Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “may,” “might,” “can,” “will,” “to be,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “likely,” “continue,” “ongoing” or similar expressions, or the negative of such words, are intended to identify “forward-looking statements.” We have based these forward-looking statements on our current expectations and projections about future events. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include those below in this Quarterly Report on Form 10-Q and those in our Annual Report on Form 10-K, in each case under the caption “Risk Factors,” and in our other filings with the Securities and Exchange Commission, or SEC. Statements made herein are as of the date of the filing of this Form 10-Q with the SEC and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim, any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes for the year ended December 31, 2022, which are included in our Annual Report on Form 10-K filed with the SEC on February 23, 2023.
Overview
We are a clinical-stage biopharmaceutical company focused on developing novel drug candidates for immuno-inflammatory diseases. In addition to developing our novel drug candidates, we are pursuing strategic alternatives, including identifying and consummating transactions with third-party partners, to further develop, obtain marketing approval for and/or commercialize our novel drug candidates.
Development Programs
Zunsemetinib, an Investigational Oral MK2 Inhibitor
We are developing zunsemetinib, an investigational oral, novel, small molecule selective MK2 inhibitor, as a potential treatment for rheumatoid arthritis and psoriatic arthritis. MK2 is a key regulator of pro-inflammatory mediators including TNFα, IL1β, IL6, IL8, IL17 and other essential pathogenic signals in chronic immuno-inflammatory diseases, as well as in oncology. As an oral drug candidate, we are developing zunsemetinib as a potential alternative to injectable anti-TNF/IL1/IL6/IL17 biologics and JAK inhibitors for treating certain immuno-inflammatory diseases. Zunsemetinib has been adopted as the nonproprietary name for ATI-450.
Moderate to Severe Rheumatoid Arthritis
In December 2021, we initiated a Phase 2b randomized, multicenter, double-blind, parallel group, placebo-controlled, dose-ranging trial to investigate the efficacy, safety, tolerability, pharmacokinetics and pharmacodynamics of multiple doses (20 mg and 50 mg twice daily) of zunsemetinib in combination with methotrexate in subjects with moderate to severe rheumatoid arthritis (ATI-450-RA-202). This trial consists of a 12-week treatment period and a 30-day follow-up period and has completed enrollment of 251 subjects in the United States and in multiple countries in Europe. The primary endpoint is the proportion of subjects achieving ACR20 at week 12. We expect topline data in November 2023.
Moderate to Severe Psoriatic Arthritis
In June 2022, we initiated a Phase 2a, randomized, multicenter, double-blind, placebo-controlled trial to investigate the efficacy, safety, tolerability, pharmacokinetics, and pharmacodynamics of zunsemetinib (50 mg twice
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daily) in subjects with moderate to severe psoriatic arthritis (ATI-450-PsA-201). This trial consists of a 12-week treatment period and a 30-day follow-up period and seeks to enroll approximately 70 subjects in the United States and in Poland. The primary endpoint is the proportion of subjects achieving ACR20 at week 12. We expect topline data in the first half of 2024.
Moderate to Severe Hidradenitis Suppurativa
In December 2021, we initiated a Phase 2a, randomized, multicenter, double-blind, placebo-controlled trial to investigate the efficacy, safety, tolerability, pharmacokinetics and pharmacodynamics of zunsemetinib (50 mg twice daily) in subjects with moderate to severe hidradenitis suppurativa (ATI-450-HS-201). In March 2023, we announced that the study did not meet its primary or secondary efficacy endpoints. We do not plan to further pursue this indication.
ATI-1777, an Investigational Topical “Soft” JAK 1/3 Inhibitor
We are developing ATI-1777, an investigational topical “soft” JAK 1/3 inhibitor, as a potential treatment for mild to severe atopic dermatitis. “Soft” JAK inhibitors are designed to be topically applied and active in the skin, but rapidly metabolized and inactivated when they enter the bloodstream, which may result in low systemic exposure.
In May 2022, we initiated a Phase 2b, multicenter, randomized, double-blind, vehicle-controlled, parallel-group trial to determine the efficacy, safety, tolerability, and pharmacokinetics of ATI-1777 in subjects with moderate to severe atopic dermatitis (ATI-1777-AD-202). In April 2023, we expanded the patient population to include patients with mild disease. In this trial, we are exploring multiple concentrations of twice daily treatment with ATI-1777 and a single concentration of once daily treatment with ATI-1777. This trial consists of a 4-week treatment period and a 2-week follow-up period and has completed enrollment of 250 patients, including adults and children as young as 12 years old, across the United States. The primary endpoint is the percentage change from baseline in EASI score at week 4. We expect topline data around the end of 2023.
ATI-2138, an Investigational Oral Covalent ITK/JAK3 Inhibitor
We are developing ATI-2138, an investigational oral covalent ITK/JAK3 inhibitor, as a potential treatment for T cell-mediated autoimmune diseases. The ITK/JAK3 compound interrupts T cell signaling through the combined inhibition of ITK/JAK3 pathways in lymphocytes.
