Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with the historical consolidated financial statements and the notes thereto included in Part II, Item 8—Consolidated Financial Statements and Supplementary Data of this Annual Report on Form 10-K. This discussion and other sections of this Annual Report contain forward-looking statements that involve risks and uncertainties, such as our plans, objectives, expectations, intentions, and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled “Risk Factors” included in Part I, Item 1A of this Annual Report. You should also carefully read “Special Note Regarding Forward-Looking Statements”.
Overview
We are a clinical stage biotechnology company developing first-in-class immunology therapeutic product candidates focused on emerging immune control mechanisms applicable to inflammation and immuno-oncology indications. We develop our product candidates using our proprietary antibody discovery technology platform, which is based upon a breakthrough understanding of the natural process of antibody generation, known as somatic hypermutation (“SHM”), and replicates this natural process of antibody generation in vitro . Our strategy is to advance the development of our proprietary product candidates, and where applicable, establish partnerships with leading biopharmaceutical companies where we retain certain development and commercialization rights. Our most advanced wholly-owned antibody programs, imsidolimab, ANB030 and ANB032, are designed to modulate therapeutic targets that are genetically associated with human inflammatory disorders.
Imsidolimab, our IL-36R antibody previously referred to as ANB019, inhibits the interleukin-36 receptor (“IL-36R”), and is being developed for the treatment of multiple dermatological inflammatory diseases. We completed a Phase 1 clinical trial in healthy volunteers, which was presented at the European Academy of Allergy and Clinical Immunology in 2018, where imsidolimab was well-tolerated by all subjects, no dose-limiting toxicities were observed, and no serious adverse events were reported among any subjects in the clinical trial. In July 2020, the U.S. Food and Drug Administration (the “FDA”) granted Orphan Drug Designation for imsidolimab for the treatment of patients with GPP. We are conducting an open-label, multi-dose, single-arm Phase 2 clinical trial of imsidolimab in 8 GPP patients, also referred to as the GALLOP clinical trial, where we announced positive topline data in October 2020. Six of 8 (75%) patients treated with imsidolimab monotherapy achieved the primary endpoint of improvement in the clinical global impression scale (“CGI”) on Day 29. Two of 8 (25%) patients were considered to have not met the primary endpoint because they dropped out of the clinical trial prior to Day 29. The modified Japanese Dermatology Association Severity Index (“mJDA-SI”) score, which incorporates both dermatological and systemic aspects of GPP, decreased on average by 29% on Day 8 and 54% on Day 29. Erythema with skin pustules, which clinically defines GPP, decreased by 60% on Day 8 and 94% on Day 29. Serum c-reactive protein (“CRP”), which is an indicator of systemic inflammation, was normal (less than 5 mg/L) for 5 of the 6 patients achieving the primary endpoint on Day 29. Genotypic testing indicated homozygous wild-type IL-36RN, CARD14 and AP1S3 alleles for all 8 patients. We believe this suggests that imsidolimab may be broadly applicable to pustular diseases irrespective of genetic drivers. Anti-drug antibodies were not detected as of Day 29 in any patient. Imsidolimab was generally well-tolerated, and most treatment-emergent adverse events were mild to moderate in severity and resolved without sequelae. No infusion or injection site reactions were observed. One patient dropped out of the clinical trial due to a diagnosis of Staphylococcal aureus bacteremia in the first week, which was a serious adverse event deemed to be possibly drug-related. Because the patient was symptomatic prior to dosing and had a prior medical history of bacteremia, a common comorbidity of GPP, we do not believe this event is likely attributable to imsidolimab. Another patient dropped out of the study on Day 22 due to investigator reported inadequate efficacy. One patient contracted COVID-19 during the course of the clinical trial, which was mild, unrelated to imsidolimab, and did not lead to study discontinuation. Data from the first two patients to have completed the Day 113 treatment period under this clinical trial, which we announced in September 2019, indicated sustained efficacy in these two patients through Day 113. We plan to report full data from the GALLOP clinical trial at a medical conference in 2021. While initial GPP epidemiology studies suggested at least 3,000 patients in the United States, recent medical claims analyses suggest GPP prevalence in the United States of at least 10,000 patients. We met with the FDA during the fourth quarter of 2020 to review an orphan disease registration plan for imsidolimab for the treatment of GPP and anticipate initiating a Phase 3 clinical trial in mid-2021 following completion of protocol alignment and review of 16-week data from the GALLOP clinical trial by the FDA.
We are also conducting a randomized, double-blind, placebo-controlled 59-patient multi-dose clinical trial of imsidolimab in PPP, also referred to as the POPLAR clinical trial, where enrollment was completed in 2020 and top-line data are anticipated in the first quarter of 2021. The primary endpoint of this clinical trial is change in palmo-plantar pustulosis area severity index (PPPASI) at week 16 relative to baseline. PPP is a non-fatal form of pustular psoriasis that we estimate affects approximately 150,000 patients in the United States alone. We have initiated a global registry of GPP and PPP patients, also referred to as the RADIANCE study, which we anticipate will improve understanding of the patient journey in these two indications and assist in enrollment of future GPP and PPP clinical trials.
