# Biohaven Ltd. (BHVN) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Biohaven Ltd.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1935979/000193597924000010/bhvn-20231231.htm
Accession: 0001935979-24-000010
Filing date: 2024-02-29
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/BHVN/
All MD&A years: /company/BHVN/mda/
Previous year: /company/BHVN/mda/fy2022/ (FY 2022)
Next year: /company/BHVN/mda/fy2024/ (FY 2024)

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. Discussions of 2021 items and year-to-year comparisons between the years ended December 31, 2022 and 2021 that are not included in this Form 10-K can be found within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this report, including those set forth under Item 1A. "Risk Factors" and under "Cautionary Note Regarding Forward-Looking Statements" in this Annual Report.

Overview

We are a biopharmaceutical company focused on the discovery, development, and commercialization of life-changing treatments in key therapeutic areas, including immunology, neuroscience, and oncology. We are advancing our innovative portfolio of therapeutics, leveraging our proven drug development experience and multiple proprietary drug development platforms. Our extensive clinical and preclinical programs include Kv7 ion channel modulation for epilepsy and mood disorders; extracellular protein degradation for immunological diseases; TRPM3 antagonism for migraine and neuropathic pain; TYK2/JAK1 inhibition for neuroinflammatory disorders; glutamate modulation for OCD and SCA; myostatin inhibition for neuromuscular and metabolic diseases, including SMA and obesity; and antibody recruiting, bispecific molecules and ADCs for cancer.

For a full discussion of our programs, including recent developments, refer to "Item 1. Business" included in this Annual Report on Form 10-K.

Separation from Biohaven Pharmaceutical Holding Company Ltd.

On October 3, 2022, the Former Parent completed the Separation from Biohaven Ltd. As a result of the Separation, Biohaven Ltd. became an independent, publicly traded company as of October 3, 2022, and commenced regular way trading under the symbol "BHVN" on the NYSE on October 4, 2022.

Biohaven is a British Virgin Islands ("BVI") corporation and was a wholly owned subsidiary of the Former Parent prior to the Separation.

Prior to the Separation, the historical combined financial statements of the Company prior to the distribution were prepared on a stand-alone basis and are derived from the consolidated financial statements and accounting records of the Former Parent. The financial statements for all periods presented, including the historical results of the Company prior to October 3, 2022, are now referred to as "Consolidated Financial Statements." Our financial statements are presented in conformity with generally accepted accounting principles in the United States ("GAAP").

The financial position, results of operations and cash flows of the Company historically operated as part of the Former Parent’s financial position, results of operations and cash flows up until the Distribution. These historical combined financial statements may not be indicative of the future performance of the Company and do not necessarily reflect what our consolidated results of operations, financial condition and cash flows would have been had we operated as a separate, publicly traded company during the periods presented.

Where we describe historical business activities in this Annual Report on Form 10-K, we do so as if these transfers had already occurred and the Former Parent's activities related to such assets and liabilities had been performed by Biohaven.

Refer to Note 1, "Nature of the Business and Basis of Presentation," of the Notes to the Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10-K for further discussion of the underlying basis used to prepare the consolidated financial statements.

Transition from the Former Parent and Costs to Operate as an Independent Company

The consolidated financial statements reflect the operating results and financial position of the Company as it was operated by the Former Parent prior to the Separation, rather than as an independent company. We have incurred and will continue to incur ongoing operating expenses to operate as an independent company. These costs will include the cost of various corporate headquarters functions, information technology-related costs and costs to operate stand-alone accounting, legal and other administrative functions. We will also incur non-recurring expenses and non-recurring capital expenditures. As an independent company, our information technology operating costs may be higher than the costs allocated in the historical combined financial statements. It is not practicable to estimate the costs that would have been incurred in each of the periods presented in the historical combined financial statements for the functions described above. Actual costs that would have been incurred if we operated as a stand-alone company during these periods would have depended on various factors, including the chosen organizational structure, what corporate functions the Company might have performed directly or outsourced and strategic

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decisions the Company might have made in areas such as executive management, legal and other professional services, and certain corporate overhead functions.