In October 2022, we submitted an IND for ATI-2138 for the treatment of ulcerative colitis, which was allowed by the FDA in November 2022. In December 2022, we initiated a two-week Phase 1 placebo-controlled, randomized, multiple ascending dose (MAD) trial to investigate the safety, tolerability, pharmacokinetics, and pharmacodynamics of ATI-2138 in healthy volunteers (ATI-2138-PKPD-102). The study enrolled 60 healthy subjects across 6 dosing cohorts ranging from 10 to 80 mg of total daily doses, with eight active and two placebo controlled per arm. Preliminary data from the trial demonstrated that ATI-2138 was generally well tolerated at all doses tested in the trial and had dose proportional pharmacokinetics. Additionally, ATI-2138 demonstrated a dose-dependent inhibition of both ITK and JAK3 exploratory pharmacodynamic biomarkers, with near maximal inhibition achieved at the 30 mg total daily dose. No serious adverse events were reported.
Based on the positive results of this study, we will progress this program into a Phase 2a proof of concept study in patients with ulcerative colitis. We anticipate initiation of this Phase 2a trial in early 2024.
We are also exploring the potential of conducting a second proof of concept trial of ATI-2138 in an additional T cell-mediated autoimmune disease.
ATI-2231, an Investigational Oral MK2 Inhibitor
We are exploring the use of ATI-2231, an investigational oral MK2 inhibitor designed to have a long half-life, as a potential treatment for pancreatic cancer and metastatic breast cancer as well as in preventing bone loss in patients with metastatic breast cancer. We are also currently exploring options to use ATI-2231 as a potential treatment for
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immuno-inflammatory diseases.
We are supporting Washington University in a first-in-human investigator-initiated Phase 1a trial of ATI-2231 in patients with advanced solid tumor malignancies. We expect clinical development activities to be initiated in the second half of 2023.
Discovery Programs
We conduct small molecule drug discovery and preclinical development research, including through KINect®, our proprietary drug discovery platform. We leverage our early research and development capabilities and KINect to identify potential drug candidates that we may develop independently or in collaboration with third parties.
Intellectual Property
Our success depends in large part upon our ability to obtain and maintain proprietary protection for our drug candidates and to operate without infringing the proprietary rights of others. We seek to avoid the latter by monitoring patents and publications that may affect our business, and to the extent we identify such developments, evaluating and taking appropriate courses of action. Our policy is to protect our proprietary position by, among other methods, filing patent applications on inventions that are important to the development and conduct of our business with the U.S. Patent and Trademark Office, or USPTO, and its foreign counterparts.
With respect to our MK2 signaling pathway inhibitor development program, we own numerous issued patents and pending applications to novel MK2 pathway inhibitors, including our lead candidate zunsemetinib, and various methods of use that expire, or would expire, between 2031 and 2041, subject to any applicable patent term adjustment or extension that may be available in a particular country. For example, we own two issued U.S. patents and issued patents and pending applications in the European Union and other foreign countries directed to zunsemetinib and analogs thereof and certain methods of using the same. The U.S. patents expire in 2034 and any claims that may issue from the pending applications expire in 2034, subject to any applicable adjustment or extension. We own one allowed U.S. application and numerous pending patent applications in the European Union and other foreign countries directed to methods of treating inflammatory conditions, such as rheumatoid arthritis and psoriatic arthritis, by orally administering zunsemetinib, which, if issued, would each expire in 2041, subject to any applicable adjustment or extension. Further, we own one U.S. patent and numerous pending patent applications in the U.S., European Union and other foreign countries directed to certain methods of manufacturing zunsemetinib and crystal forms of zunsemetinib, which, if issued, would each expire in 2041, subject to any applicable adjustment or extension. We also own pending patent applications in the U.S., European Union and other foreign countries directed to ATI-2231, and methods of use, which, if issued, would expire in 2040, subject to any applicable adjustment or extension.
With respect to our “soft” JAK inhibitor development program, we own numerous issued patents and pending applications in the U.S. and foreign countries to novel “soft” JAK inhibitors and various methods of use that expire, or would expire, between 2038 and 2042, subject to any applicable patent term adjustment or extension that may be available in a particular country. For example, we own issued patents in the U.S. and other foreign countries, as well as pending applications in the U.S. and foreign countries directed to various novel inhibitors of JAK1 and/or JAK3, including ATI-1777, and methods of using the same, which, if issued, would expire in 2038, subject to any applicable adjustment or extension. We also own pending applications in the U.S. and foreign countries directed to crystal forms of ATI-1777 and directed to methods of using ATI-1777 and topical formulations, which, if issued, would expire in 2041 and 2042, respectively, subject to any applicable adjustment or extension.
With respect to our ITK inhibitor development program, we own numerous issued U.S. patents and pending applications in the U.S. and foreign countries directed to novel inhibitors of ITK and methods of use that expire, or would expire, between 2035 and 2039, subject to any applicable patent term adjustment or extension that may be available in a particular country. For example, we own one U.S. patent and pending U.S., European Union and other foreign country applications directed to ATI-2138 and analogs thereof and methods of using the same, which, if issued, would expire in 2039, subject to any applicable adjustment or extension.
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Financial Overview
Since our inception, we have incurred significant net losses. Our net loss was $87.0 million for the nine months ended September 30, 2023 and $86.9 million for the year ended December 31, 2022. As of September 30, 2023, we had an accumulated deficit of $769.3 million. We expect to incur significant expenses and operating losses for the foreseeable future as we advance our drug candidates from discovery through preclinical and clinical development. In addition, our drug candidates, even if they are approved by regulatory agencies for marketing, may not achieve commercial success. We may also not be successful in pursuing strategic alternatives, including identifying and consummating transactions with third-party partners, to further develop, obtain marketing approval for and/or commercialize our drug candidates. Furthermore, we have incurred and expect to continue to incur significant costs associated with operating as a public company, including legal, accounting, investor relations and other expenses. We also expect to add additional personnel, as needed, to support our operational plans and strategic direction. As a result, we will need substantial additional funding to support our continuing operations.
