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, 2021, which was filed with the Securities and Exchange Commission (“SEC”) on March 15, 2022. 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 drug discovery and development for epilepsies and rare CNS disorders in a manner that is scientifically driven, patient focused and is coupled with an integrated and disciplined approach to research, clinical development and business development. Our team has significant experience and understanding of rare epilepsy and neurological conditions, and we continue to build insight into the way the different molecular mechanisms and pathways underlying these disorders impact the symptoms patients suffer. Ovid has set out to be a leader in the field, and has developed a differentiated pipeline containing novel mechanisms of action to target different causes of epilepsies and seizures. Our knowledge of epilepsy disease biology and pathology, which was acquired through our small molecule development programs, now contributes to our pursuit of additional relevant genetic targets and molecular pathways that are the cause of seizures. Over time, we have built a scalable scientific platform and efficient development capabilities in epilepsies that focus on clear, clinical endpoints. We are initially pursuing therapeutic assets for rare disorders as they can leverage accelerated development programs. If successfully developed and marketed in rare conditions, we intend to explore these assets for broader neurologic indications. Our cohesive focus in epilepsies and seizures reinforces our belief that we can develop and produce multiple novel medicines, scale our infrastructure, and thereby succeed in our mission. 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. The following chart sets forth the status and mechanism of action of our drug candidates: We have historically funded our business primarily through the sale of capital stock. Through June 30, 2022, we have raised net proceeds of $275.4 million from the sale of our convertible preferred stock and our common stock. As of June 30, 2022, we had $152.4 million in cash, cash equivalents and marketable securities. We have also, in previous periods, generated revenue through our license and collaboration agreements. In July 2022, Takeda provided a corporate update in which it reiterated that the anticipated timeline for regulatory filing of the two pivotal Phase 3 trials evaluating soticlestat for Lennox-Gastaut and Dravet syndromes are expected in Takeda’s 2024 fiscal year. As of June 30, 2022, we had an accumulated deficit of $202.1 million. We expect to continue to incur significant expenses and 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 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; 21 Table of Contents • 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; • 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; and • implement operational, financial and management systems; and attract, hire and retain additional administrative, clinical, regulatory, manufacturing, commercial and scientific personnel. 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 in a hybrid environment, productively at home or in the office, and by continuing to abide by travel restrictions issued by federal, state and local governments. Our hybrid work environment policy remains fluid as federal, state and local guidelines, rules and regulations continue to change and evolve. Financial Operations Overview Revenue We have generated revenue under various license and collaboration agreements. We have not generated any revenue from commercial drug sales and we do not expect to generate any further revenue unless or until we obtain regulatory approval and commercialize one or more of our current or future drug candidates. In the future, we may also seek to 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. 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; 22 Table of Contents • 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, and professional fees for auditing, tax and legal services. Other (Expense) Income, Net Other (expense) income primarily consists of unrealized gains (losses) on long-term equity investments and interest income earned on our cash and cash equivalents maintained in money market funds and marketable securities. Reclassifications Certain prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations. Results of Operations Comparison of the Three Months Ended June 30, 2022 and 2021, respectively The following table summarizes the results of our operations for the periods indicated: Three Months Ended June 30, Three Months Ended June 30, Change 2022 2021 (in thousands) Revenue: License and other revenue $ — $ — $ — License revenue - related party — — — Total revenue — — — Operating expenses: Research and development 6,047 7,684 (1,637) General and administrative 8,258 6,629 1,628 Total operating expenses 14,304 14,313 (9) Loss from operations (14,304) (14,313) 9 Other (expense) income, net (284) (3) (282) Loss before provision for income taxes (14,589) (14,315) (273) Provision for income taxes — 1,473 (1,473) Net loss $ (14,589) $ (15,788) $ 1,200 Revenue No revenue was generated in the three months ended June 30, 2022 and 2021. 