Item 2. Management’s Discussion and Analysis
Item 2. 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 unaudited condensed consolidated financial statements and related notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the Securities and Exchange Commission on February 25, 2021.
This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. The words “anticipate,” “believe,” “continue” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “would,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by forward-looking statements. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the section entitled “Risk Factors” in Part II, Item 1A that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make.
We are a biopharmaceutical company focused on the discovery, development and commercialization of innovative therapies for diseases of the eye. We have worldwide rights to a portfolio of innovative products and product candidates that include two marketed therapies utilizing our proprietary mucus-penetrating particle, or MPP, drug delivery technology, which we refer to as our AMPPLIFY ® technology, to address medical needs for the front of the eye, and a pipeline of proprietary new chemical entities, or NCEs, targeted to address front and back of the eye diseases.
Our two marketed products are EYSUVIS ® (loteprednol etabonate ophthalmic suspension) 0.25%, for the short-term (up to two weeks) treatment of the signs and symptoms of dry eye disease, and INVELTYS ® (loteprednol etabonate ophthalmic suspension) 1%, a topical twice-a-day ocular steroid for the treatment of post-operative inflammation and pain following ocular surgery. Both products apply our AMPPLIFY technology to loteprednol etabonate, or LE, a corticosteroid designed for ocular applications. The AMPPLIFY technology, uses selectively-sized nanoparticles that each have a proprietary coating. We believe that these two key attributes enable even distribution of drug particles on mucosal surfaces and significantly increase drug delivery to target tissues by enhancing mobility of drug particles through mucus and preventing drug particles from becoming trapped and eliminated by mucus. We commercially launched INVELTYS in January 2019 and began shipping EYSUVIS to wholesalers in the U.S. in late December 2020. Full promotional launch of EYSUVIS began in January 2021.
We are also progressing our pipeline of proprietary preclinical development programs targeted to address front and back of the eye diseases. These preclinical development programs, all of which are new chemical entities, include our receptor Tyrosine Kinase Inhibitor program, that is designed to inhibit the vascular endothelial growth factor pathway, for the treatment of retinal diseases, including wet age-related macular degeneration; our selective glucocorticoid receptor modulators, which are a novel class of therapies designed to modify the downstream activity of the receptors to exhibit the anti-inflammatory and immunomodulatory properties of the corticosteroid class of therapies without their associated side effects; and our novel surface targeting steroid designed to target the ocular surface and thus have the potential to have fewer side effects compared to traditional topical steroids. We own all intellectual property and worldwide rights to these pipeline preclinical development programs.
We have retained worldwide commercial rights for EYSUVIS, INVELTYS and our preclinical development programs. Starting with FDA approval of INVELTYS, we have built a commercial infrastructure with our own focused, specialty sales force which now includes 91 territory sales managers, or TSMs, 14 regional sales leaders, two area sales leaders and four directors of national accounts. In 2021, we plan to expand our sales force to approximately 105 TSMs by the start of the third quarter, with a subsequent expansion to 125 TSMs expected by year-end, pending continued growth in payer coverage and the status of the COVID-19 pandemic. Our sales representatives promote both EYSUVIS
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and INVELTYS. We expect to commercialize in the United States any of our product candidates that receive marketing approval as well. We also expect to explore commercialization of EYSUVIS for the treatment of dry eye disease in certain markets outside the United States, including the European Union, or EU, utilizing a variety of collaboration, distribution and other marketing arrangements with one or more third parties.
Since the initial public offering of our common stock, or IPO, we have financed our operations primarily through common stock offerings pursuant to a shelf registration statement on Form S-3 that was declared effective by the SEC on August 27, 2018, or the 2018 Shelf Registration, including sales of our common stock pursuant to a sales agreement with Jefferies, LLC, or Jefferies, under which we were able to issue and sell, from time to time, common stock in at-the-market offerings, or the ATM Offering, through Jefferies, as a sales agent; and common stock offerings pursuant to a shelf registration statement on Form S-3 that was declared effective by the SEC on May 7, 2020, or the 2020 Shelf Registration, under which we are able to issue and sell, from time to time, common stock in the ATM Offering, through Jefferies, as a sales agent, under an amended and restated sales agreement.
Since inception, we have incurred significant losses from operations and negative cash flows from operations. Our net losses were $30.4 million for the three months ended March 31, 2021 and $104.3 million for the year ended December 31, 2020. As of March 31, 2021, we had an accumulated deficit of $430.2 million. As we commenced a full promotional launch of EYSUVIS in early January 2021 and commercially launched our first product, INVELTYS, in January 2019, we have had only limited revenues to date from product sales and have financed our operations primarily through proceeds from our IPO, follow-on public common stock offerings and sales of our common stock under our ATM Offerings, private placements of preferred stock, borrowings under credit facilities, convertible promissory notes and warrants. We have devoted substantially all of our financial resources and efforts to research and development, including preclinical studies and clinical trials and engaging in activities to commercialize EYSUVIS and INVELTYS. Although we expect to continue to generate revenue from sales of EYSUVIS and INVELTYS, there can be no assurance as to the amount or timing of any such revenue, and we expect to continue to incur significant expenses and operating losses. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year.
