FOGHORN THERAPEUTICS INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Some of the numbers included herein have been rounded for the convenience of presentation. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under "Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2022 and in this Quarterly Report on Form 10-Q.
Overview
Foghorn is a clinical stage, precision therapeutics biotechnology company
pioneering a new class of medicines that treat serious diseases by correcting
abnormal gene expression through selectively targeting the chromatin regulatory
system, an untapped opportunity for therapeutic intervention in oncology and in
a wide spectrum of other diseases including virology, autoimmune diseases and
neurology.
The chromatin regulatory system orchestrates gene expression-the turning on and
off of genes-which is fundamental to how all our cells function. The chromatin
regulatory system is implicated in approximately 50% of all cancers, and
understanding how this system works could lead to an entirely new class of
precision medicines. To our knowledge, we are the only company with the ability
to study and target the chromatin regulatory system at scale, in context, and in
an integrated way.
Our proprietary Gene Traffic Control® platform provides an integrated and
mechanistic understanding of how the various components of the chromatin
regulatory system interact, allowing us to identify, validate and potentially
drug targets within this system. We have developed unique capabilities that have
yielded new insights and scalability in drugging this new, previously untapped
and promising area.
Since our inception in 2015, our platform has generated a broad pipeline of more
than a dozen programs with two clinical-stage drug candidates currently in phase
1 development across multiple indications. We have discovered highly selective
chemical matter for some of the most challenging targets in oncology including
BRM, CBP, EP300 and ARID1B as well as other undisclosed targets. We believe our
current pipeline has the potential to help more than 500,000 cancer patients. We
take a small molecule modality agnostic approach to drugging targets which
includes protein degraders, allosteric enzymatic inhibitors, and transcription
factor disruptors. We are a biology first company which means we focus first on
the underlying genetics and biology of a disease relevant target and then
leverage the most appropriate drugging approach to impact the disease biology.
Our lead clinical-stage candidate, FHD-286, a selective, allosteric ATPase
inhibitor is being developed in separate Phase 1 studies in (i) metastatic uveal
melanoma and (ii) relapsed and/or refractory acute myeloid leukemia ("AML"), and
myelodysplastic syndrome ("MDS"). We expect initial clinical data for metastatic
uveal melanoma in the second quarter of 2023. The relapsed and/or refractory AML
and MDS study has been placed on full clinical hold by the FDA due to potential
differentiation syndrome and we plan to provide a regulatory update in the
second quarter of 2023.
On April 24th, 2023 , we provided an update on the FHD-609 Phase 1 program in
synovial sarcoma and SMARCB1-deleted tumors. We have paused enrollment in the
FHD-609 study due to a grade 4 QTc prolongation event in a synovial sarcoma
patient at the second highest dose being evaluated. Enrollment of the dose
escalation portion of the study has been completed and a maximum tolerated dose
has been identified. Consequently, the FDA placed the study on partial clinical
hold, while allowing patients currently enrolled and benefiting from therapy to
continue dosing and to remain on FHD-609. The Company is not, at this time,
planning to pursue a dose expansion study independently.
We believe Foghorn has the potential to be a major biopharmaceutical company
with our current pipeline addressing more than 20 tumor types impacting more
than 500,000 new patients annually. We believe we have the potential to file at
least six new INDs over the next four years.
Since our inception, we have focused substantially all of our resources on
building our Gene Traffic Control platform, organizing and staffing our company,
business planning, raising capital, conducting discovery and research
activities, protecting our trade secrets, filing patent applications,
identifying potential product candidates, undertaking preclinical studies and
clinical trial activities, establishing arrangements with third parties for the
manufacture of initial quantities of our product candidates and component
materials and initiating two strategic collaborations. We do not have any
products approved for sale and have not generated any revenue from product
sales.
On December 10, 2021 , we entered into a collaboration agreement (the "Lilly
Collaboration Agreement") with Eli Lilly and Company ("Lilly"), for which we
received an upfront payment of $300.0 million in January 2022 (see Note 8 to our
notes to unaudited condensed consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q). Concurrent with the Lilly
Collaboration Agreement, we also entered into a stock purchase agreement (the
"Lilly SPA") and issued and sold
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Lilly 4,000,000 shares of our common stock at a price of
In the third quarter of 2022, the Company achieved a research milestone related to a Research Collaboration and Exclusive License Agreement (the "Merck Collaboration Agreement") withMerck Sharp & Dohme Corp. ("Merck") and received a$5.0 million milestone payment from Merck. We have incurred significant operating losses since our inception. For the three months endedMarch 31, 2023 and the year endedDecember 31, 2022 , we reported net losses of$30.5 million and$108.9 million , respectively. As ofMarch 31, 2023 , we had an accumulated deficit of$403.6 million . We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. Our ability to generate any product revenue or product revenue sufficient to achieve profitability will depend on the successful development and eventual commercialization of one or more product candidates we are developing and may develop.
