BridgeBio Pharma, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed financial statements and related notes included in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes thereto for the year ended December 31, 2019 included in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission (the “SEC”) on March 3, 2020. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In some cases, you can identify these statements by forward-looking words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in this Quarterly Report on Form 10-Q. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. Except as may be required by law, we assume no obligation to update these forward-looking statements or the reasons that results could differ from these forward-looking statements. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q. Overview We are a team of experienced drug discoverers, developers, and innovators working to create life-altering medicines that target well-characterized genetic diseases at their source. We founded BridgeBio in 2015 to identify and advance transformative medicines to treat patients who suffer from Mendelian diseases, which are diseases that arise from defects in a single gene, and cancers with clear genetic drivers. Our pipeline of over 20 development programs includes product candidates ranging from early discovery to late-stage development. Several of our programs target indications that we believe present the potential for our product candidate, if approved, to target portions of market opportunities of at least $1.0 billion in annual sales. We focus on genetic diseases because they exist at the intersection of high unmet patient need and tractable biology. Our approach is to translate research pioneered at academic laboratories and leading medical institutions into products that we hope will ultimately reach patients. We are able to realize this opportunity through a confluence of scientific advances: (i) identification of the genetic underpinnings of disease as more cost-efficient genome and exome sequencing becomes available; (ii) progress in molecular biology; and (iii) the development and maturation of longitudinal data and retrospective studies that enable the linkage of genes to diseases. We believe that this early-stage innovation represents one of the greatest practical sources for new drug creation. Since our inception in 2015, we have focused substantially all of our efforts and financial resources on acquiring and developing product and technology rights, building our intellectual property portfolio and conducting research and development activities for our product candidates within our wholly-owned subsidiaries and controlled entities, including partially-owned subsidiaries and subsidiaries we consolidate based on our deemed majority control of such entities as determined using either the variable interest entity, or VIE model, or the voting interest entity, or VOE model. To support these activities, we and our wholly-owned subsidiary, BridgeBio Services, Inc., (i) identify and secure new programs, (ii) set up new wholly-owned subsidiaries and controlled entities, (iii) recruit key management team members, (iv) raise and allocate capital across the portfolio and (v) provide certain shared services, including accounting and human resources, as well as workspaces. We do not have any products approved for sale and have not generated any revenue from product sales. To date, we have funded our operations with proceeds from the sale of our equity securities, issuance of convertible notes, debt borrowings and, to a lesser extent, revenue from collaboration arrangements. We have experienced some delays in enrollment of ongoing clinical trials and delay in the start of planned trials due to the global outbreak of SARS-CoV-2, the novel strain of coronavirus that causes Coronavirus disease 19, or COVID-19. The ultimate impacts of COVID-19 on our business are currently unknown. We will continue to actively monitor the situation and may take further precautionary and preemptive actions as may be required by federal, state or local authorities or that we determine are in the best interests of public health and safety and that of our patient community, employees, partners, suppliers and stockholders. We cannot predict the effects that such actions, or the impact of COVID-19 on global business operations and economic conditions, may have on our business or strategy, including the effects on our ongoing and planned clinical development activities and prospects, or on our financial and operating results. For example, depending on the full impact and prevalence of COVID-19 over time, we currently expect to provide top-line data from Part A of our Phase 3 clinical trial of acoramidis in ATTR-CM in late 2021 or early 2022. 