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We have initiated clinical development of imsidolimab for the treatment of skin toxicities associated with treatments with inhibitors of epidermal growth factor (“EGFRi”) and MAPK/ERK kinase (“MEKi”). Treatment of solid tumors with EGFRi and/or MEKi is frequently limited by the occurrence of skin toxicities, including acneiform or papulopustular rash. Recent translational data has suggested that these skin toxicities are mediated by excess IL-36 signaling, leading to IL-8-mediated cutaneous neutrophilia and acneiform rash. Based on existing claims data, approximately 60,000 patients are prescribed EGFRi and/or MEKi treatments annually, and the vast majority of these patients experience skin toxicity, which in some cases leads to dose reduction and/or discontinuation of treatment. Current standard-of-care treatments are generally ineffective in patients with the most severe grades of EGFRi and/or MEKi mediated skin toxicity. During the fourth quarter of 2020, we initiated a Phase 2 clinical trial, called EMERGE, of imsidolimab in combination with EGFRi inhibitors, for the treatment of patients diagnosed with a certain baseline severity of skin toxicity, where 45 patients are randomized 2:1 between imsidolimab and placebo arms, to assess the efficacy of imsidolimab in the treatment of this indication. We anticipate interim top-line data from this clinical trial at the end of 2021.
We have also initiated clinical development of imsidolimab in ichthyosis, which is a family of rare, inherited, dermatological disorders characterized by dry, scaling and thickened skin. Recent human translational studies have suggested that the underlying skin inflammation responsible for ichthyosis is mediated by dysregulated IL-36 signaling, and we believe that imsidolimab treatment may be efficacious in treatment of this condition. Approximately 6,000 patients in the United States are affected with moderate-to-severe levels of ichthyosis, and no approved therapies are available for this disease. We have initiated a Phase 2 clinical trial, called INSPIRE, of imsidolimab in patients with certain baseline severity of ichthyosis, where 24 patients are randomized 2:1 between imsidolimab and placebo arms, and interim top-line data is anticipated in 2022.
We plan to initiate clinical development of imsidolimab in hidradenitis suppurativa, also known as acne inversa, which is a chronic inflammatory skin disease characterized by painful nodules in intertriginous areas that can progress to abscesses, sinus tracks and scarring. Current treatment options for hidradenitis suppurativa, including antibiotics, corticosteroids and anti-TNF therapy, have variable efficacy in moderate-to-severe patients, which often leads to surgery for removal of hidradenitis suppurativa nodules. Human translational studies have demonstrated elevated IL-36 cytokine expression in hidradenitis suppurativa skin biopsies, and we believe treatment of moderate-to-severe hidradenitis suppurativa with imsidolimab may lead to therapeutic benefit for this patient population. Moderate-to-severe hidradenitis suppurativa affects approximately 150,000 adults in the United States. We intend to initiate a Phase 2 clinical trial of imsidolimab in hidradenitis suppurativa, called HARP, in the second quarter of 2021.
We plan to initiate clinical development of imsidolimab in acne, which is the most common skin disorder in the United States, with approximately 7 million patients diagnosed with moderate-to-severe disease. Moderate-to-severe acne typically presents with painful papules, pustules, nodules, cysts and scarring. A key contributing factor to the pathogenesis of acne is the immune response to p. acnes, which is associated with upregulated IL-36 cytokine activity, localized inflammation and neutrophil infiltration of the skin. Existing therapies, including isotretinoin and systemic antibiotics, provide variable efficacy for moderate-to-severe acne patients and have practical limitations to their use given potential for clinically meaningful side effects. We anticipate initiating a Phase 2 clinical trial of imsidolimab, called ACORN, for the treatment of moderate-to-severe acne
Our second wholly-owned program, ANB030, is an anti-PD-1 agonist antibody program designed to augment PD-1 signaling through ANB030 treatment to suppress T-cell driven human inflammatory diseases. Genetic mutations in the PD-1 pathway are known to be associated with increased susceptibility to human inflammatory diseases, and hence we believe that ANB030 is applicable to diseases where PD-1 checkpoint receptor function may be under-represented. We presented preclinical data for ANB030 at the Festival of Biologics Annual Meeting in March 2020, including translational data demonstrating in vitro activity of ANB030 in alopecia areata patient samples. We initiated a Phase 1 healthy volunteer clinical trial in the first half of 2020, which is designed to assess the safety, pharmacokinetics and pharmacodynamics of ANB030 in single and multiple ascending dose cohorts. We anticipate top-line data from this Phase 1 clinical trial in mid-2021. We plan to initiate Phase 2 clinical trials of ANB030 in alopecia areata and vitiligo in the second half of 2021.
Our third wholly-owned program is an anti-BTLA modulator antibody, known as ANB032, which is broadly applicable to human inflammatory diseases associated with lymphoid and myeloid immune cell dysregulation. Mutations in the BTLA signaling pathway are associated with human inflammatory disease, and we believe ANB032 silences pro-inflammatory signaling by modulating BTLA binding to HVEM. We filed a Clinical Trial Notification (“CTN”) in Australia for ANB032 during the first quarter of 2021 and anticipate initiating a healthy volunteer Phase 1 trial in the first half of 2021 upon clearance of the CTN. We presented preclinical data regarding ANB032 at the 2020 Federation of Clinical Immunology Societies (FOCIS) Virtual Annual Meeting in October 2020.
Etokimab, our anti-IL-33 antibody previously referred to as ANB020, inhibits the activity of the interleukin-33 cytokine (“IL-33”). We have conducted a randomized, placebo-controlled Phase 2 clinical trial of etokimab in approximately 100 adult patients with CRSwNP (a debilitating atopic disorder associated with elevated IL-33 pathway signaling), also referred to as the
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ECLIPSE clinical trial. We recently reported top-line data from a week 16 analysis of the ECLIPSE clinical trial. Patients dosed with etokimab every four (q4w) or eight weeks (q8w) failed to achieve the co-primary endpoints of statistically significant improvement in their bilateral nasal polyps score (“NPS”), an endoscopic measure of nasal occlusion, and in their sino-nasal outcome test (“SNOT-22”), a patient reported quality-of-life assessment, versus placebo at the week 8 time point. Both endpoints demonstrated statistically significant improvement over baseline levels of NPS and SNOT-22. Blood eosinophil levels, which are a biomarker of etokimab’s mechanism, demonstrated statistically significant reduction relative to baseline in both etokimab treatment arms. Following this data, we have decided to discontinue further development of etokimab.
In addition to our wholly-owned antibody programs, multiple Company-developed antibody programs have been advanced to preclinical and clinical milestones under our collaborations. We have received to date approximately $164.6 million in cash receipts from collaborations. Our collaborations include an immuno-oncology-focused collaboration with GlaxoSmithKline, Inc. (“GSK”) and an inflammation-focused collaboration with Bristol-Myers Squibb (“BMS”). A Biologics License Application (“BLA”) for our most advanced partnered program, which is an anti-PD-1 antagonist antibody called dostarlimab, was submitted by GSK and accepted by the FDA for the treatment of advanced or recurrent deficient mismatch repair endometrial cancer (“dMMREC”), and FDA approval is anticipated in this indication during the first half of 2021. This FDA approval is dependent on a pre-approval inspection of the dostarlimab manufacturing site by the FDA and is therefore contingent on easing of the coronavirus (“COVID-19”) pandemic travel restrictions. In addition, the European Medicines Agency (“EMA”) recently accepted GSK’s Marketing Authorization Application (“MAA”) for dostarlimab in the European Union (“EU”) for dMMREC, and EMA approval is anticipated in this indication during the first half of 2021. A second BLA submitted by GSK was accepted by the FDA during the first quarter of 2021 for dostarlimab in pan-deficient mismatch repair tumors (“PdMMRT”). We received a $10.0 million cash milestone payment upon the FDA acceptance of GSK’s first BLA for dostarlimab and anticipate an additional $20.0 million cash milestone payment upon first FDA approval of dostarlimab during the first half of 2021. We also received a $5.0 million milestone payment for the EMA acceptance of GSK’s first MAA for dostarlimab and anticipate an additional $10.0 million cash milestone payment upon first EMA approval of dostarlimab during the first half of 2021. An additional $10.0 million cash milestone payment is anticipated by the end of the first quarter of 2021 for acceptance of the second FDA BLA referred to above. Dostarlimab is currently in clinical development for various solid tumor indications, including dMMREC, PdMMRT, colorectal cancer, ovarian cancer, non-small cell lung cancer, cervical cancer, rectal cancer, clear cell sarcoma and head-and-neck squamous cell carcinoma. We anticipate receiving additional milestones from GSK, of equal magnitude to the milestone payments outlined above, upon approval of the BLA and acceptance and approval of the EMA filings of dostarlimab for the PdMMRT indication. Depending upon the timing of the aforementioned dostarlimab regulatory acceptance and approval milestones, we anticipate a total of $75.0 million in such milestone payments over the upcoming 18 months. An additional $165.0 million in sales milestones is anticipated upon achievement of certain dostarlimab annual sales revenues. In October 2020, we amended our GSK collaboration to increase royalties on global net sales of dostarlimab to 8-25%, add 1% royalty rate on GSK’s global net sales of Zejula and received a one-time cash payment of $60.0 million. For more information about these collaborations, see “— Collaborations”.
