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 of our financial condition and results of operations in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K (this “Annual Report”). The following discussion contains forward-looking statements that reflect our current plans, forecasts, estimates and beliefs and involve risks and uncertainties. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Our actual results, outcomes and the timing of events could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors”. We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Annual Report. Forward-looking statements are not historical facts, reflect our current views with respect to future events, and apply only as of the date made. We do not intend, and undertake no obligation, to update these forward-looking statements, except as required by law.
Overview
We are a clinical stage biotechnology company seeking to develop differentiated biologics for the treatment of AD, asthma, COPD, and related I&I indications with high unmet need. Our antibody programs are designed to overcome limitations of existing therapies by targeting well-established mechanisms of action and incorporating advanced antibody engineering to optimize half-life and other properties. We commenced our operations in February 2022 as a Delaware limited liability company named Apogee Therapeutics, LLC. We were founded by leading healthcare investors, Fairmount Funds and Venrock Healthcare Capital Partners, and has since assembled a management team of drug developers and an executive team with significant experience in clinical development, manufacturing of biologics and leading public biopharmaceutical company operations, financing and transactions. Apogee Therapeutics, Inc., a successor to Apogee Therapeutics, LLC, was formed as a Delaware corporation in June 2023 in preparation for our IPO. We maintain a corporate headquarters in Waltham, Massachusetts, laboratory space in Boston, Massachusetts and otherwise operate virtually in the United States. In addition, we engage significantly with third parties, including Paragon, who is also a related party, to perform ongoing research and development activities and other services on our behalf.
Our pipeline comprises four programs being developed initially for the treatment of I&I indications. Our two most advanced programs, APG777 and APG808, which we are initially developing for the treatment of AD and COPD, respectively, target the same mechanism of action as lebrikizumab and DUPIXENT (dupilumab), respectively. Moreover, we are evaluating APG777 in additional I&I indications, including asthma, alopecia areata, chronic rhinosinusitis with nasal polyps, chronic spontaneous urticaria, eosinophilic esophagitis and prurigo nodularis. Our earlier-stage programs, APG990 and APG222, utilize advanced antibody engineering to target OX40L and both IL-13 and OX40L, respectively. We recently added a new program that also utilizes advanced antibody engineering for an undisclosed target. Our programs incorporate advanced antibody engineering to optimize half-life and other properties designed to overcome limitations of existing therapies. We believe each of our programs has potential for broad application across multiple I&I indications.
In August 2023, we announced the dosing of our first participant in our first clinical trial for APG777 in Australia. The APG777 Phase 1 trial is a double-blind, placebo-controlled study in healthy volunteers and consists of a SAD component and a MAD component. The trial enrolled 40 healthy adult subjects into three SAD and two MAD cohorts. The primary endpoint is safety and a key secondary endpoint is PK. The Phase 1 trial is ongoing and we have announced initial safety and PK data from this trial. We filed an IND in support of a Phase 1 trial in healthy volunteers in the United States for subjects of Japanese descent and have received a “safe to proceed” notification from the FDA for the trial. We anticipate initiating a Phase 2 trial in AD in the United States and internationally in the first half of 2024.
In November 2023, we finalized the nomination of a development candidate for APG808 and we have received regulatory approval to commence a first-in-human clinical trial in Australia. APG808 is an SQ extended half-life mAb targeting IL-4Rα, a target with clinical validation across eight different Type 2 allergic diseases. APG808 has similar binding as a first generation mAb, DUPIXENT, with femtomolar affinity for IL-4Rα and has demonstrated similar inhibition to DUPIXENT across three in vitro assays which measure downstream functional inhibition of the IL-13/IL-4 pathway (pSTAT6 induction, inhibition of TF-1 proliferation, and inhibition of TARC secretion). Additionally, in our head-to-head studies of APG808 and DUPIXENT in non-human primates, APG808 showed a significantly longer half-
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life than DUPIXENT. In these preclinical studies, APG808’s half-life was up to 27 days, as compared to 11 days for DUPIXENT. Based on these preclinical studies, we believe that the longer half-life could support dosing either every 6 weeks or every 2 months in the clinic, which, if future clinical trials are successful, would represent a significant improvement compared to DUPIXENT which is currently being investigated with every 2-week dosing in COPD. We anticipate that APG808 will enter the clinic in healthy volunteers in the first half of 2024 followed by a potential Phase 1b trial in asthma and/or a Phase 2 trial in COPD (pending data from the Phase 1 trial and following the submission of an IND or foreign equivalent to support such trials).
Since our inception in February 2022, we have devoted substantially all of our resources to raising capital, organizing and staffing our company, business and scientific planning, conducting discovery and research activities, acquiring product programs, establishing and protecting our intellectual property portfolio, developing and progressing our pipeline, establishing arrangements with third parties for the manufacture of our programs and component materials, and providing general and administrative support for these operations. We do not have any programs approved for sale and have not generated any revenue from product sales. To date, we have funded our operations primarily with proceeds from the issuance of preferred units and sale of common stock. Through December 31, 2023, we received gross proceeds of $169.0 million from sales of our preferred units. On July 13, 2023, our Registration Statement on Form S 1, as amended (File Nos. 333 272831 and 333 273236) (the Registration Statement), relating to our IPO was declared effective by the SEC. Pursuant to the Registration Statement, we issued and sold an aggregate of 20,297,500 shares of common stock (inclusive of 2,647,500 shares pursuant to the exercise in full of the underwriters’ option to purchase additional shares) at a public offering price of $17.00 per share, for aggregate net proceeds of $315.4 million after deducting underwriting discounts and commissions and other offering expenses.
