Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis o f Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information appearing elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those expressed or implied in any forward-looking statements as a result of various factors, including those set forth in this Form 10-K under “Item 1A. Risk Factors.”
Overview
We are a biotechnology company developing innovative therapeutics targeting serious viral diseases with the potential to improve the lives of patients worldwide. Our pipeline includes two helicase-primase inhibitors (HPI) targeting recurrent genital herpes, an orally bioavailable hepatitis delta virus (HDV) entry inhibitor, a clinical stage capsid assembly modulator (CAM) designed to disrupt the replication cycle of hepatitis B virus (HBV) at several key points with the aim of achieving finite treatment and functional cures and research programs focused on the discovery of therapeutics to treat devastating viral diseases, including a non-nucleoside polymerase inhibitor (NNPI) targeting transplant-related herpesviruses and a small molecule interferon-α (IFN-α) receptor (IFNAR) agonist targeting HBV and HDV.
Our Strategy
We have recruited an accomplished leadership team and research and development organization, with a collective team track record of over 15 approved drugs in viral diseases, including hepatitis. Our collaboration with Gilead Sciences, Inc. (Gilead and the Gilead Collaboration) also brings us an industry leading partner with a shared vision of providing differentiated antiviral treatments to patients. For additional information regarding the Gilead Collaboration, see “Collaboration and License Agreements—Gilead Sciences, Inc.”
Our Clinical Programs and CTA-Enabling Programs
Recurrent Genital Herpes/HSV-1 and HSV-2
In August 2022, we introduced our first programs outside of hepatitis. Among our new viral targets is recurrent genital herpes. Genital herpes can be caused by either herpes simplex virus type 1 (HSV-1) or herpes simplex virus type 2 (HSV-2). HSV-1 and HSV-2 are acquired by oral or genital contact either during symptomatic or asymptomatic reactivation of the virus. Both viruses replicate in neurons, where they can remain latent for the rest of the patient’s life and periodically reactivate, with the virus spreading and replicating in epithelial tissues. Initial infection can be asymptomatic or can be marked by symptoms, including localized pain and painful lesions. Genital herpes recurrence is common and can cause painful genital lesions that can lead to increased transmission and debilitate patients, and symptoms may become more serious with additional episodes. Additional complications include increased risk of HIV infection, as well as associated psychological stress and isolationary thoughts, depression and suicidal ideation. Immunocompromised patients may experience more severe and prolonged symptoms due to increased recurrence rates. While genital herpes can be caused by either HSV-1 or HSV-2, recurrences are more likely to be experienced by patients infected by HSV-2.
There are an estimated 800 million people globally with HSV-2, with an estimated 32 million in the United States and 31 million in France, Germany, Italy and Spain (collectively, the EU4) and the United Kingdom (UK). Only approximately 13% of that population is aware of the infection and have been diagnosed. Awareness and diagnostic rates are impacted due to asymptomatic infections and low screening rates in adults and adolescents due to high false positive rates with current diagnostic assays.
HPIs are antiviral agents in development for HSV-1 and HSV-2, with a clinically validated mechanism of action. HPIs inhibit the HSV helicase-primase complex, which is a unique viral enzyme complex without a human homolog, consisting of helicase, primase and cofactor subunits. Both of these subunits have functions that are essential for viral DNA replication and are conserved across HSV-1 and HSV-2. Unlike nucleoside analogs, these compounds do not require phosphorylation by the HSV thymidine kinase (TK) and ongoing viral replication to become active drugs. As a result, HPIs are active immediately upon reactivation of latent HSV-1 and HSV-2. Furthermore, HPIs are active
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against TK-deficient HSV-1 and HSV-2, which is a major mechanism of resistance to nucleoside analogs. In February 2023, we announced the nomination of our first herpesvirus development candidate, ABI-5366 (5366), a long-acting HPI for treatment of recurrent genital herpes, to progress toward CTA-enabling studies. In connection with the Gilead Collaboration, in October 2023, we acquired the rights to ABI-1179 (1179), Gilead’s HPI program, which is structurally differentiated from 5366.
Currently, there are three antiviral drugs (all nucleoside analogs) that have been approved in the United States and the EU4/UK for the treatment of genital herpes. No new drugs have been approved to treat genital herpes for more than 25 years. In addition to the approved nucleoside analogs, agents such as local anesthetics or analgesics may be used to alleviate local symptoms of minor pain and discomfort.
Nucleoside analogs can be administered as episodic therapy as individual outbreaks arise or daily as chronic suppressive therapy for those with high post-exposure recurrences. However, these agents are only partially effective at controlling the infection or reducing transmission risk. With current nucleoside analog therapies, only one out of three recurrent genital herpes patients with six or more recurrences per year are able to make it through a year of treatment without a recurrence. There are still high titer (greater than 10 4 HSV-2 DNA copies/mL) shedding episodes under this current standard of care for HSV-2, which can lead to recurrences and transmission of genital herpes.