We expect that our expenses and capital requirements will increase substantially in connection with our ongoing activities, particularly if and as we:
• advance our FHD-286 product candidate and continue our preclinical development of product candidates from our current research programs;
• identify and advance additional research programs and additional product candidates;
• initiate preclinical testing for any new product candidates we identify and develop;
• obtain, maintain, expand, enforce, defend and protect our trade secrets and intellectual property portfolio and provide reimbursement of third-party expenses related to our patent portfolio;
• hire additional research and development personnel;
• add operational, legal, compliance, financial and management information systems and personnel to support our research, product development and operations;
• expand the capabilities of our platform;
• acquire or in-license product candidates, intellectual property and technologies;
• operate as a public company;
• seek marketing approvals for any product candidates that successfully complete clinical trials; and
• ultimately establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval.
We will not generate revenue from product sales unless and until we successfully
commercialize one of our product candidates, after completing clinical
development and obtaining regulatory approval. If we obtain regulatory approval
for any of our product candidates, we expect to incur significant expenses
related to developing our commercialization capability to support product sales,
marketing, manufacturing and distribution. Further, we expect to incur
additional costs associated with operating as a public company.
As a result, we will need substantial additional funding to support our
continuing operations and pursue our growth strategy. Until we can generate
significant revenue from product sales, if ever, we expect to finance our
operations through a combination of equity offerings, debt financings and
collaborations or licensing arrangements and our collaboration agreements with
Merck and Lilly. We may be unable to raise additional funds or enter into such
other agreements or arrangements when needed on favorable terms, or at all. If
we fail to raise capital or enter into such agreements as, and when, needed, we
may have to significantly delay, scale back our development or commercialization
plans for one or more of our product candidates.
Because of the numerous risks and uncertainties associated with pharmaceutical
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 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 and be forced to reduce or terminate our
operations.
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Components of Our Results of Operations
Collaboration Revenue
To date, we have not generated any revenue from product sales and do not expect to do so in the near future. If our development efforts for our product candidates are successful and result in regulatory approval or licenses with third parties, we may generate revenue in the future from product sales, milestone payments under our existing collaboration agreements or payments from other license agreements that we may enter into with third parties. In December of 2021, we entered into a strategic collaboration with Lilly to create novel oncology medicines by applying Foghorn's proprietary Gene Traffic Control platform. The collaboration includes a co-development and co-commercialization agreement for the aforementioned selective BRM oncology program and an additional undisclosed oncology target. In addition, the collaboration includes three additional discovery programs using Foghorn's proprietary Gene Traffic Control platform. Under the terms of the collaboration, Foghorn received upfront consideration of$300.0 million in cash pursuant to the Lilly Collaboration Agreement, together with an equity investment by Lilly of$80.0 million in shares of Foghorn common stock pursuant to the Lilly SPA. For the BRM-selective program and the additional undisclosed target program, Foghorn will lead discovery and early research activities, while Lilly will lead development and commercialization activities with participation from Foghorn in operational activities and cost sharing. Foghorn and Lilly will share 50/50 in theU.S. economics, and Foghorn is eligible to receive royalties on ex-U.S. sales starting in the low double-digit range and escalating into the twenties based on revenue levels. For the additional discovery programs, Foghorn will lead discovery and early research activities. Foghorn may receive up to a total of$1.3 billion in potential development and commercialization milestones. Additionally, Foghorn will have an option to participate in a percentage of theU.S. economics and is eligible to receive tiered royalties from the mid-single digit to low-double digit range on sales outside theU.S. that may be exercised after the successful completion of the dose-finding toxicity studies.
We cannot provide assurances as to the timing of future milestones, royalty payments and economics associated with the strategic collaboration with Lilly.