We have historically financed our operations primarily with sales of equity securities and incurring indebtedness in the form of loans from commercial lenders. In the near term, we expect to finance our operations through these and other capital sources, including potential partnerships with other companies or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on commercially acceptable terms, or at all. If we fail to raise capital or enter into such agreements as, and when needed, we may have to significantly delay, scale back or discontinue the development of one or more of our drug candidates.
Impact of Macroeconomic Conditions on Our Business
Unfavorable conditions in the economy both in the United States and abroad may negatively affect the growth of our business and our results of operations. For example, macroeconomic events, including rising inflation, the U.S. Federal Reserve raising interest rates, the closure of financial institutions and the Russia-Ukraine war, have led to economic uncertainty globally. The effect of macroeconomic conditions may not be fully reflected in our results of operations until future periods. If, however, economic uncertainty increases or the global economy worsens, our business, financial condition and results of operations may be harmed.
Acquisition and License Agreements
Agreement and Plan of Merger with Confluence
In 2017, we entered into an Agreement and Plan of Merger, or the Confluence Agreement, with Confluence Life Sciences, Inc. (now known as Aclaris Life Sciences, Inc.), or Confluence, Aclaris Life Sciences, Inc., our wholly owned subsidiary, or Merger Sub, and Fortis Advisors LLC, as representative of the equity holders of Confluence. Pursuant to the terms of the Confluence Agreement, Merger Sub merged with and into Confluence, with Confluence surviving as our wholly owned subsidiary.
Under the Confluence Agreement, we have agreed to pay the former Confluence equity holders aggregate remaining contingent consideration of up to $75.0 million based upon the achievement of specified regulatory and commercial milestones set forth in the Confluence Agreement. In addition, we have agreed to pay the former Confluence equity holders future royalty payments calculated as a low single-digit percentage of annual net sales, subject to specified reductions, limitations and other adjustments, until the date that all of the patent rights for that product have expired, as determined on a country-by-country and product-by-product basis or, in specified circumstances, ten years from the first commercial sale of such product. In addition to the payments described above, if we sell, license or transfer any of the intellectual property acquired from Confluence pursuant to the Confluence Agreement to a third party, we will be obligated to pay the former Confluence equity holders a portion of any consideration received from such sale, license, or transfer in specified circumstances.
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Asset Purchase Agreement with EPI Health
In 2019, we entered into an asset purchase agreement with EPI Health, LLC, or EPI Health, pursuant to which we sold the worldwide rights to RHOFADE (oxymetazoline hydrochloride) cream, 1%, or RHOFADE, which included the assignment of certain licenses for related intellectual property assets (such transaction, the “Disposition”).
Pursuant to the asset purchase agreement, EPI Health paid us closing consideration of $35.2 million. In addition, EPI Health agreed to pay us (i) potential sales milestone payments of up to $20.0 million in the aggregate upon the achievement of specified levels of net sales of products covered by the agreement, (ii) a specified high single-digit royalty calculated as a percentage of net sales, on a product-by-product and country-by-country basis, until the date that the patent rights related to a particular product, such as RHOFADE, have expired, provided, that with respect to sales of RHOFADE in any territory outside of the United States, such royalty shall be paid on a country-by-country basis until the date that the RHOFADE patent rights in the particular country have expired or, if later, 10 years from the date of the first commercial sale of RHOFADE in such country and (iii) 25% of any upfront, license, milestone, maintenance or fixed payment received by EPI Health in connection with any license or sublicense of the assets transferred in the Disposition in any territory outside of the United States, subject to specified exceptions. In addition, EPI Health agreed to assume our obligation to pay specified royalties and milestone payments under certain agreements with third parties.
On July 17, 2023, EPI Health filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. Through the bankruptcy process, EPI Health and its parent company, Novan, Inc., sold the RHOFADE assets to a third party. Under the sale agreement, our asset purchase agreement with EPI Health was not assumed by the buyer, and as a result, the buyer is not obligated to continue to pay us royalties or milestones on future sales of RHOFADE, nor is the buyer obligated to cure the outstanding amounts in default by EPI Health. The sale was approved by the bankruptcy court on September 12, 2023. As a result of the bankruptcy proceedings, we recorded an allowance for doubtful accounts resulting in $0.3 million of bad debt expense for the three months ended September 30, 2023, and $1.3 million of bad debt expense for the nine months ended September 30, 2023, representing all amounts that were due and outstanding by EPI Health.
License Agreement with Eli Lilly and Company
In August 2022, we entered into a non-exclusive patent license agreement with Eli Lilly and Company, or Lilly. Under the license agreement, we granted Lilly non-exclusive rights under certain patents and patent applications that we exclusively license from a third party. The patents and patent applications relate to the use of baricitinib, Lilly’s JAK inhibitor, to treat alopecia areata. Under the license agreement, Lilly has agreed to pay us an upfront payment, regulatory and commercial milestone payments, anniversary payments, and a low single-digit royalty calculated as a percentage of Lilly’s net sales of baricitinib for the treatment of alopecia areata. We have separate contractual obligations under which we have agreed to pay to third parties an amount equal to any regulatory and commercial milestone payments we receive under the Lilly license agreement, as well as a portion of the upfront consideration and a portion of the royalties we may receive under the license agreement.