Based on the limitations of current therapies, we see a path to advancing the treatment paradigm for patients suffering from recurrent genital herpes. To reach that goal, we identified an opportunity to develop a potent, long-acting HPI for recurrent genital herpes, 5366, which has demonstrated a strong nonclinical profile, with low nanomolar potency in vitro against both HSV-1 and HSV-2 clinical isolates, exceptionally low plasma clearance rates in multiple nonclinical models and a projected human half-life of more than seven days. This nonclinical profile has led us to target 5366 for development as a long-acting treatment with the potential to be administered orally or as an injectable.
To date, 5366 has also demonstrated a favorable nonclinical safety profile in Good Laboratory Practice (GLP) toxicology studies, with high safety margins and minimal potential for off-target effects. We currently anticipate the initiation of clinical studies with 5366 by mid-2024.
In addition, we are also advancing 1179, a second, structurally-differentiated HPI with single digit nM potency against HSV-1 and HSV-2 and a nonclinical pharmacokinetics (PK) profile strongly supporting a potential long-acting treatment by oral and injectable administration. GLP toxicology studies are underway and clinical studies are expected to begin by the end of 2024.
Our HBV and HDV Programs
The World Health Organization (WHO) estimates that 296 million people worldwide are chronically infected with HBV as of 2019, and 1.5 million new infections occur each year. HBV is a leading global cause of chronic liver disease and liver transplants, and the WHO estimates that 820,000 people died in 2019 from HBV, mostly due to cirrhosis and hepatocellular carcinoma. Of the 296 million people living with chronic HBV infection, only approximately 30.4 million, or 10.5%, were aware of their infection, and only approximately 6.6 million, or 22%, of those diagnosed received treatment. HBV is a highly prevalent disease that infects more than three times the number of people infected with hepatitis C virus and HIV infections combined, according to the WHO.
HDV is a “satellite virus,” because it can only infect people (1) who are already infected with HBV or (2) at the same time as a person is infected with HBV. HDV affects a subset of approximately 12 million HBV infected patients. These patients, which comprise an estimated 4.5% of hepatitis B surface antigen (HBsAg) positive patients, experience a substantially increased disease burden, as they account for 18% of cirrhosis and 20% of hepatocellular carcinoma associated with HBV. HDV is considered the most severe form of hepatitis, as 70% of HDV patients progress to cirrhosis within ten years. While HDV is less prevalent in the United States, it is a significant and serious health problem with inadequate treatment in many parts of Europe, Africa, the Middle East, East Asia and parts of South America. HDV may be significantly underdiagnosed, because there were no HDV-targeted therapies approved until very recently, and the first therapy approved is only approved in the European Union. HDV is known to accelerate disease progression and increase the incidence of liver cirrhosis and liver cancer, which results in higher morbidity and mortality rates than HBV alone.
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The current standard of care for chronic HBV infection, nucleos(t)ide analog reverse transcriptase inhibitors (NrtIs), are taken life-long and reduce, but do not eliminate, the virus and result in very low cure rates. No new mechanisms of action (MOA) have been approved for chronic HBV infection in over 25 years. The focus of our HBV program is to improve outcomes and increase the number of patients diagnosed and treated through the development of finite and curative therapies targeting an orthogonal MOA.
The current standard of care treatment for HDV is off-label pegylated IFN-α injected weekly or, in some regions, a large, complex molecule that requires daily injections. There are no approved HDV treatments in the United States, and there is only one approved HDV treatment in Europe. We believe a safe and effective oral small molecule entry inhibitor would be a significant innovation for patients living with HDV, which face a significant and immediate disease burden.
HDV Entry Inhibitor
HDV is a small RNA virus that encodes just two viral proteins and relies on host enzymes as well as the HBsAg from HBV to replicate, which limits the number of HDV-specific antiviral targets. Similar to HBV, HDV utilizes HBsAg to enter hepatocytes by binding the cellular transmembrane protein sodium taurocholate co-transporting peptide (NTCP). NTCP is highly expressed on human hepatocytes, where it serves as one of several proteins involved in the transport of bile acids. The binding of specific small or large molecules to NTCP has been shown to effectively inhibit the interaction of HBsAg with NTCP, which prevents HBV and HDV from infecting hepatocytes.
