What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-05-07 compared with 2023-11-06 · 128 added, 208 removed, 203 unchanged (62% of the section changed)

8 unchanged sentences

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

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.

Our proprietary KINect drug discovery platform combined with our preclinical development capabilities allows us to identify and advance potential drug candidates that we may develop independently or in collaboration with third parties.

In addition to identifying and 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.

We also provide contract research services to third parties enabled by our early-stage research and development expertise.

In January 2024, we announced that we are undertaking a strategic review of our business.

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.

ATI-2138 is an investigational oral covalent inhibitor of interleukin-2-inducible T cell kinase, or ITK, and Janus kinase, or JAK, 3 for the potential treatment of 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.

In September 2023, we announced positive results from our two-week Phase 1 placebo-controlled, randomized, multiple ascending dose, or MAD, trial of ATI-2138 (ATI-2138-PKPD-102).

ATI-2138-PKPD-201 was designed to investigate the safety, tolerability, pharmacokinetics, or PK, and pharmacodynamics of ATI-2138 in healthy volunteers.

The trial enrolled 60 healthy volunteers across 6 dosing cohorts ranging from 10 to 80 mg of total daily doses, with eight volunteers receiving ATI-2138 and two volunteers receiving placebo in each arm.

Data from the trial demonstrated that ATI-2138 was generally well tolerated at all doses tested and had dose proportional PK.

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

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.

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.

We plan to progress ATI-2138 into a Phase 2a trial in subjects with moderate to severe atopic dermatitis.

Lepzacitinib, an Investigational Topical “Soft” JAK 1/3 Inhibitor

Lepzacitinib, also referred to as ATI-1777, is an investigational topical “soft” JAK 1/3 inhibitor for the potential treatment of atopic dermatitis and other dermatologic conditions.

Lepzacitinib has been adopted as the nonproprietary name for ATI-1777.

In January 2024, we announced positive top-line results from our Phase 2b multicenter, randomized, double-blind, vehicle-controlled, parallel-group trial of lepzacitinib in patients with mild to severe atopic dermatitis (ATI-1777-AD-202).

ATI-1777-AD-202 was designed to evaluate the efficacy, safety, tolerability and PK of multiple concentrations (0.5%, 1% and 2%) of twice daily, or BID, treatment with lepzacitinib and a single concentration (2%) of once daily, or QD, treatment with lepzacitinib.

The trial randomized 250 patients with mild, moderate or severe atopic dermatitis, including adults and children as young as 12 years old, across 30 clinical trial sites in the United States.

The trial met the primary efficacy endpoint, the percent change from baseline in the Eczema Area and Severity Index, or EASI, score at week 4, with statistical significance for patients treated with lepzacitinib 2% BID compared to patients treated with vehicle (69.7% versus 58.7% in the pooled vehicle group, p=0.035).

In addition, a PK analysis showed minimal levels of exposure to lepzacitinib.

The mean steady state trough drug levels at week 4 were 0.319 ng/mL, representing 0.7% of IC50 for JAK 1/3 inhibition in whole blood.

In total, 97% of lepzacitinib plasma samples from dosed patients had concentrations below 1/10th of the IC50, and six samples (from five lepzacitinib treated patients) of 570 samples analyzed had concentrations above 1/4 of the IC50.

No meaningful safety findings were observed and lepzacitinib was well tolerated.

We are currently seeking a global development and commercialization partner for this program (excluding Greater China).

In 2022, we granted Pediatrix Therapeutics, Inc.

exclusive rights to develop and commercialize lepzacitinib in Greater China.

Zunsemetinib, an Investigational Oral MK2 Inhibitor

Zunsemetinib, or ATI-450, is an investigational oral, novel, small molecule selective MK2 inhibitor for the potential treatment of metastatic breast cancer, or MBC, and pancreatic ductal adenocarcinoma, or PDAC.

We plan to support Washington University in St.

Louis in its investigator-initiated Phase 1b/2 trials of zunsemetinib in patients with MBC and PDAC .

We expect these trials to be primarily funded by grants awarded to Washington University.

Discovery Programs and KINect Drug Discovery Platform

We conduct small molecule drug discovery and preclinical development research through KINect, our proprietary drug discovery platform.

Our KINect platform enables us to identify potential drug candidates through a unique combination of our proprietary chemical library of kinase inhibitors, our novel approaches to inhibitor modalities, our expertise in structure-based drug design, and our custom kinase assays.

