# ENANTA PHARMACEUTICALS INC (ENTA) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ENANTA PHARMACEUTICALS INC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1177648/000095017022025667/enta-20220930.htm
Accession: 0000950170-22-025667
Filing date: 2022-11-23
Report date: 2022-09-30
Extracted from a substantive MD&A body after the formal Item 7 span was a TOC or reference stub.
Confidence: high

Company profile: /company/ENTA/
All MD&A years: /company/ENTA/mda/
Previous year: /company/ENTA/mda/fy2021/ (FY 2021)
Next year: /company/ENTA/mda/fy2023/ (FY 2023)

Overview

We are a biotechnology company that uses our robust, chemistry-driven approach and drug discovery capabilities to become a leader in the discovery and development of small molecule drugs, with an emphasis on treatments for viral infections. We discovered glecaprevir, the second of two protease inhibitors discovered and developed through our collaboration with AbbVie for the treatment of chronic infection with hepatitis C virus, or HCV. Glecaprevir is co-formulated as part of AbbVie’s leading brand of direct-acting antiviral, or DAA, combination treatment for HCV, which is marketed under the tradenames MAVYRET® (U.S.) and MAVIRET® (ex-U.S.) (glecaprevir/pibrentasvir). Our royalties from our AbbVie collaboration provide us funding to support our wholly-owned research and development programs, which are primarily focused on the following disease targets:

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Respiratory syncytial virus, or RSV, the most common cause of bronchiolitis and pneumonia in young children and a significant cause of respiratory illness in older adults, with estimates suggesting that on average each year RSV leads to 3 million hospitalizations globally in children under 5 years old and 177,000 hospitalizations in the U.S. in adults over the age of 65;

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SARS-CoV-2, the virus that causes COVID-19, as well as other coronaviruses, with estimates suggesting that COVID-19 has caused over 240,000 deaths and over 1.7 million hospitalizations in the U.S. in 2022 through October 29, with comparable, or at least significant, impact in other major populations of the world and with new variants still emerging;

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Hepatitis B virus, or HBV, the most prevalent chronic hepatitis, which is estimated by the World Health Organization to affect close to 300 million individuals worldwide; and

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Human metapneumovirus, or hMPV, an important, relatively recently identified cause of respiratory tract infections, particularly in children, the elderly and immunocompromised individuals, with symptoms similar to RSV.

We had $278.5 million in cash, cash equivalents and short-term and long-term marketable securities at September 30, 2022. In fiscal 2022, we earned $86.2 million in product royalties on AbbVie’s net sales of its HCV regimens. We expect cash flows from our continuing HCV royalties and our existing financial resources will allow us to continue to fund our wholly-owned research and development programs into approximately the fourth quarter of fiscal 2024.

Our Wholly-Owned Programs

Our primary wholly-owned research and development programs are in virology, namely RSV, SARS-CoV-2, HBV and hMPV:

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RSV: We have a clinical stage program for RSV, with two compounds in clinical trials – EDP-938 and EDP-323. EDP-938, which has Fast Track designation from the U.S. Food and Drug Administration, or FDA, is a potent N-protein inhibitor of activity of both major subgroups of RSV, referred to as RSV-A and RSV-B. It has been investigated in a Phase 2a challenge study and is currently in three ongoing Phase 2 studies, each in a different patient population. In addition, we recently announced the initiation of a Phase 1 clinical study of EDP-323, an inhibitor of the RSV L-protein.

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EDP-938 - N-protein Inhibitor Candidate: We have studied EDP-938 in two Phase 2 studies that were designed to be proof-of-concept and exploratory to understand better viral response in the context of RSV infection. These studies were conducted in otherwise healthy adults. The first study was the challenge study, which was reported out in mid-2019. The second study, known as RSVP, was designed to confirm the challenge study findings in an adult outpatient population with community-acquired RSV infection to provide additional information on symptom alleviation and viral load decline. In May 2022, we announced topline results for RSVP, noting that EDP-938 did not meet the primary endpoint of reduction in total symptom score compared to placebo, or the secondary antiviral endpoints. However, a statistically significant difference in the number of subjects achieving undetectable RSV RNA at the end of treatment at Day 5 was observed with EDP-938 compared to placebo (p=0.033). Further, EDP-938 demonstrated a favorable safety profile, consistent with that observed in approximately 500 subjects exposed to EDP-938 to date. Based on the growing safety profile of EDP-938 and differences in the range of the course of RSV infection in higher risk populations, which have always been our target populations, EDP-938 merits continued study. We believe that EDP-938 continues to have the greatest potential to show optimal efficacy in high-risk

