TERNS PHARMACEUTICALS, INC. The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this Annual Report on Form
10-K. In addition to historical financial information, this discussion contains
forward-looking statements based upon current expectations that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those set forth under "Special Note Regarding Forward-Looking
Statements" and "Risk Factors" and elsewhere in this Annual Report on Form 10-K.
Our fiscal year ends on
Overview
We are a clinical-stage biopharmaceutical company developing a portfolio of
small-molecule product candidates to address serious diseases, including
oncology and metabolic diseases such as NASH, and obesity. Our programs are
based on mechanisms of action that have achieved proof-of-concept in clinical
trials in indications with large unmet needs. The most advanced product
candidates in our pipeline - TERN-701, TERN-501 and TERN-601- were internally
discovered. TERN-701 is our allosteric BCR-ABL TKI that is in clinical
development in
TERN-701 is our proprietary, oral, potent, allosteric BCR-ABL TKI specifically
targeting the ABL myristoyl pocket for chronic myeloid leukemia. CML, a form of
cancer that begins in the bone marrow and leads to growth of leukemic cells, is
classified as an orphan indication. The SOC for CML includes active-site TKIs
including imatinib, nilotinib, dasatinib, bosutinib and ponatinib. However, an
unmet medical need remains due to (1) an increasing number of patients becoming
refractory or intolerant to the current SOC, (2) BCR-ABL mutations that are
difficult for active-site TKIs to treat (e.g., T315I), or (3) safety warnings
for active-site TKIs used in CML patients who are resistant or intolerant to
prior TKI therapy. Allosteric TKIs, which bind to the myristoyl-binding pocket,
represent a new treatment class for CML and have the potential to address
active-site TKI shortcomings, including off-target activity and limited efficacy
against active site resistance mutations. TERN-701 aims to address the
limitations of active-site TKIs with the goal of achieving improved tumor
suppression through a combination of (1) potent activity against BCR-ABL
including a broad range of mutations, and (2) improved safety and tolerability
profiles. Survival rates and treatment durations for people living with CML
continue to increase. As a result, physicians are seeking additional efficacious
therapies for people whose tolerability, co-morbidity and/or drug-drug
interaction profiles change over time, limiting their available treatment
options, quality of life and the effectiveness of mainstay therapies. In
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Our second clinical stage program is TERN-501, a Thyroid Hormone Receptor beta,
or THR-?, agonist with high metabolic stability, enhanced liver distribution and
greater selectivity for THR-? compared to other THR-? agonists in development.
In
We are also discovering and developing oral small-molecule glucagon-like peptide-1 receptor (GLP-1R) agonists for the treatment of obesity. Our lead molecule, TERN-601, is a potent GLP-1R agonist biased towards cAMP generation. We are conducting investigational new drug application (IND)-enabling activities for TERN-601 with the goal of initiating a first-in-human clinical trial in the second half of 2023 and announcing top-line data in 2024. We expect that this Phase 1 clinical program for TERN-601 will include a SAD trial in healthy volunteers and a MAD proof-of-concept trial in healthy volunteers with elevated BMI. The MAD trial is expected to assess changes in body weight and glycemic control parameters, such as HbA1c, over 28 days. Each of our GLP-1 candidate structures is believed to be suitable for oral administration as a single agent or in combination with other drug candidates, such as small molecule GIPR modulators. In addition to TERN-601, efforts are currently underway to nominate and develop structurally distinct second-generation small molecule GLP-1R agonists.
Since the commencement of our operations, we have devoted substantially all of our resources to research and development activities, organizing and staffing our company, business planning, raising capital, establishing and maintaining our intellectual property portfolio, conducting preclinical studies and clinical trials and providing general and administrative support for these operations.
In
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--------------------------------------------------------------------------------We do not have any product candidates approved for commercial sale, and we have not generated any revenue from product sales. Our ability to generate product revenue sufficient to achieve profitability, if ever, will depend on the successful development and eventual commercialization of one or more of our product candidates which we expect, if it ever occurs, will take a number of years. We will not generate any revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for one or more of our product candidates. If we obtain regulatory approval for any of our product candidates, we expect to incur significant expenses related to developing our internal commercialization capability to support product sales, marketing and distribution.
