been
prepared in accordance with
Management considers an accounting estimate to be critical if:
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it requires a significant level of estimation uncertainty; and
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changes in the estimate are reasonably likely to have a material effect on our financial condition or results of operations.
We believe the following critical accounting policies and estimates describe the more significant judgments and estimates used in the preparation of our consolidated financial statements.
Stock-Based Compensation
We measure our stock-based awards granted to employees, non-employee directors, consultants and independent advisors based on the estimated grant-date fair value of the awards. We use the Black-Scholes option pricing model to estimate the fair value of our stock option awards. The Black-Scholes option pricing model requires us to make assumptions and judgements about the variables used in the calculation, including the fair value of common stock, expected term, expected volatility of our common stock, risk-free interest rate and expected dividend yield. Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation is recognized. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation recognized in future periods could be materially different.
Refer to Note 2 and 8 to our consolidated financial statements for further details regarding the development and evaluation of the assumptions used to estimate the fair value of our stock-based awards, and the related effect of stock-based compensation expense on the consolidated financial statements.
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Fair Value of Common Stock
Following the closing of our IPO, the fair market value of our common stock is based on its closing price as reported on the date of grant on the Nasdaq Global Market, on which our common stock is traded. Prior to our IPO, because there was no public market for our common stock, the estimated fair value of our common stock was determined by the board of directors as of the date of each option grant with input from management, considering the most recently available third-party valuation of common stock, and the board of directors' assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant.
The assumptions underlying these valuations represented management's best estimates which involved inherent uncertainties. As a result, if we had used significantly different assumptions or estimates, the fair value of our common stock and stock-based compensation expense could have been materially different.
Refer to Note 2 to our consolidated financial statements for further details regarding the factors considered and valuation approaches utilized in determining the best estimate of fair value of our common stock prior to our IPO.
Redeemable Convertible Preferred Stock Tranche Liability
Our Series A-1 redeemable convertible preferred stock included an obligation whereby the investors agreed to buy, and the Company agreed to sell, additional shares at a fixed price if certain agreed upon milestones were achieved (Series A-1 Tranche Rights). This redeemable convertible preferred stock tranche liability was determined to be a freestanding financial instrument that should be accounted for as a liability at fair value and was revalued at each reporting period until settlement, with changes in the fair value recorded as a change in redeemable convertible preferred stock tranche liability in the consolidated statements of operations and comprehensive loss. Upon the closing of the redeemable convertible preferred stock, the redeemable convertible preferred stock purchase rights liability was extinguished, and the mark-to-market fair value of the liability was included in the carrying value of the redeemable convertible preferred stock issued.
We estimated the fair value of the Series A-1 redeemable convertible preferred stock tranche liability using a probability-weighted present value model that considered the probability of triggering the Series A-1 Tranche Rights through achievement of the clinical development milestones specified in the Series A-1 redeemable convertible preferred stock purchase agreement. Significant estimates and assumptions impacting the fair value measurement included the estimated fair value per share of the underlying Series A-1 redeemable convertible preferred stock, risk-free rate, expected dividend yield, time to liquidity, expected volatility of the price of the underlying redeemable convertible preferred stock and determining the type of option (call option and/or forward contract) and associated probabilities. The most significant assumptions impacting the fair value of the redeemable convertible preferred stock tranche feature included the estimated fair value of our Series A-1 redeemable convertible preferred stock, estimated time to achieve the tranche milestone, and the determination of the type of option (call option and/or forward contract) and associated probability of success of completing the milestone.
We determined the estimated fair value per share of the underlying redeemable
convertible preferred stock by taking into consideration the most recent sales
of our redeemable convertible preferred stock as well as additional factors that
we deemed relevant. We assessed these assumptions and estimates on a quarterly
basis as additional information impacting the assumptions became available. The
risk-free rate was determined by reference to the
These estimates involved inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes changed and we used significantly different assumptions or estimates, our redeemable convertible preferred stock tranche liability could have been materially different.
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Internal Controls over Financial Reporting
In connection with the preparation of our consolidated financial statements for
the year ended
Emerging Growth Company Status
We are an emerging growth company, as defined in the Jumpstart Our Business
Startups Act (JOBS Act). Under the JOBS Act, emerging growth companies can delay
adopting new or revised accounting standards issued subsequent to the enactment
of the JOBS Act until such time as those standards apply to private companies.
Other exemptions and reduced reporting requirements under the JOBS Act for
emerging growth companies include presentation of only two years audited
consolidated financial statements in a registration statement for an initial
public offering, an exemption from the requirement to provide an auditor's
report on internal controls over financial reporting pursuant to the
Sarbanes-Oxley Act, an exemption from any requirement that may be adopted by the
As a result, our consolidated financial statements may not be comparable to
companies that comply with the new or revised accounting pronouncements as of
public company effective dates. We will remain an emerging growth company under
the JOBS Act until the earliest of (i) the last day of our first fiscal year in
which we have total annual gross revenue of
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