Business Impact of COVID-19 Pandemic
The ongoing COVID-19 pandemic, which began in December 2019, has spread worldwide, causing federal, state and local governments to implement measures to slow the spread of the pandemic through quarantines, strict travel restrictions and bans, heightened border scrutiny and other measures. In order to safeguard the health of our employees, we follow, and will continue to follow, recommendations from the U.S. Centers for Disease Control and Prevention, as well as federal, state, and local governments, regarding working-from-home practices for non-essential employees. As a result, all office-based personnel have been instructed to work from home, and our laboratory facilities that support our early-stage research activities are being utilized as necessary. In addition, we previously suspended our sales force from substantially all in-person interactions with physicians and were limited to conducting educational and promotional activities virtually. Our sales force has since resumed substantially all in-person interactions in the field, but to the extent we restrict, or are restricted from, in-person interactions with physicians in the future, we may be limited to conducting educational and promotional activities virtually, may continue to hamper our ability to market INVELTYS. The effects of the COVID-19 pandemic may also disrupt the full promotional launch and commercialization of EYSUVIS.
In addition, government restrictions have at times led to moratoria on elective ocular surgeries in many jurisdictions, which has significantly reduced, and may in the future continue to significantly reduce, the demand for INVELTYS, which is indicated for the treatment of inflammation and pain following ocular surgery. The extent of the impact of the COVID-19 pandemic on our commercialization efforts of EYSUVIS and INVELTYS and our operational and financial performance will depend on certain developments, including the length and severity of this pandemic and the full extent of the impact on our customers, employees and vendors and government agencies, all of which are uncertain and cannot be predicted.
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Management is actively monitoring the COVID-19 pandemic and its effects on our financial condition, liquidity, operations, customers, sales force, contractors, and workforce. For additional information on risks posed by the COVID-19 pandemic, please see Part II, Item 1A – “Risk Factors” of this Quarterly Report on Form 10-Q, including the risk factor entitled “The ongoing novel coronavirus pandemic and the efforts to prevent its spread have adversely impacted our operations and the market for INVELTYS, could impact the launch and commercialization of EYSUVIS and may continue to adversely affect our business, results of operations and financial condition.”
Recent Developments
On May 4, 2021, we entered into a Loan and Security Agreement, or the Loan Agreement, with Oxford Finance LLC, in its capacity as lender (in such capacity, the “Lender”), and in its capacity as collateral agent (in such capacity, the “Agent”), pursuant to which a term loan of up to an aggregate principal amount of $125.0 million is available to us, consisting of (i) a tranche A term loan that was disbursed on the closing date of the Loan Agreement in the aggregate principal amount of $80.0 million; (ii) a contingent tranche B term loan in the aggregate principal amount of $20.0 million available to us through June 30, 2023 and within 90 days of our achieving trailing 6-month product revenue equal to or greater than $75.0 million, subject to certain other terms and conditions; and (iii) a contingent tranche C term loan in the aggregate principal amount of $25.0 million available to us through December 31, 2023 and within 90 days of our achieving trailing 6-month product revenue equal to or greater than $100 million, subject to certain other terms and conditions.
The term loans bear interest at a floating rate equal to the greater of 30-day LIBOR and 0.11%, plus 7.89%.
The Loan Agreement provides for interest-only payments until December 1, 2024 if neither the tranche B term loan nor the tranche C term loan are made, and until June 1, 2025 if either the tranche B term loan or the tranche C term loan is made, or the Amortization Date. The aggregate outstanding principal balance of the term loans are required to be repaid in monthly installments starting on the Amortization Date based on a repayment schedule equal to (i) 18 months if neither the tranche B term loan nor the tranche C term loan is made and (ii) 12 months if either the tranche B term loan or the tranche C term loan is made. All unpaid principal and accrued and unpaid interest with respect to each term loan is due and payable in full on May 1, 2026, or the Maturity Date.
We paid a facility fee of $400,000 on the closing date of the Loan Agreement and have agreed to pay a facility fee of $100,000 upon closing of the tranche B term loan and a $125,000 facility fee upon the closing of the tranche C term loan. We will be required to make a final payment fee of 7.00% of the original principal amount of any funded term loan payable on the earlier of (i) the prepayment of the term loan in full or (ii) the Maturity Date. At our option, the we may elect to prepay all, but not less than all, of the outstanding loans, subject to a prepayment fee equal to the following percentage of the principal amount being prepaid: 3.00% if an advance is prepaid during the first 12 months following the applicable advance date, 2.00% if an advance is prepaid after 12 months but prior to 24 months following the applicable advance date, and 1.00% if an advance is prepaid any time after 24 months following the applicable advance date but prior to the Maturity Date.