We have incurred significant operating losses since inception. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of any programs we may develop. We generated net losses of $84.0 million for the year ended December 31, 2023. As of December 31, 2023, we had an accumulated deficit of $123.8 million. We expect to continue to incur significantly increased expenses for the foreseeable future if and as we:
● advance our most advanced programs, APG777 and APG808, through clinical trials and regulatory approval prior to commercialization;
● continue our research and development and preclinical development of our other programs, including APG990 and APG222;
● seek and identify additional research programs and product candidates and initiate preclinical studies for those programs;
● maintain, expand, enforce, defend and protect our intellectual property portfolio and provide reimbursement of third-party expenses related to our patent portfolio;
● hire additional research and development and clinical personnel;
● experience any delays, challenges, or other issues associated with the clinical development of our programs, including with respect to our regulatory strategies;
● seek marketing approvals for any programs for which we successfully complete clinical trials;
● develop, maintain and enhance a sustainable, scalable, reproducible and transferable manufacturing process for the programs we may develop;
● ultimately establish a sales, marketing and distribution infrastructure to commercialize any programs for which we may obtain marketing approval;
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● add operational, financial and management information systems and personnel, including personnel to support our product development;
● acquire or in-license product candidates or programs, intellectual property and technologies;
● establish and maintain our current and any future collaborations, including making royalty, milestone or other payments thereunder; and
● operate as a public company.
We will not generate revenue from product sales unless and until we successfully initiate and complete clinical development and obtain regulatory approval for any product candidates. If we obtain regulatory approval for any of our programs and do not enter into a commercialization partnership, we expect to incur significant expenses related to developing our commercialization capability to support product sales, manufacturing, marketing, and distribution. Further, we expect to incur additional costs associated with operating as a public company, including increased costs of accounting, audit, legal, regulatory and tax-related services associated with compliance with exchange listing and SEC requirements, director and officer insurance costs and investor and public relations costs.
As a result, we will need substantial additional funding to support our continued operations and growth strategy. Until such a time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the sale of equity, debt financings or other capital sources, including collaborations with other companies or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our programs.
Because of the numerous risks associated with product development, we are unable to accurately predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.
We expect that our existing cash and cash equivalents of $118.3 million, and marketable securities of $277.1 million as of December 31, 2023 will enable us to fund our operating expenses and capital expenditure requirements into the fourth quarter of 2026. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. See “Liquidity and Capital Resources” for further information.
Reorganization
Apogee Therapeutics, LLC was formed as a limited liability company under the laws of the State of Delaware in February 2022. Apogee Therapeutics, Inc. was incorporated in June 2023, in connection with our IPO to serve as a holding company that would wholly own the assets of Apogee Therapeutics, LLC. Prior to July 13, 2023, our business was conducted by Apogee Therapeutics, LLC and its subsidiary, Apogee Biologics, Inc. In July 2023, in connection with our IPO, we completed a series of transactions which are referred to, collectively, as the “Reorganization,” and pursuant to which Apogee Therapeutics, Inc., became the parent and holding company that wholly owns the assets of Apogee Therapeutics, LLC, including stock of its subsidiary, Apogee Biologics, Inc. In connection with our Reorganization:
● holders of Series A preferred units of Apogee Therapeutics, LLC received 7,678,000 shares of non-voting common stock of Apogee Therapeutics, Inc.;
● holders of Series B preferred units of Apogee Therapeutics, LLC received 11,501,108 shares of common stock and 5,808,642 shares of non-voting common stock of Apogee Therapeutics, Inc.;
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● holders of common units of Apogee Therapeutics, LLC received 1,919,500 shares of common stock of Apogee Therapeutics, Inc.;
● holders of vested incentive units of Apogee Therapeutics, LLC received 690,188 shares of common stock of Apogee Therapeutics, Inc.; and
● holders of unvested incentive units of Apogee Therapeutics, LLC received 2,779,358 shares of restricted common stock of Apogee Therapeutics, Inc.
Our Collaboration, License and Services Agreements
Paragon Option Agreements
In February 2022, we entered into the, 2022 Option Agreement. Under the terms of the 2022 Option Agreement, Paragon identifies, evaluates and develops antibodies directed against certain mutually agreed therapeutic targets of interest to us. The 2022 Option Agreement initially included two selected targets, IL-13 and IL-4Rα, and was subsequently amended in November 2022 to include an additional selected target, OX40L. Under the 2022 Option Agreement, we have the exclusive option to, on a research program-by-research program basis, be granted an exclusive, worldwide license to all of Paragon’s right, title and interest in and to the intellectual property resulting from the applicable research program to develop, manufacture and commercialize the antibodies and products directed to the selected targets. From time to time, we can choose to add additional targets to the collaboration by mutual agreement with Paragon.
Pursuant to the terms of the 2022 Option Agreement, the parties will initiate certain research programs that will generally be focused on a particular target. Each Research Program will be aimed at discovering, generating, identifying and/or characterizing antibodies directed to the respective target. For each Research Program, the parties established a research plan that sets forth the activities that will be conducted, and the associated research budget. Upon execution of the 2022 Option Agreement, we agreed with Paragon on an initial Research Plan that outlined the services that will be performed commencing at inception of the arrangement related to IL-13 and IL-4Rα. The Research Plan for OX40L was agreed to prior to December 31, 2022. Our exclusive option with respect to any future Research Program is exercisable at our sole discretion, at any time during the period beginning on the initiation of activities under the associated Research Program and ending a specified number of days following the delivery of the data package from Paragon related to the results of the Research Plan activities. There is no payment due upon exercise of an Option pursuant to the 2022 Option Agreement.