During the three and nine months ended September 30, 2023, we recorded $8.3 million and $10.7 million in royalties, commercial milestones and anniversary milestones, respectively, from Lilly, a portion of which is payable to third parties. During each of the three and nine months ended September 30, 2022, we recorded $17.6 million in upfront payment and regulatory milestones, respectively, from Lilly, a portion of which was payable to third parties.
License Agreement with Pediatrix Therapeutics, Inc.
In November 2022, we entered into a license agreement with Pediatrix Therapeutics, Inc., or Pediatrix, under which we granted Pediatrix the exclusive rights to develop, manufacture and commercialize ATI-1777 in Greater China. Pediatrix has agreed to pay us an upfront payment, development, regulatory and commercial milestone payments, and a tiered royalty ranging from a low-to-high single digit percentage of net sales of ATI-1777 by Pediatrix in Greater China. A portion of consideration received from Pediatrix is payable to the former Confluence equity holders as described above.
Upon execution of the agreement, we received an upfront payment of $5.0 million from Pediatrix, a portion of
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which was paid to the former Confluence equity holders as described above.
Components of Our Results of Operations
Revenue
Contract Research
We earn revenue from the provision of laboratory services. Contract research revenue is generally evidenced by contracts with clients which are on an agreed upon fixed-price, fee-for-service basis and are generally billed on a monthly basis in arrears for services rendered.
Licensing
Licensing revenue primarily consists of upfront consideration, royalties and milestone payments earned pursuant to license and acquisition agreements with third parties, as described above.
Other
Other revenue consists of amounts earned from the sub-sublease of our office space, which was terminated during the year ended December 31, 2022.
Cost and Expenses
Cost of Revenue
Cost of revenue consists of the costs incurred in connection with the provision of contract research services. Cost of revenue primarily includes:
● employee-related expenses, which include salaries, benefits, and stock-based compensation;
● outsourced professional scientific services;
● depreciation of laboratory equipment;
● facility-related costs; and
● laboratory materials and supplies used to support the services provided.
Research and Development
Research and development expenses consist of expenses incurred in connection with the discovery and development of our drug candidates. These expenses primarily include:
● expenses incurred under agreements with contract research organizations, or CROs, as well as clinical trial sites and consultants that conduct our clinical trials and preclinical studies, and investigator-initiated trials;
● manufacturing scale-up expenses and the cost of acquiring and manufacturing active pharmaceutical ingredients and preclinical and clinical trial materials, including domestic technology transfer expenses;
● quality assurance and quality control costs;
● outsourced professional scientific development services;
● medical affairs expenses related to our drug candidates;
● employee-related expenses, which include salaries, benefits, and stock-based compensation;
● expenses relating to regulatory activities, including filing fees paid to regulatory agencies; and
● laboratory materials and supplies used to support our research activities.
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Research and development activities are central to our business model. Drug candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect to continue to incur research and development expenses in the near term as we continue the clinical development of zunsemetinib as a potential treatment for moderate to severe rheumatoid arthritis and moderate to severe psoriatic arthritis, ATI-1777 as a potential treatment for mild to severe atopic dermatitis and ATI-2138 as a potential treatment for T cell-mediated autoimmune diseases, and as we continue the development of our preclinical compounds and discover and develop additional drug candidates. We expense research and development costs as incurred. Our direct research and development expenses primarily consist of external costs including fees paid to CROs, consultants, clinical trial sites, regulatory agencies and third parties that manufacture our preclinical and clinical trial materials and are tracked on a program-by-program basis. We do not allocate personnel costs or other indirect expenses to specific research and development programs.
The successful development of our drug candidates is highly uncertain. We cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of, or when, if ever, material net cash inflows may commence from any of our drug candidates. This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of many factors, including:
● the number of clinical sites included in the trials;
● the length of time required to enroll suitable subjects;
● the number of subjects that ultimately participate in the trials;
● the number of doses subjects receive;
● the impact on the recruitment, enrollment, conduct and timing of our clinical trials due to macroeconomic conditions;
● the duration of subject follow-up; and
● the results of our clinical trials.
Our expenditures are subject to additional uncertainties, including the preparation of regulatory filings for our drug candidates. We may obtain unexpected results from our clinical trials or other development activities. We may elect to discontinue, delay, or modify the development, including clinical trials, of some drug candidates or focus on others. A change in the outcome of any of these variables with respect to the development of a drug candidate could mean a significant change in the costs and timing associated with the development of that drug candidate. For example, if the FDA or other regulatory authorities were to require us to conduct clinical trials beyond those that we currently anticipate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.
General and Administrative
General and administrative expenses consist principally of salaries and related costs, including stock-based compensation, for personnel in executive, administrative, finance and legal functions. General and administrative expenses also include facility-related costs, patent filing and prosecution costs, professional fees for legal, auditing and tax services, investor relations costs, business development costs, insurance costs, travel expenses and bad debt expense.
Licensing
Licensing expenses consist of third-party contractual obligations incurred under license and acquisition agreements with third parties, as described above.
Revaluation of Contingent Consideration
Revaluation of contingent consideration consists of changes in the fair value of our contingent consideration liability between reporting dates.
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Other Income, Net
Other income, net primarily consists of interest earned on our cash, cash equivalents and marketable securities.