As of December 31, 2020, we had an accumulated deficit of $264.0 million, primarily as a result of losses incurred since our inception in 2005. We expect to continue to incur net operating losses for at least the next several years as we advance our products through clinical development, seek regulatory approval, prepare for and, if approved, proceed to, commercialization, expand our operations and facilities and grow in new and existing markets, territories and industries.
For our discussion related to the results of our operations and liquidity and capital resources for fiscal year ended December 31, 2019 compared to the year ended December 31, 2018, please refer to Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2019.
COVID-19
In December 2019, a strain of coronavirus was reported in Wuhan, China and began to spread globally, including to the United States and Europe, in the following months. The World Health Organization has declared COVID-19 to be a global pandemic. The full impact of the COVID-19 pandemic is inherently uncertain at the time of this Annual Report. The COVID-19 pandemic has resulted in travel restrictions and, in some cases, prohibitions of non-essential activities, disruption and shutdown of businesses, and greater uncertainty in global financial markets. As COVID-19 has spread, it has significantly impacted the health and economic environment around the world, and many governments have closed most public establishments, including restaurants, workplaces, and schools. Our ongoing clinical trials have been, and may continue to be, affected by the closure of offices, or country borders, among other measures being put in place around the world. The inability to travel and conduct face-to-face meetings can also make it more difficult to enroll new patients in ongoing or planned clinical trials. Any of these circumstances will potentially have a negative impact on our financial results and the timing of our clinical trials.
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The COVID-19 pandemic has caused us to modify our business practices (including but not limited to curtailing or modifying employee travel, moving to full remote work, and cancelling physical participation in meetings, events, and conferences), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, patients, and business partners.
The extent of the impact of the COVID-19 pandemic on our future liquidity and operational performance will depend on certain developments, including the duration and spread of the outbreak, the availability and effectiveness of vaccines, the impact on our clinical trials, patients, and collaboration partners, and the effect on our suppliers.
Financial Overview
Collaboration Revenue
We have not generated any revenue from product sales. Our revenue has been derived from amortization of upfront license payments, research and development funding and milestone payments under collaboration and license agreements with our collaborators. From inception through December 31, 2020, we have received $164.6 million in cash in non-dilutive funding from our collaborators.
Collaboration and Exclusive License Agreement with GSK
In March 2014, we entered into a Collaboration and Exclusive License Agreement GSK (the “GSK Agreement”) for the development and commercialization of therapeutic monospecific and bispecific antibodies that antagonize PD-1, TIM-3, LAG-3 and/or a fourth undisclosed checkpoint receptor. We received $17.0 million in upfront fees from GSK in March 2014, and in November 2014, we amended the agreement with GSK to include the development and commercialization of bispecific antibodies to another undisclosed target, for an additional upfront fee of $2.0 million. Both upfront fees were recognized over the same period that our research and development services for which we were reimbursed were performed, which was extended through December 31, 2016 by amendment of the GSK Agreement in February 2016.
For each of the four targets under the GSK agreement, we are eligible to receive up to $273.0 million in milestone payments, which are comprised of $18.0 million for preclinical and clinical development milestone payments, $90.0 million upon certain regulatory events and $165.0 million upon worldwide commercial sales thresholds. In addition, GSK is obligated to pay us tiered royalties, ranging from 4% to 8%, for each product developed under the agreement, except in the case of dostarlimab where the royalties payable will be 8% to 25% as amended below, on annualized net sales of each antibody commercialized from the collaboration.
On October 23, 2020, we amended the GSK Agreement (the “Amendment”). Under the Amendment, we agreed to permit GSK to conduct development and commercialization of Zejula, an oral, once-daily poly (ADP-ribose) polymerase (PARP) inhibitor, which has received US approval for the maintenance treatment of adult patients with advanced epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to first-line platinum-based chemotherapy and is under development for additional cancer indications. In addition, under the Amendment, we were granted increased royalties upon sales of dostarlimab, an anti-PD-1 antagonist antibody under development by GSK for multiple oncological disorders, including endometrial cancer, non-small cell lung cancer, ovarian cancer, colorectal cancer, and mismatch repair deficient solid tumors, equal to 8% of Net Sales (as defined in the GSK Agreement) below $1.0 billion and from 12% up to 25% of Net Sales above $1.0 billion. The Amendment also provided for a one-time non-refundable cash payment of $60.0 million that we received in the fourth quarter of 2020. GSK also agreed, starting January 1, 2021, to pay us a 1% royalty on all GSK Net Sales of Zejula. The $1.1 billion in cash milestone payments due under the GSK Agreement remain unchanged. Additionally, under the terms of the Amendment, GSK has agreed to certain diligence commitments with respect to the future development of dostarlimab, and the parties have agreed to review such commitments under regular joint review committee meetings going forward. From inception of the agreement through December 31, 2020, we have recognized $142.3 million in total revenue from GSK.