In consideration for the exclusive options granted under the 2022 Option Agreement, we paid an upfront cash amount of $1.3 million and issued 1,250,000 common units to Paragon. Paragon was also entitled to up to an additional 3,750,000 of common units in exchange for the rights granted under the 2022 Option Agreement, which were issued in connection with the closings of the additional tranches of the Series A Preferred Unit financing. As of December 31, 2023, we had issued a total of 5,000,000 common units to Paragon with an aggregate fair value of $2.2 million on the grant date, which subsequently were exchanged for common stock following the IPO. Under the 2022 Option Agreement, on a Research Program-by-Research Program basis following the finalization of the Research Plan for each respective Research Program, we are required to pay Paragon a nonrefundable fee in cash of $0.5 million. We are also obligated to compensate Paragon on a quarterly basis for its services performed under each Research Program based on the actual costs incurred. We expense the service fees as the associated costs are incurred when the underlying services are rendered. Such amounts are classified within research and development expenses in our consolidated statement of operations and comprehensive loss.
In November 2023, we entered into the 2023 Option Agreement. Under the terms of the 2023 Option Agreement, Paragon identifies, evaluates and develops antibodies directed against certain mutually agreed therapeutic targets of interest to us. The 2023 Option Agreement initially includes one undisclosed target. Under the 2023 Option Agreement, we have the exclusive option to, on a research program-by-research program basis, be granted an exclusive, worldwide license to all of Paragon’s right, title and interest in and to the intellectual property resulting from the applicable research program to develop, manufacture and commercialize the antibodies and products directed to the selected targets. From time to time, we can choose to add additional targets to the collaboration by mutual agreement with Paragon.
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Pursuant to the terms of the 2023 Option Agreement, the parties may initiate Research Programs. Each Research Program is aimed at discovering, generating, identifying and/or characterizing antibodies directed to the respective target. For each Research Program, the parties must establish a Research Plan. In January 2024, we agreed on an initial Research Plan with Paragon that outlines the services that will be performed commencing at inception of the arrangement related to the undisclosed target. Our exclusive option with respect to each Research Program is exercisable at our sole discretion at any time during the period beginning on the initiation of activities under the associated Research Program and ending a specified number of days following the delivery of the data package from Paragon related to the results of the Research Plan activities. There is no payment due upon exercise of an Option pursuant to the 2023 Option Agreement. Following entry into the 2023 Option Agreement, we and Paragon will negotiate a form of License Agreement to be entered into in the event that we exercise our exclusive option with respect to each Research Program, which License Agreement will include certain pre-agreed economic and other business terms.
Under the 2023 Option Agreement, on a Research Program-by-Research Program basis following the finalization of the Research Plan for each respective Research Program, we are required to pay Paragon a nonrefundable fee in cash of $2.0 million. In the first quarter of 2024, we paid Paragon a $2.0 million fee for a Research Program for an undisclosed target. We are also obligated to compensate Paragon on a quarterly basis for its services performed under each Research Program based on the actual costs incurred. We expense the service fees as the associated costs are incurred when the underlying services are rendered.
Unless terminated earlier, the Option Agreement shall continue in force on a Research Program-by-Research Program basis until the earlier of: (i) the end of the Option Period for such Research Program, as applicable, if such Option is not exercised by us; and (ii) the effective date of the license agreement for such Research Program if we exercise our Option with respect to such Research Program. Upon the expiration of the Term for all then-existing Research Programs, the applicable Option Agreement will automatically expire in its entirety. We may terminate either Option Agreement or any Research Program at any time for any or no reason upon 30 days’ prior written notice to Paragon, provided that we must pay certain unpaid fees due to Paragon upon such termination, as well as any non-cancellable obligations reasonably incurred by Paragon in connection with its activities under any terminated Research Program. Each party has the right to terminate either Option Agreement or any Research Program upon (i) 30 days’ prior written notice of the other party’s material breach that remains uncured for the 30 day period and (ii) the other party’s bankruptcy.
Paragon License Agreements
In November 2022, we exercised our option available under the 2022 Option Agreement with respect to the IL-13 Research Program. Upon such exercise, the parties entered into the IL-13 License Agreement. In April 2023, we exercised our option available under the 2022 Option Agreement with respect to the IL-4Rα Research Program and OX40L Research Program. Upon such exercise, the parties entered into the IL-4Rα License Agreement and the OX40L License Agreement. Under the terms of the License Agreements, Paragon granted to us an exclusive, worldwide, royalty-bearing, sublicensable right and license with respect to certain information, patent rights and sequence information related to antibodies directed at the respective target to use, make, sell, import, export and otherwise exploit the antibodies directed at the respective target. Pursuant to the License Agreements, we granted to Paragon a similar license (except that such license we granted to Paragon is non-exclusive) to the respective licenses with respect to multispecific antibodies that are directed at the respective targets and one or more other antibodies. We were also granted a right of first negotiation with Paragon concerning the development, license and grant of rights to certain multispecific antibodies associated with each respective license. We are solely responsible for the continued development, manufacture and commercialization of products at our own cost and expense for each licensed target.
