Annexon, Inc. 10-K

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 in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs, and expectations, and involve risks and uncertainties. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors.” Overview We are a clinical-stage biopharmaceutical company developing a pipeline of novel therapies for patients with classical complement-mediated disorders of the body, brain 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 have advanced ANX005 into a Phase 2/3 trial in patients with GBS and a Phase 2 trial in patients with Huntington’s disease. We plan to advance ANX005 into Phase 2 trials in patients with warm autoimmune hemolytic anemia and amyotrophic lateral sclerosis in 2021. A Phase 2 trial of ANX007 is ongoing in patients with GA, and. ANX009 is being evaluated in a first-in-human trial. Based on learnings from our initial trials, we are evaluating additional orphan and large market indications that are driven by aberrant or excess classical complement activation. 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. Prior to our initial public offering, or IPO, we had funded our operations primarily from the 94 issuance and sale of redeemable convertible preferred stock. In July 2020, we completed our IPO, pursuant to which 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. 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 $63.4 million and $37.2 million for the year ended December 31, 2020 and 2019, respectively. As of December 31, 2020, we had an accumulated deficit of $166.0 million and cash and cash equivalents and short-term investments of $351.2 million. We do not expect to generate revenue from any product candidates that we develop until we obtain regulatory approval for one or more of such product candidates and commercialize our products or enter into collaboration agreements with third parties. Until such time as we can generate significant revenue from sales of our product candidates, if ever, we expect to finance our operations 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. As a result, we will need to raise additional capital. 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, it could force us to delay, limit, reduce or terminate our product development programs, commercialization efforts or other operations. Impact of COVID-19 Pandemic The 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 the COVID-19 pandemic on our business, operations and clinical development timelines and plans remains uncertain, and will depend on the duration 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. 95 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 and facility costs 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. 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, infrastructure costs 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 and facility costs 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 interest income earned on our cash equivalents and short-term investments. 96 Results of Operations Comparison of the Year Ended December 31, 2020 and 2019 The following tables summarize our results of operations for the periods presented: Year Ended December 31, 2020 2019 Dollar Change % Change (in thousands) Operating expenses: Research and development $ 49,271 $ 24,524 $ 24,747 101% General and administrative 14,198 7,994 6,204 78% Total operating expenses 63,469 32,518 30,951 95% Loss from operations (63,469 ) (32,518 ) (30,951 ) 95% Loss on remeasurement of redeemable convertible preferred stock liability — (5,670 ) 5,670 * Other income, net 57 1,009 (952 ) (94%) Net loss before taxes (63,412 ) (37,179 ) (26,233 ) 71% Provision for income taxes — 4 (4 ) * Net loss $ (63,412 ) $ (37,183 ) $ (26,229 ) 71% * Not meaningful Research and Development Expenses Year Ended December 31, 2020 2019 Dollar Change % Change (in thousands) Direct costs: Clinical and nonclinical outside services $ 18,712 $ 9,893 $ 8,819 89% Professional services 3,947 2,164 1,783 82% Contract manufacturing 12,588 5,151 7,437 144% Laboratory supplies and materials 726 883 (157 ) (18%) Indirect costs: Compensation and personnel-related (including stock-based compensation) 11,876 5,415 6,461 119% Facilities and depreciation 1,018 865 153 18% Other 404 153 251 164% Total research and development expenses $ 49,271 $ 24,524 $ 24,747 101% Research and development expenses increased by $24.7 million, or 101%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase was primarily due to an increase of $8.8 million in direct clinical outside services related to our ongoing and planned clinical trials for ANX005, ANX007 and ANX009 as well as preclinical outside services to support pre-IND activities for our ANX105 and small molecule program. Contract manufacturing expense increased by $7.4 million related to the production of clinical trial materials to support our ongoing and planned clinical trials using ANX005 as well as pre-IND manufacturing activities to support ANX105. Compensation and personnel-related expenses increased by $6.5 million due to an increase in headcount and related employee costs. Direct professional services costs increased by $1.8 million related to external research and development during the year ended December 31, 2020. 97 General and Administrative Expenses Year Ended December 31, 2020 2019 Dollar Change % Change (in thousands) Professional services $ 7,350 $ 3,967 3,383 85% Compensation and personnel-related (including stock-based compensation) 5,715 3,422 2,293 67% Facilities and depreciation 729 416 313 75% Other 404 189 215 114% Total general and administrative expenses $ 14,198 $ 7,994 $ 6,204 78% \ General and administrative expenses increased by $6.2 million, or 78%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase was primarily due to an increase of $3.4 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 $2.3 million due to an increase in headcount and related employee costs. Loss on Remeasurement of Redeemable Convertible Preferred Stock Liability For the year ended December 31, 2019, we recorded a loss on remeasurement of redeemable convertible preferred stock liability of $5.7 million related to the change in 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 $1.0 million for the year ended December 31, 2020 compared to the year ended December 31, 2019. The decrease was primarily due to a decrease of $0.6 million in interest income and a $0.2 million grant received in 2019. 