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populations, as these patients have reduced RSV immunity, which manifests in a higher and longer duration of viral load and greater disease severity, allowing a bigger window to realize the full potential of EDP-938. We are continuing to evaluate EDP-938 in high-risk populations in the following ongoing and planned clinical studies, including pediatric patients, adult hematopoietic stem cell recipients and high-risk adults, all of which have significant unmet need:

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RSVPEDs: RSVPEDs is a Phase 2 study in pediatric patients. This dose-ranging, randomized, double-blind, placebo-controlled study, will evaluate multiple ascending doses in up to four age cohorts to determine safety, tolerability, and pharmacokinetics, as well as a second part evaluating the selected dose for antiviral activity.

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RSVTx: RSVTx is a Phase 2b study in adult hematopoietic cell transplant recipients with acute RSV infection and symptoms of upper respiratory tract infection. We plan to enroll approximately 200 adult subjects 18 to 75 years of age, within 72 hours of symptom onset, who will receive EDP-938 or placebo for 21 days and will be monitored for the incidence of lower respiratory tract complications within 28 days of enrollment.

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RSVHR: On October 3, 2022, we announced the initiation of a Phase 2b study called RSVHR in high-risk adults, including those who are older than 65 years of age and those who have asthma, chronic obstructive pulmonary disease, or COPD, or congestive heart failure. Approximately 180 patients will be treated with 800 mg of EDP-938 or placebo for five days and evaluated for 28 days thereafter. The primary endpoint of the study is time to resolution of RSV lower respiratory tract disease symptoms.

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The prevalence of RSV has not been following any normal seasonal pattern since the COVID-19 pandemic began. The future incidence and timing of RSV infections remain highly unpredictable and thus may continue to impact enrollment in our ongoing Phase 2 RSV trials.

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EDP-323 - L-protein Inhibitor Candidate: Our newest clinical candidate for RSV is a novel oral, direct-acting antiviral selectively targeting the RSV L-protein, a viral RNA-dependent RNA polymerase enzyme that contains multiple enzymatic activities required for RSV replication. EDP-323 has shown nanomolar potency against RSV-A and RSV-B in vitro and is not expected to have cross-resistance to other classes of inhibitors. EDP-323 has the potential to be used alone or in combination with other RSV mechanisms, such as EDP-938, to broaden the treatment window or addressable patient populations. We initiated a Phase 1 clinical study of EDP-323 in October 2022.

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COVID-19: We have been leveraging our expertise in developing protease inhibitors to discover new compounds specifically designed to target the SARS-CoV-2 virus and potentially other coronaviruses.

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EDP-235 – Protease Inhibitor Candidate – Our lead clinical candidate for COVID-19, EDP-235, is an oral inhibitor of coronavirus 3CL protease, also referred to as 3CLpro or the main coronavirus protease, or Mpro, which has been granted Fast Track designation by the FDA. In addition to SARS-CoV-2, EDP-235 has potent antiviral activity against other human coronaviruses, enabling the potential for a pan-coronavirus treatment, including possibly coronaviruses that may infect human populations in the future.

