Annexon, Inc. 10-Q

Item 2. 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 in conjunction with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our final prospectus, dated July 23, 2020, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, or the Prospectus. In addition to historical financial information, this discussion and other parts of this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, based upon current expectations that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” under Part II, Item 1A below. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “predict,” “should,” “will” or the negative of these terms or other similar expressions. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results and events to differ from those anticipated. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements . Overview We are a clinical-stage biopharmaceutical company developing a pipeline of novel therapies for patients with classical complement-mediated disorders of the brain, body and eye. Our pipeline is based on our platform technology addressing well-researched classical complement-mediated autoimmune and neurodegenerative disease processes, both of which are triggered by aberrant activation of C1q, the initiating molecule of the classical complement pathway. Evidence suggests that potent and selective inhibition of C1q can prevent tissue damage triggered in antibody-mediated autoimmune disease and preserve loss of functioning synapses associated with cognitive and functional decline in complement-mediated neurodegeneration. Our upstream complement approach targeting C1q acts as an “on/off switch” designed to block all downstream components of the classical complement pathway that lead to excess inflammation, tissue damage and patient disability in a host of complement-mediated disorders, while preserving the normal immune function of the lectin and alternative complement pathways involved in the clearance of pathogens and damaged cells. Our pipeline of product candidates is designed to block the activity of C1q and the entire classical complement pathway in a broad set of complement-mediated diseases. Our first product candidate, ANX005, is a full-length monoclonal antibody formulated for intravenous administration in autoimmune and neurodegenerative disorders. Our second product candidate, ANX007, is an antigen-binding fragment, or Fab, formulated for intravitreal administration for the treatment of neurodegenerative ophthalmic disorders. We are also developing ANX009, an investigational, subcutaneous formulation of a Fab designed for the treatment of systemic autoimmune diseases. We have completed Phase 1b safety and dose-ranging clinical trials for ANX005 and ANX007 in patients with Guillain-Barré Syndrome, or GBS, and glaucoma, respectively. Both ANX005 and ANX007 were well-tolerated and showed full inhibition of C1q and the classical complement pathway in the Phase 1b trials. We are advancing ANX005 into multiple Phase 2 trials in 2020 and 2021 including in patients with GBS, warm autoimmune hemolytic anemia, Huntington’s disease and amyotrophic lateral sclerosis. We plan to advance ANX007 into a Phase 2 trial in patients with GA in 2021. Additionally, we are developing novel product candidates designed to inhibit C1q and other components of the early classical complement cascade with the goal of further broadening our portfolio. Finally, we are leveraging our disciplined development strategy in early clinical trials utilizing established biomarkers to enhance patient selection, measure target engagement and assess our product candidates’ potential to meaningfully impact the disease process and improve the probability of technical success over shorter development timelines. We hold worldwide development and commercialization rights, including through exclusive licenses, to all of our product candidates, which allows us to strategically maximize value from our product portfolio over time. Our patent portfolio includes patent protection for our upstream complement platform and each of our product candidates. We were incorporated in March 2011 and commenced operations later that year. To date, we have focused primarily on performing research and development activities, hiring personnel and raising capital to support and expand these activities. We do not have any products approved for sale, and we have not generated any revenue from product sales. We have incurred net losses each year since our inception. Our net losses were $15.6 million and $10.2 million for the three months ended September 30, 2020 and 2019, respectively, and $40.2 million and $28.2 million for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, we had an accumulated deficit of $142.8 million and cash and cash equivalents of $370.7 million. 