Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with the financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in “Part I, Item 1A. Risk Factors” and in other parts of this Annual Report on Form 10-K.
A discussion of our financial performance for the year ended December 31, 2021 as compared to the year ended December 31, 2020 appears below under the captions “Results of Operations” and “Liquidity and Capital Resources.” A discussion of our financial performance for the year ended December 31, 2020 compared to the year ended December 31, 2019 can be found in our Annual Report filed on Form 10-K, in the “Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under the same captions, filed with the SEC on March 3, 2021, which is available free of charge on the SEC’s website at www.sec.gov and our Investor Relations website at ir.pmvpharma.com/financial-information/sec-filings . These website addresses are intended to be inactive, textual references only. None of the materials on, or accessible through, these websites are part of this report or are incorporated by reference herein.
Overview
We are a precision oncology company pioneering the discovery and development of small molecule, tumor-agnostic therapies targeting p53. p53 is a well-defined tumor suppressor protein known as the “guardian of the genome,” and normal, or wild-type, p53 has the ability to eliminate cancer cells. However, mutant p53 proteins can be misfolded and lose their wild-type tumor suppressing function. These p53 mutations are found in approximately half of all cancers. The field of p53 biology was established by our co-founder Dr. Arnold Levine when he discovered the p53 protein in 1979. We have leveraged more than four decades of research experience and developed unique insights into p53 to create a precision oncology platform designed to generate selective, small molecule, tumor-agnostic therapies that structurally correct specific mutant p53 proteins to restore their wild-type function. We are deploying our precision oncology platform to target the top ten most frequent, or hotspot, p53 mutations that are collectively associated with approximately 10-15% of all cancers. In addition, we are expanding the utilization of our platform to target certain cancers where wild-type p53 function is silenced.
Since our formation in March 2013, we have devoted substantially all of our time and efforts to performing research and development activities and raising capital. We are not profitable and have incurred losses in each year since our inception. Our net losses were $57.8 million, $34.4 million, and $25.4 million for the years ended December 31, 2021, 2020, and 2019, respectively. As of December 31, 2021, we had an accumulated deficit of $167.7 million. We do not currently have any product candidates approved for sale, and we continue to incur significant research and development and general administrative expenses related to our operations. We initiated a Phase 1/2 clinical trial in October 2020 for our lead product candidate, PC14586. In October 2020, we were granted FDA Fast Track Designation of PC14586 for the treatment of patients with locally advanced or metastatic solid tumors that have a p53 Y220C mutation. We dosed our first patient in this clinical trial in the fourth quarter of 2020. We expect that our operating expenses will increase significantly as we advance our product candidates through preclinical and clinical development, seek regulatory approval and prepare for and, if approved, proceed to commercialization; acquire, discover, validate and develop additional product candidates; obtain, maintain, protect and enforce our intellectual property portfolio; and hire additional personnel. Furthermore, we have incurred and will continue to incur additional costs associated with operating as a public company that we did not experience as a private company. We expect to continue to incur significant losses for the foreseeable future.
Our ability to generate product revenue will depend on the successful development, regulatory approval and eventual commercialization of one or more of our product candidates. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through private or public equity or debt financings, collaborative, or other arrangements with corporate sources, or through other sources of financing. Adequate funding may not be available to us on acceptable terms, or at all. If we fail to raise capital or enter into
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such agreements as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of our product candidates.
We plan to continue to use third-party service providers, including clinical research organizations, or CROs, and contract manufacturing organization, or CMOs, to carry out our preclinical and clinical development and to manufacture and supply the materials to be used during the development and commercialization of our product candidates. We do not currently have a sales force.
Revenue
To date, we have not generated any revenue from any sources, including from product sales, and we do not expect to generate any revenue from the sale of products in the foreseeable future. If our development efforts for our product candidates are successful and result in regulatory approval, or license agreements with third parties, we may generate revenue in the future from product sales. However, there can be no assurance as to when we will generate such revenue, if at all.
