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10-Q: PROTAGONIST THERAPEUTICS, INC

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(EDGAR Online via COMTEX) -- ITEM 2.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 Unaudited Condensed Consolidated Financial Statements and related notes included in Part I, Item 1 of this quarterly report (this "Quarterly Report") on Form 10-Q and with our Audited Consolidated Financial Statements and related notes thereto for the year ended December 31, 2020, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 10, 2021.

Forward-Looking Statements

This Quarterly Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and

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Overview

We are a biopharmaceutical company with multiple peptide-based investigational new chemical entities in different stages of development, all derived from the Company's proprietary discovery technology platform. Our clinical programs fall into two broad categories of diseases; (i) hematology and blood disorders, and

Our Product Pipeline

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Our most advanced clinical asset, rusfertide (generic name for PTG-300) is an injectable hepcidin mimetic in development for the potential treatment of erythrocytosis, iron overload and other blood disorders. Hepcidin is a key hormone in regulating iron equilibrium and is critical to the proper development of red blood cells. Rusfertide mimics the effect of the natural hormone hepcidin, but with greater potency, solubility and stability. We initiated Phase 2 proof of concept ("POC") studies in the blood disorders polycythemia vera ("PV") in the third quarter of 2019 and hereditary hemochromatosis ("HH") in January 2020. In December 2020, we presented four posters and one oral presentation relating to rusfertide at the American Society for Hematology's virtual annual meeting, including updated interim Phase 2 results for rusfertide in PV. In June 2021, we presented updated Phase 2 data supporting the long-term efficacy of rusfertide in PV during an oral presentation at the European Hematology Association ("EHA") 2021 Virtual Congress. We believe these interim results provide evidence regarding the potential of rusfertide for managing hematocrit, reducing thrombotic risk and improving iron deficiency symptoms. Rusfertide has a unique mechanism of action in the potential treatment of PV, which may enable it to decrease and maintain hematocrit levels within the range of recommended clinical guidelines without causing the iron deficiency that may occur with frequent phlebotomy.

On September 16, 2021, the FDA orally informed us that a clinical hold would be placed on our rusfertide clinical studies. We received formal written notice of the clinical hold on September 17, 2021. In October 2021, we submitted a Complete Response to the FDA related to the clinical hold, and the FDA removed the clinical hold on October 8, 2021. The clinical hold was imposed following our submission to the FDA of findings in a 26-week rasH2 transgenic mouse carcinogenicity study. In the rasH2 study, benign squamous cell papilloma were observed in six of 75 male mice and six of 75 female mice treated with doses of rusfertide ranging from 6.25 mg/kg to 25 mg/kg. Malignant squamous cell carcinoma was also observed in one male mouse and one female mouse. There were no findings in either the male or female control group. The rasH2 finding prompted a re-examination of the four cases of cancer observed across all rusfertide clinical trials (involving 160 patients) through the date of the submission of the Complete Response. All cases were initially assessed as unrelated to rusfertide treatment. Upon re-examination in light of the rasH2 finding, two of the cases were re-classified as possibly related to rusfertide. No additional cancer cases, and no other unexpected safety signals, surfaced in this process.

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In our Complete Response, we provided the individual patient clinical safety reports the FDA requested for human cancers observed in rusfertide clinical trials, updated the investigator brochure and patient informed consent forms for ongoing rusfertide trials, proposed new safety and stopping rules in clinical study protocols of our ongoing rusfertide clinical trials, and performed a comprehensive review of our rusfertide safety database. Dosing of patients in ongoing clinical trials with rusfertide is expected to resume in the fourth quarter of 2021.

We completed enrollment of 63 patients in the ongoing Phase 2 clinical trial of rusfertide in PV during the second quarter of 2021. Based on ongoing end of Phase 2 feedback provided by the FDA's Division of Nonmalignant Hematology and written comments from the European Medicines Agency ("EMA"), we expect to initiate a global Phase 3 clinical trial of rusfertide in PV in the first quarter of 2022. During the first quarter of 2021, we initiated another Phase 2 study for rusfertide in up to 20 patients diagnosed with PV and with routinely elevated hematocrit levels (>48%). In addition, we completed enrollment for our Phase 2 POC study in HH, our second indication, in April 2021. An abstract highlighting preliminary data our Phase 2 study of rusfertide in HH has been selected for oral presentation at The Liver Meeting(R) 2021, hosted by the American Association for the Study of Liver Diseases (AASLD), taking place virtually in November 2021.