Milestones achieved through December 31, 2020 under the GSK Agreement are as follows:
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Anti-PD-1
(GSK4057190A/Dostarlimab)
Anti-TIM-3
(GSK4069889A/Cobolimab)
Anti-LAG-3
(GSK40974386)
Milestone Event Amount Quarter Recognized Amount Quarter Recognized Amount Quarter Recognized
Initiated in vivo toxicology studies using good laboratory practices (GLPs)
$1.0M Q2'15 $1.0M Q4'15 $1.0M Q3'16
IND clearance from the FDA $4.0M Q1'16 $4.0M Q2'16 $4.0M Q2'17
Phase 2 clinical trial initiation $3.0M Q2'17 $3.0M Q4'17 $3.0M Q4'19
Phase 3 clinical trial initiation - first indication $5.0M Q3'18 — — — —
Phase 3 clinical trial initiation - second indication $5.0M Q2'19 — — — —
Filing of the first NDA - first indication $10.0M Q1'20 — — — —
Filing of the first MAA - first indication $5.0M Q1'20 — — — —
Milestones achieved during the discovery period were recognized as revenue pro-rata through December 31, 2016. Milestones achieved during fiscal 2017 were recognized as revenue in the period earned, while milestones after December 31, 2017 were recognized upon determination that a significant reversal of revenue would not be probable. Cash is generally received within 30 days of milestone achievement.
Antibody Generation Agreement with Bristol-Myers Squibb
In December 2011, we entered into a license and collaboration agreement (the “BMS Agreement”) with Celgene, now a part of Bristol-Myers Squibb (Celgene and Bristol-Myers Squibb are hereinafter referred to, collectively, as “BMS”), to develop therapeutic antibodies against multiple targets. We granted BMS the option to obtain worldwide commercial rights to antibodies generated against each of the targets under the agreement, which option was triggered on a target-by-target basis by our delivery of antibodies meeting certain pre-specified parameters pertaining to each target under the agreement.
The BMS Agreement provided for an upfront payment of $6.0 million from BMS, which we received in 2011, and recognized through 2014, milestone payments of up to $53.0 million per target, low single-digit royalties on net sales of antibodies against each target, and reimbursement of specified research and development costs. From inception of the agreement through December 31, 2020, we have recognized $10.0 million in total revenue from BMS.
Anti-PD-1
(CC-90006)
Milestone Event Amount Quarter Recognized
Completion of first in vivo toxicology studies using GLPs
$0.5M Q2'16
Phase 1 clinical trial initiation $1.0M Q4'16
Milestones were recognized as revenue in the period earned. There was no revenue recognized under this agreement during the years ended December 31, 2020 or 2019.
Research and Development Expense
Research and development expenses consist of costs associated with our research and development activities, including drug discovery efforts, preclinical and clinical development of our programs, and manufacturing. Our research and development expenses include:
• External research and development expenses incurred under arrangements with third parties, such as contract research organizations (“CROs”), consultants, members of our scientific and therapeutic advisory boards, and contract manufacturing organizations (“CMOs”);
• Employee-related expenses, including salaries, benefits, travel, and stock-based compensation;
• Facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of leasehold improvements and equipment, and laboratory supplies; and
• License and sub-license fees.
We expense research and development costs as incurred. We account for nonrefundable advance payments for goods and services that will be used in future research and development activities as expense when the service has been performed or when the goods have been received.
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We are conducting research and development activities primarily on inflammation programs. We have a research and development team that conducts antibody discovery, characterization, translational studies, IND-enabling preclinical studies, and clinical development. We conduct some of our early research and preclinical activities internally and plan to rely on third parties, such as CROs and CMOs, for the execution of certain of our research and development activities, such as in vivo toxicology and pharmacology studies, drug product manufacturing, and clinical trials.
We have completed Phase 1 clinical trials and have ongoing Phase 2 clinical trials for imsidolimab and an ongoing Phase 1 clinical trial for ANB030. We expect our research and development expenses to be higher for the foreseeable future as we continue to advance our product candidates.
General and Administrative Expense
General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation for our executive, finance, legal, business development, human resource, and support functions. Other general and administrative expenses include allocated facility-related costs not otherwise included in research and development expenses, travel expenses, and professional fees for auditing, tax, and legal services.
Interest Expense
Interest expense consists of floating interest payments and amortization of discounts on our outstanding notes payable relating to our Loan and Security Agreement with Oxford Finance LLC and Silicon Valley Bank, as amended (the “Loan Agreement”). On January 1, 2020, the Loan Agreement was paid in full, without penalty or premium.
Interest Income
Interest income consists primarily of interest earned on our short-term and long-term investments and is recognized when earned.