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Phase 1 Study – In July 2022, we completed a Phase 1 study and reported positive topline results. This first-in-human, randomized, double-blind, placebo-controlled study enrolled healthy volunteers to evaluate the safety, tolerability, and pharmacokinetics, or PK, of oral EDP-235 in single ascending doses and multiple ascending doses for seven days, and the effect of food. Data from the Phase 1 study demonstrated EDP-235 was generally safe and well-tolerated up to 400 mg for seven days with strong exposure multiples over the EC90, which is a measure of potency, specifically the concentration of drug that results in 90% inhibition of viral replication in vitro. EDP-235 200 mg taken once daily with food resulted in mean trough plasma levels at steady state that were 3-fold and 7-fold over the plasma-protein-adjusted EC90 for the tested Alpha variant and Omicron variant, respectively, while 400 mg resulted in levels that were 6-fold and 13-fold over the plasma-protein-adjusted EC90 for the respective variants. These target exposure multiples were achieved without the need for ritonavir boosting and its associated drug-drug interactions. EDP-235 is projected to have four times higher drug levels in lung tissue compared to plasma, which would be expected to drive the 400 mg multiples to 28-fold and 52-fold for the respective variants. Adverse events were infrequent and mild.

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Phase 2 Study – In November 2022, we initiated SPRINT (SARS-Cov-2 Protease Inhibitor Treatment), a Phase 2 clinical trial of EDP-235 in non-hospitalized, symptomatic adults with mild or moderate COVID-19. This randomized, double-blind, placebo-controlled study is designed to evaluate the safety, tolerability and antiviral activity of 200 mg and 400 mg once-daily doses of EDP-235 compared to placebo. The study will enroll approximately 200 non-hospitalized, symptomatic patients with mild to moderate COVID-19 who are not at increased risk for developing severe disease. Patients will be eligible to participate if they have had

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symptoms for five days or less and have not received a SARS-CoV-2 vaccine or been infected with SARS-CoV-2 within 90 days of enrollment. Patients will receive EDP-235 orally with food at a dose of 200 mg or 400 mg or placebo once daily for five days. The primary objective of the study includes evaluation of safety and tolerability, and secondary objectives include pharmacokinetics and multiple virology measures to guide dose selection for other trials.

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We are also researching additional compounds that might be eligible to be designated for clinical development for SARS-CoV-2.

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HBV: Our lead clinical candidate for the treatment of chronic infection with hepatitis B virus, or HBV, is EDP-514, a core inhibitor that displays potent anti-HBV activity in vitro at multiple points in the HBV lifecycle. Our goal is to develop a combination therapy approach, including existing approved treatments such as a nucleoside reverse transcriptase inhibitor, or NUC, with EDP-514 and one or more other mechanisms, which could lead to a functional cure for patients with chronic HBV infection. We are in the process of seeking other compounds that could be developed with EDP-514 for such a treatment regimen.

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EDP-514 - Core Inhibitor Candidate - In June 2022, final data from two of our Phase 1b studies of EDP-514 were presented at The International Liver CongressTM 2022. EDP-514, which has Fast Track designation from the FDA, has been shown to be safe and potent in two different chronic HBV patient populations – those who have a high viral load, whom we refer to as viremic patients, and those who are on a treatment with a nucleoside reverse transcriptase inhibitor, whom we refer to as NUC-suppressed patients. Based on these data, we remain convinced that EDP-514 has the potential to be a best-in-class core inhibitor for HBV.

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hMPV: Human metapneumovirus, or hMPV, a virus that is a significant cause of respiratory tract infections, or RTIs, particularly in children, the elderly and immunocompromised individuals. It is the second most common cause of lower respiratory tract infections in children, with symptoms similar to RSV. The viral structure and lifecycle of hMPV are also similar to RSV. We have been optimizing nanomolar inhibitor leads against hMPV and are working toward selecting our first development candidate for this indication in 2023.

We have utilized our internal chemistry and drug discovery capabilities to generate all of our development-stage programs. We continue to invest substantial resources in research programs to discover back-up compounds as well as new compounds targeting different mechanisms of action, both in our disease areas of focus as well as potentially in other disease areas.

Our Royalty Revenue Collaboration

Our royalty revenue is generated through our Collaborative Development and License Agreement with AbbVie, under which we have discovered and out-licensed to AbbVie two protease inhibitor compounds that have been clinically tested, manufactured, and commercialized by AbbVie as part of its combination regimens for HCV.