We are obligated to pay Paragon up to $3.0 million upon the achievement of specific development and clinical milestones for the first product under each of the License Agreements that achieves such specified milestones, including a payment of $1.0 million upon the nomination of a development candidate and $2.0 million upon the first dosing of a human patient in a Phase 1 trial. Upon execution of the IL-13 License Agreement, we paid Paragon a $1.0 million fee for the nomination of a development candidate. In August 2023, we announced the dosing of our first participant in the Phase 1 trial of APG777 and accordingly have recorded research and development expense for the milestone payment of $2.0 million to Paragon in the year ended December 31, 2023. In November 2023, we finalized the nomination of a development candidate under the IL-4Rα License Agreement and made a milestone payment of $1.0 million to Paragon in the fourth
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quarter of 2023. The nomination of a development candidate under the OX40L License Agreement had not yet occurred as of December 31, 2023.
We are also obligated to pay royalties to Paragon equal to a low-single digit percentage of net sales of any products under each of the respective License Agreements, and Paragon has a similar obligation to pay royalties to us with respect to each of the multispecific licenses. Royalties are due on a product-by-product and country-by-country basis beginning upon the first commercial sale of each product and ending on the later of (i) 12 years after the first commercial sale of such product in such country and (ii) expiration of the last valid claim of a patent covering such product in such country.
Biologics Master Services Agreement-WuXi Biologics (Hong Kong) Limited
In June 2022, Paragon and WuXi Biologics entered into the WuXi Biologics MSA, which was subsequently novated to us by Paragon in the second quarter of 2023. The WuXi Biologics MSA governs all development activities and GMP manufacturing and testing for APG777, APG808 and APG990 programs, as well as potential future programs, on a work order basis. Under the WuXi Biologics MSA, we are obligated to pay WuXi Biologics a service fee and all non-cancellable obligations in the amount specified in each work order associated with the agreement for the provision of services.
The WuXi Biologics MSA terminates on the later of (i) June 20, 2027 or (ii) the completion of services under all work orders executed by the parties prior to June 20, 2027, unless terminated earlier. The term of each work order terminates upon completion of the services under such work order, unless terminated earlier. We can terminate the WuXi Biologics MSA or any work order at any time upon 30 days’ prior written notice and immediately upon written notice if WuXi Biologics fails to obtain or maintain required material governmental licenses or approvals. Either party may terminate a work order (i) at any time upon six months’ prior notice with reasonable cause, provided however that if WuXi Biologics terminates a work order in such manner, no termination or cancellation fees shall be paid by us and (ii) immediately for cause upon (a) the other party’s material breach that remains uncured for 30 days after notice of such breach, (b) the other party’s bankruptcy or (c) a force majeure event that prevents performance for a period of at least 90 days.
Cell Line License Agreement — WuXi Biologics (Hong Kong) Limited
In June 2022, Paragon and WuXi Biologics entered into the Cell Line License Agreement, which was subsequently novated to us by Paragon in the second quarter of 2023. Under the Cell Line License Agreement, we received a non-exclusive, worldwide, sublicensable license to the WuXi Biologics Licensed Technology and media and feeds to make, have made, use, sell and import the WuXi Biologics Licensed Products. Specifically, the WuXi Biologics Licensed Technology is used to manufacture a component of the APG777 and APG808 programs.
In consideration for the license, we agreed to pay WuXi Biologics a non-refundable license fee of $150,000. Additionally, if we manufacture all of our commercial supplies of bulk drug product with a manufacturer other than WuXi Biologics or its affiliates, we are required to make the Royalty payments to WuXi Biologics. If we manufacture part of our commercial supplies of the WuXi Biologics Licensed Products with WuXi Biologics or its affiliates, then the Royalty will be reduced accordingly on a pro rata basis.
The Cell Line License Agreement will continue indefinitely unless terminated (i) by us upon six months’ prior written notice and our payment of all undisputed amounts due to WuXi Biologics through the effective date of termination, (ii) by WuXi Biologics for a material breach by us that remains uncured for 60 days after written notice, (iii) by WuXi Biologics if we fail to make a payment and such failure continues for 30 days after receiving notice of such failure, or (iv) by either party upon the other party’s bankruptcy.
For additional detail regarding the agreements described above, see the section titled “Notes to Consolidated Financial Statements—Other Significant Agreements” included elsewhere in this Annual Report.
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Overview of Financial Results
Revenue
We have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products for several years, if at all. If our development efforts for our programs are successful and result in regulatory approval or collaboration or license agreements with third parties, we may generate revenue in the future from product sales or payments from collaboration or license agreements that we may enter into with third parties, or any combination thereof.
Operating Expenses
Our operating expenses consist of (i) research and development expenses and (ii) general and administrative expenses.
Research and Development
Research and development expenses consist primarily of costs incurred in connection with the development and research of our programs.
These expenses include:
● costs of funding research performed by third parties, including Paragon, that conduct research and development and preclinical or clinical activities on our behalf;
● the cost to acquire in-process research and development, with no alternative future use associated with asset acquisitions, such as the Option Agreements and License Agreements;
● expenses incurred in connection with continuing our current research programs and preclinical development of any programs we may identify, including under agreements with third parties, such as consultants and contractors;
● the cost of developing and validating our manufacturing process for use in our preclinical studies and current and future clinical trials; and
● personnel-related expenses, including salaries, bonuses and equity-based compensation expense.
We measure and recognize asset acquisitions or licenses to intellectual property that are not deemed to be business combinations based on the cost to acquire or license the asset or group of assets, which includes transaction costs. In an asset acquisition or license of intellectual property, the cost allocated to acquired in-process research and development, with no alternative future use is recognized as research and development expense on the acquisition date.
