Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read together with our audited financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, include forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” included in Item 1A of this Annual Report on Form 10-K for a discussion of important factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Introduction
Management’s discussion and analysis of financial condition and results of operations is provided as a supplement to the Consolidated Financial Statements and Notes, included in Item 8 of this Annual Report on Form 10-K, to help provide an understanding of our financial condition, the changes in our financial condition and our results of operations. Our discussion is organized as follows:
• Overview. This section provides a general description of our business.
• Critical accounting estimates. This section contains a discussion of the accounting estimates that we believe are important to our financial condition and results of operations and that require significant judgment and estimates on the part of management in their application. In addition, all of our significant accounting policies are summarized in Note 2 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
• Results of operations. This section provides a general description of our operating expenses, as well as an analysis of our results of operations presented in the accompanying consolidated statements of operations and comprehensive loss by comparing the results for the year ended December 31, 2024 to the results for the year ended December 31, 2023.
• Liquidity and capital resources. This section provides an analysis of our cash flows and a discussion of our outstanding commitments and contingencies that existed as of December 31, 2024. Included in this discussion is our financial capacity to fund our future commitments and a discussion of other financing arrangements.
Overview
Connect Biopharma, headquartered in San Diego, California, is a clinical-stage biopharmaceutical company focused on advancing rademikibart, a potentially best-in-class next generation IL-4Rα antibody, to transform care in asthma and chronic obstructive pulmonary disease.
In June 2024, we announced new U.S.-based leadership with the appointment of Barry D. Quart, Pharm.D., as Chief Executive Officer and Director, and David Szekeres, as President. In addition, Kleanthis G. Xanthopoulos, Ph.D. assumed the role of Chairman of the Board. This change in leadership was the first step in transforming Connect into a U.S.-centric company and significantly reducing our footprint in China.
We continued to make progress by (i) assembling an experienced U.S. management team with deep expertise in drug development and regulatory execution, including having collectively received FDA marketing approval for 16 therapeutic products, and with deep expertise in business development, corporate strategy, finance and operations; (ii) developing a rapid clinical development program for rademikibart, which is expected to be initiated in the first half of 2025; (iii) relocating our corporate headquarters to San Diego, California; (iv) transferring the initial manufacturing process of rademikibart to a U.S. CMO; and (v) taking additional steps to become more U.S.-centric, including the voluntary election to become a domestic filer with the SEC, beginning with this Annual Report on Form 10-K.
Critical Accounting Estimates
A summary of the significant accounting policies is provided in Note 2 to our Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S.
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The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, including those related to revenue recognition, accrued research and development expenses, and share-based compensation. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.
Management considers an accounting estimate to be critical if: it requires a significant level of estimation uncertainty, and changes in the estimate are reasonably likely to have a material effect on our financial condition or results of operations.
We believe the following critical accounting estimates describe the most significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Our license and collaboration revenues have been generated through a collaborative development, manufacturing and commercialization agreement. The terms of the agreement include the license of intellectual property and associated know-how and the provision of other goods and services. Payments to us under a collaborative agreement typically include one or more for the following: non-refundable, upfront license fees; manufacturing supply services; milestone payments; and royalties on future product sales. We utilize key assumptions that require judgement to determine the stand-alone selling price for each performance obligation identified in the agreement, which may include revenue forecasts, expected development timelines, discount rates, probabilities of technical and regulatory success and costs for manufacturing clinical supplies. To date, our estimates have not differed materially from actual values. Because the amount of revenue recognized for each performance obligation is determined based upon its relative stand-alone price, changes in the estimated fair value of the stand-alone selling price for each performance obligation may result in a significant change to our revenue, which could materially affect our results of operations or financial position.