To date we have received the following designations for rusfertide in PV:

? The FDA granted orphan drug designation for rusfertide for the treatment of PV in June 2020;

? The European Medicines Agency granted orphan drug designation for rusfertide for the treatment of PV in October 2020;

? The FDA granted Fast Track designation for rusfertide for the treatment of PV in December 2020; and

? The FDA granted Breakthrough Therapy Designation for rusfertide for the treatment of PV in June 2021.

Our alpha-4-beta-7 ("?4?7") antagonist PN-943 and our Interleukin-23 receptor ("IL-23R") antagonist compounds, including PN-232 and PN-235, are orally delivered investigational drugs that are designed to block biological pathways currently targeted by marketed injectable antibody drugs. Our orally stable peptide approach may offer targeted delivery to the GI tissue compartment. We believe that, compared to antibody drugs, these product candidates have the potential to provide improved safety due to minimal exposure in the blood, increased convenience and compliance due to oral delivery, and the opportunity for the earlier introduction of targeted oral therapy.

PN-943 is an investigational, orally delivered, gut-restricted ?4?7 specific integrin antagonist for inflammatory bowel disease ("IBD"). We submitted a U.S. Investigational New Drug application with the FDA for PN-943 in December 2019, which took effect in January 2020. During the second quarter of 2020 we initiated a 150-patient Phase 2 study evaluating the safety, tolerability and efficacy of PN-943 in patients with moderate to severe UC. This study includes a 12-week induction period and a 40-week open label extension. Topline data from the 12-week induction period is expected in the second quarter of 2022.

In May 2017, we entered into a worldwide license and collaboration agreement with Janssen Biotech, Inc. ("Janssen"), a Johnson & Johnson company, to co-develop and co-detail our IL-23R antagonist compounds, including PTG-200 and certain related compounds for all indications, including IBD. PTG-200 was an investigational, orally delivered, IL-23R antagonist for the treatment of IBD. The agreement with Janssen was amended in May 2019 to expand the collaboration by supporting efforts towards second-generation IL-23R antagonists; and in July 2021 to, among other things, enable Janssen to develop collaboration compounds for multiple indications and further align our financial interests around potential multiple compound development for multiple indications in the IL-23 pathway.

Following a pre-specified interim analysis criteria, a portfolio decision was made to stop further development of first generation IL-23R antagonist candidate PTG-200 (JNJ-67864238), in favor of continued development of two second-generation candidates PN-235 (JNJ-77242113) and PN-232 (JNJ-75105186) with superior product profiles. In particular:

? The Phase 1 study of PN-235 is completed, and a Phase 2 study in psoriasis is anticipated to initiate in early 2022.

? The Phase 1 study with PN-232 is under progress with study completion expected by mid-2022.

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? Additional development in IBD is expected to initiate in 2022.

In October 2021, we became eligible to receive a $7.5 million milestone payment from Janssen triggered by the completion of data collection for PN-235 Phase 1 activities. We will earn a $25.0 million milestone in connection with the initiation of the first Phase 2 study of a second-generation candidate, and a $10.0 million milestone in connection with the initiation of the second Phase 2 study of a second-generation candidate. We remain eligible for up to approximately $900.0 million in development-related milestone payments, in addition to the $87.5M in milestones already earned.

Our clinical assets are all derived from our proprietary discovery platform. Our platform enables us to engineer novel, structurally constrained peptides that are designed to retain key advantages of both orally delivered small molecules and injectable antibody drugs in an effort to overcome many of their limitations as therapeutic agents. Importantly, constrained peptides can be designed to potentially alleviate the fundamental instability inherent in traditional peptides to allow different delivery forms, such as oral, subcutaneous, intravenous, and rectal. We continue to use our peptide technology platform to discover product candidates against targets in disease areas with significant unmet medical needs.

COVID-19 Business Impact

We are subject to risks and uncertainties as a result of the ongoing COVID-19 pandemic. We are continuing to closely monitor the impact of the COVID-19 pandemic on our business and have taken and continue to take proactive efforts to protect the health and safety of our patients, study investigators, clinical research staff and employees, and to maintain business continuity. The extent of the impact of the COVID-19 pandemic on our activities is uncertain and difficult to predict, as the pandemic and the response to the pandemic continue to evolve. Capital markets and economies worldwide have been significantly impacted by the COVID-19 pandemic, and the pandemic has contributed to a global economic recession. Such economic disruption could have a material adverse effect on our business. Policymakers around the globe have responded with fiscal policy actions to support the healthcare industry and economy as a whole. The magnitude and overall effectiveness of these actions remains uncertain.