We do not own or operate, and currently have no plans to establish, any manufacturing facilities. We rely, and expect to continue to rely, on third parties for the manufacture of our product candidates for preclinical and clinical testing, as well as for commercial manufacturing if any of our product candidates obtain marketing approval. We believe that this strategy allows us to maintain a more efficient infrastructure by eliminating the need for us to invest in our own manufacturing facilities, equipment and personnel while also enabling us to focus our expertise and resources on the development of our product candidates.
COVID-19 developments
The coronavirus disease 2019, or COVID-19, pandemic continues to evolve. The
COVID-19 pandemic continues to impact countries worldwide, including
The ultimate impact of the COVID-19 pandemic or a similar health epidemic is
highly uncertain and will depend on future developments, including the duration
and/or severity of the outbreak, the impact of any resurgences and new variants
that emerge, actions by the government authorities to contain the spread of the
virus, the availability, adoption and effectiveness of any vaccines and when and
to what extent normal economic and operating conditions can resume. To the
extent possible, we are and plan to conduct business as usual, with any
necessary or advisable modifications to employee travel and to the on-site and
in-person activities of our personnel. We will continue to actively monitor the
evolving situation related to the COVID-19 pandemic and will take necessary
actions that alter our operations, including those that may be required by
federal, state or local authorities in
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--------------------------------------------------------------------------------Results of operations
The following table summarizes our results of operations for the years endedDecember 31, 2022 and 2021: Year Ended December 31, (in thousands) 2022 2021 Change Results of Operations Revenue: License revenue $ -$ 1,000 $ (1,000 ) Operating expenses: Research and development 39,617 31,311 8,306 General and administrative 22,412 19,549 2,863 Total operating expenses 62,029 50,860 11,169 Loss from operations (62,029 ) (49,860 ) (12,169 ) Other income: Interest income 2,110 170 1,940 Other (expense) income, net (68 ) 40 (108 ) Total other income, net 2,042 210 1,832 Loss before income taxes (59,987 ) (49,650 ) (10,337 ) Income tax expense (358 ) (508 ) 150 Net loss$ (60,345 ) $ (50,158 ) $ (10,187 ) Revenue
To date, we have not generated, and do not expect to generate for the
foreseeable future, any revenue from the sale of products. We may generate
revenue from pre-specified clinical, regulatory and sales milestones as part of
an exclusive option and license agreement for TERN-701 in greater
The decrease in revenue for the year ended
Research and development expenses
Research and development expenses account for a significant portion of our operating expenses and consist primarily of external and internal expenses incurred in connection with the discovery and development of our product candidates. To date, our research and development expenses have related primarily to discovery efforts, preclinical and clinical development of our product candidates. Research and development expenses are recognized as incurred and 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. Costs for certain activities, such as manufacturing and preclinical studies and clinical trials, are generally recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and collaborators.
External expenses include:
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expenses incurred in connection with the discovery, preclinical and clinical development of our product candidates, including those incurred under agreements with third parties, such as consultants and CROs;
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the cost of manufacturing products for use in our preclinical studies and clinical trials, including payments to contract manufacturing organizations, or CMOs, and consultants;
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the costs of funding research performed by third-party vendors for performing preclinical testing on our behalf;
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the costs of purchasing lab supplies and non-capital equipment used in designing, developing and manufacturing preclinical study and clinical trial materials;
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costs associated with consultants for chemistry, manufacturing and controls development, regulatory, statistics and other services;
•
expenses related to regulatory activities, including filing fees paid to regulatory agencies; and
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facility costs including rent, depreciation and maintenance expenses.
We may also incur in-process research and development expense as we acquire or in-license assets from other parties. Technology acquisitions are expensed or capitalized based upon the asset achieving technological feasibility in accordance with management's assessment regarding the ultimate recoverability of the amounts paid and the potential for alternative future use.
Internal expenses include employee and personnel-related costs and expenses, including salaries, benefits and stock-based compensation expense for employees and personnel engaged in research and development functions. We use internal resources primarily to oversee the research and discovery as well as for managing our preclinical development, process development, manufacturing and clinical development activities.
Our direct research and development expenses consist primarily of external costs, such as fees paid to outside consultants, CROs and CMOs in connection with our preclinical development, manufacturing and clinical development activities. Our direct research and development expenses also include fees incurred under our license agreements.