Agreements with the Former Parent

We had entered into a Distribution Agreement and various other agreements relating to transition services, licenses and certain other matters with the Former Parent. These agreements govern our relationship with the Former Parent and include the allocation of employee benefits, taxes and certain other liabilities and obligations attributable to periods prior to, at and after the Separation. For additional information regarding these agreements, see Note 14, "Related Party Transactions," of the Notes to the Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10-K.

Components of Our Results of Operations

Revenue

To date, we have not generated any revenue from product sales and we do not expect to generate any revenue from the sale of products in the near future. If our development efforts for our product candidates are successful and result in regulatory approval or additional license agreements with third parties, then we may generate revenue in the future from product sales.

Operating Expenses

Research and Development Expenses

Research and development ("R&D") expenses consist primarily of costs incurred in connection with the development of our product candidates. We expense research and development costs as incurred. These expenses include:

•expenses incurred under agreements with contract research organizations (“CROs”) or contract manufacturing organizations (“CMOs”), as well as investigative sites and consultants that conduct our clinical trials, preclinical studies and other scientific development services;

•manufacturing scale-up expenses and the cost of acquiring and manufacturing preclinical and clinical trial materials and commercial materials, including manufacturing validation batches;

•employee-related expenses, including salaries, benefits, travel and non-cash share-based compensation expense for employees engaged in research and development functions;

•costs related to compliance with regulatory requirements;

•development milestone payments incurred prior to regulatory approval of the product candidate;

•rent and operating expenses incurred for leased lab facilities and equipment; and

•payments made in cash, equity securities or other forms of consideration under third-party licensing or other agreements prior to regulatory approval of the product candidate.

We recognize external development costs based on an evaluation of the progress to completion of specific tasks using estimates from our clinical personnel and information provided to us by our service providers.

Our external direct research and development expenses are tracked on a program-by-program basis for our product candidates and consist primarily of external costs, such as fees paid to outside consultants, CROs, CMOs, and central laboratories in connection with our preclinical development, process development, manufacturing and clinical development activities. Our direct research and development expenses by program also include fees and certain development milestones incurred under license agreements. We do not allocate employee costs, or other indirect costs, to specific programs because these costs are deployed across multiple programs and, as such, are not separately classified. We use internal resources primarily to oversee the research and development as well as for managing our preclinical development, process development, manufacturing and clinical development activities.

Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will remain significant over the next several years as we increase personnel costs, conduct late-stage clinical trials, and prepare regulatory filings for our product candidates. We also expect to incur additional expenses related to milestones payable to third parties with whom we have entered into license agreements to acquire the rights to our product candidates.

The successful development and commercialization of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any of our product candidates or when, if ever, material net cash inflows may commence from any of our product candidates. This uncertainty is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of:

•the scope, progress, outcome and costs of our preclinical development activities, clinical trials and other research and development activities;

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•establishment of an appropriate safety profile with IND-enabling studies;

•successful patient enrollment in, and the initiation and completion of, clinical trials;

•the timing, receipt and terms of any marketing approvals from applicable regulatory authorities;

•establishment of commercial manufacturing capabilities or making arrangements with third-party manufacturers;

•development and timely delivery of commercial-grade drug formulations that can be used in our clinical trials and for commercial launch;

•acquisition, maintenance, defense and enforcement of patent claims and other intellectual property rights;

•significant and changing government regulation;

•initiation of commercial sales of our product candidates, if and when approved, whether alone or in collaboration with others; and

•maintenance of a continued acceptable safety profile of the product candidates following approval.

