# ENANTA PHARMACEUTICALS INC (ENTA) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ENANTA PHARMACEUTICALS INC's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1177648/000095017023065884/enta-20230930.htm
Accession: 0000950170-23-065884
Filing date: 2023-11-22
Report date: 2023-09-30
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/fy2022/ (FY 2022)
Next year: /company/ENTA/mda/fy2024/ (FY 2024)

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 ongoing royalties from our AbbVie collaboration, combined with the proceeds from our April 2023 royalty sale transaction, have provided us funding to support our wholly-owned research and development programs, which are primarily focused on the following disease targets:

•
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 60,000-160,000 adults over the age of 65 in the U.S. are hospitalized and 6,000-10,000 die due to RSV infections;

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SARS-CoV-2, the virus that causes COVID-19, with estimates suggesting that COVID-19 continues to have a disease burden greater than influenza, including persistent cases of infection often referred to as long COVID and hospitalization and death among the elderly and those with comorbidities, while new variants continue to emerge on a regular basis; and

•
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.

As of September 30, 2023, we had $369.9 million in cash, cash equivalents and short-term marketable securities. We expect that our existing cash, cash equivalents, short-term marketable securities and our continuing portion of HCV royalties, will enable us to fund our operating expenses and capital expenditure requirements through fiscal 2027.

Our Wholly-Owned Programs

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

•
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 inhibitor of N-protein activity for both major subgroups of RSV, referred to as RSV-A and RSV-B. It is currently in two ongoing Phase 2 studies, each in a different patient population. We completed a Phase 1 clinical study of EDP-323, an inhibitor of the RSV L-protein with Fast Track designation from the FDA, with positive topline results reported in June 2023. We initiated a Phase 2 challenge study of EDP323 in the fourth quarter of calendar 2023.

o
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 studies to understand the viral response better in the context of RSV infection. These studies were conducted in otherwise healthy adults (not at high-risk for serious outcomes with RSV) infected with RSV. The first study was a challenge study, in which healthy adults were infected with RSV in a clinical setting. The second study, known as RSVP, was in an otherwise healthy adult outpatient population with community-acquired RSV infection. With these studies, EDP-938 has demonstrated a favorable safety profile, consistent with that observed in over 500 subjects exposed to EDP-938 to date. We believe that EDP-938 has the greatest potential to show optimal efficacy in high-risk populations since 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. Based on the efficacy and growing safety profile of EDP-938, we are continuing to evaluate EDP-938 in high-risk populations in the following ongoing clinical studies, including pediatric patients and high-risk adults, all of which have significant unmet need:

▪
RSVPEDs: RSVPEDs is a Phase 2 study in pediatric patients. This dose-ranging, randomized, double-blind, placebo-controlled study, is evaluating multiple ascending doses for five days in two age cohorts to determine

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safety, tolerability, and pharmacokinetics, as well as a second part evaluating antiviral activity at the selected dose.

▪
RSVHR: RSVHR is a Phase 2b study 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 EDP-938 or placebo for five days with a primary endpoint of time to resolution of RSV lower respiratory tract disease symptoms.

▪
Next steps: We expect to complete enrollment in one or both of our ongoing Phase 2 studies of EDP-938 in the 2023-2024 Northern Hemisphere RSV season and to report data in the third quarter of calendar 2024, assuming there is a normal, pre-pandemic type of RSV season in the Northern Hemisphere.

o
EDP-323 - L-protein Inhibitor Candidate: Our second clinical RSV candidate, EDP-323, 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 sub-nanomolar potency against RSV-A and RSV-B in vitro and protected mice in a dose-dependent manner from RSV infection as demonstrated by both virological and pathological endpoints. EDP-323 is not expected to have cross-resistance to other classes of inhibitors and has the potential to be used alone, or in combination with other RSV mechanisms, to broaden the treatment window or addressable patient populations. In June 2023, we completed a Phase 1 clinical study and reported positive topline results, which demonstrated that EDP-323 was safe and well-tolerated with pharmacokinetics supportive of once-daily dosing with target exposures achieved and no food effect. Based on these positive data, we initiated a Phase 2 challenge study of EDP-323 in the fourth quarter of calendar 2023 and expect topline data in the third quarter of calendar 2024.