The severity of the impact of the COVID-19 pandemic on our activities will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic, including the severity of any additional periods of increases or spikes in the number of cases in the areas we, our suppliers and our manufacturers operate and areas where our clinical trial sites are located; the development and spread of COVID-19 variants; the timing, extent, effectiveness and durability of vaccine programs or other treatments; and new or continuing travel and other restrictions and public health measures, such as social distancing, business closures or disruptions. Accordingly, the extent and severity of the impact on our existing and planned clinical trials, manufacturing, collaboration activities and operations is uncertain and cannot be fully predicted. We have experienced delays in our existing and planned clinical trials due to the worldwide impacts of the pandemic. Our future results of operations and liquidity could be adversely impacted by further delays in existing and planned clinical trials and collaboration activities, continued difficulty in recruiting patients for these clinical trials, delays in manufacturing and collaboration activities, supply chain disruptions, the ongoing impact on operating activities and employees, and the ongoing impact of any initiatives or programs that we may undertake to address financial and operational challenges. As of the date of issuance of this Quarterly Report on Form 10-Q, the extent to which the COVID-19 pandemic may materially impact our future financial condition, liquidity or results of operations is uncertain.

Operations

We have incurred net losses in each year since inception and we do not anticipate achieving sustained profitability in the foreseeable future. Our net loss was $33.8 million and $88.6 million for the three and nine months ended September 30, 2021, respectively. Our net loss was $7.8 million and $47.3 million for the three and nine months ended September 30, 2020, respectively. As of September 30, 2021, we had an accumulated deficit of $372.5 million. Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We expect to continue to incur significant research, development, commercialization and other expenses related to our ongoing operations and product

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development, including clinical development activities under our worldwide license and collaboration agreement with Janssen, and, as a result, we expect to continue to incur losses in the future as we continue our development of, and seek regulatory approval for, our product candidates.

Janssen License and Collaboration Agreement

On July 27, 2021, we entered into an amended and restated License and Collaboration Agreement ("Restated Agreement") with Janssen. The Restated Agreement amends and restates the License and Collaboration Agreement, dated May 26, 2017, by and between us and Janssen (as amended by the First Amendment thereto, effective May 7, 2019, the "Original Agreement"). Janssen is a related party to us as Johnson & Johnson Innovation - JJDC, Inc., a significant stockholder of ours, and Janssen are both subsidiaries of Johnson & Johnson. The Original Agreement became effective on July 13, 2017. Upon the effectiveness of the Original Agreement, we received a non-refundable, upfront cash payment of $50.0 million from Janssen. Upon the effectiveness of the First Amendment, we received a $25.0 million payment from Janssen in 2019. We also received a $5.0 million payment triggered by the successful nomination of a second-generation IL-23R antagonist development compound during the first quarter of 2020. In October 2021, we became eligible to receive a $7.5 million milestone payment from Janssen triggered by completion of the data collection for PN-235 Phase 1 activities. Following a pre-established interim analysis criteria, a portfolio decision was made to discontinue further development of first generation candidate PTG-200, in favor of further development of two second-generation candidates PN-235 and PN-232 with superior product profiles.

See Note 3 to the condensed consolidated financial statements included elsewhere in this report for additional information.

Critical Accounting Polices and Estimates

Our management's discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the unaudited condensed consolidated financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. In making estimates and judgments, management employs critical accounting policies.

Use of Estimates

Due to the ongoing COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. We have taken into consideration any known COVID-19 impacts in our accounting estimates to date and are not aware of any additional specific events or circumstances that would require any additional updates to our estimates or judgments or a revision of the carrying value of our assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.

Stock-Based Compensation

We recognize compensation costs related to stock options accounted for under Accounting Standards Codification Topic 718 - "Stock Compensation" based on the estimated fair value of the awards on the date of grant. We estimate the fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The estimated fair value of the stock-based awards is generally recognized over the requisite service period, which is generally the vesting period of the respective awards.

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The Black-Scholes option-pricing model requires the use of subjective assumptions which determine the fair value of stock-based awards. Expected volatility generally requires significant judgement to determine. For the year ended December 31, 2020, our expected volatility was estimated based upon a mix of 75% of the average volatility for comparable publicly traded biopharmaceutical companies over a period equal to the expected term of the stock option grants and 25% of the volatility of our own stock price since our initial public offering in August 2016. Beginning January 1, 2021, our expected volatility is estimated based upon a mix of 50% of the average volatility for comparable publicly traded biopharmaceutical companies over a period equal to the expected term of the stock option grants and 50% of the volatility of our own stock price since our initial public offering in August 2016. These comparable companies are chosen based on their similar size, stage in the life cycle, or area of specialty. We will continue to apply this process until a longer period of historical information regarding the volatility of our own stock price becomes available.

