Item 2. Management’s Discussion and Analysis
Item 2. 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 elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and notes thereto and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2023. Unless otherwise indicated, all references in this Quarterly Report on Form 10-Q to “Reneo,” the “company,” “we,” “our,” “us” or similar terms refer to Reneo Pharmaceuticals, Inc. and its subsidiaries.
Forward-Looking Statements
In addition to historical financial information, this discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” under Part II, Item 1A below. In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “design,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “project,” “positioned,” “potential,” “seek,” “should,” “target,” “will,” “would” or the negative of these terms or other similar expressions.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements.
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 adenosine triphosphate. Our only product candidate, mavodelpar, is a potent and selective agonist of the peroxisome proliferator-activated receptor delta (PPARδ). Mavodelpar has been shown to increase transcription of genes involved in mitochondrial function and increase fatty acid oxidation , 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 primary mitochondria myopathy due to mitochondrial DNA 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. We are no longer pursuing further clinical development of mavodelpar at this time.
On May 10, 2024, we entered into an Agreement and Plan of Merger (Merger Agreement and the transactions contemplated thereby, Proposed Transactions) with Radiate Merger Sub I, Inc., a Delaware corporation and our direct, wholly owned subsidiary (Merger Sub I), Radiate Merger Sub II, LLC, a Delaware limited liability company and our direct, wholly owned subsidiary (Merger Sub II), and OnKure, Inc., a Delaware corporation (OnKure), pursuant to which, and subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, (a) Merger Sub I will merge with and into OnKure (the First Merger), with Merger Sub I ceasing
18
to exist and OnKure surviving the First Merger as our wholly owned subsidiary (Reneo following the First Merger, NewCo), and (b) as promptly as practicable following the First Merger, OnKure, as the surviving corporation of the First Merger, will merge with and into Merger Sub II, with OnKure ceasing to exist and Merger Sub II surviving the Second Merger as a wholly owned subsidiary of NewCo (the Second Merger, and together with the First Merger, the Mergers). At the effective time of the First Merger (First Effective Time) and upon filing of an amendment to our amended and restated certificate of incorporation to reclassify our common stock, each share of our common stock existing and outstanding immediately prior thereto will be recapitalized and remain outstanding as a share of NewCo Class A common stock without any conversion or exchange thereof, subject to a proposed reverse stock split of all of the shares of our common stock outstanding at the time of effectiveness thereof by a ratio to be determined by OnKure subject to our approval (the Reverse Stock Split). Upon the First Effective Time, all shares of OnKure capital stock outstanding immediately prior to the First Effective Time, after giving effect to an assumed common stock exchange ratio of 0.24482 and an assumed preferred stock exchange ratio of 1.50062, will be converted into the right to receive approximately 76,958,781 shares of NewCo common stock in the aggregate, which is subject to adjustment as set forth in the Merger Agreement.
In connection with the Mergers, on May 10, 2024, we concurrently entered into a Subscription Agreement with certain existing OnKure stockholders and new investors (collectively, PIPE Investors) pursuant to which, among other things, we agreed to issue to the PIPE Investors shares of NewCo Class A common stock concurrently with the Mergers in a private placement transaction for an aggregate purchase price of $65.0 million, which amount may be increased to up to $85.0 million through additional subscriptions from additional PIPE Investors (the Concurrent PIPE Investments). The closing of the Concurrent PIPE Investments is conditioned upon the satisfaction or waiver of the conditions to the closing of the Mergers and the substantially concurrent closing of the Mergers, as well as certain other conditions.
