Ovid Therapeutics Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following information should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q and the audited financial information and the notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the Securities and Exchange Commission (“SEC”) on March 15, 2021. In addition to historical financial information, the following discussion contains forward-looking statements based upon our current plans, expectations and beliefs that involve risks, uncertainties and assumptions. Our actual results may differ materially from those described in or implied by these forward-looking statements because of many factors, including those set forth under the section titled “Risk Factors” in Part II, Item 1A. Such factors may be amplified by the ongoing COVID-19 pandemic and its potential impact on our business and the global economy. Overview We are a biopharmaceutical company focused on developing impactful medicines for patients and families living with rare neurological disorders. We believe these disorders represent an attractive area for drug development as the understanding of the underlying biology has grown meaningfully over the last few years and today represent a substantial opportunity medically and commercially. Based on the rapid increase in scientific understanding of the role of genetics and key biological pathways relevant to diseases of the brain, we aim to identify, discover and develop novel compounds for the treatment of rare neurological disorders. We have built a deep knowledge of such diseases, how to treat them and how to develop the clinically meaningful endpoints required for development of a compound in these disorders. As a result of this knowledge, we have developed a pipeline of first-in-class compounds and programs and have demonstrated our model by progressing compounds through to late-stage development. We continue to execute on our strategy to build this pipeline by discovering in-licensing and collaborating with leading biopharmaceutical companies and academic institutions. Our latest pipeline includes two late-stage programs and several earlier stage programs. Since our inception in April 2014, we have devoted substantially all of our efforts to organizing and planning our business, building our management and technical team, acquiring operating assets and raising capital. During the three months ended March 31, 2021, we generated $208.4 million of license and other revenue through our Collaboration and License Agreement (“the Angelini License Agreement”) with Angelini Pharma Rare Diseases AG (“Angelini”) and our Royalty, License and Termination agreement (the “Takeda License and Termination Agreement”) with Takeda Pharmaceutical Company Limited (“Takeda”) and have otherwise funded our business primarily through the sale of our capital stock. Through March 31, 2021, we have raised net proceeds of $275.4 million from the sale of our convertible preferred stock and our common stock. As of March 31, 2021, we had $233.1 million in cash and cash equivalents. We recorded net income of $176.0 million for the three months ended March 31, 2021 and net losses $20.0 million for the three months ended March 31, 2020. As of March 31, 2021, we had an accumulated deficit of $118.2 million. Although we recorded net income of $176.0 million during the three months ended March 31, 2021, we expect to incur significant expenses and increasing operating losses for at least the next several years. Our net losses may fluctuate significantly from period to period, depending on the timing of our planned preclinical studies and clinical trials and expenditures on our other research and development and commercial development activities. We expect our expenses will increase substantially over time as we: • continue the ongoing and planned preclinical and clinical development of our drug candidates; • build a portfolio of drug candidates through the development, acquisition or in-license of drugs, drug candidates or technologies; • initiate preclinical studies and clinical trials for any additional drug candidates that we may pursue in the future; • seek marketing approvals for our current and future drug candidates that successfully complete clinical trials; 20 • establish a sales, marketing and distribution infrastructure to commercialize any drug candidate for which we may obtain marketing approval; • develop, maintain, expand and protect our intellectual property portfolio; • implement operational, financial and management systems; and • attract, hire and retain additional administrative, clinical, regulatory, manufacturing, commercial and scientific personnel. Recent Developments Takeda License and Termination Agreement In March 2021, we entered into the Takeda License and Termination Agreement with Takeda, pursuant to which Takeda secured rights to our 50% global share in soticlestat, which we had originally licensed from Takeda, and we granted to Takeda an exclusive, worldwide license under our relevant intellectual property rights to develop and commercialize the investigational medicine OV935 for the treatment of developmental and epileptic encephalopathies, including Dravet syndrome and Lennox-Gastaut syndrome. Notice of Termination of the Angelini License Agreement We received Notice of Termination dated March 29, 2021 from Angelini, and we and Angelini subsequently agreed that the Angelini License Agreement terminated effective March 31, 2021. Following termination of the Angelini License Agreement, the Company was released from its performance obligations and will not be entitled to any future milestone payments under the Agreement. Discontinuation of Development of OV101 In April 2021, we announced that we will discontinue development of OV101 (gaboxadol), a delta (δ)-selective GABAA receptor agonist, in Angelman syndrome, and that we do not plan to initiate further clinical studies of OV101 in Fragile