General and Administrative Expenses

General and administrative ("G&A") expenses consist primarily of personnel costs, including salaries, benefits and travel expenses for our executive, finance, business, corporate development and other administrative functions; and non-cash share-based compensation expense. General and administrative expenses also include facilities and other related expenses, including rent, depreciation, maintenance of facilities, insurance and supplies; and for public relations, audit, tax and legal services, including legal expenses to pursue patent protection of our intellectual property.

We anticipate that our general and administrative expenses, including payroll and related expenses, will remain significant in the future as we continue to support our research and development activities and prepare for potential commercialization of our product candidates, if successfully developed and approved. We also anticipate increased expenses associated with general operations, including costs related to accounting and legal services, director and officer insurance premiums, facilities and other corporate infrastructure, office-related costs, such as information technology costs, and certain costs to establish ourself as a standalone public company, as well as ongoing additional costs associated with operating as an independent, publicly traded company.

Other Income (Expense)

Other Income (Expense), Net

Other income (expense), net during the year ended December 31, 2023 primarily consists of net investment income and service revenue from the Transition Service Agreement we entered into with the Former Parent. Refer to Note 14, "Related Party Transactions," for further discussions of agreements entered into with the Former Parent. Net investment income is comprised of interest income and net accretion and amortization on investments in addition to realized gains and losses. Refer to Note 3, "Marketable Securities," for further discussion of our investments.

Other income (expense), net during the year ended December 31, 2022 primarily consisted of a $10.0 million impairment loss recognized during the fourth quarter on our Artizan Series A-2 Preferred Stock Investment, partially offset by net investment income and service revenue from the Transition Service Agreement we entered into with the Former Parent.

Provision for Income Taxes

The income tax expense in the consolidated financial statements was calculated on a separate return method and presented as if the Company’s operations were separate taxpayers in the respective jurisdictions up to and including the Separation. Cash tax payments, income taxes receivable and deferred taxes, net of valuation allowance, are reflective of our actual tax balances prior and subsequent to the Separation.

As a company incorporated in the BVI, we are principally subject to taxation in the BVI. Under the current laws of the BVI, the Company and all dividends, interest, rents, royalties, compensation and other amounts paid by the Company to persons who are not resident in the BVI and any capital gains realized with respect to any shares, debt obligations, or other securities of the Company by persons who are not resident in the BVI are exempt from all provisions of the Income Tax Ordinance in the BVI.

We have historically outsourced all of the research and clinical development for our programs under a master services agreement with Biohaven Pharmaceuticals, Inc. ("BPI"). As a result of providing services under this agreement, BPI was profitable during the years ended December 31, 2023, 2022, and 2021, and BPI is subject to taxation in the United States. As such, in each reporting period, the tax provision includes the effects of the results of operations of BPI.

At December 31, 2023 and 2022, we continued to maintain a full valuation allowance against our net deferred tax assets, comprised primarily of research and development tax credit carryforwards, and net operating loss carryforwards, based on management’s assessment that it is more likely than not that the deferred tax assets will not be realized.

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Our income tax provision/benefit primarily represents Federal and state taxes related to the profitable operations of our subsidiaries in the United States and Ireland. The income tax benefit recorded during the year ended December 31, 2023 was primarily attributable to our adoption of the guidance contained in a Notice of Proposed Rule Making issued by the United States Internal Revenue Service during the third quarter of 2023 ("the Notice"). The Notice indicates that BPI has the ability to immediately deduct R&D expenditures which were incurred in the US and reimbursed by our foreign parent. Previously these expenditures were capitalized, as was generally understood to be required under the Tax Cuts and Jobs Act, which was effective for tax years beginning on or after January 1, 2022. Based on this guidance and its application to our specific facts, we deducted these expenditures on our 2022 tax return, substantially reducing our taxable income in the US and capitalized R&D expenditures, resulting in an increase to our federal net operating loss carryforward of $598.7 million that can be carried forward indefinitely. Our adoption of the Notice in 2023 also increased our State net operating losses, resulting in the reversal of $0.8 million of state income taxes recorded in 2022.