42 Financial Operations Overview Cash, Cash Equivalents and Marketable Securities As of September 30, 2020 we had cash, cash equivalents and marketable securities of $710.7 million. On March 9, 2020, we issued an aggregate principal amount of $550.0 million of our 2.50% Convertible Senior Notes due 2027, or the 2027 Notes, in a private offering (the “Note Offering”) to qualified institutional buyers. We received net proceeds from the Note Offering of approximately $537.0 million, after deducting purchasers’ discount and offering expenses. We used approximately $49.3 million of the net proceeds from the Note Offering to pay for the cost of capped call transactions and approximately $75.0 million to pay for the repurchase of shares of our common stock. We also received net proceeds of $24.1 million from Eidos’ at-the-market issuance of shares in February 2020. During the nine months ended September 30, 2020, we used cash of approximately $303.5 million to support our operations. License Revenue License revenue for three and nine months ended September 30, 2020 was $8.1 million arising primarily from the recognition of the upfront payment receivable from LianBio upon execution of the Exclusive License Agreement that focuses on the Phase 1-ready SHP2 inhibitor BBP-398 (“BBP-398”) that is being developed by our controlled entity, Navire Pharma, Inc. License revenue for three and nine months ended September 30, 2019 was $26.7 million arising primarily from the recognition of the upfront payment received by Eidos upon execution of the Alexion License Agreement. Operating Expenses Cost of License Revenue Cost of license revenue of $2.5 million for the three and nine months ended September 30, 2019 represents sublicensing fees payable under the Stanford License in connection with the Alexion License Agreement. There were no such amounts during the three and nine months ended September 30, 2020. Research and Development Expenses Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 Change 2020 2019 Change (in thousands) Research and development $ 92,050 $ 55,278 $ 36,772 $ 246,873 $ 152,462 $ 94,411 Research and development expense increased by $36.8 million and $94.4 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019 primarily due to increase in external-related costs and in our headcount to support progression in our research and development programs including our increasing research pipeline. Research and development costs consist primarily of external costs, such as fees paid to consultants, contractors, contract manufacturing organizations, or CMOs, and contract research organizations, or CROs, in connection with our preclinical and clinical development activities and are tracked on a program-by-program basis. License fees and other costs incurred after a product candidate has been designated and that are directly related to the product candidate are included in the specific program expense. License fees and other costs incurred prior to designating a product candidate are included in early stage research programs. 43 The following table summarizes our research and development expenses by program incurred for the following periods : Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (in thousands) Acoramidis (Previously known as BBP-265 or AG10) (Eidos) (1) $ 22,741 $ 11,906 $ 58,604 $ 32,805 Infigratinib (Previously known as BBP-831) (QED) 20,524 17,292 66,965 49,105 Fosdenopterin (Previously known as BBP-870) (Origin) 6,661 6,479 17,420 14,566 BBP-631 (Adrenas) 5,275 3,069 15,074 11,174 BBP-589 (PTR) 5,710 1,151 9,807 5,115 BBP-812 (ASPA) 2,042 3,978 6,157 12,060 BBP-681 (Venthera) 4,408 1,544 8,078 4,283 BBP-454 (TheRas) 2,187 1,527 6,002 3,661 BBP-418 (ML Bio) 3,545 1,393 10,038 1,393 Other programs including early-stage 18,957 6,939 48,728 18,300 Total $ 92,050 $ 55,278 $ 246,873 $ 152,462 (1) Amounts presented above may differ from the financial statements of Eidos due to intercompany income and expenses, which are eliminated in the condensed consolidated financial statements of BridgeBio for all periods presented. In light of recent developments relating to the COVID-19 global pandemic, the focus of healthcare providers and hospitals on fighting the virus, and consistent with the U.S. Food and Drug Administration’s updated industry guidance for conducting clinical trials issued on March 18, 2020, we have experienced delays in or temporary suspension of the enrollment of patients in our subsidiaries’ ongoing clinical trials. We additionally may experience delays in certain ongoing key program activities, including commencement of planned clinical trials, as well as non-clinical experiments and investigational new drug application-enabling good laboratory practice toxicology studies. The exact timing of delays and their overall impact on our business are currently unknown, and we are monitoring the COVID-19 outbreak as it continues to rapidly evolve. We are continuing to actively monitor the situation and may take further precautionary and preemptive actions as may be required by federal, state or local authorities or that we determine are in the best interests of public health and safety and that of our patient community, employees, partners, suppliers and stockholders. We cannot predict the effects that such actions, or the impact of COVID-19 on global business operations and economic conditions, may have on our business or strategy, including the effects on our ongoing and planned clinical development activities and prospects, or on our financial and operating results. General and Administrative Expenses Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 Change 2020 2019 Change (in thousands) (in thousands) General and administrative $ 36,016 $ 23,495 $ 12,521 $ 108,247 $ 59,381 $ 48,866 General and administrative expenses increased by $12.5 million and $48.9 million for the three and nine months ended September 30, 2020 compared to the same periods in 2019 due to increase in headcount to support the growth of our operations and external-related costs incurred as a result of continuing compliance as a public company. Other Income (Expense), Net Interest Income Interest income consists of interest income earned on our cash equivalents and marketable securities. The changes in interest income for the three and nine months ended September 30, 2020 compared to the same periods in 2019 were not significant. 