Glecaprevir is the HCV protease inhibitor we discovered that was developed by AbbVie in a fixed-dose combination with its NS5A inhibitor, pibrentasvir, for the treatment of chronic HCV. This patented combination, currently marketed under the brand names MAVYRET® (U.S.) and MAVIRET® (ex-U.S.), is referred to in this report as MAVYRET/MAVIRET. The first protease inhibitor developed through this collaboration, paritaprevir, is part of Abbvie’s initial HCV regimens, which have been almost entirely replaced by MAVYRET/MAVIRET. Since August 2017, substantially all of our royalty revenue has been derived from AbbVie’s net sales of MAVYRET/MAVIRET. Our ongoing royalty revenues from this regimen consist of annually tiered, double-digit, per-product royalties on 50% of the calendar year net sales of the 2-DAA glecaprevir/pibrentasvir combination in MAVYRET/MAVIRET. The annual royalty tiers return to the lowest tier for sales on and after each January 1.

COVID-19 Update

The current COVID-19 pandemic has presented substantial challenges for public health and economies around the world, and it is affecting our clinical trials, our royalty revenues received from AbbVie, and our business operations. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19 and public health actions taken to contain it and roll out vaccinations worldwide, as well as the cumulative economic impact of all of these factors. Additionally, as new, more infectious variants emerge, such as the Omicron variants, it is possible that the impact of the pandemic on our business may continue or change.

We are continuing to assess and manage the potential impact of the COVID-19 pandemic on our business and operations, including our expenses, clinical trials and royalty revenue. While the majority of our employees were working from home during the first 18 months of the pandemic, as we prepare to transition back to working on site, the majority of our employees are now working hybrid schedules while our scientific personnel are working full-time in our laboratories.

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Our third-party contract manufacturing partners continue to operate at or near normal levels producing drug substance and drug product for our research and clinical development programs, so we currently do not anticipate any material interruptions in our supply chain, but it is possible that may change. In addition, the mitigation steps to manage the COVID-19 pandemic in the past two years have suppressed the global incidence of RSV and respiratory illnesses other than COVID-19, which has adversely affected enrollment in our RSV studies. We also continue to experience a variety of more minor interruptions and complications in our clinical trials, such as limitations in clinical trial supplies other than drug product, as well as local changes in COVID-19 impacts at individual trial sites. While our ongoing trials are proceeding, it is unclear what further impact, if any, the COVID-19 pandemic may have on the timeline for enrollment and/or completion of all or any of our clinical trials.

Regarding our royalty revenue, we continued to report lower royalty revenue during fiscal 2022 as compared to periods ending before March 2020 due to the worldwide impact of the COVID-19 pandemic. The pandemic resulted in a decline in patient volumes, HCV diagnoses, HCV prescriptions and sales of MAVYRET/MAVIRET.

While the evolving impact of COVID-19 will likely continue to affect aspects of our business, including those described above, we remain capable of funding our research and development programs into approximately the fourth quarter of fiscal 2024 with the current level of royalty revenue and our existing cash, cash equivalents and short-term and long-term marketable securities, which totaled $278.5 million at September 30, 2022.

Please see Item 1A “Risk Factors” in this Form 10-K for additional discussion of risks and potential risks of the COVID-19 pandemic on our business, results of operations and financial condition.

Financial Operations Overview

We are currently funding all research and development for our wholly-owned programs, which are targeted toward the discovery and development of novel compounds with an emphasis on treatments for viral infections. As of November 2022, we are conducting three Phase 2 studies and one Phase 1 study in our RSV program and one Phase 2 study in our SARS-CoV-2 program. We are also progressing other compounds into preclinical development.

During fiscal 2022, our business has been impacted by the COVID-19 pandemic. Specifically, AbbVie continues to report lower HCV revenues as a result of lower treated patient volumes. In addition, the prevalence of RSV has not been following any normal seasonal pattern since the COVID-19 pandemic began, and we continued to experience slower enrollment in the clinical studies in our RSV program as a result of suppression of the incidence of respiratory illnesses globally (other than COVID-19) due to mitigation measures intended to suppress SARS-CoV-2.

As a result of the timing of our clinical and preclinical development programs, we expect our research and development expenses to fluctuate from period to period. However, in the coming years, we expect our research and development expenses generally to increase as our wholly-owned programs advance.

We are funding our operations primarily through royalty payments received under our collaboration agreement with AbbVie and our existing cash, cash equivalents, and short-term and long-term marketable securities. Our revenue is currently dependent on royalty payments we receive from AbbVie on its sales of MAVYRET/MAVIRET. Absent a significant increase in the level of AbbVie’s MAVYRET/MAVIRET sales that generate our royalty revenue, and given the planned levels of our future expenditures for the advancement of our internally developed compounds, we expect to continue to have net losses in fiscal 2023.

Revenue

Our revenue is derived from our collaboration agreement with AbbVie and AbbVie's sales of MAVYRET/MAVIRET, an 8-week treatment regimen for chronic HCV.

The following table is a summary of revenue recognized for the years ended September 30, 2022, 2021, and 2020:

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[[/GREPCENT_TABLE]]

AbbVie Agreement

We currently receive annually tiered, double-digit royalties on our protease inhibitor product glecaprevir included in AbbVie’s net sales of MAVYRET/MAVIRET. Under the terms of our AbbVie agreement, as amended in October 2014, 50% of AbbVie’s net sales of MAVYRET/MAVIRET are allocated to glecaprevir. Beginning with each January 1, the cumulative net sales of

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MAVYRET/MAVIRET start at zero for purposes of calculating the tiered royalties. For detail regarding the royalty tiers under our AbbVie agreement, see Note 7 in Notes to Consolidated Financial Statements of this report, which is incorporated herein by this reference.

Internal Programs

As our internal product candidates are currently in Phase 1 or Phase 2 clinical development, we have not generated any revenue from our own product sales and do not expect to generate any revenue from product sales derived from these product candidates for at least the next several years.

Operating Expenses

The following table summarizes our operating expenses for the years ended September 30, 2022, 2021, and 2020:

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Research and Development Expenses

Research and development expenses consist of costs incurred to conduct basic research, such as the discovery and development of novel small molecules as therapeutics, as well as any external expenses of preclinical and clinical development activities. We expense all costs of research and development as incurred. These expenses consist primarily of:

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personnel costs, including salaries, related benefits and stock-based compensation for employees engaged in scientific research and development functions;

•
third-party contract costs relating to research, formulation, manufacturing, preclinical study and clinical trial activities;

•
laboratory consumables;

•
allocated facility-related costs; and

•
third-party license fees.

Project-specific expenses reflect costs directly attributable to our clinical development candidates and preclinical candidates nominated and selected for further development. Remaining research and development expenses are reflected in research and drug discovery, which represents early-stage drug discovery programs. At any given time, we typically have several active early-stage research and drug discovery projects. Our internal resources, employees and infrastructure are not directly tied to any individual research or drug discovery project and are typically deployed across multiple projects. As such, we do not report information regarding costs incurred for our early-stage research and drug discovery programs on a project-specific basis. We expect that our research and development expenses will increase in the future as we advance our research and development programs. To date we have not identified any significant impact of inflation on spending in research and development, but it is uncertain whether there will be inflationary impacts in future periods.

Our research and drug discovery and development programs are at early stages; therefore, the successful development of our product candidates is highly uncertain and may not result in approved products. Completion dates and completion costs can vary significantly for each product candidate and are difficult to predict. Given the uncertainty associated with clinical trial enrollments, particularly in the context of the COVID-19 pandemic, and the risks inherent in the development process, we are unable to determine the duration and completion costs of the current or future clinical trials of our product candidates or if, or to what extent, we will generate revenue from the commercialization and sale of any of our product candidates. We anticipate that we will make determinations as to which development programs to pursue and how much funding to direct to each program on an ongoing basis in response to the preclinical and clinical success and prospects of each product candidate, as well as ongoing assessments of the commercial potential of each product candidate.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel costs, which include salaries, related benefits and stock-based compensation, of our executive, finance, business and corporate development and other administrative functions. General and administrative expenses also include travel expenses, allocated facility-related costs not otherwise included in research and

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development expenses, directors’ and officers’ liability insurance premiums, professional fees for auditing, tax, and legal services, and patent expenses.

We expect that general and administrative expenses will continue to increase in the future primarily due to the ongoing expansion of our operating activities in support of our own research and development programs, as well as our patent litigation seeking damages for infringement of one of our COVID-19 patents. To date we have not experienced a significant impact of inflation on spending in general and administrative, but we anticipate inflation may impact future periods.

Other Income (Expense)

Other income (expense) consists of interest and investment income, net and the change in fair value of our outstanding Series 1 nonconvertible preferred stock. Interest income consists of interest earned on our cash equivalents and short-term and long-term marketable securities balances and interest earned for any refunds received from tax authorities. Investment income consists of the amortization or accretion of any purchased premium or discount, respectively, on our short-term and long-term marketable securities. The change in fair value of our Series 1 nonconvertible preferred stock relates to the remeasurement of these financial instruments from period to period as these instruments may require a transfer of assets because of the liquidation preference features of the underlying instrument.

Income Tax Benefit (Expense)

Income tax benefit for the year ended September 30, 2022 is the result of the release of a state tax reserve. Income tax benefit (expense) for the years ended September 30, 2021 and 2020 is the result of federal and state taxes generated from our domestic operations or the benefit of tax refunds due as a result of tax losses generated in the period which were able to be carried back to prior years under the Coronavirus Aid, Relief and Economic Security Act, or CARES Act. The tax refunds provided by the CARES Act are no longer available to us for periods after September 30, 2021.

Income tax benefit (expense) is based on our best estimate of applicable income tax rates, net research and development tax credits, net operating loss carrybacks, changes in valuation allowance estimates and deferred income taxes.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, equity, revenue, costs and expenses, and related disclosures. We believe that the estimates and assumptions involved in the accounting policies described below may have the greatest potential impact on our consolidated financial statements and, therefore, consider these to be our critical accounting policies. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates under different assumptions and conditions. See also Note 2 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information about these critical accounting policies as well as a description of our other significant accounting policies.

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Research and Development and Pharmaceutical Drug Manufacturing Accruals

We have entered into various contracts with third parties to perform research and development and pharmaceutical drug manufacturing. These include contracts with contract research organizations, or CROs, clinical manufacturing organizations, or CMOs, testing laboratories, research hospitals and not-for-profit organizations and other entities to support our research and development activities. We expense the cost of each contract as the work is performed. When billing terms under these contracts do not coincide with the timing of when the work is performed, we are required to make estimates of our outstanding obligations to those third parties as of period-end. Our accrual estimates are based on a number of factors, including our knowledge of the research and development programs and pharmaceutical drug manufacturing activities and associated timelines, invoicing to date, and the provisions in the contract. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ from our estimates.

Results of Operations

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[[/GREPCENT_TABLE]]

Comparison of the Years Ended September 30, 2022 and 2021

Revenue. We recognized revenue of $86.2 million and $97.1 million during the years ended September 30, 2022 and 2021, respectively. The decrease in revenue year-over-year was due to AbbVie’s lower reported HCV sales in 2022, as compared to 2021. Our weighted average royalty rate on the portion of AbbVie’s sales allocable to our protease inhibitor products was approximately 11% in both fiscal 2022 and 2021.

Our royalty revenues eligible to be earned in the future will depend on AbbVie’s HCV market share, the pricing of the MAVYRET/MAVIRET regimen and the number of patients treated. In addition, at the beginning of each calendar year (the second quarter of our fiscal year), our royalty rate resets to the lowest tier for each of our royalty-bearing products licensed to AbbVie. (See Note 7 to our consolidated financial statements for further details on our royalty rate tier.)

Research and development expenses.

