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 clinical-stage pharmaceutical company 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 lead product candidate, REN001, is a potent and selective agonist of the PPARδ. REN001 has been shown to increase transcription of genes involved in mitochondrial function and increase fatty acid oxidation, and may increase production of new mitochondria.
The PPAR family of nuclear hormone receptors control the transcription of genes critical for regulating energy metabolism and homeostasis. PPARδ is highly expressed in muscle, kidney, brain, and liver tissue. Activation of PPARδ results in changes in the expression of genes involved with multiple aspects of energy metabolism including uptake of fatty acids, utilization of fatty acids as an energy source, and mitochondrial biogenesis.
Increases in PPARδ activity also correlate with a shift in muscle tissue towards oxidative, fat-consuming type I fibers that are associated with endurance as opposed to glycolytic, type II fibers. In preclinical and clinical studies, increased PPARδ activity through transgenic overexpression or pharmacological activation increases muscular strength and endurance across a variety of functional measures. REN001 was studied in healthy volunteers with one leg immobilized to produce muscle atrophy. Compared to placebo, administration of REN001 resulted in statistically significant increases in expression of genes involved in mitochondrial oxidative phosphorylation, and statistically significant improvements in
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muscle strength. REN001 was also studied in an open-label trial in patients with PMM. In this trial, administration of REN001 improved function, reduced symptoms, and increased expression of genes involved in mitochondrial activity.
As a PPARδ agonist, REN001 may benefit patients with genetic mitochondrial myopathies who experience weakness, fatigue, or deterioration in muscle due to impaired mitochondrial energy production. We are currently developing REN001 in rare genetic diseases that typically present with myopathy and have high unmet medical needs, including PMM and LC-FAOD. Patients with these diseases are unable to perform many everyday activities, can experience cardiomyopathy and other organ dysfunction, and typically have a reduced life expectancy.
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 REN001. 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 our product candidate for several years, if ever. Since inception, we have incurred significant operating losses. Our net losses were $39.8 million and $19.5 million for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, we had an accumulated deficit of $84.7 million, and cash, cash equivalents and short-term investments of $147.7 million. We have funded our operations primarily through the issuance and sale of equity securities.
We expect to continue to incur net operating losses for at least the next several years, and we expect our research and development expenses, general and administrative expenses, and capital expenditures will continue to increase as we conduct our ongoing and planned clinical trials and preclinical studies, engage in other research and development activities, seek regulatory approvals for any product candidates that successfully complete clinical trials, incur development milestone payments related to our research and development activities, prepare for commercialization, hire additional personnel, protect our intellectual property and incur additional expenses as a result of operating as a public company.
Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and our expenditures on other research and development activities. As a result, we will need to raise additional capital. Until such time as we can generate significant revenue from sales of our product candidate, if ever, we expect to finance our operations through public or private equity offerings or debt financings, credit or loan facilities, collaborations, strategic alliances, licensing arrangements or a combination of one or more of these funding sources. Additional funds may not be available to us on acceptable terms or at all. Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic, as well as actual or perceived changes in interest rates and economic inflation. If we fail to obtain necessary capital when needed on acceptable terms, or at all, it could force us to delay, limit, reduce or terminate our product development programs, commercialization efforts or other operations. Based upon our current operating plan, we believe that our cash, cash equivalents, and short-term investments as of December 31, 2021 will enable us to fund our operating expenses and capital expenditure requirements through our planned near-term clinical milestones.
We do not own or operate manufacturing facilities. We rely, and expect to continue to rely, on third parties for the manufacture of REN001 for preclinical studies and clinical trials, as well as for commercial manufacturing if REN001 obtains marketing approval. We also rely, and expect to continue to rely, on third parties to manufacture, package, label, store, and distribute REN001, if marketing approval is obtained. We believe that this strategy allows us to maintain a more efficient infrastructure by eliminating the need for us to invest in our own manufacturing facilities, equipment, and personnel while also enabling us to focus our expertise and resources on the development of REN001.