44 Interest Expense Interest expense for the three and nine months ended September 30, 2020 consists primarily of interest expense incurred under our term loans with Hercules Capital, Inc. pursuant to our Loan and Security Agreement, dated June 19, 2018, as amended, Eidos’ term loan with Silicon Valley Bank and Hercules pursuant to its Loan and Security Agreement, dated November 13, 2019, or the “SVB and Hercules Loan Agreement”, and our 2027 Notes issued in March 2020. Interest expense for the same period in 2019 consists primarily of interest expense incurred under our term loans with Hercules. The increases of $8.8 million and $20.0 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019 was primarily attributed to increase in principal amounts. Loss from an Equity Investment Loss from an equity investment for the three and nine months ended September 30, 2019 pertain to our share of losses from our investment in PellePharm totaling $6.6 million and $16.1 million, respectively. We recognize our share of losses from the PellePharm equity method investment as incurred. After our equity method investment was reduced to zero during the three months ended March 31, 2019, we recognized our percentage of net losses consistent with our preferred stock ownership percentage until the investment was also reduced to zero during the remaining period of 2019. We have not recognized our share of net losses for the three and nine months ended September 30, 2020 as our equity investment balances were reduced to zero as of December 31, 2019. Other Income (Expense) Other income (expense) consists mainly of changes in fair value of the LEO Call Option liability. The LEO Call Option is subject to remeasurement to fair value at each balance sheet date until the LEO Call Option is either exercised or expires. The LEO Call Option income (expense) of $0.1 million and $(1.1) million for the three and nine months ended September 30, 2020, respectively, and $0.3 million and $(1.0) million for the three and nine months ended September 30, 2019, respectively, were due to change in fair value. Net Loss Attributable to Redeemable Convertible Noncontrolling Interests and Noncontrolling Interests Net loss attributable to redeemable convertible noncontrolling interests and noncontrolling interests in our condensed consolidated statements of operations consists of the portion of the net loss of those consolidated entities that is not allocated to us. Changes in the amount of net loss attributable to noncontrolling interests are directly impacted by changes in the net loss of our consolidated entities and are the result of ownership percentage changes. Refer to Note 6 to our condensed consolidated financial statements. Net loss attributable to redeemable convertible noncontrolling interests and noncontrolling interests was $14.3 million and $41.7 million for the three and nine months ended September 30, 2020, respectively, compared to $0.7 million and $17.3 million for the same periods, respectively, in 2019. Liquidity and Capital Resources We have historically financed our operations primarily through the sale of our equity securities, issuance of convertible notes, debt borrowings and revenue from certain licensing arrangements. As of September 30, 2020, we had cash, cash equivalents and marketable securities of $710.7 million or $563.4 million excluding Eidos. The funds held by our wholly-owned subsidiaries and controlled entities are available for specific entity usage, except in limited circumstances. The cash and cash equivalents of $147.3 million as of September 30, 2020 belonging to Eidos may only be used solely by Eidos. As of September 30, 2020, our outstanding debt was $471.9 million, net of debt discounts and issuance costs and accretion or $455.2 million excluding Eidos’ debt. Since inception, we have incurred significant operating losses. For the years ended December 31, 2019, 2018 and 2017, we incurred net losses of $288.6 million, $169.5 million and $43.8 million, respectively. For the nine months ended September 30, 2020, we incurred net losses of $370.5 million. We had an accumulated deficit as of September 30, 2020 of $768.8 million. We expect to continue to incur net losses over the next several years as we continue our drug development and discovery efforts and incur significant clinical and preclinical development costs related to our current research and development programs as well as costs related to commercial launch readiness for our late-stage programs. In particular, to the extent we advance our programs into and through later-stage clinical trials without a partner, we will incur substantial expenses. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of our product candidates at our wholly-owned subsidiaries and controlled entities. Our current business plan is also subject to significant uncertainties and risks as a result of, among other factors, our ability to generate product revenue sufficient to achieve profitability, which will depend heavily on the successful development and eventual commercialization of our product candidates at our consolidated entities. 