X syndrome. As a result, we intend to reprioritize our resources to focus on the development of our robust early-stage pipeline, including OV882, a short hairpin RNA therapy targeting UBE3A gene expression in neurons, as a potential treatment for Angelman syndrome. COVID-19 Update We have implemented business continuity plans designed to address and mitigate the impact of the ongoing COVID-19 pandemic on our employees and our business. We continue to operate normally with the exception of enabling all of our employees to work productively at home and abiding by travel restrictions issued by federal, state and local governments. Our current plans to return to the office remain fluid as federal, state and local guidelines, rules and regulations continue to evolve . Financial Operations Overview Revenue Since inception, we recognized $25.0 million of revenue under the Angelini License Agreement and $196.0 million in connection with the Takeda License and Termination Agreement . We have not generated any revenue from commercial drug sales and do not expect to generate any revenue from commercial drug sales unless or until we obtain regulatory approval of and commercialize one or more of our current or future drug candidates. In the future, we may generate revenue from a combination of research and development payments, license fees and other upfront or milestone payments. Research and Development Expenses Research and development expenses consist primarily of costs incurred for our research activities, including our product discovery efforts and the development of our product candidates, which include, among other things: • employee-related expenses, including salaries, benefits and stock-based compensation expense; • fees paid to consultants for services directly related to our drug development and regulatory effort; • expenses incurred under agreements with contract research organizations, as well as contract manufacturing organizations and consultants that conduct preclinical studies and clinical trials; • costs associated with preclinical activities and development activities; • costs associated with technology and intellectual property licenses; • milestone payments and other costs under licensing agreements; and • depreciation expense for assets used in research and development activities. 21 Costs incurred in connection with research and development activities are expensed as incurred. Costs for certain development activities, such as clinical trials, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations or other information provided to us by our vendors. Research and development activities are and will continue to be central to our business model. We expect our research and development expenses to increase over the next several years as we advance our current and future drug candidates through preclinical studies and clinical trials. The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time-consuming. It is difficult to determine with certainty the duration and costs of any preclinical study or clinical trial that we may conduct. The duration, costs and timing of clinical trial programs and development of our current and future drug candidates will depend on a variety of factors that include, but are not limited to, the following: • number of clinical trials required for approval and any requirement for extension trials; • per patient trial costs; • number of patients who participate in the clinical trials; • number of sites included in the clinical trials; • countries in which the clinical trial is conducted; • length of time required to enroll eligible patients; • number of doses that patients receive; • drop-out or discontinuation rates of patients; • potential additional safety monitoring or other studies requested by regulatory agencies; • duration of patient follow-up; and • efficacy and safety profile of the drug candidate. In addition, the probability of success for any of our current or future drug candidates will depend on numerous factors, including competition, manufacturing capability and commercial viability. We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each drug candidate, as well as an assessment of each drug candidate’s commercial potential. General and Administrative Expenses General and administrative expenses consist primarily of employee-related expenses, including salaries, benefits and stock-based compensation expense, related to our executive, finance, business development and support functions. Other general and administrative expenses include costs associated with operating as a public company described below, travel expenses, conferences, professional fees for auditing, tax and legal services and facility-related costs. Other (Expenses) Income, Net Other (expense) income consists of interest income earned on our cash and cash equivalents maintained in money market funds and prior short-term investments that were maintained in U.S. treasury notes. 22 Results of Operations Comparison of the Three Months Ended March 31, 2021 and 2020 The following table summarizes the results of our operations for the periods indicated: Three Months Ended March 31, Three Months Ended March 31, 2021 2020 Change (in thousands) Revenue: License and other revenue $ 12,383 $ - $ 12,383 License revenue - related party 196,000 - 196,000 Total revenue 208,383 - 208,383 Operating expenses: Research and development $ 16,249 $ 14,625 $ 1,624 General and administrative 15,577 5,669 9,908 Total operating expenses 31,825 20,294 11,531 Income (loss) from operations 176,557 (20,294 ) 196,851 Other (expense) income, net (50 ) 264 (314 ) Income (loss) before provision for income taxes 176,508 (20,030 ) 196,538 Provision for income taxes 500 - 500 Net income (loss) $ 176,007 $ (20,030 ) $ 196,037 Revenue Total revenue was $208.4 million for the three months ended March 31, 2021. We did not generate any revenue during the three months ended March 31, 