ASSEMBLY BIOSCIENCES, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The interim condensed consolidated financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2020 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the U.S. Securities and Exchange Commission on February 25, 2021 (2020 Annual Report). In addition to historical information, this discussion and analysis 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 under “Part I. Item 1A. Risk Factors” in our 2020 Annual Report and “Part II. Item 1A. Risk Factors” in this report. 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 chronic HBV infection. 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 and nonclinical 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 chronic HBV infection. 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 viral DNA species 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 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 viral protein 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 our initial Phase 2 studies, Study 201 and 202, is complete. Our open-label extension study, Study 211, involved treating patients with VBR plus nucelos(t)ide analog reverse transcriptase inhibitors (NrtIs) and ultimately 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 chronic HBV infection. 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, and that dual combination therapy of VBR plus NrtIs is insufficient to cure chronic HBV infection. Based on these results, we terminated Study 211 in the fourth quarter of 2020. We plan to present additional follow-up from Study 211 related to virologic response, safety and resistance following treatment discontinuation, at the European Association for the Study of the Liver’s (EASL) International Liver Congress TM in June 2021 (EASL 2021). 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), 21 we recently decided to not move forward with the global registrational studies for VBR as a chronic suppressive treatment (CST) with NrtI s . The decision was made to focus on the greatest unmet medical need of patients, which lies predominantly in cure, rather than CST. In connection with focusing our efforts with VBR moving forward in combination with NrtI s and additional mechanisms targeting finite and curative combination therapy , we terminated Study 205 in the first quarter of 2021. Study 205 had been initiated to evaluate treatment intensification with VBR in patients with chronic HBV infection who are only partially virologically suppressed on NrtI . 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, we do not currently 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. We expect to present observations on the enhanced potency and target coverage for both antiviral inhibition and inhibition of cccDNA generation for our next generation core inhibitors 2158 and 3733 at EASL 2021. 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 core inhibitor candidate, which we anticipate in the first half of 2021. Multi-Drug Combination Studies We believe that core inhibitors and NrtIs 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 have begun 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 to only incorporate 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, we are exploring the 300mg VBR + NrtI antiviral backbone in two triple combination studies. Our first triple combination study is being conducted pursuant to a Clinical Trial Collaboration Agreement with Arbutus Biopharma Corporation (Arbutus Biopharma) and consists of a randomized, multi-center, open-label Phase 2 clinical study to explore the safety, PK and antiviral activity of the triple combination of VBR, NrtI and AB-729 (Arbutus Biopharma’s investigational RNAi candidate) compared to the dual combinations of VBR + NrtI and AB-729 + NrtI in virologically suppressed subjects. Our second triple combination study evaluates VBR and NrtI in combination with pegylated interferon alfa in treatment-naïve HBeAg positive subjects. Both studies initiated in the first quarter of 2021. In addition to the above studies, we expect to pursue additional multi-drug combinations that include other or additional non-overlapping mechanisms of action to the core inhibitor + NrtI antiviral backbone. 22 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 core inhibitor, cccDNA disruptors and small molecules targeting novel undisclosed targets to add to the core inhibitor + NrtI antiviral backbone to achieve finite and curative therapies. In November 2020, we entered into an exclusive, two-year collaboration and option agreement with Door Pharmaceuticals (Door Pharma) focused on the development of a novel class of HBV inhibitors. Door Pharma’s discovery platform targets functions of HBV core protein distinct from viral assembly and has the potential to interfere with viral nucleic acid, including intra-nuclear cccDNA. Together with Door Pharma, we are working on identifying cccDNA disruptors, which will be aimed at inhibiting different intra-nuclear steps in the viral replication cycle that complement the activity of our core inhibitors. Under the terms of the agreement, Door Pharma will build upon its previous efforts to lead and conduct new discovery research, which we will fund. In return for an up-front payment and success-based milestones and royalties, we received an exclusive option to license compounds arising from the collaboration and will be responsible for the continued development and commercialization of optioned compounds. Operations We currently have corporate and administrative offices and research laboratory space in South San Francisco, California and a small office in China. Until the lease expires in June 2021, we also have administrative office and laboratory space in Groton, Connecticut that was used by our Microbiome program prior to the program being wound down. 