In connection with our entry into the Loan Agreement, we granted the Agent a security interest in substantially all of our personal property owned or later acquired, including intellectual property. The Loan Agreement also contains customary representations and warranties and affirmative and negative covenants, as well as customary events of default. Certain of the customary negative covenants limit our and certain of our subsidiaries’ ability, among other things, to incur future debt, grant liens, make investments, make acquisitions, distribute dividends, make certain restricted payments and sell assets, subject in each case to certain exceptions.
Concurrently with the closing of the Loan Agreement and the initial borrowing of the tranche A loan, we utilized substantially all of the proceeds from the tranche A loan to repay in full all outstanding amounts owed under our credit facility, or the Athyrium Credit Facility, with Athyrium Opportunities III Acquisition LP, or Athyrium, under which we had an aggregate principal amount of $75.0 million of indebtedness outstanding. We terminated all commitments by Athyrium to extend further credit thereunder and all guarantees and security interests granted by us thereunder. In connection with the termination of the Athyrium Credit Facility, we paid to the lenders a prepayment premium of $2.25 million and an exit fee of $750,000.
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Financial Operations Overview
Product Revenues, Net
We commenced generating product revenues from sales of INVELTYS in January 2019 and commenced generating revenue from EYSUVIS upon the shipment to wholesalers in the United States in late December 2020. Full promotional launch of EYSUVIS began in early January 2021. Our product revenues are recorded net of provisions relating to estimates for (i) trade discounts and allowances, such as discounts for prompt payment and other discounts and distributor fees, (ii) estimated rebates, chargebacks and co-pay assistance program, and (iii) reserves for expected product returns. These estimates reflect current contractual and statutory requirements, known market events and trends, industry data and forecasted customer buying and payment patterns. Actual amounts may ultimately differ from these estimates. If actual results vary, estimates may be adjusted in the period such change in estimate becomes known, which could have an impact on earnings in the period of adjustment. Beginning in March 2020 and continuing through most of the second quarter of 2020, prescriptions of INVELTYS and revenue had been adversely affected by the ongoing COVID-19 pandemic as federal, state and local governments implemented restrictions on elective procedures, which included most ocular surgeries. While many deferred ocular surgeries have been rescheduled as individual states have released restrictions on elective procedures, and INVELTYS prescriptions have returned to quarterly growth, we are unable to project the specific timing or potential impact on future revenues given the continued uncertainty around the impact and duration of the restrictions related to the COVID-19 pandemic. We also cannot project the full extent of the impact that the COVID-19 pandemic may have on the full promotional launch and commercialization of EYSUVIS.
Cost of Product Revenues
Cost of product revenues consists primarily of materials, third-party manufacturing costs, freight and distribution costs, royalty expense, allocation of labor, quality control and assurance, reserves for defective inventory, reserves for excess and obsolete inventory and other manufacturing overhead costs. We expensed cost of product revenues related to INVELTYS as research and development expenses prior to U.S. regulatory approval, which we received on August 22, 2018. We expensed cost of product revenues related to EYSUVIS as research and development expenses prior to the determination that FDA approval was probable and before the future economic benefit was expected to be realized. With respect to the ongoing COVID-19 pandemic, we expect that the cost of product revenues will be impacted consistent with the negative impact to product revenues, net. However, we are unable to predict the specific timing or specific impact on cost of product revenues given the continued uncertainty around the impact and duration of the restrictions related to the COVID-19 pandemic.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries, benefits, commissions, stock-based compensation and travel expenses related to our commercial infrastructure and our executive, finance, human resources, legal, information technology and business development functions. Selling, general and administrative expenses also include external selling and marketing costs, costs to manufacture sample units and professional fees for auditing, tax, information technology, consultants, legal services and allocated facility-related costs not otherwise included in research and development expenses.
We anticipate that our selling, general and administrative expenses will increase in the future as we continue to build our commercial infrastructure to support the full promotional launch and commercialization of EYSUVIS and the commercialization of INVELTYS or of any product candidates for which we obtain marketing approval. We also anticipate that our selling, general and administrative expenses will increase if and as we increase our administrative headcount to support our continued research activities and development of our product candidates. Our sales force has resumed substantially all in-person interactions in the field with physicians, which were previously suspended due to the restrictions with respect to the ongoing COVID-19 pandemic. If we are forced to suspend all or some in-person sales force interactions again in the future as a result of the COVID-19 pandemic, selling, general and administrative expenses could be favorably impacted by a reduction in certain expenses associated with the restriction in activities for our sales force and other employees. We are unable to predict the specific amount of this impact if we are forced to resume such restrictions.
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Research and Development Expenses
Research and development expenses consist of costs associated with our research activities, including compensation and benefits for full-time research and development employees, an allocation of facilities expenses, overhead expenses and certain outside expenses. Our research and development expenses include:
● employee-related expenses, including salaries, related benefits, travel and stock-based compensation;
● expenses incurred for the preclinical and clinical development of our product candidates and under agreements with contract research organizations, or CROs, including costs of manufacturing product candidates prior to the determination that FDA approval of a drug candidate is probable and before the future economic benefit of the drug is expected to be realized; and
● facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities and supplies.