Immediately after the Mergers, pre-Mergers OnKure stockholders are expected to own approximately 69.4% of NewCo on a fully-diluted basis and pre-Mergers Reneo stockholders are expected to own approximately 30.6% of NewCo on a fully-diluted basis. Following the completion of the Concurrent PIPE Investments, assuming a subscription amount of (i) $65.0 million, pre-Mergers OnKure stockholders are expected to own approximately 54.8% of NewCo on a fully-diluted basis, pre-Mergers Reneo stockholders are expected to own approximately 24.2% of NewCo on a fully-diluted basis, and the PIPE Investors are expected to own approximately 21.0% of NewCo on a fully-diluted basis, and (ii) $85.0 million, pre-Mergers OnKure stockholders are expected to own approximately 51.5% of NewCo on a fully-diluted basis, pre-Mergers Reneo stockholders are expected to own approximately 22.7% of NewCo on a fully-diluted basis, and the PIPE Investors are expected to own approximately 25.8% of NewCo on a fully-diluted basis. The exchange ratios, and related pro forma ownership, will be adjusted (i) to account for the effect of the proposed Reverse Stock Split and (ii) to the extent that Reneo’s net cash as of the close of business on the business day immediately preceding the closing date of the Mergers is less than $59.0 million or greater than $61.0 million (resulting in pre-Mergers Reneo stockholders owning less or more of NewCo, respectively). The expected relative ownership percentages of pre-Mergers OnKure stockholders and pre-Mergers Reneo stockholders of NewCo are calculated using the treasury stock method, as described in the Merger Agreement.
The Mergers, which have been approved by our Board of Directors and the board of directors of OnKure, are expected to close in the second half of 2024, subject to the satisfaction or waiver of certain closing conditions, including the approval of our stockholders. Certain stockholders of Reneo holding approximately 28.2% of the outstanding shares of our common stock entered into support agreements with Reneo and OnKure to vote all of their shares of our common stock in favor of the Mergers, subject to the terms of the support agreements. Although we have entered into the Merger Agreement and intend to consummate the proposed Mergers, there is no assurance that we will be able to successfully consummate the proposed Mergers on a timely basis, or at all. If, for any reason, the proposed Mergers are not completed, we will reconsider our strategic alternatives and could pursue another strategic transaction similar to the proposed Mergers, potential collaborative, partnering or other strategic arrangements for our assets, including a license, sale or divestiture of our assets, or liquidate and distribute available cash.
19
License Agreement
In December 2017, we entered into a License Agreement (vTv License Agreement) with vTv Therapeutics LLC (vTv Therapeutics), under which we obtained an exclusive, worldwide, sublicensable license under certain vTv Therapeutics intellectual property to develop, manufacture and 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 June 30, 2024, 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 three and six months ended June 30, 2024 and 2023.
Although we have suspended development activities related to mavodelpar, we are continuing to maintain and prosecute mavodelpar intellectual property.
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 severance payments, salaries, benefits, and stock-based compensation expense;
• external expenses incurred under agreements with contract research organizations (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
20
development when the ultimate recoverability of the amounts paid is uncertain and the technology has no alternative future use when acquired.
The following table summarizes our research and development expenses for the three and six months ended June 30, 2024 and 2023 (unaudited and in thousands):
Three Months Ended June 30,
Six Months Ended June 30,
2024
2023
2024
2023
Clinical and regulatory
$
69
$
6,979
$
3,647
$
13,036
Contract manufacturing cost
91
3,124
125
5,152
Nonclinical
5
1,843
444
3,087
Medical affairs
195
1,648
763
2,666
Research and development-other expense
230
806
554
1,448
Total
$
590
$
14,400
$
5,533
$
25,389
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 costs related to the proposed Mergers with OnKure, personnel expenses, including severance payments, salaries, benefits, and stock-based compensation expenses for personnel in executive, finance and administrative functions. General and administrative expenses also include professional fees for accounting, legal, and commercial development, insurance and corporate facility costs not otherwise included in research and development expenses. We expect our general and administrative
21
expenses , not related to the proposed Mergers, to decrease for the foreseeable future as a result of our cash preservation activities.
Other Income
Other income consists of interest income on our cash, cash equivalents and short-term investments.