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 March 31, 2021, we had an accumulated deficit of $528.8 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. In mid-March 2020, as a result of the COVID-19 pandemic, six San Francisco Bay Area counties announced a shelter-in-place order, restricting all residents to their homes, with few exceptions. Within a week, California issued a statewide stay-at-home order. As a biotechnology company, we were exempt from such orders. While California has begun reopening on a tiered county-by-county basis, with counties assigned to tiers based on positivity rate, adjusted case rate and a health equity metric, both the statewide and local orders remain in place. Because of the exemptions described above, there has not been any significant interruption to date of essential activities at our offices, including work in our laboratories with proper protections and procedures in place. While we have experienced some shipping delays or shortages of personal protective equipment (PPE) that are important to maintaining normal workflows in our laboratories, we have been able to continue our critical research activities through schedule shifts, use of PPE on-hand and reallocation of certain resources that allow our employees to practice “social distancing” and comply with applicable laws. Substantially all of our U.S.-based non-research employees have been working from their homes since mid-March 2020. Clinical study-related impacts of the COVID-19 pandemic to date have been limited to short enrollment delays for our Phase 1 study of 3733. We continually work with our contract research organizations (CROs) and other vendors to ensure, to the extent possible, that services are provided in a timely manner while also identifying alternative vendors and strategies to utilize in the event that COVID or third party-related delays threaten our ability to meet our timelines. We cannot currently predict the specific extent, duration or full impact that the COVID-19 pandemic will have on our ongoing and planned research efforts, clinical studies and other business operations. We continue to monitor the situation regularly for additional potential delays, or modifications to our ongoing and planned studies and, if circumstances warrant, we may adjust our budget and operating plan. 23 Critical Accounting Policies and Significant Judgments and Estimates Our management’s discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with the accounting principles generally accepted in the United States (U.S. GAAP). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. We evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation, 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. Our critical accounting policies and significant estimates are detailed in our 2020 Annual Report. Our critical accounting policies and significant estimates have not changed from those previously disclosed in our 2020 Annual Report, except for those accounting subjects discussed in the section of Note 2 to the unaudited condensed consolidated financial statements titled Adoption of Recent Accounting Pronouncements included in this Quarterly Report on Form 10-Q. Results of Operations Comparison of the Three Months Ended March 31, 2021 and 2020 Collaboration Revenue The following table summarizes the period-over-period changes in our collaboration revenue (in thousands, except for percentages): Three Months Ended March 31, $ Change % Change 2021 2020 2021 vs. 2020 2021 vs. 2020 Collaboration revenue $ — $ 4,081 $ (4,081 ) -100 % Collaboration revenue for the three months ended March 31, 2020 includes the recognition of deferred revenue and reimbursements incurred under Research, Development, Collaboration and License Agreement (the Allergan Agreement) that we entered into with Allergan Pharmaceuticals Limited (Allergan). Following its acquisition of Allergan, AbbVie, Inc. (AbbVie) gave written notice of termination of the Allergan Agreement in June 2020 which became effective October 2020. Research and Development Expense The following table summarizes the period-over-period changes in our research and development expenses (in thousands, except for percentages): Three Months Ended March 31, $ Change % Change Program/Description 2021 2020 2021 vs. 2020 2021 vs. 2020 HBV Cure program $ 19,358 $ 15,636 $ 3,722 24 % Microbiome program (804 ) 7,410 (8,214 ) -111 % Total research and development expenses $ 18,554 $ 23,046 $ (4,492 ) -19 % Research and development expenses were $18.6 million for the three months ended March 31, 2021 compared to $23.0 million for the same period in 2020. The decrease was due to a decrease of $8.2 million in research and development expenses related to the Microbiome program due to the wind-down of the Microbiome program and includes the reversal of $2.4 million of previously recognized stock-based compensation expense related to forfeited awards of terminated employees. This decrease was partially offset by an increase of $3.7 million in research and development expenses related to the HBV program, which were primarily due to increases in clinical activities, chemistry and manufacturing control activities to support our clinical studies and increased salary and benefits due to additional employees. Research and development expenses include $2.1 million in a net reversal of non-cash 24 stock-based compensation expense as a result of forfeited awards for the three months ended March 31, 2021 compared to $ 1.9 million of non-cash stock-based compensation expense for the same period in 2020 . General and Administrative Expense The following table summarizes the period-over-period changes in our general and administrative expenses (in thousands, except for percentages): Three Months Ended March 31, $ Change % Change 2021 2020 2021 vs. 2020 2021 vs. 2020 General and administrative expenses $ 8,704 $ 8,729 $ (25 ) 0 % 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 $8.7 million for both the three months ended March 31, 2021 and 2020. General and administrative expenses include non-cash stock-based compensation expenses of $1.8 million for the three months ended March 31, 2021 and $3.0 million for the same period in 2020. The decrease in stock-based compensation expense of $1.2 million was in part due to the reversal of $0.5 million of previously recognized expense related to forfeited awards from terminated employees as well as a decrease in the grant-date fair value of recent option grants. This decrease in stock-based compensation expense was offset by increases of $0.2 million in salary and benefits and $0.2 million in recruitment expenses due to additional employees and $0.7 million in lease-related costs largely attributable to asset impairment and other charges in connection with restructurings. 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 March 31, 2021 principally through equity financings, raising an aggregate of $586.0 million in net proceeds, and strategic collaborations, raising an aggregate of $90.0 million through upfront payments. Cash Flows for the Three Months Ended March 31, 2021 and 2020 The following table summarizes our cash flow activities (in thousands): Three Months Ended March 31, Cash provided by (used in): 2021 2020 Operating activities $ (33,344 ) $ (25,218 ) Investing activities 18,016 20,693 Financing activities 34,137 119 Net Cash from Operating Activities Net cash used in operating activities was $33.3 million for the three months ended March 31, 2021. This was primarily due to a $27.2 million net loss, $0.1 million of accretion of discount of marketable securities and a decrease of $8.8 million of operating assets and liabilities. These decreases were partially offset by $1.1 million amortization of operating lease right-of-use (ROU) assets, $0.3 million net reversal of non-cash stock-based compensation recognized as a result of forfeited awards from terminated employees, $0.1 million depreciation and amortization expense and a $1.6 million loss on the sale of purchased leased equipment in connection with the wind-down of the Microbiome program. Net cash used in operating activities was $25.2 million for the three months ended March 31, 2020. This was primarily due to a $26.7 million net loss, $0.1 million accretion of discount of marketable securities and a decrease of $4.6 million of operating assets and liabilities, which were offset by $4.9 million non-cash stock-based 25 compensation expense, $ 1.2 million amortization of operating lease ROU assets and $ 0.1 million depreciation and amortization expense. Net Cash from Investing Activities Net cash provided by investing activities for the three months ended March 31, 2021 was $18.0 million due to $66.5 million of redemptions of marketable securities and $3.0 million of sale of marketable securities, which were partially offset by the purchase of $49.2 million of marketable securities. Additionally, the Company purchased leased equipment for $3.1 million that it sold for $0.9 million in connection with the wind-down of the Microbiome program. Net cash provided by investing activities for the three months ended March 31, 2020 was $20.7 million due to $55.0 million of redemptions of marketable securities and $10.0 million of sale of marketable securities, which were partially offset by the purchase of $44.2 million of marketable securities and $0.1 million of property and equipment. Net Cash from Financing Activities Net cash provided by financing activities for the three months ended March 31, 2021 was $34.1 million resulting from sale of 6.0 million shares of our common stock through “at-the-market” offerings, net of commissions and fees. Net cash provided by financing activities for the three months ended March 31, 2020 was $0.1 million resulting from the exercise of stock options to purchase 16,834 shares of common stock. Funding Requirements 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 March 2021. 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 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 26 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 . Off-Balance Sheet Arrangements None. Contractual Obligations There were no material changes in our commitments under contractual obligations as disclosed in our 2020 Annual Report. Item 3. Quantitative and Qualitative Disclosures about Market Risk There have been no material changes to our quantitative and qualitative disclosures about market risk as compared to the quantitative and qualitative disclosures about market risk described in our 2020 Annual Report.