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 our unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q and the audited financial information and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the Securities and Exchange Commission (“SEC”) on March 13, 2023. 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 and the timing of selected events may differ materially from those described in or implied by these forward-looking statements as a result of many factors, including those set forth under the section titled “Risk Factors” in Part II, Item 1A. You should carefully read the “Risk Factors” section of this Quarterly Report on Form 10-Q to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled “Special Note Regarding Forward-Looking Statements.” Overview We are a biopharmaceutical company committed to developing medicines that transform the lives of people with epilepsies and seizure-related 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 epilepsies and seizure-related 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. We have set out to be a leader in the field, and have developed a differentiated pipeline containing three 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. 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, as applicable. Our cohesive focus in rare 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. We have historically funded our business primarily through the sale of our capital stock. Through June 30, 2023, we have raised net proceeds of $275.4 million from the sale of our convertible preferred stock and our common stock. We have also, in previous periods, generated revenue through license and collaboration agreements. As of June 30, 2023, we had $96.5 million in cash, cash equivalents and marketable securities. As of June 30, 2023, we had an accumulated deficit of $251.3 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; • 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; • implement operational, financial and management systems; and • attract, hire and retain additional administrative, clinical, regulatory, manufacturing, commercial and scientific personnel. 23 Table of Contents The following chart sets forth the status and mechanism of action of our drug candidates: In the first quarter of 2023, 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. In the fourth quarter of 2022, the FDA cleared our investigational new drug application for OV329, a GABA-aminotransferase inhibitor, and we subsequently initiated a Phase 1 trial in healthy volunteers. Significant Risks and Uncertainties The global economic slowdown, the overall disruption of global healthcare systems and other risks and uncertainties associated with bank failures, public health crises and the ongoing war between Russia and Ukraine may have a material adverse effect on our business, financial condition, results of operations and growth prospects. The resulting high inflation rates may materially affect our business and corresponding financial position and cash flows. Inflationary factors, such as increases in the cost of our clinical trial materials and supplies, interest rates and overhead costs may adversely affect our operating results. Rising interest rates also present a recent challenge impacting the U.S. economy and could make it more difficult for us to obtain traditional financing on acceptable terms, if at all, in the future. Furthermore, economic conditions have produced downward pressure on share prices. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, we may experience increases in the near future (especially if inflation rates remain high or begin to rise again) on our operating costs, including our labor costs and research and development costs, due to supply chain constraints, the global geopolitical tension as a result of the ongoing war between Russia and Ukraine, worsening global macroeconomic conditions and employee availability and wage increases, which may result in additional stress on our working capital resources. In addition, we are subject to other challenges and risks specific to our business and our ability to execute on our strategy, as well as risks and uncertainties common to companies in the pharmaceutical industry with development and commercial operations, including, without limitation, risks and uncertainties associated with: identifying, acquiring or in-licensing products or product candidates; obtaining regulatory approval of product candidates; pharmaceutical product development and the inherent uncertainty of clinical success; and the challenges of protecting and enhancing our intellectual property rights; complying with applicable regulatory requirements. Financial Operations Overview Revenue We have generated revenue under various licensing 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 24 Table of Contents 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 and payments under licensing agreements, research agreements and collaboration 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 for the foreseeable future 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, legal, business development and support functions. Other general and administrative expenses include costs associated with operating as a public company, travel expenses, conferences, and professional fees for auditing, tax and legal services. 