We expense research and development costs as they are incurred. We expense costs relating to the production of inventory for our product candidates, as research and development expenses within our condensed consolidated statements of operations and comprehensive loss in the period incurred, unless we believe regulatory approval and subsequent commercialization of the product candidate is probable and we expect the future economic benefit from sales of the drug to be realized. Research and development costs that are paid in advance of performance are capitalized as a prepaid expense until incurred. We track outsourced development costs by development program but do not allocate personnel costs, payments made under our license agreements or other costs to specific product candidates or development programs. These costs are included in Employee-related costs and Other research and development costs in the line items in the tables under “Results of Operations”.
We expect that our total research and development costs will decrease in 2021 as compared to the year ended December 31, 2020 as a result of the completion of our Phase 3 clinical trial of EYSUVIS, which we refer to as STRIDE 3 (STRIDE- S hort T erm R elief I n D ry E ye), and as a result of the capitalization of EYSUVIS manufacturing costs as inventory beginning in the third quarter of 2020. We expect that research and development costs will increase if and as we continue to advance our preclinical development programs, identify product candidates and conduct preclinical studies and clinical trials. The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time-consuming. We may never succeed in obtaining marketing approval for any of our product candidates. The probability of success for each product candidate may be affected by numerous factors, including preclinical data, clinical data, competition, manufacturing capability and commercial viability. With respect to the ongoing COVID-19 pandemic, we may incur reduced research and development costs resulting from any limitations that may be placed on our laboratory facilities that support our early-stage research. However, we are unable to predict the specific amount of this impact, nor are we able to predict the additional costs, if any, associated with personnel safely resuming their full activities.
Our research and development programs are at the early stage of development. Successful development and completion of preclinical studies and clinical trials is uncertain and may not result in approved products. Completion dates and completion costs can vary significantly for each product candidate and future product candidate and are difficult to predict. We will continue to make determinations as to which product candidates to pursue and how much funding to direct to each product candidate on an ongoing basis in response to the scientific and clinical success of each product candidate as well as ongoing assessments as to the commercial potential of product candidates and our ability to enter into collaborations with respect to each product candidate. We may need to raise additional capital and may seek collaborations in the future to advance our various product candidates. Additional private or public financings may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a material adverse effect on our financial condition and our ability to pursue our business strategy.
Interest Income
Interest income consists of interest earned on our cash, cash equivalents and short-term investments.
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Interest Expense
Interest expense primarily consists of contractual coupon interest, amortization of debt discounts and debt issuance costs recognized on our debt facility.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as critical because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates—which also would have been reasonable—could have been used. On an ongoing basis, we evaluate our estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be 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 material changes to our critical accounting policies from those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Results of Operations
Comparison of the Three Months Ended March 31, 2021 and 2020
The following table summarizes the results of our operations for the three months ended March 31, 2021 and 2020:
Three Months Ended
March 31,
2021
2020
Change
(in thousands)
Product revenues, net
$
3,266
$
1,071
$
2,195
Costs and expenses:
Cost of product revenues
755
354
401
Selling, general and administrative
27,699
15,408
12,291
Research and development
3,126
5,434
(2,308)
Total operating expenses
31,580
21,196
10,384
Loss from operations
(28,314)
(20,125)
(8,189)
Other income (expense)
Interest income
43
298
(255)
Interest expense
(2,141)
(2,128)
(13)
Net loss
$
(30,412)
$
(21,955)
$
(8,457)
Product revenues, net
Product revenues, net was $3.3 million for the three months ended March 31, 2021, consisting of $1.63 million from INVELTYS sales and $1.64 million from EYSUVIS sales, compared to $1.1 million from INVELTYS sales for the three months ended March 31, 2020. The increase in product revenues, net of $2.2 million was driven primarily by sales of EYSUVIS, which we began shipping to wholesalers in the United States in late December 2020, as well as a higher per unit gross selling price of INVELTYS and an increase in the total units of INVELTYS sold in the three months ended March 31, 2021 as compared to those sold during the three months ended March 31, 2020. These increases in INVELTYS sales were partially offset by higher estimated reserves per unit during the three months ended March 31, 2021 as compared to those estimated during the three months ended March 31, 2020. We expect product revenues to
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increase if and as we increase our market share and obtain and maintain coverage and adequate reimbursement for EYSUVIS and INVELTYS from third-party payors; however, revenues could continue to be negatively impacted in 2021 as a result of the COVID-19 pandemic.
Cost of product revenues
Cost of product revenues was $0.8 million for the three months ended March 31, 2021, compared to $0.4 million in the three months ended March 31, 2020, an increase of $0.4 million. The cost of product revenues attributable to EYSUVIS was $0.1 million for the three months ended March 31, 2021. There were no sales of EYSUVIS in the three months ended March 31, 2020. The remaining $0.3 million increase in cost of product revenues was due to an increase in total INVELTYS units sold during the three months ended March 31, 2021 compared to the three months ended March 31, 2020 as well as a higher INVELTYS cost per unit as a result of the units sold during the three months ended March 31, 2020 being partially manufactured prior to FDA approval and for which costs were expensed as research and development expenses in the period prior to FDA approval as compared to those units sold during the three months ended March 31, 2021. We expect aggregate cost of product revenues to increase as we continue to commercialize INVELTYS and as a result of the launch of EYSUVIS, which we began shipping to wholesalers in the United States in late December 2020 and for which we commenced a full promotional launch in early January 2021.
