Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Financial Data”, 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 clinical-stage biotechnology company advancing a novel class of oral therapeutic candidates for the treatment of chronic hepatitis B virus (HBV) infection. According to the World Health Organization (WHO), approximately 270 million people worldwide are chronically infected with HBV. Our research and development programs are pursuing multiple drug candidates designed to inhibit the HBV replication cycle and block the generation of covalently closed circular DNA (cccDNA), with the aim of discovering and developing finite and curative therapies for patients with HBV. We have discovered several novel core inhibitors, which are small molecules that directly target and allosterically modulate the HBV core (HBc) protein in a way that affects assembly and stability of HBV nucleocapsids.
The ongoing COVID-19 pandemic has affected certain aspects of our business. As further detailed below, those effects have been primarily limited to where and how our employees work in our labs and offices. To date, our current and future planned clinical trials and pre-clinical studies have not been subject to significant impact as a result of the COVID-19 pandemic.
As previously announced, in January 2021, we wound down our Microbiome program to prioritize and focus our resources on discovering and developing finite and curative therapies for HBV. Our Microbiome program had been developing a novel class of oral live microbial biotherapeutics candidates designed to treat disorders associated with the microbiome.
Our Primary Focus: Targeting HBV Core Protein to Achieve a Cure
HBV is a DNA virus that infects hepatocytes and establishes a reservoir of cccDNA, a unique DNA moiety that resides in the cell 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 highly sought in the HBV field. As a result, most of our research and development efforts to date have focused on discovering and developing compounds targeting the core protein, a highly conserved viral structural protein that has no human homologue and is involved in numerous aspects of the HBV replication cycle, including the generation of HBV cccDNA. Through our research efforts, we have discovered several chemically distinct series of small molecule core inhibitors that directly target and allosterically inhibit core protein functions.
Vebicorvir
Vebicorvir (VBR), our lead core inhibitor product candidate, is licensed from Indiana University. The conduct of the Phase 2 studies, Study 201 and 202 and our open-label extension study, Study 211, are all complete. We presented interim updates on our clinical studies at a variety of conferences, including at the European Association for the Study of the Liver’s (EASL) Digital International Liver Congress TM in August 2020 and the American Association for the Study of Liver Diseases (AASLD) Annual Meeting in November 2020.
Our most recently completed study for VBR, Study 211, involved transitioning patients who met the requisite stopping criteria, as determined with our lead investigators and the U.S. Food and Drug Administration (FDA), off of therapy to test for sustained virologic response (SVR). SVR refers to sustained viral suppression (more than six months) of HBV DNA below the lower limit of quantification (LLOQ) and would be consistent with a successful finite treatment for HBV. In November 2020, it became clear that patients who stopped therapy in Study 211 had not achieved meaningful SVR rates as 39 of 41 patients relapsed, meaning they had detectable HBV. We continue to collect and analyze Study 211 data and intend to submit more detailed findings to a future medical meeting; however, it is clear that combination therapy of VBR plus nucelos(t)ide analog reverse transcriptase inhibitors (NrtI) alone is not sufficient to cure HBV. Based on these results, we terminated Study 211 prior to its completion.
Based on discussions with leading viral hepatitis experts, global regulatory discussions and feedback, and, with respect to the China territory, discussions and agreement with our collaboration partner, BeiGene, Ltd. (BeiGene), we
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recently decided to not move forward with the global registrational studies for VBR as a chronic suppressive treatment (CST) with NrtI. The decision was made to focus on the greatest unmet medical need of patients, which lies predominantly in cure, rather than CST. As a result, we also expect to terminate Study 205, as we focus our efforts with VBR moving forward in combination with NrtI and additional mechanisms targeting finite and curative combination therapy.
ABI-H2158
Our second-generation core inhibitor product candidate, ABI-H2158 (2158), was internally discovered and developed and is chemically distinct from VBR.
We reported the final data from dose-ranging cohorts of the Phase 1b portion of the Phase 1a/1b dose-ranging clinical study at EASL in August 2020. Based on data from the Phase 1b dose-ranging study, we initiated a Phase 2 clinical study in June 2020 using a 300 mg daily dose of 2158. This study is being conducted in approximately ten countries in Asia, North America and Europe. We expect interim data from this study in the second half of 2021. While we will continue to monitor the situation closely, at this time, we do not expect our timelines for this study to be significantly impacted by the COVID-19 pandemic.
ABI-H3733
Our third core inhibitor product candidate, ABI-H3733 (3733), has completed Investigational New Drug (IND) enabling studies. 3733 has a novel chemical scaffold separate from both VBR and 2158. We presented a preclinical profile of this candidate in the first quarter of 2019.
In the first quarter of 2020, we initiated a Phase 1a clinical study to evaluate safety, tolerability and pharmacokinetics (PK) following single ascending dose and multiple ascending dose administration of 3733 in healthy subjects in New Zealand. Conduct for the study was completed in the fourth quarter of 2020 and preliminary data indicate that 3733 was generally well-tolerated and had favorable PK.
Additional Product Candidates
In addition to our three clinical-stage product candidates, our research discovery team is actively focused on identifying and selecting a fourth-generation core inhibitor candidate, which we anticipate in the first half of 2021.
