PUMA BIOTECHNOLOGY, INC. (PBYI) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
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 meanings of the federal securities laws. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those expressed or implied by such forward-looking statements. For a detailed discussion of these risks and uncertainties, see the “Risk Factors” section in Item 1A of Part I of this Form 10-K. We caution the reader not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this Form 10-K. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-K.
Overview
We are a biopharmaceutical company with a focus on the development and commercialization of innovative products to enhance cancer care. We in-licensed from Pfizer, Inc. ("Pfizer") the global development and commercialization rights to PB272 (neratinib, oral), PB272 (neratinib, intravenous) and PB357. Neratinib is a potent irreversible tyrosine kinase inhibitor ("TKI") that blocks signal transduction through the human epidermal growth factor receptors, HER1, HER2 and HER4. Currently, we are primarily focused on the development and commercialization of the oral version of neratinib, our most advanced drug candidate is directed at the treatment of HER2-positive breast cancer and HER2 mutated cancers. We believe neratinib has clinical application in the treatment of several other cancers as well, including other tumor types that over-express or have a mutation in HER2 or EGFR, such as breast cancer, cervical cancer, lung cancer or other solid tumors.
Prior to 2017, our efforts and resources had been focused primarily on acquiring and developing our pharmaceutical technologies, raising capital and recruiting personnel. In 2017, the U.S. Food and Drug Administration ("FDA") approved NERLYNX, formally known as PB272 (neratinib, oral), for the extended adjuvant treatment of adult patients with early stage HER2-overexpressed/amplified breast cancer following adjuvant trastuzumab-based therapy. In February 2020, NERLYNX was also approved by the FDA in combination with capecitabine for the treatment of adult patients with advanced or metastatic HER2-positive breast cancer who have received two or more prior anti-HER2-based regimens in the metastatic setting. In 2018, the European Commission ("EC"), granted marketing authorization for NERLYNX in the European Union for the extended adjuvant treatment of adult patients with early-stage hormone receptor positive HER2-overexpressed/amplified breast cancer and who are less than one year from the completion of prior adjuvant trastuzumab-based therapy.
We have entered into exclusive sub-license agreements with various parties to pursue regulatory approval, if necessary, and commercialize NERLYNX, if approved, in numerous regions outside the United States, including Europe (excluding Russia and Ukraine), Australia, Canada, China, Southeast Asia, Israel, Mexico, South Korea, and various countries and territories in Central and South America. We plan to continue to pursue commercialization of NERLYNX in other countries outside the United States, if approved.
In July 2021, we announced that the U.S. Food and Drug Administration ("FDA") approved a labeling supplement to the U.S. Prescribing Information for NERLYNX that incorporates the use of NERLYNX dose escalation as evaluated in the Phase II CONTROL Trial. In July 2021, our Canadian partner, Knight Therapeutics, Inc., received Health Canada’s approval of an alternate dosing regimen (two-week dose escalation) to be incorporated into the prescribing information.
On July 23, 2021, we entered into a note purchase agreement with Athyrium Opportunities IV Co-Invest 1 LP ("Athyrium") for an aggregate principal amount of $100.0 million. The borrowings under the Athyrium Note Purchase Agreement ("Athyrium Notes"), together with cash on hand, were used to repay the outstanding indebtedness, including the applicable exit and prepayment fees owed to lenders under our Oxford Credit facility. See Note 10-Debt, for further details regarding both the Athyrium Notes and Oxford Loan and Security Agreement.
In the fourth quarter of 2021, Puma received additional approvals for the use of NERLYNX in the extended adjuvant population. On November 11, 2021, Bixink’s, Puma’s partner in South Korea announced the approval of NERLYNX from the Korean Ministry of Food and Drug Safety and on December 13, 2021, Pint Pharma, Puma’s partner in Latin America announced that the Brazilian Health Authority ("ANVISA") had approved NERLYNX in Brazil.
In December 2021, NERLYNX (neratinib) was included in the updated National Reimbursement Drug List ("NRDL") by the China National Healthcare Security Administration ("NHSA") for patients with early stage hormone receptor positive HER2-overexpressed/amplified breast cancer after adjuvant trastuzumab based therapy. The addition of NERLYNX to the China NRDL now enables broad access to neratinib to more women throughout China.
Our expenses to date have been related to hiring staff, commencing company-sponsored clinical trials and the build out of our corporate infrastructure and, since 2017, the commercial launch of NERLYNX. Accordingly, our success depends not only on the safety and efficacy of our product candidates, but also on our ability to finance product development. To date, our major sources of working capital have been proceeds from product and license revenue, public offerings of our common stock, proceeds from various debt instruments and sales of our common stock in private placements.
Impact of COVID-19
Our priorities during the COVID-19 pandemic are protecting the health and safety of our employees while continuing our mission to develop and commercialize innovative products to enhance cancer care. Substantially all geographic regions in which our U.S. sales force operates have imposed, and those regions or other regions in which our sales force operates may in the future impose, “shelter-in-place” orders, quarantines or similar orders or restrictions to control the spread of COVID-19. These types of restrictions may deter or prevent cancer patients from traveling to see their doctors and result in a decline in revenue for NERLYNX, our only commercial product. Additionally, our commercial team and sales force have limited travel and personal interactions with physicians and customers, including visits to healthcare provider offices due to limitations that have been imposed at certain hospitals and medical facilities, and are currently conducting a large percentage of promotional activities virtually. These types of restrictions have adversely impacted our ability to engage with our customers and have adversely impacted sales of NERLYNX, our only commercial product, and they may continue to do so. The respective commercial teams of certain of the companies to which we sub-license the commercial rights to NERLYNX, and on which we rely for our international sales, have chosen or have been forced to take similar action, and other sub-licensees of NERLYNX may choose or be forced to take similar action. Furthermore, the COVID-19 pandemic has resulted in dramatic increases in unemployment rates, which may result in a substantial number of people becoming uninsured or underinsured. Any of these developments may have an adverse effect on our revenue. We have observed disruptions in patient enrollments in the United States and in our SUMMIT basket trial. If the COVID-19 pandemic continues to spread in the geographies in which we are conducting clinical trials, we may experience additional disruptions in those clinical trials, which could have a material adverse impact on our clinical trial plans and timelines.