Selling, general and administrative expenses
Selling, general and administrative expenses were $27.7 million for the three months ended March 31, 2021 compared to $15.4 million for the three months ended March 31, 2020, which was an increase of $12.3 million. Selling, general and administrative expenses for the three months ended March 31, 2021 included a $5.5 million increase in external sales and marketing costs as compared to the three months ended March 31, 2020, as a result of the launch of EYSUVIS. External sales and marketing costs incurred during the three months ended March 31, 2020 primarily related to commercial activities for INVELTYS. Also contributing to the increase in selling, general and administrative expenses for the three months ended March 31, 2021 was a $4.2 million increase in employee-related expenses primarily due to an increase in employee headcount related to the launch of EYSUVIS and merit-based pay, a $1.8 million increase in stock-based compensation costs, a $0.3 million increase in costs for administrative and professional service fees and a $0.5 million increase in other selling, general and administrative costs, which includes facility related costs and certain medical affairs costs. We anticipate that our selling, general and administrative expenses will increase in the future as we continue to commercialize EYSUVIS and INVELTYS and if and as we increase our administrative headcount to support our continued research and development activities and seek marketing approval for our product candidates.
Research and development expenses
The following table summarizes the research and development expenses incurred during the three months ended March 31, 2021 and 2020:
Three Months Ended
March 31,
2021
2020
Change
(in thousands)
KPI-121 development costs
$
73
$
1,680
$
(1,607)
Employee‑related costs
2,205
2,877
(672)
Other research and development costs
848
877
(29)
Total research and development
$
3,126
$
5,434
$
(2,308)
Research and development expenses were $3.1 million for the three months ended March 31, 2021 compared to $5.4 million for the three months ended March 31, 2020, a $2.3 million decrease. The decrease was primarily the result of a $1.6 million decrease in EYSUVIS development costs related to a decrease in external spend on STRIDE 3, our Phase 3 clinical trial of EYSUVIS, and a $0.7 million decrease in employee-related costs largely due to the decrease in the allocation of employee time dedicated to research and development. We expect research and development costs to
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increase if and as we advance our development programs and conduct any necessary preclinical studies and clinical trials and other development activities for product candidates.
Interest income
Interest income was less than $0.1 million for the three months ended March 31, 2021, compared to $0.3 million for the three months ended March 31, 2020, a decrease of $0.2 million. Interest income consists of interest earned on our cash, cash equivalents and short-term investments. The decrease was attributable to lower interest rates during the three months ended March 31, 2021.
Interest expense
We incurred interest expense of $2.1 million for the three months ended March 31, 2021, which remained consistent with interest expense of $2.1 million for the three months ended March 31, 2020. Interest expense was comprised of the contractual coupon interest expense and the amortization of the debt discount associated with our Athyrium Credit Facility during the three months ended March 31, 2021 and 2020. During each of the three months ended March 31, 2021 and 2020, $75.0 million of indebtedness was outstanding under the Athyrium Credit Facility.
Liquidity and Capital Resources
Since our inception, we have incurred significant operating losses. As we commercially launched our first product, INVELTYS, in January 2019, and commenced a full promotional launch of our second product, EYSUVIS, in early January 2021, we have had limited revenues to date from product sales and have financed our operations primarily through proceeds from our IPO, follow-on public common stock offerings and sales of our common stock under our ATM Offerings, private placements of preferred stock, borrowings under credit facilities, convertible promissory notes and warrants.
In July 2017, we completed an IPO pursuant to which we issued and sold 6,900,000 shares of our common stock, which included 900,000 shares sold pursuant to the exercise of the underwriters’ option to purchase additional shares, at a price of $15.00 per share. We received net proceeds of $94.0 million after deducting underwriting discounts and commission of $7.3 million and offering costs of $2.2 million.
On August 9, 2018, we filed our 2018 Shelf Registration, under which we could initially offer and sell up to $250.0 million of a variety of securities including common stock, preferred stock, warrants, depositary shares, debt securities, purchase contracts, purchase units or any combination of such securities during the three-year period that commenced upon the 2018 Shelf Registration becoming effective. Under the 2018 Shelf Registration, we may periodically offer one or more types of securities in amounts, at prices and on terms announced, if and when the securities are ever offered.