Multi-Drug Combination Studies
We believe that core inhibitors and NrtI will be central to finite and curative therapies for chronic HBV infection. Therefore, as we continue to develop and advance our current and future core inhibitors through clinical studies, we plan to conduct multi-drug combination studies in parallel that add additional drugs (or compounds) with non-overlapping mechanisms of action to the core inhibitor + NrtI antiviral backbone. Specifically, we plan on only incorporating our current and future core inhibitors that have demonstrated they are well-tolerated and effective in clinical studies in dual combination with NrtI. As the 300 mg daily dose of VBR has been observed to be well-tolerated in all studies conducted to date, with no serious adverse effects or dose-limiting toxicities identified and no pattern of treatment-emergent clinical or laboratory abnormalities observed and has progressed beyond dual combination studies, we currently have two triple combination studies planned to study VBR in combination with NrtI and a third mechanism of action.
Beyond Core Inhibitors
In addition to the development and advancement of our core inhibitor portfolio and our current and future multi-drug combination studies, our research and development team is working on discovering and developing a potent fourth-generation core inhibitor, cccDNA disruptors and small molecules targeting novel undisclosed targets to add to the core inhibitor + NrtI antiviral backbone to achieve cure.
Operations
We currently have corporate and administrative offices and research laboratory space in South San Francisco, California, Groton, Connecticut and a small office 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
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raising capital. We have generated significant losses to date, and we expect to continue to generate losses as we continue to develop our product candidates. As of December 31, 2020 , we had an accumulated deficit of $ 501.6 million . 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. As a result, our operating losses are likely to be substantial over the next several years as we continue the development of our product candidates and thereafter if none 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.
Financial Operations Overview
Research and Development Expense
Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery efforts, target validation, lead optimization and the development of our product candidates, which include:
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employee-related expenses including salaries, benefits, and stock-based compensation expense;
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expenses incurred under agreements with third parties, including contract research organizations (CROs) that conduct research and development, nonclinical and clinical activities on our behalf and the cost of consultants, and contract manufacturing organizations (CMOs) that manufacture all of our drug substance and the drug product used in our HBV program;
•
the cost of lab supplies and acquiring, developing, and manufacturing nonclinical and, in the case of our Microbiome program, early stage clinical study materials;
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fees related to our license agreements; and
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facilities, depreciation, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance, and other operating costs.
Research and development costs are expensed as incurred. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are rendered.
We use our employee and infrastructure resources across multiple research and development programs, and we allocate internal employee-related and infrastructure costs, as well as certain third-party costs, to each of our programs based on the personnel resources allocated to such program. Our research and development expenses, by major program, are outlined in the table below (in thousands):
Year Ended December 31,
2020
2019
2018
HBV (1)
$
71,957
$
57,534
$
49,416
Microbiome ( 2 )
34,866
28,223
23,325
Total
$
106,823
$
85,757
$
72,741
(1)
Expenses presented for HBV include reimbursement of expenses of $0.2 million under the Clinical Trial Collaboration Agreement (Arbutus Agreement) with Arbutus Biopharma Corporation (Arbutus), as discussed in Note 9 to the Consolidated Financial Statements.
(2 )
Expenses presented for Microbiome do not reflect reimbursement of expenses under the Research, Development, Collaboration and License Agreement (Allergan Agreement) with Allergan Pharmaceuticals International Limited (Allergan), as discussed in Note 9 to the Consolidated Financial Statements.
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The successful discovery and development of our product candidates is highly uncertain. As such, at this time, we cannot reasonably estimate, or know the nature, timing and estimated costs, of the efforts that will be necessary to complete the remainder of their development. We are also unable to predict when, if ever, material net cash inflows will commence from our product candidates. This is due to the numerous risks and uncertainties associated with developing medicines, including the uncertainty of:
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the timing, progress and success of our clinical trials and research discovery team in identifying new product candidates;
•
establishing an appropriate safety profile with IND-enabling toxicology studies sufficient to advance additional product candidates into clinical development;
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successful enrollment in, and completion of, clinical studies;
•
making arrangements with third-party manufacturers; and
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obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates.
A change in the outcome of any of these variables or variables discussed in “Item 1A. Risk Factors” with respect to the development of any of our product candidates would significantly change the costs and timing associated with the development of that product candidate.
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical studies. However, we do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans.
General and administrative expenses
General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in executive, finance, accounting, business development, legal and human resources functions. Other 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.
We anticipate that our general and administrative expenses will increase in the future to support continued research and development activities, potential commercialization of our product candidates and costs of operating as a public company. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, lawyers and accountants, among other expenses. Additionally, we anticipate increased costs associated with being a public company, including expenses related to services associated with maintaining compliance with exchange listing and U.S. Securities and Exchange Commission (SEC) requirements, insurance, and investor relations costs.
Interest income
Interest income consists of interest earned on our cash and cash equivalents and available-for-sale securities.
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 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. 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
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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.
While our significant accounting policies are described in more detail in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations.
Revenue Recognition and Accounts Receivable 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 elements of collaboration arrangements that are not accounted for pursuant to the revenue from contracts with customers accounting standard, an appropriate recognition method is determined and applied consistently, generally by analogy to the revenue from contracts with customers accounting standard. Amounts related to transactions with a counterparty in a collaborative arrangement that is not a customer are presented as collaboration revenue and on a separate line item from revenue recognized from contracts with customers, if any, in our consolidated statements of operations and comprehensive loss.
