Nuvation Bio Inc. (NUVB) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are identified by words such as “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” or the negative of these terms or similar expressions. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this report in Part I, Item 1A — “Risk Factors,” and elsewhere in this report. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments. We caution investors that our business and financial performance are subject to substantial risks and uncertainties. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Annual Report on Form 10-K. While we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into or review of, all relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely on these statements.

Overview

We are a clinical-stage biopharmaceutical company tackling some of the greatest unmet needs in oncology by developing differentiated and novel therapeutic candidates. We were founded in 2018 by our chief executive officer, David Hung, M.D., who founded Medivation, Inc. and led its successful development of oncology drugs Xtandi® and talazoparib (now marketed as Talzenna®), leading to its $14.3 billion sale to Pfizer Inc. (“Pfizer”) in 2016. We leverage our team’s extensive expertise in medicinal chemistry, preclinical development, formulation, and drug development to pursue oncology targets validated by strong clinical or preclinical data and discover novel small molecules that improve the activity and overcome the liabilities of currently marketed drugs. In addition to our focus on development of small molecules for validated targets, we are also developing novel therapeutic candidates based on our proprietary Drug-Drug Conjugate (DDC) platform.

For our lead product candidate, NUV-422, we initiated a Phase 1/2 clinical trial of NUV-422 for the treatment of high-grade gliomas in December 2020. Two additional INDs were cleared by the FDA for NUV-422 for the treatment of advanced breast cancer and for the treatment of prostate cancer in 2021, respectively. Additional trials and trial expansion are planned for NUV-422 in 2022. Our second product is NUV-868, a BD2-selective oral small molecule BET (bromodomain and extra-terminal) inhibitor that inhibits BRD4. An IND has been cleared by the FDA and we intend to initiate a Phase 1 trial of NUV-868 in patients with advanced solid tumors in mid-2022. Our third candidate, NUV-569, is a differentiated oral small molecule selective inhibitor of Wee1 kinase, an important regulator of DNA damage repair. We intend to submit an IND for NUV-569 by year end 2022 and initiate Phase 1 trials in patients with advanced solid tumors following IND clearance. Our adenosine receptor inhibitors are designed to have high affinity for the A2Aadenosine receptor, which plays multiple critical roles in human physiology and pathophysiology including anti-cancer immunity. We also designed our adenosine receptor inhibitors to have a reduced affinity for the adenosine A1 receptor, which may potentially improve tolerability. We intend to nominate a clinical development candidate by year end 2022. Lastly, we are also characterizing multiple potential lead product candidates from our DDC platform. We intend to nominate a DDC clinical development candidate by year end 2022.

Merger and Public Company Costs

In October 2020, Legacy Nuvation Bio entered into an Agreement and Plan of Merger with Panacea and Merger Sub pursuant to which Merger Sub was merged with and into Legacy Nuvation Bio, with Legacy Nuvation Bio surviving the merger as a wholly-owned subsidiary of Panacea (the “Merger Agreement”). The transaction provided us with approximately $646 million of gross proceeds, including $476.6 million from a PIPE financing (the “PIPE Investment”). At a special meeting of Panacea stockholders held on February 9, 2021, the Merger was approved and adopted, and the merger and all other transactions contemplated by the Merger were approved. On February 10, 2021,

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the Merger was consummated pursuant to the Merger Agreement, Panacea changed its name to Nuvation Bio Inc. and our financial statements became those of Panacea. Following the Closing, Legacy Nuvation Bio was deemed the accounting predecessor and will be the successor registrant for SEC purposes, meaning that Legacy Nuvation Bio’s financial statements for previous periods will be disclosed in our future periodic reports filed with the SEC.

While the legal acquirer in the Merger is Panacea, for financial accounting and reporting purposes under U.S. GAAP, Legacy Nuvation Bio was the accounting acquirer and the Merger was accounted for as a “reverse recapitalization.” A reverse recapitalization (i.e., a capital transaction involving the issuance of stock by Panacea for Legacy Nuvation Bio’s stock) does not result in a new basis of accounting, and the consolidated financial statements of the combined entity represent the continuation of the consolidated financial statements of Legacy Nuvation Bio in many respects. Accordingly, the consolidated assets, liabilities and results of operations of Legacy Nuvation Bio became the historical consolidated financial statements of the combined company, and Panacea’s assets, liabilities and results of operations were consolidated with those of Legacy Nuvation Bio beginning on the acquisition date. Operations prior to the Merger will be presented as those of Legacy Nuvation Bio in future reports. The net assets of Panacea were recognized at historical cost (which is expected to be consistent with carrying value), with no goodwill or other intangible assets recorded.