The inhibition of HBV and HDV infection by molecules that bind NTCP has been demonstrated in vitro, in animal models and clinically. Notably, Bulevirtide, a peptide blocker of NTCP, is the only approved therapy for HDV (approved in the European Union (the EU). The binding of NTCP-targeted HBV/HDV entry inhibitors to NTCP has also been shown to inhibit the transport of certain bile acids into cells, which results in plasma elevations of bile acids; this effect has been well tolerated clinically and may serve as a biomarker of pharmacologically active concentrations of drug in the plasma.
We believe a safe and effective oral small molecule entry inhibitor would be a significant innovation for patients living with HDV and could significantly improve treatment uptake and diagnosis rates, especially when compared with currently available injectable products.
In March 2022, we announced our research program focused on a novel, orally bioavailable small molecule approach to inhibit entry of HBV and HDV by targeting NTCP, and in September 2023, we nominated ABI-6250 (6250). In nonclinical studies, 6250 demonstrated low nanomolar potency against all HBV/HDV genotypes, favorable selectivity for NTCP versus other bile acid transporters, good oral bioavailability and a PK profile in nonclinical species projected to support once-daily oral dosing.
At the European Association for the Study of the Liver's (EASL) International Liver Congress TM in June 2023 and the International HBV Meeting in September 2023, we presented nonclinical characterization of the potencies and properties of our novel class of highly potent, small molecule, orally-bioavailable entry inhibitors. We expect to initiate Phase 1a clinical studies of 6250 by the end of 2024.
Capsid Assembly Modulator
HBV is a DNA virus that infects hepatocytes and establishes a reservoir of covalently closed circular DNA (cccDNA), a unique viral DNA moiety that resides in the nucleus of HBV-infected hepatocytes and is associated with viral persistence and chronic infection. No currently approved oral therapies target cccDNA activity directly, which makes molecules that can modulate cccDNA generation or disrupt its function. As a result, we have worked to discover and develop compounds targeting the core protein, a viral protein involved in numerous aspects of the HBV replication cycle, including the generation of HBV cccDNA.
A benchmark for therapeutic agents aiming to decrease cccDNA levels is the use of several key viral antigens as surrogate biomarkers of active cccDNA. The same biomarkers can be used in both primary human hepatocytes and patients. On this basis, our next-generation CAM, ABI-4334 (4334), has shown nonclinical proof of principle. In a variety of cell culture models, 4334 has demonstrated the ability to reduce production of viral HBV DNA levels as
37
well as the surrogate markers for cccDNA establishment: HBV e antigen (HBeAg), HBV core-related antigen (HBcrAg) and viral pre-genomic RNA (pgRNA).
As a next-generation CAM, 4334 has been optimized to potently disrupt viral replication (MOA #1) and prevent the establishment and replenishment of new cccDNA (MOA #2). In contrast, while active against MOA #1, first-generation CAMs have not demonstrated adequate potency to sufficiently block cccDNA formation (MOA #2). Further, the current standard of care, NrtIs, impacts the viral life cycle after establishment of cccDNA and can only inhibit production of new viral particles, and it does so incompletely. In mid-2021, we announced the selection of 4334, which was internally discovered, for clinical development. The chemical scaffold of 4334 is novel and distinct from all our prior CAM candidates.
We believe that 4334 has a best-in-class nonclinical profile, with single-digit nanomolar potency against MOA #1 and MOA #2, pan-genotypic activity, an improved resistance profile and a favorable safety profile. Through mechanistic studies presented at multiple conferences, we have demonstrated that 4334 promotes the formation of empty capsids by acceleration of capsid assembly, prevents the formation of cccDNA by disrupting incoming capsids, and prematurely disrupts capsids containing duplex linear DNA, the precursor for integrated HBV DNA.
We expect to initiate Phase 1b clinical studies of 4334 by mid-2024.
Research Programs
Transplant-Associated Herpesviruses
In August 2022, in connection with our announcement of our HPI program, we also introduced our NNPI research program, targeting transplant-associated herpesviruses. In a transplant setting, when patients are experiencing immunosuppression, they are at high risk of uncontrolled viral replication and severe disease brought on by one or more herpesviruses, including cytomegalovirus (CMV), HSV-1, HSV-2 and varicella zoster virus (VZV). Each of these herpesviruses are highly prevalent, as approximately (1) 60% of transplant patients are CMV-positive; (2) 60% of transplant patients are HSV-positive; and (3) 80% of transplant patients are VZV-positive. These viruses establish lifelong latent infections and frequently reactivate in transplant patients due to the use of immunosuppressive drugs following the transplant. These uncontrolled viral infections increase the risk of severe disease and serious complications, including organ rejection, graft loss and death, and impacted approximately 60,000 patients in 2018 in the United States and EU4/UK.