Under certain collaborative arrangements, we are reimbursed for a portion of our research and development expenses or participate in the cost-sharing of such research and development expenses. Such reimbursements and cost-sharing arrangements are reflected as a reduction of research and development expense our consolidated statements of operations and comprehensive loss, as we do not consider performing these activities for reimbursement to be a part of our ongoing major or central operations.
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 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 have provided standard indemnification and protection of licensed intellectual property for our customers. These provisions are part of assurance that the licenses meet the agreements, representations and are not obligations to provide goods or services.
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 it transfers to the customer. As part of the accounting for contracts with customers, we must develop assumptions that require judgment to determine the standalone selling price of each performance obligation identified in the contract. We then allocate the total transaction price to each performance obligation based on the estimated standalone selling prices of each performance obligation. We recognize the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied as revenue.
Upfront License Fees
If a license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from nonrefundable, upfront license fees based on the relative value prescribed to the license compared to the total value of the arrangement. The revenue is recognized when the license is transferred to the collaborator and the collaborator is able to use and benefit from the license. For licenses that are not distinct from other obligations identified in the arrangement, we utilize judgment to assess the nature of the combined
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performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time. If the combined performance obligation is satisfied over time, we apply an appropriate method of measuring progress for purposes of recognizing revenue from nonrefundable, upfront license fees. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.
Research and Development Service Payments
Under the Allergan Agreement, we were reimbursed at a certain percentage for performing research and development services based on hours worked by our employees at a fixed contractual rate per hour and third-party pass-through costs we incurred on a quarterly basis. Research and development service payments were included in the transaction price in the reporting period we concluded it was probable that recording revenue in the period would not result in a significant reversal in amounts recognized in future periods. Accounts receivable were recorded when the right to the research and development service payment consideration became unconditional. We recorded the full reimbursed portion of these expenses accounted for under the contract with customer accounting standard as collaboration revenue in our consolidated statements of operations as we consider performing research and development services to be a part of our ongoing and central operations.
Development and Regulatory Milestone Payments
Depending on facts and circumstances, we may record revenues from certain milestones in a reporting period before the milestone is achieved if we conclude that achievement of the milestone is probable and that recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods. We record a corresponding contract asset when this conclusion is reached. Milestone payments that have not been included in the transaction price to date are fully constrained. We re-evaluate the probability of achievement of such milestones and any related constraint each reporting period. We adjust our estimate of the overall transaction price, including the amount of collaborative revenue that was recorded, if necessary.
Sales-based Milestone and Royalty Payments
Our customer may be required to pay us sales-based milestone payments or royalties on future sales of commercial products. We recognize revenues related to sales-based milestone and royalty payments upon the later to occur of (1) achievement of the collaborator’s underlying sales or (2) satisfaction of any performance obligation(s) related to these sales, in each case assuming our licensed intellectual property is deemed to be the predominant item to which the sales-based milestones and/or royalties relate.
We receive payments from our customer based on billing schedules established in each contract. Upfront payments and fees are recorded as deferred revenue upon receipt or when due until we perform our obligations under the arrangement. If the related performance obligation is expected to be satisfied within the next 12 months, these amounts will be classified in current liabilities. We recognize a contract asset relating to our conditional right to consideration that is not subject to a constraint. Amounts are recorded as accounts receivable when our right to consideration is unconditional.
A net contract asset or liability is presented for each contract with a customer. We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.
We may be required to exercise considerable judgment in estimating revenue to be recognized. Judgment is required in identifying performance obligations, estimating the transaction price, estimating the standalone selling prices of identified performance obligations, which may include forecasted revenue, development timelines, reimbursement rates for personnel and other research and development costs, discount rates and probabilities of technical and regulatory success, and estimating the progress towards satisfaction of performance obligations.
On January 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers , as amended (Accounting Standards Codification Topic 606) (ASC 606) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. We also elected to use the practical expedient that allows an entity to expense the incremental cost of obtaining a contract as an expense when incurred if the amortization period of the asset that an entity otherwise would have recognized is less than one year. Results for the year ended December 31, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in
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accordance with historic accounting under the previous revenue recognition accounting standard . As of the adoption date of ASC 606, we had only one contract with a customer, Allergan, that had not been completed. Based on our analysis, we concluded there was no significant change in applying ASC 606 to our agreement with Allergan and no amounts have been recognized within “accumulated deficit” in the consolidated balance sheet related to the adoption of the new standard.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill and indefinite-lived intangible assets are reviewed for impairment at least annually in the fourth quarter and more frequently if events or other changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Impairment of goodwill and indefinite-lived intangibles is determined to exist when the fair value is less than the carrying value of the net assets being tested.