[[GREPCENT_TABLE]]
[["","","Years Ended September 30,"],["","","2022","","","2021"],["","","(in thousands)"],["R&D programs:"],["Virology","","$","144,344","","","$","127,488"],["Liver disease (non-viral)","","","17,658","","","","43,908"],["Other","","","2,520","","","","2,715"],["Total research and development expenses","","$","164,522","","","$","174,111"]]
[[/GREPCENT_TABLE]]

Research and development expenses decreased by $9.6 million for the year ended September 30, 2022, as compared to the same period in 2021. While we incurred increased costs of $16.9 million in our virology program, costs in our non-viral liver disease program decreased by $26.3 million from fiscal 2021 to fiscal 2022 as we wound down our non-alcoholic steatohepatitis, or NASH, program, which is now substantially complete. Increased costs in our virology program were primarily due to an increase in manufacturing and clinical trial costs due to the timing and scope of clinical trials. For our virology program, we had three Phase 2 studies of EDP-938 in RSV, one Phase 1 study of EDP-235 in our COVID-19 program, which was initiated during the second quarter of 2022, and a Phase 1a study of an HBV RNA destabilizer that was discontinued in November 2021. In the prior year, we had two Phase 1b studies of EDP-514 in chronic HBV, as well as three Phase 2 studies of EDP-938 in RSV, including the expanded RSVP study, which was ongoing in 2021, and the Phase 1a study of an HBV RNA destabilizer.

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We expect our research and development expenses will increase in the future as we conduct more clinical development activities.

General and administrative expenses. General and administrative expenses increased to $45.5 million for the year ended September 30, 2022, as compared to $32.5 million for the same period in 2021. The increase was primarily due to increases in headcount and stock-based compensation expense to support our research and development operations.

We expect our general and administrative expenses will continue to increase in the future as our operations grow to support further research and development.

Other income (expense). Changes in components of other income (expense) were as follows:

Interest and investment income, net. Interest and investment income, net decreased by $0.4 million for the year ended September 30, 2022, as compared to the same period in 2021, primarily due to lower invested cash balances.

Income tax benefit (expense). We recorded income tax benefits of $0.4 million and $28.6 million for the years ended September 30, 2022 and 2021, respectively. The effective tax rates used to calculate our income tax benefit for the years ended September 30, 2022 and 2021 were 0.4% and 26.6%, respectively. We recorded an income tax benefit in 2022 due to the release of a state tax reserve during the year. We recorded an income tax benefit in 2021 due to a federal net operating loss carryback available under the CARES Act for our fiscal year 2021, which is no longer available after September 30, 2021.

As of September 30, 2022 and 2021, we continue to record a valuation allowance against our deferred tax assets because it is more likely than not that we will not have sufficient taxable income in the future that would allow us to realize the majority of our deferred tax assets.

Comparison of the Years Ended September 30, 2021 and 2020

For a discussion of our results of operations for the year ended September 30, 2021, as compared to the year ended September 30, 2020, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Comparison of the Years Ended September 30, 2021 and 2020 included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021.

Liquidity and Capital Resources

We fund our operations with cash flows from our royalty revenue and our existing financial resources. At September 30, 2022, our principal sources of liquidity were cash and cash equivalents and short-term and long-term marketable securities of $278.5 million.

The following table shows a summary of our cash flows:

[[GREPCENT_TABLE]]
[["","","Years Ended September 30,"],["","","2022","","","2021","","","2020"],["","","(in thousands)"],["Cash provided by (used in):"],["Operating activities","","$","(84,782",")","","$","(69,996",")","","$","7,088"],["Investing activities","","","54,897","","","","36,991","","","","19,830"],["Financing activities","","","20,033","","","","3,080","","","","8,983"],["Net increase (decrease) in cash, cash equivalents and restricted cash","","$","(9,852",")","","$","(29,925",")","","$","35,901"]]
[[/GREPCENT_TABLE]]

Net cash used in operating activities

Cash used in operating activities was $84.8 million for the year ended September 30, 2022 as compared to cash used in operating activities of $70.0 million for the same period in 2021. The increase in cash used in operating activities was primarily driven by a decrease in royalty payments received under our collaboration with AbbVie.