We expense research and development costs as incurred. Non-refundable advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or the services are performed, or when it is no longer expected that the goods will be delivered or the services rendered.
Our primary focus since inception has been the identification and development of our pipeline programs. Our research and development costs primarily consist of external costs, such as fees paid to Paragon under the Option Agreements, and the License Agreements. We do not separately track or segregate the amount of costs incurred under the Option Agreement due to the early-stage and discovery nature of the services. We do not allocate personnel-related costs
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by program because these resources are used and these costs are deployed across multiple programs under development, and, as such, are not separately classified.
We expect that our research and development expenses will increase substantially for the foreseeable future as we continue to invest in research and development activities related to the continued development of our programs, developing any future programs, including investments in manufacturing, as we advance any programs we may identify and continue to conduct clinical trials. The success of programs we may identify and develop will depend on many factors, including the following:
● timely and successful completion of preclinical studies;
● effective INDs or comparable foreign applications that allow commencement of our planned clinical trials or future clinical trials for any programs we may develop;
● successful enrollment and completion of clinical trials;
● positive results from our future clinical trials that support a finding of safety and effectiveness, acceptable PK profile, and an acceptable risk-benefit profile in the intended populations;
● receipt of marketing approvals from applicable regulatory authorities;
● establishment of arrangements through our own facilities or with third-party manufacturers for clinical supply and, where applicable, commercial manufacturing capabilities;
● establishment, maintenance, defense and enforcement of patent, trademark, trade secret and other intellectual property protection or regulatory exclusivity for any products we may develop; and
● maintenance of a continued acceptable safety, tolerability and efficacy profile of any programs we may develop following approval.
Any changes in the outcome of any of these variables with respect to the development of programs that we may identify could mean a significant change in the costs and possible delays in timing associated with the development of such programs. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development of a program, or if we experience significant delays in our clinical trials due to patient enrollment or other reasons, we would be required to expend significant additional financial resources and time on the completion of clinical development. We may never obtain regulatory approval for any of our programs.
General and Administrative
General and administrative expenses consist primarily of personnel-related expenses, including salaries, bonuses, and equity-based compensation, for individuals in our executive, finance, operations, human resources, business development and other administrative functions. Other significant general and administrative expenses include legal fees relating to corporate matters, professional fees for accounting, auditing, tax and administrative consulting services, insurance costs and recruiting costs. These costs relate to the operation of the business, unrelated to the research and development function, or any individual program.
We expect that our general and administrative expenses will increase substantially for the foreseeable future as we increase our headcount to support the expected growth in our research and development activities and the potential commercialization of our programs, if approved. We also expect to incur increased expenses associated with being a public company, including increased costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance costs, and investor and public relations costs.
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We do not incur material operating expenses for the rent, maintenance and insurance of facilities or for depreciation of fixed assets.
Other Income (Expense), Net
Interest Income
Interest income consists of interest income earned from our cash, cash equivalents, and marketable securities and amortization of investment discounts.
Income Taxes
Since our inception, we have not recorded any income tax benefits for the net losses we have incurred or for the research and development tax credits generated in each period as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating loss (“NOL”) carryforwards and tax credit carryforwards will not be realized. As of December 31, 2023, we had U.S. federal NOL carryforwards of approximately $23.6 million, which may be available to reduce future taxable income and have an indefinite carryforward period but are limited in their usage to an annual deduction equal to 80% of annual taxable income. As of December 31, 2023, we also had U.S. federal and state research and development tax credit carryforwards of approximately $2.7 million and $0.7 million, respectively, which may be available to reduce future tax liabilities. The U.S. federal research and development tax credit carryforwards expire at various dates beginning in 2042 and the state research and development tax credit carryforwards do not expire. We have recorded a full valuation allowance against our net deferred tax assets at the balance sheet date.
Comparison of the Year Ended December 31, 2023 to the Period from February 4, 2022 (inception) to December 31, 2022
The following table summarizes our consolidated statements of operations for the period presented (in thousands):
PERIOD FROM
YEAR ENDED
FEBRUARY 4, 2022
DECEMBER 31,
(INCEPTION) TO
2023
DECEMBER 31, 2022
$ CHANGE
Operating expenses:
Research and development
$
68,424
$
27,786
40,638
General and administrative
24,579
2,941
21,638
Total operating expenses
93,003
30,727
62,276
Loss from operations
(93,003)
(30,727)
(62,276)
Other income (expense), net:
Interest income
9,018
92
8,926
Other financing expense
—
(9,150)
9,150
Total other income (expense), net
9,018
(9,058)
18,076
Net loss
$
(83,985)
$
(39,785)
$
(44,200)
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Research and Development Expense
The following table summarizes our research and development expenses incurred for the periods presented (in thousands):
PERIOD FROM
YEAR ENDED
FEBRUARY 4, 2022
DECEMBER 31,
(INCEPTION) TO
2023
DECEMBER 31, 2022
External research and development costs by program:
APG777
$
21,644
$
—
APG808 (1)
20,801
—
Unallocated research and development costs:
In-process research and development acquisitions
—
4,505
External-discovery related costs and other
15,019
21,237
Personnel-related (including equity-based compensation)
10,960
2,044
Total research and development expenses
$
68,424
$
27,786
(1)
External research and development costs for APG808 for the period from February 4, 2022 (inception) to December 31, 2022, were recorded as unallocated external discovery related costs. Note that the development candidate for APG808 was nominated in November 2023.