Critical Accounting Estimates
This discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under 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. We evaluate our estimates and judgments on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. There have been no material changes to our significant accounting policies and use of estimates as disclosed in the footnotes to our audited consolidated financial statements for the year ended December 31, 2022 included in our Annual Report on Form 10-K filed with the SEC on February 23, 2023.
Contingent Consideration
We initially recorded a contingent consideration liability at fair value on the date of acquisition related to future potential payments resulting from the acquisition of Confluence based upon significant unobservable inputs including the achievement of development, regulatory and commercial milestones, as well as estimated future sales levels and the discount rates applied to calculate the present value of the potential payments. Significant judgement was involved in determining the appropriateness of these assumptions. These assumptions are considered Level 3 inputs. Revaluation of our contingent consideration liability can result from changes to one or more of these assumptions. These assumptions are highly dependent on the outcome and timing of the development of our drug candidates. We evaluate the fair value estimate of our contingent consideration liability on a quarterly basis with changes, if any, recorded as income or expense in our consolidated statement of operations. Any such changes could have a material impact on our financial results.
The fair value of contingent consideration is estimated using a probability-weighted expected payment model for regulatory milestone payments and a Monte Carlo simulation model for commercial milestone and royalty payments and then applying a risk-adjusted discount rate to calculate the present value of the potential payments. Significant assumptions used in our estimates include the probability of achieving regulatory milestones and commencing commercialization, which are based on an asset’s current stage of development and a review of existing clinical data. Probability of success assumptions ranged between 17% and 41% on September 30, 2023. Additionally, estimated future sales levels and the risk-adjusted discount rate applied to the potential payments are also significant assumptions used in calculating the fair value. The discount rate ranged between 9.3% and 10.4% depending on the year of each potential payment.
During the nine months ended September 30, 2023, we removed estimated sales from zunsemetinib for moderate to severe hidradenitis suppurativa following our decision to cease pursuing that indication. As a result of this, as well as due to higher discount rates resulting from higher risk-free rates and changes in credit spreads being applied to potential payments relative to prior periods, we recorded an overall decrease in contingent consideration of $0.6 million. This decrease was partially offset by an increase in the probability of success of ATI-2138, as well as the passage of time.
During the nine months ended September 30, 2022, we did not modify any significant assumptions; however, due to higher discount rates resulting from higher risk-free rates and wider credit spreads being applied to potential payments relative to prior periods, we recorded an overall decrease in contingent consideration of $2.4 million. This decrease was partially offset by increases as a result of the impact of the passage of time.
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Results of Operations
Comparison of Three and Nine Months Ended September 30, 2023 and 2022
Three Months Ended September 30,
Nine Months Ended September 30,
(In thousands)
2023
2022
Change
2023
2022
Change
Revenues:
Contract research
$
705
$
1,090
$
(385)
$
2,469
$
3,529
$
(1,060)
Licensing
8,577
17,898
(9,321)
11,210
18,378
(7,168)
Other
—
30
(30)
—
92
(92)
Total revenue
9,282
19,018
(9,736)
13,679
21,999
(8,320)
Costs and expenses:
Cost of revenue
848
923
(75)
2,698
3,146
(448)
Research and development
23,876
23,656
220
71,738
56,741
14,997
General and administrative
7,091
5,813
1,278
24,198
17,987
6,211
Licensing
7,344
7,300
44
8,955
7,300
1,655
Revaluation of contingent consideration
1,700
2,200
(500)
(600)
(2,400)
1,800
Total costs and expenses
40,859
39,892
967
106,989
82,774
24,215
Loss from operations
(31,577)
(20,874)
(10,703)
(93,310)
(60,775)
(32,535)
Other income, net
2,316
922
1,394
6,320
1,502
4,818
Net loss
$
(29,261)
$
(19,952)
$
(9,309)
$
(86,990)
$
(59,273)
$
(27,717)
Revenue
Contract research
Contract research revenue was $0.7 million and $1.1 million for the three months ended September 30, 2023 and 2022, respectively, and was comprised of fees earned from the provision of laboratory services. The decrease was driven by lower overall hours billed and a lower average billing rate.
Contract research revenue was $2.5 million and $3.5 million for the nine months ended September 30, 2023 and 2022, respectively, and was comprised of fees earned from the provision of laboratory services. The decrease was primarily driven by lower overall hours billed.
Licensing
Licensing revenue was $8.6 million and $17.9 million for the three months ended September 30, 2023 and 2022, respectively. The decrease was primarily driven by a one-time upfront payment under the Lilly license agreement during the three months ended September 30, 2022.
Licensing revenue was $11.2 million and $18.4 million for the nine months ended September 30, 2023 and 2022, respectively. The decrease was primarily driven by a one-time upfront payment under the Lilly license agreement during the nine months ended September 30, 2022.
Other
Other revenue was $30 thousand for the three months ended September 30, 2022, and $92 thousand for the nine months ended September 30, 2022, which was comprised of rent received from the sub-sublease of our office space. The sub-sublease was terminated in December 2022.
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Costs and Expenses
Cost of Revenue
Cost of revenue was $0.8 million and $0.9 million for the three months ended September 30, 2023 and 2022, respectively, and in each case, related to providing laboratory services. Changes in cost of revenue generally correlate to changes in contract research revenue. Cost of revenue decreased in the three months ended September 30, 2023 compared to the corresponding prior year period due to lower variable costs resulting from a decrease in hours billed.