Net cash provided by investing activities

The increase of $17.9 million in cash provided by investing activities for the year ended September 30, 2022, as compared to the same period in 2021, was driven primarily by the timing of purchases, sales and maturities of marketable securities.

Net cash provided by financing activities

The increase in cash provided by financing activities of $17.0 million for the year ended September 30, 2022, as compared to 2021, was driven by an increase in proceeds from stock option exercises.

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Year Ended September 30, 2021

For a discussion of our cash flows for the year ended September 30, 2021, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Cash Flows included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021.

Funding Requirements

As of September 30, 2022, we had $278.5 million in cash, cash equivalents and short-term and long-term marketable securities. We believe that our existing cash, cash equivalents and short-term and long-term marketable securities as of September 30, 2022, and cash flows from our continuing HCV royalties will be sufficient to meet our anticipated cash requirements into approximately the fourth quarter of fiscal 2024. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially.

Our future capital requirements are difficult to forecast and will depend on many factors, including:

•
the amount of royalties generated from MAVYRET/MAVIRET sales under our existing collaboration with AbbVie;

•
any continuing impact of the COVID-19 pandemic on the number of treated HCV patients;

•
the number and characteristics of our research and development programs;

•
the scope, progress, results and costs of researching and developing our product candidates on our own, including conducting advanced clinical trials;

•
delays and additional expense in our clinical trials as a result of COVID-19;

•
the cost of manufacturing our product candidates for clinical development and any products we successfully commercialize independently;

•
our ability to establish new collaborations, licensing or other arrangements, if any, and the financial terms of such arrangements;

•
opportunities to in-license or otherwise acquire new technologies and therapeutic candidates;

•
the timing of, and the costs involved in, obtaining regulatory approvals for any product candidates we develop independently;

•
the cost of commercialization activities, if any, of any product candidates we develop independently that are approved for sale, including marketing, sales and distribution costs;

•
the timing and amount of any sales of our product candidates, if any, or royalties thereon;

•
the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patents, including any litigation costs and the outcomes of any such litigation; and

•
potential fluctuations in foreign currency exchange rates.

Off-Balance Sheet Arrangements

We do not engage in any off-balance sheet financing activities. We do not have any interest in entities referred to as variable interest entities or unconsolidated entities, which include special purpose entities and other structured finance entities.

Recently Issued Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is set forth in Note 2 to the consolidated financial statements included in this Annual Report on Form 10-K.

Contractual Obligations and Commitments

We currently lease space in Watertown, Massachusetts, under two separate lease agreements with one landlord. We have entered into a third lease agreement with the same landlord to lease additional laboratory and office space at a to-be-constructed facility located at Arsenal on the Charles in Watertown, Massachusetts.

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Our first lease for office and laboratory space at 500 Arsenal Street expires on September 1, 2027. In May 2022, we entered into a new ten-year lease for laboratory and office space in Watertown, Massachusetts, adjacent to our 400 Talcott Avenue premises at Arsenal on the Charles, at a to-be-constructed facility. We currently anticipate we will gain access to construct tenant improvements in October 2023. In connection with this lease, we amended our 500 Arsenal Street lease to shorten the expiration date from September 1, 2027, to the date the Arsenal on the Charles facility is ready for our occupancy.

The second lease for office space located at 400 Talcott Avenue, commenced on September 24, 2018 for a term of six years. In May 2022, we amended this lease to expand the rented space and extend the lease term through June 1, 2034. We expect to spend approximately $7.6 million in capital expenditures for the additional space, which primarily relate to tenant improvements. We are eligible to receive a tenant improvement allowance from the landlord of up to $2.6 million.

As of September 30, 2022, we had 1.9 million outstanding shares of Series 1 nonconvertible preferred stock, all of which we classified as a long-term liability on our consolidated balance sheet and recorded at fair value of $1.4 million. The fair value of the preferred stock was measured based on significant inputs not observable in the market, which represented a Level 3 measurement within the fair value hierarchy. The fair value of these instruments represents less than 10% of liabilities as of September 30, 2022. The Series 1 nonconvertible preferred stock issued would require the payment of $2.0 million in the event of a qualifying merger or sale of the company.