On October 1, 2018, we entered into the Athyrium Credit Facility with Athyrium for up to $110.0 million. The Athyrium Credit Facility provided for a Term Loan A in the aggregate principal amount of $75.0 million, and a Term Loan B in the aggregate principal amount of $35.0 million which we did not draw down on. On May 4, 2021, we entered into a Loan and Security Agreement, or the Loan Agreement, with Oxford Finance LLC, in its capacity as lender (in such capacity, the “Lender”), and in its capacity as collateral agent (in such capacity, the “Agent”), pursuant to which a term loan of up to an aggregate principal amount of $125.0 million is available to us, consisting of (i) a tranche A term loan that was disbursed on the closing date of the Loan Agreement in the aggregate principal amount of $80.0 million; (ii) a contingent tranche B term loan in the aggregate principal amount of $20.0 million available to us through June 30, 2023 and within 90 days of our achieving trailing 6-month product revenue equal to or greater than $75.0 million, subject to certain other terms and conditions; and (iii) a contingent tranche C term loan in the aggregate principal amount of $25.0 million available to us through December 31, 2023 and within 90 days of our achieving trailing 6-month product revenue equal to or greater than $100 million, subject to certain other terms and conditions. The term loans bear interest at a floating rate equal to the greater of 30-day LIBOR and 0.11%, plus 7.89%. Certain of the customary negative covenants limit our and certain of our subsidiaries’ ability, among other things, to incur future debt, grant liens, make investments, make acquisitions, distribute dividends, make certain restricted payments and sell assets, subject in each case to certain exceptions.
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Concurrently with the closing of the Loan Agreement and the initial borrowing of the tranche A loan, we utilized substantially all of the proceeds from the tranche A loan to repay in full all outstanding amounts owed under our Athyrium Credit Facility, under which we had an aggregate principal amount of $75.0 million of indebtedness outstanding. We terminated all commitments by Athyrium to extend further credit under the Athyrium Credit Facility and all guarantees and security interests granted by us thereunder. In connection with the termination of the Athyrium Credit Facility, we paid to the lenders a prepayment premium of $2.25 million and an exit fee of $750,000.
On October 5, 2018, we sold 7,500,000 shares of common stock in an underwritten offering pursuant to the 2018 Shelf Registration at a public offering price of $8.25 per share, before underwriting discounts and commissions. In addition, the underwriters were granted an overallotment option to purchase an additional 1,125,000 shares of the common stock at the same public offering price, less underwriting discounts and commissions. On October 11, 2018, the underwriters exercised in full their option to purchase the overallotment shares. The total number of shares sold by us in the offering was 8,625,000 shares, resulting in net proceeds to us, after underwriting discounts and offering expenses, of $66.1 million. In connection with the filing of the 2018 Shelf Registration, we entered into a sales agreement with Jefferies, pursuant to which we could issue and sell, from time to time, up to an aggregate of $50.0 million of our common stock in an ATM Offering, through Jefferies, as sales agent. Through the first quarter of 2020, we issued an aggregate of 4,945,605 shares of our common stock under the ATM Offering, resulting in net proceeds to us of $25.6 million. On March 10, 2020, we suspended and terminated the prospectus related to the ATM Offering.
On March 11, 2020, we sold 16,000,000 shares of our common stock in an underwritten offering pursuant to the 2018 Shelf Registration at a public offering price of $7.89 per share, resulting in net proceeds of $118.2 million, after underwriting discounts, commissions, and offering expenses. In addition, the underwriters of the offering were granted the option for a period of 30 days to purchase up to an additional 2,400,000 shares of common stock offered in the public offering at the public offering price, less underwriting discounts, commissions and offering expenses. On April 3, 2020, the underwriters exercised their option and purchased an additional 979,371 shares of common stock at $7.89 per share, resulting in net proceeds to us of $7.2 million, after underwriting discounts, commissions, and offering expenses. The total number of shares sold by us in the offering was 16,979,371, resulting in total net proceeds to us, after underwriting discounts, commissions and offering expenses, of $125.4 million.
Under the 2018 Shelf Registration, we have issued an aggregate of 30,549,976 shares of common stock, including under the ATM Offering, resulting in aggregate gross proceeds to us of $231.7 million. There was $18.3 million of securities available to be issued under the 2018 Shelf Registration as of March 31, 2021.
On May 7, 2020, we filed our 2020 Shelf Registration, under which we may offer and sell up to $350.0 million of a variety of securities including common stock, preferred stock, warrants, depositary shares, debt securities or units during the three-year period that commenced upon the 2020 Shelf Registration becoming effective. In connection with the filing of the 2020 Shelf Registration, we entered into an amended and restated sales agreement with Jefferies, pursuant to which we may issue and sell, from time to time, up to an aggregate of $75.0 million of our common stock under our ATM Offering. During the fourth quarter of 2020, we issued an aggregate of 2,821,059 shares of our common stock under the ATM Offering, resulting in net proceeds to us of $20.6 million. In the three months ended March 31, 2021, we issued and sold an additional 4,746,072 shares of our common stock under our ATM Offering, resulting in net proceeds to us of $34.7 million. As of March 31, 2021, there was $18.1 million of shares of common stock remaining under the ATM Offering that we may issue and sell in the future and, excluding the shares of common stock that may be offered under our ATM Offering, there was $275.0 million of securities available to be issued under the 2020 Shelf Registration. In the period beginning April 1, 2021 through the date of this Quarterly Report on Form 10-Q, we issued and sold an additional 837,257 shares of our common stock under our ATM Offering, resulting in our receipt of $6.0 million in net proceeds.
