What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-08-07 compared with 2024-05-07 · 86 added, 46 removed, 285 unchanged (32% of the section changed)

21 unchanged sentences

No serious adverse events were reported.

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

We have initiated study activities for a Phase 2a open-label trial to investigate the safety, tolerability, pharmacokinetics, efficacy, and pharmacodynamics of ATI-2138 administered over 12 weeks in approximately 15 patients in the United States with moderate to severe atopic dermatitis.

The primary endpoints are safety related parameters.

Secondary endpoints include Eczema Area and Severity Index, or EASI, response (EASI-50, EASI-74, EASI-90),

Validated Investigator Global Assessment (vIGA) response, body surface area (BSA) response and other pertinent efficacy related measures .

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

34 unchanged sentences

Since our inception, we have incurred significant net losses.

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.

Our net loss was $27.9 million for the six months ended June 30, 2024 and $88.5 million for the year ended December 31, 2023.

As of June 30, 2024, we had an accumulated deficit of $798.7 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.

9 unchanged sentences

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.

For example, macroeconomic events, including inflationary pressure, the U.S.

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

1 unchanged sentence

If, however, economic uncertainty increases or the global economy worsens, our business, financial condition and results of operations may be harmed.

Recent Developments

Royalty Purchase Agreement with OCM IP Healthcare Portfolio LP

In July 2024, we entered into a royalty purchase agreement with OCM IP Healthcare Portfolio LP, an investment vehicle for Ontario Municipal Employees Retirement System, or OMERS.

Under the royalty purchase agreement, we sold to OMERS a portion of the future royalty payments and the remaining anniversary milestones associated with our existing license to Eli Lilly and Company, or Lilly, relating to OLUMIANT® (baricitinib) for the treatment of alopecia areata.

Under the terms of the royalty purchase agreement, we received an upfront payment of $26.5 million and are eligible to receive up to an additional $5.0 million based on the achievement of certain sales milestones for OLUMIANT in 2024.

In exchange, OMERS acquired a portion of the royalty payable by Lilly to us for worldwide net sales of OLUMIANT for the treatment of alopecia areata from April 1, 2024 through the remainder of the royalty term under our license agreement with Lilly, and 100% of the remaining anniversary milestone payments payable by Lilly to us under the license agreement.

The royalty payments and milestones we sold to OMERS represent our entire financial interest in the Lilly license agreement after taking into account our other contractual third party obligations.

Acquisition and License Agreements

11 unchanged sentences

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.

In August 2022, we entered into a non-exclusive patent license agreement with 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.

Under the license agreement, Lilly has paid us an upfront payment and regulatory and certain commercial milestone payments, and 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.

In July 2024, we entered into a royalty purchase agreement pursuant to which we sold a portion of our future royalty payments and the remaining anniversary milestones associated with the license to Lilly.

See “Recent Developments—Royalty Purchase Agreement with OCM IP Healthcare Portfolio LP.”

We recorded licensing revenue from Lilly under this agreement of $2.1 million and $0.9 million during the three months ended June 30, 2024 and 2023, respectively, and $3.9 million and $2.3 million during the six months ended June 30, 2024 and 2023, respectively, a portion of which was payable to third parties.

The licensing revenue earned during the three months ended June 30, 2024 was sold to OMERS pursuant to the royalty purchase agreement.

Asset Purchase Agreement with EPI Health

3 unchanged sentences

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.

of the bankruptcy proceedings, all amounts that are due and outstanding by EPI Health have been fully reserved for as of June 30, 2024.

Agreement and Plan of Merger with Confluence

6 unchanged sentences

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.

In December 2023, our Board of Directors approved a reduction of our workforce by approximately 46%, which was substantially completed as of June 2024.

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

2 unchanged sentences

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.

During the three and six months ended June 30, 2024, we recognized severance expense of $0.1 million and $2.6 million, respectively.

During the six months ended June 30, 2024, we made cash payments of $4.5 million related to severance to impacted employees.

Components of Our Results of Operations

40 unchanged sentences

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.

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.

25 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 40% at March 31, 2024.