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Our ability to continue to operate without any significant negative impacts will in part depend on the length and severity of the COVID-19 pandemic and our ability to protect our employees and our supply chain. We continue to follow and monitor recommended actions of government and health authorities to protect our employees worldwide. For the year ended December 31, 2021, we and our key third-party suppliers and manufacturers were able to broadly maintain operations. We rely exclusively on third-party manufacturers to manufacture NERLYNX.
We intend to satisfy our near-term liquidity requirements through a combination of our existing cash and cash equivalents and marketable securities as of December 31, 2021 and proceeds that will become available to us through product sales, royalties and sub-license milestone payments. However, this intention is based on assumptions that may prove to be wrong. Changes may occur that would consume our available capital faster than anticipated, including the length and severity of the COVID-19 pandemic and measures taken to control the spread of COVID-19, as well as changes in and progress of our development activities, the impact of commercialization efforts, acquisitions of additional drug candidates and changes in regulation. Some of these developments have had and may continue to have an adverse effect on our revenue and thus could have an adverse effect on our ability to satisfy the minimum revenue and cash balance covenants in our loan and security agreement.
Key Litigation Developments
On October 29, 2021, the parties to the class action lawsuit against us and certain of our executive officers, Hsu v. Puma Biotechnology, Inc., et. al., informed the court that a settlement was reached in principle. The court entered judgment in an amount representing the claimed damages and prejudgment interest totaling approximately $54.2 million. On November 2, 2021, the court dismissed the case in light of the parties' settlement and retained jurisdiction solely for the purpose of settlement approval. The parties' settlement in principle provides that there will be no judgment for liability entered against us or Mr. Auerbach, and additionally provides for payment by us of approximately $54.2 million in two (2) installments payable in January 2022 and June 2022. The settlement in principle is subject to execution of a formal settlement agreement to be negotiated among the parties, which will be submitted to the court for approval. For additional detail regarding the class action lawsuit, see Part I. Item 3. Legal Proceedings in this Annual Report on Form 10-K.
In February 2016, Fredric N. Eshelman filed a lawsuit against our Chief Executive Officer and President, Alan H. Auerbach, and us in the United States District Court for the Eastern District of North Carolina (Case No. 7:16-cv-00018-D). The complaint generally alleged that we and Mr. Auerbach made defamatory statements regarding Dr. Eshelman in connection with a proxy contest. In May 2016, Dr. Eshelman filed a notice of voluntary dismissal of the claims against Mr. Auerbach. A trial on the remaining defamation claims against us took place from March 11 to March 15, 2019. At trial, the jury found us liable and awarded Dr. Eshelman $15.9 million in compensatory damages and $6.5 million in punitive damages. We strongly disagreed with the verdict and, on April 22, 2019, filed a motion for a new trial or, in the alternative, a reduced damages award. The Court denied that motion on March 2, 2020. We appealed that ruling, and the verdict. Additionally, after trial, the plaintiff filed a motion seeking approximately $3.0 million in attorneys’ fees, as well as prejudgment interest. In the Court’s March 2, 2021 ruling, it denied the motion for attorneys’ fees but granted the request for prejudgment interest, bringing the total judgment to $26.3 million. On March 30, 2020, the plaintiff filed a notice of cross-appeal and conditional cross-appeal, appealing the Court’s order denying the plaintiff’s request for attorneys’ fees and conditionally cross-appealing a Court ruling that certain communications between Mr. Auerbach and his attorneys were protected by attorney-client privilege and a related evidentiary ruling. On June 23, 2021, the United States Court of Appeals for the Fourth Circuit affirmed the liability verdict in the Eshelman v. Puma Biotechnology, et. al matter but found the $22.4 million damages award, payable by us, to be excessive in light of the evidence at trial. The court vacated this award and remanded for a new trial on damages. The Court's judgment will eliminate the damages award, including interest on the judgment, pending further proceedings on remand. On July 7, 2021, the plaintiff filed a petition for panel or en banc rehearing, which was denied on July 20, 2021. On July 26, 2021, the plaintiff filed a motion to stay issuance of the Fourth Circuit's mandate pending the filing and resolution of a petition for certiorari in the Supreme Court. The Fourth Circuit denied that motion on July 29, 2021. On October 18, 2021, the plaintiff filed a petition of certiorari with the Supreme Court seeking review of the Fourth Circuit's ruling. On December 13, 2021, the Supreme Court denied plaintiff's petition for certiorari. The case remains pending in the district court, which has not yet scheduled the new trial on damages.
Summary of Income and Expenses
Product revenue, net
Product revenue, net consists of revenue from sales of NERLYNX. We sell NERLYNX to a limited number of specialty pharmacies and specialty distributors in the United States. We record revenue at the net sales price, which includes an estimate for variable consideration for which reserves are established. Variable consideration consists of trade discounts and allowances, product returns, provider chargebacks and discounts, government rebates and other incentives.
License revenue
License revenue consists of consideration earned for performance obligations satisfied pursuant to our sub-license agreements.
