(EDGAR Online via COMTEX) -- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K, or this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the section entitled "Risk Factors," our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. You should carefully read the section entitled "Risk Factors" to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled "Special Note Regarding Forward-Looking Statements." We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
We are a clinical-stage biotechnology company focused on the discovery and development of engineered T cell therapies, and aim to provide a deep and durable, perhaps curative, treatment, for patients with B cell-mediated autoimmune diseases. Our proprietary technology utilizes Chimeric AutoAntibody Receptor, or CAAR, T cells that are designed to selectively bind and eliminate only specific B cells that produce disease-causing autoantibodies, or pathogenic B cells, while sparing normal B cells. Our lead CAAR T cell product candidate was designed based on the clinically validated and commercially approved Chimeric Antigen Receptor, or CAR, T cell technology that is marketed for the treatment of B cell cancers. By harnessing the power of targeted cell therapy, we believe our CAAR T product candidates have the potential to provide responses that may be a safer and more effective option than current treatments. We believe our technology, in combination with our proprietary Cabaletta Approach for selective B cell Ablation platform, called our CABATM platform, has applicability across over two dozen B cell-mediated autoimmune diseases that we have identified, evaluated, and prioritized.
Our initial focus is mucosal pemphigus vulgaris, or mPV, which is an autoimmune blistering disease. Our lead product candidate, DSG3-CAART, is being evaluated for the treatment of mPV, a subtype of pemphigus vulgaris, or PV, that affects the mucous membrane. mPV is caused by autoantibodies against the cell adhesion protein desmoglein 3, or DSG3. DSG3-CAART is designed to selectively target and eliminate autoreactive B cells specific for DSG3, which may prevent these B cells from differentiating into antibody secreting plasma cells that produce anti-DSG3 antibodies that are the cause of mPV, while preserving general B cell immune function. DSG3-CAART is being evaluated in a Phase 1 trial, or the DesCAARTesTM trial, in which we are currently enrolling patients. During 2021, we reported acute and 28-day safety data from the first three cohorts of patients in the DesCAARTesTM trial, with no dose-limiting toxicities, or DLTs, or clinically relevant adverse events observed in the 28 days after infusion of DSG3-CAART. In November 2021, we reported that dose-dependent increases in DSG3-CAART persistence in the third cohort relative to the first two low dose cohorts throughout the 28 days following infusion had been observed. On December 14, 2021, we reported top-line biologic activity data for the first, two low dose cohorts, where no clear evidence of biologic activity was observed at doses that represent less than 2% of the current planned maximum dose in the trial, as well as the continued absence of any DLTs or clinically relevant adverse events. Furthermore, we announced the addition of a planned fifth cohort to receive a higher dose with a more consolidated dosing regimen, which we expect to initiate in 2022 after review of the fourth cohort's 28-day safety data. In January 2022, we announced that 28-day safety data for the fourth cohort was anticipated to be announced in the first quarter of 2022, and that other clinical data updates from the DesCAARTesTM trial are expected to be provided at scientific meetings throughout 2022 and 2023 with biologic activity data for cohorts A3 and A4 expected to be announced in mid-2022. In March 2022, we disclosed 28-day safety data for the fourth cohort with no DLTs observed in any patient during the 28 days after infusion of DSG3-CAART. In addition, we disclosed that we are currently enrolling patients for the fifth cohort, and expect to announce 28-day safety data for the fifth cohort at a scientific meeting in mid-2022, assuming no DLTs are observed during such cohort, that enrollment is uninterrupted and there are no delays due to COVID-19 resurgence.
Our MuSK-CAART product candidate is designed for the treatment of muscle-specific kinase myasthenia gravis, or MuSK MG. In the fourth quarter of 2021, we submitted an Investigational New Drug, or IND, application for the first-in-human studies to the United States Food and Drug Administration, or FDA, which became effective in January 2022. In February 2022, MuSK-CAART received fast track designation from the FDA for improving
activities of daily living and muscle strength in patients with MuSK antibody-positive myasthenia gravis. We plan to initiate the MusCAARTesTM trial in 2022. We are also advancing additional product candidates currently in discovery-stage or preclinical development for the treatment of mucocutaneous PV, or mcPV, PLA2R-associated membranous nephropathy, or PLA2R MN, and Hemophilia A with Factor VIII, or FVIII, alloantibodies, in addition to two undisclosed targets. We conducted a pre-IND interaction with the FDA to discuss the development path for PLA2R-CAART in the fourth quarter of 2021. Preclinical data indicating that PLA2R CAAR T cells specifically recognized and eliminated anti-PLA2R antibody-expressing B cells and that membrane proteome arrays screened with PLA2R CAAR candidates did not identify off-target interaction was presented at the American Society of Nephrology Kidney Week in the fourth quarter of 2021.