Net Operating Loss and Research and Development Tax Credit Carryforwards
Since inception, we have accumulated net operating losses, or NOLs in all years except December 31, 2015 and 2014, in which we generated taxable income as a result of our collaboration agreement with GSK as well as expenses incurred by our Australian subsidiary which are not deductible for U.S. income tax purposes. While we utilized NOLs in 2015 and 2014, we have since incurred losses and therefore continue to have a valuation allowance against our net deferred tax assets due to the uncertainty of the realization of such assets.
At December 31, 2020, we had federal and state net operating loss carryforwards (“NOLs”), of $248.4 million and $64.2 million, respectively. The federal and state NOLs will begin to expire in 2028, unless previously utilized. The federal NOLs includes $188.4 million of net operating losses generated in 2018 and after. Federal net operating losses generated in 2018 and after carryover indefinitely and may generally be used to offset up to 80% of future taxable income. At December 31, 2020, we had federal and California research tax credit carryforwards of approximately $14.3 million and $8.9 million, respectively. The federal research tax credit carryforwards will begin to expire in 2026 and the California state credits carryforward indefinitely. We also have foreign tax losses of $3.4 million, which will carry forward indefinitely, subject to a continuity of ownership test.
The NOL carryforward and the research tax credit carryforwards may be subject to an annual limitation under Section 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, and similar state provisions if we experience one or more ownership changes which would limit the amount of NOL and tax credit carryforwards that can be utilized to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382 and 383 of the Code, results from transactions increasing ownership of certain stockholders or public groups in the stock of the corporation by more than 50 percentage points over a three-year period. In September 2015, we completed a Section 382 and 383 of the Code ownership change analysis through December 31, 2014 and determined that there was an ownership change in 2007 that may limit the utilization of approximately $5.3 million and $5.4 million in Federal and state NOLs, respectively, and $0.2 million in both Federal and state research tax credits. We extended the analysis period of the study through December 31, 2018, noting one additional ownership changes during fiscal 2017 that may limit the utilization of Federal and State NOLs. Limitations on our ability to use NOL carryforwards and research and development tax credits to offset future taxable income could require us to pay U.S. federal income tax earlier than would be required if such limitations were not in effect. Similar rules and limitations may apply for state income tax purposes.
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Critical Accounting Policies and Use of Estimates
Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts, and experience.
While our significant accounting policies are described in more detail in the notes to our financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies used in the preparation of our financial statements require the most significant judgments and estimates.
Revenue Recognition
Revenue is recognized in accordance with revenue recognition accounting guidance, which utilizes five basic steps to determine whether revenue can be recognized and to what extent: (i) identify the contract with a customer; (ii) identify the performance obligation; (iii) determine the transaction price; (iv) allocate the transaction price; and (v) determine the recognition period.
Performance Obligations. We evaluate deliverables on a contract-by-contract basis to determine whether each deliverable represents a good or service that is distinct or has the same pattern of transfer as other deliverables. A deliverable is considered distinct if the customer can benefit from the good or service independently of other goods/services either in the contract or that can be obtained elsewhere, without regard to contract exclusivity, and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contact. If the deliverable is not considered distinct, we combine such deliverables and account for them as a single performance obligation. We allocate the consideration to each deliverable at the inception of the arrangement based on the transaction price.
Our performance obligations may include the following:
• License Arrangements. The performance obligations under our collaboration and license agreements generally include exclusive or nonexclusive licenses to one or more products generated using our technologies. Licenses for multiple antibodies within a single contract are generally combined as they have substantially the same pattern of transfer to the customer. Historically, our licenses have held no value to the customer, as the antibodies were in the discovery phase and required our expertise for further development. Accordingly, licenses are not considered distinct.
• Research and Development Services. The performance obligations under our collaboration and license agreements generally include research and development services we perform on behalf of or with our collaborators. As discussed within license arrangements above, our licenses have historically held no value without the research and development services we provide. As we generally only provide research and development services for internally generated antibodies that require a license to be utilized by a third party, our research and development services are not considered distinct.
• Steering Committee Meetings. The performance obligations under our collaboration and license agreements may also include our participation in a steering committees, which allows us to direct the progression of our discovery programs. As these steering committees would not occur or benefit the customer without the use of our licenses, these are not considered distinct.
We recognize consideration allocated to a performance obligation as the performance obligation is satisfied, and the determination as to whether consideration is recognized over time or at a point in time is made upon contract inception. For our collaboration agreements, this is generally over the period in which research and development services have been performed.
Transaction Price. Our collaboration and license agreements generally include both fixed and variable consideration. Fixed payments, such as those for upfront fees are included in the transaction price at contract value, while variable consideration such as reimbursement for research and development services, milestone and royalty payments are estimated and then evaluated for constraints upon inception of the contract and evaluated on a quarterly basis thereafter. Research and development services are updated for actual invoices. Given the nature of our agreements, milestones are estimated using the most likely amount and are evaluated on a quarterly basis. Upon commercialization, royalty payments are recognized in the period incurred.