45 We expect our cash and cash equivalents and marketable securities will fund our operations for at least the next 12 months based on curre nt operating plans and financial forecasts. If our current operating plans or financial forecasts change, i ncluding the effects of the COVID-19 pandemic on our research and development activities , we may require additional funding sooner in the form of public or private equity offerings, debt financings or additional collaborations and licensing arrangements. However, future financing may not be available in amounts or on terms acceptable to us, if at all. In addition, we are closely monitoring ongoing developments in connection with the COVID-19 pandemic, which may negatively impact our financial and operating results. We will continue to assess our operating expenses and our cash and cash equivalents and, if circumstances warrant, we will make appropriate adjustments to our operating plan. Sources of Liquidity Initial public offerings and at-the-market share issuances In June 2018, our controlled subsidiary, Eidos, completed its U.S. initial public offering of its common stock of which net proceeds received were $95.5 million. As of September 30, 2020, we held 24,575,501 shares of common stock of Eidos. In December 2019 and February 2020, Eidos received net proceeds of $23.9 million and $24.1 million, respectively, from its at-the-market issuance of shares. All cash and cash equivalents held by Eidos are restricted and can be applied solely to fund the operations of Eidos. On July 1, 2019, we completed the IPO of our common stock. As part of the IPO, we issued and sold 23,575,000 shares of our common stock, which included 3,075,000 shares sold pursuant to the exercise of the underwriters’ option to purchase additional shares, at a public offering price of $17.00 per share. We received net proceeds of approximately $366.2 million from the IPO, after deducting underwriters’ discounts and commissions of $28.1 million and offering costs of $6.5 million. On July 7, 2020, we filed the 2020 Shelf with the SEC in relation to the registration of common stock, preferred stock, debt securities, warrants and units or any combination thereof. We also simultaneously entered into the 2020 Sales Agreement with the Sales Agents, to provide for the offering, issuance and sale by us of up to an aggregate of $350.0 million of our common stock from time to time in “at-the-market” offerings under the 2020 Shelf and subject to the limitations thereof. We will pay to the applicable Sales Agents cash commissions of up to 3.0 percent of the gross proceeds of sales of common stock under the 2020 Sales Agreement. We have not issued any shares or received any proceeds from this offering through September 30, 2020. Debt 2027 Notes On March 9, 2020, we issued an aggregate principal amount of $550.0 million of our 2027 Notes, pursuant to an Indenture dated March 9, 2020, or the Indenture, between BridgeBio and U.S. Bank National Association, as trustee, or the Trustee, in a private offering to qualified institutional buyers, or the Note Offering, pursuant to Rule 144A under the Securities Act of 1933, as amended, or the Securities Act. The 2027 Notes issued in the Note Offering include $75.0 million aggregate principal amount of 2027 Notes sold to the initial purchasers in the offering, or the Initial Purchasers, pursuant to the exercise in full of their option to purchase additional 2027 Notes. The 2027 Notes are senior, unsecured obligations of BridgeBio and will accrue interest payable semiannually in arrears on March 15 and September 15 of each year, beginning on September 15, 2020, at a rate of 2.50 % per year. The 2027 Notes will mature on March 15, 2027, unless earlier converted or repurchased. Upon maturity, the 2027 Notes are convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. We received net proceeds from the Note Offering of approximately $537.0 million, after deducting the Initial Purchasers’ discount and offering expenses. We used approximately $49.3 million of the net proceeds from the Note Offering to pay for the cost of the Capped Call Transactions, and approximately $75.0 million to pay for the repurchases of shares of our common stock. We intend to use the remainder of the net proceeds from the Note Offering for working capital and other general corporate purposes, including for our commercial organization and launch preparations. We may also use any remaining net proceeds to fund possible acquisitions of, or investments in, complementary businesses, products, services and technologies. A holder of 2027 Notes may convert all or any portion of its 2027 Notes at its option at any time prior to the close of business on the business day immediately preceding December 15, 2026 in multiples of $1,000 only under the following circumstances: • During any calendar quarter commencing after the calendar quarter ending on June 30, 2020 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; 46 • During the five business day period after any five consecutive trading day perio d (the “measurement period”) in which the “trading price” (as defined in the Indenture) per $1,000 principal amount of 2027 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or, • Upon the occurrence of specified corporate events. On or after December 15, 2026 until the close of business on the second scheduled trading day immediately