Upon consummation of the Merger and the closing of the PIPE Investment, the most significant change in the post-combination company’s future reported financial position is an increase in cash and cash equivalents (as compared to Legacy Nuvation Bio’s condensed consolidated balance sheet at December 31, 2020) primarily due to $476.6 million in gross proceeds from the PIPE Investment.

As a consequence of the Merger, we became the successor to an SEC-registered and NYSE-listed company, which has required us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We have incurred and expect to continue to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting, legal and administrative resources, including increased audit and legal fees.

Our future results of consolidated operations and financial position may not be comparable to historical results as a result of the Merger.

COVID-19 Business Update

The global COVID-19 pandemic continues to rapidly evolve, and we will continue to monitor the COVID-19 situation closely. To date our financial condition and operations have not been significantly impacted by the COVID-19 impact. However, we cannot, at this time, predict the specific extent, duration or full impact that the COVID-19 outbreak will have on our financial condition and operations, including our ongoing and planned preclinical activities and clinical trials. The extent of the impact of the COVID-19 on our business, operations and clinical development timelines and plans remains uncertain and will depend on certain developments, including the duration and spread of the outbreak and its impact on our clinical trial enrollment, trial sites, contract research organizations (“CROs”), third-party manufacturers, and other third parties with which we do business, as well as its impact on regulatory authorities and our key scientific and management personnel. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel as many of our employees are working remotely. We will continue to actively monitor the rapidly evolving situation related to COVID-19 and may take further actions that alter our operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees and other third parties with which we do business. The development of our product candidates could be disrupted and materially adversely affected in the future by the COVID-19 pandemic. Our planned clinical trials also could be delayed due to government orders or site policies on account of the pandemic, and some patients may be unwilling or unable to travel to study sites or enroll in our trials or be unable to comply with clinical trial protocols if quarantines impede patient movement or interrupt healthcare services. Any of these occurrences could delay our ability to conduct clinical trials or release clinical trial results and delay our ability to obtain regulatory approval and commercialize our product candidates. Furthermore, COVID-19 could affect our employees or the employees of research sites and service providers on which we rely, including CROs, as well as those of companies with which we do business, including our suppliers and contract manufacturing organizations, thereby disrupting our business operations. Quarantines and travel restrictions imposed by governments in the jurisdictions in which we and the companies with which we do business operate could materially impact the ability of employees to access preclinical and clinical sites, laboratories, manufacturing site and office. These and other events resulting from the

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COVID-19 pandemic could disrupt, delay, or otherwise adversely impact our business. Further information relating to the risks and uncertainties related to the ongoing COVID-19 pandemic are contained in the section titled “Item 1A. Risk Factors.”

Financial Overview

Since our inception in 2018, we have focused substantially all of our resources on conducting research and development activities, including drug discovery, preclinical studies, conducting our Phase 1/2 study of our lead product candidate NUV-422, establishing and maintaining our intellectual property portfolio, developing our manufacturing network and managing the manufacture of clinical and research material, hiring personnel, raising capital and providing general and administrative support for these operations. We have not recorded revenue from product sales or collaboration activities, or any other source. We have funded our operations to date primarily from the issuance and sale of our common and preferred stock, including through the Merger and the PIPE Investment.

We have incurred net losses in each year since inception. As of December 31, 2021, we had an accumulated deficit of $162.8 million. Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We expect to continue to incur significant expenses and increasing operating losses over at least the next several years. We expect our expenses will increase substantially in connection with our ongoing activities, as we:

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advance product candidates through clinical trials;

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pursue regulatory approval of product candidates;

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operate as a public company;

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continue our preclinical programs and clinical development efforts;

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continue research activities for the discovery of new product candidates; and

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manufacture supplies for our preclinical studies and clinical trials.

In addition, we expect to incur additional costs associated with operating as a public company, including significant legal, audit, accounting, regulatory, tax-related, director and officer insurance, investor relations and other expenses that we did not incur as a private company. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the public or private sale of equity, government or private party grants, debt financings or other capital sources, including potential collaborations with other companies or other strategic transactions. If we are unable to obtain additional funding, we could be forced to delay, reduce or eliminate some or all of our research and development programs, product portfolio expansion or any commercialization efforts, which could adversely affect our business prospects, or we may be unable to continue operations. If we raise funds through strategic collaborations or other similar arrangements with third parties, we may have to relinquish valuable rights to our platform technology, future revenue streams, research programs or product candidates or may have to grant licenses on terms that may not be favorable to us and/or may reduce the value of our common stock. Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic or other events. Because of the numerous risks and uncertainties associated with product development, we cannot predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability.