Research and development expenses for the year ended December 31, 2023 were $68.4 million, compared to $27.8 million for the period from February 4, 2022 (inception) to December 31, 2022. For the year ended December 31, 2023, we recorded $21.6 million of external research and development expense related to the APG777 program, which included a $2.0 million milestone payable upon the first dosing of a human patient in a Phase 1 trial in August 2023, and no such expense was recorded in the period from February 4, 2022 (inception) to December 31, 2022, as APG777 expenses were recorded as unallocated external-discovery related costs until the program candidate was nominated in November 2022. For the year ended December 31, 2023, we recorded $20.8 million of external research and development expense related to the APG808 program, which included a $1.0 million milestone payable upon the nomination of a development candidate, and no such expense was recorded in the period from February 4, 2022 (inception) to December 31, 2022, as APG808 expenses were recorded as unallocated external-discovery related costs until the program candidate was nominated in November 2023. Other external-discovery related costs decreased from $21.2 million in the period from February 4, 2022 (inception) to December 31, 2022 to $15.0 million for the year ended December 31, 2023, due to the advancement of the APG777 and APG808 programs and those costs now reported as separate programs for the year ended December 31, 2023 due to the aforementioned nominations of the respective development candidates. Additionally, there was $4.5 million of in-process research and development acquisition costs in the period from February 4, 2022 (inception) to December 31, 2022. Our personnel related expenses were $11.0 million for the year ended December 31, 2023 compared to $2.0 million recorded for the period from February 4, 2022 (inception) to December 31, 2022. The increase in personnel related costs was primarily due to an increase in headcount and share-based compensation expense in the year ended December 31, 2023 compared to the period from February 4, 2022 (inception) to December 31, 2022.
General and Administrative Expense
The following table summarizes our general and administrative expenses for the periods presented (in thousands):
PERIOD FROM
YEAR ENDED
FEBRUARY 4, 2022
DECEMBER 31,
(INCEPTION) TO
2023
DECEMBER 31, 2022
Personnel-related (including equity-based compensation)
$
12,577
$
1,642
Legal and professional fees
4,322
1,073
Other
7,680
226
Total general and administrative expenses
$
24,579
$
2,941
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General and administrative expenses for the year ended December 31, 2023 were $24.6 million, compared to $2.9 million in the period from February 4, 2022 (inception) to December 31, 2022. The increase of $21.7 million was primarily due to an increase of personnel costs of $11.0 million, an increase in legal and professional services costs of $3.2 million and an increase of other expenses of $7.5 million, all of which were the result of the expansion of our operations to support the growth in our business and the cost of operating as a public company.
Other Income (Expense), Net
Interest income increased $8.9 million for the year ended December 31, 2023 compared to the period from February 4, 2022 (inception) to December 31, 2022, which was primarily related to interest on our cash, cash equivalents and marketable securities.
Other financing expense was $9.2 million for the Period from February 4, 2022 (inception) to December 31, 2022, which was related to the change in fair value for the tranche options associated with the Series A Preferred Unit financing.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have incurred significant losses. We have not yet commercialized any of our programs, which are in various phases of early-stage development, and we do not expect to generate revenue from sales of any of our programs for several years, if at all. To date, we have financed our operations from the proceeds from the issuance of preferred units and the sale of common stock in our IPO. From inception through December 31, 2023, we have raised $484.4 million in aggregate cash proceeds from such transactions. As of December 31, 2023, we had cash and cash equivalents of $118.3 million and $277.1 million of marketable securities.
In connection with our IPO in July 2023, we issued and sold an aggregate of 20,297,500 shares of common stock (inclusive of 2,647,500 shares pursuant to the exercise in full of the underwriters’ option to purchase additional shares) at a price of $17.00 per share. We received net proceeds of $315.4 million, after deducting underwriting discounts and commissions and other offering expenses.
Cash Flows
The following table provides information regarding our cash flows for the periods presented (in thousands):
PERIOD FROM
YEAR ENDED
FEBRUARY 4, 2022
DECEMBER 31,
(INCEPTION) TO
2023
DECEMBER 31, 2022
Net cash, cash equivalents, and restricted cash provided by (used in):
Operating activities
$
(74,761)
$
(16,427)
Investing activities
(273,910)
—
Financing activities
315,391
168,317
Net (decrease) increase in cash equivalents, and restricted cash
$
(33,280)
$
151,890
Net Cash used in Operating Activities
Cash used in operating activities resulted primarily from our net losses adjusted for non-cash charges and changes in components of operating assets and liabilities, which are generally attributable to timing of payments, and the related effect on certain account balances, operational and strategic decisions and contracts to which we may be a party.
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For the year ended December 31, 2023, operating activities used $74.8 million of cash, primarily due to a net loss of $84.0 million, partially offset by non-cash charges of $6.1 million for equity-based compensation and net changes in our operating assets and liabilities of $6.1 million.
For the period from February 4, 2022 (inception) to December 31, 2022, operating activities used $16.4 million of cash, primarily due to a net loss of $39.8 million, partially offset by non-cash charges including $2.2 million for equity-based compensation expense related to common units issued under the 2022 Option Agreement with Paragon, $2.1 million for equity-based compensation and non-cash loss on remeasurement of the tranche option liability of $9.2 million and net changes in operating assets and liabilities of $9.8 million.
Net Cash used in Investing Activities
During the year ended December 31, 2023, net cash used in investing activities of $273.9 million was primarily related to purchases of marketable securities, partially offset by the maturities of marketable securities.
Net Cash provided by Financing Activities
For the year ended December 31, 2023, financing activities provided $315.4 million of cash related to the issuance and sale of common stock in our IPO, net of paid issuance costs.