In February 2021, we granted performance share units ("PSUs) to certain of our executives. Stock-based compensation expense associated with PSUs is based on the fair value of our common stock on the grant date, which equals the closing price of our common stock on the grant date. We recognize compensation expense over the vesting period of the awards that are ultimately expected to vest when the achievement of the related performance obligation becomes probable. The total fair value of the PSUs granted in February 2021 was $2.6 million.

There have been no other material changes in our critical accounting policies during the three and nine months ended September 30, 2021, as compared to those disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 10, 2021.

Components of Our Results of Operations

License and Collaboration Revenue

Our license and collaboration revenue is derived from payments we receive under the Janssen License and Collaboration Agreement. See Note 3 to the condensed consolidated financial statements included elsewhere in this report for additional information.

Research and Development Expenses

Research and development expenses represent costs incurred to conduct research, such as the discovery and development of our product candidates. We recognize all research and development costs as they are incurred, unless there is an alternative future use in other research and development projects or otherwise. Non-refundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when payment has been made. In instances where we enter into agreements with third parties to provide research and development services to us, costs are expensed as services are performed. Amounts due under such arrangements may be either fixed fee or fee for service and may include upfront payments, monthly payments, and payments upon the completion of milestones or the receipt of deliverables.

Research and development expenses consist primarily of the following:

? expenses incurred under agreements with clinical study sites that conduct research and development activities on our behalf;

? employee-related expenses, which include salaries, benefits and stock-based compensation;

? laboratory vendor expenses related to the preparation and conduct of pre-clinical, non-clinical, and clinical studies;

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? costs related to production of clinical supplies and non-clinical materials, including fees paid to contract manufacturers;

? license fees and milestone payments under license and collaboration agreements; and

facilities and other allocated expenses, which include expenses for rent and ? maintenance of facilities, information technology, depreciation and amortization expense and other supplies.

We recognize the funds from grants under government programs as a reduction of research and development expenses when the related research costs are incurred. In addition, we recognize the funds related to our Australian research and development refundable cash tax incentive that are not subject to refund provisions as a reduction of research and development expenses. The research and development tax incentives are recognized when there is reasonable assurance that the incentives will be received, the relevant expenditure has been incurred and the amount of the consideration can be reliably measured. We evaluate our eligibility under the tax incentive program as of each balance sheet date and make accruals and related adjustments based on the most current and relevant data available. We may alternatively be eligible for a taxable credit in the form of a non-cash tax incentive.

We allocate direct costs and indirect costs incurred to product candidates when they enter clinical development. For product candidates in clinical development, direct costs consist primarily of clinical, pre-clinical, and drug discovery costs, costs of supplying drug substance and drug product for use in clinical and pre-clinical studies, including clinical manufacturing costs, contract research organization fees, and other contracted services pertaining to specific clinical and pre-clinical studies. Indirect costs allocated to our product candidates on a program specific basis include research and development employee salaries, benefits, and stock-based compensation, and indirect overhead and other administrative support costs. Program-specific costs are unallocated when the clinical expenses are incurred for our early-stage research and drug discovery projects, our internal resources, employees and infrastructure are not tied to any one research or drug discovery project and are typically deployed across multiple projects. As such, we do not provide financial information regarding the costs incurred for early-stage pre-clinical and drug discovery programs on a program-specific basis prior to the clinical development stage.

The following table summarizes our research and development expenses incurred during the periods indicated:







                                                             Three Months Ended         Nine Months Ended
                                                               September 30,              September 30,
                                                              2021         2020         2021         2020
                                                                        (Dollars in thousands)
        Clinical and development expense - rusfertide
        (PTG-300)                                          $   14,881    $   8,322    $  37,128    $  22,881
        Clinical and development expense - PN-943              10,919        3,847       26,394       17,867
        Clinical and development expense - PN-235                 567            -        3,799            -
        Clinical and development expense - PN-232                 831            -          870            -
        Clinical and development expense - PTG-200                 11          183           13        1,108
        . . .
        


Nov 03, 2021

COMTEX_396314718/2041/2021-11-03T17:12:47

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