Our focus has been on difficult to drug kinase targets that exhibit some level of clinical, genetic and/or pharmacological disease validation.

Our approach involves the following mechanisms:

(1) reversible and irreversible covalent inhibitors, (2) molecular glue/complex targeted inhibitors and (3) targeted protein degraders.

These novel approaches are currently being utilized to prosecute additional validated, difficult to drug kinase targets with the goal of demonstrating potential platform utility.

We are actively progressing several discovery programs focused on delivering the next wave of drug candidates from our KINect platform.

Our discovery efforts center on targeting kinases that play pivotal roles in various inflammatory, autoimmune, and oncology pathways.

For example, we are progressing to development candidate selection a second generation ITK selective inhibitor for autoimmune indications.

We intend to evaluate both internal and external development options, including strategic partnerships, for these assets.

Discontinued Programs

We were previously developing zunsemetinib as a potential treatment for various immuno-inflammatory diseases, including hidradenitis suppurativa, psoriatic arthritis, and rheumatoid arthritis.

Following the results of the Phase 2 trials for these programs, we discontinued further development of our MK2 inhibitor programs in immuno-inflammatory diseases in 2023.

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.

Our net loss was $16.9 million for the three months ended March 31, 2024 and $88.5 million for the year ended December 31, 2023.

As of March 31, 2024, we had an accumulated deficit of $787.7 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.

2 unchanged sentences

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.

6 unchanged sentences

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.

Federal Reserve raising interest rates and geopolitical conflicts, have led to economic uncertainty globally.

The effect of macroeconomic conditions may not be fully reflected in our results of operations until future periods.

1 unchanged sentence

Acquisition and License Agreements

License Agreement with Sun Pharmaceutical Industries, Inc.

In December 2023, we entered into an exclusive patent license agreement with Sun Pharmaceutical Industries, Inc., or Sun Pharma.

Under the license agreement, we granted Sun Pharma exclusive rights under certain patents that we exclusively license from a third party.

The patents relate to the use of deuruxolitinib, Sun Pharma’s JAK inhibitor, or other isotopic forms of ruxolitinib, to treat alopecia areata or androgenetic alopecia.

Under the license agreement, Sun Pharma has paid us an upfront payment, and has agreed to pay us regulatory and commercial milestone payments upon the achievement of specified milestones set forth in the agreement, and a mid single-digit tiered royalty calculated as a percentage of Sun Pharma’s net sales.

We have separate contractual obligations under which we have agreed to pay to third parties a portion of the consideration we may receive under the license agreement.

Upon execution of the agreement, we received an upfront payment of $15.0 million from Sun Pharma, 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 lepzacitinib in Greater China.

Pediatrix has paid us an upfront payment, and has agreed to pay us development, regulatory and commercial milestone payments upon the achievement of specified milestones set forth in the agreement, and a tiered royalty ranging from a low-to-high single digit percentage of net sales of lepzacitinib by Pediatrix in Greater China.

A portion of consideration received from Pediatrix is payable to the former Confluence equity holders as described below under the caption “Agreement and Plan of Merger with Confluence.”

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 paid us an upfront payment and regulatory and certain commercial milestone payments, and has agreed to pay us anniversary payments and other commercial milestone payments upon the achievement of specified milestones as set forth in the agreement, 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 months ended March 31, 2024 and 2023, we recorded licensing revenue under this agreement of $1.7 million and $1.6 million from Lilly, respectively, a portion of which was payable to third parties.

Asset Purchase Agreement with EPI Health

In October 2019, we sold RHOFADE (oxymetazoline hydrochloride) cream, 1%, or RHOFADE, to EPI Health, LLC, or EPI Health, pursuant to an asset purchase agreement.

In July 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, which excluded our asset purchase agreement with EPI Health and the outstanding amounts due.

The sale was approved by the bankruptcy court in September 2023.

As a result of the bankruptcy proceedings, all amounts that are due and outstanding by EPI Health have been fully reserved for as of March 31, 2024.

Agreement and Plan of Merger with Confluence

5 unchanged sentences

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.

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.

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.

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

which was paid to the former Confluence equity holders as described above.

Restructuring

In December 2023, our Board of Directors approved a reduction of our workforce by approximately 46%, which we expect to be substantially completed by June 2024.