While there are approved antivirals that are administered in a transplant setting. However, currently approved antivirals are not broad spectrum and pose the risk of potentially serious side effects and drug-drug interactions. As a result of these limitations, we identified an opportunity to develop an oral pan-herpes NNPI for these transplant-associated herpesvirus infections, which could greatly advance treatment. Our research team has discovered multiple chemical series of potent, broad-spectrum herpesvirus polymerase inhibitors. In addition, Gilead exclusively licensed us its NNPI program, and we believe the combined effort will speed candidate nomination and enhance our chance of clinical success.
IFNAR Agonist
In July 2022, we introduced our new research program advancing a novel, small molecule IFNAR agonist designed to selectively activate the IFN-α pathway within the liver and offer the convenience of oral dosing. IFN-α is a subcutaneous injectable immune modulatory therapy approved for HBV that has demonstrated functional cure in some HBV patients, but its poor tolerability profile significantly limits its use. Substantial side effects include flu-like symptoms, cytopenias, serious depression and psychiatric effects. In addition, multiple contraindications limit its use, and it requires weekly injections that result in systemic exposure for up to a year.
By focusing exposure on the liver, our investigational IFNAR agonist program aims to engage IFN-α’s validated antiviral and immune modulatory mechanisms, retaining the efficacy of IFN-α while reducing systemic exposure to improve tolerability. Lead optimization of multiple IFNAR agonists is in progress.
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Collaboration and License Agreements
Gilead Sciences, Inc.
On October 15, 2023, we entered into an Option, License and Collaboration agreement (the Gilead Collaboration Agreement) with Gilead pursuant to which Gilead (1) exclusively licensed to us its HPI program and its NNPI program, while retaining opt-in rights to these programs and (2) has an option to take an exclusive license, on a program-by-program basis, to all of our other current and future pipeline programs. During the 12-year collaboration term (subject to payment of certain extension fees) and for a specified period thereafter, Gilead may exercise its opt-in rights, on a program-by-program basis, at one of two timepoints—completion of a certain Phase 1 study or completion of a certain Phase 2 study for the first product within the program—upon payment of an opt-in fee ranging from $45.0 million to $125.0 million per program depending on the type of program and when the option is exercised. Pursuant to the Gilead Collaboration Agreement, Gilead made an $84.8 million upfront cash payment to us.
If Gilead exercises its opt-in right to any current or future program under the collaboration, we are eligible to receive up to $330.0 million in potential regulatory and commercial milestones on that program, in addition to royalties ranging from the high single-digits to high teens, depending on the clinical stage of the program at the time of the opt-in. Following Gilead’s exercise of its option for each of our programs, we may opt in to cover 40% of the research and development costs in the United States and share 40% of the profits and operating loss in the United States for products within the program in lieu of receiving milestones and royalties for that program in the United States, unless we later opt out of the cost/profit share for the program. Prior to Gilead’s potential exercise of its opt-in, we will be primarily responsible for all discovery, research and development on both our programs and the two Gilead-contributed programs. Following Gilead’s opt-in, Gilead will control the further discovery, research, development, and commercialization on any optioned programs. During the term, Gilead will continue to support the collaboration through extension fees of $75.0 million in each of the third, fifth and seventh years of the collaboration.
The Gilead Collaboration Agreement is subject to termination by either party for the other party’s uncured, material breach or insolvency. Subject to certain limitations, we and Gilead both have certain termination for convenience rights, upon sufficient prior written notice, with respect to programs that one party in-licenses from the other (subject to Gilead’s option rights), and with respect to Gilead, for programs it has option rights to subject to certain time limitations with respect to existing Company programs). Gilead also has a right to terminate the collaborative activities under the Gilead Collaboration Agreement at certain specified points during the collaboration term. Other customary termination rights are further provided in the Gilead Collaboration Agreement.
We and Gilead also entered into a Common Stock Purchase Agreement and an Investor Rights Agreement (together, the Gilead Equity Agreements), pursuant to which Gilead made an upfront equity investment of $15.2 million by purchasing from us 1,089,472 shares of our common stock at a purchase price of $13.92 per share. If we complete an equity financing (or series of financings) by July 15, 2024 that results in at least $30 million of proceeds to us, then, subject to approval by our stockholders (which was obtained on January 31, 2024), we may require Gilead to purchase additional shares of common stock from us in an amount that results in Gilead owning 29.9% of our then-outstanding voting capital stock. If we do not complete the equity financing or do not require Gilead to purchase the additional shares, Gilead may elect to purchase additional shares of common stock from us in an amount that results in Gilead owning 29.9% of our then-outstanding voting capital stock. The purchase price per share for additional shares purchased by Gilead will be equal to the lesser of (1) a 35% premium to the 30-day volume weighted average price immediately prior to the date of purchase or (2) a 35% premium to the 30-day volume weighted average price immediately prior to delivery by Gilead of notice of the anticipated closing date. The Gilead Equity Agreements also include a three-year standstill provision and two-year lockup provision, each with customary exceptions, and provide Gilead with certain other stock purchase rights and registration rights, as well as the right to designate two directors (or, alternatively, board observers at Gilead’s election) to our board of directors. In December 2023, Gilead designated Tomas Cihlar, Ph.D. to serve on our board of directors, and in March 2024, Gilead designated Robert D. Cook II to serve on our board of directors.