Royalty revenue
Royalty revenue consists of consideration earned related to product sales made by our sub-licensees in their respective territories pursuant to our license agreements.
Cost of sales
Cost of sales consists of third-party manufacturing costs, freight, and indirect overhead costs associated with sales of NERLYNX. Cost of product sales also includes period costs related to royalty charges payable to Pfizer, the amortization of milestone payments under our license agreement with Pfizer, certain inventory manufacturing services, inventory adjustment charges, unabsorbed manufacturing and overhead costs, and manufacturing variances. Cost of license revenue includes applicable license termination fees.
Selling, general and administrative expenses
Selling, general and administrative ("SG&A") expenses, consist primarily of salaries and payroll-related costs, stock-based compensation expense, professional fees, business insurance, rent, general legal activities, credit loss expense and other corporate expenses. We expense SG&A expenses as they are incurred.
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Research and development expenses
Research and development ("R&D") expenses include costs associated with services provided by consultants who conduct clinical services on our behalf, contract organizations for manufacturing of clinical materials and clinical trials. During the years ended December 31, 2021, 2020 and 2019, our R&D expenses consisted primarily of CRO fees; fees paid to consultants; salaries and related personnel costs; and stock-based compensation. We expense our R&D expenses as they are incurred. Internal R&D expenses primarily consist of payroll-related costs and also include equipment costs, travel expenses and supplies.
Results of Operations
The following summarizes our results of operations for the years ended December 31, 2021 and 2020. For discussion related to the results of operations and changes in financial condition for the year ended December 31, 2020 compared to the year ended December 31, 2019, please refer to Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report for the Year Ended December 31, 2020, which was filed with the United States Securities and Exchange Commission on March 1, 2021.
Total revenue
Total revenue was approximately $253.2 million for the year ended December 31, 2021, compared to $225.1 million for the year ended December 31, 2020.
Product revenue, net
Product revenue, net was approximately $189.1 million for the year ended December 31, 2021, compared to $196.7 million for the year ended December 31, 2020. The decrease in product revenue, net was attributable to a volume decrease of approximately 13% in bottles of NERLYNX sold, and an increase in reserves for variable consideration from approximately 16% of product revenue for the year ended December 31, 2020 to approximately 19% of product revenue for the year ended December 31, 2021. The increase in reserves for variable consideration is primarily due to an increase in Medicaid claims and government chargebacks as a percentage of gross revenue. The decrease in product revenue, net was partially offset by increases in gross selling price that occurred in the first and third quarters of 2021.
License revenue
License revenue was approximately $51.8 million for the year ended December 31, 2021, compared to $22.7 million for the year ended December 31, 2020. The increase in license revenue was primarily due to a large upfront payment resulting from an amendment to a sub-licensing agreement during the year ended December 31, 2021.
Royalty revenue
Royalty revenue was approximately $12.3 million for the year ended December 31, 2021, compared to $5.7 million for the year-ended December 31, 2020. The increase was due to increased product sales by our sub-licensees as they increased commercialization of NERLYNX in additional territories.
Cost of sales
Cost of sales was approximately $63.7 million for the year ended December 31, 2021, compared to $39.4 million for the year ended December 31, 2020. The increase in cost of sales was primarily attributable to a one-time license termination fee of $20.0 million in February 2021 and increased royalty and license fee expenses of $3.5 million.
Selling, general and administrative expenses:
| Selling, general, and administrative expenses | For the Year Ended | Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | December 31, | $ | % | |||||||||||||
| 2021 | 2020 | 2021/2020 | 2021/2020 | |||||||||||||
| Payroll and related costs | $ | 38,118 | $ | 41,313 | $ | (3,195 | ) | -7.7 | % | |||||||
| Professional fees and expenses | 38,356 | 42,935 | (4,579 | ) | -10.7 | % | ||||||||||
| Travel and meetings | 4,521 | 4,726 | (205 | ) | -4.3 | % | ||||||||||
| Facilities and equipment costs | 5,546 | 5,673 | (127 | ) | -2.2 | % | ||||||||||
| Stock-based compensation | 25,699 | 17,778 | 7,921 | 44.6 | % | |||||||||||
| Credit loss expense (recovery) | (1,000 | ) | 1,000 | (2,000 | ) | -200.0 | % | |||||||||
| Other | 5,054 | 5,063 | (9 | ) | -0.2 | % | ||||||||||
| $ | 116,294 | $ | 118,488 | $ | (2,194 | ) | -1.9 | % |
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Total SG&A expenses decreased approximately 1.9% to $116.3 million for the year ended December 31, 2021 from $118.5 million for the year ended December 31, 2020. The decrease is primarily attributable to the following:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | a decrease in payroll and related costs of approximately $3.2 million due to a reduction in headcount; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | a decrease in professional fees and expenses of approximately $4.6 million, consisting of a $5.7 million decrease in consulting fees related to marketing and commercialization efforts, partially offset by an increase of $1.1 million in legal fees; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | a recovery of credit loss expense of $1.0 million for the year ended December 31, 2021, compared to a credit loss expense of $1.0 million for the year ended December 31, 2020; |
which were partially offset by:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | an increase in stock-based compensation expense of approximately $7.9 million primarily due to the $13.6 million incremental expense resulting from the modification of the term of Mr. Auerbach’s warrant, and an increase of approximately $4.0 million from new grants, partially offset by a decrease of approximately $7.9 million for fully vested grants and a decrease of approximately $1.8 million for awards forfeited. |