This action was taken in order to streamline operations, reduce costs and preserve capital.

As a result, we terminated certain employees, or terminated employees, and gave notice to additional employees, or noticed employees, who were asked to provide transition services through termination dates ranging between one to thirteen months from the date notice was given.

The terminated employees were entitled to receive cash severance payments and other benefits.

The noticed employees are entitled to receive cash severance payments and other benefits, which are contingent upon providing additional services to us.

During the three months ended March 31, 2024, we recognized severance expense of $2.5 million and made cash payments of $3.0 million related to severance to terminated employees.

Components of Our Results of Operations

3 unchanged sentences

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 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

20 unchanged sentences

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 expect to continue to incur research and development expenses in the near term as we continue the development of our drug candidates and pursue our discovery programs.

We expense research and development costs as incurred.

8 unchanged sentences

● 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;

7 unchanged sentences

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 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.

Revaluation of contingent consideration consists of changes in the fair value of our contingent consideration liability between reporting dates, as described below.

Other Income, Net

8 unchanged sentences

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.

We record a contingent consideration liability related to future potential payments resulting from the acquisition of Confluence based upon significant unobservable inputs including the achievement of 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 is 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.

These assumptions are highly dependent on the outcome and timing of the development of certain 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.

2 unchanged sentences

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.

Probability of success assumptions ranged between 17% and 40% at March 31, 2024.

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 7.4% and 8.3% 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.

During the three months ended March 31, 2024 we recorded a charge to the contingent consideration liability, which was primarily due to changes in estimated sales levels and changes to the probability of success for certain drug candidates.

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,

Comparison of Three Months Ended March 31, 2024 and 2023

Three Months Ended March 31,

(In thousands)

10 unchanged sentences

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.

Contract research revenue was $0.7 million and $0.9 million for the three months ended March 31, 2024 and 2023, 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 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 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.

Licensing revenue was $1.7 million and $1.6 million for the three months ended March 31, 2024 and 2023, respectively.

The increase was primarily driven by an increase in royalties under the Lilly license agreement during the three months ended March 31, 2024, offset by the achievement of a commercial milestone during the three months ended March 31, 2023.

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.

Cost of revenue was $0.8 million for each of the three months ended March 31, 2024 and 2023, 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.

Cost of revenue included a decrease in expense due to lower variable costs resulting from a decrease in hours billed, which was offset by an increase in termination benefits, as a result of our restructuring that was announced in December 2023.

Research and Development

1 unchanged sentence

Three Months Ended

Nine Months Ended

September 30,

(In thousands)

2 unchanged sentences

Total research and development expenses

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.

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.

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.

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.

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.

The decrease in expenses for zunsemetinib during the three months ended March 31, 2024 compared to the three months ended March 31, 2023 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, and a Phase 2b trial in subjects with rheumatoid arthritis, which initiated in December 2021 and was completed in November 2023.

Drug candidate manufacturing costs also decreased accordingly.

The decrease in expenses for lepzacitinib during the three months ended March 31, 2024 compared to the three months ended March 31, 2023 was primarily due to lower costs associated with preclinical development activities and costs associated with a Phase 2b clinical trial in subjects with atopic dermatitis, which initiated in May 2022 and was completed in January 2024.

The decrease in expenses for ATI-2138 during the three months ended March 31, 2024 compared to the three months ended March 31, 2023 was primarily due to a decrease in clinical development expenses associated with a Phase 1 MAD trial which was completed in September 2023, as well as a decrease in preclinical development activities and ancillary studies.

The increase in expenses related to discovery during the three months ended March 31, 2024 compared to the three months ended March 31, 2023 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.

The decrease in personnel and stock-based compensation expenses in the aggregate during the three months ended March 31, 2024 compared to the three months ended March 31, 2023 was primarily due to lower headcount and higher forfeiture credits, offset by an increase in termination benefits, as a result of our restructuring.

General and Administrative

1 unchanged sentence

Three Months Ended

Nine Months Ended

September 30,

(In thousands)

5 unchanged sentences

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.

The decrease in personnel and stock-based compensation expenses in the aggregate during the three months ended March 31, 2024 compared to the three months ended March 31, 2023, was primarily due to higher forfeiture credits, offset by an increase in termination benefits, as a result of our restructuring.

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

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 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 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.