Probability of success assumptions ranged between 17% and 40% at June 30, 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 7.0% and 8.2% depending on the year of each potential payment.

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.

During the six months ended June 30, 2024 we recorded a charge to the contingent consideration liability of $3.0 million, which was primarily due to changes in estimated sales levels and changes to the probability of success for certain drug candidates.

During the six months ended June 30, 2023, we did not modify any significant assumptions other than the removal of estimated sales from zunsemetinib for moderate to severe hidradenitis suppurativa following our decision to cease pursuing that indication.

This impact was partially offset by lower discount rates resulting from lower risk-free rates and changes in credit spreads being applied to potential payments relative to prior periods, as well as the passage of time, resulting in an overall decrease in contingent consideration of $2.3 million.

Results of Operations

Comparison of Three Months Ended March 31, 2024 and 2023

Three Months Ended March 31,

Comparison of Three and Six Months Ended June 30, 2024 and 2023

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

10 unchanged sentences

Contract research

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.

Contract research revenue was $0.6 million and $0.9 million for the three months ended June 30, 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.

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.

Contract research revenue was $1.3 million and $1.8 million for the six months ended June 30, 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.

Licensing revenue was $2.1 million and $1.0 million for the three months ended June 30, 2024 and 2023, respectively.

The increase was primarily driven by an increase in royalties under the Lilly license agreement during the three months ended June 30, 2024 offset by a decrease of royalties under the EPI Health agreement between periods.

Licensing revenue was $3.9 million and $2.6 million for the six months ended June 30, 2024 and 2023, respectively.

The increase was primarily driven by an increase in royalties under the Lilly license agreement during the six months ended June 30, 2024, offset by the achievement of a commercial milestone under the Lilly license agreement during the six months ended June 30, 2023 and a decrease of royalties under the EPI Health agreement between periods.

Costs and Expenses

Cost of Revenue

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.

Cost of revenue was $0.6 million and $1.0 million for the three months ended June 30, 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 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.

Cost of revenue included a decrease in expense due to lower variable costs resulting from a decrease in hours billed.

Cost of revenue was $1.4 million and $1.9 million for the six months ended June 30, 2024 and 2023, 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 six months ended June 30, 2024 compared to the corresponding prior year period 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

Six Months Ended

(In thousands)

2 unchanged sentences

Total research and development expenses

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.

The decrease in expenses for zunsemetinib during the three and six months ended June 30 , 2024 compared to the three and six months ended June 30, 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 was initiated in December 2021 and was completed in early March 2023, a Phase 2b trial in subjects with rheumatoid arthritis, which was initiated in December 2021 and was completed in November 2023, and a Phase 2b trial in subjects with psoriatic arthritis, which was initiated in June 2022 and was discontinued in December 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.

The decrease in expenses for lepzacitinib during the three and six months ended June 30, 2024 compared to the three and six months ended June 30 , 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 was initiated in May 2022 and was completed in January 2024.

The decrease in expenses for ATI-2138 during the three and six months ended June 30, 2024 compared to the three and six months ended June 30, 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.

This decrease was partially offset by clinical development expenses associated with the initiation of Phase 2a study activities in May 2024.

Personnel and stock-based compensation

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.

The decrease in personnel and stock-based compensation expenses during the three and six months ended June 30, 2024 compared to the three and six months ended June 30, 2023 was primarily due to lower headcount and higher forfeiture credits, partially offset by an increase in termination benefits, as a result of our restructuring that was announced in December 2023.

General and Administrative

1 unchanged sentence

Three Months Ended

Six Months Ended

(In thousands)

5 unchanged sentences

Personnel and stock-based compensation

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, 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.

Professional and legal fees, including accounting, investor relations and corporate communication costs, decreased during the three and six months ended June 30, 2024 compared to the three and six months ended June 30, 2023.

The decrease was primarily driven by a decrease in patent, legal and accounting related expenses, which were partially offset by an increase in other professional fees.

Facility and support services

Facility and support services, including general office expenses, information technology costs and other expenses, decreased during the three and six months ended June 30, 2024 compared to the three and six months ended June 30, 2023 primarily as a result of a decrease in rent expense and information technology expenses.