o
RSV/hMPV Dual-Inhibitor: We have a research program targeting development of single agents with broader spectrum antiviral activity against both RSV and human metapneumovirus, or hMPV, a virus that is a significant cause of respiratory tract infections similar to those caused by RSV. These target compounds, which we refer to as dual-inhibitors, maintained activity against multiple genotypes and strains of RSV and hMPV in a range of cell types in preclinical studies, and blocked replication in a dose-dependent manner in respective mouse models of each virus. We have paused this research program as we do not plan to advance a third RSV candidate into the clinic as long as EDP-938 and EDP-323 continue to progress into further clinical development.

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

o
EDP-235 – Protease Inhibitor Candidate: EDP-235 is an oral inhibitor of the 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 nanomolar activity against all SARS-CoV-2 variants tested to date, 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. Furthermore, EDP-235 has good tissue distribution, and is projected to have four times higher drug levels in lung tissue compared to plasma and has demonstrated high cell penetration rates in many cell types studied to date in vitro. A robust treatment effect and prevention of transmission was observed in a ferret model.

▪
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 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 in doses up to 400 mg for seven days and adverse events were infrequent and mild. Pharmacokinetics were supportive of once-daily dosing without ritonavir and without regard to food and achieved target exposure levels of up to 13-fold over the plasma protein-adjusted EC90.

▪
Phase 2 Study: In May 2023, we reported topline results from SPRINT (SARS-CoV-2 Protease Inhibitor Treatment), a Phase 2 clinical trial of EDP-235. This randomized, double-blind, placebo-controlled study evaluated the safety, tolerability, antiviral activity and clinical symptoms of EDP-235 compared to placebo in approximately 230 non-hospitalized, symptomatic patients with mild to moderate COVID-19 who were not at increased risk for developing severe disease. Patients were eligible to participate if they had symptoms for five days or less and had not received a SARS-CoV-2 vaccine or been infected with SARS-CoV-2 within 90 days of enrollment. Patients received either 200 mg or 400 mg EDP-235 or placebo orally with food once daily for five days. EDP-235 met the primary endpoint of the trial and was generally safe and well-tolerated. A dose-dependent improvement in total symptom score was observed with EDP-235 treatment compared to placebo, which achieved statistical significance (p0.05) in the 400 mg treatment group at multiple time

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points, starting as early as one day after the first dose. While no difference was observed in time to improvement in the overall group of 14 measured COVID-19 symptoms, an analysis of a subset of six symptoms showed a two-day shorter time to improvement in patients receiving EDP-235 400 mg who were enrolled within three days of symptom onset (p0.01). No effect on virologic endpoints as measured in the nose was detected due to the rapid viral decline in the placebo arm of this highly immunologically-experienced, standard risk population. However, in the subset of patients who were nucleocapsid seronegative (indicating no recent natural infection with SARS-CoV-2), a viral load decline was observed at day five in the 400 mg group of 0.8 log overall and 1 log in the patients with symptom onset within three days before treatment with EDP-235.

▪
Next Steps: Going forward, we will continue to focus on potential collaborations to progress EDP-235, as we will not advance this candidate further on our own.

•
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. Advancement of this program is dependent upon our accessing another compound that could be developed with EDP-514 for such a treatment regimen.

o
EDP-514 - Core Inhibitor Candidate: Final data from two Phase 1b studies of EDP-514 demonstrate the compound is safe with strong antiviral activity in two different chronic HBV patient populations – those who have a high viral load and those who are on a treatment with a nucleoside reverse transcriptase inhibitor. Based on these data, we remain convinced that EDP-514, which has Fast Track designation, has the potential to be a best-in-class core inhibitor for HBV.

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 compounds targeting new disease areas.

Our Royalty Revenue Collaboration and Royalty Sale Agreement

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.