Research and development expenses:
| Research and development expenses | For the Year Ended | Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | December 31, | $ | % | |||||||||||||
| 2021 | 2020 | 2021/2020 | 2021/2020 | |||||||||||||
| Clinical trial expense | $ | 26,033 | $ | 31,428 | $ | (5,395 | ) | -17.2 | % | |||||||
| Internal R&D | 33,068 | 38,736 | (5,668 | ) | -14.6 | % | ||||||||||
| Consultant and contractors | 5,835 | 8,689 | (2,854 | ) | -32.8 | % | ||||||||||
| Stock-based compensation | 6,934 | 18,797 | (11,863 | ) | -63.1 | % | ||||||||||
| $ | 71,870 | $ | 97,650 | $ | (25,780 | ) | -26.4 | % |
Total R&D expenses decreased approximately 26.4% to $71.9 million for the year ended December 31, 2021 from approximately $97.7 million for the year ended December 31, 2020. The decrease is primarily attributable to the following:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | a decrease in stock-based compensation expense of approximately $11.9 million related to the full vesting of previous grants; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | a decrease in internal R&D expense of approximately $5.7 million as a result of lower headcount and related compensation expense; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | a decrease in clinical trial expenses of approximately $5.4 million due to the close out of certain clinical trials and a reduction in patient enrollments and monitoring costs; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | a decrease in consultant and contractor expenses of approximately $2.9 million due to the close out of certain clinical trials. |
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Other income and expenses:
| Other income (expenses) | For the Year Ended | Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | December 31, | $ | % | |||||||||||||
| 2021 | 2020 | 2021/2020 | 2021/2020 | |||||||||||||
| Interest income | $ | 160 | $ | 489 | $ | (329 | ) | -67.3 | % | |||||||
| Interest expense | (12,807 | ) | (14,046 | ) | 1,239 | -8.8 | % | |||||||||
| Legal verdict expense | (9,591 | ) | (16,196 | ) | 6,605 | -40.8 | % | |||||||||
| Loss on debt extinguishment | (8,146 | ) | — | (8,146 | ) | 100.0 | % | |||||||||
| Other income | 292 | 367 | (75 | ) | -20.4 | % | ||||||||||
| $ | (30,092 | ) | $ | (29,386 | ) | $ | (706 | ) | 2.4 | % |
Interest expense
For the year ended December 31, 2021, we recognized approximately $12.8 million in interest expense compared to approximately $14.0 million of interest expense for the year ended December 31, 2020. The approximately $1.2 million decrease in interest expense is primarily due to less interest expense related to Pfizer in 2021.
Legal verdict expense
For the year ended December 31, 2021, we reduced our legal verdict expense accrual by approximately $19.8 million with respect to the Eshelman v. Puma Biotechnology, Inc., et.al judgment, and we increased our legal verdict expense accrual by approximately $29.4 million with respect to the Hsu v. Puma Biotechnology, Inc., et. al judgement, which resulted in a net legal verdict expense of approximately $9.6 million for the period.
Loss on debt extinguishment
For the year ended December 31, 2021 we recognized approximately $8.1 million in loss on debt extinguishment in connection with our debt refinancing during the third quarter of 2021. See Note 10-Debt.
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Non-GAAP Financial Measures:
In addition to our operating results, as calculated in accordance with U.S. generally accepted accounting principles, or GAAP, we use certain non-GAAP financial measures when planning, monitoring, and evaluating our operational performance. The following table presents our net income (loss) and net income (loss) per share, as calculated in accordance with GAAP, as adjusted to remove the impact of stock-based compensation. For the years ended December 31, 2021 and 2020, stock-based compensation represented approximately 112.0% and 61.0% of our net loss, respectively. Our management believes that these non-GAAP financial measures are useful to enhance understanding of our financial performance, are more indicative of our operational performance and facilitate a better comparison among fiscal periods. These non-GAAP financial measures are not, and should not be viewed as, substitutes for GAAP reporting measures.
Reconciliation of GAAP Net Loss to Non-GAAP Adjusted Net Income (Loss) and GAAP Net Loss Per Share to Non-GAAP Adjusted Net Income (Loss) Per Share
(in thousands except share and per share data)
| For the Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||
| GAAP net loss | $ | (29,126 | ) | $ | (59,995 | ) | ||
| Adjustments: | ||||||||
| Stock-based compensation - | ||||||||
| Selling, general and administrative | 25,699 | 17,778 | (1) | |||||
| Research and development | 6,934 | 18,797 | (2) | |||||
| Non-GAAP adjusted net income (loss) | $ | 3,507 | $ | (23,420 | ) | |||
| GAAP net loss per share—basic | $ | (0.72 | ) | $ | (1.52 | ) | ||
| Adjustment to net loss (as detailed above) | 0.81 | 0.93 | ||||||
| Non-GAAP adjusted basic net income (loss) per share | $ | 0.09 | $ | (0.59 | )(3) | |||
| GAAP net income (loss) per share—diluted | $ | (0.70 | ) | $ | (1.52 | ) | ||
| Adjustment to net income (loss) (as detailed above) | 0.78 | 0.93 | ||||||
| Non-GAAP adjusted diluted net income (loss) per share | $ | 0.08 | (4) | $ | (0.59 | )(5) |
| (1) To reflect a non-cash charge to operating expense for selling, general, and administrative stock-based compensation. |
|---|
| (2) To reflect a non-cash charge to operating expense for research and development stock-based compensation. |
| (3) Non-GAAP adjusted basic net loss per share was calculated based on 40,638,852 and 39,576,107 weighted-average shares of common stock outstanding for the years ended December 31, 2021 and 2020, respectively. |
| (4) Non-GAAP adjusted diluted net income per share was calculated based on 41,558,838 weighted average common shares outstanding and potentially dilutive common stock equivalents (stock options, restricted stock units and warrants) for the twelve months ended December 31, 2021. |
| (5) Potentially dilutive common stock equivalents (stock options, restricted stock units and warrants) were not included in the non-GAAP adjusted diluted net loss per share for the twelve months ended December 31, 2020 as these shares would be considered anti-dilutive. |
Liquidity and Capital Resources