23 Table of Contents Research and Development Expenses Three Months Ended June 30, Three Months Ended June 30, Change 2022 2021 (in thousands) Preclinical and development expense $ 2,643 $ 3,006 $ (362) Payroll and payroll-related expenses 2,330 3,831 (1,502) Other expenses 1,074 847 227 Total research and development $ 6,047 $ 7,684 $ (1,637) During the three months ended June 30, 2022, total research and development expenses were $6.0 million compared to $7.7 million for the same period in 2021. The decrease of $1.6 million was primarily due to the decision to discontinue the clinical study of OV101 in Angelman syndrome and Fragile X syndrome and the termination of the Takeda collaboration agreement for OV935. General and Administrative Expenses Three Months Ended June 30, Three Months Ended June 30, Change 2022 2021 (in thousands) Payroll and payroll-related expenses $ 3,860 $ 3,640 $ 220 Legal and professional fees 2,560 2,074 487 General office expenses 1,837 916 921 Total general and administrative $ 8,258 $ 6,629 $ 1,628 General and administrative expenses were $8.3 million for the three months ended June 30, 2022 compared to $6.6 million for the same period in 2021. The increase of $1.6 million was primarily due to straight-line rent expense recognized of approximately $0.5 million, strategic consulting fees of approximately $0.6 million, and increased legal and accounting fees relating to business development and compliance of approximately $0.2 million. Provision for Income Taxes There was no tax provision recorded for the three months ended June 30, 2022. The tax provision recorded for the three months ended June 30, 2021 was $1.5 million, which related to licensing revenue recognized in the first quarter of 2021. Other (Expense) Income, net Other (expense) income, net for the three months ended June 30, 2022 includes unrealized gain (loss) on long-term equity investments and interest earned on marketable securities, and included interest income and other nominal items for the three months ended June 30, 2021. 24 Table of Contents Comparison of the Six Months Ended June 30, 2022 and 2021, respectively The following table summarizes the results of our operations for the periods indicated: Six Months Ended June 30, Six Months Ended June 30, 2022 2021 Change (in thousands) Revenue: License and other revenue $ 1,445 $ 12,383 $ (10,937) License revenue - related party — 196,000 (196,000) Total revenue 1,445 208,383 (206,937) Operating expenses: Research and development 13,879 23,933 (10,054) General and administrative 18,138 22,206 (4,068) Total operating expenses 32,017 46,138 (14,122) (Loss) income from operations (30,571) 162,244 (192,816) Other (expense) income, net (125) (52) (73) (Loss) income before provision for income taxes (30,696) 162,192 (192,889) Provision for income taxes — 1,973 (1,973) Net (loss) income $ (30,696) $ 160,219 $ (190,915) Revenue Total revenue was $1.4 million during the six months ended June 30, 2022, recorded in connection with the Marinus and Healx License Agreements. Total revenue was $208.4 million for the six months ended June 30, 2021, recorded in connection with the Takeda and Angelini License Agreements Research and Development Expenses Six Months Ended June 30, Six Months Ended June 30, Change 2022 2021 (in thousands) Preclinical and development expense $ 4,724 $ 14,141 $ (9,417) Payroll and payroll-related expenses 7,266 7,746 (481) Other expenses 1,889 2,045 (156) Total research and development $ 13,879 $ 23,932 $ (10,054) During the six months ended June 30, 2022, total research and development expenses were $13.9 million compared to $23.9 million for the same period in 2021. The decrease of $10.0 million was primarily due to the decision to discontinue the clinical study of OV101 in Angelman syndrome and Fragile X syndrome and the termination of the Takeda collaboration agreement for OV935. General and Administrative Expenses Six Months Ended June 30, Six Months Ended June 30, Change 2022 2021 (in thousands) Payroll and payroll-related expenses $ 8,538 $ 7,425 $ 1,113 Legal and professional fees 5,028 12,816 (7,788) General office expenses 4,572 1,965 2,607 Total general and administrative $ 18,138 $ 22,206 $ (4,068) General and administrative expenses were $18.1 million for the six months ended June 30, 2022 compared to $22.2 million for the same period in 2021. The decrease of $4.1 million was primarily due to the discontinuation of certain studies and programs detailed above, as well as reduced administrative headcount. 25 Table of Contents Provision for Income Taxes There was no tax provision recorded for the six months ended June 30, 2022. The tax provision recorded for the six months ended June 30, 2021 was $2.0 million, which related to licensing revenue recognized in the first quarter of 2021. Other (Expense) Income, net Other (expense) income for the six months ended June 30, 2022 includes unrealized gain (loss) on long-term equity investments and interest earned on marketable securities, and included interest income and other nominal items for the six months ended June 30, 2021. Liquidity and Capital Resources Overview As of June 30, 2022, we had total cash, cash equivalents and marketable securities of $152.4 million as compared to $187.8 million as of December 31, 2021. The $35.4 million decrease was due to payments relating to licensing and other agreements of $5.0 million, and operating expenses totaling $32.0 million for the six months ended June 30, 2022. Similar to other development stage biotechnology companies, we have generated limited revenue, which has been through the Takeda License and Termination Agreement and 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 the next several years. We recorded net losses of approximately $14.6 million and $15.8 million for the three months ended June 30, 2022 and 2021, respectively. As of June 30, 2022, we had an accumulated deficit of $202.1 million and working capital of $146.9 million. Future Funding Requirements We believe that our cash, cash equivalents and marketable securities as of June 30, 2022 are sufficient to fund existing and planned cash requirements through at least the next 12 months from the date of filing of this Quarterly Report on Form 10-Q. Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, third-party clinical research and development services, clinical costs, legal and other regulatory expenses and general overhead costs. We have based our estimates on assumptions that may prove to be incorrect, and we could use our capital resources sooner than we currently expect. Additionally, the process of testing drug candidates in clinical trials is costly, and the timing of progress in these trials is uncertain. We cannot estimate the actual amounts necessary to successfully complete the development and commercialization of our product candidates or whether, or when, we may achieve profitability. As of June 30, 2022, we had no long-term debt and no material non-cancelable purchase commitments with service providers, as we have generally contracted on a cancellable, purchase order basis. We cannot estimate whether we will receive or the timing of 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 AstraZeneca AB, H. Lundbeck A/S, and Northwestern. Pursuant to these license agreements, we have agreed to make milestone payments up to an aggregate of $279.3 million upon the achievement of certain development, regulatory and sales milestones. These potential contingent payments have not been recognized in these financial statements, given that the timing, probability, and amount, if any, of such payments cannot be reasonably estimated at this time. In September 2021, we entered into a 10-year lease agreement for our corporate headquarters with a term commencing March 10, 2022, for approximately 19,143 square feet of office space at Hudson Commons in New York, NY. The lease provides for monthly rental payments over the lease term. The base rent under the lease is currently $2.3 million per year. Rent payments commence 10 months following the commencement date of the lease, or January 10, 2023, and continue for 10 years following the rent commencement date. Rent also includes two months of free rent in the 6th and 7th months following the rent commencement date. We issued a letter of credit in the amount of $1.9 million in association with the execution of the lease agreement, which is reflected as restricted cash on the balance sheet. Payment obligations under the lease agreement include approximately $1.1 million in the 12 months subsequent to June 30, 2022 and approximately $23.5 million over the term of the agreement. For additional information see Note 5 of our condensed consolidated financial statements under the heading "Leases". We have no products approved for commercial sale and have not generated any product revenues from product sales to date. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings and additional funding from license and collaboration arrangements. Except for any obligations of our collaborators to reimburse us for research and development expenses or to make milestone or royalty payments under our agreements with them, we will not have any committed external source of liquidity. 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 26 Table of Contents 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. At-the-Market Offering Program In November 2020, we filed a 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 June 30, 2022, we had $250.0 million available under our S-3 Registration Statement, including $75.0 million available pursuant to our ATM program. Cash Flows The following table summarizes our cash flows for the periods indicated: Six Months Ended June 30, 2022 Six Months Ended June 30, 2021 (in thousands) Net cash (used in) provided by: Operating activities $ (33,375) $ 141,482 Investing activities (81,753) (1,595) Financing activities 143 246 Net (decrease) increase in cash and cash equivalents $ (114,986) $ 140,133 Net Cash (Used In) Provided By Operating Activities Net cash used in operating activities was $33.4 million for the six months ended June 30, 2022, which consisted of a net loss of $30.7 million offset by $3.1 million in stock-based compensation expense, $0.1 million, net, of other noncash transactions and charges, and a decrease in accounts payable and accrued expenses of $5.5 million. Net cash provided by operating activities was $145.1 million for the six months ended June 30, 2021, which resulted from an upfront payment pursuant to the Takeda License and Termination Agreement, offset by operating expenses for the period. Net Cash Used In Investing Activities Net cash used in investing activities was $81.8 million for the six months ended June 30, 2022, which was primarily due to the purchases of marketable securities during the period. A nominal amount was used in investing activities for the six months ended June 30, 2021. Net Cash Provided By Financing Activities Net cash provided by financing activities during the six months ended June 30, 2022 was primarily due to the exercise of options. Net cash provided by financing activities of $0.1 million for the six months ended June 30, 2021 was primarily due to proceeds from exercise of options and purchases of shares under the 2017 employee stock purchase plan. 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. We have taken advantage of reduced reporting requirements in this Quarterly Report on Form 10-Q and will continue to do so until December 31, 2022, the date on which we cease to be an emerging growth company. In addition, we will continue to qualify as smaller reporting company as defined in the Exchange Act 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, including: • reduced disclosure about our executive compensation arrangements; and • to provide audited financial statements for two fiscal years, in contrast to other reporting companies, which must provide audited financial statements for three fiscal years. As of June 30, 2022, in addition to being classified as a “smaller reporting company,” we will be classified as an “accelerated filer” pursuant to SEC rules and will be required to provide, among other items, an auditor’s attestation of management’s assessment of internal control over financial reporting required under Sarbanes-Oxley Act Section 404(b) beginning with our annual report for the year ending December 31, 2022. 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 27 Table of Contents 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 six months ended June 30, 2022, there were no material changes to our critical accounting policies as reported for the year ended December 31, 2021 as part of our Annual Report on Form 10-K, which was filed with the SEC on March 15, 2022. 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 six months ended June 30, 2022.