We expect our research and development expenses to increase substantially in absolute dollars for the foreseeable future as we advance our product candidates or any other future product candidates we may develop into and through preclinical studies and clinical trials and pursue regulatory approval of our product candidates. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming. The actual probability of success for our product candidates or any other future product candidate that we may develop may be affected by a variety of factors including: the safety and efficacy of our product candidates, early clinical data, investment in our clinical program, the ability of collaborators to successfully develop our licensed product candidates, competition, manufacturing capability and commercial viability. We may never succeed in achieving regulatory approval for our product candidates. As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of our product candidates or any other future product candidates we may develop. The duration, costs and timing of preclinical studies and clinical trials and development of our product candidates will depend on a variety of factors.
The increase in research and development expenses for the year ended
General and administrative expenses
General and administrative expenses consist primarily of personnel-related expenses, including salaries, benefits and stock-based compensation expense, for personnel in executive, finance, accounting, business development, legal, human resources and other administrative functions. General and administrative expenses also include corporate facility costs, depreciation and other expenses, which include direct or allocated expenses for rent and maintenance of facilities and insurance, not otherwise included in research and development expenses, as well as professional fees for legal, patent, consulting, investor and public relations, accounting and tax services.
We expect that our general and administrative expenses will increase in the
foreseeable future as we increase our headcount to support the continued
research and development of our programs and the growth of our business. We also
anticipate incurring additional expenses associated with operating as a public
company, including increased expenses related to accounting, legal and
regulatory matters, compliance, director and officer insurance, investor and
public relations and tax-related services associated with maintaining compliance
with the rules and regulations of the
The increase in general and administrative expenses for the year ended
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--------------------------------------------------------------------------------Interest income
Interest income primarily consists of interest income on our marketable securities.
Interest income for the year ended
Other (expense) income, net
Other (expense) income, net for the year ended
Income tax expense
Income tax expense for the year ended
Liquidity and capital resources
Uses of cash
Our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures and general and administrative expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.
We believe that our existing cash and cash equivalents will be sufficient to fund our planned operating expenses and capital expenditures into 2026, including three clinical data readouts from our three lead programs. However, we continue to anticipate that our research and development expenses, general and administrative expenses and capital expenditures will remain significant to support our ongoing and planned activities. We expect to continue to incur net operating losses for at least the next several years.
Sources of liquidity
We have primarily funded our operations through proceeds from the sale of shares of our common stock, convertible preferred stock and sale of our convertible promissory notes. We have devoted substantially all of our resources to research and development activities, organizing and staffing our company, raising capital, establishing and maintaining our intellectual property portfolio, conducting preclinical studies and clinical trials and providing general and administrative support for these operations.
Since our inception, we have not generated any revenue from product sales and we
have incurred significant operating losses and negative cash flows from our
operations. As of
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We believe that our existing cash and cash equivalents will be sufficient to fund our planned operating expenses and capital expenditure requirements into 2026. We will need substantial additional funding to support our operating activities.
Future funding requirements
We expect to incur significant expenses and operating losses for the foreseeable future as we advance the preclinical and clinical development of our product candidates. We expect that our research and development and general and administrative costs will increase in connection with conducting additional preclinical studies and clinical trials for our current and future research programs and product candidates, contracting with CROs and contract manufacturing organizations, or CMOs, to support preclinical studies and clinical trials, expanding our intellectual property portfolio, and providing general and administrative support for our operations. As a result, we will need additional capital to fund our operations, which we may obtain from additional equity or debt financings, collaborations, licensing arrangements or other sources.
Our primary uses of cash are to fund our research and development activities, business planning, establishing and maintaining our intellectual property portfolio, hiring personnel, raising capital and providing general and administrative support for these operations.
We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research and development of, continue or initiate clinical trials of, and seek marketing approval for, our product candidates. In addition, if we obtain marketing approval for our product candidates, we expect to incur significant commercialization expenses related to any approved products, marketing, manufacturing, and distribution to the extent that such sales, marketing and distribution are not the responsibility of potential collaborators. Furthermore, we expect to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce, or eliminate our research and development programs or future commercialization efforts.