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Cash Flows
As of March 31, 2021 and 2020, we had $156.0 million and $196.5 million, respectively, in cash, cash equivalents and short-term investments, and $75.0 million in indebtedness. The indebtedness in 2021 and 2020 represented the aggregate principal amount that was outstanding under the Athyrium Credit Facility.
The following table summarizes our sources and uses of cash for the three months ended March 31, 2021 and 2020:
Three Months Ended
March 31,
2021
2020
(in thousands)
Net cash used in operating activities
$
(32,640)
$
(19,880)
Net cash provided by (used in) investing activities
48,031
(292)
Net cash provided by financing activities
35,315
131,181
Increase in cash and restricted cash
$
50,706
$
111,009
Operating Activities
Net cash used in operating activities for the three months ended March 31, 2021 was $32.6 million compared to $19.9 million for the three months ended March 31, 2020, an increase of $12.7 million, primarily due to the timing of working capital fluctuations which accounted for $6.6 million of the increase and a $6.1 million increase in the net loss adjusted for non-cash charges. Notable working capital fluctuations include an increase to accounts receivable in the three months ended March 31, 2021 of $2.6 million driven by an increase in sales largely due to the launch of EYSUVIS, whereas accounts receivable had decreased by $6.8 million in the three months ended March 31, 2020 driven by a decrease in sales of INVELTYS primarily as a result of the COVID-19 pandemic. Inventory increased by a greater amount during the three months ended March 31, 2021 due to an increase in manufacturing activity for EYSUVIS and INVELTYS. Offsetting these increases was a decrease in accrued expenses and other current liabilities during the three months ended March 31, 2021 of $3.8 million, as compared to a decrease in accrued expenses and other current liabilities in the three months ended March 31, 2020 of $6.0 million.
Investing Activities
Net cash provided by investing activities for the three months ended March 31, 2021 was $48.0 million compared to net cash used of $0.3 million for the same period in 2020, an increase of $48.3 million, primarily due to sales or maturities of short-term investments of $48.3 million during the three months ended March 31, 2021.
Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2021 was $35.3 million, a decrease of $95.9 million compared to $131.2 million in the three months ended March 31, 2020. Net cash provided by financing activities for the three months ended March 31, 2021 included $34.7 million of net proceeds from the sale of shares of our common stock under the ATM Offering and $0.6 million of proceeds from the exercise of stock options and the issuance of common stock under our employee stock purchase plan. Net cash provided by financing activities for the three months ended March 31, 2020 consisted of $118.2 million of net proceeds from the sale of shares of our underwritten offering pursuant to the 2018 Shelf Registration, $12.5 million of net proceeds from the sale of shares of our common stock under the ATM Offering and $0.4 million of proceeds from the exercise of stock options and the issuance of common stock under our employee stock purchase plan.
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Funding Requirements
We anticipate that our expenses will increase substantially as compared to prior periods as we continue to commercialize INVELTYS in the United States and execute our commercial launch plans for EYSUVIS, as a result of increased headcount, including management personnel to support our clinical, manufacturing and commercialization activities, expanded infrastructure, increased legal, compliance, accounting and investor and public relations expenses associated with being a public company and increased insurance premiums, among other factors. The increase in headcount includes the expansion of our sales force from 56 TSMs to 91 TSMs, which occurred in the fourth quarter of 2020, and our plan to further increase our sales force in 2021 from 91 TSMs to approximately 105 TSMs by the start of the third quarter, with a subsequent expansion to 125 TSMs expected by year-end, pending continued growth in payer coverage and the status of the COVID-19 pandemic.
Our expenses will also increase if and as we:
● continue to grow our sales, marketing and distribution capabilities in connection with the commercialization of EYSUVIS, INVELTYS and any product candidates for which we may submit for and obtain marketing approval;
● continue to scale up our manufacturing processes and capabilities to support commercialization of EYSUVIS and INVELTYS;
● seek regulatory approval for EYSUVIS and INVELTYS outside of the United States;
● progress our current and any future preclinical development programs;
● in license or acquire the rights to other products, product candidates or technologies;
● conduct clinical trials and other development activities and/or seek marketing approval for future product candidates;
● leverage our proprietary AMPPLIFY technology to seek to advance additional therapeutics into preclinical and clinical development;
● maintain, expand and protect our intellectual property portfolio;
● hire additional clinical, quality control, scientific, manufacturing, commercial and management personnel;
● expand our operational, financial and management systems; and
● increase our product liability insurance coverage as we expand our commercialization efforts for EYSUVIS and INVELTYS.
