PLIANT THERAPEUTICS, INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis is intended to provide material information around events and uncertainties known to management relevant to an assessment of the financial condition and results of operations of the Company and should therefore be read in conjunction with our audited Financial Statements and the accompanying Notes to Financial Statements and other disclosures included in this Annual Report on Form 10-K (including the disclosures under Part I, Item 1A. Risk Factors) where other material events and uncertainties not otherwise discussed below are disclosed. Certain amounts and percentages herein may not sum or recalculate due to rounding. The following discussion and analysis does not address certain items regarding the year ended December 31, 2022. Discussion and analysis of 2022 and year-to-year comparisons between 2023 and 2022 that are not included in this Report can be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 202 3 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC" on February 27, 2024). In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate we have conducted exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. 72 Overview We are a late-stage biopharmaceutical company focused on discovering and developing novel therapies for the treatment of fibrosis and related diseases. Our initial focus is on treating fibrosis by inhibiting integrin-mediated activation of TGF-β. We have applied our deep understanding of fibrosis biology, along with our medicinal chemistry and translational medicine expertise to develop a set of proprietary tools designed to discover and de-risk product candidates quickly and efficiently. Our wholly owned lead product candidate, bexotegrast, is an oral, small molecule, dual selective inhibitor of αvβ6 and αvβ1 integrins that we are developing for the treatment of idiopathic pulmonary fibrosis, or IPF. We have recently discontinued BEACON-IPF trial, a global Phase 2b trial in patients with idiopathic pulmonary fibrosis (IPF). While an imbalance in unadjudicated IPF-related adverse events between the treatment and placebo groups led to the discontinuation of the trial, early evidence of efficacy on the forced vital capacity (FVC) endpoint was also observed. The Company plans to analyze the complete data from the BEACON-IPF trial and evaluate next steps for bexotegrast’s development. In January 2023, we received United States Food and Drug Administration, or FDA, clearance of an investigational new drug application, or IND, for PLN-101095, a small molecule, dual selective inhibitor of integrins αvβ8 and αvβ1 for the treatment of solid tumors that are resistant to immune checkpoint inhibitors. We are currently dosing the fourth of five dose cohorts in a Phase 1 open-label dose-escalation trial of PLN-101095 as monotherapy and in combination with pembrolizumab in patients with solid tumors that are resistant to immune checkpoint inhibitors. Preliminary data from cohorts one through three is expected in the first quarter of 2025. Our Phase 1-ready program PLN-101325, is in development for treatment of muscular dystrophies, including Duchenne muscular dystrophy. PLN-101325 is a monoclonal antibody designed to act as an allosteric agonist of integrin α7β1. PLN-101325 has received a clinical trial approval (CTA) in Australia. We have also developed PLN-1474, an oral, small molecule selective inhibitor of αvß1 for the treatment of liver fibrosis associated with nonalcoholic steatohepatitis, or MASH. Global rights to PLN-1474, licensed to Novartis in 2019, were returned to Pliant in 2023 upon termination of our collaboration and license agreement. Recent Events Bexotegrast Highlights • BEACON-IPF discontinued following recommendation from expanded data safety monitoring board (DSMB). Following a prespecified data review and recommendation by the trial’s independent DSMB, as well as a secondary review and recommendation by an outside expert panel, Pliant has discontinued the BEACON-IPF Phase 2b trial.While an imbalance in unadjudicated IPF-related adverse events between the treatment and placebo groups led to the discontinuation of the trial, early evidence of efficacy on the forced vital capacity (FVC) endpoint was also observed. The Company plans to analyze the complete data from the BEACON-IPF trial and evaluate next steps for bexotegrast’s development. BEACON-IPF is a 52-week, multinational, randomized, dose-ranging, double-blind, placebo-controlled trial evaluating bexotegrast at once-daily doses of 160 mg or 320 mg in patients with idiopathic pulmonary fibrosis (IPF). Oncology Program • Phase 1 trial of PLN-101095 in solid tumors continues to enroll, with interim data expected in the first quarter 2025. This is a Phase 1 open label trial of PLN-101095, an oral, small molecule, dual selective inhibitor of αvβ8 and αvβ1 integrins designed to block TGF-β activation in the tumor microenvironment. The trial is currently dosing the fourth of five planned dose cohorts in a Phase 1 open label dose-escalation trial of PLN-101095 as monotherapy and in combination with pembrolizumab in patients with solid tumors that are resistant to immune checkpoint inhibitors. Interim data from the first three cohorts is expected in the first quarter of 2025. Neuromuscular Program • PLN-101325 for treatment of muscular dystrophies. PLN-101325 is a monoclonal antibody that acts as an allosteric agonist of integrin