Accrued Research and Development Expenses
We estimate certain costs and expenses and accrue for these liabilities as part of our process of preparing financial statements. Examples of areas in which subjective judgments may be required include, among other things, costs associated with services provided by contract organizations for preclinical development, manufacturing of our Product Candidates and clinical trials. We accrue for costs incurred as the services are being provided by monitoring the status of the trial or services provided, and the invoices received from our external service providers. In the case of clinical trials, a portion of the estimated cost normally relates to the projected cost to treat a patient in the trials, and this cost is recognized based on the number of patients enrolled in the trial. Other indirect costs are generally recognized on a straight-line basis over the estimated period of the study. As actual costs become known to us, we adjust our accruals. Nonrefundable advance payments for goods and services, including fees for process development or manufacturing and distribution of clinical supplies that will be used in future research and development activities, are deferred and recognized as expense in the period that the related goods are consumed or services are performed. To date, our estimates have not differed materially from the actual costs incurred. However, subsequent changes in estimates may result in a material change in our accruals, which could also materially affect our balance sheet and results of operations.
Share-based Compensation
We estimate the fair value of each option grant using the binomial option pricing model. This fair value is then amortized using the straight-line single-option method of attributing the value of share-based compensation to expense over the requisite service periods of the awards. Forfeitures are accounted for, as incurred, as a reversal of share-based compensation expense related to awards that will not vest. The fair value of each employee share purchase right is estimated on the grant date using the Black-Scholes option pricing model. The estimated fair value of each purchase right is then expensed on a straight-line basis over the requisite service period, which is generally the purchase period. The binomial option pricing model and the Black-Scholes option pricing model require inputs of complex and subjective assumptions, including each option’s expected life and price volatility of the underlying shares.
Recent Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
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Results of Operations
Comparison of the Years Ended December 31, 2024 and 2023
License and Collaboration Revenues
License and collaboration revenues relate to the Simcere License Agreement under which Simcere has been granted exclusive rights to develop, manufacture, and commercialize rademikibart for all indications in Greater China, including mainland China, Hong Kong, Macau, and Taiwan.
License and collaboration revenues for the year ended December 31, 2024 were $26.0 million for the upfront license fee, achievement of certain development milestones and cost reimbursements. There were no license and collaboration revenues for the year ended December 31, 2023.
Research and Development Expense
All costs of research and development are expensed in the period incurred. Research and development expense consists primarily of fees paid to external service providers, salaries and related costs for personnel, share-based compensation expense, and other costs incurred related to our Product Candidates.
Research and development expense consisted of the following (in thousands):
December 31,
2024 2023
Rademikibart-related costs $ 16,304 $ 37,572
Other development related costs 460 4,018
Personnel costs and other expenses 9,541 8,920
Share-based compensation expense 2,951 2,492
Total research and development expense $ 29,256 $ 53,002
For the year ended December 31, 2024, research and development expense was $29.3 million, compared to $53.0 million for the same period in 2023. The decrease in rademikibart-related costs was primarily due to lower clinical trial and drug manufacturing expenses as a result of (i) completion of the rademikibart global Phase 2b program in patients with asthma in late 2023, (ii) completion of the rademikibart China pivotal trials for patients with atopic dermatitis in late 2023, and (iii) higher costs incurred during 2023 for the manufacturing of rademikibart clinical trial material. The decrease in other development related costs was primarily due to the completion of the global Phase 2 trial in ulcerative colitis in 2023.
At this time, due to the risks inherent in the clinical trial process, we are unable to estimate with any certainty the costs we will incur in the continued development of our Product Candidates. Other than costs for outsourced services associated with our clinical programs, we generally do not track research and development expense by project; rather, we track such expense by the type of cost incurred.
We expect research and development expense to increase in 2025 to support our development efforts, primarily due to the two Phase 2 trials of rademikibart, which we expect to initiate in the first half of 2025. The lengthy process of completing our clinical trials and seeking regulatory approval for our Product Candidates requires the expenditure of substantial resources.
General and Administrative Expense
General and administrative expense primarily consists of salaries, share-based compensation expense and other related costs for personnel in executive, finance and accounting, information technology, legal and human resource functions. Other general and administrative expense includes professional fees for legal, investor relations, accounting and other general corporate purposes, facility costs and insurance not otherwise included in research and development expense.