We recognized total deferred revenue of$337.8 million related to the Lilly Collaboration Agreement and the Lilly SPA, which included the$300.0 million upfront payment under the Lilly Collaboration Agreement as well as$37.8 million allocated to deferred revenue from the gross proceeds of the Lilly SPA to be recognized over the performance period. During the three months endedMarch 31, 2023 , we recognized$4.7 million and$3.8 million , respectively, of revenue under the Lilly Collaboration Agreement and, as ofMarch 31, 2023 , we had$315.1 million of deferred revenue related to the above mentioned upfront payment and revenue allocation remaining on our condensed consolidated balance sheets. InJuly 2020 , we entered into the Merck Collaboration Agreement, pursuant to which we will apply our proprietary Gene Traffic Control platform to discover and develop novel therapeutics. Under the Merck Collaboration Agreement, we granted Merck exclusive global rights to develop and commercialize drugs that target dysregulation of a single transcription factor. Under the terms of the Merck Collaboration Agreement, we received a nonrefundable upfront payment of$15.0 million from Merck, and are eligible to receive up to$245.0 million upon achievement of specified research, development and regulatory milestones by any product candidate generated by the collaboration, and up to$165.0 million upon achievement of specified sales-based milestones per approved product from the collaboration, if any, as well as royalties on sales of any approved product from the collaboration. We cannot provide assurance as to the timing of future milestone or royalty payments or that we will receive any of these payments at all. For the three months endedMarch 31, 2023 and 2022, we recognized$0.6 million and$0.1 million of revenue under the Merck Collaboration Agreement. In the third quarter of 2022, the Company achieved a research milestone related to the Merck Collaboration Agreement and received a$5.0 million milestone payment from Merck. As ofMarch 31, 2023 , we had$16.4 million of deferred revenue related to the upfront payment and milestone achievement remaining on our condensed consolidated balance sheets.
Operating Expenses
Our operating expenses are comprised of research and development expenses and general and administrative expenses.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our research activities, including our discovery efforts, and progressing our programs, which include:
•personnel-related costs, including salaries, benefits and stock-based compensation expense, for employees engaged in research and development functions;
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•expenses incurred in connection with our research programs and preclinical and
clinical development of our product candidates, including under agreements with
third parties, such as consultants and contractors and contract research
organizations ("CROs');
•the cost of manufacturing drug substance and drug product for use in our research and preclinical studies and clinical trials under agreements with third parties, such as consultants and contractors and contract development and manufacturing organizations ("CDMOs)";
•laboratory supplies and research materials;
•facilities, depreciation and amortization and other expenses, which include direct and allocated expenses for rent and maintenance of facilities and insurance; and
•payments made under third-party licensing agreements.
We track our direct external research and development expenses on a program-by-program basis. These consist of costs that include fees, reimbursed materials, and other costs paid to consultants, contractors, CDMOs, and CROs in connection with our preclinical, clinical and manufacturing activities. We do not allocate employee costs, costs associated with our discovery efforts, laboratory supplies, and facilities expenses, including depreciation or other indirect costs, to specific product development programs because these costs are deployed across multiple programs and our platform and, as such, are not separately classified. We expect that our research and development expenses will increase substantially as we advance our programs into clinical development and expand our discovery, research and preclinical activities in the near term and in the future. At this time, we cannot accurately estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any product candidates we may develop. A change in the outcome of any number of variables with respect to product candidates we may develop could significantly change the costs and timing associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any product candidates we may develop.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel-related costs, including salaries, benefits and stock-based compensation, for employees engaged in executive, legal, finance and accounting and other administrative functions. General and administrative expenses also include professional fees for legal, patent, consulting, investor and public relations, human resources, and accounting and audit services as well as direct and allocated facility-related costs. We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research activities and development of our programs and platform. We also anticipate that we will continue to incur increased accounting, audit, legal, regulatory, compliance, director and officer insurance costs and investor and public relations expenses associated with operating as a public company.
Other Income (Expense)
Interest Income
Interest income consists of interest earned on our invested cash balances.
Other Income (Expense), Net
Other income (expense) ,net consists of sublease income and miscellaneous expense unrelated to our core operations.