BeiGene, Ltd.
In July 2020, we entered into a Collaboration Agreement (the BeiGene Agreement) with BeiGene, Ltd. (BeiGene), granting BeiGene an exclusive, royalty-bearing license to develop and commercialize products containing vebicorvir
39
(VBR), ABI-H2158 (2158) and ABI-H3733 (3733) in the People’s Republic of China, Hong Kong, Taiwan and Macau (the Territory).
Under the BeiGene Agreement, we and BeiGene will collaborate on development activities with respect to the licensed products in accordance with a mutually agreed upon development plan.
Pursuant to the terms of the BeiGene Agreement, BeiGene paid us an upfront amount of $40.0 million, and we were eligible to receive up to approximately $500.0 million in milestone payments, comprised of up to $113.8 million in development and regulatory and $385.0 million in net sales milestone payments. In September 2021, we discontinued development of 2158 following the observation of elevated alanine transaminase (ALT) levels in the Phase 2 clinical study consistent with drug-induced hepatotoxicity, in July 2022, we discontinued VBR because it did not achieve functional cure or finite treatment in our two- and three-drug combination studies and in March 2023, we prioritized 4334 over 3733 based on data from clinical Phase 1 studies of both candidates and chronic toxicology observation for 3733 and announced that we would seek partnering opportunities for the CAMs. In conjunction with the Gilead Collaboration Agreement, we elected to no longer seek partnering or further development of 3733. As of our discontinuation of 3733 development, there are no remaining products in development that have been licensed to BeiGene.
The BeiGene Agreement also contains provisions such as representations and warranties of the parties, terms as to governance of the collaboration, commercialization and regulatory responsibilities of the parties, and manufacturing and supply, including potential adjustments in the event supply costs exceed certain levels. In addition, during the term of the BeiGene Agreement, neither party will commercialize any competing products in the Territory.
BeiGene may terminate the BeiGene Agreement for convenience at any time upon 90 days’ advance written notice to us. The BeiGene Agreement also contains customary provisions for termination by either party, including in the event of breach of the BeiGene Agreement, subject to cure.
Indiana University Research and Technology Corporation
In September 2013, we entered into an exclusive license agreement (the IURTC License Agreement) with Indiana University Research and Technology Corporation (IURTC) pursuant to which we acquired, with rights to sublicense, the rights to develop and commercialize products associated with multiple patents and patent applications covering aspects of our HBV program held by IURTC. As part of this agreement, we were obligated to make milestone payments based upon the successful accomplishment of clinical and regulatory milestones. The aggregate amount of all performance milestone payments under the IURTC License Agreement, should all performance milestones through development be met, was $0.8 million, with a portion related to the first performance milestone having been paid. Under the IURTC License Agreement, we were also obligated to pay IURTC royalties based on net sales of the licensed technology ranging from 0.5% to 1.75%. In addition, under the IURTC License Agreement, we paid annual diligence maintenance fees of $0.1 million. Milestone payments received by IURTC were fully creditable against the annual diligence maintenance fee for the year in which the milestone payments were received.
In January 2024, we notified the Indiana University Innovation and Commercialization Office and IURTC that we had decided to terminate the IURTC License Agreement. The termination of the License Agreement will be effective on April 11, 2024, 90 days following the delivery of the termination notice.
Operations
We currently have corporate and administrative offices and research laboratory space in South San Francisco, California as well as a registrational office, but no employees, in China.
Since our inception, we have had no revenue from product sales and have funded our operations principally through debt financings prior to our initial public offering in 2010 and through equity financings and collaborations since then. Our operations to date have been primarily limited to organizing and staffing our company, licensing our product candidates, discovering and developing our product candidates, maintaining and improving our patent portfolio and raising capital.
We have generated significant losses to date, and we expect to continue to generate losses as we develop our product candidates. As of December 31, 2023, we had an accumulated deficit of $785.7 million primarily as a result of research
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and development expenses and general and administrative expenses. Because we do not generate revenue from any of our product candidates, our losses will continue as we further develop and seek regulatory approval for, and commercialize, our product candidates. Additionally, we expect our research and development expenses to increase over the coming years as we continue the development of our product candidates. As a result, our operating losses are likely to be substantial over the next several years and thereafter if none of our product candidates are approved or successfully launched. We are unable to predict the extent of any future losses or when we will become profitable, if at all.