25 Table of Contents Other Income (Expense), net Other income (expense), net primarily consists of unrealized gains (losses) on long-term equity investments and interest income and accretion of discount on investments in marketable securities. Results of Operations Comparison of the Three Months Ended June 30, 2023 and 2022 The following table summarizes the results of our operations for the periods indicated: Three Months Ended June 30, 2023 Three Months Ended June 30, 2022 Change $ (in thousands) Revenue: License and other revenue $ 75 $ — $ 75 Total revenue 75 — 75 Operating expenses: Research and development 5,999 6,047 (48) General and administrative 8,248 8,258 (10) Total operating expenses 14,247 14,304 (57) Loss from operations (14,172) (14,304) 132 Other income (expense), net 1,764 (284) 2,048 Loss before provision for income taxes (12,408) (14,588) 2,180 Provision for income taxes — — — Net loss $ (12,408) $ (14,588) $ 2,180 Revenue Revenue of $75,000 was generated in the three months ended June 30, 2023. No revenue was recognized in the three months ended June 30, 2022. Research and Development Expenses Three Months Ended June 30, 2023 Three Months Ended June 30, 2022 Change $ (in thousands) Preclinical and development expenses $ 2,623 $ 2,643 $ (20) Payroll and payroll-related expenses 2,547 2,330 217 Other expenses 829 1,074 (245) Total research and development $ 5,999 $ 6,047 $ (48) During the three months ended June 30, 2023 and 2022, total research and development expenses were $6.0 million. Payroll and related expenses increased with the additions of new management hires. Other expense decreased due to cost reduction measures. 26 Table of Contents General and Administrative Expenses Three Months Ended June 30, 2023 Three Months Ended June 30, 2022 Change $ (in thousands) Payroll and payroll-related expenses $ 5,030 $ 3,860 $ 1,170 Legal and professional fees 1,616 2,560 (944) General office expenses 1,602 1,837 (235) Total general and administrative $ 8,248 $ 8,258 $ (10) General and administrative expenses were $8.2 million and $8.3 million for the three months ended June 30, 2023 and 2022, respectively. The increase in payroll and payroll-related expenses between the periods was primarily due to $1.1 million in severance costs recognized during the three months ended June 30, 2023, partially offset by a decrease in legal and professional fees relating to projects during the same period in 2022. Other Income (Expense), net Other income (expense), net for the three months ended June 30, 2023 and 2022 includes unrealized gain (loss) on long-term equity investments and interest earned and accretion of discount on marketable securities. Other income, net for the three months ended June 30, 2023 was $1.8 million compared to other expense of $0.3 million for the same period in 2022. The increase of $2.0 million is primarily due to interest and accretion on investments in marketable securities. Comparison of the Six Months Ended June 30, 2023 and 2022 The following table summarizes the results of our operations for the periods indicated: Six Months Ended June 30, 2023 Six Months Ended June 30, 2022 Change $ (in thousands) Revenue: License and other revenue $ 141 $ 1,445 $ (1,304) Total revenue 141 1,445 (1,304) Operating expenses: Research and development 12,613 13,879 (1,266) General and administrative 16,592 18,138 (1,546) Total operating expenses 29,205 32,017 (2,812) Loss from operations (29,064) (30,571) 1,508 Other income (expense), net 3,300 (125) 3,425 Loss before provision for income taxes (25,764) (30,697) 4,933 Provision for income taxes — — — Net loss $ (25,764) $ (30,697) $ 4,933 Revenue Revenue of $141,160 was generated in the six months ended June 30, 2023, compared to revenue of $1.4 million recognized in the same period in 2022 relating to licensing agreements. 27 Table of Contents Research and Development Expenses Six Months Ended June 30, 2023 Six Months Ended June 30, 2022 Change $ (in thousands) Preclinical and development expenses $ 5,605 $ 4,724 $ 881 Payroll and payroll-related expenses 5,401 7,266 (1,865) Other expenses 1,607 1,889 (282) Total research and development $ 12,613 $ 13,879 $ (1,266) During the six months ended June 30, 2023, total research and development expenses were $12.6 million compared to $13.9 million for the same period in 2022. The decrease of $1.3 million was primarily due to a $1.9 million reduction in payroll and payroll-related expenses following an organizational restructuring in 2022, and a reduction in severance costs of $0.1 million compared to $1.3 million for the same period in 2022. The decrease in payroll and payroll-related expenses was offset by a $0.8 million increase in preclinical and development expenses relating to the Phase 1 clinical trial for OV329. General and Administrative Expenses Six Months Ended June 30, 2023 Six Months Ended June 30, 2022 Change $ (in thousands) Payroll and payroll-related expenses $ 9,777 $ 8,538 $ 1,239 Legal and professional fees 3,496 5,028 (1,532) General office expenses 3,319 4,572 (1,253) Total general and administrative $ 16,592 $ 18,138 $ (1,546) General and administrative expenses were $16.6 million for the six months ended June 30, 2023 compared to $18.1 million for the same period in 2022. The decrease of $1.5 million was primarily due to a reduction in legal and professional fees of $1.5 million and a decrease in general office expenses of $1.3 million, partially offset by an increase in payroll and payroll-related expenses of $1.2 million. Severance costs of $1.6 million were recognized during the six months ended June 30, 2023 compared to $0.7 million for the same period in 2022. Other Income (Expense), net Other income (expense), net for the six months ended June 30, 2023 results from unrealized gain (loss) on long-term equity investments and interest earned and accretion of discount on marketable securities. Other income, net for the six months ended June 30, 2023 was $3.3 million compared to other expense of $0.1 million for the same period in 2022. The increase of $3.4 million is primarily due to interest and accretion on investments in marketable securities. Liquidity and Capital Resources Overview As of June 30, 2023, we had total cash, cash equivalents and marketable securities of $96.5 million as compared to $129.0 million as of December 31, 2022. We believe that our cash, cash equivalents and marketable securities as of June 30, 2023 will fund our projected operating expenses and capital expenditure requirements for at least 12 months from the issuance of this Quarterly Report on Form 10-Q. Similar to other development-stage biotechnology companies, we have generated limited revenue, which has been through various license and collaboration agreements. With the exception of the three months ended March 31, 2021, when we received a one-time upfront payment of $196.0 million as part of the RLT Agreement, we have incurred losses and experienced negative operating cash flows since our inception and anticipate that we will continue to incur losses and experience negative operating cash flows for at least the next several years. We recorded net losses of approximately $12.4 million and $14.6 million for the three months ended June 30, 2023 and 2022, respectively. As of June 30, 2023, we had an accumulated deficit of $251.3 million and working capital of $92.0 million. 