α7β1, currently in development for treatment of muscular dystrophies. PLN-101325 is Phase 1 ready with clinical trial approval (CTA) open in Australia. Corporate Highlights • Appointment of Delphine Imbert, Ph.D. as Chief Technical Officer. Dr. Imbert brings 25 years of product development, process optimization and manufacturing experience across multiple drug modalities. Most recently, Dr. Imbert served as Senior Vice President of CMC and Technical Operations at Chinook Therapeutics. Since inception, we have had significant operating losses. Our net loss was $210.3 million, $161.3 million and $123.3 million for the years ended December 31, 2024, 2023 and 2022, respectively. As of December 31, 2024, we had an 73 accumulated deficit of $710.1 million and cash, cash equivalents, restricted cash and short-term investments of $357.2 million. We expect to continue to incur net losses for the foreseeable future, and we expect our research and development expenses, general and administrative expenses, and capital expenditures will increase in connection with our ongoing activities, as we: • perform research and development activities to identify and develop product candidates; • advance product candidates into and through clinical development; • require the manufacture of supplies to support research and development, preclinical studies and clinical trials; • seek regulatory approvals for any product candidates that successfully complete clinical trials; • expand our operational, financial and management systems and increase personnel to support our clinical development, manufacturing and commercialization efforts and our operations as a public company; • maintain, expand and protect our intellectual property portfolio; and • invest in or in-license other technologies or product candidates. Financial Operations Overview Revenue We have not generated any revenue from product sales and do not expect to do so in the near future. Our revenue to date is derived from a Collaboration and License Agreement with Novartis, or the "Novartis Agreement," that was executed in 2019. The Novartis Agreement was for the development and commercialization of PLN-1474 and up to three additional integrin research targets. Under the terms of the Novartis Agreement, we received an upfront license fee payment of $50.0 million for the worldwide, exclusive license to PLN-1474 and an additional $29.0 million upon the achievement of specified research and development milestones. Novartis discontinued clinical development in MASH and, as a result, discontinued development of PLN-1474. In February 2023, Novartis issued a termination notice for the collaboration and license agreement, and returned global rights to Pliant for PLN-1474. Following termination of the Novartis Agreement, we were no longer eligible to receive additional milestone or royalty payments under the arrangement, however, we continued to earn research and development services revenues through the effective termination date of April 18, 2023. Revenues for the years ended December 31, 2024, 2023 and 2022 were nil, $1.6 million and $9.7 million respectively. Operating Expenses Research and Development Our research and development expenses consist of expenses incurred in connection with the development of our product candidates. Research and development expenses include: • employee-related expenses, which include salaries, benefits and stock-based compensation for our research and development personnel; • expenses incurred under agreements with third-party contract organizations for pre-clinical studies, clinical trials and consultants that conduct research and development activities on our behalf; • costs associated with the manufacture of supplies to support research and development, preclinical studies and clinical trials; • depreciation of laboratory equipment and costs of equipment and supplies; • facilities expenses, which include expenses for rent and other facility related costs; and • other expenses and other allocations associated with research and development The following table summarizes our research and development expenses for the years ended December 31, 2024, 2023 and 2022 (in thousands): 74 Year Ended December 31, 2024 2023 2022 Employee-related expenses $ 49,597 $ 46,658 $ 30,457 Outside and consulting services for preclinical studies and research and development activities by third party contract organizations 16,529 15,948 25,402 Clinical trials expenses 80,596 49,252 26,032 Depreciation of lab equipment and costs of equipment and supplies 6,717 5,588 5,854 Facilities expenses 7,776 4,288 3,757 Other expenses and other allocations 8,095 6,063 5,434 Total research and development expenses $ 169,310 $ 127,797 $ 96,936 We expense all research and development costs in the periods in which they are incurred. We do not allocate our internal costs by product candidates or by preclinical programs as these are in early stages of clinical trials or development, and any such allocation would involve significant estimates and judgments and, accordingly, would be imprecise. Where appropriate, we allocate our third-party research and development expense by product candidate or preclinical program. These expenses primarily relate to outside consultants, clinical research organizations, contract manufacturing organization. When we refer to the research and development expenses associated with a specific product candidate or preclinical program, these refer exclusively to the allocated third-party expenses associated with that product candidate. Due to the discontinuation of the BEACON-IPF Phase 2b/3 trial in IPF, we expect research and development expenses to decrease in the near term as we curtail spending on the BEACON-IPF trial. While we plan to analyze data from the BEACON-IPF trial and evaluate next steps for bexotegrast's development, in the near term we will re-prioritize our development of product candidates that are in earlier, less capital intensive stages of development. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain. As a result, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates. General and Administrative Our general and administrative expenses consist primarily of salaries, benefits and stock-based compensation for our general and administrative personnel, allocated facilities costs, insurance and other expenses for outside professional services, including legal, marketing, investor relations, human resource and accounting services. We expect general and administrative expenses to remain relatively consistent for the foreseeable future. In addition, if we obtain regulatory approval for any of our product candidates and do not enter into a third-party commercialization collaboration, we expect to incur significant expenses related to building a sales and marketing team to support product sales, marketing and distribution activities. Interest and Other Income (Expense), net Our interest and other income (expense), net consists of interest, accretion income and amortization expense on cash, cash equivalents and short-term investments, and realized gains and losses on short-term investments. Interest Expense Our interest expense is derived from a term loan executed under the Oxford Loan Agreement that we entered into in May 2022 and amended in March 2024 (the "Amended Loan Agreement"). Borrowings under the Amended Loan Agreement bear interest at a rate per annum equal to 1-month term Secured Overnight Financing Rate (SOFR) plus 5.25%, subject to an agreed upon floor of 8.75%. 75 Results of Operations Comparison of the Years Ended December 31, 2024 and 2023 (In thousands, except percentages) Year Ended December 31, 2024 2023 $ Change % Change Revenue $ — $ 1,580 $ (1,580) (100.0 %) Operating expenses: Research and development (169,310) (127,797) (41,513) 32.5 % General and administrative (59,055) (57,928) (1,127) 1.9 % Total operating expenses (228,365) (185,725) (42,640) 23.0 % Loss from operations (228,365) (184,145) (44,220) 24.0 % Interest and other income (expense), net 21,085 24,076 (2,991) (12.4) % Interest expense (3,024) (1,267) (1,757) 138.7 % Net loss $ (210,304) $ (161,336) $ (48,968) 30.4 % Revenue Revenue decreased by $1.6 million due to decreased research and development services resulting from the termination of the Novartis Agreement. Research and Development Expenses The following table summarizes the results of our research and development expenses for the years ended December 31, 2024 and 2023 (in thousands): 2024 2023 Program-specific external expenses: Bexotegrast - clinical trial and outside service third party contracting costs 86,365 51,446 Other pipeline programs - clinical trial and outside service third party contracting costs 10,760 13,754 Total program-specific external expenses 97,125 65,200 Unallocated internal expenses Employee-related expenses 49,597 46,658 Depreciation of lab equipment and costs of equipment and supplies 6,717 5,588 Facilities expenses 7,776 4,288 Other expenses and other allocations 8,095 6,063 Total unallocated internal expenses 72,185 62,597 Total research and development expenses 169,310 127,797 The increase in research and development expenses of $41.5 million was primarily due to: • $34.9 million increase related to bexotegrast development primarily driven by BEACON-IPF, a Phase 2b/3 study of bexotegrast in patients with IPF, and related manufacturing activities; • $3.0 million decrease in others pipeline programs as we prioritized BEACON-IPF; • $2.9 million increase in employee-related costs, including stock-based compensation, driven by an increase in our research and development workforce; and • $5.5 million increase in facilities and other allocated expenses, resulting from the move to our new office and laboratory space. General and Administrative Expenses General and administrative expenses increased by $1.1 million primarily due to an increase in employee-related costs driven by increased headcount. 76 Interest and Other Income (Expense), Net Interest and other income (expense), net decreased $3.0 million due to lower average investment balances in 2024 compared to 2023 due to continued funding of operating activities. Interest Expense Interest expense increased $1.8 million due to additional borrowings under the Amended Loan Agreement executed March 11, 2024. 