Cost of revenue was $2.7 million and $3.1 million for the nine months ended September 30, 2023 and 2022, respectively, and in each case, related to providing laboratory services. Changes in cost of revenue generally correlate to changes in contract research revenue. Cost of revenue decreased in the nine months ended September 30, 2023 compared to the corresponding prior year period due to lower variable costs resulting from a decrease in hours billed.
Research and Development
The following table summarizes our research and development expenses by drug candidate or, for unallocated expenses, by type:
Three Months Ended
Nine Months Ended
September 30,
September 30,
(In thousands)
2023
2022
Change
2023
2022
Change
Zunsemetinib
$
6,921
$
10,182
$
(3,261)
$
22,371
$
21,500
$
871
ATI-1777
2,556
3,354
(798)
7,848
9,220
(1,372)
ATI-2138
3,220
1,793
1,427
9,851
4,060
5,791
ATI-2231
745
1,308
(563)
1,265
4,397
(3,132)
Discovery
1,994
1,141
853
4,976
3,411
1,565
Other research and development
957
418
539
2,341
1,084
1,257
Personnel
4,411
4,060
351
13,918
10,841
3,077
Stock-based compensation
3,072
1,400
1,672
9,168
2,228
6,940
Total research and development expenses
$
23,876
$
23,656
$
220
$
71,738
$
56,741
$
14,997
Zunsemetinib
The decrease in expenses for zunsemetinib during the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was primarily due to a decrease in costs associated with clinical development activities for a Phase 2a trial in subjects with hidradenitis suppurativa, which initiated in December 2021 and was completed in early March 2023.
The increase in expenses for zunsemetinib during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to higher costs associated with drug candidate manufacturing and costs associated with clinical development activities for a Phase 2b trial in subjects with rheumatoid arthritis, which initiated in December 2021, and several ancillary clinical trials. The increase was partially offset by a decrease in costs associated with clinical development activities for a Phase 2a trial in subjects with hidradenitis suppurativa, which initiated in December 2021 and was completed in early March 2023.
ATI-1777
The decrease in expenses for ATI-1777 during the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022 was primarily due to lower costs associated with drug candidate manufacturing and other preclinical development activities. The decrease was partially offset by an increase in costs associated with a Phase 2b clinical trial in subjects with atopic dermatitis.
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ATI-2138
The increase in expenses for ATI-2138 during the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022 was primarily due to an increase in clinical development expenses associated with a Phase 1 MAD trial, as well as an increase in preclinical development activities and ancillary studies.
ATI-2231
The decrease in expenses for ATI-2231 during the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022 was primarily due to preclinical development activities, IND-enabling studies and drug manufacturing in the prior period as we progressed the program toward IND submission in 2023.
Discovery
The increase in expenses related to discovery during the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022 was due to continued investment in our discovery-stage programs as we progressed programs toward candidate selection.
Personnel and stock-based compensation
The increase in personnel and stock-based compensation expenses in the aggregate during the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was primarily due to an increase in costs associated with higher average headcount and equity awards granted in 2023.
The increase in personnel and stock-based compensation expenses in the aggregate during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to an increase in costs associated with higher average headcount, compensation adjustments and equity awards granted in 2023, and lower costs during the nine months ended September 30, 2022 due to forfeiture credits.
General and Administrative
The following table summarizes our general and administrative expenses:
Three Months Ended
Nine Months Ended
September 30,
September 30,
(In thousands)
2023
2022
Change
2023
2022
Change
Personnel
$
1,893
$
1,283
$
610
$
5,766
$
4,221
$
1,545
Professional and legal fees
1,042
877
165
4,207
3,167
1,040
Facility and support services
738
601
137
2,213
1,692
521
Other general and administrative
596
571
25
1,709
1,746
(37)
Stock-based compensation
2,529
2,481
48
8,989
7,161
1,828
Bad debt
293
—
293
1,314
—
1,314
Total general and administrative expenses
$
7,091
$
5,813
$
1,278
$
24,198
$
17,987
$
6,211
Personnel and stock-based compensation
Personnel and stock-based compensation expenses in the aggregate increased during the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022 primarily due to higher average headcoun t, compensation adjustments, and equity awards granted in 2023.
Professional and legal fees
Professional and legal fees, including accounting, investor relations and corporate communication costs, increased during the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022. The increase during the three months ended September 30, 2023 compared to the three months ended
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September 30, 2022 was primarily driven by an increase in accounting related expenses. The increase during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily driven by an increase in patent and accounting related expenses.
Facility and support services
Facility and support services, including general office expenses, information technology costs and other expenses, increased during the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022 primarily as a result of an increase in rent expense due to leasing additional office and laboratory space and an increase in information technology costs during the three and nine months ended September 30, 2023.
Bad debt
Bad debt expenses were related to our determination that amounts due to us as of September 30, 2023 pursuant to the asset purchase agreement with EPI Health are uncertain as a result of the bankruptcy filing by EPI Health, which was initiated in July 2023.
Licensing
Licensing expenses during the three and nine months ended September 30, 2023 and 2022 were related to amounts payable to third parties pertaining to the Lilly agreement.
Revaluation of Contingent Consideration
The loss on revaluation of contingent consideration decreased during the three months ended September 30, 2023 compared to the three months ended September 30, 2022 and was mainly due to the modification of a valuation model assumption during the three months ended September 30, 2022.