Critical Accounting Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States. 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 financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Note 2 to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. We evaluate our estimates and judgments, including those described in greater detail below, on an ongoing basis. We base our estimates on 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.
Revenue Recognition from Collaboration
We analyze our collaboration arrangements to assess whether such arrangements, or transactions between arrangement participants, involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities or are more akin to a vendor-customer relationship. In making this evaluation, we consider whether the activities of the collaboration are considered to be distinct and deemed to be within the scope of the collaborative arrangement accounting standard and those that are more reflective of a vendor-customer relationship and, therefore, within the scope of the revenue with contracts with customers accounting standard. This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement.
For arrangements or transactions between arrangement participants determined to be within the scope of the contracts with customers accounting standard, we evaluate the term of the arrangement and recognize revenue when the customer obtains control of promised goods or services in a contract for an amount that reflects the consideration we expect to receive in exchange for those goods or services. For contracts with customers, we apply the following five-step model, each of which requires judgment, in order to determine this amount: (1) identification of the promised goods or services in the contract; (2) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (3) measurement of the transaction price, including the constraint on variable consideration; (4) allocation of the transaction price to the performance obligations; and (5) recognition of revenue when (or as) we satisfy each performance obligation.
We only apply the five-step model to contracts when it is probable we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. As part of the accounting for contracts with customers, we must develop assumptions that require judgment to determine the estimated relative standalone selling price (SSP) of each performance obligation identified in the contract. We then allocate the total transaction price to each performance obligation based on its SSP and recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when or as the performance obligation is satisfied.
For recognition of revenue relating to the Gilead Collaboration Agreement, we determined the transaction price and allocated it to a single combined performance obligation, the discovery, research and development services during the collaboration term. We estimated the SSP of extension fees and opt-in rights pursuant to the Gilead Collaboration Agreement using significant estimates, including forecasted revenues and costs, development timelines, discount rates, and probabilities of technical and regulatory success. We concluded none of the options in the contract are performance obligations at the outset of the arrangement as they are contingent upon option exercise, are capable of being distinct from the research and development services and are not offered at a discount to their SSP. We evaluate each performance obligation to determine if it can be satisfied at a point in time or over time, and we measure the services delivered to the customer, which we periodically review based on the progress of the related program. We recognize revenue under the Gilead Collaboration Agreement over time using a cost-based input method. Revenue related to certain performance obligations that are satisfied over time could be materially impacted as a result of changes in the estimated total research effort required to satisfy those obligations. A 10% change in the total estimated
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effort required to satisfy the single combined performance obligation related to the Gilead Collaboration Agreement would have changed the related revenue recognized during the year ended December 31, 2023 by as much as $0.5 million. The effect of any change made to an estimated input component and, therefore revenue recognized, would be recorded as a change in estimate. Such changes in estimate could have a material impact on the revenue recognized in a future period. In addition, variable consideration (including regulatory and commercial milestones) must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price.
Research and Development Expense and Accruals
As part of the process of preparing our consolidated financial statements, we are required to estimate certain research and development expenses. This process involves reviewing quotations and contracts, reviewing the terms of our license agreements, communicating with our vendors and applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. Payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received. Such payments are evaluated for current or long-term classification based on when they will be realized or consumed. Examples of estimated amortized or accrued research and development expenses include fees to:
• contract research organizations (CROs) and other service providers in connection with clinical studies;
• contract manufacturing organizations (CMOs) in connection with the production of clinical trial materials; and
• vendors in connection with nonclinical development activities.
We base our expenses related to clinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that conduct and manage clinical studies on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows and expense recognition. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In either amortizing or accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the related prepayment or accrual accordingly. Our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in our reporting changes in estimates in any particular period. Adjustments to prior period estimates have not been material for the years ended December 31, 2023 and 2022.
We have and may continue to enter into license agreements to access and utilize certain technology. In each case, we evaluate if the license agreement results in the acquisition of an asset or a business. To date, none of our license agreements have been considered to be acquisitions of businesses. For asset acquisitions, the upfront payments to acquire such licenses, as well as any future milestone payments, are immediately recognized as research and development expense when paid, provided there is no alternative future use of the rights in other research and development projects. These license agreements may also include contingent consideration in the form of cash payments to be made for future milestone events. We assess whether such contingent consideration meets the definition of a derivative and to date we have determined that such contingent consideration are not derivatives.