28 Table of Contents Future Funding Requirements We believe that our available cash, and cash equivalents and marketable securities are sufficient to fund existing and planned cash requirements for at least the next 12 months. 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, 2023, 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. In addition, we cannot estimate the timing of any potential 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 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. We excluded these contingent payments from the condensed consolidated 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 19,000 square feet of office space at Hudson Commons in New York, New York. 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 commenced January 10, 2023, and will continue for 10 years 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 our condensed consolidated balance sheets. Payment obligations under the lease agreement include approximately $1.9 million in the 12 months subsequent to June 30, 2023 and approximately $22.5 million over the remaining term of the agreement. For additional information see Note 5 to our condensed consolidated financial statements under the heading 'Leases.' We have no products approved for commercial sale and have not generated any revenue 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. Additionally, inflation rates have increased recently to levels not seen in decades, contributing to the ongoing economic slowdown. Increased inflation may result in increased operating costs (including labor costs) and may affect our operating budgets. In response to concerns about inflation, the U.S. Federal Reserve has raised, and is expected to further raise, interest rates. Increases in interest rates, especially if coupled with reduced government spending and volatility in financial markets, may further increase economic uncertainty and heighten these risks. If the disruptions and slowdown deepen or persist, we may not be able to access additional capital on favorable terms, or at all, which could in the future negatively affect our ability to pursue our business strategy. 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. See “Risk Factors” for additional risks associated with our capital requirements. 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 (“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, 2023, we had up to $250.0 million available under our S-3 Registration Statement, including up to $75.0 million available pursuant to our ATM offering program. 29 Table of Contents Cash Flows The following table summarizes our cash flows for the periods indicated: Six Months Ended June 30, 2023 Six Months Ended June 30, 2022 (in thousands) Net cash (used in) provided by: Operating activities $ (23,818) $ (33,375) Investing activities 50,295 (81,753) Financing activities 278 143 Net increase (decrease) in cash, cash equivalents, and restricted cash $ 26,755 $ (114,986) Net Cash Used In Operating Activities Net cash used in operating activities was $23.8 million for the six months ended June 30, 2023, which consisted of a net loss of $25.8 million offset by a net of $2.0 million of non-cash charges and indirect cash charges, primarily related to $3.9 million of stock-based compensation expense. Net cash used in operating activities was $33.4 million for the six months ended June 30, 2022, which consisted of net loss of $30.7 million offset by a net of $3.1 million in stock-based compensation expense, $0.1 million, net, of other noncash transactions and charges and decreases in accounts payable and accrued expenses of $5.5 million. Net Cash Provided By (Used In) Investing Activities Net cash provided by investing activities was $50.3 million for the six months ended June 30, 2023, which was due to sales/maturities of marketable securities during the period. Net cash used in investing activities was $81.8 million for the six months ended June 30, 2022, which was due to purchases of marketable securities. Net Cash Provided By Financing Activities Net cash provided by financing activities during the six months ended June 30, 2023 and 2022 resulted from proceeds from the exercise of stock options under the 2017 equity incentive plan and purchases of shares under the 2017 employee stock purchase plan. Smaller Reporting Company Status We are a smaller reporting company as defined in the Exchange Act. 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. As a smaller reporting company, we are permitted to comply with scaled-back disclosure obligations in our SEC filings compared to other issuers, including with respect to disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We have elected to adopt the accommodations available to smaller reporting companies, including but not limited to: • reduced disclosure obligations regarding our executive compensation arrangements; and • being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure . 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 30 Table of Contents 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 and six months ended June 30, 2023, there were no material changes to our critical accounting policies as reported for the year ended December 31, 2022 as part of our Annual Report on Form 10-K, which was filed with the SEC on March 13, 2023. In addition, see Note 2 of our Condensed Consolidated Financial Statements under the heading “Recent Accounting Pronouncements” for new accounting pronouncements or changes to the accounting pronouncements during the three and six months ended June 30, 2023.