77 Liquidity and Capital Resources Overview As of December 31, 2024, we had cash, cash equivalents, restricted cash and short-term investments of $357.2 million. Our cash, cash equivalents, and short-term investments consist of money market funds, U.S. Treasury securities, U.S. Government Agency securities and highly rated, investment-grade corporate debt securities. In March 2024, we entered into an Amended Loan Agreement with Oxford Finance LLC (or the “Lender” or “Oxford”) which upsized our existing Term Loan facility to a total size of $150.0 million of non-dilutive capital. Pursuant to the Amended Loan Agreement, we drew an additional Term Loan of $20.0 million. The agreement allowed for borrowing up to $70.0 million at our option, $35.0 million being available commencing October 1, 2025 contingent upon the continued operation of the BEACON-IPF study and a further $35.0 million being available upon demonstrating that BEACON-IPF had achieved positive Phase 2b data sufficient to support continued development, in the sole discretion of Oxford. An additional $50.0 million could be made available to us at the sole discretion of Lender. Given the discontinuation of the BEACON-IPF trial, we do not expect to have access to additional borrowing under the Oxford Agreement. See Note 7 to the Notes to our financial statements of this Report for more information. In July 2022, we completed an underwritten public offering of 12,432,432 shares of common stock, including the exercise in full of the underwriters' option to purchase 1,621,621 additional shares of common stock. The shares were offered at a price to the public of $18.50 per share, resulting in aggregate proceeds of approximately $215.4 million, net of underwriting discounts, commissions and offering expenses. In January 2023, we completed an underwritten public offering of 9,583,334 shares of common stock, including the exercise in full of the underwriters' option to purchase 1,250,000 additional shares of common stock. The shares were offered at a price to the public of $30.00 per share, resulting in aggregate proceeds of approximately $269.8 million, net of underwriting discounts, commissions and offering expenses. During the third quarter of 2021, we entered into a Controlled Equity Offering SM Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co., as sales agent, pursuant to which we may issue and sell shares of common stock in an "at-the-market" offering. In March 2023, we filed a prospectus registering the offer and sale of up to $150.0 million of shares of common stock from time to time pursuant to the Sales Agreement. We have not issued any shares pursuant to any at-the-market offerings, including pursuant to the Sales Agreement, but may do so at a future date. We believe that our existing capital resources will be sufficient to fund our anticipated operating expenses and capital expenditure requirements for the next 12 months and beyond. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for product development and commercialization sooner than planned. Our operations have been financed primarily through the issuance and sale of common stock and convertible preferred stock and our prior collaboration with Novartis. Funding Requirements Our primary use of cash is to fund operating expenses, primarily research and development expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable, accrued expenses and prepaid expenses. Our future funding requirements will depend on many factors, including the following: • the initiation, progress, timing, costs and results of preclinical studies and clinical trials for our product candidates; • the clinical development plans we establish for these product candidates; • the timelines of our clinical trials and the overall costs to conduct and complete the clinical trials, which may be impacted by health epidemics and pandemics, such as COVID-19; • the number and characteristics of product candidates that we develop; • the outcome, timing and cost of meeting regulatory requirements established by the U.S. Food and Drug Administration, or FDA, and other comparable foreign regulatory authorities including but not limited to the European Medicines Agency (EMA) and the U.K. Medicines and Healthcare products Regulatory Agency (MHRA); • whether we enter into any collaboration agreements and the terms of any such agreements; 78 • the cost of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights; • the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against us or our product candidates; • the effect of competing technological and market developments; • the cost and timing of completion of commercial-scale outsourced manufacturing activities; • the cost and timing of achieving favorable pricing and reimbursement agreements with the pricing authorities in each market of interest, including of securing a positive recommendation after undergoing a health technology assessment by health technology authorities; • the cost of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval in regions where we choose to commercialize our products on our own; and • the cost of operating as a public company. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for clinical trials and other research and development expenditures. If we need to raise additional capital to fund our operations, funding may not be available to us on acceptable terms, or at all. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of or suspend one or more of our preclinical studies, clinical trials, research and development programs or commercialization efforts. We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings, collaborations and other licensing arrangements. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish certain valuable rights to our product candidates, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us. 79 Cash Flows The following summarizes our cash flows for the periods indicated (in thousands): Year Ended December 31, 2024 2023 2022 Net cash used in operating activities $ (155,503) $ (116,361) $ (94,631) Net cash provided by (used in) investing activities 140,340 (127,012) (150,204) Net cash provided by financing activities 23,117 274,405 226,854 Net increase (decrease) in cash, cash equivalents and restricted cash $ 7,954 $ 31,032 $ (17,981) Cash Used in Operating Activities Net cash used in operating activities increased due to higher spending related to third-party vendors to support research and development and general and administrative operations: approximately $27.0 million paid to outside service vendors in support of BEACON-IPF and an increase of $9.5 million in payroll and related employee costs. Cash Provided (Used in) Investing Activities Net cash provided by investing activities increased over the same period of prior year as maturities of marketable securities exceeded related purchases during the twelve months ended December 31, 2024, while purchases exceeded maturities during the twelve months ended December 31, 2023 as a result of the public offering of common stock in January 2023. Cash Provided by Financing Activities Net cash provided by financing activities decreased by $251.3 million primarily due to net proceeds of $270.3 million from the Company's January 2023 underwritten public offering, which was partially offset by additional Term Loans entered into during the twelve months ended December 31, 2024 associated with the Amended Loan Agreement. 80 Off-Balance Sheet Arrangements During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements or holdings in any variable interest entities other than the operating lease commitments described in Note 15 to our financial statements appearing elsewhere in this Annual Report. Material Cash Requirements At December 31, 2024, we have a non-cancelable operating lease for office and laboratory space for a period of seven years through March 31, 2031. Refer to Note 14 and Note 15 to our financial statements appearing elsewhere in this Annual Report for a discussion of material obligations and commitments. We enter into contracts in the normal course of business with third-party contract organizations for clinical trials, non-clinical studies and testing, manufacturing and other services and products. These contracts generally provide for termination following a certain period after notice and therefore we believe that our cancellable obligations under these agreements are not material. Critical Accounting Polices and Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with United States generally accepted accounting principles. 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 reported expenses incurred during the reporting periods. Our estimates are based on our 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 readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 2 to our financial statements appearing elsewhere in this Annual Report, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements. Revenue Recognition As of December 31, 2024, all of our revenue to date has been generated from the Novartis Agreement. Following termination of the Novartis Agreement, we were no longer eligible to receive additional milestone or royalty payments under the arrangement, however, we continued to earn research and development services revenues through the effective termination date of April 18, 2023. We recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine the appropriate amount of revenue to be recognized for arrangements determined to be within the scope of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, ("Topic 606") we perform the following five steps: (i) identification of the contract(s) with the customer, (ii) identification of the promised goods or services in the contract and determination of whether the promised goods or services are performance obligations, (iii) measurement of the transaction price, (iv) allocation of the transaction price to the performance obligations, and (v) recognition of revenue when (or as) we satisfy each performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to our customer. Identification of the Contracts with the Customers We evaluate every contract to determine whether it in its entirety or in part represent a contract with a customer, or a collaboration agreement and, based on this determination, apply appropriate accounting guidance. We account for a contract with a customer that is within the scope of Topic 606 when all of the following criteria are met: (i) the arrangement has been approved by the parties and the parties are committed to perform their respective obligations, (ii) each party’s rights regarding the goods or services to be transferred can be identified, (iii) the payment terms for the goods or services to be transferred can be identified, (iv) the arrangement has commercial substance and (v) collection of substantially all of the consideration to which we will be entitled in exchange for the goods or services that will be transferred to the customer is probable. Identification of the Performance Obligations The promised goods or services in our collaboration and option arrangements consist of license and research and development services. The arrangements also have options for additional items (i.e., license rights). Options are considered 81 to be marketing offers and are to be accounted for as separate contracts when the customer elects such options, unless we determine the option provides a material right which would not