In April 2023, we entered into a royalty sale agreement with an affiliate of OMERS, a Canadian public employee pension fund, pursuant to which we were paid a $200.0 million cash purchase price in exchange for 54.5% of our future quarterly royalty payments on net sales of MAVYRET/MAVIRET, after June 30, 2023, through June 30, 2032, subject to a cap on aggregate payments to OMERS equal to 1.42 times the purchase price.

For accounting purposes, we continue to record 100% of HCV royalties earned under the AbbVie agreement as royalty revenue in our consolidated statements of operation. The $200.0 million received in April 2023 was recognized on our consolidated balance sheets as a liability, which will be reduced by the payments made to OMERS over the term of the Agreement. We recognize imputed interest expense over the life of the royalty sale agreement based on our estimated future MAVYRET/MAVIRET royalties.

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. As of the date of this report, we are conducting two Phase 2 studies for EDP-938 and a Phase 2 challenge study of EDP-323. We are also conducting preclinical discovery research efforts in other disease areas.

As a result of the timing of our clinical and preclinical development programs, we expect our research and development expenses will fluctuate from period to period. However, in the next 12 months, we expect our external research and development expenses generally

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to decrease since we will not conduct any further development of EDP-235 on our own and we have made important adjustments to reduce our spending significantly in 2024.

To date, we have funded our operations primarily through royalty payments received under our collaboration agreement with AbbVie, a $200.0 million payment from our royalty sale agreement, and our existing cash, cash equivalents, and short-term and long-term marketable securities. We believe that our existing cash, cash equivalents and short-term marketable securities, as well as our continuing portion of HCV royalties, will enable us to fund our operating expenses and capital expenditure requirements through fiscal 2027.

Revenue

Our revenue is primarily derived from our collaboration agreement with AbbVie and AbbVie’s sales of MAVYRET/MAVIRET, an 8-week treatment regimen for chronic HCV. During the year ended September 30, 2023, we also generated $1.0 million of license revenue from an upfront payment related to a license agreement for one of the antibacterial compounds we are no longer developing.

The following table is a summary of revenue recognized for the years ended September 30, 2023, 2022, and 2021:

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[[/GREPCENT_TABLE]]

AbbVie Agreement

To date, we have received 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, 50% of AbbVie’s net sales of MAVYRET/MAVIRET are allocated to glecaprevir. Beginning with each January 1, the cumulative net sales of MAVYRET/MAVIRET start at zero for purposes of calculating the tiered royalties. As disclosed above regarding the OMERS royalty sale agreement, we will only retain 45.5% of the cash payments from royalties on net sales of MAVYRET/MAVIRET occurring after June 30, 2023 through June 30, 2032, subject to a cap on aggregate payments to OMERS equal to 1.42 times OMERS’ purchase price.

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. We do not expect to generate any revenue from product sales derived from these product candidates for at least the next several years.

Operating Expenses

Our operating expenses are comprised of research and development expenses and general and administrative expenses.

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:

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

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

•
allocated facility-related costs;

•
laboratory consumables; and

•
third-party license fees.

Project-specific expenses reflect costs directly attributable to our clinical development and preclinical candidates nominated and selected for further development. Our remaining research and development expenses are reflected in research and drug discovery, which represent early-stage drug discovery programs. At any given time, we typically have several active early-stage research and

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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 fluctuate from period to period as we advance our research and development programs. However, in the next 12 months, we expect our external research and development expenses generally to decrease since we will not advance EDP-235 further on our own. 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 in 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 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 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 may increase in the long term. To date we have not experienced a significant impact of inflation on general and administrative expenses, but we anticipate inflation may impact future periods.