COVID-19
The COVID-19 pandemic continues to evolve, and we will continue to monitor the COVID-19 situation closely. The extent of the impact of COVID-19 on our business, operations and clinical development timelines and plans remains uncertain, and will depend on certain developments, including the duration and spread of the pandemic, including new
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variants of the virus, and its impact on our clinical trial enrollment, trial sites, contract research organizations, third-party manufacturers, and other third parties with whom we do business, as well as its impact on regulatory authorities and our key scientific and management personnel. For example, our Phase 1b study of REN001 in PMM patients was closed early as a result of COVID-19, and we may face future clinical trial disruptions. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. As a result of COVID-19, we have taken precautionary measures in order to minimize the risk of the virus to our employees and the communities in which we operate. While we have experienced impacts to our clinical development activities as a result of COVID-19 as set forth in this Annual Report, there has been a minimal disruption to date in our ability to ensure the effective operation of our business. We will continue to actively monitor the rapidly evolving situation related to COVID-19 and may take further actions that alter our operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees and other third parties with whom we do business. At this point, the extent to which the COVID-19 pandemic may affect our business, operations and clinical development timelines and plans, including the resulting impact on our expenditures and capital needs, remains uncertain.
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 commercialize PPARδ agonists and products containing such PPARδ agonists, including REN001, for any therapeutic, prophylactic or diagnostic application in humans. Under the terms of the vTv License Agreement, we paid vTv Therapeutics an initial upfront license fee payment of $3.0 million and issued to vTv Therapeutics shares of our common stock subject to antidilution provisions under the agreement. Upon the achievement of certain pre-specified development and regulatory milestones, we are also required to pay vTv Therapeutics up to an aggregate of $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. In addition, we are obligated to pay vTv Therapeutics tiered royalty payments 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. In July 2021, a milestone under the vTv License Agreement was achieved, and we made a payment of $2.0 million to vTv Therapeutics.
Components of Our Results of Operations
Operating Expenses
Research and Development Expenses
Research and development expenses primarily relate to preclinical and clinical development of REN001. 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 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;
● facility costs including rent, 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
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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.
The following table summarizes our research and development expenses for the years ended December 31, 2021 and 2020:
Year Ended
December 31,
2021
2020
(in thousands)
Clinical and regulatory
$
14,863
$
7,894
Contract manufacturing cost
6,450
4,254
Nonclinical
2,339
4,026
Research and development-other expense (income)
4,517
(230)
Total
$
28,169
$
15,944
We expect our research and development expenses to increase substantially for the foreseeable future as we advance our product candidate into and through clinical trials, continue to conduct preclinical studies and pursue regulatory approval of our product candidate. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming. The actual probability of success for our product candidate may be affected by a variety of factors including: the safety and efficacy of our product candidate, early clinical data, investment in our clinical program, competition, manufacturing capability and commercial viability. We may never succeed in achieving regulatory approval for our product candidate. As a result of the uncertainties discussed above, at this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development of and obtain regulatory approval for our product candidate. 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, particularly in light of the current COVID-19 pandemic environment;
● 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 personnel expenses, including salaries, benefits, and stock-based compensation expense, for personnel in executive, finance, accounting, compliance and human resource and other
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administrative functions. General and administrative expense also includes corporate facility costs not otherwise included in research and development expenses, legal fees related to intellectual property and corporate matters, insurance costs and fees for accounting and consulting services.
We expect our general and administrative expenses to increase significantly for the foreseeable future to support continued research and development activities, including our ongoing and planned research and development of our product candidate for multiple indications.
Other Income
Other income consists of interest income on our cash, cash equivalents and short-term investments.
Critical Accounting 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 and clinical trials (including amounts paid to clinical research organizations and other professional services), license fees, salaries and employee benefits.
Research and development costs, comprising payments for work performed by third party contractors, laboratories, participating clinical trial sites and others. 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 reviewing open contracts and purchase orders, communicating with our 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. We accrue and expense clinical trial activities performed by third parties based upon estimates of the proportion of work completed over the life of the individual study and patient enrollment rates in accordance with agreements established with clinical research organizations, clinical trial sites and other vendors associated with the clinical trials. We determine the estimates by reviewing contracts, vendor agreements and purchase orders and through discussions with internal clinical personnel and external service providers as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services. We make estimates of accrued expenses as of each balance sheet date based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments, if necessary. 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.
Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result
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in us reporting amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred.