Results of Operations
Comparison of Three Months Ended June 30, 2024 and 2023 (Unaudited)
The following table summarizes our results of operations for the three months ended June 30, 2024 and 2023 (unaudited and in thousands):
Three Months Ended June 30,
2024
2023
Change
Operating expenses:
Research and development
$
590
$
14,400
$
(13,810
)
General and administrative
5,774
6,639
(865
)
Total operating expenses
6,364
21,039
(14,675
)
Loss from operations
(6,364
)
(21,039
)
14,675
Other income
1,003
1,508
(505
)
Net loss
$
(5,361
)
$
(19,531
)
$
14,170
Operating Expenses
Research and Development Expenses
Research and development expenses decreased by $13.8 million during the three months ended June 30, 2024, compared to the three months ended June 30, 2023. This decrease was primarily due to the suspension of development activities for mavodelpar and cash preservation activities, including workforce reductions in December 2023 and February 2024.
General and Administrative Expenses
General and administrative expenses decreased by $0.9 million during the three months ended June 30, 2024, compared to the three months ended June 30, 2023. This decrease was primarily due to a decrease of $1.6 million in facility and personnel-related costs related to our workforce reductions in December 2023 and February 2024 and a decrease of $1.7 million in commercial development and consulting costs due to the suspension of mavodelpar development activities, offset by an increase of $2.4 million in legal and advisory fees related to the proposed Mergers.
Other Income
The decrease in other income for the three months ended June 30, 2024, compared to the three months ended June 30, 2023 relates to a decrease in our short-term investment balance during 2024.
22
Comparison of Six Months Ended June 30, 2024 and 2023 (Unaudited)
The following table summarizes our results of operations for the six months ended June 30, 2024 and 2023 (unaudited and in thousands):
Six Months Ended June 30,
2024
2023
Change
Operating expenses:
Research and development
$
5,533
$
25,389
$
(19,856
)
General and administrative
10,396
11,771
(1,375
)
Total operating expenses
15,929
37,160
(21,231
)
Loss from operations
(15,929
)
(37,160
)
21,231
Other income
2,142
2,522
(380
)
Net loss
$
(13,787
)
$
(34,638
)
$
20,851
Operating Expenses
Research and Development Expenses
Research and development expenses decreased by $19.9 million during the six months ended June 30, 2024, compared to the six months ended June 30, 2023. This decrease was primarily due to the suspension of development activities for mavodelpar and cash preservation activities, including workforce reductions in December 2023 and February 2024.
General and Administrative Expenses
General and administrative expenses decreased by $1.4 million during the six months ended June 30, 2024, compared to the six months ended June 30, 2023. This decrease was primarily due to a decrease of $2.1 million in facility and personnel-related costs related to our workforce reductions in December 2023 and February 2024 and a decrease of $1.9 million in commercial development and consulting costs due to the suspension of mavodelpar development activities, offset by an increase of $2.7 million in legal and advisory fees related to the proposed Mergers.
Other Income
The decrease in other income for the six months ended June 30, 2024, compared to the six months ended June 30, 2023 relates to a decrease in our short-term investment balance during 2024.
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 June 30, 2024, we had available cash, cash equivalents and short-term investments of approximately $76.7 million, which we believe will be sufficient to fund our current operating plan for at least the next 12 months from the date of issuance of these unaudited condensed financial statements.
In November 2023, we entered into an at-the-market equity offering sales agreement (Sales Agreement) with Leerink Partners LLC (Leerink) under which we could offer and sell, from time to time, at our sole discretion, up to $100.0 million in shares of our common stock (2023 ATM Facility). Effective as of April 8, 2024, we terminated the Sales Agreement. We did not sell any shares of our common stock under the 2023 ATM Facility.
23
Funding Requirements
From our inception in 2014, we have incurred significant losses and negative cash flows from operations. As of June 30, 2024, we had an accumulated deficit of $232.3 million. For the three and six months ended June 30, 2024, we had a net loss of $5.4 million and $13.8 million, respectively, and we used $27.8 million of cash in operating activities during the six months ended June 30, 2024.
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. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, including as a result of the proposed Mergers with OnKure, and actual results could vary materially.
If, for any reason, the proposed Mergers are not completed, we will reconsider our strategic alternatives and could pursue another strategic transaction similar to the proposed Mergers, potential collaborative, partnering or other strategic arrangements for our assets, including a license, sale or divestiture of our assets, or liquidate and distribute available cash. If we liquidate, we would be required to pay all of our debts and contractual obligations, and to set aside certain reserves for potential future claims, and there can be no assurances as to the amount or timing of available cash left to distribute to our stockholders after paying our debts and other obligations and setting aside funds for reserves.
Cash Flows
The following table summarizes our cash flows for the six months ended June 30, 2024 and 2023 (unaudited and in thousands):
Six Months Ended June 30,
2024
2023
Net cash used in operating activities
$
(27,821
)
$
(25,162
)
Net cash provided by (used in) investing activities
36,248
(50,504
)
Net cash (used in) provided by financing activities
(89
)
64,820
Net increase (decrease) in cash and cash equivalents
$
8,338
$
(10,846
)
Operating Activities
Net cash used in operating activities for the six months ended June 30, 2024 was $27.8 million, consisting primarily of our net loss of $13.8 million adjusted for non-cash items of $0.6 million primarily due to $2.1 million of stock-based compensation expense, offset by $1.6 million of amortization/accretion on short-term investments and a $14.6 million net change in operating assets and liabilities. The change in our net operating assets and liabilities was primarily due to a decrease in prepaid and other current assets of $2.3 million, offset by a decrease in accounts payable and accrued expenses of $16.8 million due to timing of payments.
Net cash used in operating activities for the six months ended June 30, 2023 was $25.2 million, consisting primarily of our net loss of $34.6 million adjusted for non-cash items of $1.5 million primarily due to $2.4 million of stock-based compensation expense and $0.8 million in fair value of a performance award, offset by $2.0 million of amortization/accretion on short-term investments and a $7.9 million net change in operating assets and liabilities. The change in our net operating assets and liabilities was primarily due to a decrease in prepaid and other current assets of $1.3 million and an increase in accounts payable and accrued expenses of $6.8 million due to timing of receipt of invoices and payments.
Investing Activities
Net cash provided by investing activities for the six months ended June 30, 2024 was $36.2 million, consisting primarily of the net proceeds from maturities of available-for-sale short-term investments.
24
Net cash used in investing activities for the six months ended June 30, 2023 was $50.5 million, consisting primarily of the net purchase of available-for-sale short-term investments.
Financing Activities
Net cash used in financing activities for the six months ended June 30, 2024 was $0.1 million consisting primarily of the payment of deferred costs in connection with the Concurrent PIPE Investments.
Net cash provided by financing activities for the six months ended June 30, 2023 was $64.8 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, in our May 2023 private placement, and under our May 2022 at-the-market equity offering sales agreement with SVB Securities LLC, respectively.
Material Cash Requirements
The discussion below summarizes our significant contractual obligations and commitments as of June 30, 2024.
Leases . See Note 7 of Notes to Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for information regarding our leases, including the future operating lease minimum payments.
Performance Award. See Note 8 of Notes to Consolidated Financial Statements included in this Quarterly Report on Form 10-Q 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 9 of Notes to Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for information regarding the vTv License Agreement, including potential milestone and royalty payments.
In addition to the contractual obligations above, we also expect to have near term future material cash requirements associated with the proposed Mergers.
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.
Our critical accounting policies are described in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2023, and the notes to our consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. During the six months ended June 30, 2024, there were no material changes to our critical accounting policies from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2023.
Recent Accounting Pronouncements
See Note 2 of Notes to Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements applicable to our consolidated financial statements.
25
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting companies.