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Results of Operations

Comparison of the Years Ended December 31, 2023 and 2022

The following table summarizes our results of operations for the years ended December 31, 2023 and 2022:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["In thousands","","2023","","2022","","Change"],["Operating expenses:"],["Research and development","","$","373,281","","","$","437,072","","","$","(63,791)"],["General and administrative","","62,770","","","130,860","","","(68,090)"],["Total operating expenses","","436,051","","","567,932","","","(131,881)"],["Loss from operations","","(436,051)","","","(567,932)","","","131,881"],["Other income (expense):"],["Other income (expense), net","","26,500","","","(1,909)","","","28,409"],["Total other income (expense), net","","26,500","","","(1,909)","","","28,409"],["Loss before (benefit) provision for income taxes","","(409,551)","","","(569,841)","","","160,290"],["(Benefit) provision for income taxes","","(1,383)","","","438","","","(1,821)"],["Net loss","","$","(408,168)","","","$","(570,279)","","","$","162,111"]]
[[/GREPCENT_TABLE]]

Research and Development Expenses

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["In thousands","","2023","","2022*","","Change"],["Direct research and development expenses by program:"],["BHV-7000 & BHV-7010","","$","47,327","","","$","131,956","","","$","(84,629)"],["BHV-8000","","39,025","","","\u2014","","","39,025"],["BHV-2100 (TRPM3)","","12,864","","","8,255","","","4,609"],["Troriluzole","","73,080","","","58,769","","","14,311"],["BHV-2000","","40,870","","","16,799","","","24,071"],["BHV-1300","","22,239","","","\u2014","","","22,239"],["BHV-1100","","1,951","","","852","","","1,099"],["BHV-1200 (COVID 19)","","\u2014","","","6,033","","","(6,033)"],["Verdiperstat","","3,064","","","13,654","","","(10,590)"],["Other programs","","600","","","668","","","(68)"],["Unallocated research and development costs:"],["Personnel related (including non-cash share-based compensation)","","78,608","","","170,122","","","(91,514)"],["Preclinical research programs","","35,093","","","18,116","","","16,977"],["Other","","18,560","","","11,848","","","6,712"],["Total research and development expenses","","$","373,281","","","$","437,072","","","$","(63,791)"]]
[[/GREPCENT_TABLE]]

*Certain prior year amounts have been reclassified to conform to current year presentation

R&D expenses, including non-cash share-based compensation costs, were $373.3 million for the year ended December 31, 2023, compared to $437.1 million for the year ended December 31, 2022. The decrease of $63.8 million was primarily due to a one-time $93.7 million expense to BHV-7000 and BHV-7010 during 2022 for our Kv7 Platform acquisition, a $25.0 million milestone relating to BHV-7000, a decrease of $91.5 million in personnel related costs, and reduced program spend for BHV-1200 and verdiperstat in 2023

compared to 2022. The decrease was partially offset by increases in direct program spend for additional and advancing clinical trials, including late Phase 2/3 studies and preclinical research programs in 2023, as compared to the same period in the prior year. The increased program spend in 2023 included recognition of one-time expenses of a $10.0 million cash payment and a $21.8 million non-cash issuance of common shares to acquire rights related to our Highlightll Agreement. Refer to

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Note 11, "License Agreements" for further discussion of the payments to Highlightll.

Non-cash share-based compensation expense was $16.0 million for the year ended December 31, 2023, a decrease of $100.4 million as compared to the same period in 2022. Non-cash share-based compensation expense for the year ended December 31, 2022 included $108.7 million of expense allocated from the Former Parent, including $61.7 million of expense recognized in connection with the settlement of outstanding Former Parent stock options and RSUs upon the effectiveness of the Separation in the fourth quarter of 2022. Non-cash share-based compensation expense was higher in the year ended December 31, 2022 primarily because expense allocated from the Former Parent equity plan was based on equity awards with higher grant date fair value.

General and Administrative Expenses

G&A expenses, including non-cash share-based compensation costs, were $62.8 million for the year ended December 31, 2023, compared to $130.9 million for the year ended December 31, 2022. The decrease of $68.1 million was primarily due to decreased non-cash share-based compensation costs.

Non-cash share-based compensation expense was $12.8 million for the year ended December 31, 2023, a decrease of $64.4 million as compared to the same period in 2022. Non-cash share-based compensation expense for the year ended December 31, 2022 included $70.6 million of expense allocated from the Former Parent, including $39.7 million of expense recognized in connection with the settlement of each outstanding Former Parent stock option and RSU upon the effectiveness of the Separation in the fourth quarter of 2022. Non-cash share-based compensation expense was higher in the year ended December 31, 2022 primarily because expense allocated from the Former Parent equity plan was based on equity awards with higher grant date fair value.

Other Income (Expense), Net

Other income (expense), net was other income of $26.5 million for the year ended December 31, 2023, compared to other expense of $1.9 million for the year ended December 31, 2022. The increase of $28.4 million in other income (expense), net was primarily due to increased net investment income of $14.5 million and increased service revenue from the Transition Service Agreement we entered into with the Former Parent of $5.2 million in 2023, as compared to the same period in the prior year, as well as a $10.0 million impairment loss recognized during the fourth quarter of 2022 on our Artizan Series A-2 Preferred Stock Investment.

(Benefit) Provision for Income Taxes

We recorded a benefit for income taxes of $1.4 million for the year ended December 31, 2023, compared

to a provision for income taxes of $0.4 million for the year ended December 31, 2022. The decrease in the income tax provision as compared to 2022 was primarily attributable to the Company adopting the guidance contained in the Notice. See further discussion of the Notice in "Components of Our Results of Operations" included in Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" of this report.

Liquidity and Capital Resources

Since our inception as a business of the Former Parent, we have not generated any revenue and have incurred significant operating losses and negative cash flows from operations. We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates. We expect to continue to incur significant expenses for at least the next several years as we advance our product candidates from discovery through preclinical development and clinical trials and seek regulatory approval and pursue commercialization of any approved product candidate. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution, regulatory and commercial milestones and royalty payments. We may also incur expenses in connection with the in-license or acquisition of additional product candidates.

Historically, for periods prior to the Separation, we have funded our operations primarily with proceeds allocated to our business from financing arrangements entered into by the Former Parent and through the one-time issuance of contingently redeemable non-controlling interests.

From the Separation through February 29, 2024, we have funded our operations primarily with the cash contribution received from the Former Parent at the Separation and proceeds from the public offerings of our common shares. Pursuant to the Distribution Agreement, immediately prior to the Separation, the Former Parent made a cash contribution to the Company which resulted in a cash balance of approximately $257.8 million as of October 3, 2022. We have incurred recurring losses since our inception and expect to continue to generate operating losses for the foreseeable future.

As of December 31, 2023, we had cash and cash equivalents of $248.4 million and marketable securities of $133.4 million. Cash in excess of immediate requirements is invested in marketable securities and money market funds with a view to liquidity and capital preservation. We continuously assess our working capital needs, capital expenditure requirements, and future investments or acquisitions.

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Cash Flows

The following table summarizes our cash flows for each of the periods presented:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["In thousands","","2023","","2022","","2021"],["Net cash used in operating activities","","$","(331,725)","","","$","(297,689)","","","$","(145,840)"],["Net cash provided by (used in) investing activities","","129,830","","","(304,790)","","","944"],["Net cash provided by financing activities","","211,908","","","767,597","","","138,447"],["Effect of exchange rate changes on cash and cash equivalents and restricted cash","","(497)","","","429","","","\u2014"],["Net increase (decrease) in cash, cash equivalents and restricted cash","","$","9,516","","","$","165,547","","","$","(6,449)"]]
[[/GREPCENT_TABLE]]

Operating Activities

Net cash used in operating activities was $331.7 million in 2023, $297.7 million in 2022, and $145.8 million in 2021. The $34.0 million increase in net cash used in operating activities in 2023 was driven primarily by an increase in payments for clinical operations, clinical supply, discovery operations and personnel costs to support our acquired and late-stage programs partially offset by an increase in collections of income tax refunds, collections related to the transition services agreement with Pfizer, and interest received on cash and restricted cash, cash equivalents, and debt securities.

Investing Activities

Net cash provided by investing activities was $129.8 million in 2023, and $0.9 million in 2021, and net cash used in investing activities was $304.8 million in 2022. The $429.7 million increase in net cash provided by investing activities in 2023 was driven primarily by an increase in proceeds from sales and maturities of marketable securities, a decrease in purchases of marketable securities (see Note 3, "Marketable Securities," to the Consolidated Financial Statements), and a decrease in cash payments for IPR&D asset acquisition.

Financing Activities

Net cash provided by financing activities was $211.9 million in 2023, $767.6 million in 2022, and $138.4 million in 2021. The $555.7 million decrease in net cash provided by financing activities in 2023 was driven primarily by a decrease in proceeds from net transfers from Parent due to the Company operating as a standalone entity for the year ended December 31, 2023 and a decrease in restricted cash held in connection with the execution of the United States Distribution Services Agreement which is legally payable to the Former Parent (see Note 14, "Related Party Transactions," to the Consolidated Financial Statements).

October 2023 Public Offering

On October 5, 2023, we closed an underwritten public offering of 11,761,363 of our common shares, which included the exercise in full of the underwriters' option to purchase additional shares, at a price to the

public of $22.00 per share. The net proceeds raised in the offering, after deducting underwriting discounts and expenses of the offering payable by us, were approximately $242.4 million. The net proceeds received from the offering are being used for general corporate purposes.

Equity Distribution Agreement

In October 2023, we entered into an equity distribution agreement pursuant to which we may offer and sell common shares having an aggregate offering price of up to $150.0 million from time to time through or to the sales agent, acting as our agent or principal (the "Equity Distribution Agreement"). Sales of our common shares, if any, will be made in sales deemed to be “at-the-market offerings”. The sales agent is not required to sell any specific amount of securities but will act as our sales agent using commercially reasonable efforts consistent with its normal trading and sales practices, on mutually agreed terms between the sales agent and us. We currently plan to use the net proceeds from any at-the-market offerings of our common shares for general corporate purposes.

As of December 31, 2023, we have issued and sold no common shares under the Equity Distribution Agreement.

October 2022 Public Offering

On October 25, 2022, we completed a public offering of 28,750,000 of our common shares, including the full exercise of the underwriters' option to purchase additional shares, at a public offering price of $10.50 per share. The offering resulted in net proceeds, after deducting underwriting discounts and expenses of the offering payable by Biohaven, of approximately $282.8 million. The net proceeds from the offering are being used for general corporate purposes.

Funding Requirements

We expect our expenses to increase in connection with our ongoing activities, particularly as we advance and expand preclinical activities, clinical trials and

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potential commercialization of our product candidates. Our costs will also increase as we:

•continue to advance and expand the development of our discovery programs and clinical-stage assets;

•continue to initiate and progress other supporting studies required for regulatory approval of our product candidates, including long-term safety studies, drug-drug interaction studies, preclinical toxicology and carcinogenicity studies;

•initiate preclinical studies and clinical trials for any additional indications for our current product candidates and any future product candidates that we may pursue;

•continue to build our portfolio of product candidates through the acquisition or in-license of additional product candidates or technologies;

•continue to develop, maintain, expand and protect our intellectual property portfolio;

•pursue regulatory approvals for our current and future product candidates that successfully complete clinical trials;

•establish and support our sales, marketing and distribution infrastructure to commercialize any future product candidates for which we may obtain marketing approval;

•hire additional clinical, medical, commercial, and development personnel; and

•incur additional legal, accounting and other expenses in operating as a public company.