preceding the maturity date, a holder may convert all or any portion of its 2027 Notes at any time, regardless of the foregoing. The conversion rate will initially be 23.4151 shares of our common stock per $1,000 principal amount of 2027 Notes (equivalent to an initial conversion price of approximately $42.71 per share of our common stock, for a total of approximately 12,878,305 shares). The conversion rate is subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, we will, in certain circumstances, increase the conversion rate for a holder who elects to convert its 2027 Notes in connection with such a corporate event. The maximum number of shares issuable should there be an increase in the conversion rate is 17,707,635 shares of our common stock. We may not redeem the 2027 Notes prior to the maturity date, and no sinking fund is provided for the 2027 Notes. If we undergo a fundamental change (as defined in the Indenture), holders may require us to repurchase for cash all or any portion of their 2027 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2027 Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The Indenture contains customary terms and covenants, including that upon certain events of default occurring and continuing, either the Trustee or the holders of not less than 25% in aggregate principal amount of the 2027 Notes then outstanding may declare the entire principal amount of all the Notes plus accrued special interest, if any, to be immediately due and payable. The 2027 Notes are our general unsecured obligations and rank senior in right of payment to all of our indebtedness that is expressly subordinated in right of payment to the 2027 Notes; equal in right of payment with all of our liabilities that are not so subordinated; effectively junior to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries. Hercules Loan and Security Agreement In June 2018, we executed a Loan and Security Agreement with Hercules Capital, Inc., or Hercules, under which we borrowed $35.0 million, or Tranche I. The term of the loan was approximately 42 months, with a maturity date of January 1, 2022, or the Maturity Date. No principal payments were due during an interest-only period, commencing on the initial borrowing date and continuing through July 1, 2020, or the Amortization Date. In December 2018, we executed the First Amendment to the Loan and Security Agreement, whereby we borrowed an additional $20.0 million, or Tranche II, to increase the total principal balance outstanding to $55.0 million. Upon draw of the additional $20.0 million, the interest-only period on the entire facility was extended until January 1, 2021 and the maturity date for the entire facility was July 1, 2022. In May 2019, we executed the Second Amendment to the Loan and Security Agreement whereby we borrowed an additional $20.0 million, or Tranche III, to increase the total principal balance outstanding to $75.0 million. In July 2019, the completion of BridgeBio’s IPO triggered certain provisions of the Hercules Term Loan. BridgeBio received an option to pay up to 1.5% of scheduled cash pay interest on the entire facility as payment in kind, or PIK Interest, with such cash pay interest paid as PIK Interest at a 1:1.2 ratio. The interest-only period will continue through July 1, 2021, or the Modified Amortization Date, and the entire facility received a maturity date of January 1, 2023, or the Modified Maturity Date. The outstanding balance of the Hercules Term Loan is to be repaid by BridgeBio monthly beginning on the Modified Amortization Date and extending through the Modified Maturity Date. Prior to the Fourth Amendment to the Loan and Security Agreement, or the Amended Hercules Term Loan, described below, the interest rate for the Hercules Term Loan was established as follows: (1) Tranche I bears interest at a floating rate equal to the greater of: (i) the prime rate as reported in the Wall Street Journal plus 3.85% and (ii) 8.85%, payable monthly; (2) Tranche II bears interest at a floating rate equal to the greater of: (i) the prime rate as reported in the Wall Street Journal plus 2.85% and (ii) 8.60%, payable monthly; and (3) Tranche III bears interest at a floating rate equal to the greater of: (i) the prime rate as reported in the Wall Street Journal plus 3.10% and (ii) 9.10%, payable monthly. The Hercules Term Loan contains customary representations and warranties, events of default, and affirmative and negative covenants for a term loan facility of this size and type. However, Hercules imposes no liquidity covenants on us and Hercules cannot limit or restrict our ability to dispose of assets, make investments, or make acquisitions. As pledged collateral for our obligations under the Hercules Term Loan, we granted Hercules a security interest in all of our assets or personal property, including all equity interests owned or hereafter acquired by us. Further, at Hercules’ sole discretion we must make a mandatory prepayment equal to 75% of net cash proceeds received from the sale or licensing of any pledged or collateral assets, including intellectual property, of a consolidated entity owned by us, or the repurchase or redemption of any pledged collateral by certain specified operating companies. None of our consolidated entities are a party to, nor provide any credit support or other security in connection with the Hercules Term Loan. 47 In March 2020, we executed the Third