Income Taxes
As ofDecember 31, 2022 , we had federal and state net operating loss carryforwards of$221.7 million and$203.3 million , respectively, which may be available to offset future taxable income. The federal net operating loss carryforwards include$5.3 million which expire in 2037 and$216.4 million which carryforward indefinitely but in some circumstances may be limited to offset 80% of annual taxable income. The state net operating loss carryforwards expire at various dates beginning in 2036. As ofDecember 31, 2022 , we also had federal and state research and development tax credit carryforwards of$9.6 million and$5.7 million , respectively, which may be available to reduce future tax liabilities and expire at various dates beginning in 2036 and 2031, respectively. Due to our history of cumulative net losses since inception and uncertainties surrounding our ability to generate future taxable income, we have recorded a full valuation allowance against our net deferred tax assets at each balance sheet date. We expect to have taxable income in the current year, which will be reduced by utilizing available net operating loss carryforwards and research and development tax credit carryforwards. 16
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Critical Accounting Estimates
Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles inthe United States ("GAAP"). The preparation of our condensed consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2022 as well as elsewhere in this Quarterly Report on Form 10-Q, we believe that revenue recognition and accrued research and development expenses are those most critical to the judgments and estimates used in the preparation of our condensed consolidated financial statements. There have been no material changes to our critical accounting policies and estimates detailed in the Critical Accounting Policies and Significant Judgements section of Item 7. Managements Discussion and Analysis of financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2022 .
Results of Operations
Comparison of the Three Months Ended
The following table summarizes our results of operations for three months endedMarch 31, 2023 and 2022: Three Months EndedMarch 31, 2023
2022 Change
(in thousands)
Collaboration revenue $ 5,309 $ 3,920 $ 1,389
Operating expenses:
Research and development 29,985 24,508 5,477
General and administrative 8,641 7,216 1,425
Total operating expenses 38,626 31,724 6,902
Loss from operations (33,317) (27,804) (5,513)
Other income (expense):
Interest income 2,669 235 2,434
Other income, net 720 655 65
Total other income, net 3,389 890 2,499
Loss before income taxes (29,928) (26,914) (3,014)
Provision for income taxes (560) - (560)
Net loss $ (30,488) $ (26,914) $ (3,574)
Collaboration Revenue
Collaboration revenue was
•an increase in Lilly collaboration revenue recognition of
•an increase in Merck collaboration revenue recognition of$0.5 million due to continued advancement of the single specified transcription factor target under the Merck collaboration agreement. 17
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Research and Development Expenses
The following table summarizes our research and development expenses for the
three months ended
Three Months
Ended March 31,
2023 2022 Change
(in thousands)
Research and development program expenses:
FHD-286 $ 4,031 $ 4,475 $ (444)
FHD-609 2,686 2,319 367
Platform, research and discovery, and unallocated
expenses:
Platform and other early stage research external costs 7,104 5,164 1,940
Personnel related (including stock-based compensation) 10,373 7,911 2,462
Facility related and other 5,791 4,639 1,152
Total research and development expenses Research and development expenses were$30.0 million for the three months endedMarch 31, 2023 , compared to$24.5 million for the three months endedMarch 31, 2022 . The increase is attributed to the following:
•an increase in personnel-related costs of
•an increase in platform and other early stage research investments of
•an increase in facility-related and other expenses of
•an increase in our FHD-609 program costs of
•This was slightly offset by a decrease in our FHD-286 program costs of$0.4 million primarily driven by a decline in clinical trail spend due to theFDA's full clinical hold on the Phase 1 study in AML/MDS inAugust 2022 .
General and Administrative Expenses
The following table summarizes our general and administrative expenses for the
three months ended
Three Months
Ended March 31,
2023 2022 Change
(in thousands)
Personnel related (including stock-based compensation) $ 5,769 $ 4,070 $ 1,699
Professional and consulting 1,624 1,712 (88)
Facility related and other 1,248 1,434 (186)
Total general and administrative expenses General and administrative expenses were$8.6 million for the three months endedMarch 31, 2023 , compared to$7.2 million for the three months endedMarch 31, 2022 . The increase is primarily attributed to the following: •an increase in personnel-related costs of$1.7 million , including a$0.8 million increase in stock-based compensation expense, which was the result of increased headcount in our general and administrative function to support our growing business. Other Income (Expense) Interest income was$2.7 million for the three months endedMarch 31, 2023 , compared to$0.2 million for the three months endedMarch 31, 2022 . The increase in interest and other income (expense), net for the three months endedMarch 31, 2023 was due to an increase in the average interest rate compared to three months endedMarch 31, 2022 .