We were incorporated in April 2017. In August 2018, we entered into multiple agreements with Penn to develop the CAAR T technology to treat B cell-mediated autoimmune diseases. Our operations to date have been financed primarily by net proceeds of $86.4 million from the sale of convertible notes and convertible preferred stock and net proceeds of $71.0 million from the sale of common stock in our initial public offering, or IPO, in October 2019. In 2021, we raised $49.7 million, with net proceeds of $48.3 million, in "at-the-market" offerings, pursuant to a Sales Agreement, or the Sales Agreement, with Cowen and Company, LLC, or the Sales Agent, which provides for the offering, issuance and sale of up to an aggregate amount of $75.0 million of our common stock. As of December 31, 2021, we had $122.2 million in cash and cash equivalents.
Amended and Restated License Agreement with the Trustees of the University of Pennsylvania and the Children's Hospital of Philadelphia
In August 2018, we entered into a license agreement with Penn, which was amended and restated in July 2019 to include the Children's Hospital of Philadelphia, or CHOP, collectively, the Institutions, and collectively with such amendment, as amended in May 2020 and October 2021, the License Agreement, pursuant to which we obtained (a) a non-exclusive, non-sublicensable, worldwide research license to make, have made and use products in two subfields of use, (b) effective as of October 2018, an exclusive, worldwide, royalty-bearing license, with the right to sublicense, under certain of the Institutions' intellectual property to make, use, sell, offer for sale and import products in the same two subfields of use, and (c) effective as of October 2018, a non-exclusive, worldwide, royalty-bearing license, with limited rights to sublicense, under certain of Penn's know-how to make, have made, use, sell, offer for sale, import and have imported products in the same two subfields of use. Our rights are subject to the rights of the U.S. government and certain rights retained by the Institutions.
Unless earlier terminated, the License Agreement expires on the expiration or abandonment or other termination of the last valid claim in Penn's intellectual property licensed by us. We may terminate the License Agreement at any time for convenience upon 60 days written notice. In the event of an uncured, material breach, Penn may terminate the License Agreement upon 60 days written notice.
Sponsored Research Agreements
We have sponsored research agreements, or SRAs, with Penn for the laboratories of Drs. Payne and Milone, who are also our scientific co-founders and members of our scientific advisory board. In May 2020, the agreement with Dr. Payne, or the Payne SRA, was expanded to include CAAR design and optimization efforts in three additional B cell-mediated autoimmune diseases. In August 2020, the Payne SRA was further amended to extend the term of the original research plan. In April 2021 and October 2021, the Milone SRA was amended to extend the term of the original research plan through November 2022. In December 2021, we further amended the Payne SRA to extend the term through December 2024 and expand the workplan to include additional correlative studies related to the DesCAARTesTM trial. The total estimated cost of the agreements is $12.5 million, which satisfies the $2.0 million annual obligation under the License Agreement. As of December 31, 2021, $9.9 million of cost has been incurred pursuant to these agreements.
In December 2021, we entered into a SRA with Penn for the laboratory of Dr. Drew Weissman, or the Weissman SRA. Under the Weissman SRA, discovery-stage proof of concept studies for lipid nanoparticle mRNA for the delivery and/or enhancement of CAAR technology is being conducted. Under the Weissman SRA, Penn granted us a non-transferable, non-exclusive license to use certain intellectual property for specific internal research purposes and further grants us the first option to negotiate to acquire, subject to agreement on commercial terms, an exclusive or
non-exclusive worldwide license to certain patent rights for specific CAAR products developed under the Weissman SRA. Unless earlier terminated, the Weissman SRA will expire in December 2023. Pursuant to the Weissman SRA, we also entered into an Option Agreement with Penn, or the Weissman Option, which grants us the option to negotiate to acquire a non-exclusive worldwide license to certain patent rights in connection with the Weissman SRA.
