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Item 7. Management’s Discussion and Analysis

2024-03-25 compared with 2023-03-30 · 59 added, 75 removed, 171 unchanged (44% of the section changed)

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Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those set forth under the section entitled “Risk Factors” or in other parts of this Annual Report.

Our mission is to enable the rapid development of innovative therapeutics by pushing the frontiers of drug discovery technologies.

We intend to achieve this mission by enabling the discovery of high-quality therapeutic candidates and by being the partner of choice for pharmaceutical and biotechnology companies.

We believe that pairing the large and diverse antibody repertoires generated from our proprietary transgenic animals with our cutting-edge and high-throughput validated screening tools will deliver high-quality therapeutic candidates for a wide range of diseases.

Our OmniAb technology platform creates and screens diverse antibody repertoires and is designed to quickly identify optimal antibodies for our partners’ drug development efforts.

We harness the power of Biological Intelligence, which we built into our proprietary transgenic animals and paired with our high-throughput screening technologies to enable the discovery of high-quality, fully-human antibody therapeutic candidates.

We believe these antibodies are high quality because they are naturally optimized in our proprietary host systems for affinity, specificity, developability and functional performance.

Our partners have access to these antibody candidates that are based on unmatched biological diversity and optimized through integration across a full range of technologies, including antigen design, transgenic animals, deep screening and characterization.

licenses cutting edge discovery research technology to the pharmaceutical and biotech industry to enable the discovery of next generation therapeutics.

Our technology platform creates and screens diverse antibody repertoires and is designed to quickly identify optimal antibodies for our partners’ drug development efforts.

At the heart of the OmniAb platform is something we call Biological Intelligence TM , which powers the immune systems of our proprietary, engineered transgenic animals to create optimized antibody candidates for human therapeutics.

We believe the OmniAb animals comprise the most diverse host systems available in the industry.

Our suite of technologies and methods, including computational antigen design and immunization methods, paired with high-throughput single B cell phenotypic screening and mining of next-generation sequencing datasets with custom algorithms, are used to identify fully human antibodies with exceptional performance and developability characteristics.

We provide our partners both integrated end-to-end capabilities and highly customizable offerings, which address critical industry challenges and provide optimized antibody discovery solutions.

As of December 31, 2022, we had 69 active partners with 291 active programs using the OmniAb technology, including 23 OmniAb-derived antibodies in clinical development by our partners, and three approved products of our partners:

(i) zimberelimab, which was approved in China for the treatment of recurrent or refractory classical Hodgkin’s lymphoma, (ii) sugemalimab, which was approved in China for the first-line treatment of metastatic (stage IV) non-small cell lung cancer in combination with chemotherapy, as well as for patients with unresectable stage III non-small cell lung cancer whose disease has not progressed following concurrent or sequential platinum-based chemoradiotherapy, and (iii) teclistamab, which received accelerated approval in the U.S.

for adult patients with relapsed or refractory multiple myeloma who have received at least four prior lines of therapy, including a proteasome inhibitor, an immunomodulatory agent, and an anti-CD38 monoclonal antibody, and conditional marketing authorization in Europe as monotherapy for the treatment of adult patients with relapsed and refractory multiple myeloma.

We partner with numerous pharmaceutical and biotechnology companies, varying in size, clinical stage, geography and therapeutic focus.

As of December 31, 2023, we had 77 active partners with 325 active programs using the OmniAb technology platform, including 28 OmniAb-derived antibodies in clinical development by our partners, one under regulatory review, and three approved products of our partners.

Our proprietary transgenic animals, including OmniRat ® , OmniChicken ® and OmniMouse ® have been genetically modified to generate antibodies with human sequences to streamline the development of human therapeutic candidates.

OmniFlic ® and OmniClic ® are fixed or common light-chain rats and chickens, respectively, designed to facilitate the discovery of bispecific antibodies.

OmniTaur™ provides cow-inspired antibodies with unique structural characteristics for challenging targets.

In May 2023, we announced the launch of OmniDeep™, a suite of in silico, AI and machine learning tools for therapeutic discovery and optimization that are woven throughout our various technologies and capabilities.

These tools include structural modeling, molecular dynamics simulations, large multi-species antibody databases, artificial intelligence, machine learning, deep learning models and more.

OmniDeep is designed to expedite the identification of candidates with the optimal affinity, specificity and developability profiles required for successful drug development.

In November 2023, we launched Omni dAb TM , an in vivo platform for the discovery of single domain antibodies based upon a human VH scaffold that affinity matures in a chicken host environment to provide a functionally diverse immune repertoire unavailable from mammalian systems.

We offer the industry’s only 4-species platform with differentiated technologies and capabilities.

We partner with pharmaceutical and biotechnology companies and leading academic institutions that vary in size, clinical stage, geography and therapeutic focus.

Our license agreements are negotiated separately for each discovery partner, and as a result, the financial terms and contractual provisions vary from agreement to agreement.

We structure our license agreements with partners to typically include:

(i) upfront or annual payments for technology access (license revenue) and payments for performance of research services (service revenue);

(ii) downstream payments in the form of preclinical, intellectual property, clinical, regulatory, and commercial milestones (milestone revenue);

and (iii) royalties on net sales of our partners’ products, if any.

(i) upfront or, in some instances, annual payments for technology access (license revenue), (ii) payments for the performance of research services (service revenue), (iii) downstream payments in the form of preclinical, intellectual property, clinical, regulatory, and commercial milestones (milestone revenue), and (iv) royalties on net sales of our partners’ products.

We succeed when our partners are successful and our agreements are structured to align economic and scientific interests.

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Additionally, unless publicly disclosed by our partners, we do not have access to information related to our partners’ clinical trial results, including serious adverse events, or ongoing communications with regulatory agencies regarding our partners’ current clinical programs, which limits our visibility into how such programs may be progressing.

For the years ended December 31, 2022 and 2021, our revenue was $59.1 million and $34.7 million, respectively.

For the years ended December 31, 2022 and 2021, our net loss was $22.3 million and $27.0 million, respectively.

Historically, our revenue has been derived from payments for technology access, collaborative research services and milestones.

We believe the long-term value of our business will be driven by partner royalties as such payments are based on global sales of potential future partner antibodies, which generally provide for larger and recurring payments as compared to technology access, research and milestone payments.

While in 2022 we recognized royalty revenue from our partners’ sales of zimberelimab and sugemalimab in China, we believe our revenue will be materially driven by milestones in the shorter term, and by royalties in the longer term, from our partnered programs in the United States and Europe.

However, drug discovery and development has significant uncertainty in timing and likelihood of reaching marketing authorization, and we cannot be certain when, if at all, royalty payments will be a material portion of our revenue.

We believe our revenue will be materially driven by milestones in the shorter term, and by royalties in the longer term, from our partnered programs in the United States and Europe.

However, there is significant uncertainty in timing and likelihood of reaching marketing authorization in drug discovery and development, and we cannot be certain when, if at all, royalty payments will be a material portion of our revenue.

Furthermore, we do not control the progression, clinical development, regulatory strategy or eventual commercialization of antibodies discovered using our platform, and as a result, we are entirely dependent on our partners’ efforts and decisions with respect to such antibodies.

Closing of the Business Combination and Separation from Ligand

On November 1, 2022, in accordance with the terms of the Separation Agreement, Ligand transferred the Legacy OmniAb business, including certain related subsidiaries of Ligand, to Legacy OmniAb and made a contribution to the capital of Legacy OmniAb of $1.8 million, after deducting certain transaction and other expenses reimbursable by Legacy OmniAb.

Following the Separation, as contemplated by the Separation Agreement, Ligand distributed on a pro rata basis to its stockholders all of the Legacy OmniAb Common Stock held by Ligand, such that each holder of Ligand Common Stock was entitled to receive one share of Legacy OmniAb Common Stock for each share of Ligand Common Stock held by such holder as of the record date for the Distribution.

On November 1, 2022 (the “Closing Date”), we, Ligand Pharmaceuticals Incorporated, a Delaware corporation (“Ligand” or the “Parent”), OmniAb Operations, Inc., a Delaware corporation and wholly-owned subsidiary of Ligand (“Legacy OmniAb”, formerly known as OmniAb, Inc.

and, together with Ligand, collectively, the “Companies”), and Orwell Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of APAC (“Merger Sub”), consummated the transactions contemplated by the Agreement and Plan of Merger (the “Merger Agreement”), dated as of March 23, 2022.

In connection with, and as contemplated by, the Merger Agreement, on November 1, 2022, in accordance with the terms of the Separation and Distribution Agreement, dated as of March 23, 2022, by and among APAC, Ligand and Legacy OmniAb (the “Separation Agreement”), Ligand transferred the Legacy OmniAb business, including certain related subsidiaries of Ligand, to Legacy OmniAb and made a contribution to the capital of Legacy OmniAb of $1.8 million, after deducting certain transaction and other expenses reimbursable by Legacy OmniAb (the “Separation”).

Following the Separation, as contemplated by the Separation Agreement, Ligand distributed on a pro rata basis to its stockholders all of the shares of common stock, par value $0.001 per share, of Legacy OmniAb (“Legacy OmniAb Common Stock”) held by Ligand, such that each holder of shares of common stock, par value $0.001 per share, of Ligand (“Ligand Common Stock”) was entitled to receive one share of Legacy OmniAb Common Stock for each share of Ligand Common Stock held by such holder as of the record date for the distribution, October 26, 2022 (the “Distribution”).

Following the Separation and Distribution, on November 1, 2022, we consummated the Business Combination, by and among us (formerly known as APAC), Ligand, Legacy OmniAb and Merger Sub, pursuant to which Merger Sub merged with and into Legacy OmniAb, with Legacy OmniAb becoming a wholly owned subsidiary of OmniAb.

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Following the Separation, we began accounting for our financial activities as an independent entity.

Our financial statements as of December 31, 2022 and for the period from November 1, 2022 through December 31, 2022 are based on the reported results of OmniAb as a standalone company.

Our financial statements as of December 31, 2023 and December 31, 2022 and for the period from November 1, 2022 through December 31, 2022 are based on the reported results of OmniAb as a standalone company.

The accompanying consolidated and combined financial statements include the accounts of OmniAb and its wholly owned subsidiaries.

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Approved products 3 3 —%

Active partners represents the number of partners that have an active program or have executed a license agreement in advance of initiating an active program.

Active partners represents the number of partners that have rights to an active program or have executed a license agreement in advance of initiating an active program.

We view this metric as an indication of the competitiveness of our platform and our current level of market penetration.

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Active programs represents a program for which research work has commenced or where an antigen is introduced into our animals and remains so as long as the program is actively being developed or commercialized.

This number includes active clinical programs and approved products separately disclosed above.

This number includes active clinical programs and approved products separately disclosed in the table above.

We view this metric as an indication of the usage of our technology and the potential for mid- and long-term milestone and royalty payments.

Active clinical programs represents the number of unique programs for which an Investigational New Drug (“IND”) or equivalent under other regulatory regimes has been filed based on an OmniAb-derived antibody and which are in clinical development by our partners and we continue to count programs as active as long as they are actively being developed or commercialized.

Active clinical programs and approved products represents the number of unique programs for which an Investigational New Drug Application or equivalent under other regulatory regimes has been filed based on an OmniAb-derived antibody and which are in clinical development by our partners.

We continue to count programs as active as long as they are actively being developed, under regulatory review or commercialized.

Where the date of such application is not known to us, we use the official start date from clinical trial registries for the purpose of calculating this metric.

This number includes approved products separately disclosed below.

This number includes approved products separately disclosed in the table above.

We view this metric as an indication of our near- and mid-term potential revenue from milestone fees and potential royalty payments in the long term.

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We view this metric as an indication of our near- and mid-term potential revenue from royalty payments.

Impact of COVID-19 Pandemic

To date, we have not experienced material disruptions in our business operations or financial impacts as a result of the COVID-19 pandemic.

While it is not possible at this time to estimate the impact that COVID-19 or other public health epidemic could have on our business in the future, the continued spread of COVID-19 and variants of the virus, the rate of vaccinations regionally and globally and the measures taken by the government authorities, and any future epidemic disease outbreaks, could:

disrupt the supply chain and the manufacture or shipment of products and supplies for use by us in our discovery activities and by our partners for their discovery and development activities;

delay, limit or prevent us or our partners’ from continuing research and development activities;

impede our negotiations with partners and potential partners;

impede testing, monitoring, data collection and analysis and other related activities, by us and our partners;

interrupt or delay the operations of the FDA or other regulatory authorities, which may impact review and approval timelines for initiation of clinical trials or marketing;

impede the launch or commercialization of any approved products;

any of which could delay our partnership programs, increase our operating costs, and have a material adverse effect on our business, financial condition and results of operations.

In addition, if COVID-19 or any other epidemic disease infects our genetically modified animals, which form the basis of our platform, or if there is an outbreak among our employees or subcontractor’s employees who maintain and care for these animals, we and our partners may be unable to produce antibodies for development.

Results of Operations

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(Dollars in thousands) 2023 2022 $ Change % Change

Milestone revenue $ 33,871 $ 10,164 $ 23,707 233 %

License and milestone revenue $ 20,699 $ 38,926 $ (18,227) (47) %

Service revenue 12,180 18,784 (6,604) (35) %

License fees 5,055 4,500 555 12 %

Royalty revenue 1,367 — 1,367 NM (1)

Royalty revenue 1,285 1,367 (82) (6) %

Total revenue $ 34,164 $ 59,077 $ (24,913) (42) %

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(1) Percentage change is not meaningful.

Total revenue increased $24.3 million, or 70%, in the year ended December 31, 2022 as compared to 2021 driven primarily by (1) additional milestone revenue following the first commercial sale of teclistamab in the U.S.

during the year ended December 31, 2022 and (2) royalty revenue from our partners’ sales of zimberelimab and sugemalimab.

Operating Costs and Expenses

• License and milestone revenue decreased primarily due to (1) the recognition of a $25.0 million milestone related to the first commercial sale of teclistamab in the U.S.

during the year ended December 31, 2022, which was partially offset by the recognition of a $10.0 million milestone related to the first commercial sale of teclistamab in the EU during the year ended December 31, 2023 and (2) decreases in license and milestone revenue from other programs.

• Service revenue decreased as a result of the completion of work on certain ion channel programs and adjustments resulting from the extension of one of our ion channel programs with GSK, partially offset by the recognition of a portion of a research progression milestone.

Operating Expenses

(Dollars in thousands) 2023 2022 $ Change % Change

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Amortization of intangibles 13,554 13,050 504 4 %

Other operating (income) expense, net (592) 1,210 (1,802) (149) %

Other operating (income) expense, net 191 (592) 783 NM (1)

Total operating expenses $ 103,583 $ 85,725 $ 17,858 21 %

Our R&D expenses increased $9.1 million, or 23%, in the year ended December 31, 2022 compared with 2021, primarily due to an increase in rent expense for newly leased facilities and increased personnel-related costs driven by our increased investment in the growth and development of the OmniAb business.

General and administrative expenses increased $8.0 million, or 47% in the year ended December 31, 2022 compared with 2021, primarily due to increased personnel-related costs and costs associated with our obligations as a public company.

Other operating income, net, of $0.6 million and other operating expense, net, of $1.2 million in the years ended December 31, 2022 and 2021, respectively, resulted from fair value adjustments to contingent earnout liabilities issued in connection with acquisitions.

Other income (expense)

(Dollars in thousands) 2022 2021 $ Change % Change

Interest income $ 587 $ — $ 587 NM (1)

Interest expense — (7) 7 NM (1)

Other income, net — 1,266 (1,266) NM (1)

Total other income, net $ 587 $ 1,259 $ (672) (53) %

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(1) Percentage change is not meaningful.

Interest income of $0.6 million in the year ended December 31, 2022 was due to interest earned on short-term investments.

Other income, net of $1.3 million in the year ended December 31, 2021 included a gain from sale of an equity security.

Interest expense for the year ended December 31, 2021 was related to certain equipment financing.

(1) P ercentage change is not meaningful.

• Research and development expenses increased primarily due to increased personnel costs and rent expenses for newly leased facilities as we invested in the growth and development of our business.

• General and administrative expenses increased primarily due to personnel-related costs and costs associated with our obligations as a new public company.

• The change in other operating (income) expense, net was primarily due to changes in the fair value adjustments to contingent earnout liabilities and royalty expense.

Other income (expense)

Interest income of $5.1 million and $0.6 million during the years ended December 31, 2023 and December 31, 2022, respectively, was due to interest earned on short-term investments.

Prior to the Separation on November 1, 2022, interest income was earned and accounted for by Ligand.

Income tax benefit

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The tax rate is also affected by discrete items that may occur in any given year, but are not consistent from year to year.

Our effective tax rate for the year ended December 31, 2022 differed from the federal statutory tax rate of 21.0% due to share-based compensation expense which is not tax deductible and an increase to our valuation allowance recorded against deferred tax assets, partially offset by the tax benefit of research and development tax credits and the impact of changes in our state tax rate.

Our effective tax rate for the year ended December 31, 2021 differed from the federal statutory tax rate of 21.0% due to share-based compensation expense which is not tax deductible and an increase to our valuation allowance recorded against deferred tax assets, offset by the tax benefit of research and development tax credits.

Our effective tax rate for the year ended December 31, 2023 differed from the federal statutory tax rate of 21.0% primarily due to the tax benefit from research and development credits and the deduction of certain transaction costs, offset with non-deductible share-based compensation expense.

Our effective tax rate for the year ended December 31, 2022 differed from the federal statutory tax rate of 21.0% primarily due to non-deductible share-based compensation expense and an increase to our valuation allowance recorded against deferred tax assets, partially offset by the tax benefit from research and development tax credits and the impact of changes in our state tax rate.

Liquidity and Capital Resources

Prior to November 1, 2022, funding from Ligand was our primary source of liquidity.

On November 1, 2022, with the closing of the Business Combination, we were capitalized with $95.8 million in net cash.

Prior to our spin-off from Ligand, funding from Ligand was our primary source of liquidity.

In connection with the closing of the Business Combination, we were capitalized with $95.8 million in net cash, and as of December 31, 2022, had cash, cash equivalents short-term investments of $88.3 million.

As of December 31, 2023, our cash, cash equivalents and short-term investments were $87.0 million.

In January 2023, we received an aggregate of $35.0 million in milestone payments in connection with teclistamab;

we recognized $25.0 million as revenue in the fourth quarter of 2022 and the remainder is expected to be recognized in 2023 in accordance with the terms of the license agreement.

We believe our cash, cash equivalents and short-term investments and the cash we expect to generate from operations will provide us the flexibility we need to meet operating, investing, and financing needs and support our operations through at least the next 12 months.