For the period from February 4, 2022 (inception) to December 31, 2022, financing activities provided $168.3 million of cash from the issuance and sale of our Series A preferred units.
Future Funding Requirements
To date, we have not generated any revenue from product sales. We do not expect to generate revenue from product sales unless and until we successfully complete preclinical and clinical development of, receive regulatory approval for, and commercialize a program and we do not know when, or if at all, that will occur. We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities and studies and initiate clinical trials. In addition, if we obtain regulatory approval for any programs, we expect to incur significant expenses related to product sales, marketing, and distribution to the extent that such sales, marketing and distribution are not the responsibility of potential collaborators. We expect to incur additional costs associated with operating as a public company. The timing and amount of our operating expenditures will depend largely on the factors set out above. Our funding requirements and timing and amount of our operating expenditures will depend on many factors, including, but not limited to:
● the rate of progress in the development of our APG777 and APG808 programs and other development programs;
● the scope, progress, results and costs of preclinical studies and clinical trials for any other current and future programs;
● the number and characteristics of programs and technologies that we develop or may in-license;
● the costs and timing of future commercialization activities, including manufacturing, marketing, sales and distribution, for any of our programs for which we receive marketing approval;
● the costs necessary to obtain regulatory approvals, if any, for any approved products in the United States and other jurisdictions, and the costs of post-marketing studies that could be required by regulatory authorities in jurisdictions where approval is obtained;
● the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;
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● the continuation of our existing licensing arrangements and entry into new collaborations and licensing arrangements;
● the costs we incur in maintaining business operations;
● the costs of hiring additional clinical, quality control, manufacturing and other scientific personnel;
● the costs adding operational, financial and management information systems and personnel;
● the costs associated with being a public company;
● the costs and timing of future laboratory facilities;
● the revenue, if any, received from commercial sales of our programs for which we receive marketing approval;
● the effect of competing technological and market developments; and
● the extent to which we acquire or invest in businesses, products and technologies, including entering into licensing or collaboration arrangements for programs.
For more information, see the section titled “Risk Factors—Risks Related to Our Limited Operating History, Financial Position and Capital Requirements.”
Identifying potential programs and product candidates and conducting preclinical studies and clinical trials is a time consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our programs, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for many years, if ever. Accordingly, we will need to obtain substantial additional funds to achieve our business objectives.
Adequate additional funds may not be available to us on acceptable terms, or at all. We do not currently have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our stockholders’ ownership interests could be diluted, and the terms of these securities may include liquidation or other preferences that could adversely affect our stockholders’ rights.
Additional debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring debt, making capital expenditures or declaring dividends, and may require the issuance of warrants, which could potentially dilute our stockholders’ ownership interests.
If we raise additional funds through strategic collaborations or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, or product candidates or grant licenses on terms that may not be favorable to us.
If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit or terminate our product development programs or any future commercialization efforts or grant rights to develop and market product candidates to third parties that we would otherwise prefer to develop and market ourselves.
As of December 31, 2023, we had $118.3 million of cash and cash equivalents and $277.1 million of marketable securities. Based on our current operating plan, as of the date of this Annual Report, we estimate that our existing cash, cash equivalents, and marketable securities will be sufficient to enable us to fund our operating expenses and capital expenditure requirements through at least the next twelve months following the issuance of our consolidated financial
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statements included elsewhere in the Annual Report. Moreover, based on our current operating plan, we estimate that such funds will be sufficient to enable us to fund our operating expenses and capital expenditure requirements into the fourth quarter of 2026. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect.
Contractual Obligations and Other Commitments
We enter into contracts in the normal course of business with contract research organizations (“CROs”), contract manufacturing organizations (“CMOs”) and other third parties for preclinical research studies and testing, clinical trials, manufacturing and other services. These contracts do not contain any minimum purchase commitments and provide for termination by us upon prior written notice. Payments due upon cancellation consist only of payments for services provided and expenses incurred up to the date of cancellation, including non-cancelable obligations of our service providers and, in some cases, wind-down costs. The exact amounts of such obligations are dependent on the timing of termination and the terms of the associated agreement. Accordingly, these payments are not disclosed as the amount and timing of such payments are not known.
Our agreements to license intellectual property include potential milestone payments that are dependent upon the development of products using the intellectual property licensed under the agreements and contingent upon the achievement of specific development and clinical milestones. As of December 31, 2023, we have incurred $4.0 million of the maximum aggregate potential milestone payments. We are also obligated to pay royalties to (i) Paragon at a royalty rate of a low single-digit percentage based on net sales of any products under the License Agreements, once commercialized and (ii) WuXi Biologics at a royalty rate of a fraction of a single digit percentage of global net sales of WuXi Biologics Licensed Products manufactured by a third-party manufacturer.
We do not have any off-balance sheet arrangements that are material or reasonably likely to become material to our financial condition or results of operations.
Critical Accounting Policies and Significant Judgments and Estimates
Our 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 generally accepted accounting principles in the United States (GAAP). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenues recognized and expenses incurred during the reporting periods. 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.
We define our critical accounting policies as those accounting principles generally accepted in the United States of America that are most critical to the judgments and estimates used in the preparation of our consolidated financial statements. While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report, we believe the following accounting policies used in preparation of our consolidated financial statements require the most significant judgements and estimates.