Components of Results of Operations

Research and Development Expenses

Research and development expenses include:

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expenses incurred under agreements with third-party contract organizations, and consultants;

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costs related to production of drug substance, including fees paid to contract manufacturers;

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laboratory and vendor expenses related to the execution of preclinical trials; and

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

We expense all research and development costs in the periods in which they are incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks and estimates of services performed using information and data provided to us by our vendors and third-party service providers. Nonrefundable advance payments for goods or services to be received in future periods for use in research and development activities are deferred and capitalized. The capitalized amounts are then expensed as the related goods are delivered and as services are performed. We expense in-process research and development projects acquired as part of asset acquisitions that have no alternative future use.

To date, the majority of these expenses have been incurred to advance our lead product candidate, NUV-422. We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates, as our product candidates advance into later stages of development, and as we begin to conduct clinical trials. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain. As a result, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.

General and Administrative Expenses

General and administrative expenses consist of personnel-related costs, facilities costs, depreciation and amortization expenses and professional services expenses, including legal, human resources, audit and accounting services. Personnel-related costs consist of salaries, benefits and stock-based compensation. Facilities costs consist of rent and maintenance of facilities. We expect our general and administrative expenses to increase for the foreseeable future due to anticipated increases in headcount to advance our product candidates and as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC, NYSE, additional insurance expenses, investor relations activities and other administrative and professional services.

Other Income (Expense), Net

Other income (expense) consists of change in fair value of Warrant liabilities, interest earned on our cash equivalents and investments, advisory expense related to our investments and realized gains and losses on marketable securities.

Results of Operations

Years Ended December 31, 2021 and 2020

Research and Development Expenses

Research and development expenses increased by $36.4 million for the years ended December 31, 2021 compared to 2020. The increase was primarily due to a $22.8 million increase in third-party costs related to research services and manufacturing to advance our current preclinical programs and Phase 1/2 clinical trial, $3.8 million related to issuance of common stock as consideration for the purchase of in-process research and development, as well as a $9.8 million increase in personnel-related costs driven by an increase in headcount and stock-based compensation.

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General and Administrative Expenses

General and administrative expenses increased by $13.3 million for the years ended December 31, 2021, compared to 2020. The increase was primarily due to a $6.9 million increase in personnel-related costs driven by an increase in headcount and stock-based compensation, a $4.0 million increase in insurance, a $0.4 million increase in taxes, a $1.1 million increase in professional fees and a $1.0 million increase in other miscellaneous expenses.

Other Income (Expense), Net

Other income (expense), net increased by $4.6 million for the years ended December 31, 2021 compared to 2020 primarily related to a $4.2 million decrease in fair value of Warrant liability, increase of $1.0 million in interest income from investments in 2021 primarily because of higher cash balance compared to 2020 offset by an increase of $0.4 million in investment fees and a decrease of $0.3 million in realized gain on marketable securities.

Liquidity, Capital Resources and Plan of Operations

From inception through December 31, 2021, our operations have been financed primarily by the sale and issuance of Series A preferred stock and common stock, including through the Merger and the PIPE Investment. As of December 31, 2021, we had $765.4 million in cash, cash equivalents and marketable securities and an accumulated deficit of $162.8 million.

Our primary use of cash is to fund operating expenses, which consist of research and development expenses related to our lead product candidate, NUV-422, and preclinical programs, and to a lesser extent, general and administrative expenses. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.

Based upon our current operating plan, we believe that our existing cash, cash equivalents and marketable securities as of December 31, 2021, will enable us to fund our operating expenses and capital expenditure requirements through at least the next 12 months.

We expect to incur substantial expenses in the foreseeable future for the development and potential commercialization of our product candidates and ongoing internal research and development programs. At this time, we cannot reasonably estimate the nature, timing or aggregate amount of costs for our development, potential commercialization, and internal research and development programs. However, in order to complete our current and future preclinical studies and clinical trials, and to complete the process of obtaining regulatory approval for our product candidates, as well as to build the sales, marketing and distribution infrastructure that we believe will be necessary to commercialize our product candidates, if approved, we may require substantial additional funding in the future.

Cash Flows

The following table summarizes our cash flows for the periods indicated:

Operating Activities

In 2021, cash used in operating activities of $68.2 million was attributable to a net loss of $86.8 million partially offset by a net change of $4.8 million in our net operating assets and liabilities and non-cash charges of $13.9 million. The change in operating assets and liabilities was due to a $7.4 million increase in accrued expenses, $1.9 million increase in accounts payable offset by $2.4 million increase in prepaid expenses, $1.9 million increase in interest receivable on marketable securities and $0.2 million decrease in deferred rent. The non-cash charges consisted of the issuance of common stock for in-process research and development expense of $3.8 million, stock-based compensation of $9.3 million, amortization of premium on marketable securities of $4.6 million, $0.2 million of

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depreciation and amortization expense and $0.2 million of lease expense offset by a change in fair value of Warrant liability of $4.2 million.

In 2020, cash used in operating activities of $36.5 million was attributable to a net loss of $41.6 million partially offset by a net change of $2.1 million in our net operating assets and liabilities and non-cash charges of $3.0 million. The change in operating assets and liabilities was primarily due to a $2.9 million increase in accrued expense and $0.2 million increase in deferred rent offset by $0.7 million increase in prepaid expenses and $0.3 million increase in interest receivable on marketable securities. The non-cash charges consisted primarily of stock-based compensation of $2.2 million and amortization of premium on marketable securities of $0.9 million.

Investing Activities

In 2021, cash used for investing activities of $454.7 million was related to the purchase of marketable securities of $609.3 million, purchases of property and equipment of $0.3 million partially offset by $154.9 million of proceeds from the sale of marketable securities.

In 2020, cash used for investing activities of $70.3 million was related to the $143.3 million purchase of marketable securities and purchases of property and equipment of $0.1 million offset by of $73.1 million of proceeds from the sale of marketable securities and investment held to maturity .

Financing Activities

In 2021, cash provided by financing activities of $625.5 million was related to the $624.8 million net proceeds from the Merger, $0.3 million of proceeds from issuance of common stock under Employee Stock Purchase Plan and $0.4 million of proceeds from exercise of options.

In 2020, cash provided by financing activities of $133.1 million was related to the $135.6 million net proceeds from the Merger offset by $2.5 million of deferred financing costs.

Off-Balance Sheet Financing Arrangements

As of December 31, 2021, we did not have any off-balance sheet arrangements, as defined in Regulation S-K, Item 303(a)(4)(ii).

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an on-going basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.

While our significant accounting policies are described in the notes to our consolidated financial statements, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results.

Research and Development Expenses

We expense all research and development costs in the periods in which they are incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks and estimates of services performed using information and data provided to us by our vendors and third-party service providers. Nonrefundable advance payments for goods or services to be received in future periods for use in research and development activities are deferred and capitalized. The capitalized amounts are then expensed as the related goods are delivered and as services are performed. We expense in-process research and development projects acquired as part of asset acquisitions that have no alternative future use.

Warrant Liability

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We account for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the company’s own ordinary shares, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.

For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded as a liability at their fair value on the date of issuance and each balance sheet date thereafter. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the statements of operations. The fair value of Public and Forward Purchase Warrants was determined using the closing price of the warrants on the NYSE market. The fair value of the Private Warrants was estimated using the Black-Scholes option pricing formula (see Note 4).

Stock-Based Compensation Expense

We estimate the fair value of our stock-based awards to employees and non-employees that are based on a service condition only using the Black-Scholes option-pricing model, which is impacted by our common stock price as well as other variables including, but not limited to, expected term that options will remain outstanding, expected common stock price volatility over the term of the option awards, risk-free interest rates and expected dividends.

We determine the fair value of stock-based awards that are based on both a service condition and achievement of the first to occur of a market or performance condition using a Monte Carlo simulation.

The fair value of a stock-based award is recognized over the period during which a recipient is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period) on a straight-line basis. Stock-based compensation expense is recognized based on the fair value determined on the date of grant and is reduced for forfeitures as they occur.

Estimating the fair value of stock-based awards as of the grant date using valuation models, such as the Black-Scholes option pricing model, is affected by assumptions regarding a number of variables. Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized. These inputs are subjective and generally require significant analysis and judgment to develop.

Expected Term—We have opted to use the “simplified method” for estimating the expected term of options whose vesting is based on service condition only, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option (generally 10 years).

Expected Volatility—Due to our limited operating history and a lack of company specific historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded.

Risk-Free Interest Rate—The risk-free rate assumption is based on the U.S. Treasury instruments with maturities similar to the expected term of our stock options at the time of the grant.

Expected Dividend—We have not issued any dividends in our history and do not expect to issue dividends over the life of the options and therefore have estimated the dividend yield to be zero.

We will continue to use judgment in evaluating the expected volatility, and interest rates utilized for our stock-based compensation expense calculations on a prospective basis.

Recent Accounting Pronouncements

For information about recent accounting pronouncements, see the sections titled “Significant Accounting Policies—Recent Accounting Pronouncements” in Note 2 to our consolidated financial statements for the year ended December 31, 2021 appearing elsewhere in this report.

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