Goodwill
We determined that we have only one operating segment and reporting unit. Accordingly, our review of goodwill impairment indicators is performed at the entity-wide level. In performing each annual impairment assessment and any interim impairment assessment, we determine if we should qualitatively assess whether it is more likely than not that the fair value of goodwill is less than its carrying amount (the qualitative impairment test). Some of the factors considered in the assessment include general macroeconomic conditions, conditions specific to the industry and market, cost factors, the overall financial performance and whether there have been sustained declines in our share price. If we conclude it is more likely than not that the fair value of the reporting unit is less than its carrying amount, or elect not to use the qualitative impairment test, a quantitative impairment test is performed. Effective January 1, 2020, we early adopted ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04), which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Under this accounting standard, annual or interim quantitative impairment testing is performed by comparing the estimated fair value of the reporting unit to its carrying value. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the carrying value of goodwill. We use our market capitalization as an indicator of fair value. We believe that since our reporting unit is publicly traded, the ability of a controlling stockholder to benefit from synergies and other intangible assets that arise from control might cause the fair value of our reporting unit as a whole to exceed our market capitalization. However, we believe that the fair value measurement need not be based solely on the quoted market price of an individual share of our common stock, but also can consider the impact of a control premium in measuring the fair value of its reporting unit. The control premium utilized is based on control premiums observed in recent acquisitions of entities similar to us that were made on a non-minority basis. Should our market capitalization be less than our total stockholders’ equity as of our annual test date or as of any interim impairment testing date, we would also consider market comparables, recent trends in our stock price over a reasonable period and, if appropriate, use an income approach (discounted cash flow) to determine whether the fair value of our reporting unit is greater than our carrying amount. If we were to use an income approach, we would establish a fair value by estimating the present value of our projected future cash flows expected to be generated from our business. The discount rate applied to the projected future cash flows to arrive at the present value would be intended to reflect all risks of ownership and the associated risks of realizing the stream of projected future cash flows. Our discounted cash flow methodology would consider projections of financial performance for a period of several years combined with an estimated residual value. The most significant assumptions we would use in a discounted cash flow methodology are the discount rate, the residual value and expected future revenues, gross margins and operating costs, along with considering any implied control premium. In 2020, we elected to bypass the qualitative goodwill impairment assessment. As of October 1, 2020, we have determined through a quantitative impairment test that the fair value significantly exceeded the carrying value of our single reporting unit, and concluded that goodwill was not impaired. In November 2020, after our public announcement that it became clear that patients who stopped therapy in Study 211 had not achieved meaningful SVR rates as 39 of 41 patients relapsed, our stock price declined 152% closing on November 5 at $15.90 and opening on November 6 at $6.30. Due to a sustained decline in our stock price during the remainder of the fourth quarter of 2020, we determined these factors were an indication of a triggering event of impairment and an interim goodwill impairment test was performed as of December 31, 2020. However, our interim quantitative impairment test still determined the fair value exceeded the carrying value of our single reporting unit and concluded that goodwill was still not impaired. We did not recognize any goodwill impairment in any of the years presented.
Indefinite-Lived Intangible Asset
Our indefinite-lived intangible asset consists of in-process research and development (IPR&D) projects acquired in a business combination that are used in research and development activities but have not yet reached technological feasibility, regardless of whether they have alternative future use. The primary basis for determining the technological
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feasibility or completion of these projects is obtaining regulatory approval to market the underlying products in an applicable geographic region. We classify in-process research and development acquired in a business combination as an indefinite-lived intangible asset until the completion or abandonment of the associated research and development efforts. Upon completion of the associated research and development efforts, we perform a final test for impairment and will determine the useful life of the technology and begin amortizing the assets to reflect their use over their remaining lives. Upon permanent abandonment, we would write off the remaining carrying amount of the associated IPR&D intangible asset.
In performing each annual impairment assessment and any interim impairment assessment, we determine if we should qualitatively assess whether it is more likely than not that the fair value of our IPR&D asset is less than its carrying amount (the qualitative impairment test). If we conclude that is the case, or elect not to use qualitative impairment test, we would proceed with quantitatively determining the fair value of the IPR&D asset and comparing its fair value to its carrying value to determine the amount of impairment, if any (the quantitative impairment test).
In performing the qualitative impairment test, we consider the results of the most recent quantitative impairment test and identify the most relevant drivers of the fair value for the IPR&D asset. The most relevant drivers of fair value we have identified are consistent with the assumptions used in the quantitative estimate of the IPR&D asset discussed below. Using these drivers, we identify events and circumstances that may have an effect on the fair value of the IPR&D asset since the last time the IPR&D’s fair value was quantitatively determined. We then weigh these factors to determine and conclude if it is not more likely than not that the IPR&D asset is impaired. If it is more likely than not that the IPR&D asset is impaired we proceed with quantitatively determining the fair value of the IPR&D asset.
We use the income approach to determine the fair value of our IPR&D asset. This approach calculates fair value by estimating the after-tax cash flows attributable to an in-process project over its useful life and then discounting these after-tax cash flows back to a present value. This estimate includes significant assumptions regarding the estimates that market participants would make in evaluating the IPR&D asset, including the probability of successfully completing clinical trials and obtaining regulatory approval to market the IPR&D asset, the timing of and the expected costs to complete IPR&D projects, future net cash flows from potential drug sales, which are based on estimates of the sales price of the drug, the number of patients who will be diagnosed and treated and our competitive position in the marketplace, and appropriate discount and tax rates. Any impairment to be recorded is calculated as the difference between the fair value of the IPR&D asset as of the date of the assessment with the carrying value of the IPR&D asset on our consolidated balance sheet.