Amendment to the Loan and Security Agreement primarily to allow us to issue our 2027 Notes and to enter into the Capped Call and Share Rep urchase Transactions . In April 2020, we entered into the Amended Hercules Term Loan, which among other things, (1) extended the interest-only period under the Loan and Security Agreement to July 1, 2022 (the Amended Amortization Date, which may be further extended to January 1, 2023 and July 1, 2023, in each case, subject to certain conditions set forth in the Amended Hercules Term Loan), (2) extended the maturity date for the term loans under the Loan and Security Agreement to November 1, 2023 (the Amended Maturity Date, which may be further extended to May 1, 2024, subject to certain conditions set forth in the Amended Hercules Term Loan), (3) provided for an interest rate on the Tranche I equal to the greater of (x) a floating interest rate linked to the prime rate as reported in the Wall Street Journal plus 3.85% and (y) 8.75% (8.75% as of September 30, 2020), payable monthly, (4) provided for an interest rate on the Tranche II equal to the greater of (x) a floating interest rate linked to the prime rate as reported in the Wall Street Journal plus 2.85% and (y) 8.60% (8.60% as of September 30, 2020), payable monthly, (5) provided for an interest rate on the Tranche III equal to the greater of (x) a floating interest rate linked to the prime rate as reported in the Wall Street Journal plus 3.10% and (y) 8.85% (8.85% as of September 30, 2020), payable monthly, and (6) provided for, subject to Hercules’ approval in its sole and absolute discretion, an additional increase in available loan facilities aggregating to $125.0 million as follows: (a) an additional incremental loan in the amount of $25.0 million, available no later than December 15, 2020, (b) an additional incremental loan in the amount of $25.0 million, available no later than December 15, 2021, (c) an additional incremental loan following the achievement of certain performance milestones in the amount of $25.0 million, available no later than December 15, 2021 and (d) an additional $50.0 million discretionary incremental tranche, available no later than December 15, 2022. The Amended Hercules Term Loan also provides us with more flexibility to consummate acquisitions and investments, incur additional debt, dispose of assets and repurchase and/or redeem stock, each subject to certain conditions set forth in the Amended Hercules Term Loan. There have not been any additional draws on the $125.0 million additional available facilities as of September 30, 2020. Silicon Valley Bank and Hercules Loan Agreement On November 13, 2019, Eidos entered into the SVB and Hercules Loan Agreement. The SVB and Hercules Loan Agreement provides for up to $55.0 million in term loans to be drawn in three tranches as follows: (i) Tranche A loan of $17.5 million, (ii) Tranche B loan of up to $22.5 million which is available to be drawn until October 31, 2020, and (iii) Tranche C loan of up to $15.0 million available to be drawn upon a clinical trial milestone. The Tranche C loan is available to be drawn until September 30, 2021. The Tranche A loan of $17.5 million was drawn on November 13, 2019. There have not been any additional draws on the other tranches as of September 30, 2020. The Tranche A loan bears interest at a fixed rate equal to the greater of either (i) 8.50% or (ii) 3.25% plus the prime rate as reported in The Wall Street Journal (8.50% as of September 30, 2020). The Tranche A loan repayment schedule provides for interest only payments until November 1, 2021, followed by consecutive equal monthly payments of principal and interest commencing on this date continuing through the maturity date of October 2, 2023. The Tranche A loan also provides for a $0.3 million commitment fee that was paid at closing and a final payment charge equal to 5.95% multiplied by the amount funded to be paid when the loan becomes due or upon prepayment of the facility. If Eidos elects to prepay the Tranche A loan, there is also a prepayment fee of between 0.75% and 2.50% of the principal amount being prepaid depending on the timing and circumstances of prepayment. The Tranche A loan is secured by substantially all of Eidos’ assets, except Eidos’ intellectual property, which is the subject of a negative pledge. 48 Cash Flows The following table summarizes our cash flows during the periods indicated: Nine Months Ended September 30, 2020 2019 Change (in thousands) Net cash used in operating activities $ (303,453 ) $ (177,384 ) $ (126,069 ) Net cash used in investing activities (136,011 ) (200,352 ) 64,341 Net cash provided by financing activities 442,658 355,888 86,770 Net increase (decrease) in cash, cash equivalents and restricted cash $ 3,194 $ (21,848 ) $ 25,042 Net Cash Flows Used in Operating Activities Net cash used in operating activities was $303.5 million for the nine months ended September 30, 2020, consisting primarily of our net loss of $370.5 million, adjusted for non-cash items such as $46.3 million in stock-based compensation expense and $12.3 million accretion of our 2027 Notes and term loans. The net cash from changes in operating assets and liabilities was minimal during the period and is attributed mainly to an increase of $4.0 million in accrued research and development liabilities, an increase of $2.4 million in accrued compensation and benefits, and an increase of $4.9 million