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Results of Operations
Comparison of the Years Ended December 31, 2023 and 2022
Collaboration Revenue
The following table summarizes the period-over-period changes in our collaboration revenue (in thousands, except for percentages):
Year Ended December 31,
$ Change
% Change
2023
2022
2023 vs. 2022
2023 vs. 2022
Collaboration revenue
$
7,163
$
—
$
7,163
100
%
Collaboration revenue for the year ended December 31, 2023 includes the recognition of $4.4 million for services performed under the Gilead Collaboration Agreement entered into in October 2023. Additionally, collaboration revenue includes the recognition of $2.7 million of deferred revenue allocated to 3733 under the BeiGene Agreement upon discontinuing development of 3733, following entering into the Gilead Collaboration, as we prioritize 4334. There was no revenue for the year ended December 31, 2022.
Research and Development Expenses
Research and development expenses consist primarily of employee-related expenses, fees paid to CROs and CMOs, lab supplies and other third-party expenses that support our research and discovery, nonclinical and clinical activities. External costs represent a significant portion of our research and development expenses, which we track on a program-by-program basis following the nomination of a development candidate. We use our employee and infrastructure resources, as well as certain third-party costs, across multiple research and development programs, and we do not specifically allocate these costs to our programs.
The following table summarizes the period-over-period changes in our research and development expenses (in thousands, except for percentages):
Year Ended December 31,
$ Change
% Change
2023
2022
2023 vs. 2022
2023 vs. 2022
External expenses:
Research and discovery
$
9,741
$
10,338
$
(597
)
(6
%)
3733
3,383
8,165
(4,782
)
(59
%)
5366
2,869
—
2,869
100
%
4334
1,947
5,195
(3,248
)
(63
%)
VBR
1,755
6,962
(5,207
)
(75
%)
6250
421
—
421
100
%
2158
226
2,440
(2,214
)
(91
%)
Total external expenses
20,342
33,100
(12,758
)
(39
%)
Employee and contractor-related expenses
22,956
31,052
(8,096
)
(26
%)
Facility and other expenses
5,602
5,828
(226
)
(4
%)
Total research and development expenses
$
48,900
$
69,980
$
(21,080
)
(30
%)
Research and development expenses were $48.9 million for the year ended December 31, 2023 compared to $70.0 million for the year ended December 31, 2022. The $21.1 million decrease in research and development expenses was primarily driven by decreases in external expenses due to pausing further development of our CAMs as we sought partnering opportunities after the completion of the Phase 1b trial for 3733 and Phase 1a trial for 4334 and our discontinuation of the VBR and 2158 programs. We also experienced decreases in employee and contractor-related expenses of $8.1 million due to the termination of employees as part of the reorganization announced in July 2022. This was partially offset by increases in external expenses generated from the advancement of 5366 and 6250.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and other related costs for personnel in executive, finance, accounting, business development, information technology, legal and human resources functions. Other
43
significant costs include facility costs not otherwise included in research and development expenses, insurance costs, legal fees relating to patents and corporate matters and fees for accounting and consulting services.
The following table summarizes the period-over-period change in our general and administrative expenses (in thousands, except for percentages):
Year Ended December 31,
$ Change
% Change
2023
2022
2023 vs. 2022
2023 vs. 2022
General and administrative expenses
$
22,909
$
24,134
$
(1,225
)
(5
%)
General and administrative expenses were $22.9 million for the year ended December 31, 2023, compared to $24.1 million for the year ended December 31, 2022. The decrease of $1.2 million in general and administrative expenses was primarily due to a $2.2 million decrease in salaries and benefits due to a decrease in headcount, largely attributable to the reorgan ization announced in July 2022. This was partially offset by an increase in legal expenses incurred with entering into the Gilead Collaboration.
Interest and Other Income, Net
Interest income consists of interest earned on our cash and cash equivalents and available-for-sale securities.
The following table summarizes the period-over-period changes in our interest and other income, net (in thousands, except for percentages):
Year Ended December 31,
$ Change
% Change
2023
2022
2023 vs. 2022
2023 vs. 2022
Interest and other income, net
$
3,451
$
1,022
$
2,429
238
%
Interest and other income, net was $3.5 million for the year ended December 31, 2023, compared to $1.0 million for the year ended December 31, 2022. The increase of $2.4 million was primarily due to more interest income earned on marketable securities caused by multiple interest rate increases in 2023 and a larger portfolio balance after the receipt of $100.0 million upon entering into the Gilead Collaboration in October 2023.
Liquidity and Capital Resources
Sources of Liquidity
As a result of our significant research and development expenditures and the lack of any FDA-approved products to generate product sales revenue, we have not been profitable and have generated operating losses since we were incorporated in October 2005. We have funded our operations through December 31, 2023 principally through equity financings, raising an aggregate of $618.8 million in net proceeds, and strategic collaborations, raising an aggregate of $185.7 million through upfront payments.