Operating Expenses
Research and Development Expenses
Our research and development expenses consist primarily of costs incurred to conduct research, such as the discovery and development of our product candidates as well as the development of future product candidates. Research and development expenses include personnel costs, including stock-based compensation expense, third-party contractor services, laboratory materials and supplies, and depreciation and maintenance of research equipment. We expense research and development costs as they are incurred.
As we are at a very early stage of development, we do not allocate our costs by product candidate or development program, as a significant amount of research and development expenses include compensation costs, materials, supplies, depreciation on and maintenance of research equipment, and the cost of services provided by outside contractors, which are not tracked by product candidate or development program. In particular, with respect to internal costs, several of our departments support multiple product candidate research and development programs, and therefore the costs cannot be allocated to a particular product candidate or development program. Substantially all of our research and development costs are associated with our lead product candidate, PC14586. We initiated a Phase 1/2 clinical trial in October 2020 for our lead product candidate, PC14586. In October 2020, we were granted FDA Fast Track Designation of PC14586 for the treatment of patients with locally advanced or metastatic solid tumors that have a p53 Y220C mutation. We dosed our first patient in this clinical trial in the fourth quarter of 2020.
We expect our research and development expenses to increase substantially in absolute dollars in the future as we advance our product candidates into and through clinical trials and pursue regulatory approval of our product candidates. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming. The actual probability of success for our product candidates may be affected by a variety of factors including: the safety and efficacy of our product candidates, early clinical data, investment in our clinical program, the ability of any future collaborators to successfully develop our licensed product candidates, competition, manufacturing capability, and commercial viability. We may never succeed in achieving regulatory approval for any of our product candidates. As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects.
General and Administrative Expenses
General and administrative expenses include personnel costs, expenses for outside professional services and other allocated expenses. Personnel costs consist of salaries, bonuses, benefits and stock-based compensation. Outside professional services consist of legal, accounting and audit services and other consulting fees. Allocated expenses consist of rent expense related to our office and research and development facility. We have incurred additional expenses as a public company, including expenses related to compliance with the rules and regulations of
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the SEC , and those of any national securities exchange on which our securities are traded, additional insurance expenses, investor relations activities and other administrative and professional services. We have increased our headcount significantly to support our operations as a public company. We also expect to increase our general and administrative expenses as we advance our product candidates through preclinical research and development, manufacturing, clinical development , and commercialization.
Interest Income, Net
Interest income, net primarily consists of interest income from our interest-bearing cash, cash equivalents and marketable securities and interest costs related to amortization of premiums and discounts on our marketable securities.
Comparison of the Years Ended December 31, 2021 and 2020
The following table summarizes our results of operations (in thousands):
Year Ended
December 31,
Statement of operations data:
2021
2020
Change
Operating expenses:
Research and development
$
36,493
$
23,933
$
12,560
General and administrative
21,800
11,009
10,791
Total operating expenses
58,293
34,942
23,351
Loss from operations
(58,293
)
(34,942
)
23,351
Other income (expense):
Interest income, net
449
651
(202
)
Other income (expense)
21
(143
)
164
Total other income (expense)
470
508
(38
)
Loss before provision for income taxes
(57,823
)
(34,434
)
23,389
Provision for income taxes
23
6
17
Net loss
$
(57,846
)
$
(34,440
)
$
23,406
Research and Development Expenses
The following table summarizes our research and development expenses incurred during the periods indicated (in thousands):
Year Ended
December 31,
Statement of operations data:
2021
2020
Change
Research
$
8,296
$
7,999
$
297
Development
19,436
7,706
11,730
Personnel related
7,321
7,392
(71
)
Stock-based compensation
1,440
836
604
Total
$
36,493
$
23,933
$
12,560
Research and development expenses were $36.5 million for the year ended December 31, 2021, compared to $23.9 million for the year ended December 31, 2020. The increase of $12.6 million was primarily due to the following:
•
$0.3 million increase in research expenses, largely driven by increased contractual research organization costs focused on discovery research;
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•
$ 11.7 million increase in development expenses, primarily associated with increased effort advancing our lead compound PC14586 through the Phase 1/2 clinical trial; and
•
$0.5 million increase in expenses for personnel related costs and stock-based compensation, primarily driven by the rise in the Company’s stock value subsequent to the IPO in September 2020.