The following table summarizes our liquidity and capital resources as of and for the years ended December 31, 2021 and December 31, 2020 and is intended to supplement the more detailed discussion that follows:
| As of | As of | |||||||
|---|---|---|---|---|---|---|---|---|
| Liquidity and capital resources (in thousands) | December 31, 2021 | December 31, 2020 | ||||||
| Cash and cash equivalents | $ | 63,131 | $ | 85,293 | ||||
| Marketable securities | 18,975 | 8,096 | ||||||
| Working capital | 30,436 | 31,884 | ||||||
| Stockholders' deficit | (2,446 | ) | (5,951 | ) |
| Year Ended | Year Ended | |||||||
|---|---|---|---|---|---|---|---|---|
| December 31, 2021 | December 31, 2020 | |||||||
| Cash provided by (used in): | ||||||||
| Operating activities | $ | 20,650 | $ | 773 | ||||
| Investing activities | (10,881 | ) | 33,403 | |||||
| Financing activities | (31,931 | ) | (9,932 | ) | ||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | $ | (22,162 | ) | $ | 24,244 |
Operating Activities
We recorded net losses of approximately $29.1 million and approximately $60.0 million for the years ended December 31, 2021 and 2020, respectively. We recorded positive cash flows from operating activities of approximately $20.7 million for the year ended December 31, 2021 and recorded positive cash flows from operating activities of approximately $0.8 million for the year ended December 31, 2020.
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Net cash provided by operating activities for the year ended December 31, 2021 consisted of a net loss of a $29.1 million, offset by a decrease of non-cash items of approximately $46.6 million, including stock-based compensation, depreciation and amortization, credit loss recovery and loss on extinguishment of debt of approximately $3.8 million related to the write off of debt issuance costs. Further changes in cash flows from operations included an increase in accrued expenses other of approximately $5.2 million, a decrease in other current assets of approximately $3.2 million, and a decrease in prepaid expenses and other of approximately $2.7 million. These changes were offset by an increase in accounts receivable, net of approximately $6.0 million, a increase in inventory of approximately $3.7 million, a decrease in post-marketing commitment liability of approximately $1.1 million, and a decrease in accounts payable of approximately $0.9 million.
Net cash used in operating activities for the year ended December 31, 2020, included a net loss of approximately $60.0 million, adjusted for non-cash items of approximately $36.6 million for stock-based compensation expense, approximately $10.0 million for depreciation and amortization, and $1.0 million for a provision for credit loss expense. Further changes in cash flows from operations included an increase in accrued expenses of approximately $19.3 million, a decrease in accounts receivable, net of approximately $2.4 million, and a decrease in prepaid expenses and other of approximately $2.3 million. These changes were offset by a decrease in accounts payable of approximately $7.1 million, an increase in other current assets of approximately $3.1 million, and an increase in inventory, net of approximately $0.3 million, and other immaterial fluctuations.
Investing Activities
During the year ended December 31, 2021, cash provided by investing activities was approximately $10.9 million. This included the maturity of available-for-sale securities of approximately $27.2 million, partially offset by the purchase of available-for-sale securities of approximately $38.1 million.
During the year ended December 31, 2020, cash provided by investing activities was approximately $33.4 million. This included the maturity of available-for-sale securities of approximately $73.2 million, partially offset by the purchase of available-for-sale securities of approximately $29.8 million and an increase in intangible assets relating to the milestone achieved under our license agreement with Pfizer of $10.0 million.
Financing Activities
During the year ended December 31, 2021, cash provided by financing activities was approximately $31.9 million. During July 2021, we used approximately $8.5 million for the payment of prepayment costs, end of loan payment costs and other extinguishment costs related to our credit facility with Oxford, and approximately $1.9 million in payment of debt issuance costs related to the Athyrium Notes, and $20.0 million was used for installment payments relating to the milestone achieved under our license agreement with Pfizer of $20.0 million.
During the year ended December 31, 2020, cash used in financing activities was approximately $9.9 million related to the installment payment associated with a milestone achieved under our license agreement with Pfizer of $10.0 million. Additionally, during April 2020, approximately $8.4 million was borrowed and fully repaid with no penalty or interest from Silicon Valley Bank, ("SVB") under the Paycheck Protection Program ("PPP"), of the Coronavirus Aid, Relief, and Economic Security Act.
Oxford Loan and Security Agreement
In October 2017, we initially entered into a loan and security agreement with SVB, as administrative agent, and the lenders party thereto from time to time, or the Original Lenders, including Oxford and SVB (as amended and restated from time to time, the “Oxford Credit Facility”). On February 3, 2021, we amended the Oxford Credit Facility to establish revised minimum revenue thresholds for the trailing year to date periods ending March 31, June 30, September 30, and December 31, 2021. Pursuant to the terms of the Oxford Credit Facility, at our option, we could prepay the outstanding principal balance of any term loan in whole, but not in part, subject to a prepayment fee of either (a) three percent (3.0%) of the amount prepaid if the prepayment occurred through and including the first anniversary of the funding date of such term loan, (b) two percent (2.0%) of the amount prepaid if the prepayment occurred after the first anniversary of the funding date of such term loan through and including the second anniversary of the funding date of such term loan, or (c) one percent (1.0%) of the amount prepaid if the prepayment occurred after the second anniversary of the funding date of such term loan and prior to the Maturity Date. On July 23, 2021, we used proceeds from the Athyrium Note Purchase Agreement to repay the amounts outstanding under the Oxford Credit Facility, together with applicable exit and prepayment fees, and terminated the Oxford Credit Facility.