Other Income (Expense)

Other income (expense) consists of interest expense, interest and investment income, net and the change in fair value of our outstanding Series 1 nonconvertible preferred stock. Interest expense consists of the non-cash interest expense and amortization of debt issuance costs associated with the royalty sale agreement with an affiliate of OMERS. Interest income consists of interest earned on our cash equivalents and short-term and long-term marketable securities balances. 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 (Expense) Benefit

Income tax expense for the year ended September 30, 2023 was driven by the receipt of the $200.0 million from the royalty sale agreement, the taxable gain on which was substantially offset by net operating loss and research and development tax credit carryforwards, a deduction for foreign derived intangible income and interest due from expected refunds from tax authorities. Income tax benefit for the year ended September 30, 2022 is the result of the release of a state tax reserve. Income tax benefit for the year ended September 31, 2021 is the result of the carryback of net operating losses under the Coronavirus Aid, Relief and Economic Security Act, or CARES Act.

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.

Liability Related to the Sale of Future Royalties

We accounted for the $200.0 million payment from OMERS as a liability on our consolidated balance sheets because (1) under the royalty sale agreement, OMERS will receive a portion of our royalty payments up to a capped amount of 1.42 times the original payment to us, and (2) we have significant continuing involvement in the generation of cash flows under the AbbVie Agreement. Interest expense for the liability related to the sale of future royalties will be recognized using the effective interest rate method over the term of the royalty sale agreement.

The liability related to the sale of future royalties and the related interest expense are based on our current estimates of future royalties, which we determine by using third-party forecasts of MAVYRET/MAVIRET sales. Third-party forecasts are updated periodically based on the latest pricing, market share, and patient data. Changes in the amount or timing of estimated royalties will affect the interest rate utilized in calculating the liability related to the sale of future royalties.

Results of Operations

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[[/GREPCENT_TABLE]]

Comparison of the Years Ended September 30, 2023 and 2022

Revenue

We recognized revenue of $79.2 million and $86.2 million during the years ended September 30, 2023 and 2022, respectively. The decrease in revenue year-over-year was due to AbbVie’s lower reported HCV sales in 2023, as compared to 2022. Our weighted average royalty rate on the portion of AbbVie’s sales allocable to our protease inhibitor products was approximately 11% in both fiscal 2023 and 2022.

Beginning with the quarter ended September 30, 2023, 54.5% of our quarterly royalty payments on net sales of MAVYRET/MAVIRET that are included in our total revenue are paid to OMERS through June 30, 2032, subject to a cap on aggregate payments equal to 1.42 times the purchase price. The $200.0 million received in April 2023 was recognized on our consolidated balance sheets as a liability which will be reduced by the payments made to OMERS over the term of the royalty sale agreement. We will continue to record 100% of HCV royalties earned under the AbbVie Agreement as royalty revenue in our consolidated statements of operations since the AbbVie Agreement has not been amended and is independent of our agreement with OMERS.

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.

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Research and development expenses

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[[/GREPCENT_TABLE]]

Research and development expenses decreased by $1.0 million for the year ended September 30, 2023, as compared to the same period in 2022. The increase in costs of $6.8 million in our virology program was primarily due to an increase in clinical trial costs and an increase in headcount, partially offset by a decrease in preclinical and manufacturing costs due to the timing of our studies in our virology programs and decrease in depreciation expense. The costs in our non-viral liver disease program decreased by $13.6 million as we wound down our non-alcoholic steatohepatitis, or NASH, program, which is now substantially complete. The costs in our other discovery programs increased by $5.7 million due to an increase in headcount and lab material and supply purchases.

In the next 12 months, we expect our external research and development expenses generally to decrease since we will not advance EDP-235 further on our own.

General and administrative expenses

General and administrative expenses increased to $52.9 million for the year ended September 30, 2023, compared to $45.5 million for the same period in 2022. The increase was primarily due to an increase in legal fees related to our patent infringement suit against Pfizer and to a lesser extent, an increase in stock-based compensation expense.

Other income (expense)

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

Interest expense. Interest expense increased $5.1 million for the year ended September 30, 2023. The non-cash interest expense is associated with the royalty sale agreement entered into during April 2023 with an affiliate of OMERS.

Interest and investment income, net. Interest and investment income, net increased by $9.8 million for the year ended September 30, 2023, as compared to the same period in 2022. The increase was due to an increase in our cash balance due to receipt of the $200.0 million from OMERS and changes in interest rates year over year.