General and Administrative Expenses
General and administrative expenses were $21.8 million for the year ended December 31, 2021, compared to $11.0 million for the year ended December 31, 2020. The increase of $10.8 million was primarily due to the following:
•
$5.5 million increase in personnel related expenses due to increased headcount to build out general and administrative infrastructure; and
•
$1.1 million increase in finance and legal support, $0.5 million increase in business licenses and fees, $1.9 million increase for directors and officers insurance, and a $1.8 million increase due to facility and equipment related costs for the Company’s new headquarters in Princeton, New Jersey.
Interest Income, Net
Interest income, net primarily consists of interest income from our interest-bearing cash, cash equivalents and marketable securities and interest costs related to amortization of premiums and discounts on marketable securities. Interest income, net was $0.5 million for the year ended December 31, 2021, compared to $0.7 million for the year ended December 31, 2020. The decrease of $0.2 million is driven by decreased interest rates from cash investments in marketable securities and U.S treasuries as of the year ended December 31, 2021.
Liquidity and Capital Resources
Our financial condition is summarized as follows:
As of December 31,
2021
2020
Change
Financial assets:
Cash and cash equivalents
$
172,467
$
361,422
$
(188,955
)
Marketable securities - current
124,696
—
124,696
Marketable securities - noncurrent
16,911
—
16,911
Total financial assets
$
314,074
$
361,422
$
(47,348
)
Working capital:
Current assets
$
301,286
$
364,761
$
(63,475
)
Current liabilities
12,219
6,410
5,809
Total working capital
$
289,067
$
358,351
$
(69,284
)
Sources of Liquidity
Since our inception, we have not generated any revenue from any product sales or any other sources and have incurred significant operating losses and negative cash flows from our operations. We have not yet commercialized any of our product candidates and we do not expect to generate revenue from sales of any product candidates for several years, if at all. As of December 31, 2021, we had cash, cash equivalents, and marketable securities of $314 million and an accumulated deficit of $167.7 million. We have financed our operations primarily through issuances of our convertible preferred and common stock. In 2019, we sold an aggregate of 5,469,606 shares of our Series C convertible preferred stock to accredited investors, generating gross proceeds of $61.9 million. In July 2020, we sold an aggregate of 5,321,864 shares of our Series D convertible preferred stock to accredited investors, generating gross proceeds of $70.0 million. In September 2020, we completed an IPO of 13,529,750 shares of our common stock, which includes the exercise in full by the underwriters of their option to purchase 1,764,750 additional shares
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of common stock, at a public offering price of $18.00 per share for aggregate gross proceeds of $243.5 million. We received $223.2 million in net proceeds after deducting underwriting discounts and commissions and other offering expenses payable by us. In October 2021, we filed a shelf registration statement on Form S-3, which may result in aggregate gross process of up to $150.0 million. We did not sell any shares pursuant to the shelf registration statement and did not receive any gross proceeds in fiscal year 2021.
Contractual Obligations and Commitments
We enter into contracts in the normal course of business with CROs and other vendors to assist in the performance of our research and development activities and other services and products for operating purposes. These contracts generally provide for termination on notice, and therefore are cancelable contracts and not included in the table of contractual obligations and commitments.
In January 2021, we signed a lease for 50,581 square feet of office and laboratory space at One Research Way in Princeton, New Jersey. That lease term extends through 2032, has a five-year extension option, and is intended to replace our two existing facilities. Payments under this lease will total $19.6 million through May 2032. Amounts related to future lease payments as of December 31, 2021 totaled $20.4 million, with $1.4 million to be paid within the next 12 months.