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Athyrium Note Purchase Agreement
We issued senior notes for an aggregate principal amount of $100.0 million pursuant to the note purchase agreement dated July 23, 2021, by us, and our subsidiaries, and Athyrium, as Administrative Agent, and certain other investor parties (the “Note Purchase Agreement”), with an initial maturity date of July 23, 2026 (the “Athyrium Notes”). The Athyrium Notes were issued for face amount of $100.0 million net of an original issue discount of $1.5 million. The Athyrium Notes also require a 2.0% exit payment to be made on each payment of principal. The borrowings under the Athyrium Notes, together with cash on hand, were used to repay our outstanding indebtedness, including the applicable exit and prepayment fees owed to lenders under its Oxford Credit Facility. We can borrow up to an additional $25.0 million under the Note Purchase Agreement for general corporate purposes and to further support commercial initiatives. The Athyrium Notes are secured by substantially all of our assets. We incurred $1.9 million of deferred financing costs with the borrowing.
The Athyrium Notes bear interest at an annual rate equal to the sum of (i) 8.0% and (ii) three-month London Interbank Offering Rate ("LIBOR") rate where the three-month LIBOR rate cannot be less than 1.5% or greater than 3.5%. (or a comparable or successor rate that gives due consideration to the then prevailing rate used by commercial banks in the United States which rate is reasonably determined by Athyrium). Interest is payable quarterly on the last business day of March, June, September and December each year. Beginning June 30, 2024, principal payments are required to be made quarterly at 11.11% of the original face amount with the remaining balance paid at maturity. Each principal payment will also include a 2.0% exit payment. As of December 31, 2021, the effective interest rate for the loan was 10.98%.
At the Company’s option, the Company may prepay the outstanding principal balance of the notes in whole or in part, subject to a prepayment fee of 2.0% of the amount prepaid if the prepayment occurs on or prior to the second anniversary of the issuance date of such notes, plus the present value of remaining interest that would have accrued through and including the second anniversary date, and 2.0% of the amount prepaid if the prepayment occurs after the second anniversary but on or prior to the third anniversary of the issuance date of such notes.
The Athyrium Notes include affirmative and negative covenants applicable to the Company. The affirmative covenants include, among others, covenants requiring the Company to maintain its legal existence and governmental approvals, deliver certain financial reports, maintain insurance coverage, and satisfy certain requirements regarding deposit accounts. The negative covenants include, among others, restrictions on the Company’s transferring collateral, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends or making other distributions, making investments, creating liens, selling assets and suffering a change in control, in each case subject to certain exceptions. The Company is also required to achieve certain minimum product revenue targets, measured as of the last day of each fiscal quarter on a trailing year-to-date basis.
As of December 31, 2021, the principal balance outstanding under the Athyrium Notes was $100.0 million, representing all of the Company’s long-term debt. The Company was in compliance with all applicable covenants under the Athyrium Notes.
Current and Future Financing Needs
We did not receive or record any product revenues until the third quarter of 2017. We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including our planned product development efforts, our clinical trials, our R&D efforts and our commercialization efforts.
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We may choose to begin new R&D efforts or we may choose to launch additional marketing efforts. These efforts may require funding in addition to the cash and cash equivalents totaling approximately $63.1 million and approximately $19.0 million in marketable securities available at December 31, 2021. While our consolidated financial statements have been prepared on a going concern basis, we expect to continue incurring significant losses for the foreseeable future and will need to generate significant revenue to sustain operations and successfully commercialize neratinib. While we have been successful in raising financing in the past, there can be no assurance that we will be able to do so in the future. Our ability to obtain funding may be adversely impacted by uncertain market conditions, including the global COVID-19 pandemic, our success in commercializing neratinib, unfavorable decisions of regulatory authorities or adverse clinical trial results. The outcome of these matters cannot be predicted at this time. We believe that our existing cash and cash equivalents and marketable securities as of December 31, 2021 and proceeds that will become available to us through product sales and sub-license payments are sufficient to satisfy our operating cash and capital needs for at least one year after the filing of this Annual Report.
In addition, we have based our estimate of capital needs on assumptions that may prove to be wrong. Changes may occur that would consume our available capital faster than anticipated, including changes in and progress of our development activities, the impact of commercialization efforts, acquisitions of additional drug candidates and changes in regulation. Potential sources of financing include strategic relationships, public or private sales of equity or debt and other sources of funds. We may seek to access the public or private equity markets when conditions are favorable due to our long-term capital requirements. If we raise funds by selling additional shares of common stock or other securities convertible into common stock, the ownership interests of our existing stockholders will be diluted. If we are not able to obtain financing when needed, we may be unable to carry out our business plan. As a result, we may have to significantly limit our operations, and our business, financial condition and results of operations would be materially harmed. In such an event, we will be required to undertake a thorough review of our programs, and the opportunities presented by such programs, and allocate our resources in the manner most prudent.
Off-Balance Sheet Arrangements
We do not have any “off-balance sheet arrangements,” as defined by the SEC regulations.
Contractual Obligations
Contractual obligations represent future cash commitments and liabilities under agreements with third parties and exclude contingent liabilities for which we cannot reasonably predict future payment. Our contractual obligations result from leases for office space and office equipment and the principal and interest owed under our Note Purchase Agreement. We also have unrecognized tax benefits that, if recognized, would affect the effective tax rate at December 31, 2021. We do not have tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefit will significantly increase or decrease within 12 months of the reporting date. Additionally, the expected timing of payment of the obligations presented below is estimated based on current information.