Professional and legal fees, including accounting, investor relations and corporate communication costs, decreased during the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

The decrease was primarily driven by a decrease in patent expenses.

The decrease in licensing expenses during the three months ended March 31, 2024 compared to the three months ended March 31, 2023 was due to the achievement of a commercial milestone during the three months ended March 31, 2023, offset by an increase in royalties during the three months ended March 31, 2024, earned under the Lilly license 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.

The increase in the fair value of our contingent consideration liability during the three months ended March 31, 2024 compared to the three months ended March 31, 2023 was primarily due to changes in estimated sales levels and changes to the probability of success for certain drug candidates.

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.

Other income, net increased during the three months ended March 31, 2024 compared to the three months ended March 31, 2023 primarily due to higher interest income on investment portfolio balances.

Liquidity and Capital Resources

3 unchanged sentences

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.

We may receive royalties and milestone payments under third-party licensing and acquisition agreements.

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.

As of September 30, 2023, we had cash, cash equivalents and marketable securities of $187.0 million.

As of March 31, 2024, we had cash, cash equivalents and marketable securities of $161.4 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 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.

Cash and cash equivalents were $35.8 million as of March 31, 2024 compared to $39.9 million as of December 31, 2023.

We also had $125.6 million in short- and long-term marketable securities as of March 31, 2024 compared to $142.0 million as of December 31, 2023.

The sources and uses of cash that contributed to the change in cash and cash equivalents were:

Nine Months Ended

September 30,

Three Months Ended

(In thousands)

2 unchanged sentences

Net cash provided by investing activities

Net cash provided by financing activities

Net cash used in financing activities

Cash and cash equivalents ending balance

1 unchanged sentence

Cash flow related to operating activities was the result of:

Nine Months Ended

September 30,

Three Months Ended

(In thousands)

4 unchanged sentences

Net cash used in operating activities

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.

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.

Net cash used in operating activities decreased for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 primarily as a result of lower net losses after adjusting for non-cash items.

This change was partially offset by a reduction in accounts payable and accrued expenses, which was due to the timing of payments to vendors as well as third parties in connection with amounts earned under licensing agreements.

Investing Activities

Cash flow related to investing activities was the result of:

Nine Months Ended

September 30,

Three Months Ended

(In thousands)

3 unchanged sentences

Net cash provided by investing activities

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.

The decrease in net cash provided by investing activities for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 resulted primarily from lower sales and maturities of marketable securities during the three months ended March 31, 2024, partially offset by lower purchases of marketable securities during the three months ended March 31, 2024.

Financing Activities

Cash flow related to financing activities was the result of:

Nine Months Ended

September 30,

Three Months Ended

(In thousands)

Proceeds from issuance of common stock under the at-the-market sales agreement, net of

issuance costs

Payments of employee withholding taxes related to restricted stock unit award vesting

Proceeds from exercise of employee stock options and the issuance of stock

Net cash provided by financing activities

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.

Net cash used in financing activities

Net cash used in financing activities during the three months ended March 31, 2024 consisted of payments of employee withholding taxes related to restricted stock unit award vesting.

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.

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.

We anticipate we will incur net losses in the near term as we continue to discover and develop 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, 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, research and development expenses, laboratory and related supplies, legal and other regulatory expenses, and administrative and overhead costs.

Our future funding requirements will be heavily determined by the resources needed to support the development of our drug candidates, without taking into account any potential business development activities resulting from our ongoing strategic review of our business.

As a publicly traded company, we incur and will continue to incur significant legal, accounting, and other similar expenses.

1 unchanged sentence

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.

We will require additional capital to develop our drug candidates 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.

8 unchanged sentences

● 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;

● our ability to earn revenue as a result of licenses to, or partnerships or other arrangements with, third parties.

We occupied space for our headquarters in Wayne, Pennsylvania under a sublease agreement, which expired as of October 31, 2023.

We occupy space for our headquarters in Wayne, Pennsylvania under a lease agreement which has a term through February 2029.

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.

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.

Our aggregate remaining lease payment obligation for these two spaces was $4.5 million as of March 31, 2024.

Agreement and Plan of Merger – Confluence

7 unchanged sentences

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 therapeutics segment is focused on identifying and developing innovative therapies to address significant unmet needs for immuno-inflammatory diseases and earns revenue through licensing our intellectual property.

The contract research segment earns revenue from the provision of laboratory services.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis