You should read the following discussion and analysis of our financial condition
and operating results together with our financial statements and related notes
included elsewhere in this Annual Report. This discussion and analysis contains
forward-looking statements based upon current beliefs, plans and expectations
that involve risks, uncertainties and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of various factors, including those set forth under "Risk Factors" or in
other parts of this Annual Report. For the comparison of the financial results
for the fiscal years ended
Overview
We are a clinical-stage biotechnology company pioneering a precision medicine approach to the discovery, development, and commercialization of novel therapeutic products for the treatment of immune-mediated diseases, starting first with inflammatory bowel disease (IBD). We leverage our proprietary precision medicine platform, Prometheus360™, which includes one of the world's largest gastrointestinal (GI) bioinformatics databases and sample biobanks, to identify novel therapeutic targets, develop therapeutic candidates to engage those targets, and develop genetics-based diagnostic tests designed to identify patients more likely to respond to our therapeutic candidates. We have generated a robust pipeline of therapeutic development programs for the treatment of immune-mediated diseases.
Our lead product candidate, PRA023, is a humanized IgG1 monoclonal antibody (mAb) that has been shown to block the tumor necrosis factor (TNF)-like ligand 1A (TL1A), a target associated with both intestinal inflammation and fibrosis. PRA023's dual mechanism of action, targeting both inflammation and fibrosis, also provides a strong rationale for advancing PRA023 into clinical trials for indications beyond IBD.
In
In
We plan to advance PRA023 into pivotal Phase 3 clinical trials for UC and CD in
2023 after we meet with the
In
Our second product candidate, PRA052, is an anti-CD30L mAb. The CD30L-CD30 co-stimulatory pathway has been implicated in IBD by genetic, preclinical, and human translational data. We filed an investigational new drug application (IND) for PRA052 in the third quarter of 2022 and then initiated a Phase 1 single ascending dose/multiple ascending dose clinical trial in normal healthy volunteers in the fourth quarter of 2022. We expect topline results from the Phase 1 study in the fourth quarter of 2023. We are also developing a proprietary genetics-based diagnostic test for PRA052 to identify patients that are more likely to respond to CD30L inhibition.
We continue to explore additional potential indications for our development programs and evaluate numerous other drug targets, identified through Prometheus360, for therapeutic utility for potential drug discovery development. We may also explore and evaluate entering into strategic collaborations for specific therapeutic indications or geographic territories in order to maximize the value of PRA023 and our other product candidates. The research and development of therapeutic product candidates and diagnostics comprises our therapeutics business segment.
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On
On
We do not expect to generate any revenue from therapeutic product sales until we successfully complete development and obtain regulatory approval for one or more of our therapeutic product candidates and diagnostics, which we expect will take a number of years and may never occur.
We have incurred operating losses in each year since inception. Our net losses,
including those generated from PLI, were
From inception and to the date of our initial public offering (IPO) in
Based on our current operating plan, we believe that our existing cash and cash equivalents will be sufficient to fund our operations for at least the next 12 months from the date of issuance of these financial statements. If we obtain regulatory approval for any of our therapeutic product candidates and diagnostics, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution, including royalty payments under our license and collaboration agreements. As we continue to advance our pipeline of diagnostic products, we expect to incur additional costs associated with conducting clinical studies to demonstrate the utility of our products and support reimbursement efforts. Accordingly, until such time as we can generate significant revenue from sales of our product candidates, if ever, we expect to finance our cash needs through equity offerings, debt financings or other capital sources, including potential additional collaborations, licenses and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements when needed would have a negative impact on our financial condition and could force us to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
License and Collaboration Agreements
Our Collaboration with
In
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respect to certain patents, information and materials related to therapeutic
targets and diagnostic products, to conduct research, develop, and commercialize
therapeutic and diagnostic products for human use. The licensed technology
includes information and materials arising out of Cedars-Sinai's database and
biobank, as well as exclusive access to this database and biobank, which is an
integral part of our Prometheus360 platform. As upfront consideration for the
license agreement, we issued to Cedars-Sinai 257,500 shares of fully vested
common stock and 335,000 shares of restricted common stock, which shares fully
vested in
Our Collaboration with
In
Components of Results of Operations
Revenue
Collaboration revenue
We currently derive all of our revenue from our collaboration agreement. For the foreseeable future, we expect to generate revenue from services performed under the Falk Agreement. We may receive a combination of upfront payments and milestone payments under our current and/or future collaboration agreements.