The following table represents our contractual obligations as of December 31, 2021, aggregated by type (in thousands):
| Contractual Obligations | Total | Less than 1 year | 1 - 3 years | 3 - 5 years | More than 5 years | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Operating lease obligations | $ | 24,410 | $ | 5,483 | $ | 11,436 | $ | 7,491 | — | ||||||||||
| Debt obligations (principal and interest) | 135,782 | 9,632 | 52,478 | 73,672 | — | ||||||||||||||
| Total | $ | 160,192 | $ | 15,115 | $ | 63,914 | $ | 81,163 | — |
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We also engage with CROs and contract manufacturing organizations ("CMOs") in addition to engaging in contracts for the management of its ongoing clinical trials and pre-commercialization efforts. The Company may cancel these agreements with a 30 to 45 day written notice to the outside vendor. We would be obligated to pay for services rendered up to that point, which amounts to total contractual obligations of $54.8 million within the next twelve months. The contracts also contain variable costs that are hard to predict as they are based on such things as patients enrolled and clinical trial sites, which can vary, and therefore, are not included in the total obligations amount.. Included in the total contractual obligations above are payments to be made when milestones are reached. As of December 31, 2021, our obligations for potential milestone payments totaled approximately $17.3 million. This amount will be paid by the Company if all milestones are reached and would reduce the overall contractual obligation if one or more milestone is never reached.
In regard to our contractual obligations in relation to the Pfizer in-license agreement, as consideration for the license, we are required to make substantial payments upon the achievement of certain milestones totaling approximately $187.5 million if all such milestones are achieved. The remaining milestone amounts were not included in the table above as the timing of when or if these payments will be made is uncertain. In connection with the FDA approval of NERLYNX in July of 2017, we triggered a one-time milestone payment pursuant to the agreement. In June 2020, we entered into a letter agreement with Pfizer relating to the method of payment associated with a milestone payment under our license agreement with Pfizer (see Note 14-Commitments and Contingencies in the accompanying notes to the financial statements). Should we commercialize any more of the compounds licensed from Pfizer or any products containing any of these compounds, we will be obligated to pay to Pfizer annual royalties at a fixed rate in the low to mid-teens of net sales of all such products, subject to certain reductions and offsets in some circumstances. Our royalty obligation continues, on a product-by-product and country-by-country basis, until the later of (i) the last to expire licensed patent covering the applicable licensed product in such country, or (ii) the earlier of generic competition for such licensed product reaching a certain level in such country or expiration of a certain time period after first commercial sale of such licensed product in such country. In the event that we sublicense the rights granted to us under the license agreement with Pfizer to a third party, the same milestone and royalty payments are required. We can terminate the license agreement at will, or for safety concerns, in each case upon specified advance notice.
See Note 13-Income Taxes and Note 14-Commitments and Contingencies in the accompanying notes to the financial statements for a summary of our uncertain tax positions and contracts held by us as of December 31, 2021. As of December 31, 2021, the amount of unrecognized tax benefit was $4.3 million, and is also not included in the table above as the timing of when or if these payments will be made is uncertain.
Critical Accounting Policies
The discussion and analysis of our consolidated financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, and expenses, and related disclosure of contingent assets and liabilities reported in our consolidated financial statements. The estimation process requires assumptions to be made about future events and conditions and, as a result, is inherently subjective and uncertain. Actual results could differ materially from our estimates.
The SEC defines critical accounting policies as those that are, in management’s view, most important to the portrayal of our financial condition and results of operations and most demanding of our judgment. We consider the following policies to be critical to an understanding of our consolidated financial statements and the uncertainties associated with the complex judgments made by us that could impact our results of operations, financial position, and cash flows.
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Revenue Recognition
Under Accounting Standards Codification ("ASC") Topic 606 - Revenue from Contracts with Customers ("ASC 606") we recognize revenue when a customer obtains control of the promised goods or services, in an amount that reflects the consideration which we expect to be entitled in exchange for those goods or services. We had no contracts with customers until the FDA approved NERLYNX on July 17, 2017. Subsequent to receiving FDA approval, we entered into a limited number of arrangements with specialty pharmacies and specialty distributors in the United States to distribute NERLYNX. These arrangements are our initial contracts with customers. We have determined that these sales channels with customers are similar.
Product Revenue, Net:
We sell NERLYNX to a limited number of specialty pharmacies and specialty distributors in the United States. These customers subsequently resell our products to patients and certain medical centers or hospitals. In addition to distribution agreements with these customers, we enter into arrangements with health care providers and payors that provide for government mandated and/or privately negotiated rebates, chargebacks and discounts with respect to the purchase of our products.
We recognize revenue on product sales when the specialty pharmacy or specialty distributor, as applicable, obtains control of our product, which occurs at a point in time (upon delivery). Product revenue is recorded net of applicable reserves for variable consideration.
Shipping and handling costs for product shipments occur prior to the customer obtaining control of the goods and are recorded in cost of sales.
Reserves for Variable Consideration:
Revenue from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established. Components of variable consideration include trade discounts and allowances, product returns, provider chargebacks and discounts, government rebates, payor rebates, and other incentives, such as voluntary patient assistance, and other allowances that are offered within contracts between us and our customers, payors, and other indirect customers relating to the sale of our products. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as reductions of accounts receivable or a current liability. These estimates take into consideration a range of possible outcomes which are probability-weighted in accordance with the expected value method in ASC 606 for relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts.