For our 2020 impairment test, we performed a qualitative test and concluded it was more-likely-than-not that the fair value of our IPR&D asset exceeded its carrying value and no further testing was required. This was based on a decrease in the probability of success based on the impact of the Study 211 and dual combination VBR and NrtI therapy’s ability to serve as a finite and curative therapy for chronic HBV infection offset by an increase in the probability of success of 2158 and 3733 based on their advancement into Phase 2 and Phase 1 trials during 2020, respectively and the significance of the future net cash flows from potential drug sales for a finite and curative therapy for chronic HBV infection as primarily driven by the number of patients who will be diagnosed and treated and our competitive position in the marketplace. We did not recognize any IPR&D impairment in any of the years presented.
For asset purchases outside of business combinations, we expense any purchased research and development assets as of the acquisition date if they have no alternative future uses.
Research and Development Expense and Accruals
Research and development costs include personnel-related costs, outside contracted services including clinical study costs, facilities costs, fees paid to consultants, milestone payments prior to FDA approval, license fees prior to FDA approval, professional services, travel costs, dues and subscriptions, depreciation and materials used in clinical trials as well as research and development and costs incurred under our collaboration agreements. Research and development costs are expensed as incurred unless there is an alternative future use in other research and development projects. 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. Assets acquired as part of an asset acquisition that are used in research and development or are IPR&D are immediately expensed as research and development unless there is an alternative future use in other research and development projects.
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
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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:
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CROs and other service providers in connection with clinical studies;
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CMOs in connection with the production of clinical trial materials; and
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vendors in connection with preclinical 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 contract research organizations 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, 2020 and 2019.
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.
Restructuring Charges
We recognize restructuring charges related to reorganization plans that have been committed to by us and when liabilities have been incurred. In connection with these activities, we record restructuring charges at fair value for (1) contractual employee termination benefits when obligations are associated to services already rendered, rights to such benefits have vested, and payment of benefits is probable and can be reasonably estimated, (2) one-time employee termination benefits when we have committed to a plan of termination, the plan identifies the employees and their expected termination dates, the details of termination benefits are complete, it is unlikely changes to the plan will be made or the plan will be withdrawn and communication to such employees has occurred, and (3) contract termination costs when a contract is terminated before the end of its term.
One-time employee termination benefits are recognized in their entirety when communication has occurred and future services are not required. If future services are required, the costs are recorded ratably over the remaining period of service. Contract termination costs to be incurred over the remaining contract term without economic benefit are recorded in their entirety when the contract is canceled.
The recognition of restructuring charges requires us to make certain judgments and estimates regarding the nature, timing and amount of costs associated with the planned reorganization plan. To the extent the actual results differ from its estimates and assumptions, we may be required to revise the estimates of future accrued restructuring liabilities, requiring the recognition of additional restructuring charges or the reduction of accrued restructuring liabilities previously recognized. Such changes to previously estimated amounts may be material to our consolidated financial statements. Changes in the estimates of the restructuring charges are recorded in the period in which the change is determined.
At the end of each reporting period, we evaluate the remaining accrued restructuring balances to ensure that no excess accruals are retained and the utilization of the provisions are for their intended purpose in accordance with developed restructuring plans.
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Off-Balance Sheet Arrangements
Since our inception, we have not engaged in any off-balance sheet arrangements.
Contractual Obligations
We have contractual and commercial obligations under our operating lease commitments and licenses. The following table summarizes our future contractual obligations and commercial commitments at December 31, 2020 (in thousands):
Payments Due By Period
Less than
1 year
1-3 years
3-5 years
More than
5 years
Total
Operating lease obligations
$
4,369
$
7,407
$
—
$
—
$
11,776
Total contractual obligations
$
4,369
$
7,407
$
—
$
—
$
11,776
In general, milestone, royalty and other contingent fees associated with certain collaboration and license agreements have not been included in the above table of contractual obligations, because we cannot reasonably estimate if or when they will occur. The milestone payments included in the table of contractual obligations above are payments we believe are reasonably likely to occur during the indicated time periods. We enter into contracts in the normal course of business with CROs for clinical trials and CMO’s for clinical supply manufacturing and with vendors for preclinical research studies and other services and products for operating purposes, which generally provide for termination within 30 days of notice, and therefore, are cancelable contracts and not included in the table above. Further, we anticipate that our operating lease obligations will be higher than projected as we renew existing real estate leases that expire in 2020 and enter into new or expanded real estate leases.
Results of Operations
General
At December 31, 2020, we had an accumulated deficit of $501.6 million primarily as a result of research and development expenses and general and administrative expenses. While we may in the future generate revenue from a variety of sources, including license fees, milestone payments, research and development payments in connection with strategic partnerships and/or product sales, our product candidates are in the clinical stage of development and may never be successfully developed or commercialized. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future and there can be no assurance that we will ever generate significant revenues.
Comparison of the Years Ended December 31, 2020 and 2019
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
2020
2019
2020 vs. 2019
2020 vs. 2019
Collaboration revenue
$
79,105
$
15,963
$
63,142
396
%
Collaboration revenue for the year ended December 31, 2020 includes the remaining deferred revenue balance of $37.0 million and reimbursements incurred under the Allergan Agreement, for which AbbVie Inc. gave written notice of termination in June 2020 following its acquisition of Allergan, and $31.0 million recognized for the transfer of the VBR License upon entering into the Collaboration Agreement with BeiGene (BeiGene Agreement).
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Research and Development Expense
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
Program/Description
2020
2019
2020 vs. 2019
2020 vs. 2019
HBV (1)
$
71,957
$
57,534
$
14,423
25
%
Microbiome (2)
34,866
28,223
6,643
24
%
Total research and development expenses
$
106,823
$
85,757
$
21,066
25
%
(1)
Expenses presented for HBV include reimbursement of expenses of $0.2 million under the Arbutus Agreement, as discussed in Note 9 to the Consolidated Financial Statements.
( 2 )
Expenses presented for the Microbiome program exclude collaboration revenue related to expense reimbursements under the Allergan Agreement as discussed in Note 9 to the Consolidated Financial Statements.
Research and development expenses were $106.8 million for the year ended December 31, 2020 compared to $85.8 million for the year ended December 31, 2019 . The increase was due to an increase of $14.4 million in research and development expenses related to the HBV program and an increase of $6.6 million in research and development expenses related to the Microbiome program. These increases were primarily due to increases in clinical activities, chemistry and manufacturing control activities to support VBR, 2158, 3733 and Microbiome clinical trials and increased salary and benefits due to additional employees. In December 2020, we and our Board of Directors determined that it was in our best interest to wind down the Microbiome program, enabling us to prioritize resources and focus on the advancement of our pipeline of novel core inhibitors for chronic HBV infection. We expect to complete the wind-down of the Microbiome program in early 2021. Microbiome expenses for the year ended December 31, 2020 includes $5.5 million in restructuring costs related to the wind-down, which consists of $3.9 million in employee severance and related benefits and $1.6 million in asset impairment and other costs. Refer to Note 6 to the Consolidated Financial Statements for additional information. Research and development expenses include non-cash stock-based compensation expenses of $ 11.4 million for both the years ended December 31, 2020 and 2019 .
General and Administrative Expense
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
2020
2019
2020 vs. 2019
2020 vs. 2019
General and administrative expenses
$
37,058
$
32,919
$
4,139
13
%
General and administrative expense consists primarily of salaries, consulting fees and other related costs, professional fees for legal services, accounting and tax services, insurance and travel expenses, as well as stock-based compensation expense associated with equity awards to our employees, consultants and directors.
General and administrative expenses were $37.1 million for the year ended December 31, 2020, compared to $32.9 million for the year ended December 31, 2019 . The increase in general and administrative expenses was primarily due to an increase of $3.1 million in professional expenses mostly attributable to the amortized incremental contract costs associated with entering into the BeiGene Agreement, $1.3 million in stock-based compensation expense, $0.5 million in equipment rental and $0.3 million in recruitment costs due to an increase in headcount partially offset by a decrease of $0.9 million in travel related expenses due to state and local laws restricting travel in response to the COVID-19 pandemic. General and administrative expenses includes non-cash stock-based compensation expense of $10.5 million and $9.2 million for the years ended December 31, 2020 and 2019, respectively. Stock-based compensation expense for the year ended December 31, 2020 includes the reversal of previously recognized expense of $1.7 million related to forfeited awards resulting from the departure of one of our former officers during the period, while stock-based compensation expense for the year ended December 31, 2019 includes the reversal of previously recognized expense of $3.6 million related to forfeited awards resulting from another our former officers during the period.
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Interest and Other Income
The following table summarizes the period-over-period changes in our interest and other income (in thousands, except for percentages):
Year ended December 31,
$ Change
% Change
2020
2019
2020 vs. 2019
2020 vs. 2019
Interest and other income
$
2,624
$
4,305
$
(1,681
)
-39
%
Interest and other income was $2.6 million for the year ended December 31, 2020 compared to $4.3 million for the same period in 2019. Interest income for the years ended December 31, 2020 and 2019 was primarily related to interest income earned on marketable securities, corporate bonds and money market funds and the decrease is a result of lower balances and lower yields carried in 2020.
Income Tax (Expense) Benefit
The following table summarizes the period-over-period change in our income tax benefit (in thousands, except for percentages):
Year ended December 31,
$ Change
% Change
2020
2019
2020 vs. 2019
2020 vs. 2019
Income tax benefit
$
—
$
774
$
(774
)
-100
%
Income tax benefit for the year ended December 31, 2020 was nominal compared to an income tax benefit for year ended December 31, 2019 of $0.8 million. The income tax benefit in the prior year is primarily due to a change in our state and local effective tax rate and recording the impact of certain indefinite-lived deferred tax asset carryforwards.
Comparison of the Years Ended December 31, 2019 and 2018
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
2019
2018
2019 vs. 2018
2019 vs. 2018
Collaboration revenue
$
15,963
$
14,804
$
1,159
8
%
During the year ended December 31, 2019, we generated $16.0 million of collaboration revenue, which included the amortization of deferred revenue and reimbursement revenue in each case incurred under the Allergan Agreement, an increase of $1.2 million from $14.8 million for the same period in 2018. The increase was based on increased research efforts performed during 2019 for our Microbiome program.
Research and Development Expense
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
Program/Description
2019
2018
2019 vs. 2018
2019 vs. 2018
HBV (1)
$
57,534
$
49,416
$
8,118
16
%
Microbiome (2)
28,223
23,325
4,898
21
%
Total research and development expenses
$
85,757
$
72,741
$
13,016
18
%
(1) Expenses presented for the Microbiome program exclude collaboration revenue related to expense reimbursements under the Allergan Agreement as discussed in Note 9 to the Consolidated Financial Statements.
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Research and development expense s were $ 85.8 million for the year ended December 31, 2019 compared to $ 72.7 million for the year ended December 31, 2018 . The increase was due to an increase of $ 8.1 million in research and development expenses related to the HBV program and an increase of $4. 9 million in research and development expenses related to the Microbiome program. These increases were primarily due to increases in clinical activities, chemistry and manufacturing control activities to support VBR, 2158 and M icrobiome clinical trials and increased salary and benefits due to additional employees. Research and development expenses include non-cash stock based compensation expenses of $11.4 million for the year ended December 31, 2019, a decrease of $0.4 million from $11.8 million for the year ended December 31, 2018.
General and Administrative Expense
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
2019
2018
2019 vs. 2018
2019 vs. 2018
General and administrative expenses
$
32,919
$
34,798
$
(1,879
)
-5
%
General and administrative expense consists primarily of salaries, consulting fees and other related costs, professional fees for legal services, accounting and tax services, insurance and travel expenses, as well as stock-based compensation expense associated with equity awards to our employees, consultants and directors.
General and administrative expenses were $32.9 million for the year ended December 31, 2019, compared to $34.8 million for the year ended December 31, 2018. The increase in general and administrative expenses was primarily due to an increase of $3.5 million in employee related expenses due to the addition of employees in executive management, finance and human resources. This increase also includes a one-time expense of $1.7 million for severance packages in conjunction with the relocation of our corporate headquarters to South San Francisco, California effective January 1, 2020, the departure of one of our former executives, $0.9 million in rent expenses for our new office in South San Francisco and $0.3 million in professional expenses.
Stock-based compensation expense was $9.2 million for the year ended December 31, 2019, a decrease of $7.5 million from $16.7 million for the year ended December 31, 2018. The decrease was primarily due to a $4.3 million one-time expense related to the departure and transition to consultant of one of our former executive officers in 2018 coupled with the reversal of previously recognized expense of $3.6 million related to forfeited awards resulting from the departure of one of our former executive officers in 2019.
Interest and Other Income
The following table summarizes the period-over-period changes in our interest and other income (in thousands, except for percentages):
Year ended December 31,
$ Change
% Change
2019
2018
2019 vs. 2018
2019 vs. 2018
Interest and other income
$
4,305
$
3,083
$
1,222
40
%
Interest and other income was $4.3 million for the year ended December 31, 2019 compared to $3.1 million for the same period in 2018. Interest income for the years ended December 31, 2019 and 2018 was primarily related to interest income earned on marketable securities, corporate bonds and money market funds, and the increase is a result of higher balances carried in 2019.
Income Tax (Expense) Benefit
The following table summarizes the period-over-period change in our income tax benefit (in thousands, except for percentages):
Year ended December 31,
$ Change
% Change
2019
2018
2019 vs. 2018
2019 vs. 2018
Income tax benefit (expense)
$
774
$
(1,099
)
$
1,873
170
%
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Income tax benefit for the year ended December 31, 2019 was $ 0.8 million compared to an income tax expense for year ended December 31, 2018 of $1.1 million. The income tax benefit in 2019 is primarily due to a change in our state and local effective tax rate and recording the impact of certain indefinite-lived deferred tax asset carryforwards. The income tax expense recognized in 2018 is primarily due to a change in our state and local effective tax rate.
Liquidity and Capital Resources
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, 2020 principally with debt prior to our initial public offering, and thereafter with equity financing, raising an aggregate of $551.8 million in net proceeds from public offerings and private placements from inception to December 31, 2020. Additionally, in February 2017, we received a $50.0 million upfront payment in connection with the execution of the Allergan Agreement and in July 2020, we received a $40.0 million upfront payment in connection with the execution of the BeiGene Agreement.
In July 2018, we sold to various investors an aggregate of 4,600,000 shares of common stock in a public offering at $36.00 per share, which included the exercise in full by the underwriters of their option to purchase 600,000 additional shares of common stock. We received aggregate net proceeds of $155.4 million from the offering and the option exercise, after deducting underwriting discounts and commissions and offering expenses payable.
In December 2019, we sold to various investors an aggregate of 6,287,878 shares of common stock at a public offering price of $16.50 per share, which included the exercise in full by the underwriters of their option to purchase 1,136,363 shares of common stock, and pre-funded warrants to purchase 2,424,242 shares of common stock at a public offering price of $16.499. We received aggregate net proceeds of $134.7 million from the offering and the option exercise, after deducting underwriting discounts and commissions and offering expenses payable.
In December 2020, we sold an aggregate of 892,840 shares of common stock through “at-the-market” offerings (2020 ATM), resulting in net proceeds of $5.5 million.
Cash Flows
A summary of our cash flows for the periods presented was as follows (in thousands):
Year Ended December 31,
2020
2019
2018
Operating activities
$
(62,957
)
$
(84,067
)
$
(64,958
)
Investing activities
68,070
(50,318
)
(135,397
)
Financing activities
7,599
139,646
159,793
Net increase (decrease) in cash and cash equivalents
$
12,712
$
5,261
$
(40,562
)
Net Cash Used in Operating Activities
Net cash used in operating activities was $63.0 million for the year ended December 31, 2020. This was primarily due to $62.2 million of net loss and a decrease of $30.3 million of operating assets and liabilities, which were offset by a $21.9 million non-cash expense recorded for stock-based compensation, $5.2 million of amortization of operating lease right-of-use assets, $1.8 million in non-cash expense for acquired IPR&D and $0.7 million of depreciation and amortization expense.
Net cash used in operating activities was $84.1 million for the year ended December 31, 2019. This was primarily due to $97.6 million of net loss, a decrease of $9.5 million of operating assets and liabilities, $0.8 million of deferred income tax benefit and $1.7 million of amortization of discount on marketable securities, which were offset by a $20.6 million non-cash expense recorded for stock-based compensation, $4.5 million of amortization of operating lease right-of-use assets and $0.5 million of depreciation and amortization expense.
50
Net cash used in operating activities was $65.0 million for the year ended December 31, 201 8 . This was primarily due to $90.8 million of net loss, a decrease of $4.2 million of operating assets and liabilities and $0.2 million of amortization of discount on marketable securities, which were offset by a $28.5 million non-cash expense recorded for stock-based compensation, $0.6 million of depreciation and amortization expense and $1.1 million of deferred income tax expenses.
Net Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities for the year ended December 31, 2020 was $68.1 million primarily due to a purchase of $193.2 million marketable securities, $0.5 million of fixed assets and $1.8 million of IPR&D, which were offset by $221.6 million for the redemption of marketable securities and $41.9 million for the sale of marketable securities.
Net cash used in investing activities for the year ended December 31, 2019 was $50.3 million primarily due to a purchase of $281.3 million marketable securities and $1.6 million of fixed assets, which were offset by $203.9 million for the redemption of marketable securities and $28.7 million for the sale of marketable securities.
Net cash used in investing activities for the year ended December 31, 2018 was $135.4 million primarily due to a purchase of $183.9 million marketable securities and $0.3 million of fixed assets and construction in progress, which were offset by $48.9 million for the redemption of marketable securities.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the year ended December 31, 2020 was $7.6 million resulting from the net proceeds of $5.5 million from the sale of 892,840 shares of our common stock under the 2020 ATM, $1.5 million from the exercise of stock options to purchase 175,579 shares of common stock and $0.7 million from the issuance of 86,812 shares of common stock under our 2018 ESPP.
Net cash provided by financing activities for the year ended December 31, 2019 was $139.6 million resulting from the net proceeds of $134.7 million from our public offering of 6,287,878 shares of common stock and 2,424,242 pre-funded warrants to purchase 2,424,242 shares of common stock at a public offering price of $16.499, including 1,136,363 shares of common stock purchased by the underwriters pursuant to their 30-day option to purchase additional shares, $4.2 million from the exercise of stock options to purchase 585,292 shares of common stock and $0.7 million from the issuance of 59,370 shares of common stock under our 2018 ESPP.
Net cash provided by financing activities for the year ended December 31, 2018 was $159.8 million, resulting from the net proceeds of $155.4 million from our public offering of 4,600,000 shares of common stock, including 600,000 shares of common stock purchased by the underwriters pursuant to their 30-day option to purchase additional shares, and $4.0 million from the exercise of stock options to purchase 775,224 shares of common stock.
Future Funding Requirements
We expect our expenses related to HBV program to remain flat in 2021 but to generally increase over time in connection with our ongoing activities, particularly as we continue the research, development and clinical studies of our product candidates and pursue our intellectual property strategy. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.
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, most recently in December 2020. We expect to continue to raise capital when and as needed and at the time and in the manner most advantageous to us.
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We expect that our existing cash, cash equivalents and marketable securities, will enable us to fund our operating expenses and capital expenditure requirements for at least the next twelve months. 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;
•
the extent to which we further acquire or in-license other product candidates and technologies;
•
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;
•
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; and
•
our ability to establish and maintain collaborations on favorable terms, if at all.
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 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.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, 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 raise funds through additional collaborations, strategic alliances 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 to 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, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
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Recent Accounting Pronouncements
See Note 2 of notes to the consolidated financial statements for a discussion of recent accounting standards and pronouncements.
Cautionary Statement
We operate in a highly competitive environment that involves a number of risks, some of which are beyond our control. The following statement highlights some of these risks. For more detail, see “Item 1A. Risk Factors.”
Statements contained in this Form 10-K that are not historical facts, are or might constitute forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, our expectations might not be attained. Forward-looking statements involve known and unknown risks that could cause actual results to differ materially from expected results. Factors that could cause actual results to differ materially from our expectations expressed in the report include, among others: risks related to the costs, timing, regulatory review and results of our nonclinical studies and clinical studies; our ability to obtain FDA approval of our product candidates; our anticipated capital expenditures, our estimates regarding our capital requirements, and our need for future capital; our liquidity and working capital requirements; our expectations regarding our revenues, expenses and other results of operations; the unpredictability of the size of the markets for, and market acceptance of, any of our products; our ability to sell any approved products and the price we are able realize; our ability to establish and maintain collaborations on favorable terms; our ability to obtain future funding on acceptable terms; our ability to hire and retain necessary employees and to staff our operations appropriately; our ability to compete in our industry and innovation by our competitors; our ability to stay abreast of and comply with new or modified laws and regulations that currently apply or become applicable to our business; estimates and estimate methodologies used in preparing our financial statements; the future trading prices of our common stock and the impact of securities analysts’ reports on these prices; and the risks set out in our filings with the SEC.
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