2020. The increase in total revenue was due to $12.4 million of revenue recorded in connection with the Angelini License Agreement and $196.0 million of revenue recorded in connection with the Takeda License and Termination Agreement. Research and Development Expenses Three Months Ended March 31, Three Months Ended March 31, 2021 2020 Change (in thousands) Preclinical and development expenses $ 11,136 $ 9,752 $ 1,384 Payroll and payroll-related expenses 3,917 3,922 (5 ) Other expenses 1,196 951 245 Total research and development $ 16,249 $ 14,625 $ 1,624 Research and development expenses were $16.2 million for the three months ended March 31, 2021 compared to $14.6 million for the three months ended March 31, 2020 . The increase of $1.6 million included a decrease in preclinical and development expenses for the clinical studies of OV101 and an increase in Takeda collaboration expenses related to OV935. During the three months ended March 31, 2021 total research and development expenses consisted of $11.1 million in preclinical and development expenses, including a credit of $2.6 million representing costs to be reimbursed to us from Takeda in respect of the Takeda collaboration, $3.9 million in payroll and payroll-related expenses, of which $0.5 million related to stock-based compensation, and $1.2 million in other expenses . During the three months ended March 31, 2020, total research and development expenses consisted of $9.8 million in preclinical and development expenses, including a credit of $0.4 million representing costs to be reimbursed to us from Takeda in respect of the Takeda collaboration, $3.9 million in payroll and payroll-related expenses, of which $0.6 million related to stock-based compensation, and $1.0 million in other expenses. General and Administrative Expenses Three Months Ended March 31, Three Months Ended March 31, 2021 2020 Change (in thousands) Payroll and payroll-related expenses $ 3,785 $ 2,780 $ 1,005 Legal and professional fees 10,753 1,932 8,821 General office expenses 1,039 958 81 Total general and administrative $ 15,577 $ 5,669 $ 9,907 23 General and administrative expenses were $15.6 million for the three months ended March 31, 2021 compared to $5.7 million for the three months ended March 31, 2020 . The increase of $9.9 million was primarily due to an increase in legal fees and professional fees of $8.8 million, which includes $8.2 million of one-time fees related to the Takeda License and Termination Agreement, an increase in payroll and payroll-related expenses of $1.0 million and an increase in general office expenses of $0.1 million. Other (Expense) Income, net Other expense was $0.1 million for the three months ended March 31, 2021. Other income was $0.3 million for the three months ended March 31, 2020. Liquidity and Capital Resources Overview As of March 31, 2021, we had total cash and cash equivalents of $233.1 million as compared to $72.0 million of cash and cash equivalents as of December 31, 2020. The $161.1 million increase in total cash and cash equivalents was due primarily to the one-time upfront payment of $196.0 million received as part of the Takeda License and Termination Agreement offset by operating expenses of $31.8 million for the three months ended March 31, 2021. In November 2020, we filed a new shelf registration statement on Form S-3 (Registration No. 333-250054) that allows us to sell up to an aggregate of $250.0 million of our common stock, preferred stock, debt securities and/or warrants (the “S-3 Registration Statement”), which includes a prospectus covering the issuance and sale of up to $75.0 million of common stock pursuant to an at-the-market (“ATM”) offering program. As of March 31, 2021, we had $250.0 million available under our S-3 Registration Statement, including $75.0 million available pursuant to our ATM program. Similar to other development stage biotechnology companies, we have generated limited revenue, which has been through the Angelini License Agreement. With the exception of the three months ended March 31, 2021, when we received the one-time upfront payment of $196.0 million as part of the Takeda License and Termination Agreement, we have incurred losses and experienced negative operating cash flows since our inception and anticipate that we will continue to incur losses for at least the next several years. We recorded net income of approximately $176.0 million and net losses of $20.0 million for the three months ended March 31, 2021 and 2020 , respectively. We expect to incur net losses in subsequent periods. As of March 31, 2021, we had an accumulated deficit of $118.2 million and working capital of $220.3 million. We believe that our existing cash and cash equivalents as of March 31, 2021 will be sufficient to fund our current operating plans through at least the next 12 months from the date of the filing of this Quarterly Report on Form 10-Q. We plan to finance our cash needs through either equity offerings, debt financings, collaborations, strategic alliances, or licensing agreements or a combination of any such transactions. To the extent that we raise additional capital through future equity offerings or debt financings, ownership interests may be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt and equity financings, 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. There can be no assurance that such financings will be obtained on terms acceptable to us, if at all. The ongoing COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of global financial markets. If the disruption persists and deepens, we could experience an inability to access additional capital, which could in the future negatively affect our operations. If we raise additional funds through collaborations, strategic alliances or licensing agreements with third parties for one or more of our current or future drug candidates, we may be required to relinquish valuable rights to our technologies, future