Master Translational Research Services Agreement
In October 2018, we entered into a Master Translational Services Agreement with Penn, or the Services Agreement, pursuant to which Penn agreed to perform certain services related to the research and development of the technology licensed to us under the License Agreement, as well as certain clinical, regulatory and manufacturing services. The Services Agreement will expire on the later of (i) October 19, 2021 or (ii) completion of the services for which we have engaged Penn under the Services Agreement. Either party may terminate this agreement with or without cause upon a certain number of days' prior written notice. The services encompassed by the Services Agreement are performed by different organizations at Penn pursuant to certain addenda to the Services Agreement, including the Center for Advanced Retinal and Ocular Therapeutics, or CAROT, Addendum, as amended in May 2020, and the CVPF Addendum.
Components of Operating Results
To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sales of products for several years, if at all. If our development efforts for our current or future product candidates are successful and result in marketing approval, we may generate revenue in the future from product sales. We cannot predict if, when or to what extent we will generate revenue from the commercialization and sale of our product candidates. We may never succeed in obtaining regulatory approval for any of our product candidates.
We may also in the future enter into license or collaboration agreements for our product candidates or intellectual property, and we may generate revenue in the future from payments as a result of such license or collaboration agreements.
Research and Development
Our research and development expenses include:
expenses incurred under agreements with consultants and third-party contract organizations that conduct research and development activities on our behalf;
costs related to sponsored research service agreements;
costs related to production of preclinical and clinical materials, including fees paid to contract manufacturers;
licensing fees for intellectual property and know-how;
laboratory and vendor expenses related to the execution of preclinical studies and ongoing and planned clinical trials; and
laboratory supplies and equipment used for internal research and development activities and related depreciation expense.
We have not reported program costs since inception because historically we have not tracked or recorded our research and development expenses on a preclinical program-by-program basis. We use our personnel and infrastructure resources across the breadth of our research and development activities, which are directed toward identifying and developing product candidates.
We expense all research and development costs in the periods in which they are incurred. Costs for certain research and development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and third-party service providers.
We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates, including investments in manufacturing, as our programs advance and we conduct clinical trials. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain. As a result, 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 any of our product candidates.
Because of the numerous risks and uncertainties associated with product development, we cannot determine with certainty the duration and completion costs of the current or future preclinical studies and clinical trials or if, when, or to what extent we will generate revenues from the commercialization and sale of our product candidates. We may never succeed in achieving regulatory approval for our product candidates. The duration, costs and timing of preclinical studies and clinical trials and development of our product candidates will depend on a variety of factors, including:
development of chemistry, manufacturing and controls, or CMC, processes and procedures for purposes of IND applications;
successful patient enrollment in, and the initiation and completion of, clinical trials;
the impact of any business interruptions to our operations, including the timing and enrollment of patients in our ongoing and planned clinical trials, or to those of our clinical sites, manufacturers, suppliers, or other vendors resulting from the COVID-19 pandemic or similar public health crisis;
receipt of regulatory approvals from applicable regulatory authorities;
establishing commercial manufacturing capabilities or arrangements with third-party manufacturers;
obtaining and maintaining patent and trade secret protection and non-patent exclusivity;
launching commercial sales of our product candidates, if and when approved, whether alone or in collaboration with others;
acceptance of our product candidates, if and when approved, by patients, the medical community and third-party payors;
effectively competing with other therapies and treatment options;
a continued acceptable safety and efficacy profile following approval;
enforcing and defending intellectual property and proprietary rights and claims; and
achieving desirable medicinal properties for the intended indications.
We may never succeed in achieving regulatory approval for any of our product candidates. We may obtain unexpected results from our preclinical studies and clinical trials. We may elect to discontinue, delay or modify clinical trials of some product candidates or focus on others. A change in the outcome of any of these factors could mean a significant change in the costs and timing associated with the development of our current and future preclinical and clinical product candidates. For example, if the FDA or another regulatory authority, were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development, or if we experience significant delays in execution of or enrollment in any of our preclinical studies or clinical trials, we could be required to expend significant additional financial resources and time on the completion of preclinical and clinical development. We expect our research and development expenses to increase for the foreseeable future as we continue the development of product candidates.
General and Administrative Expenses
Our general and administrative expenses consist primarily of personnel costs, costs related to maintenance and filing of intellectual property, depreciation expense and other expenses for outside professional services, including legal, human resources, audit and accounting services. Personnel costs consist of salaries, benefits and stock-based compensation expense. We expect our general and administrative expenses to increase over the next several years to support our continued research and development activities, manufacturing activities, increased costs of operating as a public company and the potential commercialization of our product candidates. We anticipate our general and administrative costs will increase with respect to the hiring of additional personnel, developing commercial infrastructure, fees to outside consultants, lawyers and accountants, and increased costs associated with being a public company such as expenses related to services associated with maintaining compliance with Nasdaq listing rules and SEC requirements, insurance and investor relations costs.