Accrued research and development expenses year-over-year have increased by approximately 10% due to increased activities in our research and development as we advance our pipeline, and management anticipates the expense to continue to increase in 2022.
Stock-Based Compensation
We recognize stock-based compensation expense for grants under our 2014 and 2021 Equity Incentive Plans and employee stock purchase plan (ESPP). We account for all stock-based awards granted to employees and board of 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. Since we have recently completed our IPO and do not have sufficient trading history our common stock the expected volatility assumption is based on volatilities of a peer group of similar companies whose share prices are publicly available . 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 performance 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 an accumulative expense catch-up, with remaining expense amortized over the remaining service period.
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 appropriate 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 2021 to attract and retain key scientific or management personnel. We anticipate an increase in our stock-based compensation expense in 2022.
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.
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Results of Operations
Comparison of Years Ended December 31, 2021 and 2020
The following table summarizes our results of operations for the years ended December 31, 2021 and 2020 (in thousands):
Year ended
December 31,
2021
2020
Change
Operating expenses:
Research and development
$
28,169
$
15,944
$
12,225
General and administrative
11,649
3,608
8,041
Total operating expenses
39,818
19,552
20,266
Loss from operations
(39,818)
(19,552)
(20,266)
Other income
48
87
(39)
Net loss
$
(39,770)
$
(19,465)
$
(20,305)
Operating Expenses
Research and Development Expenses
Research and development expenses increased by $12.2 million during 2021 compared to 2020. This increase was primarily due to an increase of $5.7 million related to clinical and manufacturing activities for REN0001, $3.0 million in personnel related costs due to support growth in our development activities, and $2.0 million in milestone costs under the vTv License Agreement, offset by a $1.5 million tax rebate received from the UK government in 2020 for qualifying research expense incurred in the UK.
General and Administrative Expenses
General and administrative expenses increased by $8.0 million during 2021, compared to 2020 primarily as a result of our IPO in April 2021 and increased operating activities necessary to operate as a public company, which consisted of increases in personnel-related expenses of $5.1 million, insurance premiums of $1.1 million, and outside professional services of $1.3 million.
Other Income
Other income for the years ended December 31, 2021 and 2020 was immaterial.
Liquidity and Capital Resources
Since inception, we have incurred operating losses and negative cash flows from operations and have funded our operation primarily through the sale of preferred and common stock. We do not have any product candidates approved for sale and have not generated any revenue from product sales, and we do not expect to generate revenues from the commercial sale of our product candidate for at least the foreseeable future, if ever. We are subject to all the risks related to the development and commercialization of novel therapeutics, and we may encounter unforeseen expenses, difficulties, complications, delays, and other unknown factors that may adversely affect our business. We continue to incur additional costs associated with operating as a public company. We anticipate that we will need substantial additional funding in connection with our continuing operations.
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Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2021 and 2020:
Year Ended
December 31,
2021
2020
(in thousands)
Net cash used in operating activities
$
(37,983)
$
(18,536)
Net cash (used in) provided by investing activities
(23,376)
7,376
Net cash provided by financing activities
132,406
47,272
Net increase in cash and cash equivalents
$
71,047
$
36,112
Operating Activities
Net cash used in operating activities for the year ended December 31, 2021 was $38.0 million, consisting primarily of our net loss of $39.8 million adjusted for non-cash items of $4.6 million primarily due to stock-based compensation expense and $2.8 million net change in operating assets and liabilities. The change in our net operating assets and liabilities was primarily due to an increase in prepaid and other assets of $4.7 million as a result of prepayments made for clinical trial activities, offset by the increase in accounts payable, accrued expense and other of $1.8 million due to timing of receipt of invoices and payments.
Net cash used in operating activities for the year ended December 31, 2020 was $18.5 million, consisting primarily of our net loss of $19.5 million, partially offset by a $0.5 million net change in operating assets and liabilities and $0.5 million in non-cash adjustment primarily consisting of stock-based compensation expense.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2021 was $23.4 million consisting primarily of purchases of $31.4 million of available for sale short term investments, offset by $8.2 million of proceeds received from maturities of available for sale short term investments.
Net cash provided investing activities for the year ended December 31, 2020 was $7.4 million consisting primarily of proceeds received from maturities of available for sale short term investments.