We do not expect to generate any revenue from the sale of therapeutic products unless and until such time that our therapeutic product candidates and diagnostics have advanced through clinical development and regulatory approval, if ever. We expect that any revenue we generate, if at all, will fluctuate from quarter-to-quarter as a result of the timing and amount of payments relating to such services and milestones and the extent to which any of our therapeutic product candidates are approved and successfully commercialized. If we fail to complete preclinical and clinical development of therapeutic product candidates or obtain regulatory approval for them, our ability to generate future revenues, and our results of operations and financial position would be adversely affected.
Operating Expenses Research and Development
Research and development expenses consist of external and internal costs associated with our research and development activities, including our discovery and research efforts, the preclinical and clinical development of our product candidates and the development and validation of our diagnostics. Our research and development expenses include:
•
external costs, including expenses incurred under arrangements with third parties, such as CROs, contract manufacturers, consultants and our scientific advisors; and
• internal costs, including: o
employee-related expenses, including salaries, benefits, and stock-based compensation;
o
the costs of laboratory supplies and acquiring, developing and manufacturing preclinical study materials; and
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o
facilities, information technology and depreciation, which include direct and allocated expenses for rent and maintenance of facilities and depreciation of equipment.
The following table summarizes our research and development expenses by program for the periods indicated (in thousands):
Year Ended December 31, 2022 2021 PRA023$ 73,151 $ 42,802 PRA052 22,641 10,602 Other preclinical programs 17,056 9,023
Total research and development
We expect our research and development expenses to increase for the foreseeable future as we continue to progress our Phase 2 and Phase 3 clinical trials of PRA023 globally, advance PRA052 through a Phase 1 clinical trial, develop diagnostic candidates, and continue to advance several preclinical research and development programs. The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time consuming. We may never succeed in achieving marketing approval for any of our product candidates.
The timelines and costs with research and development activities are uncertain and can vary significantly for each product candidate and development program and are difficult to predict. We anticipate we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to preclinical and clinical results, regulatory developments, ongoing assessments as to each program's commercial potential, and our ability to maintain or enter into new collaborations, to the extent we determine the resources or expertise of a collaborator would be beneficial for a given program. We will need to raise substantial additional capital in the future. In addition, we cannot forecast which development programs may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.
Our development costs may vary significantly based on factors such as:
•
the number and scope of preclinical and IND-enabling studies;
•
per patient trial costs;
•
the number of trials required for approval;
•
the number of sites included in the trials;
•
the countries in which the trials are conducted;
•
the length of time required to enroll eligible patients;
•
the number of patients that participate in the trials;
•
the number of doses that patients receive;
•
the drop-out or discontinuation rates of patients;
•
the number, costs and timing of developing diagnostics and scope of validation studies;
•
potential additional safety monitoring requested by regulatory agencies;
•
the duration of patient participation in the trials and follow-up;
•
the cost and timing of manufacturing our product candidates;
•
the phase of development of our product candidates; and
•
the efficacy and safety profile of our product candidates and effectiveness of our diagnostics.
General and Administrative
General and administrative expenses consist primarily of employee-related expenses, including salaries, benefits and stock-based compensation, for employees in our finance, accounting, legal, human resources, business development and support functions. Other general and administrative expenses include allocated facility, information technology and depreciation related costs not otherwise included in research and development expenses and professional fees for auditing, tax, intellectual property and legal
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services. Costs related to filing and pursuing patent applications are recognized as general and administrative expenses as incurred since recoverability of such expenditures is uncertain.
We expect our general and administrative expenses will increase for the foreseeable future to support our increased research and development activities.
Interest and Other Income (Expense)
Interest income
Interest income consists primarily of interest earned on our cash, cash equivalents, and short-term investments.
Interest expense
Interest expense consists of interest expense incurred in connection with our borrowings under the Loan Agreement and non-cash interest expense associated with the deferred purchase payments for PLI.
Loss on early extinguishment of debt
Loss on early extinguishment of debt consists of the unamortized debt issuance costs, prepayment penalty and final payment due under the terms of the Loan Agreement.
Change in fair value of preferred stock purchase liability
In connection with the issuance of our Series D convertible preferred stock in
2020, the investors agreed to buy, and we agreed to sell, additional shares of
such preferred convertible stock at the original issue price upon the
achievement of pre-defined milestones. These contractual obligations were
required to be accounted for as liabilities and remeasured to fair value at each
reporting date, with any change in the fair value reported as a component of
other income (expense). In
Change in fair value of preferred stock warrant liability
Changes in the fair value of preferred stock warrant liabilities relates to warrants for the purchase of convertible preferred stock issued in connection with our Loan Agreement. These warrants were converted into warrants for the purchase of common stock in connection with our IPO and were reclassified into stockholders' equity.
Results of Operations
Comparison of the Years Ended
This section provides an analysis of our financial results for the fiscal year
ended
The following table summarizes our results of operations for the years ended
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Year Ended December 31, 2022 2021 Change Collaboration revenue$ 6,809 $ 3,129 $ 3,680 Operating expenses: Research and development 112,848 62,427 50,421 General and administrative 39,739 28,505 11,234 Total operating expenses 152,587 90,932 61,655 Loss from operations (145,778 ) (87,803 ) (57,975 ) Other income (expense), net: Interest income 4,026 108 3,918 Interest expense - (861 ) 861 Loss on early extinguishment of debt - (554 ) 554 Change in fair value of preferred stock purchase right liability - (980 ) 980 Change in fair value of preferred stock warrant liability - (105 ) 105 Total other income (expense), net 4,026 (2,392 ) 6,418 Net loss$ (141,752 ) $ (90,195 ) $ (51,557 ) Revenue
Revenue was
Research and Development Expenses
Research and development expenses were
General and Administrative Expenses
General and administrative expenses were
Other Income (Expense), Net
Interest income
Interest income was
Interest expense
Interest expense was zero for the year ended
Loss on early extinguishment of debt
Loss on early extinguishment of debt of
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Change in Fair Value of Convertible Preferred Stock Purchase Right Liability
The change in fair value of convertible preferred stock purchase right liability
decreased
Liquidity and Capital Resources
Sources of Liquidity
From our inception to the date of our IPO, we received aggregate gross proceeds
of
Oxford Loan and Security Agreement
In
Under the Loan Agreement, interest accrued at an annual rate equal to the sum of
(I) the greater of (a) the 30-day
In connection with execution of the Loan Agreement, we issued Oxford a warrant
to purchase 112,500 shares of our Series C convertible preferred stock at an
exercise price of
Open Market Sale Agreement
On
We are not obligated to sell, and the Agent is not obligated to buy or sell, any
shares of common stock under the Sale Agreement. No assurance can be given that
we will sell any shares of common stock under the Sale Agreement, or, if we do,
as to the price or amount of shares of common stock that we sell or the dates
when such sales will take place. During the year ended
Public Offering of Common Stock
On
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relating to the issuance and sale of 4,545,455 shares of our common stock. In
addition, under the terms of the Underwriting Agreement, we granted the
Underwriters a 30-day option to purchase up to 681,818 additional shares of
common stock at
Future Capital Requirements
As of
Our future capital requirements are difficult to forecast and will depend on many factors, including but not limited to:
•
the type, number, scope, progress, expansions, results, costs and timing of, discovery, preclinical studies and clinical trials of our product candidates which we are pursuing or may choose to pursue in the future;
•
the costs and timing of manufacturing for our product candidates and commercial manufacturing if any product candidate is approved;
•
the costs, timing and outcome of regulatory review of our product candidates;
•
the costs and timing of developing our diagnostics, and the outcome of regulatory review;
•
the success of our current and any future collaborations, including the timing and amount of payments made to us under the Falk Agreement or any future collaboration agreements;
•
the costs of obtaining, maintaining and enforcing our patents and other intellectual property rights;
•
the additional costs we may incur as a result of operating as a public company, including our efforts to enhance operational systems and hire additional personnel, including enhanced internal controls over financial reporting;
•
the timing and amount of payments that we must make to the licensors and other third parties from whom we have in-licensed intellectual property rights related to our Prometheus360 platform and product candidates;
•
the costs associated with hiring additional personnel and consultants as our preclinical and clinical activities increase;
•
the costs and timing of maintaining our sales and marketing capabilities and any expansion thereof, including if any product candidate is approved;
•
our ability to achieve sufficient market acceptance, coverage and adequate reimbursement from third-party payors and adequate market share and revenue for any approved products and diagnostics;
•
the terms and timing of establishing and maintaining collaborations, licenses and other similar arrangements; and
•
costs associated with any products or technologies that we may in-license or acquire.
Other than our collaboration agreements, we have no other committed sources of capital. Until we can generate a sufficient amount of product revenue to finance our cash requirements, if ever, we expect to finance our future cash needs primarily through equity offerings, debt financings or other capital sources, including potential collaborations, licenses and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Any future debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through other collaborations or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, 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 funds through equity or debt
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financings when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant rights to develop and market product candidates to third parties that we would otherwise prefer to develop and market ourselves.