Other income consists of interest earned on our cash equivalents, amortization of bond discount or premium and investment gains and losses realized during the period.
Results of Operations for the years ended December 31, 2021 and 2020 The following sets forth our results of operations: Year Ended December 31, 2021 2020 Change (in thousands) Statements of Operations Data: Operating expenses: Research and development $ 32,494 $ 21,376 $ 11,118 General and administrative 13,819 12,457 1,362 Total operating expenses 46,313 33,833 12,480 Loss from operations (46,313 ) (33,833 ) (12,480 ) Other income: Interest income 24 494 (470 ) Net loss $ (46,289 ) $ (33,339 ) $ (12,950 )
Research and Development Expenses Research and development expenses were $32.5 million for the year ended December 31, 2021 as compared to $21.4 million for the year ended December 31, 2020. The table below summarizes our research and development expenses: Year Ended December 31, 2021 2020 Change (in thousands) Sponsored research activities $ 3,021 $ 3,062 $ (41 ) License of intellectual property and subscription fee 28 143 (115 ) Manufacturing of preclinical and clinical supplies 7,390 4,652 2,738 Clinical trials 3,165 1,202 1,963 Personnel 10,604 7,827 2,777 Development services 7,933 4,350 3,583 Other 353 140 213 $ 32,494 $ 21,376 $ 11,118
Specific changes in our research and development expenses year over year include a:
$2.8 million increase in personnel costs primarily driven by an increase in headcount to support overall growth, including an increase of $0.8 million in stock-based compensation expense;
$2.7 million increase in manufacturing costs primarily due to vector manufacturing and cell processing capabilities and related activities; and
$2.0 million increase in clinical trial costs for the DesCAARTesTM trial, including outsourced costs and investigator payments to clinical trial sites.
General and Administrative Expenses
General and administrative expenses were $13.8 million for the year ended December 31, 2021 as compared to $12.5 million for the year ended December 31, 2020. The increase of $1.3 million in our general and administrative expenses year over year includes:
$0.2 million of additional services, including legal and other general and administrative expenses.
Interest income has decreased $0.5 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020 primarily as a result of a significant decrease in interest rates beginning in March 2020.
Liquidity and Capital Resources
Since our inception in April 2017 through December 31, 2020, our operations have been financed by proceeds of $86.4 million from the sale of convertible notes and our convertible preferred stock and proceeds of $71.0 million from the sale of common stock in our initial public offering. In 2021, we raised $49.7 million, with net proceeds of $48.3 million, in "at-the-market" offerings, pursuant to our Sales Agreement which provides for the offering, issuance and sale of up to an aggregate amount of $75.0 million of our common stock. As of December 31, 2021, we had $122.2 million in cash and cash equivalents. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation.
We have incurred losses since our inception and, as of December 31, 2021, we had an accumulated deficit of $112.6 million. Our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures, and to a lesser extent, 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 prepaid expenses and other current assets, accounts payable and accrued expenses.
Any product candidates we may develop may never achieve commercialization and we anticipate that we will continue to incur losses for the foreseeable future. We expect that our research and development expenses, general and administrative expenses, and capital expenditures will continue to increase. As a result, until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings or other capital sources, including potentially collaborations, licenses and other similar arrangements. Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, third-party clinical research, manufacturing and development services, costs relating to the build-out of our headquarters, laboratories and manufacturing facility, license payments or milestone obligations that may arise, laboratory and related supplies, clinical costs, manufacturing costs, legal and other regulatory expenses and general overhead costs.
Based upon our current operating plan, we believe that our existing cash, cash equivalents and investments as of December 31, 2021 will enable us to fund our operating expenses and capital expenditure requirements through the third quarter of 2023. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. We will continue to require additional financing to advance our current product candidates through clinical development, to develop, acquire or in-license other potential product candidates and to fund operations for the foreseeable future. We will continue to seek funds through equity offerings, debt financings or other capital sources, including potentially 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. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders' rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. If we are unable to raise capital, we will need to delay, reduce or terminate planned activities to reduce costs.
At-The-Market Offering Sales Agreement
On November 10, 2020, we filed a registration statement on Form S-3 (File No. 333-250006) with the SEC, which was declared effective on November 18, 2020, or the Shelf Registration Statement, in relation to the registration of common stock, preferred stock, debt securities, warrants and/or units of any . . .
Mar 17, 2022
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