Bad debt expenses were related to our determination that amounts due to us as of June 30, 2023 pursuant to the asset purchase agreement with EPI Health are uncertain as a result of the bankruptcy filing by EPI Health in July 2023.

There was no bad debt expense during the three and six months ended June 30, 2024.

The increase in licensing expenses during the three and six months ended June 30, 2024 compared to the three and six months ended June 30, 2023 was due to an increase in royalties earned under the Lilly license agreement.

Revaluation of Contingent Consideration

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.

The revaluation of contingent consideration loss during the three months ended June 30, 2024 was primarily due to the passage of time, compared to the revaluation of contingent consideration gain during the three months ended June 30, 2023 which was primarily due to a change in discount rates, including risk-free rates and credit spreads, on potential future payments.

The gain during the three months ended June 30, 2023 was partially offset by adjustments to other assumptions for certain clinical programs and an increase in the probability of success of zunsemetinib in psoriatic arthritis.

The revaluation of contingent consideration loss during the six months ended June 30, 2024 was primarily due to changes in estimated sales levels and changes to the probability of success for certain drug candidates, compared to the revaluation of contingent consideration gain during the six months ended June 30, 2023 which was primarily due to changes in discount rates, including risk-free rates and credit spreads, on potential future payments.

The gain during the six months ended June 30, 2023 was partially offset by adjustments to other assumptions for certain clinical programs, including the removal of estimated future sales levels of zunsemetinib for moderate to severe hidradenitis suppurativa following our decision to cease pursuing this indication.

Other Income, net

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.

Other income, net decreased during the three and six months ended June 30, 2024 compared to the three and six months ended June 30, 2023 primarily due to lower interest income on investment portfolio balances.

Liquidity and Capital Resources

5 unchanged sentences

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

As of June 30, 2024, we had cash, cash equivalents and marketable securities of $149.9 million.

In July 2024, we sold to OMERS a portion of the future royalty payments and the remaining anniversary milestones associated with our existing license to Lilly for an upfront payment of $26.5 million and are eligible to receive up to an additional $5.0 million upon the achievement of certain sales milestones.

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.

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.

Cash and cash equivalents were $22.8 million as of June 30, 2024 compared to $39.9 million as of December 31, 2023.

We also had $127.1 million in short- and long-term marketable securities as of June 30, 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:

Three Months Ended

Six Months Ended

(In thousands)

2 unchanged sentences

Net cash provided by investing activities

Net cash used in financing activities

Net cash (used in) provided by financing activities

Cash and cash equivalents ending balance

1 unchanged sentence

Cash flow related to operating activities was the result of:

Three Months Ended

Six Months Ended

(In thousands)

4 unchanged sentences

Net cash used in operating activities

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.

Net cash used in operating activities decreased for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 primarily as a result of lower net losses after adjusting for non-cash items.

This change was partially offset by an increase in cash used for 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:

Three Months Ended

Six Months Ended

(In thousands)

3 unchanged sentences

Net cash provided by investing activities

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.

The increase in net cash provided by investing activities for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 resulted primarily from lower purchases of marketable securities during the six months ended June 30, 2024, partially offset by lower sales and maturities of marketable securities during the six months ended June 30, 2024.

Financing Activities

Cash flow related to financing activities was the result of:

Three Months Ended

Six 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

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.

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

Net cash (used in) provided by financing activities

Net cash used in financing activities for the six months ended June 30, 2024 was $0.1 million compared to net cash provided by financing activities during the six months ended June 30, 2023 of $26.7 million.

The change was primarily due to proceeds in the six months ended June 30, 2023 from sales under our at-the-market sales agreement.

Funding Requirements

4 unchanged sentences

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.

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.

17 unchanged sentences

Louis, Missouri under a sublease agreement which has a term through June 2029.

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

Our aggregate remaining lease payment obligation for these two spaces was $3.6 million as of June 30, 2024.

Agreement and Plan of Merger – Confluence

2 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.

As of June 30, 2024, the balance of our contingent consideration liability was $9.2 million.

R&D Obligations

6 unchanged sentences

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