revenue streams, research programs or drug candidates or to grant licenses on terms that may not be favorable to us. Our failure to raise capital as and when needed would have a material adverse effect on our financial condition and our ability to pursue our business strategy. Cash Flows The following table summarizes our cash flows for the periods indicated: Three Months Ended March 31, Three Months Ended March 31, 2021 2020 (in thousands) Net cash provided by (used in): Operating activities $ 160,899 $ (18,412 ) Investing activities (12 ) 3,836 Financing activities 130 16 Net increase (decrease) in cash and cash equivalents $ 161,017 $ (14,560 ) 24 Net Cash Provided by (Used in) Operating Activities Net cash provided by operating activities was $160.9 million for the three months ended March 31, 2021, which consisted of net income of $176.0 million offset by a net of $15.1 million of non-cash charges and indirect cash changes, primarily related to $1.3 million of stock-based compensation expense and $12.4 million of deferred revenue. Net cash used in operating activities was $18.4 million for the three months ended March 31, 2020, which consisted of a net loss of $20.0 million offset by a net of $1.6 million of non-cash charges and indirect cash changes, primarily related to $1.3 million of stock-based compensation expense. Net Cash (Used In) Provided by Investing Activities Net cash used in investing activities was $12,000 for the three months ended March 31, 2021, compared to $3.8 million of net cash provided by investing activities for the three months ended March 31, 2020. The change in net cash provided by investing activities was primarily due to the maturities of short-term investments during the three months ended March 31, 2020 compared to no investment activity during the three months ended March 31, 2021. Net Cash Provided by Financing Activities Net cash provided by financing activities of $0.1 million for the three months ended March 31, 2021 primarily due to proceeds purchases of shares under the 2017 employee stock purchase plan and the exercise of options. Net cash provided by financing activities of $16,000 for the three months ended March 31, 2020 was primarily due to purchases of shares under the 2017 employee stock purchase plan, offset by expenses related to our ATM program. Contractual Obligations and Commitments As of March 31, 2021, we had no material contractual obligations or commitments. We had no long-term debt or capital leases and no material non-cancelable purchase commitments with service providers, as we have generally contracted on a cancelable, purchase order basis. We excluded any potential contingent payments upon the achievement by us of clinical, regulatory and commercial events, as applicable, or royalty payments that we may be required to make under license agreements we have entered into with various entities pursuant to which we have in-licensed certain intellectual property as contractual obligations or commitments, including agreements with H. Lundbeck A/S and Northwestern. Pursuant to these license agreements, we have agreed to make milestone payments up to an aggregate of $194.3 million upon the achievement of certain development, regulatory and sales milestones. We excluded these contingent payments given that the timing, probability, and amount, if any, of such payments cannot be reasonably estimated at this time. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC. Emerging Growth Company Status and Smaller Reporting Company Status We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and may remain an emerging growth company until December 31, 2022. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include: • reduced disclosure about our executive compensation arrangements; • no non-binding stockholder advisory votes on executive compensation or golden parachute arrangements; and • exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting. We have taken advantage of reduced reporting requirements in this Quarterly Report on Form 10-Q and may continue to do so until such time that we are no longer an emerging growth company. We will remain an “emerging growth company” until the earliest of (a) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more, (b) December 31, 2022, the last day of the fiscal year following the fifth anniversary of the completion of the our IPO, (c) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years or (d) the date on which we are deemed to be a large accelerated filer under the rules of the SEC. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period for complying with new or revised accounting standards. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies. In addition, we are also a smaller reporting company as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as (i) our voting and non-voting common stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter or (ii) our annual revenue is less than $100.0 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter. 25 Critical Accounting Policies and Estimates Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the revenue and expenses incurred during the reported periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation. We base our estimates on historical experience and on various other factors that we believe are 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 apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions. During the three months ended March 31, 2021, there were no material changes to our critical accounting policies as reported for the year ended December 31, 2020 as part of our Annual Report on Form 10-K, which was filed with the SEC on March 15, 2021. In addition, see Note 2 of our Condensed Financial Statements under the heading “Recent Accounting Pronouncements” for new accounting pronouncements or changes to the accounting pronouncements during the three months ended March 31, 2021.