The gain on revaluation of contingent consideration decreased during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 and was mainly driven by changes in discount rates, including risk-free rates and credit spreads, on potential future payments, as well as an increase in the probability of success of ATI-2138 during the nine months ended September 30, 2023. This decrease was partially offset by the removal of estimated future sales levels of zunsemetinib for moderate to severe hidradenitis suppurativa following our decision to cease pursuing this indication during the nine months ended September 30, 2023.
Other Income, net
Other income, net increased during the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022, primarily due to higher interest income on investment portfolio balances.
Liquidity and Capital Resources
Overview
Since our inception, we have incurred net losses and negative cash flows from our operations. Prior to our acquisition of Confluence, we did not generate any revenue. We have financed our operations over the last several years primarily through sales of our equity securities and incurring indebtedness in the form of loans from commercial lenders. We may engage in additional debt and equity financing transactions in order to raise funds. We may also receive royalties and milestone payments under existing license and acquisition agreements with third parties. In addition, to the extent we are able to consummate transactions with potential third-party partners to further develop, obtain marketing approval for and/or commercialize our drug candidates, we may receive upfront payments, milestone payments or royalties from such arrangements that would increase our liquidity.
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As of September 30, 2023, we had cash, cash equivalents and marketable securities of $187.0 million. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view towards liquidity and capital preservation.
We currently have no ongoing material financing commitments, such as lines of credit or guarantees, that are expected to affect our liquidity, other than our contingent obligations under the Confluence Agreement, which is summarized above under “Overview—Acquisition and License Agreements, ” and our lease obligations.
Equity Financing
Sale of Common Stock under At-the-Market-Facility
In April 2023, we sold 3.4 million shares of our common stock for aggregate gross proceeds of $27.5 million, pursuant to a sales agreement with SVB Securities LLC and Cantor Fitzgerald & Co., as sales agents, dated February 23, 2023. We paid selling commissions of $0.8 million in connection with the sale.
In April 2022, we sold 4.8 million shares of our common stock for aggregate gross proceeds of $75.0 million, pursuant to a sales agreement with SVB Securities LLC and Cantor Fitzgerald & Co., as sales agents, dated May 20, 2021. We paid selling commissions and other fees of $2.3 million in connection with the sale.
Cash Flows
Cash and cash equivalents were $39.0 million as of September 30, 2023 compared to $45.3 million as of December 31, 2022. We also had $148.0 million in short- and long-term marketable securities as of September 30, 2023 compared to $184.5 million as of December 31, 2022.
The sources and uses of cash that contributed to the change in cash and cash equivalents were:
Nine Months Ended
September 30,
(In thousands)
2023
2022
Cash and cash equivalents beginning balance
$
45,277
$
27,349
Net cash used in operating activities
(71,564)
(48,452)
Net cash provided by investing activities
38,670
9,926
Net cash provided by financing activities
26,657
72,830
Cash and cash equivalents ending balance
$
39,040
$
61,653
Operating Activities
Cash flow related to operating activities was the result of:
Nine Months Ended
September 30,
(In thousands)
2023
2022
Net loss
$
(86,990)
$
(59,273)
Non-cash adjustments to reconcile net loss to net cash used in operating activities
19,311
8,433
Change in accounts payable and accrued expenses
5,270
(1,046)
Change in accounts receivable
138
26
Change in prepaid expenses and other assets
(9,293)
3,408
Net cash used in operating activities
$
(71,564)
$
(48,452)
Net cash used in operating activities increased for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily as a result of higher net losses after adjusting for non-cash items.
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The increase in non-cash adjustments to reconcile net loss to net cash used in operating activities was mainly driven by an increase in stock-based compensation expense during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 due to higher employee headcount and equity awards granted in 2023, as well as forfeiture credits recognized during the nine months ended September 30, 2022, and licensing expenses pertaining to the Lilly agreement payable to third parties. This increase was partially offset by a decrease in the gain on revaluation of contingent consideration during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 mainly driven by changes in discount rates, including risk-free rates and credit spreads, on potential future payments, as well as an increase in the probability of success of ATI-2138 during the nine months ended September 30, 2023. This decrease was partially offset by the removal of estimated future sales levels of zunsemetinib for moderate to severe hidradenitis suppurativa following our decision to cease pursuing this indication during the nine months ended September 30, 2023.
Investing Activities
Cash flow related to investing activities was the result of:
Nine Months Ended
September 30,
(In thousands)
2023
2022
Purchases of property and equipment
$
(868)
$
(500)
Purchases of marketable securities
(135,675)
(118,729)
Proceeds from sales and maturities of marketable securities
175,213
129,155
Net cash provided by investing activities
$
38,670
$
9,926
The increase in net cash provided by investing activities for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 resulted primarily from higher sales and maturities of marketable securities during the nine months ended September 30, 2023, which were used to fund our operations, partially offset by higher purchases of marketable securities during the nine months ended September 30, 2023.
Financing Activities
Cash flow related to financing activities was the result of:
Nine Months Ended
September 30,
(In thousands)
2023
2022
Proceeds from issuance of common stock under the at-the-market sales agreement, net of
issuance costs
$
26,714
$
72,744
Payments of employee withholding taxes related to restricted stock unit award vesting
(102)
(34)
Proceeds from exercise of employee stock options and the issuance of stock
45
120
Net cash provided by financing activities
$
26,657
$
72,830
Net cash provided by financing activities decreased for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily due to larger proceeds in 2022 from sales under our at-the-market sales agreement.