The amount of variable consideration which is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. Our analyses also contemplated application of the constraint in accordance with the guidance, under which it determined a significant reversal of revenue would not occur in a future period for the estimates detailed below as of December 31, 2021 and, therefore, the transaction price was not reduced further during the year ended December 31, 2021. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.
Trade Discounts and Allowances:
We generally provide customers with discounts which include incentive fees that are explicitly stated in our contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, we compensate (through trade discounts and allowances) our customers for sales order management, data, and distribution services. However, we have determined such services received to date are not distinct from our sale of products to the customer and, therefore, these payments have been recorded as a reduction of revenue within the statement of operations.
Product Returns:
Consistent with industry practice, we offer the specialty pharmacies and specialty distributors limited product return rights for damaged and expiring products, provided it is within a specified period around the product expiration date as set forth in the applicable individual distribution agreement. We estimate the amount of our product sales that may be returned by our customers and record this estimate as a reduction of revenue in the period the related product revenue is recognized, as well as a reduction to accounts receivables, net on the consolidated balance sheets. We currently estimate product returns using our sales information, including our visibility into the inventory remaining in the distribution channel. We have an insignificant amount of returns to date and believe that returns of our products will continue to be minimal.
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Provider Chargebacks and Discounts:
Chargebacks for fees and discounts to providers represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to customers who directly purchase the product from us. Customers charge us for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and a reduction to accounts receivable, net on the consolidated balance sheets. Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider by customers, and we generally issue credits for such amounts within a few weeks of the customer’s notification to us of the resale. Chargebacks consist of credits that we expect to issue for units that remain in the distribution channel at each reporting period end that we expect will be sold to qualified healthcare providers, and chargebacks that customers have claimed, but for which we have not yet issued a payment.
Government Rebates:
We are subject to discount obligations under state Medicaid programs and Medicare. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses on the consolidated balance sheets. Our liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but which remains in the distribution channel at the end of each reporting period.
Payor Rebates:
We contract with certain private payor organizations, primarily insurance companies and pharmacy benefit managers, for the payment of rebates with respect to utilization of its products. We estimate these rebates and record such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability.
Other Incentives:
Other incentives which we offer include voluntary patient assistance programs, such as the co-pay assistance program, which are intended to provide financial assistance to qualified commercially-insured patients with prescription drug co-payments required by payors. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with product that has been recognized as revenue, but remains in the distribution channel at the end of each reporting period. The adjustments are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included as a component of accrued expenses on the consolidated balance sheets.
License Revenue:
We recognize license revenue under certain of our sub-license agreements that are within the scope of ASC 606. The terms of these agreements may contain multiple performance obligations, which may include licenses and research and development activities. We evaluate these agreements under ASC 606 to determine the distinct performance obligations. Non-refundable, up-front fees that are not contingent on any future performance and require no consequential continuing involvement by us, are recognized as revenue when the license term commences and the licensed data, technology or product is delivered. We defer recognition of non-refundable upfront license fees if the performance obligations are not satisfied.
Prior to recognizing revenue, we make estimates of the transaction price, including variable consideration that is subject to a constraint. Amounts of variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur and when the uncertainty associated with the variable consideration is subsequently resolved. Variable consideration may include nonrefundable upfront license fees, payments for research and development activities, reimbursement of certain third-party costs, payments based upon the achievement of specified milestones, and royalty payments based on product sales derived from the collaboration.
If there are multiple distinct performance obligations, we allocate the transaction price to each distinct performance obligation based on its relative standalone selling price. The standalone selling price is generally determined based on the prices charged to customers or using expected cost-plus margin. Revenue is recognized by measuring the progress toward complete satisfaction of the performance obligations using an input measure.
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Royalty Revenue:
For sub-license agreements that are within the scope of ASC 606, we recognize revenue when the related sales occur in accordance with the sales-based royalty exception under ASC 606-10-55-65. Royalty revenue consists of consideration earned related to international sales of NERLYNX made by our sub-licensees in their respective territories. We recognize royalty revenue when the performance obligations have been satisfied.
Legal Contingencies and Expense
For legal contingencies, we accrue a liability for an estimated loss if the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated. Legal fees and expenses are expensed as incurred based on invoices or estimates provided by legal counsel. We periodically evaluate available information, both internal and external, relative to such contingencies and adjust the accrual as necessary. We determine whether a contingency should be disclosed by assessing whether a material loss is deemed reasonably possible. In determining whether a loss should be accrued, we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of the loss (see Note 14-Commitments and Contingencies in the accompanying notes to the financial statements).
Recently Issued Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires that credit losses be reported using an expected losses model rather than the incurred losses model that is currently used, and establishes additional disclosures related to credit risks. For trade accounts receivable, we recognize credit losses based on lifetime expected losses using the probability of default method. For available-for-sale debt securities with unrealized losses, this standard now requires allowances to be recorded instead of reducing the amortized cost of the investment. These amendments under ASU 2016-13 are effective for interim and annual fiscal periods beginning after December 15, 2019. We adopted ASU 2016-13, and the adoption did not have a material effect on our current financial position, results of operations or financial statement disclosures.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. As of January 1, 2020, we adopted the amendments in ASU 2018-13, which modifies the disclosure requirements on fair value measurements. The removed and modified disclosures were adopted on a retrospective basis and the new disclosures were adopted on a prospective basis. The adoption of ASU 2018-13 did not have a material effect on our current financial position, results of operations or financial statement disclosures.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as part of its Simplification Initiative to reduce the cost and complexity in accounting for income taxes. The amendments in ASU 2019-12 remove certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of GAAP. The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. We do not expect ASU 2019-12 to have a material effect on our current financial position, results of operations or financial statement disclosures.