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• the effect of competing technological and market developments;

• the impact of the COVID-19 pandemic or other epidemic diseases on global social, political and economic conditions;

• the impact of pandemics or other epidemic diseases on global social, political and economic conditions;

• our efforts to enhance operational systems and hire additional personnel to satisfy our obligations as a public company;

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Cash Flow Summary

A discussion regarding our cash flow summary for the year ended December 31, 2022 compared to the year ended December 31, 2021 is presented below.

in thousands 2022 2021 $ Change % Change

(dollars in thousands)

2023 2022 $ Change

Net cash provided by (used in):

Operating activities $ 2,347 $ (3,587) $ 5,934

Investing activities (73,313) (4,025) (69,288) NM (1)

Financing activities $ 110,739 $ 9,697 $ 101,042 NM (1)

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(1) Percentage change is not meaningful.

Investing activities (18,376) (73,313) 54,937

Financing activities $ (892) $ 110,739 $ (111,631)

Cash Used in Operating Activities:

During the year ended December 31, 2022, cash used in operating activities of $3.6 million primarily reflected our net loss of $22.3 million for the period, adjusted by net non-cash charges of $29.6 million which primarily included $18.3 million in share-based compensation, and $18.2 million in depreciation and amortization, partially offset by $6.4 million of deferred income taxes, net, as well as changes in our operating assets and liabilities in the amount of $10.8 million.

During the year ended December 31, 2021, cash used in operating activities of $5.7 million primarily reflected our net loss of $27.0 million for the period, adjusted by net non-cash charges of $24.0 million which primarily included $15.1 million in share-based compensation, and $16.3 million in depreciation and amortization, partially offset by $7.3 million of deferred income taxes, net, as well as changes in our operating assets and liabilities in the amount of $2.6 million.

During the year ended December 31, 2023, cash provided by operating activities of $2.3 million primarily reflected our net loss of $50.6 million for the period, adjusted by net non-cash charges of $28.1 million and a net change in operating assets and liabilities of $24.9 million.

The net non-cash charges primarily consisted of share-based compensation expense of $24.8 million and depreciation and amortization expense of $19.5 million, which were partially offset by a $12.5 million change in deferred income taxes, net.

The net change in operating assets and liabilities was primarily driven by a decrease in accounts receivable of $26.9 million and a decrease in deferred revenue of $5.3 million.

The net non-cash charges primarily consisted of share-based compensation expense of $18.3 million, and depreciation and amortization expense of $18.2 million, which were partially offset by a $6.4 million change in deferred income taxes, net.

The net change in operating assets and liabilities was primarily driven by an increase in accounts payable and accrued liabilities of $15.1 million offset by an increase in accounts receivable of $12.7 million and a decrease in deferred revenue of $9.5 million.

Cash Used in Investing Activities:

During the year ended December 31, 2023, cash used in investing activities of $18.4 million primarily consisted of $112.6 million of cash used to purchase short-term investments and $96.9 million of cash from the maturity of short-term investments.

During the year ended December 31, 2022, cash used in investing activities of $73.3 million primarily consisted of $54.8 million of cash used to purchase short-term investments and $17.2 million of cash used to purchase property and equipment.

During the year ended December 31, 2021, cash used in investing activities of $4.0 million primarily consisted of $4.1 million of cash used to purchase property and equipment.

Cash Provided by Financing Activities:

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Cash provided by financing activities during the year ended December 31, 2023 and 2022 primarily included cash transferred to us from Ligand based on changes in our cash used for operations.

During the year ended December 31, 2023, cash used in financing activities was $0.9 million.

During the year ended December 31, 2022, cash provided by financing activities was $110.7 million, which primarily consisted of $96.2 million of proceeds from the issuance of common stock upon the business combination and $18.6 million net transfer from Ligand, partially offset by $4.3 million in payments for deferred transaction costs and $2.0 million of payments to CVR holders.

During the year ended December 31, 2021, cash provided by financing activities was $9.7 million which primarily consisted of $10.7 million net transfer from Ligand partially offset by $1.1 million of payments to CVR holders.

Critical Accounting Policies and Estimates

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis