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 consolidated financial statements and related notes thereto for the year ended December 31, 2020, included in our Annual Report on Form 10-K, or Annual Report, filed with the Securities and Exchange Commission, or SEC, on March 25, 2021. 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 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 Geographic Atrophy (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 deploying a rigorous, biomarker-driven development strategy designed to 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 $26.0 million and $12.3 million for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, we had an accumulated deficit of $192.0 million and cash and cash equivalents and short-term investments of $326.7 million. 18 Initial Public Offering On July 28, 2020, we completed an 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. Impact of COVID-19 Pandemic The COVID-19 pandemic continues to rapidly evolve, and its ongoing impact is uncertain and subject to change. For instance, we have experienced interruption in clinical trial activities in Bangladesh due to quarantines, shortages in clinical site staff, longer timelines for clinical site initiation and temporary shortages in lab kits and supplies. 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. 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. 19 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. Other Income, Net Other income, net, primarily consists of non-recurring income from research grants and interest income earned on our cash equivalents and short-term investments. Results of Operations Comparison of the Three Months Ended March 31, 2021 and 2020 The following tables summarize our results of operations for the periods presented. Three Months Ended March 31, 2021 2020 Dollar Change % Change (in thousands) Operating expenses: Research and development $ 20,696 $ 10,217 $ 10,479 103% General and administrative 5,452 2,239 3,213 144% Total operating expenses 26,148 12,456 13,692 110% Loss from operations (26,148 ) (12,456 ) (13,692 ) 110% Other income, net 142 115 27 23% Net loss $ (26,006 ) $ (12,341 ) $ (13,665 ) 111% Research and Development Expenses Three Months Ended March 31, 2021 2020 Dollar Change % Change (in thousands) Direct costs: Clinical and nonclinical outside services $ 7,909 $ 4,048 $ 3,861 95% Consulting and professional services 1,732 608 1,124 * Contract manufacturing 5,192 3,001 2,191 73% Laboratory supplies and materials 283 56 227 * Indirect costs: Compensation and personnel-related (including stock-based compensation) 4,919 2,239 2,680 120% Facilities and depreciation 574 216 358 * Other 87 49 38 78% Total research and development expenses $ 20,696 $ 10,217 $ 10,479 103% * Not meaningful 20 Research and development expenses increased by $10.5 million, or 103%, for the three months ended March 31, 2021 compared to the same period in 2020. The increase was primarily due to an increase of $3.9 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 $2.2 million related to the production of ANX005 as well as pre-IND manufacturing activities to support ANX105. Compensation and personnel-related expenses increased by $2.7 million due to an increase in headcount and related employee costs. Direct consulting and professional services costs increased by $1.1 million related to external research and development during the three months ended March 31, 2021. General and Administrative Expenses Three Months Ended March 31, 2021 2020 Dollar Change % Change (in thousands) Compensation and personnel-related (including stock-based compensation) $ 2,578 $ 937 $ 1,641 * Consulting and professional services 2,348 1,071 1,277 119% Facilities and depreciation 332 113 219 * Other 194 118 76 64% Total general and administrative expenses $ 5,452 $ 2,239 $ 3,213 144% * Not meaningful General and administrative expenses increased by $3.2 million, or 144%, for the three months ended March 31, 2021 compared to the same period in 2020. The increase was primarily due to an increase of $1.6 million in compensation and personnel-related expenses due to an increase in headcount and an increase of $1.3 million in consulting and professional services for accounting, legal and audit fees, and directors and officers liability insurance. 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 March 31, 2021, 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 March 31, 2021, we had available cash and cash equivalents and short-term investments of $326.7 million and an accumulated deficit of $192.0 million. Historical Cash Flows Three Months Ended March 31, 2021 2020 (in thousands) Cash used in operating activities $ (23,416 ) $ (10,001 ) Cash used in investing activities (37,581 ) — Cash provided by (used in) financing activities 268 (571 ) Net decrease in cash, cash equivalents and restricted cash $ (60,729 ) $ (10,572 ) Cash Flows from Operating Activities Cash used in operating activities for the three months ended March 31, 2021 was $23.4 million, which consisted of a net loss of $26.0 million, partially offset by $3.7 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 stock-based compensation of $3.0 million, depreciation and amortization of $0.5 million, and accretion of discount on available-for sale securities of $0.2 million. 21 Cash used in operating activities for the three months ended March 3 1, 202 0 was $ 10.0 million, which consisted of a net loss of $ 12.3 million, partially offset by $ 0.8 million in non-cash charges and a net change of $ 1.5 million in our net operating assets and liabilities. The non-cash charges consisted of stock-based compensation of $ 0.7 million and depreciation and amortization of $ 0.1 million. Cash Flows from Investing Activities Cash used in investing activities for the three months ended March 31, 2021 was $37.6 million, which consisted of $42.5 million of purchases of available-for-sale securities and $5.0 million of maturities of available-for-sale securities. There were no investing activities as of March 31, 2020. Cash Flows from Financing Activities Cash provided by financing activities for the three months ended March 31, 2021 was $0.3 million, related to proceeds from issuance of common stock. Cash used in financing activities for the three months ended March 31, 2020 was $0.6 million, related to payments for deferred offering costs. 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; • 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. 22 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. 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. During the three months ended March 31, 2021, there were no material changes to our critical accounting policies 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 our Annual Report. 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. 23 Item 3. Quantitative and Qualitat ive Disclosures About Market Risk Not required for the Company as a smaller reporting company.