19 Recent Developments On July 28, 2020, we completed an initial public offering, or IPO, of our common stock. As part of the IPO, we issued and sold 14,750,000 shares of our common stock at a public offering price of $17.00 per share and 2,139,403 shares of our common stock to the underwriters of the IPO pursuant to the partial exercise of their option to purchase additional shares at a price of $17.00 per share less underwriting discounts and commissions. We received net proceeds of approximately $262.4 million from the IPO, after deducting underwriting discounts and commissions of $20.1 million and offering costs of $4.6 million. The global COVID-19 pandemic continues to rapidly evolve, and its ultimate impact is highly uncertain and subject to change. We will continue to monitor the COVID-19 situation closely. The extent of the impact of COVID-19 on our business, operations and clinical development timelines and plans remains uncertain, and will depend on the duration and spread of the outbreak and its impact on our clinical trial enrollment, trial sites, contract research organizations, or CROs, third-party manufacturers, regulatory authorities and other third parties with whom we do business. Components of Operating Results Revenue Our product candidates are not approved for commercial sale. We have not generated any revenue from sales of our product candidates and do not expect to do so in the foreseeable future and until we complete clinical development, submit regulatory filings and receive approvals from applicable regulatory bodies for such product candidates, if ever. Operating Expenses Research and Development Research and development expenses account for a significant portion of our operating expenses. Research and development expenses consist primarily of direct and indirect costs incurred for the development of our product candidates. Direct expenses include: • preclinical and clinical outside service costs associated with discovery, preclinical and clinical testing of our product candidates; • professional services agreements with third party contract organizations, investigative clinical trial sites and consultants that conduct research and development activities on our behalf; • contract manufacturing costs to produce clinical trial materials; and • laboratory supplies and materials. Indirect expenses include: • compensation and personnel-related expenses (including stock-based compensation); • allocated expenses for facilities and depreciation; and • other indirect costs. We record research and development expenses as incurred. Payments made to other entities are under agreements that are generally cancelable by us. Advance payments for goods or services to be received in future periods for use in research and development activities are deferred as prepaid expenses. The prepaid amounts are then expensed as the related services are performed. At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates. We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates, particularly as they advance into later stages of development and as we conduct larger clinical trials, engage in other research and development activities and seek regulatory approvals for any product candidates that successfully complete clinical trials and as we incur expenses associated with hiring additional personnel to support our research and development efforts. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain. 20 General and Administrative General and administrative expenses consist primarily of compensation and personnel-related expenses (including stock-based compensation) for our personnel in executive, finance and other administrative functions. General and administrative expenses also include professional fees paid for accounting, legal and tax services, allocated expenses for facilities and depreciation and other general and administrative costs. We expect our general and administrative expenses to increase substantially for the foreseeable future as we continue to support our research and development activities, grow our business and, if any of our product candidates receive marketing approval, commercialization activities. We will also incur additional expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC, Sarbanes-Oxley Act and the Nasdaq Stock Market, additional insurance expenses, investor relations activities and other administrative and professional services. We also expect to increase the size of our administrative function to support the growth of our business. Loss on Remeasurement of Redeemable Convertible Preferred Stock Liability Loss on remeasurement of redeemable convertible preferred stock liability consists of gains and losses from the remeasurement to fair value of the redeemable convertible preferred stock liability related to our Series C redeemable convertible preferred stock. We remeasured the liability each reporting period from the date of issuance (December 2018) until the second closing of our Series C redeemable convertible preferred stock which occurred in August 2019. Other Income, Net Other income, net, primarily consists of non-recurring income from research grants and interest income earned on our cash equivalents. Results of Operations Comparison of the Three Months Ended September 30, 2020 and 2019 The following tables summarize our results of operations for the periods presented. Three Months Ended September 30, 2020 2019 Dollar Change % Change (in thousands) Operating expenses: Research and development $ 11,775 $ 7,089 $ 4,686 66% General and administrative 3,810 1,981 1,829 92% Total operating expenses 15,585 9,070 6,515 72% Loss from operations (15,585 ) (9,070 ) (6,515 ) 72% Loss on remeasurement of redeemable convertible preferred stock liability — (1,340 ) 1,340 * Other (expense) income, net (52 ) 224 (276 ) (123%) Net loss before taxes (15,637 ) (10,186 ) (5,451 ) 54% Provision for income taxes 1 2 (1 ) (50%) Net loss $ (15,638 ) $ (10,188 ) $ (5,450 ) 53% * Not meaningful 21 Research and Development Expenses Three Months Ended September 30, 2020 2019 Dollar Change % Change (in thousands) Direct costs: Preclinical and clinical outside services $ 4,404 $ 2,238 $ 2,166 97% Professional services 1,222 501 721 144% Contract manufacturing 2,453 2,637 (184 ) (7%) Laboratory supplies and materials 279 84 195 * Indirect costs: Compensation and personnel-related (including stock- based compensation) 3,133 1,352 1,781 132% Facilities and depreciation 221 234 (13 ) (6%) Other 63 43 20 47% Total research and development expenses $ 11,775 $ 7,089 $ 4,686 66% * Not meaningful Research and development expenses increased by $4.7 million, or 66%, for the three months ended September 30, 2020 compared to the same period in 2019. The increase was primarily due to an increase of $2.2 million in direct clinical outside services related to our ongoing and planned clinical trials. Compensation and personnel-related expenses increased by $1.8 million due to an increase in headcount and related employee costs. Direct professional services costs increased by $0.7 million related to external research and development during the three months ended September 30, 2020. General and Administrative Expenses Three Months Ended September 30, 2020 2019 Dollar Change % Change (in thousands) Compensation and personnel-related (including stock-based compensation) $ 1,566 $ 669 $ 897 134% Professional services 1,962 1,130 832 74% Facilities and depreciation 136 129 7 5% Other 146 53 93 175% Total general and administrative expenses $ 3,810 $ 1,981 $ 1,829 92% General and administrative expenses increased by $1.8 million, or 92%, for the three months ended September 30, 2020 compared to the same period in 2019. The increase was primarily due to an increase of $0.9 million in compensation and personnel-related expenses and an increase of $0.8 million in professional services for public company readiness efforts including accounting, legal and audit fees and directors and officers liability insurance required for a public corporation. Loss on Remeasurement of Redeemable Convertible Preferred Stock Liability For the three months ended September 30, 2019, we recorded a $1.3 million loss on remeasurement of redeemable convertible preferred stock liability related to the change in the fair value of the liability. The liability was recognized in connection with the initial closing of our Series C redeemable convertible preferred stock financing in December 2018 and was settled upon completion of the second closing in August 2019. Other (Expense) Income, Net Other (expense) income, net, decreased by $0.3 million for the three months ended September 30, 2020 compared to the same period in 2019. The decrease in other income was primarily driven by $0.2 million grant received in 2019 and lower interest income in 2020. 22 Comparison of the Nine Months Ended September 30, 2020 and 2019 The following tables summarize our results of operations for the periods presented. Nine Months Ended September 30, 2020 2019 Dollar Change % Change (in thousands) Operating expenses: Research and development $ 31,279 $ 17,729 $ 13,550 76% General and administrative 8,999 5,660 3,339 59% Total operating expenses 40,278 23,389 16,889 72% Loss from operations (40,278 ) (23,389 ) (16,889 ) 72% Loss on remeasurement of redeemable convertible preferred stock liability — (5,670 ) 5,670 * Other income, net 64 821 (757 ) (92%) Net loss before taxes (40,214 ) (28,238 ) (11,976 ) 42% Provision for income taxes 5 3 2 67% Net loss $ (40,219 ) $ (28,241 ) $ (11,978 ) 42% * Not meaningful Research and Development Expenses Nine Months Ended September 30, 2020 2019 Dollar Change % Change (in thousands) Direct costs: Preclinical and clinical outside services $ 12,490 $ 7,375 $ 5,115 69% Professional services 2,594 1,340 1,254 94% Contract manufacturing 7,238 4,388 2,850 65% Laboratory supplies and materials 552 365 187 51% Indirect costs: Compensation and personnel-related (including stock- based compensation) 7,596 3,542 4,054 114% Facilities and depreciation 665 646 19 3% Other 144 73 71 97% Total research and development expenses $ 31,279 $ 17,729 $ 13,550 76% Research and development expenses increased by $13.6 million, or 76%, for the nine months ended September 30, 2020 compared to the same period in 2019. The increase was primarily due to an increase of $5.1 million in direct preclinical and clinical outside services primarily related to our ongoing and planned clinical trials and toxicology studies to support ANX009 and our next generation candidates. Compensation and personnel-related expenses increased by $4.1 million due to an increase in headcount and related employee costs. Contract manufacturing expenses increased by $2.9 million primarily related to the manufacturing of ANX005 and pre-IND activities for our next generation candidates. In addition, professional services increased by $1.3 million due to an increase in external research and development. 