Cash Flows
The following table shows a summary of our cash flows for the periods presented (in thousands):
Year Ended December 31, 2022 2021 Net cash provided by (used in) Operating activities$ (123,254 ) $ (63,505 ) Investing activities (403,779 ) (1,136 ) Financing activities 562,202 267,694
Net increase in cash and cash equivalents
Operating Activities
Cash used in operating activities was
Investing Activities
Net cash used in investing activities was
Financing Activities
Net cash provided by financing activities was
Critical Accounting Polices and Estimates
This management discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities revenue and expenses.
On an ongoing basis, we evaluate these estimates and judgments. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue and expenses that are not readily apparent from other sources. Actual results may differ materially from these estimates.
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While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements included elsewhere in this Annual Report, we believe the following accounting policies and estimates to be most critical to the preparation of our consolidated financial statements.
Revenue Recognition
To date, all of our revenue has been derived from our collaboration agreements with Falk and Takeda. The terms of these arrangements include payments to us for the following: non-refundable, upfront license fees; development, regulatory and commercial milestone payments; payments for research, and royalties on net sales of licensed products.
We recognize revenue in accordance with Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (ASC 606). In accordance with ASC 606, we perform the following steps in determining the appropriate amount of revenue to be recognized as we fulfill our obligations under each of these agreements: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when, or as satisfy each performance obligation. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations and assesses whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
With respect to our assessment of the Falk and Takeda Agreements, we identified one performance obligation for each deliverable under the agreement since the delivered elements are not distinct within the context of the contract. Accordingly, we will recognize revenue for the transaction price in an amount proportional to the collaboration expenses incurred and the total estimated collaboration expenses over the period over which it expects to deliver its performance obligations. We included certain milestones in the transaction price as they were deemed not probable of significant reversal at the inception of the agreement. Due to the uncertainty in the achievement of the developmental and commercial milestones, the variable consideration associated with these future milestone payments has been fully constrained (excluded) from the transaction price until such time that we conclude that it is probable that a significant reversal of previously recognized revenue will not occur.
Amounts received prior to satisfying the above revenue recognition criteria were recognized as deferred revenue until all applicable revenue recognition criteria were met. Deferred revenue represented the portion of payments received that have not been earned. Refer to Note 6 to our consolidated financial statements included elsewhere in this Annual Report for quantitative disclosures related to revenue recognition.
Stock-Based Compensation
Stock-based compensation expense for employee and non-employee stock option grants and restricted stock units is recorded at the estimated fair value of the award as of the grant date and is recognized as expense on a straight-line basis over the requisite service period (usually the vesting period) of the stock-based award, and forfeitures are recognized as incurred. Stock-based compensation expense for employee stock purchases under the Employee Stock Purchase Plan, or the ESPP, is recorded at the estimated fair value of the purchase as of the plan enrollment date and is recognized as expense on a straight-line basis over the applicable six-month ESPP offering period.
We estimate the fair value of our stock-based awards using the Black-Scholes model. The Black-Scholes model requires the use of subjective assumptions, including the fair value of the underlying common stock on the date of grant, risk-free interest rate, expected volatility, expected term and expected dividend yield. Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized. These inputs are subjective and generally require judgment to develop. See Note 9 to our consolidated financial statements included elsewhere in this Annual Report for information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value
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of our stock options granted in the years ended
As of
Common Stock Valuations
Prior to our IPO in
Research and Development and Clinical Trial Accruals
We are required to make estimates of our accrued expenses resulting from our obligations under contracts with CROs, manufacturers, vendors and consultants, in connection with conducting research and development activities. The financial terms of these contracts 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. We reflect research and development expenses in our financial statements by matching those expenses with the period in which services and efforts are expended.
We account for these expenses according to the progress of the preclinical study as measured by the timing of various aspects of the study or related activities. In accruing for these activities, we obtain information from various sources and estimates level of effort or expense allocated to each period. Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred.
Contractual Obligations and Commitments
We have obligations related to our operating lease for office and laboratory
space in
We enter into contracts in the normal course of business for contract research services, contract manufacturing services, professional services and other services and products for operating purposes. These contracts generally provide for termination after a notice period, and, therefore, are cancelable contracts. Any related cancellation fees are not reasonably possible to estimate if and when these provisions would be triggered and, therefore, the amounts are not fixed and determinable at this time.
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