We expect that our cash, cash equivalents and marketable securities, as of the date of this Annual Report on Form 10-K, will be sufficient to fund our current forecast for operating expenses, financial commitments and other cash requirements for more than one year. We expect we will need to raise additional capital until we are profitable. If no additional capital is raised through either public or private equity financings, debt financings, strategic relationships, alliances and licensing agreements, or a combination thereof, we may delay, limit or reduce discretionary spending in areas related to research and development activities and other general and administrative expenses in order to fund our operating costs and working capital needs.

We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. We expect that we will require additional capital to pursue in-licenses or acquisitions of other product candidates. If we receive regulatory approval for our product candidates, we expect to incur commercialization expenses related to product manufacturing, sales,

marketing and distribution, depending on where we choose to commercialize or whether we commercialize jointly or on our own.

Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical product candidates, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on and could increase significantly as a result of many factors, including:

•the scope, progress, results and costs of researching and developing our product candidates, and conducting preclinical studies and clinical trials;

•the costs, timing and outcome of regulatory review of our product candidates;

•the costs and timing of hiring new employees to support our continued growth;

•the costs of preparing, filing, and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;

•the extent to which we acquire or in-license other product candidates and technologies;

•the timing, receipt and amount of sales of, or milestone payments related to or royalties on, our current or future product candidates, if any; and

•other capital expenditures, working capital requirements, and other general corporate activities.

Until such time, if ever, that we can generate product revenue sufficient to achieve profitability, we expect to finance our cash needs through a combination of public and private equity offerings, debt financings, other third-party funding, strategic alliances, licensing arrangements or marketing and distribution arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing shareholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing shareholders. 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 third-party funding, strategic alliances, licensing arrangements or marketing and distribution arrangements, 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.

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Contractual Obligations and Commitments

The following table summarizes certain estimated future obligations by period under our various contractual obligations as of December 31, 2023 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods:

[[GREPCENT_TABLE]]
[["","","Payments Due by Period"],["In thousands","","Total","","2024","","2025-2026","","2027-2028","","Thereafter"],["Operating leases(1)","","$","39,780","","","$","5,020","","","$","9,687","","","$","8,454","","","$","16,619"],["Purchase obligations"],["Research commitments(2)","","36,539","","","36,539","","","","","\u2014","","","\u2014"],["Total","","$","76,319","","","$","41,559","","","$","9,687","","","$","8,454","","","$","16,619"]]
[[/GREPCENT_TABLE]]

(1)    Refer to Note 12, "Commitments and Contingencies," to the consolidated financial statements included in this 10-K for additional information on future minimum rental commitments under non-cancelable operating leases.

(2)    Research commitments are primarily CRO agreements that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. For obligations with cancellation provisions, the amounts included in the preceding table are limited to the non-cancelable portion of the agreement terms or the minimum cancellation fee. In addition to the amounts above, as of December 31, 2023, the Company had remaining maximum research commitments in excess of one year of approximately $9,025, which are variable based on number of trial participants and contingent upon the achievement of certain milestones of the clinical trials covered under the agreements. Since the achievement of these milestones is uncertain and the timing unpredictable, the Company did not include the additional research commitments in the table above. If all related milestones are achieved, the Company expects these amounts to be paid over approximately one year.

In addition to the contractual obligations in the table above, under various agreements with third-party licensors and collaborators, we have agreed to make milestone payments and pay royalties and annual maintenance fees to third parties and to meet due diligence requirements based upon specified milestones. We have not included any contingent payment obligations, such as milestones, royalties, or due diligence, in the table above as the amount, timing and likelihood of such payments are not known. We have not included any of the annual license maintenance fee payments in the above table, as although the amount and timing are known, we cannot currently determine the final termination dates of the agreements and, as a result, we cannot determine the total amounts of such payments we will be required to make under the agreements. We do not anticipate making material annual license maintenance payments related to our license agreements in the next 12 months.