Plan of Operation and Future Funding Requirements
We use our capital resources primarily to fund operating expenses, primarily research and development expenditures. We plan to increase our research and development expenses for the foreseeable future as we continue the preclinical development and move into clinical development of our product candidates. At this time, due to the inherently unpredictable nature of preclinical and clinical development and given the early stage of our product candidates, we cannot reasonably estimate the costs we will incur and the timelines that will be required to complete development, obtain marketing approval and commercialize our current product candidates or any future product candidates, if at all. For the same reasons, we are also unable to predict when, if ever, we will generate revenue from product sales or whether, or when, we may achieve profitability. Clinical and preclinical development timelines, the probability of success, and development costs can differ materially from expectations. In addition, we cannot forecast which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.
Due to our significant research and development expenditures, we have generated substantial operating losses in each period since inception. We have incurred an accumulated deficit of $167.7 million through December 31, 2021. We expect to incur substantial additional losses in the future as we expand our research and development activities.
Our cash operating expenditures were $46.6 million in 2021 and $32.7 million in 2020, and we expect to increase our investment in operations in 2022 . Based on our research and development plans, we expect that our cash balances as of December 31, 2021 will be sufficient to fund our operations at least through 2023.
We have based this estimate on assumptions that may prove to be wrong, however, and we could use our capital resources sooner than we expect.
The timing and amount of our operating expenditures will depend largely on:
•
the timing and progress of preclinical and clinical development activities;
•
the number and scope of preclinical and clinical programs we decide to pursue;
•
the timing and amount of milestone payments we may receive under any future collaboration agreements;
•
our ability to maintain future business licenses and research and development programs and to establish new collaboration arrangements;
•
the costs involved in prosecuting and enforcing patent and other intellectual property claims;
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•
the cost and timing of regulatory approvals; and
•
our efforts to enhance operational systems and hire additional personnel, including personnel to support development of our product candidates and satisfy our obligations as a public company.
Until such time, if ever, as we can generate substantial revenue from product sales, we expect to fund our operations and capital funding needs through equity and/or debt financing. We may also consider entering into collaboration arrangements or selectively partnering for clinical development and commercialization. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations or our ability to incur additional indebtedness or pay dividends, among other items. If we raise additional funds through governmental funding, collaborations, strategic partnerships and alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are not able to secure adequate additional funding, we may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these actions could materially and adversely affect our business, financial condition, results of operations and prospects.
Cash Flows
The following table summarizes our cash flows for the period indicated (in thousands):
Year Ended
December 31,
2021
2020
2019
Cash used in operating activities
$
(46,571
)
$
(32,739
)
$
(22,065
)
Cash (used in) provided by investing activities
(143,584
)
27,911
3,231
Cash provided by financing activities
2,022
292,972
61,805
Net (decrease) increase in cash and cash equivalents
$
(188,133
)
$
288,144
$
42,971
Operating Activities
Net cash used in operating activities for the year ended December 31, 2021, was $46.6 million, which consisted primarily of net loss of $57.8 million decreased by non-cash charges of $7.2 million and a net change of $4.1 million in our net operating assets. The non-cash charges primarily consisted of stock-based compensation of $5.3 million, depreciation of $0.9 million, and non-cash lease expense of $1.0 million. The change in our net operating assets and liabilities was primarily due to a decrease in prepaid expenses and other assets, an increase in accrued expenses, and an increase in outstanding payables.
Net cash used in operating activities for the year ended December 31, 2020, was $32.7 million, which consisted primarily of a net loss of $34.4 million decreased by non-cash charges of $2.5 million and increased by a net change of $0.9 million in our net operating assets. The non-cash charges primarily consisted of stock-based compensation of $1.9 million and depreciation of $0.3 million. The change in our net operating assets and liabilities was primarily due to an increase in current assets, accompanied by a decrease in outstanding payables, and an increase in accrued compensation and accrued liabilities in 2020.
Investing Activities
Our investing activities used $143.6 million of cash during the year ended December 31, 2021, which consisted primarily of purchases of marketable securities of $256.8 million, along with purchase of property and equipment of $1.3 million partially offset by maturities of marketable securities of $114.6 million.
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Our investing activities provided $28.0 million of cash during the year ended December 31, 2020, which consisted primarily of maturities of marketable securities of $42.6 million, partially offset by purchases of marketable securities of $14.5 million and purchases of property and equipment of $0.1 million.