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Research and Development Expenses
As part of the process of preparing our financial statements, we are required to estimate research and development costs incurred during the period, which impacts the amount of accrued expenses and prepaid balances related to such costs as of each balance sheet date. This process involves reviewing open contracts and purchase orders, communicating with our personnel and service providers to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. The significant estimates in our accrued research and development expenses include the costs incurred for services performed by our vendors in connection with research and development activities for which we have not yet been invoiced.
We base our expenses related to research and development activities on our estimates of the services received and efforts expended pursuant to quotes and contracts with vendors that conduct research and development on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the research and development expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid accordingly. Advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made.
Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred.
Recently Issued Accounting Pronouncements
For further information on recently issued accounting pronouncements, see Note 2 — Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Results of Operations
Collaboration Revenue
Collaboration revenue was $75.0 million compared to $8.0 million for the years ended December 31, 2020 and 2019, respectively. A comparison of collaboration revenue is as follows:
Year Ended
December 31, Increase
(in thousands) 2020 2019 (Decrease)
GSK Amendment No. 3 Payment $ 60,000 $ — $ 60,000
GSK milestones 15,000 8,000 7,000
Total collaboration revenue
$ 75,000 $ 8,000 $ 67,000
Collaboration revenue during the year ended December 31, 2020 increased $67.0 million compared to the year ended December 31, 2019 primarily due to payment received related to an amendment to the GSK Agreement during 2020 and the timing of milestones achieved.
We expect that any collaboration revenue we generate will continue to fluctuate from period to period as a result of the timing and amount of milestones from our existing collaborations.
Research and Development Expenses
Research and development expenses were $80.0 million during the year ended December 31, 2020 compared to $99.3 million during the year ended December 31, 2019, for a decrease of approximately $19.3 million. The decrease is primarily
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attributable to a $14.1 million decrease in outside services for preclinical and manufacturing expenses, a $3.7 million decrease in clinical expenses, a $1.1 million decrease in salaries and related expenses, including stock compensation expense, and a $0.4 million decrease in other research and development expenses.
We do not track fully burdened research and development costs separately for each of our product candidates. We review our research and development expenses by focusing on external development and internal development costs. External development expenses consist of costs associated with our external preclinical and clinical trials, including pharmaceutical development and manufacturing. Included in preclinical and other unallocated costs are external corporate overhead costs that are not specific to any one program. Internal costs consist of salaries and wages, share-based compensation and benefits, which are not tracked by product candidate as several of our departments support multiple product candidate research and development programs. The following table summarizes the external costs attributable to each program and internal costs:
Year Ended
December 31, Increase/(Decrease)
(in thousands) 2020 2019
External Costs
Imsidolimab $ 25,577 $ 18,570 $ 7,007
Etokimab 14,483 41,872 (27,389)
ANB030 4,563 9,261 (4,698)
ANB032 9,447 2,216 7,231
Preclinical and other unallocated costs 8,143 8,564 (421)
Total External Costs $ 62,213 $ 80,483 $ (18,270)
Internal Costs 17,812 18,855 (1,043)
Total Costs $ 80,025 $ 99,338 $ (19,313)
General and Administrative Expenses
General and administrative expenses were $18.9 million during the year ended December 31, 2020 compared to $16.1 million during the year ended December 31, 2019, for an increase of approximately $2.8 million. The increase is primarily due to a $1.5 million increase in legal expenses, a $1.3 million increase in personnel costs including stock compensation expense, and a $0.7 million increase in insurance expense, offset by a $0.4 million decrease in professional fees, a $0.1 million decrease in travel expense, and $0.2 million decrease in other general and administrative expense.
We expect that our general and administrative expenses will increase for the foreseeable future as we incur additional costs associated with being a publicly traded company, including legal, auditing and filing fees, additional insurance premiums, investor relations expenses and general compliance and consulting expenses. We also expect our intellectual property related legal expenses, including those related to preparing, filing, prosecuting and maintaining patent applications, to increase as our intellectual property portfolio expands.
Interest Expense
Interest expense was $0.0 million during the year ended December 31, 2020. Interest expense was $1.0 million during the year ended December 31, 2019 and primarily represents effective interest of approximately 12.67% on our outstanding Term Loans on an outstanding principal balance of $0.6 million as of December 31, 2019. The decrease in interest expense during the periods is due to the final payment made on the Loan Agreement on January 1, 2020.
Interest Income
Interest income was $4.0 million and $11.0 million during the years ended December 31, 2020 and 2019, respectively, which primarily related to our short-term and long-term investments, the balance of which decreased during the periods as a result of funding our clinical trial programs. The decrease in interest income is also attributable to lower interest rates during the year ended December 31, 2020.