Future Funding Requirements
We expect our future operating expenses to increase substantially over the coming years as we continue to advance our candidates into the clinic. We monitor our cash needs and the status of the capital markets on a continuous basis. From time to time, we opportunistically raise capital and have done so numerous times since our initial public offering by issuing equity securities. We expect to continue to raise capital when and as needed and at the time and in the manner most advantageous to us.
We expect our existing cash, cash equivalents and marketable securities will enable us to fund our operating expenses and capital expenditure requirements into the second half of 2025. We have based this estimate on assumptions that may prove to be wrong, and we may utilize our available capital resources sooner than we currently expect. Our contractual obligations include operating lease obligations totaling $2.3 million as of December 31, 2023, of which $1.2 million are short-term. We also enter into contracts in the normal course of business with CROs for clinical trials and CMOs for clinical supply manufacturing and with vendors for nonclinical research studies and other services and products for operating purposes, which generally provide for termination within 30 days of notice.
44
Our future capital requirements will depend on many factors, including:
• the scope, progress, results and costs of our ongoing drug discovery, nonclinical development, laboratory testing and clinical studies of our product candidates and any additional clinical studies we may conduct in the future;
• our ability to raise capital despite macroeconomic and geopolitical events impacting financial markets, such as rising inflation, market volatility and risk of recession;
• our ability to realize future potential benefits pursuant to the Gilead Collaboration and maintain the collaboration;
• our ability to manufacture, and to contract with third parties to manufacture, adequate supplies of our product candidates for our clinical studies and any eventual commercialization;
• the costs, timing and outcome of regulatory review of our product candidates; and
• the costs of preparing, filing and prosecuting patent applications in the United States and abroad, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims.
Identifying potential product candidates and conducting nonclinical testing and clinical studies 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 product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will likely be derived from sales of medicines that we do not expect to be commercially available for years, if at all. Accordingly, we will need to continue to rely on additional financings to achieve our business objectives. Adequate additional financings may not be available to us on acceptable terms, or at all. To the extent that we raise additional capital through the sale of equity, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we are unable to raise additional funds when needed, we may be required to reduce staff, delay, scale back or discontinue our product development and clinical studies or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Cash Flows
The following table summarizes our cash flows for the periods presented (in thousands):
Year Ended December 31,
2023
2022
Operating activities
$
22,743
$
(84,463
)
Investing activities
(69,138
)
90,640
Financing activities
13,818
614
Net (decrease) increase in cash and cash equivalents
$
(32,577
)
$
6,791
Operating Activities
Net cash provided by operating activities was $22.7 million for the year ended December 31, 2023. This was primarily due to proceeds of $90.7 million from the upfront payment under the Gilead Collaboration Agreement. This was partially offset by our net loss of $61.2 million, adjusted for $5.1 million recognized for stock-based compensation expense.
Net cash used in operating activities was $84.5 million for the year ended December 31, 2022. This was primarily due to our net loss of $93.1 million, adjusted for $6.6 million recognized for stock-based compensation expense.
45
Investing Activities
Net cash used in investing activities for the year ended December 31, 2023 was $69.1 million primarily due to purchases of marketable securities, net of maturities.
Net cash provided by investing activities for the year ended December 31, 2022 was $90.6 million. This was due to proceeds of $89.2 million from sales and maturities of marketable securities, net of purchases, and proceeds of $1.5 million received in 2022 from the sale of Microbiome assets in 2021.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2023 was $13.8 million resulting from the net proceeds of $9.1 million from the sale of 1,089,472 shares of our common stock in accordance with the Gilead Equity Agreements, $4.5 million from the sale of 261,170 shares of our common stock under our "at-the-market" offering program (the 2020 ATM) and $0.1 million from the issuance of 14,453 shares of common stock under the Assembly Biosciences Amended and Restated 2018 Employee Stock Purchase Plan (2018 ESPP).
Net cash provided by financing activities for the year ended December 31, 2022 was $0.6 million resulting from the net proceeds of $0.3 million from the sale of 25,068 shares of our common stock under the 2020 ATM and $0.3 million from the issuance of 18,819 shares of common stock under the 2018 ESPP.
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Item 7A. Quantitative and Qualitat ive Disclosures about Market Risk
Not applicable.
Item 8. Financial Statemen ts and Supplementary Data
(a) Financial Statements
The financial statements required to be filed pursuant to this Item 8 are appended to this report. An index of those financial statements is found on page F-1.
(b) Supplementary Data
Not applicable.
Item 9. Changes in and Disagreements with Acco untants on Accounting and Financial Disclosure
None.