Income tax (expense) benefit

We recorded income tax expense of $2.8 million and an income tax benefit of $0.4 million for the years ended September 30, 2023 and 2022, respectively. The effective tax rates used to calculate our income tax (expense) benefit for the years ended September 30, 2023 and 2022 were (2.2)% and 0.4%, respectively. Despite recording a loss before taxes, we recorded income tax expense in 2023 due to the receipt of the $200.0 million from the royalty sale agreement which was substantially offset by net operating loss carryforwards, research and development tax credit carryforwards and a deduction for foreign derived intangible income. We recorded an income tax benefit in 2022 due to the release of a state tax reserve during the year.

As of September 30, 2023 and 2022, 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 to allow us to realize the majority of our deferred tax assets.

Comparison of the Years Ended September 30, 2022 and 2021

For a discussion of our results of operations for the year ended September 30, 2022, as compared to the year ended September 30, 2021, 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, 2022 and 2021 included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

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Liquidity and Capital Resources

We fund our operations with cash flows from our retained portion of our royalty revenue and our existing financial resources. At September 30, 2023, our principal sources of liquidity were cash and cash equivalents and short-term marketable securities of $369.9 million.

The following table shows a summary of our cash flows:

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[[/GREPCENT_TABLE]]

Net cash used in operating activities

Cash used in operating activities was $103.2 million for the year ended September 30, 2023 as compared to cash used in operating activities of $84.8 million for the same period in 2022. The increase in cash used in operating activities was primarily driven by timing of operating expense cash payments, a decrease in royalty payments received under our collaboration with AbbVie and the timing of estimated tax payments made in fiscal 2023.

For the foreseeable future, we expect to continue to incur substantial costs associated with research and development for our internally developed programs.

Net cash provided by (used in) investing activities

Cash used in investing activities was $53.6 million for the year ended September 30, 2023 as compared to cash provided by investing activities of $54.9 million for the same period in 2022. Our cash used in investing activities increased $108.5 million, driven by timing of purchases, sales and maturities of marketable securities in 2023 compared to 2022 as well as increased capital expenditures in fiscal 2023 for the buildout of our leased premises at 400 Talcott Avenue.

Net cash provided by financing activities

Cash provided by financing activities was $198.1 million for the year ended September 30, 2023 as compared to cash provided by financing activities of $20.0 million for the same period in 2022. Our cash provided by financing activities increased $178.1 million, driven by the net proceeds from the sale of future royalties offset by a decrease in proceeds from exercise of stock options and an increase in payments for settlement of share-based awards.

Year Ended September 30, 2022

For a discussion of our cash flows for the year ended September 30, 2022, 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, 2022.

Funding Requirements

As of September 30, 2023, we had $369.9 million in cash, cash equivalents and short-term marketable securities. We believe that our existing cash, cash equivalents and short-term marketable securities as of September 30, 2023, as well as the cash flows from our continuing portion of HCV royalties will be sufficient to meet our anticipated cash requirements through fiscal 2027. However, our projection 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 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;

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

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

•
delays and additional expenses in our clinical trials;

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

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

•
costs associated with prosecuting our patent infringement suit regarding use of a coronavirus 3CL protease inhibitor in Paxlovid, Pfizer's antiviral treatment for COVID-19;

•
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, 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.

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 December 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 spent approximately $6.3 million in capital expenditures for the additional space, which primarily relate to tenant improvements. We received a tenant improvement allowance from the landlord of $2.5 million.

As of September 30, 2023, 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, 2023. 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.

In April 2023, we entered into a royalty sale agreement with an affiliate of OMERS, pursuant to which we were paid a $200.0 million cash purchase price in exchange for 54.5% of our future quarterly royalty payments on net sales of MAVYRET/MAVIRET after June 30, 2023, through June 30, 2032, subject to a cap on aggregate payments equal to 1.42 times the purchase price.

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The $200.0 million received in April 2023 was recognized on our consolidated balance sheets as a liability which will be reduced by the payments made to OMERS over the term of the Agreement.