We expect to continue to incur significant expenses and operating losses. Net losses may fluctuate significantly from quarter-to-quarter and year-to-year. We anticipate that our cash, cash equivalents and short-term investments as of March 31, 2021, along with anticipated revenue from EYSUVIS and INVELTYS, will enable us to fund our operations, lease and debt service obligations, and capital expenditure requirements for at least two years. We have based this estimate on assumptions that may prove to be wrong, and our operating plan may change as a result of many factors currently unknown to us. As a result, we could deplete our available capital resources sooner or later than we currently expect.
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Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. Our expenses will increase from what we anticipate if:
● we elect or are required by the FDA or non-U.S. regulatory agencies to perform clinical trials or studies in addition to those expected;
● there are any delays in enrollment of patients in or completing our clinical trials or the development of our product candidates;
● we in-license or acquire rights to other products, product candidates or technologies; or
● there are any third-party challenges to our intellectual property portfolio, or the need arises to defend against intellectual property-related claims or enforce our intellectual property rights.
Our ability to become and remain profitable depends on our ability to generate revenue. While we began to generate revenue from the sales of EYSUVIS and INVELTYS in late December 2020 and January 2019, respectively, there can be no assurance as to the amount or timing of any future revenue from these products, and we may not achieve profitability. Achieving and maintaining profitability will require us to be successful in a range of challenging activities, including:
● successfully launching EYSUVIS and growing EYSUVIS revenues;
● successfully growing INVELTYS revenues ;
● achieving an adequate level of market acceptance, and obtaining and maintaining coverage and adequate reimbursement from third-party payors for EYSUVIS, INVELTYS and any other products we commercialize ;
● manufacturing at commercial scale, marketing, selling and distributing EYSUVIS and INVELTYS;
● maintaining regulatory and marketing approvals for EYSUVIS and INVELTYS;
● discovering, developing and successfully seeking marketing approval and commercialization of additional product candidates;
● hiring and building a full commercial organization required for marketing, selling and distributing those products for which we obtain marketing approval;
● obtaining, maintaining and protecting our intellectual property rights; and
● adapting our business in response to the current pandemic health event resulting from COVID-19 and its collateral consequences.
EYSUVIS and INVELTYS are our only products that have been approved for sale, and they have only been approved in the United States. We plan to seek approval in other jurisdictions, but may not do so successfully, or at all. Further, the successful commercialization of EYSUVIS and INVELTYS in the United States is subject to many risks. As a company, we have limited experience commercializing products, and we may not be able to do so successfully. There are numerous examples of unsuccessful product launches and failures to meet expectations of market potential, including by pharmaceutical companies with more experience and resources than us. Our revenue from sales of EYSUVIS and INVELTYS alone may not be sufficient for us to become profitable in the near future, if at all.
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In addition, our recent commercialization efforts have been hampered by the operational restrictions on our sales force from quarantines, travel restrictions and bans and other governmental restrictions related to the COVID-19 pandemic. As a result of these restrictions, we previously suspended our sales force from substantially all in-person interactions with physicians and were limited to conducting educational and promotional activities virtually. Our sales force has since resumed substantially all in-person interactions in the field, but to the extent we restrict, or are restricted from, in-person interactions with physicians, we may be limited to conducting educational and promotional activities virtually, which may continue to hamper our ability to market INVELTYS and could adversely affect our ability to launch and market EYSUVIS. In addition, government restrictions have at times led to moratoria on elective ocular surgeries in many jurisdictions, which has significantly reduced, and may in the future continue to significantly reduce, the demand for INVELTYS, which is indicated for the treatment of post-operative inflammation and pain following ocular surgery. The extent of the impact of COVID-19 on our commercialization efforts will depend on the length and severity of this pandemic, including the extent there is any resurgence of the COVID-19 virus or any variant strains of the virus, the availability and effectiveness of vaccines, and the impact of the foregoing on our customers, employees and vendors and government agencies, which is uncertain and cannot be predicted.
We may never succeed in these activities and may never generate revenue that is sufficient to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our product offerings or even continue our operations. A decline in the value of our company could also cause you to lose all or part of your investment.
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, licensing arrangements, royalty agreements, and marketing and distribution arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include pledging of assets as collateral, covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Our pledge of our assets as collateral to secure our obligations under our Loan Agreement may limit our ability to obtain additional debt financing. Under our Loan Agreement, we are also restricted from incurring future debt, granting liens, making investments, making acquisitions, distributing dividends on our common stock, making certain restricted payments and selling assets and making certain other uses of our cash, without the lenders’ consent, subject in each case to certain exceptions.
We may need to raise additional capital in the future to advance our business. Additional private or public financings may not be available to us on acceptable terms, or at all. Additionally, the COVID-19 pandemic has already caused significant disruptions in the financial markets, and may continue to cause such disruptions, which could impact our ability to raise additional funds. The COVID-19 pandemic has also impacted, and may continue to impact, the volatility of our stock price and trading in our stock. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future.
Our failure to raise capital as and when needed would have a material adverse effect on our financial condition and our ability to pursue our business strategy. If we raise additional funds through collaborations, strategic alliances, licensing arrangements, royalty agreements, 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. 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 current or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves.
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Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.