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 December 31, 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. As of December 31, 2020, we had available cash and cash equivalents and short-term investments of $351.2 million and an accumulated deficit of $166.0 million. Cash Flows Year Ended December 31, 2020 2019 (in thousands) Cash used in operating activities $ (53,087 ) $ (28,358 ) Cash used in investing activities (83,164 ) (267 ) Cash provided by financing activities 360,876 28,395 Net increase (decrease) in cash and cash equivalents $ 224,625 $ (230 ) 98 Cash Flows from Operating Activities Cash used in operating activities for the year ended December 31, 2020 was $53.1 million, which consisted of a net loss of $63.4 million, partially offset by $5.6 million in non-cash charges and a net change of $4.7 million in our net operating assets and liabilities. The non-cash charges consisted of stock-based compensation of $4.9 million and depreciation and amortization of $0.7 million. Cash used in operating activities for the year ended December 31, 2019 was $28.4 million, which consisted primarily of a net loss of $37.2 million and a net change of $0.6 million in our net operating assets and liabilities, partially offset by $8.2 million in non-cash charges. The non-cash charges pertained to the loss on remeasurement of the redeemable convertible preferred stock liability of $5.7 million, stock-based compensation of $2.0 million and depreciation and amortization of $0.5 million. Cash Flows from Investing Activities Cash used in investing activities for the year ended December 31, 2020 was $83.2 million, which consisted of $82.7 million of purchases of available-for-sale securities and $0.5 million of purchases of property and equipment. Cash used in investing activities for the year ended December 31, 2019 was $0.3 million related to purchases of property and equipment. Cash Flows from Financing Activities Cash provided by financing activities for the year ended December 31, 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 the Paycheck Protection Program loan which was repaid in full. Cash provided by financing activities for the year ended December 31, 2019 was $28.4 million, which consisted of net proceeds received from the sale and issuance of our Series C redeemable convertible preferred stock of $30.0 million, partially offset by payments for deferred offering costs of $1.6 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; • 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; 99 • 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; • 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 such 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. 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 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. 100 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. generally accepted accounting principles, or 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. While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report, we believe the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations. Accrued and Prepaid Research and Development Costs We estimate preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on our behalf. In recording service fees as either prepaid or accrued costs, we estimate the period over which services will be performed and the level of effort to be expended in each period. These estimates of the expense are based on communications with and information provided by the third-party service providers at each balance sheet date. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the amounts recorded accordingly. The estimates are trued up to reflect the best information available at the time of the financial statement issuance. We have not experienced any material differences between accrued or prepaid costs and actual costs incurred since inception. We defer and capitalize non-refundable advance payments for goods or services that will be used or rendered for future research and development activities as prepaid expenses until the related goods are delivered or services are performed. We evaluate such payments for current or long-term classification based on when such services are expected to be received. Stock-Based Compensation We maintain a stock-based compensation plan as a long-term incentive for employees, non-employee directors and consultants. The plan allows for the issuance of incentive stock options, non-qualified stock options, restricted stock units and other forms of equity awards. We recognize stock-based compensation expense for stock options on a straight-line basis over the requisite service period and account for forfeitures as they occur. Our stock-based compensation costs are based upon the grant date fair value of options estimated using the Black-Scholes option pricing model. This model utilizes inputs which are highly subjective assumptions and generally require significant judgment. These assumptions include: Fair Value of Common Stock — Historically, for all periods prior to the IPO in July 2020, fair values of the shares of common stock underlying our share-based awards were estimated on each grant date by our board of directors. Our board of directors considered, among other things, valuations of our common stock which were prepared by an independent third- party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants 2013 Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. After the completion of the IPO in July 2020, the fair value of each share of underlying common stock will be based on the closing price of our common stock as reported on the date of grant on the Nasdaq Global Select Market. 101 Expected Term —The expected term represents the period that the stock-based awards are expected to be outstanding and is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term). Expected Volatility —Because we were privately held and do not have sufficient trading history for our common stock, the expected volatility was estimated based on the average volatility for comparable publicly traded life sciences companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on the similar size, stage in life cycle or area of specialty. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available. Risk-Free Interest Rate —The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the option. Dividend Yield —We have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we used an expected dividend yield of zero. See Note 8—Equity Incentive Plan to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options. Certain of such assumptions involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation could be materially different. Income Taxes We recognize deferred income taxes for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. In evaluating our valuation allowance, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance. Due to our lack of earnings history and uncertainties surrounding our ability to generate future taxable income, the net deferred tax assets have been fully offset by a valuation allowance. The deferred tax assets were primarily comprised of federal and state tax net operating losses and tax credit carryforwards. Recent Accounting Pronouncements Not Yet Adopted See Note 2—Basis of Presentation and Significant Accounting Policies to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K 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. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not required for the Company as a smaller reporting company. 102