Critical Accounting Policies and Significant Judgments and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States ("GAAP"). The preparation of our consolidated financial statements and related disclosures requires us to make estimates, assumptions, and judgments that affect the reported amounts of assets, liabilities, expenses, and related disclosures at the date of the consolidated financial statements. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on 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 could therefore differ materially from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in Note 2, "Summary of Significant Accounting Policies," in the notes to our financial statements appearing at the end of this Annual Report, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.

Accrued Research and Development Expenses

As part of the process of preparing the consolidated financial statements, we are required to estimate accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on its behalf and estimating the level of service performed and the associated cost incurred for the service when it has not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in the consolidated financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of these estimates with the service providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include fees paid to:

•vendors, including central laboratories, in connection with preclinical development activities;

•CROs and investigative sites in connection with preclinical and clinical studies; and

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•CMOs in connection with drug substance and drug product formulation of preclinical and clinical trial materials.

We base expenses related to preclinical studies and clinical trials on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple research institutions and CROs that conduct and manage preclinical studies and clinical trials on our behalf as well as estimates of services and materials consumed by CMOs that manufacture drug substances and products on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or the amount of prepaid expenses accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses.

Cost Allocations

Prior to the distribution on October 3, 2022, we have historically operated as part of the Former Parent and not as separate, publicly traded company. Accordingly, for periods prior to the distribution, certain shared costs and non-cash share-based compensation expenses have been allocated to us and are reflected as expenses in the accompanying consolidated statement of operations. Management considers the expense methodology and resulting allocation to be reasonable for all periods presented; however, the allocations may not be indicative of actual expenses that would have been incurred had we operated as an independent, publicly traded company for the periods presented. Actual costs that we may have incurred had we been a stand-alone company would depend on a number of factors, including the organizational structure, what corporate functions the Company might have performed directly or outsourced and strategic decisions the Company might have made in areas such as executive management, legal and other professional services, and certain corporate overhead functions.

Recently Issued Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2, "Summary of Significant Accounting Policies," to our consolidated financial statements appearing at the end of this Annual Report.

Emerging Growth Company Status

The Jumpstart Our Business Startups (JOBS) Act (the "JOBS Act") permits an “emerging growth company” to take advantage of an extended transition period to comply with new or revised financial accounting standards applicable to public companies until those standards would otherwise apply to nonpublic companies. As an emerging growth company, we also were exempt from Section 404(b) of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley), which would require independent auditors to report on the effectiveness of the Company's internal control over financial reporting.

As of June 30, 2023, the market value of our common stock that was held by non-affiliates exceeded $700 million, and as a result, we no longer qualified as an emerging growth company as of December 31, 2023 when we became a large accelerated filer. Therefore, we are required to comply with new or revised financial accounting standards as of the effective dates applicable to public companies that are not emerging growth companies. In addition, we are required to comply with Section 404(b) of Sarbanes-Oxley.

Smaller Reporting Company Status

A “smaller reporting company,” as defined in Rule 12b-2 under the Exchange Act, is eligible for exemptions from various reporting requirements applicable to other public companies that are not smaller reporting companies, including, but not limited to, reduced disclosure obligations regarding executive compensation.

As of June 30, 2023, the aggregate market value of our common shares held by non-affiliates exceeded $700 million. As a result, we became a “large accelerated filer” and no longer qualify as a “smaller reporting company.” However, we are not required to reflect the change in our “smaller reporting company” status, or comply with the associated increased disclosure obligations, until our quarterly report for the three-month period ended March 31, 2024. We may continue to take advantage of certain reduced disclosures available to smaller reporting companies through the filing of this Annual Report on Form 10-K for the year ending December 31, 2023.

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