Item 1A. Risk Factors
Item 1A.
Risk Factors.
Except as set forth below, there have been no material changes to the risk factors included in detail in the “Risk Factors” sections appearing in Part I, Item 1A of our Annual Report on Form 10-K
for the year ended December 31, 2021, filed with the SEC on February 25, 2022 (the “Annual Report”).
We plan to expand our development plan for resmetirom, and the changes we have made will lead to increased cost in the near term and may not have the benefits that we anticipate.
MAESTRO-NASH Outcomes is a clinical outcomes study we plan to initiate in patients with compensated cirrhosis, which is designed to unlock a broader market opportunity for resmetirom by addressing a major unmet need for patients at elevated risk of progressing to negative clinical outcomes; however, there is no certainty that the trial will be successful or, even if it is, will provide sufficient evidence to achieve this goal. As a result of this expansion of our resmetirom clinical development program, we also expect our cash operating expenses will increase over certain future periods compared to prior plans.
More generally, drug development has inherent risk, including with respect to the design of clinical trials. There is no certainty that our design for the MAESTRO-NASH Outcomes study will be sufficient to achieve the intended outcomes. Furthermore, we cannot be certain that any of our ongoing or future clinical trials will be successful, and any safety concerns observed in any one of our clinical trials could have an effect on our prospects for regulatory or label approval of our product candidates.
The risk factors related to clinical trials that are set forth in detail in the “Risk Factors” sections appearing in Part I, Item 1A of the Annual Report remain applicable and more generally apply to our planned MAESTRO-NASH Outcomes study.
Our Loan and Security Agreement contains restrictive and financial covenants that may limit our operating flexibility.
On May 6, 2022, we and our subsidiary, Canticle Pharmaceuticals, Inc. (“Canticle”) entered into the Loan Agreement with Hercules, providing for an aggregate of $250.0 million in term loans that will be available to us in four tranches subject to the conditions set forth in the Loan Agreement (collectively, the “Term Loans”). Our obligations under the Loan Agreement are secured by a security interest in substantially all of our assets, other than intellectual property. Until we have repaid such indebtedness, the Loan Agreement subjects us to various terms, conditions and covenants as described in the Loan Agreement Form 8-K filed with the SEC on May 6, 2022. These include financial reporting obligations, and certain limitations on indebtedness, liens (including a negative pledge on intellectual property and other assets), investments, distributions (including dividends), collateral, investments, distributions, transfers, mergers or acquisitions, taxes, corporate changes, and deposit accounts. Additionally, the Loan Agreement contains affirmative and restrictive financial covenants commencing on January 1, 2023, including maintenance of a minimum cash, cash equivalents and liquid funds covenant of $35.0 million, which may decrease in certain circumstances if the Company achieves both a certain FDA approval for resmetirom and a revenue milestone (the “Minimum Cash Covenant”). The Loan Agreement also includes a revenue-based covenant (the “Revenue Covenant”) that could apply commencing at or after the time that financial reporting is due for the quarter ending September 30, 2024; however, the Revenue Covenant will be waived at any time in which the Company maintains, as measured monthly (i) a certain level of cash, cash equivalents and liquid funds relative to outstanding Hercules debt or (ii) a market capitalization of at least $1.2 billion. The Revenue Covenant, as and when effective on or after November of 2024, would require the Company to maintain a minimum amount of trailing three-month net product revenue. Our business may be adversely affected by these restrictions on our ability to operate our business. If we raise any additional debt financing, as permitted by the Loan Agreement and if pursued and secured by the Company, the terms of such additional debt could further restrict our operating and financial flexibility.
We may not be able to generate sufficient cash flow or sales to meet the financial covenants or pay the principal and interest under the Term Loans. Furthermore, our future working capital, borrowings or equity financing could be unavailable to repay or refinance the amounts outstanding under the Term Loans. In the event of a liquidation, the lender under the facility would be repaid all outstanding principal and interest prior to distribution of assets to unsecured creditors, and the holders of our common stock would receive a portion of any liquidation proceeds only if all of our creditors then existing, including the lender under the Term Loans, were first repaid in full.
Our failure to comply with the covenants or other terms of the Loan Agreement, including as a result of events beyond our control, could result in a default under the Loan Agreement that could materially and adversely affect our business.
Additionally, we may be required to repay the outstanding indebtedness under the loan if an event of default occurs under the Loan Agreement or, if applicable, any future debt facility. The Loan Agreement includes customary events of default, including payment defaults, breaches of covenants following any applicable cure period, the occurrence of certain events that could reasonably be expected to have a “material adverse effect” as set forth in the Loan Agreement, and cross acceleration. We may not have enough available cash or be able to raise additional funds through equity or debt financings to repay such indebtedness at the time any such event of default occurs. In this case, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant to others rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. Our business, financial condition and results of operations could be materially adversely affected as a result of any of these events.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3.
Defaults Upon Senior Securities.
None.
Item 4.
Mine Safety Disclosures.
Not applicable.
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