For the year ended December 31, 2024, general and administrative expense was $19.2 million, compared to $16.1 million for the same period in 2023. The increase was primarily due to costs associated with executive departures, including cash severance of $1.2 million and non-cash, share-based compensation expense related to certain stock option modifications of $0.6 million. The increase was also due to higher professional fees to support the Company’s ongoing operations.
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Other Income, Net
For the year ended December 31, 2024, other income, net was $7.0 million, compared to $7.1 million for the same period in 2023. Other income, net primarily consists of interest income earned on our cash, cash equivalents and short-term investments and funds received from government grants related to our development activities.
Income Tax Expense
Income tax expense is recognized based on the income tax rates in the following main tax jurisdictions where we operate. We are incorporated in the Cayman Islands, with subsidiaries in Hong Kong, the PRC, Australia and the U.S., and we are exempt from income tax in the Cayman Islands. There is no tax expense in Hong Kong, PRC or Australia as there was no estimated assessable profit that was subject to tax. Our U.S. entity is a service provider for the Hong Kong entity and as a result its cost-plus income is subject to taxation in the U.S. Income tax expense for the years ended December 31, 2024 and 2023 was $0.2 million and $0.1 million, respectively.
Reorganization
See Note 7 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for discussion of the Company’s executive officer reorganization plan.
Liquidity and Capital Resources
As of December 31, 2024, we had cash, cash equivalents and short-term investments of $93.7 million. Based on our current operating plan and projections, management believes that the Company’s existing cash, cash equivalents and short-term investments will be sufficient to meet the Company’s anticipated cash requirements for a period of at least one year from the date this Annual Report on Form 10-K is filed with the U.S. Securities and Exchange Commission.
Our net loss for the year ended December 31, 2024 was $15.6 million, or $0.28 per share, compared to a net loss of $62.1 million, or $1.13 per share, for the same period in 2023.
Our net cash used in operating activities for the year ended December 31, 2024 was $23.6 million, compared to $47.7 million for the same period in 2023. The decrease in net cash used in operating activities was primarily due to a decrease in net loss, adjusted for non-cash share-based compensation expense and accretion of discounts on our available-for-sale investments, partially offset by changes in our operating assets and liabilities.
Our net cash used in investing activities for the year ended December 31, 2024 was $3.5 million, compared to net cash provided by investing activities of $75.0 million for the same period in 2023. The decrease in cash provided by investing activities was primarily due to net purchases of short-term investments of $2.7 million for the year ended December 31, 2024, compared to net maturities of $72.1 million for the year ended December 31, 2023.
Our net cash provided by financing activities for the year ended December 31, 2024 was $227,000, compared to $45,000 for the same period in 2023. The increase in cash provided by financing activities was primarily due to an increase in shares issued upon exercise of outstanding stock options.
Historically, we have financed our operations, including technology and product research and development, primarily through sales of our ordinary shares and ADSs, including our IPO that we completed on March 23, 2021 for total cash consideration of $219.9 million before underwriting discounts and commissions, and, through up-front payments, research funding and milestone payments under collaborative arrangements.
Material Cash Requirements
As of December 31, 2024, we had a lease for 3,628 square feet of office space in San Diego, California, with a lease term that expires on April 30, 2025. We also have a lease for 25,476 square feet of laboratory and office space in Taicang, China, with a lease term that expires on April 30, 2026. As of December 31, 2024, we had total operating lease obligations of $199,000, with $166,000 due in one year and $33,000 due within two years.
In February 2025, we relocated our corporate headquarters to a new location in San Diego, California. This operating lease for the new corporate headquarters is for 6,942 square feet of office space and expires on January 31, 2028. We have agreed to pay a basic annual rent for the additional office space that increases incrementally over the term of the lease from $0.3 million for the first 12 months of the lease (inclusive of certain rent abatements) to $0.4 million for the last 12 months of the lease, and such other amounts as set forth in the lease.
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At December 31, 2024, purchase obligations primarily consisted of non-cancellable commitments with third-party manufacturers primarily including costs related to the development and technology transfer of a new high-yield cell-line for rademikibart, as well as ongoing stability studies for our Product Candidates. Total purchase obligations of $3.4 million were not included in our consolidated financial statements for the year ended December 31, 2024, and are due within one year.
We enter into agreements with clinical sites and clinical research organizations for the conduct of our clinical trials and contract manufacturing organizations for the manufacture and supply of preclinical, clinical and, eventually, commercial materials and drug product. We make payments to these clinical sites and clinical research organizations based in part on the number of eligible patients enrolled and the length of their participation in the clinical trials. Under certain of these agreements, we may be subject to penalties in the event that we prematurely terminate these agreements. At this time, due to the variability associated with clinical site agreements, contract research organization agreements and contract manufacturing agreements, we are unable to estimate with certainty the future costs we will incur. We intend to use our current financial resources to fund our obligations under these commitments.
We have based our estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development of Product Candidates and programs, and because the extent to which we may enter into collaborations with third parties for development of our Product Candidates is unknown, we are unable to estimate the timing and amounts of increased capital outlays and operating expenses associated with completing the research and development of our Product Candidates. Our future capital requirements will depend on many factors, including:
• our ability to raise capital in light of the impacts of the unfavorable global economic and political conditions;
• the scope, progress, results, and costs of drug discovery, preclinical development, laboratory testing, and clinical trials for the Product Candidates we may develop;
• the costs associated with our manufacturing process development and evaluation of third-party manufacturers and suppliers;
• the costs, timing and outcome of regulatory review of our Product Candidates;
• the costs of preparing and submitting marketing approvals for any of our Product Candidates that successfully complete clinical trials, and the costs of maintaining marketing authorization and related regulatory compliance for any products for which we obtain marketing approval;
• the costs of preparing, filing, and prosecuting patent applications, maintaining and enforcing our intellectual property and proprietary rights, and defending intellectual property-related claims;
• the costs of future activities, including product sales, medical affairs, marketing, manufacturing, and distribution, for any Product Candidates for which we receive marketing approval;
• the terms of our current and any future license agreements and collaborations;
• the extent to which we acquire or in-license other Product Candidates, technologies and intellectual property;
• the success of our ongoing or future collaborations;
• our ability to establish and maintain additional collaborations on favorable terms, if at all; and
• the costs of operating as a public company.
Until such time, if ever, that we can generate product revenue sufficient to achieve profitability, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, monetization transactions, government contracts or other strategic transactions. To the extent that we raise additional capital through the sale of equity, ownership interests of existing holders of our ADSs and ordinary shares will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of holders of our ADSs or ordinary shares. If we raise additional funds through collaboration agreements, strategic alliances, licensing arrangements,
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monetization transactions, or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or Product Candidates or grant licenses on terms that may not be favorable to us or grant rights to develop and market products or Product Candidates that we would otherwise prefer to develop and market ourselves. Future debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or equity financing that we raise may contain terms that are not favorable to us or our shareholders.
There have been significant disruptions to global financial markets that have contributed to a general global economic slowdown. The resulting high inflation rates may materially affect our business and corresponding financial position and cash flows. Inflationary factors, such as increases in the cost of our clinical trial materials and supplies, interest rates and overhead costs may adversely affect our operating results. High interest rates also present a recent challenge impacting the U.S. economy and could make it more difficult for us to obtain traditional financing on acceptable terms, if at all, in the future. Additionally, the general consensus among economists suggests that we should expect a higher recession risk to continue over the next year, which, together with the foregoing, could result in further economic uncertainty and volatility in the capital markets in the near term, and could negatively affect our operations. Furthermore, such economic conditions have produced downward pressure on share prices. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, we may experience increases in the near future (especially if inflation rates remain high or begin to rise again) on our operating costs, including our labor costs and research and development costs, due to supply chain constraints, consequences associated with geopolitical conflicts such as the ongoing wars involving Ukraine and Israel, the impact of any tariffs imposed by or on the U.S. or other matters impacting global trade, shifting priorities and policies within the U.S. federal government, worsening global macroeconomic conditions, and employee availability and wage increases, which may result in additional stress on our working capital resources. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce, or eliminate our research and development programs or future commercialization efforts.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not required for smaller reporting companies.
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