Our future capital requirements will depend on many factors, including:
•
the scope, progress, results and costs of product discovery, preclinical studies and clinical trials;
•
the scope, prioritization and number of our research and development programs;
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the costs, timing and outcome of regulatory review of our product candidates;
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our ability to establish and maintain collaborations on favorable terms, if at all;
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the achievement of milestones or occurrence of other developments that trigger payments under any collaboration agreements we enter into;
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the extent to which we are obligated to reimburse, or entitled to reimbursement of, clinical trial costs under collaboration agreements, if any;
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the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;
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the extent to which we acquire or in-license other product candidates and technologies;
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the costs of securing manufacturing arrangements for commercial production; and
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the costs of establishing or contracting for sales and marketing capabilities if we obtain regulatory approvals to market our product candidates.
Identifying potential product candidates and conducting preclinical studies and clinical trials is a time-consuming, expensive, and uncertain process that takes many years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of product candidates that we do not expect to be commercially available for many years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.
Until such time, if ever, as we can generate substantial revenues from product sales, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt 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 funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required 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.
Cash flows
Operating activities
Net cash used in operating activities for the year ended
Net cash used in operating activities for the year ended
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--------------------------------------------------------------------------------Investing activities
Net cash used in investing activities for the year ended
Net cash used in investing activities for the year ended
Financing activities
Net cash provided by financing activities for the year ended
Net cash provided by financing activities for the year ended
Off-balance sheet arrangements
We do not have any off-balance sheet arrangements (as defined by applicable
regulations of the
Critical accounting policies and significant estimates
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
While our significant accounting policies are described in more detail in Note 1, Nature of the Business, Basis of Presentation and Summary of Significant Accounting Policies, to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our audited consolidated financial statements.
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--------------------------------------------------------------------------------Loans Payable
We have elected to record certain loans payable at fair value on the date of issuance, with gains and losses arising from changes in fair value recognized in the statements of operations at each period end while such loans payable are outstanding. Issuance costs are recognized in the statement of operations in the period in which they are incurred. The fair value of the loans payable was determined using a probability weighted expected return model, a scenario-based valuation model in which discrete future outcome scenarios for our company are projected and discounted to present value.
Accrued research and development expenses
Research and development costs are expensed as incurred. Research and development expenses consist of costs incurred to discover, research and develop drug candidates, including personnel expenses, stock-based compensation expense, allocated facility-related and depreciation expenses, third-party license fees and external costs, including fees paid to consultants and contract research organizations, or CROs, in connection with nonclinical studies and clinical trials and other related clinical trial fees, such as for investigator grants, patient screening, laboratory work, clinical trial database management, clinical trial material management and statistical compilation and analysis. Non-refundable prepayments for goods or services that will be used or rendered for future research and development activities are recorded as prepaid expenses. Such amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered, or the services rendered. Costs incurred in obtaining technology licenses are charged immediately to research and development expense if the technology licensed has not reached technological feasibility and has no alternative future uses.
From time to time, we have entered into various research and development and other agreements with commercial firms, researchers, universities and others for provisions of goods and services. These agreements are generally cancelable, and the related costs are recorded as research and development expenses as incurred. We record accruals for estimated ongoing research and development costs. When evaluating the adequacy of the accrued liabilities, we analyze progress of the studies or clinical trials, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ materially from our estimates. Since inception, our historical accrual estimates have not been materially different from the actual costs.
Emerging growth company status
The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, permits an "emerging growth company" to take advantage of an extended transition to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition provided in the JOBS Act. As a result, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies and our consolidated financial statements may not be comparable to other public companies that comply with new or revised accounting pronouncements as of public company effective dates. We may choose to early adopt any new or revised accounting standards whenever such early adoption is permitted for private companies. The JOBS Act also exempts us from having to provide an auditor attestation of internal control over financial reporting under Sarbanes-Oxley Act Section 404(b).
We will remain an emerging growth company until the earliest of (i) the last day
of the fiscal year following the fifth anniversary of the consummation of our
initial public offering, (ii) the last day of the fiscal year in which we have
total annual gross revenue of at least
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--------------------------------------------------------------------------------Further, even after we no longer qualify as an emerging growth company, we may still qualify as a "smaller reporting company" which would allow us to take advantage of many of the same exceptions from disclosure requirements, including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our shares of common stock less attractive because we may rely on these exemptions. If some investors find our shares of common stock less attractive as a result, there may be a less active trading market for shares of our common stock and our share price may be more volatile.
Recently issued accounting pronouncements
See Note 1, Nature of the Business, Basis of Presentation and Summary of Significant Accounting Policies to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a description of recent accounting pronouncements applicable to our consolidated financial statements.
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