be provided without entering into the contract. The determination as to whether such options are material rights requires significant management judgment, and management considers factors such as other similar arrangements, market data and the terms of the contractual arrangement to make such conclusion. Performance obligations are promised goods or services in a contract to transfer a distinct good or service to the customer. Promised goods or services are considered distinct when: (i) the customer can benefit from the good or service on its own or together with other readily available resources and (ii) the promised good or service is separately identifiable from other promises in the contract. In assessing whether promised goods or services are distinct, we consider factors such as the stage of development of the underlying intellectual property, the capabilities of our customer to develop the intellectual property on their own and whether the required expertise is readily available. Determination of the Transaction Price We estimate the transaction price based on the amount of consideration we expect to receive for transferring the promised goods or services in the contract. The consideration may include both fixed consideration and variable consideration. At the inception of each arrangement that includes variable consideration, we evaluate the amount of the potential payments and the likelihood that the payments will be received. We utilize either the most likely amount method or expected value method to estimate the transaction price based on which method better predicts the amount of consideration expected to be received. If it is probable that a significant revenue reversal would not occur, the variable consideration is included in the transaction price. All contingent future payments, which include research, development, regulatory, and sales-based royalty payments, were not considered in the initial analysis, as they were contingent upon options being exercised or were subject to significant risk of achievement. Allocation of Transaction Price We allocate the transaction price based on the estimated standalone selling price. We must develop assumptions that require judgment to determine the standalone selling price for each performance obligation identified in the contract. We utilize key assumptions to determine the standalone selling price, which may include other comparable transactions, pricing considered in negotiating the transaction, and the estimated costs. Certain variable consideration is allocated specifically to one or more performance obligations in a contract when the terms of the variable consideration relate to the satisfaction of the performance obligation and the resulting amounts allocated to each performance obligation are consistent with the amounts we would expect to receive for satisfying each performance obligation. Recognition of Revenue We recognize revenue at the point in time when distinct, functional licenses are transferred to the licensee and/or over the period of time which we perform research and development services. We utilize a cost-based input method to measure proportional performance, as such costs have direct relationship between our effort and the progress made towards satisfying its performance obligations to Novartis. Accrued and Prepaid Research and Development Expenses We record accrued expenses for estimated costs of our research and development activities which include the conduct of clinical studies and preclinical studies by third-party service providers. We record the estimated costs of research and development activities based upon the estimated amount of services provided but not yet invoiced and include these costs in accrued liabilities in the balance sheets and within research and development expenses in the statements of operations and comprehensive loss. These costs are a significant component of our research and development expenses. We record accrued expenses for these costs based on factors such as estimates of the work completed and in accordance with agreements established with these third-party service providers. Any payments made in advance of services provided are recorded as prepaid assets, which are expensed as the contracted services are performed. We estimate the amount of work completed through review of detailed budgets and timelines included in our contracts and agreements, and update these estimates with information obtained from third-party service providers and internal personnel on a quarterly basis. We make significant judgments and estimates in determining the accrued and/or prepaid balance in each reporting period. As actual costs become known, we adjust our estimates. Our accrued expenses and prepaid research and development expenses are dependent, in part, upon the receipt of timely and accurate reporting from contract research organizations, other third-party service providers and internal research and development personnel. If we under estimate or over-estimate the level of services performed or the costs of these services, our accrued expenses could differ from our estimates. For the periods presented, we have experienced no material differences between our accrued expenses and actual expenses. 82 Recent Accounting Pronouncements The information set forth under Note 2 to the financial statements under the caption “Recently Issued Accounting Pronouncements” is incorporated herein by reference.