Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included in Item 8 “Financial Statements and Supplementary Data” and included elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements based upon our current beliefs, estimates, plans and expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those contained in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this Annual Report.
Overview
Reneo is a pharmaceutical company historically focused on the development and commercialization of therapies for patients with rare genetic mitochondrial diseases, which are often associated with the inability of mitochondria to produce ATP. Our only product candidate, mavodelpar, is a potent and selective agonist of PPARδ. Mavodelpar has been shown to increase transcription of genes involved in mitochondrial function and increase FAO, and may increase production of new mitochondria.
On December 14, 2023, we announced that our pivotal STRIDE study, a global, randomized, double-blind, placebo-controlled Phase 2b trial of mavodelpar in adult patients with PMM due to mtDNA defects, did not meet its primary or secondary efficacy endpoints. As a result, we suspended the development activities for mavodelpar and implemented cash preservation activities, including a substantial workforce reduction. We implemented a reduction in workforce in December 2023 and February 2024, and currently have eight full-time employees remaining.
In January 2024, our Board of Directors retained an independent financial advisor to initiate a formal process to evaluate potential strategic alternatives focused on maximizing stockholder value, including, but not limited to, a merger, sale, other business combination, a strategic partnership with one or more parties, or the licensing, sale or divestiture of our assets. Our Board of Directors, in consultation with our independent financial and legal advisors, is evaluating a number of indications of interest we have received. If we do not successfully consummate a strategic alternative, our Board of Directors may decide to pursue a dissolution and liquidation of our company. We are no longer pursuing further clinical development of mavodelpar at this time. The disclosures throughout this Annual Report include discussion regarding our historical operations along with potential risks that could arise if we or a third party pursue further research, development or clinical trials in the future. Our evaluation of potential strategic alternatives entails numerous significant risks and uncertainties, including those set forth in Part I, Item 1A under the heading “Risk Factors” of this Annual Report.
Financial Overview
Since our inception in 2014, our operations have primarily focused on raising capital, establishing and protecting our intellectual property portfolio, organizing and staffing our company, business planning, and conducting preclinical and clinical development of and manufacturing development for mavodelpar. We do not have any product candidates approved for sale, have not generated any revenue from product sales, and do not expect to generate revenues from the commercial sale of any products for the foreseeable future, if ever. Since inception, we have incurred significant operating losses. Our net losses were $77.4 million and $52.0 million for the years ended December 31, 2023 and 2022, respectively. As of December 31, 2023, we had an accumulated deficit of $218.5 million, and cash, cash equivalents and short-term investments of $103.0 million. We anticipate having approximately $82.0 million in cash, cash equivalents, and short-term investments as of March 31, 2024. We have funded our operations primarily through the issuance and sale of equity securities.
License Agreement
In December 2017, we entered into the vTv License Agreement, under which we obtained an exclusive, worldwide, sublicensable license under certain vTv Therapeutics intellectual property to develop, manufacture and
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commercialize PPARδ agonists and products containing such PPARδ agonists, including mavodelpar, for any therapeutic, prophylactic or diagnostic application in humans. Since we have suspended all development activity related to mavodelpar, we are not currently performing any development efforts under the vTv License Agreement.
Under the terms of the vTv License Agreement, we paid vTv Therapeutics an initial upfront license fee of $3.0 million and $2.0 million of milestone payments and issued an aggregate of 576,443 shares of our common stock to vTv Therapeutics. On October 30, 2023, we repurchased from vTv Therapeutics all 576,443 shares of our common stock previously issued to vTv Therapeutics under the vTv License Agreement for an aggregate purchase price of approximately $4.4 million in a private, non-underwritten transaction.
Upon the achievement of certain pre-specified development and regulatory milestones, we are also required to pay vTv Therapeutics milestone payments totaling up to $64.5 million. We are also required to pay vTv Therapeutics up to $30.0 million in total sales-based milestones upon achievement of certain sales thresholds of the licensed product. As of December 31, 2023, we have paid an aggregate of $2.0 million in development and regulatory milestone payments. In addition, we are obligated to make tiered royalty payments to vTv Therapeutics at mid-single digit to low teen percentage royalty rates, based on tiers of annual net sales of licensed products, subject to certain customary reductions. There were no milestone payments achieved or recorded for the years ended December 31, 2023 and 2022.
In January 2024, consistent with our implementation of cash preservation activities, including suspension of development activities of our only product candidate, mavodelpar, we returned to vTv Therapeutics prosecution and maintenance responsibility of the vTv Therapeutics intellectual property relating to vTv Therapeutics’ PPARδ agonist program, including mavodelpar. We continue to maintain and prosecute Reneo owned intellectual property related to mavodelpar.
Components of Our Results of Operations
Operating Expenses
Research and Development Expenses
Research and development expenses primarily relate to preclinical and clinical development of mavodelpar. Research and development expenses include:
• personnel expenses, including salaries, benefits, and stock-based compensation expense;
• external expenses incurred under agreements with CROs, investigative sites and consultants to conduct and support our preclinical studies and clinical trials;
• raw materials related to manufacturing of our product candidate for clinical trials and preclinical studies, including fees paid to third-party manufacturers;
• expenses related to regulatory activities, including filing fees paid to regulatory agencies;
• expenses related to medical affairs activities, including field teams to initiate relevant disease education and publications;
• depreciation and maintenance expenses; and
• fees for maintaining licenses under our third-party licensing agreements.
Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received. Costs for certain activities, such as manufacturing and preclinical studies and clinical trials, are generally recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and collaborators. We expense amounts paid to acquire licenses associated with products under development when the ultimate recoverability of the amounts paid is uncertain and the technology has no alternative future use when acquired.
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The following table summarizes our research and development expenses for the years ended December 31, 2023 and 2022 (in thousands):
Year Ended December 31,
2023
2022
Clinical and regulatory
$
30,698
$
19,919
Contract manufacturing cost
11,536
8,915
Nonclinical
4,276
3,931
Medical affairs
6,839
484
Research and development-other expense
3,264
4,456
Total
$
56,613
$
37,705
As a result of implementing our cash preservation activities, including suspension of development activities for mavodelpar, we expect our research and development expenses to decrease for the foreseeable future. If we pursue further development of mavodelpar or any other product candidates in the future, we cannot determine with certainty the timing of initiation, the duration or the completion costs of such clinical trials due to the inherently unpredictable nature of preclinical and clinical development. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. We may need to raise substantial additional capital in the future. In addition, we cannot forecast whether any future product candidate may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.
Our research and development costs may vary significantly based on factors such as:
• the scope, rate of progress, expense and results of clinical trials and preclinical studies;
• per patient trial costs;
• the number of trials required for approval;
• the number of sites included in the trials;
• the countries in which the trials are conducted;
• the number of patients that participate in the trials;
• uncertainties in patient enrollment or drop out or discontinuation rates;
• potential additional safety monitoring requested by regulatory agencies;
• the duration of patient participation in the trials and follow-up;
• the safety and efficacy of our product candidate;
• the cost and timing of manufacturing our product candidates; and
• the extent to which we establish strategic collaborations or other arrangements.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries, benefits, and stock-based compensation expense for personnel in executive, finance and administrative functions. General and administrative expenses also include professional fees for accounting, legal, and commercial development, corporate facility costs not otherwise included in research and development expenses, and insurance. We expect our general and administrative expenses to decrease for the foreseeable future as a result of our cash preservation activities.
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Other Income
Other income consists of interest income on our cash, cash equivalents and short-term investments.
Results of Operations
Comparison of Year Ended December 31, 2023 and 2022
The following table summarizes our results of operations for the years ended December 31, 2023 and 2022 (in thousands):
Year Ended December 31,
2023
2022
Change
Operating expenses:
Research and development
$
56,613
$
37,705
$
18,908
General and administrative
26,440
16,143
10,297
Total operating expenses
83,053
53,848
29,205
Loss from operations
(83,053
)
(53,848
)
(29,205
)
Other income
5,665
1,893
3,772
Net loss
$
(77,388
)
$
(51,955
)
$
(25,433
)
Operating Expenses
Research and Development Expenses
Research and development expenses increased by $18.9 million during 2023 compared to 2022. This increase was primarily due to an increase of $13.3 million related to clinical and manufacturing costs in our STRIDE and STRIDE AHEAD studies, which have now been completed and discontinued, respectively, an increase of $2.6 million in medical affairs, an increase of $1.7 million in personnel-related costs due to additional headcount and an increase of $1.7 million in severance payments related to our workforce reduction in December 2023, offset by decrease of $0.6 million in other research and development expenses.
General and Administrative Expenses
General and administrative expenses increased by $10.3 million during 2023 compared to 2022. This increase was primarily due to an increase of $5.7 million in commercial development activities, an increase of $1.7 million in facility and personnel-related costs due to additional headcount, an increase of $0.8 million in severance expense related to our workforce reduction in December 2023 and an increase of $0.6 million in impairment charges as a result of the suspension of our mavodelpar development program.
Other Income
Other income increased by $3.8 million during 2023 compared to 2022. This increase primarily relates to higher interest income attributable to increasing interest rates during 2023.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through the sale of equity securities. We have not generated any revenue from the sale of any products. As of December 31, 2023, we had available cash, cash equivalents and short-term investments of approximately $103.0 million. We anticipate having approximately $82.0 million in cash, cash equivalents, and short-term investments as of March 31, 2024.
In May 2022, we entered into an at-the-market equity offering sales agreement (2022 ATM Facility) with Leerink (previously SVB Securities LLC) under which we could offer and sell, from time to time, at our sole
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discretion, up to $20.0 million in shares of our common stock. On November 13, 2023, concurrent with entering into the 2023 ATM Facility, we and Leerink terminated the 2022 ATM Facility. We had sold approximately 500,000 shares of our common stock pursuant to the 2022 ATM Facility at a weighted-average price of $2.48 per share, resulting in aggregate gross proceeds to us of $1.2 million, as of the termination date. Sales commissions to Leerink and other issuance expenses were immaterial.
In May 2023, we completed a public offering in which we sold an aggregate of 7,906,250 shares of common stock which included the full exercise of the underwriters’ option to purchase an additional 1,031,250 shares of common stock, at a price of $8.00 per share. Total net proceeds from the public offering, after deducting underwriting discounts and commissions and offering expenses, were approximately $58.9 million.
Also, in May 2023, we completed a concurrent private placement in which we sold an aggregate of 625,000 shares of common stock to Abingworth Bioventures 8 L.P., a holder of more than 5% of our common stock, at a price of $8.00 per share (the Private Placement). Total net proceeds from the Private Placement, after deducting advisor fees and other estimated fees and expenses, were approximately $4.7 million.
On October 30, 2023, pursuant to a Common Stock Repurchase Agreement with vTv Therapeutics, we repurchased from vTv Therapeutics 576,443 shares of our common stock at price of $7.64 per share for an aggregate purchase price of approximately $4.4 million in a private, non-underwritten transaction. Subsequently, we retired the repurchased shares.
On November 13, 2023, we entered into the 2023 ATM Facility with Leerink under which we may offer and sell, from time to time, at our sole discretion, up to $100.0 million in shares of our common stock. As of December 31, 2023, we had not sold any shares of our common stock under the 2023 ATM Facility and on March 25, 2024, we provided notice to Leerink of our election to terminate the Sales Agreement, effective as of April 8, 2024.
Funding Requirements
From our inception in 2014, we have incurred significant losses and negative cash flows from operations. For the year ended December 31, 2023, we had a net loss of $77.4 million and used $63.7 million of cash in operating activities. As of December 31, 2023, we have an accumulated deficit of $218.5 million.
We may incur additional costs not currently contemplated due to events that may occur as a result of, or that are associated with, pursuing and evaluating potential strategic alternatives for the Company. We believe that our existing cash, cash equivalents, and short-term investments will be sufficient to meet our cash requirements through at least the next 12 months. We are subject to all the risks related to the development and commercialization of any future product candidates, including those discussed in the section titled “Risk Factors” under Part I, Item 1A above.
Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2023 and 2022 (in thousands):
Year Ended December 31,
2023
2022
Net cash used in operating activities
$
(63,682
)
$
(47,362
)
Net cash provided by (used in) investing activities
10,522
(57,842
)
Net cash provided by financing activities
60,865
471
Net increase (decrease) in cash and cash equivalents
$
7,705
$
(104,733
)
Operating Activities
Net cash used in operating activities for the year ended December 31, 2023 was $63.7 million, consisting primarily of our net loss of $77.4 million adjusted for non-cash items of $1.5 million primarily due to $5.1 million of
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stock-based compensation expense, $0.7 million in right-of-use and leasehold improvement impairment expense and $0.4 million in lease expense, offset by $4.8 million of amortization/accretion on short term investments and $12.2 million related to net change in operating assets and liabilities. The change in net operating assets and liabilities was primarily due to a decrease in prepaid and other assets of $1.5 million as a result of a decrease in prepayments made for non-clinical activities and an increase in accounts payable and accrued expenses of $11.1 million due to timing of receipt of invoices and payments, increase in clinical study accruals and accrued severance liability.
Net cash used in operating activities for the year ended December 31, 2022 was $47.4 million, consisting primarily of our net loss of $52.0 million adjusted for non-cash items of $3.6 million primarily due to stock-based compensation expense and $1.0 million net change in operating assets and liabilities. The change in net operating assets and liabilities was primarily due to a decrease in prepaid and other current assets of $0.9 million as a result of a decrease in prepayments made for clinical trial activities and an increase in accrued expenses of $0.5 million due to timing of receipt of invoices and payments, offset by a decrease in operating lease liabilities of $0.4 million as a result of lease payments.
Investing Activities
Net cash provided by investing activities for the year ended December 31, 2023 was $10.5 million, consisting of the net proceeds from maturities of available-for-sale short-term investments.
Net cash used in investing activities for the year ended December 31, 2022 was $57.8 million, consisting of the net purchase of available-for-sale short-term investments.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2023 was $60.9 million, consisting primarily of the net proceeds of $58.9 million, $4.7 million, and $1.0 million from the sale of common stock in our May 2023 public offering, the Private Placement, and the 2022 ATM Facility, respectively, and $0.7 million of proceeds from the exercise of stock options and purchases under our employee stock purchase plan (ESPP), offset by $4.4 million in connection with our repurchase of shares of common stock from vTv Therapeutics.
Net cash provided by financing activities for the year ended December 31, 2022 was $0.5 million, consisting primarily of $0.3 million of proceeds from the exercise of stock options and ESPP purchases and net proceeds of $0.2 million from the sale of common stock under our 2022 ATM Facility.
Material Cash Requirements
The discussion below summarizes our significant contractual obligations and commitments as of December 31, 2023.
Leases . See Note 8 of Notes to Consolidated Financial Statements included in this Annual Report for information regarding our leases, including the future operating lease minimum payments.
Performance Award. See Note 9 of Notes to Consolidated Financial Statements included in this Annual Report for information regarding a special performance award that our chief executive officer may be entitled to receive, including the maximum payout.
vTv License Agreement . See Note 10 of Notes to Consolidated Financial Statements included in this Annual Report for information regarding the vTv License Agreement, including potential milestone and royalty payments.
Severance Obligation . See Note 13 of Notes to Consolidated Financial Statements included in this Annual Report for information regarding our severance payment obligations.
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In addition to the contractual obligations above, we also expect to have near term future material cash requirements associated with pursuing and evaluating potential strategic alternatives for the Company.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements. We base our estimates on historical experience, known trends and events, and various other factors 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 materially from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report, we believe the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations.
Accrued Research and Development Expenses
All research and development costs are expensed as incurred. Research and development costs consist primarily of costs associated with manufacturing drug substance and drug product, costs associated with preclinical studies, clinical trials managed through CROs and other third parties, license fees, salaries and employee benefits.
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued expenses as of each balance sheet date. This process involves the following:
• communicating with appropriate internal and external personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost;
• estimating and accruing expenses in our consolidated financial statements as of each balance sheet date based on facts and circumstances known to us at the time; and
• periodically confirming the accuracy of our estimates with service providers and making adjustments, if necessary.
We base our expense accruals related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing costs, we estimate the time period over which services will be performed and the level of effort to be expended in each period.
Nonrefundable advance payments for goods and services, including fees for process development or manufacturing and distribution of clinical supplies that will be used in future research and development activities, are deferred and recognized as expense in the period that the related goods are consumed, or services are performed.
To date, we have not experienced significant changes in our estimates of accrued research and development expenses after a reporting period. However, due to the nature of estimates, we cannot assure you that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our clinical trials and other research activities.
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Stock-Based Compensation
We recognize stock-based compensation expense for grants under our 2014 and 2021 Equity Incentive Plans and ESPP. We account for all stock-based awards granted to employees and directors at their fair value and recognize compensation expense over the award’s vesting period. Determining the amount of stock-based compensation to be recorded requires us to develop estimates of fair values of stock options as of the grant date. We calculate the grant date fair values of stock options using the Black-Scholes valuation model, which requires the input of subjective assumptions, including but not limited to expected stock price volatility over the term of the awards and the expected term of stock options. The fair value of restricted stock awards granted to employees is based on the quoted closing market price per share on grant date.
We granted restricted stock awards with performance conditions that are based upon the achievement of pre-specified clinical development or regulatory performance events. As the outcome of each event has inherent risks and uncertainties, and a positive outcome may not be known until the event is achieved, we will begin to recognize the value of the performance-based restricted stock awards when the achievement of each performance condition is deemed probable, a determination that requires significant judgment by management. Compensation cost is recognized under the accelerated method and is adjusted in future periods for subsequent changes in the expected outcome of the performance-related conditions.
We also granted restricted stock awards with market conditions. We measure the fair value of stock-based awards with market-based vesting conditions on the date of grant using a Monte Carlo simulation model. In accordance with accounting guidance for awards with market conditions, the stock-based compensation expense will be recognized over the derived service period regardless of whether the award achieves the market condition and will only be adjusted to the extent the service condition is not met.
Stock-based compensation expenses year-over-year have increased due to more equity grants awarded in 2023 to attract and retain key scientific or management personnel.
Recent Accounting Pronouncements
A description of recent accounting pronouncements that may potentially impact our financial position, results of operations or cash flows is disclosed in Note 2 to our consolidated financial statements included elsewhere in this Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting companies.