Financing Activities
Net cash provided by financing activities in the year ended December 31, 2021 was $132.4 million, consisting primarily of $93.8 million of gross proceeds raised from our IPO, net of $6.6 million in underwriters’ discount and commissions and issuance costs of $2.6 million, as well as $47.2 million of net proceeds from the issuance of shares of Series B convertible preferred stock, and $0.6 million of proceeds from the exercise of stock options and ESPP purchases.
Net cash provided by financing activities in the year ended December 31, 2020 was $47.3 million, consisting primarily of $47.2 million of net proceeds from the issuance of Series B convertible preferred stock and $0.1 million of proceeds from the exercise of stock options.
Funding Requirements
To date, we have not generated any revenue. We do not expect to generate revenue from product sales unless and until we obtain regulatory approval and commercialize REN001 or any future product candidates, and we do not know when, or if at all, that will occur. We will continue to require additional capital to develop REN001 and fund operations for the foreseeable future. Our primary uses of cash are to fund our operations, which consist primarily of research and development expenses related to our clinical development programs, and to a lesser extent, general and administrative expenses. We expect our expenses to continue to increase in connection with our ongoing activities as we continue to advance REN001 through clinical development and regulatory approval and additional costs associated with operating as
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a public company. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and our expenditures on other research and development activities.
We will need to raise additional capital through public or private equity offerings or debt financings, credit or loan facilities, collaborations, strategic alliances, licensing arrangements or a combination of one or more of these funding sources. Additional funds may not be available to us on acceptable terms or at all. Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic , as well as actual or perceived changes in interest rates and economic inflation . If we fail to obtain necessary capital when needed on acceptable terms, or at all, it could force us to delay, limit, reduce or terminate our product development programs, commercialization efforts or other operations .
Our future capital requirements will depend on many factors, including:
● the scope, progress, results and costs of clinical trials and preclinical studies for REN001;
● the scope, prioritization and number of our research and clinical indications we pursue;
● the costs and timing of manufacturing for our product candidates;
● the costs, timing, and outcome of regulatory review of REN001;
● the timing and amount of the milestone or other payments we must make to vTv Therapeutics and any future licensors;
● the terms and timing of establishing and maintaining collaborations, licenses and other similar arrangements;
● the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;
● the extent to which we acquire or in-license other product candidates and technologies;
● the costs of securing manufacturing arrangements for commercial production;
● our ability to achieve sufficient market acceptance, coverage and adequate reimbursement from third-party payors and adequate market share and revenue for any approved products; and
● the costs of establishing or contracting for sales and marketing capabilities if we obtain regulatory approvals to market any product candidates.
In December 2020 and March 2021, we raised net proceeds of $94.4 million from the sale of Series B convertible preferred stock. In April 2021, we raised net proceeds of approximately $84.6 million in connection with our IPO. As of December 31, 2021, we had $147.7 million in cash, cash equivalents and short-term investments. We believe, based upon our current operating plan, that our cash, cash equivalents and short-term investments as of December 31, 2021 will be sufficient to fund our planned operations into 2024.
Identifying potential product candidates and conducting preclinical studies and clinical trials is a time-consuming, expensive, and uncertain process that takes many years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidate, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of a product candidate that we do not expect to be commercially available for many years, if at all. Until such time as we can generate significant revenue from sales of our product candidate, if ever, we expect to finance our operations through public or private equity offerings or debt financings, credit or loan facilities, collaborations, strategic alliances, licensing arrangements or a combination of one or more of these funding sources. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these
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securities may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends.
If we raise funds through collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidate that we would otherwise prefer to develop and market ourselves.
Material Cash Requirements
The discussion below summarizes our significant contractual obligations and commitments as of December 31, 2021.
vTv License Agreement . See Note 8 of Notes to Consolidated Financial Statements included in this Annual Report for information, including the milestone payments, associated with the vTv License Agreement.
Operating Leases . See Note 10 of Notes to Consolidated Financial Statements included in this Annual Report for information, including the future operating lease minimum payments.
Performance bonus. See Note 7 of Notes to Consolidated Financial Statements included in this Annual Report for information, including the maximum payout.
In addition to contractual obligations above, we also expect to have future material cash requirements related to our contract manufacturing, preclinical and clinical programs, and personnel expenses.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting companies.