in other accrued and other liabilities, mostly due to increase in our CROs’ and CMOs’ expenses for research activities and other expenses to support the growth of our operation, partially offset by an increase in receivable from a related party of $5.2 million, an increase in prepaid and expenses and other current assets of $5.4 million, and a decrease in operating lease liabilities of $2.3 million. Net cash used in operating activities was $177.4 million for the nine months ended September 30, 2019, consisting primarily of our net loss of $204.4 million, adjusted for non-cash items such as $16.1 million share in net loss of our equity method investment, $11.4 million for stock-based compensation expense, $3.6 million for acquired in-process research and development assets and $1.0 million of expense rela ted to the revaluation of the LEO Call Option liability, as well as net cash outflow of $7.0 million related to changes in operating assets and liabilities. The $7.0 million net cash outflow related to changes in operating assets and liabilities was attributed mainly to an increase of $12.5 million in prepaid expenses and other current assets and of $1.7 million in other assets, and a decrease of $3.2 million in accounts payable, primarily due to the payments made for research due to increased activities at CROs and CMOs. These increases were partially offset by increases of $4.3 million in accrued professional services and of $3.5 million in accrued compensation and benefits, which was primarily related to the timing of payments. Net Cash Flows Used in Investing Activities Net cash used in investing activities was $136.0 million for the nine months ended September 30, 2020, consisting primarily of purchases of marketable securities of $269.8 million and purchases of property and equipment of $5.4 million, partially offset by $139.0 million in maturities of marketable securities. Net cash used in investing activities was $200.4 million for the nine months ended September 30, 2019, which consisted primarily of $197.7 million purchases of marketable securities and $2.5 million payment for in-progress research and development assets acquired primarily in connection with the Phoenix Tissue Repair, Inc. asset acquisition related to a Contribution Agreement and Asset Purchase Agreement entered into in July 2017. Net Cash Flows Provided by (Used in) Financing Activities Net cash provided by financing activities was $442.7 million for the nine months ended September 30, 2020, consisting primarily of the net proceeds from the issuance of our 2027 Notes of $537.0 million and at-the-market issuance of noncontrolling interest by Eidos of $24.1 million, offset by the repurchase of our common stock of $75.0 million and purchase of capped calls of $49.3 million, both in relation to the issuance of our 2027 Notes. Net cash provided by financing activities was $355.9 million for the nine months ended September 30, 2019, consisting primarily of the proceeds from our IPO of $366.2 million, issuance of noncontrolling interest in Eidos to Alexion of $23.3 million, availment of term a loan of $19.8 million and the issuance of redeemable convertible noncontrolling interest to third-party investors of $1.5 million, offset by a $55.0 million payment in relation to the repurchase of common stock of Eidos from a noncontrolling interest holder. 49 Contractual Obligations The following table summarizes our contractual obligations as of September 30, 2020: Payments Due by Period Less than 1 year 1 to 3 years 3 to 5 years More than 5 years Total (in thousands) Operating lease obligations $ 4,253 $ 4,485 $ 4,131 $ 1,278 $ 14,147 Obligation under a manufacturing agreement 4,149 — — — 4,149 2027 Notes — — — 550,000 550,000 Interest on 2027 Notes 13,750 27,500 27,500 20,625 89,375 Term loans — 87,019 5,481 — 92,500 Interest on term loans and final end of term payments 8,152 15,691 1,081 — 24,924 Total contractual obligations $ 30,304 $ 134,695 $ 38,193 $ 571,903 $ 775,095 We have performance-based milestone compensation arrangements with certain employees, whose vesting is contingent upon meeting various regulatory and development milestones, with fixed monetary amounts known at inception that can be settled in the form of cash or equity at our sole election, upon achievement of each contingent milestone. As of September 30, 2020, the potential performance-based milestone compensation amount is up to $68.2 million. Since the timing of the payments is contingent on the occurrence of these performance-based milestones, these payments are not included in the contractual obligations table above. We also have performance-based milestone compensation arrangements with certain employees as part of the Exchange Program, which is further discussed in Note 14 to our condensed consolidated financial statements. The compensation arrangements under the Exchange Program are excluded from the table above because such compensation arrangements are to be settled in the form of equity only. We have certain payment obligations under various license and collaboration agreements. Under these agreements we are required to make milestone payments upon successful completion and achievement of certain intellectual property, clinical, regulatory and sales milestones. The payment obligations under the license and collaboration agreements are contingent upon future events such as our achievement of specified development, clinical, regulatory and commercial milestones, and we will be required to make development milestone payments and royalty payments in connection with the sale of products developed under these agreements. As the achievement and timing of these future milestone payments are not probable or estimable, such amounts have not been included in our condensed consolidated balance sheet as of September 30, 2020, or in the contractual obligations table above. In addition, we enter into agreements in the normal course of business with CROs and other vendors for clinical trials and with vendors for preclinical studies and other services and products for operating purposes, which are generally cancelable upon written notice. These payments are not included in the contractual obligations table above. Off-Balance Sheet Arrangements During the periods presented, we did not have any off-balance sheet arrangements. While we have investments classified as VIEs, their purpose is not to provide off-balance sheet financing. Critical Accounting Polices and Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as revenues and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no significant changes in our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in the section titled “Management’s Discussion and Analysis of Financial Condition and Operations” included in our Form 10-K for the year ended December 31, 2019, as filed with the SEC, except for the adoption in January 1, 2020, of Accounting Standards Codification 842 discussed in Note 1, as well as the accounting for the 2027 Notes and the Capped Call and Repurchase Transactions discussed in Note 9, and the 2020 Stock and Equity Award Exchange Program discussed in Note 14 in our unaudited condensed consolidated financial statements as of and for the three and nine months ended September 30, 2020. 50 JOBS Act and Emerging Growth Company Status We are an emerging growth company, or EGC, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, EGCs can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use the extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that (i) we are no longer an EGC or (ii) we affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our condensed consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. We will cease to be an EGC on December 31, 2020 because our aggregate worldwide market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2020, our most recently completed second fiscal quarter, was greater than $700 million. Effective January 1, 2021, we will no longer be able to use the exemptions from certain reporting requirements available to EGCs. Recent Accounting Pronouncements See Note 2, “Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements” to our condensed consolidated financial statements appearing under Part I, Item 1 of this Quarterly Report on Form 10-Q for more information. 51 Item 3. Quantitative and Qualitati ve Disclosures About Market Risk We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate sensitivities. The primary objective of our investment activities is to preserve our capital to fund our operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of cash equivalents and investments in a variety of marketable securities of high credit quality. As of September 30, 2020, we held cash, cash equivalents and marketable securities of $710.7 million. Our cash equivalents consist of amounts invested in money market accounts, such as money market funds and short-term commercial paper. Our marketable securities consisted of commercial paper, corporate debt securities and U.S. government agency securities. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. We have not been exposed nor do we anticipate being exposed to material risks due to changes in interest rates. A hypothetical 100 basis point change in interest rate during any of the periods presented would not have had a material impact on our financial statements. We do not believe that our cash, cash equivalents or marketable securities have a significant risk of default or illiquidity. As of September 30, 2020, we had $92.5 million in variable rate debt outstanding. The Hercules Term Loan, which had a principal balance of $75.0 million, matures in November 2023, with interest-only monthly payments until July 2022. Tranche I bears interest at a floating rate equal to the greater of: (i) the prime rate as reported in the Wall Street Journal plus 3.85% and (ii) 8.75% (8.75% as of September 30, 2020); Tranche II bears interest at a floating rate of equal to the greater of: (i) the prime rate as reported in the Wall Street Journal plus 2.85% and (ii) 8.60% (8.60% as of September 30, 2020); and Tranche III bears interest at a floating rate of equal to the greater of: (i) the prime rate as reported in the Wall Street Journal plus 3.10% and (ii) 8.85% (8.85% as of September 30, 2020). The SVB and Hercules Loan Agreement entered into by Eidos, which matures in October 2023, had a principal balance of $17.5 million as of September 30, 2020 and bears interest equal to the greater of either (i) 8.50% or (ii) 3.25% plus the prime rate as reported in The Wall Street Journal (8.50% as of September 30, 2020). Our 2027 Notes had a principal balance of $550.0 million as of September 30, 2020 and bear interest at a fixed rate. Our cash flows on this debt obligation are not subject to variability as a result of changes in interest rates.