Other income, net was
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Provision for income taxes
We recorded an income tax provision of$0.6 million for the three months endedMarch 31, 2023 . The income tax provision is primarily driven by the current federal and state taxes related to the$300.0 million upfront payment for Lilly Collaboration Agreement, which will be recognized as taxable income in the current year, and the required capitalization of research and development costs pursuant to Internal Revenue Code Section 174. The Company did not record a provision for income taxes for the three months endedMarch 31, 2022 .
Liquidity and Capital Resources
Since our inception inOctober 2015 , we have incurred significant operating losses. We expect to incur significant expenses and operating losses for the foreseeable future as we support our continued research activities and development of our programs and platform. ThroughMarch 31, 2023 , we have funded our operations with proceeds from our IPO inOctober 2020 , sales of preferred stock, term loans, an upfront payment of$15.0 million we received inJuly 2020 under the Merck Collaboration Agreement and proceeds we received inDecember 2021 under the Lilly SPA of$80.0 million ; an upfront payment of$300.0 million received inJanuary 2022 under the Lilly Collaboration Agreement and a payment of$5.0 million received from Merck under the Merck Collaboration Agreement for the achievement of a research milestone. As ofMarch 31, 2023 , we had cash, cash equivalents and marketable securities of$316.0 million .
Cash Flows
The following table summarizes our sources and uses of cash for each of the
periods presented:
Three Months Ended March 31,
2023 2022
(in thousands)
Net cash provided by (used in) operating activities $ (31,180) $ 271,534
Net cash provided by (used in) investing activities 29,505 (159,409)
Net cash provided by financing activities 102 384
Net decrease in cash, cash equivalents and restricted cash
Operating Activities During the three months endedMarch 31, 2023 , operating activities used$31.2 million of cash, resulting from the net cash used to fund our net loss of$30.5 million and changes in our operating assets and liabilities of$6.6 million partially offset by net non-cash charges of$5.9 million . Net cash provided by changes in our operating assets and liabilities for the three months endedMarch 31, 2023 was primarily driven by a$5.3 million decrease in deferred revenue resulting from the recognition of revenue on the upfront payments received in connection with our collaboration agreements and a$1.7 million decrease in operating lease liabilities. During the three months endedMarch 31, 2022 , operating activities provided$271.5 million of cash, resulting from our changes in our operating assets and liabilities of$293.2 million and net non-cash charges of$5.2 million partially offset by a net loss of$26.9 million . Net cash provided by changes in our operating assets and liabilities for the three months endedMarch 31, 2022 consisted primarily of the$300.0 million of cash received related to our collaboration receivable, an increase of$1.3 million in accounts payable and a decrease of$0.2 million of prepaid expenses and other current assets partially offset by a$3.9 million decrease in deferred revenue resulting from the recognition of revenue on the upfront payments received in connection with our collaboration agreements, a$2.5 million decrease in accrued expenses and other liabilities and a$1.8 million decrease in operating lease liabilities.
Investing Activities
During the three months endedMarch 31, 2023 net cash used in investing activities was$29.5 million due to$26.2 million of purchases of marketable securities and$0.6 million in purchases of property and equipment partially offset by$56.4 million of maturities of marketable securities. During the three months endedMarch 31, 2022 net cash provided by investing activities was$159.4 million due to$212.3 million of purchases of marketable securities and$0.2 million in purchases of property and equipment partially offset by$53.1 million of maturities of marketable securities. 19
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Financing Activities
During the three months ended
During the three months ended
Funding Requirements
We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities, initiate clinical trials for our product candidates in development and continue to fund on-going clinical efforts. As of the issuance date of these interim condensed consolidated financial statements, we expect that our cash, cash equivalents and marketable securities will be sufficient to fund our operating expenses and capital expenditure requirements for at least twelve months. We have based these estimates as to how long we expect we will be able to fund our operations on assumptions that may prove to be inaccurate. 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 planned, 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 be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources. If we are unable to raise sufficient capital as and when needed, we may be required to significantly curtail, delay or discontinue one or more of our research or development programs or the commercialization of any product candidate we may develop, or be unable to expand our operations or otherwise capitalize on our business opportunities. If we raise additional funds through collaborations or licensing arrangements with third parties, we may have to relinquish valuable rights to future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. See "Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2022 for additional risks associated with our substantial capital requirements.
Off-balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have,
any off-balance sheet arrangements, as defined in the rules and regulations of
the
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report.
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