Funding Requirements
We anticipate we will incur net losses in the near term as we continue the clinical development of zunsemetinib as a potential treatment for moderate to severe rheumatoid arthritis and moderate to severe psoriatic arthritis, ATI-1777 as a potential treatment for mild to severe atopic dermatitis and ATI-2138 as a potential treatment for T cell-mediated autoimmune diseases, continue the development of our preclinical compounds, and continue to discover and develop additional drug candidates. We may not be able to generate revenue from these programs if, among other things, our clinical trials are not successful, the FDA does not approve our drug candidates currently in clinical trials when we expect,
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or at all, or we are not able to identify and consummate transactions with third-party partners to further develop, obtain marketing approval for and/or commercialize our drug candidates.
Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, clinical costs, external research and development services, laboratory and related supplies, legal and other regulatory expenses, and administrative and overhead costs. We expect to add additional personnel to support our operational plans and strategic direction. Our future funding requirements will be heavily determined by the resources needed to support the development of our drug candidates.
As a publicly traded company, we incur and will continue to incur significant legal, accounting, and other similar expenses. In addition, the Sarbanes-Oxley Act of 2002, as well as rules adopted by the SEC and the Nasdaq Stock Market LLC, requires public companies to implement specified corporate governance practices that could increase our compliance costs.
We believe our existing cash, cash equivalents and marketable securities are sufficient to fund our operating and capital expenditure requirements for a period greater than 12 months from the date of issuance of our condensed consolidated financial statements that appear in Item 1 of this Quarterly Report on Form 10-Q based on our current operating assumptions. We will require additional capital to complete the clinical development of zunsemetinib, ATI-1777 and ATI-2138, to develop our preclinical compounds, and to support our discovery efforts. Additional funds may not be available on a timely basis, on commercially acceptable terms, or at all, and such funds, if raised, may not be sufficient to enable us to continue to implement our long-term business strategy. Our ability to raise additional capital may be adversely impacted by potentially worsening global economic conditions caused by a variety of factors including geopolitical tensions, rising interest rates, the closure of financial institutions and inflationary pressures. If we are unable to raise sufficient additional capital or generate revenue from transactions with potential third-party partners for the development and/or commercialization of our drug candidates, we may need to substantially curtail our planned operations.
We may raise additional capital through the sale of equity or debt securities. In such an event, our stockholders’ ownership will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of a holder of our common stock.
Because of the numerous risks and uncertainties associated with research and development of pharmaceutical drugs, we are unable to estimate the exact amount of our working capital requirements. Our funding requirements in the near term will depend on many factors, including:
● the number and development requirements of the drug candidates that we may pursue;
● the scope, progress, results and costs of preclinical development, laboratory testing and conducting preclinical and clinical trials for our drug candidates;
● the costs, timing, and outcome of regulatory review of our drug candidates;
● the extent to which we in-license or acquire additional drug candidates and technologies;
● the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;
● the impact on the timing of our preclinical studies, the recruitment, enrollment, conduct and timing of our clinical trials and our business due to macroeconomic conditions, including the Russia-Ukraine war;
● our ability to identify and consummate transactions with third-party partners to further develop, obtain marketing approval for and/or commercialize our drug candidates; and
● our ability to earn revenue as a result of licenses to, or partnerships or other arrangements with, third parties.
Leases
We occupied space for our headquarters in Wayne, Pennsylvania under a sublease agreement, which expired as of October 31, 2023. We also occupy office and laboratory space in St. Louis, Missouri under a sublease agreement which has a term through June 2029. In February 2023, we added an additional 6,261 square feet of office and laboratory space in St. Louis, Missouri.
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Our aggregate remaining lease payment obligations for these two spaces was $2.8 million as of September 30, 2023.
As of November 1, 2023, we occupy 11,564 square feet of office space for our headquarters in Wayne, Pennsylvania under a lease agreement which has a term that runs through March 2029. Total lease payment obligations for the life of the lease are $2.0 million.
Agreement and Plan of Merger – Confluence
Under the Confluence Agreement, we have agreed to pay the former Confluence equity holders aggregate remaining contingent consideration of up to $75.0 million based upon the achievement of specified regulatory and commercial milestones set forth in the Confluence Agreement. In addition, we have agreed to pay the former Confluence equity holders future royalty payments calculated as a low single-digit percentage of annual net sales, subject to specified reductions, limitations and other adjustments, until the date that all of the patent rights for that product have expired, as determined on a country-by-country and product-by-product basis or, in specified circumstances, ten years from the first commercial sale of such product. In addition to the payments described above, if we sell, license or transfer any of the intellectual property acquired from Confluence pursuant to the Confluence Agreement to a third party, we will be obligated to pay the former Confluence equity holders a portion of any consideration received from such sale, license, or transfer in specified circumstances.
R&D Obligations
We enter into contracts in the normal course of business with CROs, contract manufacturing organizations and other service providers for clinical trials, preclinical studies and testing, manufacturing and other services and products for operating purposes. These contracts generally provide for termination upon notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.
Segment Information
We have two reportable segments, therapeutics, and contract research. The therapeutics segment is focused on identifying and developing innovative therapies to address significant unmet needs for immuno-inflammatory diseases. The contract research segment earns revenue from the provision of laboratory services.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.