23 General and Administrative Expenses Nine Months Ended September 30, 2020 2019 Dollar Change % Change (in thousands) Professional services $ 4,768 $ 2,642 $ 2,126 80% Compensation and personnel-related (including stock-based compensation) 3,501 2,575 926 36% Facilities and depreciation 369 318 51 16% Other 361 125 236 189% Total general and administrative expenses $ 8,999 $ 5,660 $ 3,339 59% General and administrative expenses increased by $3.3 million, or 59%, for the nine months ended September 30, 2020 compared to the same period in 2019. The increase was primarily due to $2.1 million in professional services for public company readiness efforts including accounting, legal and audit fees and directors and officers liability insurance required for a public corporation. Compensation and personnel-related expenses increased by $0.9 million primarily due to an increase in headcount and related employee costs. Loss on Remeasurement of Redeemable Convertible Preferred Stock Liability For the nine months ended September 30, 2019, we recorded a $5.7 million loss on remeasurement of redeemable convertible preferred stock liability related to the change in the fair value of the liability. The liability was recognized in connection with the initial closing of our Series C redeemable convertible preferred stock financing in December 2018 and was settled upon completion of the second closing in August 2019. Other Income, Net Other income, net, decreased by $0.8 million, or 92%, for the nine months ended September 30, 2020 compared to the same period in 2019. In the nine months ended September 30, 2019, we had received $0.2 million under the Sponsored Research Agreement for a new therapeutic agent, ANX005, which was recorded as other income. The remaining $0.6 million decrease was primarily driven by $0.2 million grant received in 2019 as well as lower interest income in 2020. Liquidity and Capital Resources Sources of Liquidity Due to our significant research and development expenditures, we have generated operating losses since our inception. We have funded our operations primarily through the sale of equity securities. From our inception through September 30, 2020, we have raised net cash proceeds of $233.9 million from private placements of our redeemable convertible preferred stock and $262.4 million from the IPO of our common stock. As of September 30, 2020, we had available cash and cash equivalents of $370.7 million and an accumulated deficit of $142.8 million. Historical Cash Flows Nine Months Ended September 30, 2020 2019 (in thousands) Cash used in operating activities $ (33,831 ) $ (19,569 ) Cash used in investing activities (292 ) (168 ) Cash provided by financing activities 360,876 29,241 Net increase in cash and cash equivalents $ 326,753 $ 9,504 24 Cash Flows from Operating Activities Cash used in operating activities for the nine months ended September 30, 2020 was $33.8 million, which consisted of a net loss of $40.2 million, partially offset by $3.3 million in non-cash charges and a net change of $3.1 million in our net operating assets and liabilities. The non-cash charges consisted of stock-based compensation of $2.9 million and depreciation and amortization of $0.4 million. Cash used in operating activities for the nine months ended September 30, 2019 was $19.6 million, which consisted of a net loss of $28.2 million, partially offset by $7.5 million in non-cash charges and a net change of $1.1 million in our net operating assets and liabilities. The non-cash charges consisted of the loss on remeasurement of the redeemable convertible preferred stock liability of $5.7 million, stock-based compensation of $1.5 million and depreciation and amortization of $0.3 million. Cash Flows from Investing Activities Cash used in investing activities for the nine months ended September 30, 2020 and 2019 was $0.3 million and $0.2 million, respectively, related to purchases of property and equipment. Cash Flows from Financing Activities Cash provided by financing activities for the nine months ended September 30, 2020 was $360.9 million, which consisted of the net proceeds of $262.4 million from the IPO, net of underwriting discounts and expenses, the net proceeds received from sale and issuance of our Series D redeemable convertible preferred stock of approximately $96.8 million, and proceeds of $0.5 million from Paycheck Protection Program loan, partially offset by repayment of the $0.5 million Paycheck Protection Program loan. Cash provided by financing activities for the nine months ended September 30, 2019 was $29.2 million, which consisted of net proceeds received from the second closing of our Series C redeemable convertible preferred stock of $30.0 million in August 2019, partially offset by payments for deferred offering costs of $0.8 million. Funding Requirements We use our cash to fund operations, primarily to fund our clinical trials, research and development expenditures and related personnel costs. We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to our product candidates, particularly as they advance into later stages of development and as we conduct larger clinical trials, engage in other research and development activities, seek regulatory approvals for any product candidates that successfully complete clinical trials and as we incur expenses associated with hiring additional personnel to support our research and development efforts. In addition, we expect our general and administrative expenses to increase substantially for the foreseeable future as we continue to support our research and development activities and to grow our business and as we expect to engage in commercialization activities, if any of our product candidates receive marketing approval. We will also incur additional expenses as a result of operating as a public company and also expect to increase the size of our administrative function to support the growth of our business. The timing and amount of our operating expenditures will depend on many factors, including: • the scope, progress, results and costs of researching and developing our current product candidates or any other future product candidates we choose to pursue, and conducting preclinical studies and clinical trials, including our planned clinical trials of ANX005, ANX007, and ANX009; • the timing of, and the costs involved in, obtaining regulatory approvals for our lead product candidates or any future product candidates; • the number and characteristics of any additional product candidates we develop or acquire; • the timing and amount of any milestone, royalty and/or other payments we are required to make pursuant to our current or any future license or collaboration agreements; • the cost of manufacturing our lead product candidates or any future product candidates and any products we successfully commercialize; • the cost of building a sales force in anticipation of product commercialization; • the cost of commercialization activities of our product candidates, if approved for sale, including marketing, sales and distribution costs; 25 • our ability to establish strategic collaborations, licensing or other arrangements and the financial terms of any such agreements, including the timing and amount of any future milestone, royalty or other payments due under any su ch agreement; • any product liability or other lawsuits related to our products; • the expenses needed to attract, hire and retain skilled personnel; • the costs associated with operating as a public company; • the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing our intellectual property portfolio; and • the timing, receipt and amount of sales of any future approved products. Based upon our current operating plan, we believe that our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements through 2023. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. We expect to continue to expend significant resources for the foreseeable future. Until such time, if ever, as we can generate substantial product revenue, we will be required to seek additional funding in the future and currently intend to do so through public or private equity offerings or debt financings, credit or loan facilities, collaborations or a combination of one or more of these funding sources. Additional funds may not be available to us on acceptable terms or at all. If we fail to obtain necessary capital when needed on acceptable terms, or at all, we could be forced to delay, limit, reduce or terminate our product development programs, commercialization efforts or other operations. If we raise additional funds by issuing equity securities, our stockholders will suffer dilution and the terms of any financing may adversely affect the rights of our stockholders. In addition, as a condition to providing additional funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders. Debt financing, if available, is likely to involve restrictive covenants limiting our flexibility in conducting future business activities, and, in the event of insolvency, debt holders would be repaid before holders of our equity securities received any distribution of our corporate assets. Contractual Obligations and Other Commitments During the nine months ended September 30, 2020, there have been no material changes outside the ordinary course of business to our contractual obligations from those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Prospectus. Off-Balance Sheet Arrangements Since our inception, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC. Emerging Growth Company Status We are an “emerging growth company,” as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period to enable us to get comply with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. Critical Accounting Policies and Estimates Management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material. 26 During the nine months ended September 30, 2020, there were no material changes to our critical accounting polici es or in the methodology used for estimates from those described in “ Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Prospectus. Recent Accounting Pronouncements Not Yet Adopted See Note 2—Basis of Presentation and Significant Accounting Policies to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one yet, of their potential impact on our financial condition of results of operations.