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Provision for Income Taxes
The income tax benefit was $0.0 million and $0.2 million during the year ended December 31, 2020 and 2019, respectively. The income tax benefit for the year ended December 31, 2019 is primarily related to the allocation of tax benefit to continuing operations offsetting income tax expense recorded in other comprehensive income that is related to unrealized gains.
Liquidity and Capital Resources
From our inception through December 31, 2020, we have received an aggregate of $804.0 million to fund our operations, which included $620.3 million from the sale of equity securities, $164.6 million from our collaboration agreements and $19.1 million from venture debt. As of December 31, 2020, we had $411.2 million in cash, cash equivalents and investments.
In addition to our existing cash, cash equivalents and investments, we are eligible to earn milestone and other contingent payments for the achievement of defined collaboration objectives and certain nonclinical, clinical, regulatory and sales-based events, and royalty payments under our collaboration agreements. Our ability to earn these milestone and contingent payments and the timing of achieving these milestones is primarily dependent upon the outcome of our collaborators’ research and development activities. Our rights to payments under our collaboration agreements are our only committed external source of funds.
Specific to our collaboration agreement with GSK, dostarlimab is currently in clinical development for various solid tumor indications. We anticipate receiving additional milestones from GSK, of equal magnitude to the milestone payments outlined above, upon acceptance and approval of BLA and EMA filings of dostarlimab for the PdMMRT indication. Depending upon the timing of the aforementioned dostarlimab regulatory acceptance and approval milestones, we anticipate a total of $75.0 million in such milestone payments over the upcoming 18 months. An additional $165.0 million in sales milestones is anticipated upon achievement of certain dostarlimab annual sales revenues. Our amended GSK Agreement also includes a royalty to GSK’s global net sales of Zejula that began in 2021.
Funding Requirements
We may seek to obtain additional financing in the future through equity or debt financings or through collaborations or partnerships with other companies. If we are unable to obtain additional financing on commercially reasonable terms, our business, financial condition and results of operations will be materially adversely affected.
Our primary uses of capital are, and we expect will continue to be, third-party clinical and preclinical research and development services, including manufacturing, laboratory and related supplies, compensation and related expenses, legal, patent and other regulatory expenses, and general overhead costs. We have entered into agreements with certain vendors for the provision of services, including services related to commercial manufacturing, that we are unable to terminate for convenience. Under such agreements, we are contractually obligated to make certain minimum payments to the vendors with the amounts to be based on the timing of the termination and the specific terms of the agreement.
Cash, cash equivalents and investments totaled $411.2 million as of December 31, 2020, compared to $428.5 million as of December 31, 2019. We believe that our existing cash, cash equivalents and investments will fund our current operating plan at least into 2024. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we expect. Additionally, the process of testing product candidates in clinical trials is costly, and the timing of progress and expenses in these trials is uncertain.
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Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2020 and 2019:
Year Ended
December 31,
(in thousands) 2020 2019
Net cash (used in) provided by:
Operating activities $ (14,157) $ (69,517)
Investing activities 94,475 131,431
Financing activities (879) (4,493)
Net increase in cash, cash equivalents and restricted cash
$ 79,439 $ 57,421
Operating Activities
Net cash used in operating activities during the year ended December 31, 2020 of $14.2 million was primarily due to our net loss of $19.9 million, adjusted for addbacks for non-cash items of $12.5 million which includes stock-based compensation and income from marketable securities and decreases in working capital of $6.8 million.
Net cash used in operating activities during the year ended December 31, 2019 of $69.5 million was primarily due to our net loss of $97.3 million, adjusted for addbacks for non-cash items of $11.0 million which includes stock-based compensation and income from marketable securities and increases in working capital of $16.9 million.
Investing Activities
Cash provided by and used in investing activities during the year ended December 31, 2020 and 2019 was primarily due to the acquisition of investments upon receipt of the proceeds from our IPO and follow-on public offerings, offset by investment maturities.
Financing Activities
Cash used in financing activities during the year ended December 31, 2020 of $0.9 million was primarily related to $1.4 million in repayments on our outstanding Term Loan, offset by proceeds of $0.5 million from the issuance of common stock as a result of option exercises.
Cash used in financing activities during the year ended December 31, 2019 of $4.5 million was primarily related to $7.5 million in repayments on our outstanding Term Loan, offset by proceeds of $3.0 million from the issuance of common stock as a result of option exercises.
Contractual Obligations
We have entered into agreements with certain vendors for the provision of goods and services, which includes manufacturing services with contract manufacturing organizations and development services with contract research organizations. These agreements may include certain provisions for purchase obligations and termination obligations that could require payments for the cancellation of committed purchase obligations or for early termination of the agreements. The amount of the cancellation or termination payments vary and are based on the timing of the cancellation or termination and the specific terms of the agreement and therefore are cancellable contracts.
For further information related to our operating lease and future minimum annual obligations for license payments under our collaboration in-license agreements, see Note 11 — Commitments and Contingencies in the accompanying notes to the consolidated financial statements included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.