Financing Activities
Our financing activities provided $2.0 million of cash during the year ended December 31, 2021, which consisted primarily of proceeds from the exercise of stock options.
Our financing activities provided $293.0 million of cash during the year ended December 31, 2020, which consisted primarily of gross IPO proceeds of $243.5 million and Series D Preferred Stock issuance proceeds of $70.0 million, offset by equity issuance costs of $20.6 million.
Critical Accounting and Estimates
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the amounts reported in those financial statements and accompanying notes. Although we believe that the estimates we use are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates.
We believe that the accounting policies described below involve a high degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of our operations.
Research and Development Costs, Accrued Research and Development Costs and Related Prepaid Expenses
Research and development costs are expensed as incurred. Research and development expenses consist principally of personnel costs, including salaries, stock-based compensation and benefits for employees, third-party license fees and other operational costs related to our research and development activities, including allocated facility-related expenses and external costs of outside vendors, and other direct and indirect costs. Non -refundable research and development advance payments are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or services are performed.
As part of the process of preparing our financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in the financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of the estimates with the service providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include fees paid to:
•
vendors, including research laboratories, in connection with preclinical development activities;
•
CROs and investigative sites in connection with preclinical studies and clinical trials; and
•
CMOs in connection with drug substance and drug product formulation of preclinical studies and clinical trial materials.
We base our expenses related to preclinical studies and clinical trials on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple research institutions and CROs that supply, conduct and manage preclinical studies and clinical trials on our behalf. The financial terms of these agreements are
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subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or the prepaid expense accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses.
Stock-Based Compensation
We measure all stock options and other stock-based awards granted to our employees, directors, consultants and other non-employee service providers based on the fair value on the date of the grant. Compensation expense related to awards to employees and directors with service-based vesting conditions is recognized on a straight-line basis based on the grant date fair value over the associated service period of the award, which is typically the vesting term. Compensation expense related to awards to employees with performance-based vesting conditions is recognized based on grant date fair value over the requisite service period using the accelerated attribution method to the extent achievement of the performance condition is probable. Non-employee option awards are measured at the earlier of the commitment date for performance by the counterparty or the date when the performance is complete, and compensation expense is recognized in the same manner as if we had paid cash for goods or services.
We classify stock-based compensation expense in our statement of operations in the same way the award recipient’s payroll costs are classified or in which the award recipients’ service payments are classified.
We use the Black-Scholes option pricing model to estimate the fair value of stock options on the date of grant. Using the Black-Scholes option pricing model requires management to make significant assumptions and judgments. We determined these assumptions for the Black-Scholes option-pricing model as discussed below.
•
Expected Term —The expected term represents the period that the stock-based awards are expected to be outstanding. As we do not have sufficient historical experience for determining the expected term of the stock option awards granted, we based our expected term for awards issued to employees and non-employees using the simplified method which is presumed to be the midpoint between the vesting date and the end of the contracted term.
•
Risk-Free Interest Rate —The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant for zero-coupon U.S. Treasury constant maturity notes with terms approximately equal to the stock-based awards’ expected term.
•
Expected Volatility —Since we do not have a trading history of common stock, the expected volatility was derived from the average historical stock volatilities of the common stock of several public companies within the industry that we consider to be comparable to our business over a period equivalent to the expected term of the stock-based awards.
•
Dividend Rate —The expected dividend rate is zero as we have not paid and do not anticipate paying any dividends in the foreseeable future.
•
Fair Value of Common Stock —Prior to our IPO, the fair value of the shares of common stock underlying the stock-based awards was determined by our board of directors with input from management. Because there was no public market for our common stock, our board of directors determined the fair value of our common stock at the time of grant of the stock-based award by considering a number of objective and subjective factors, including having valuations of the common stock performed by a third-party valuation specialist, as further described below.
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Recent Accounting Pronouncements
For a description of recent accounting pronouncements, see Note 2 of the notes to our audited financial statements for the year ended December 31, 2021 included elsewhere in this Annual Report on Form 10-K.