Research and Development Expense
Research and development costs are expensed as incurred. Research and development expenses consist of costs incurred in performing research and development activities, including salaries and bonuses, overhead costs, contract services and other related costs. The value of goods and services received from contract research organizations and contract manufacturing organizations in the reporting period are estimated based on the level of services performed, and progress in the period in cases when we have not received an invoice from the supplier. In circumstances where amounts have been paid in excess of costs incurred, we record a prepaid expense. When billing terms under these contracts do not coincide with the timing of when the work is performed, we are required to make estimates of outstanding obligations to those third
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parties as of period end. Any accrual estimates are based on a number of factors, including our knowledge of the progress towards completion of the specific tasks to be performed, invoicing to date under the contracts, communication from the vendors of any actual costs incurred during the period that have not yet been invoiced and the costs included in the contracts. Significant judgments and estimates may be made in determining the accrued balances at the end of any reporting period. Actual results could differ from the estimates made by us.
Equity-Based Compensation
Prior to the Reorganization, we issued equity-based awards to employees, managers, executives, non-employees and service providers in the form of common units and incentive units. Subsequent to the Reorganization, we issued equity-based awards to employees, managers, executives, non-employees and service providers in the form of restricted common units and stock options. We account for equity-based compensation awards in accordance with FASB ASC Topic 718, Compensation—Stock Compensation (“ASC 718”).
Due to the absence of an active market for our common units or incentive units prior to the completion of the IPO, we utilized methodologies in accordance with the framework of the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation, to estimate the fair value of our common units and incentive units. The estimated fair value of the common units and incentive units was determined at each grant date based upon a variety of factors, including the illiquid nature of the common units, arm’s-length sales of our equity units (including preferred units), the effect of the rights and preferences of the preferred unit unitholders, and the prospects of a liquidity event. Among other factors are our financial position and historical financial performance, the status of technological developments within our research, the composition and ability of the current research and management team, an evaluation or benchmark of our competition, and the current business climate in the marketplace. Significant changes to the key assumptions underlying the factors used could have resulted in different fair values of the common units and incentive units at each valuation date.
Subsequent to the completion of the IPO, the fair value of our common stock underlying our equity awards is based on the quoted market price of our common stock on the grant date.
We estimate the fair value of our stock options using the Black-Scholes option pricing model, which uses as inputs the fair value of our common stock, and certain management estimates, including the expected stock price volatility, the expected term of the award, the risk-free rate, and expected dividends. Expected volatility is calculated based on reported volatility data for a representative group of publicly traded companies for which historical information is available. We select companies with comparable characteristics with historical share price information that approximates the expected term of the equity-based awards. We compute the historical volatility data using the daily closing prices for the selected companies’ shares during the equivalent period that approximates the calculated expected term of the stock options. We will continue to apply this method until a sufficient amount of historical information regarding the volatility of our stock price becomes available. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected term assumption. We use the simplified method, under which the expected term is presumed to be the midpoint between the vesting date and the end of the contractual term. We utilize this method due to lack of historical exercise data. The expected dividend yield is assumed to be zero as we have no current plans to pay any dividends on common stock. The fair value of the restricted stock units is calculated based on our stock price on the date of the grant.
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We generally issue equity awards that are subject to either service-based vesting conditions and in limited instances, service-based and performance-based vesting conditions. Compensation expense for awards issued to grantees with service-based vesting conditions are recognized on a straight-line basis based on the grant date fair value over the associated requisite service period of the award, which is generally the vesting term. Compensation expense for awards to grantees with service-based and performance-based vesting conditions are recognized based on the grant-date fair value over the requisite service period using the accelerated attribution method to the extent achievement of the performance condition is probable. As of each reporting date, we estimate the probability that specified performance criteria will be met and do not recognize compensation expense until it is probable that the performance-based vesting condition will be achieved.
We evaluate whether an equity award should be classified and accounted for as a liability award or equity award for all equity-based compensation awards granted. As of December 31, 2023, all of our equity-based awards were equity classified. Forfeitures are recognized as they occur. We classify equity-based compensation expense in the accompanying consolidated statements of operations and comprehensive loss in the same manner in which the award recipient’s salary and related costs are classified or in which the award recipient’s service payments are classified, as applicable.
JOBS Act Transition Period and Smaller Reporting Company Status
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”). Under the JOBS Act, an emerging growth company can take advantage of the extended transition period for complying with new or revised accounting standards and delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption from complying with new or revised accounting standards and, therefore, will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. 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.
We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements under the JOBS Act. Subject to certain conditions, as an emerging growth company, we may rely on certain of these exemptions, including without limitation exemptions to the requirements for (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an emerging growth company until the earlier to occur of (a) the last day of the fiscal year (A) following the fifth anniversary of the completion of our IPO, (B) in which we have total annual gross revenues of at least $1.235 billion or (C) in which we are deemed to be a “large accelerated filer” under the rules of the SEC, which means the market value of our common stock and non-voting common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th, or (b) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
We are also a “smaller reporting company,” as defined by Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), meaning that the market value of our common stock and non-voting common stock held by non-affiliates is less than $700.0 million and our annual revenue is less than $100.0 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our common stock and non-voting common stock held by non-affiliates is less than $250.0 million or (ii) our annual revenue is less than $100.0 million during the most recently completed fiscal year and the market value of our common stock and non-voting common stock held by non-affiliates is less than $700.0 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
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Recently Issued Accounting Pronouncements
We have reviewed all recently issued accounting standards and have determined that, other than as disclosed in Note 2 to our consolidated financial statements included elsewhere in this Annual Report, such standards are not expected to have a material impact on our consolidated financial statements or do not otherwise apply to our operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended, for this reporting period and are not required to provide the information required under this Item.
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