What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-03 compared with 2021-08-04 · 154 added, 135 removed, 274 unchanged (51% of the section changed)

27 unchanged sentences

Rusfertide has a unique mechanism of action in the potential treatment of PV, which may enable it to decrease and maintain hematocrit levels within the range of recommended clinical guidelines without causing the iron deficiency that may occur with frequent phlebotomy.

We completed patient enrollment in the ongoing pivotal Phase 2 clinical trial of rusfertide in PV in April 2021.

Based on end of Phase 2 feedback provided by the FDA’s Division of Nonmalignant Hematology and written comments from the European Medicines Agency (“EMA”) received during the first quarter of 2021, we expect to initiate a global Phase 3 clinical trial of rusfertide in PV in early 2022.

On September 16, 2021, the FDA orally informed us that a clinical hold would be placed on our rusfertide clinical studies.

We received formal written notice of the clinical hold on September 17, 2021.

In October 2021, we submitted a Complete Response to the FDA related to the clinical hold, and the FDA removed the clinical hold on October 8, 2021.

The clinical hold was imposed following our submission to the FDA of findings in a 26-week rasH2 transgenic mouse carcinogenicity study.

In the rasH2 study, benign squamous cell papilloma were observed in six of 75 male mice and six of 75 female mice treated with doses of rusfertide ranging from 6.25 mg/kg to 25 mg/kg.

Malignant squamous cell carcinoma was also observed in one male mouse and one female mouse.

There were no findings in either the male or female control group.

The rasH2 finding prompted a re-examination of the four cases of cancer observed across all rusfertide clinical trials (involving 160 patients) through the date of the submission of the Complete Response.

All cases were initially assessed as unrelated to rusfertide treatment.

Upon re-examination in light of the rasH2 finding, two of the cases were re-classified as possibly related to rusfertide.

No additional cancer cases, and no other unexpected safety signals, surfaced in this process.

In our Complete Response, we provided the individual patient clinical safety reports the FDA requested for human cancers observed in rusfertide clinical trials, updated the investigator brochure and patient informed consent forms for ongoing rusfertide trials, proposed new safety and stopping rules in clinical study protocols of our ongoing rusfertide clinical trials, and performed a comprehensive review of our rusfertide safety database.

Dosing of patients in ongoing clinical trials with rusfertide is expected to resume in the fourth quarter of 2021.

We completed enrollment of 63 patients in the ongoing Phase 2 clinical trial of rusfertide in PV during the second quarter of 2021.

Based on ongoing end of Phase 2 feedback provided by the FDA’s Division of Nonmalignant Hematology and written comments from the European Medicines Agency (“EMA”), we expect to initiate a global Phase 3 clinical trial of rusfertide in PV in the first quarter of 2022.

During the first quarter of 2021, we initiated another Phase 2 study for rusfertide in up to 20 patients diagnosed with PV and with routinely elevated hematocrit levels (>48%).

In addition, we completed enrollment for our Phase 2 POC study in HH, our second indication, in April 2021 and expect to disclose preliminary data from this study in the fourth quarter of 2021.

In addition, we completed enrollment for our Phase 2 POC study in HH, our second indication, in April 2021.

A n abstract highlighting preliminary data our Phase 2 study of rusfertide in HH has been selected for oral presentation at The Liver Meeting® 2021, hosted by the American Association for the Study of Liver Diseases (AASLD), taking place virtually in November 2021.

To date we have received the following designations for rusfertide in PV:

Food and Drug Administration (“FDA”) granted orphan drug designation for rusfertide for the treatment of PV in June 2020;

● The FDA granted orphan drug designation for rusfertide for the treatment of PV in June 2020;

● The European Medicines Agency granted orphan drug designation for rusfertide for the treatment of PV in October 2020;

1 unchanged sentence

● The FDA granted Breakthrough Therapy Designation for rusfertide for the treatment of PV in June 2021.

Our alpha-4-beta-7 (“α4β7”) antagonist PN-943 and our Interleukin-23 receptor (“IL-23R”) antagonist compounds, including PTG-200, PN-235 and PN-232, are orally delivered investigational drugs that are designed to block biological pathways currently targeted by marketed injectable antibody drugs.

Our alpha-4-beta-7 (“α4β7”) antagonist PN-943 and our Interleukin-23 receptor (“IL-23R”) antagonist compounds, including PN-232 and PN-235, are orally delivered investigational drugs that are designed to block biological pathways currently targeted by marketed injectable antibody drugs.

Our orally stable peptide approach may offer targeted delivery to the GI tissue compartment.

We believe that, compared to antibody drugs, these product candidates have the potential to provide improved safety due to minimal exposure in the blood, increased convenience and compliance due to oral delivery, and the opportunity for the earlier introduction of targeted oral therapy.

PN-943 is an investigational, orally delivered, gut-restricted α4β7 specific integrin antagonist for IBD.

PN-943 is an investigational, orally delivered, gut-restricted α4β7 specific integrin antagonist for inflammatory bowel disease (“IBD”).

We submitted a U.S.

1 unchanged sentence

During the second quarter of 2020 we initiated a 150-patient Phase 2 study evaluating the safety, tolerability and efficacy of PN-943 in patients with moderate to severe UC.

This ongoing study is expected to be completed in the second quarter of 2022, subject to delays related to the COVID-19 pandemic.

This study includes a 12-week induction period and a 40-week open label extension.

Topline data from the 12-week induction period is expected in the second quarter of 2022.

In May 2017, we entered into a worldwide license and collaboration agreement with Janssen Biotech, Inc.

(“Janssen”), a Johnson & Johnson company, to co-develop and co-detail our IL-23R antagonist compounds, including PTG-200 and certain related compounds for all indications, including IBD.

PTG-200 (also referenced as JNJ-67864238) is an investigational, orally delivered, IL-23R antagonist for the treatment of IBD.

PTG-200 was an investigational, orally delivered, IL-23R antagonist for the treatment of IBD.

The agreement with Janssen was amended in May 2019 to expand the collaboration by supporting efforts towards second-generation IL-23R antagonists;

In January 2020, as part of the expanded research collaboration, we announced the identification and nomination of an orally delivered IL-23R antagonist peptide as a second-generation development candidate, triggering a $5.0 million milestone payment to us.

Janssen initiated a global Phase 2 POC clinical study for PTG-200 in moderate-to-severe CD in the fourth quarter of 2019, and the study is currently in progress.

In October 2020, we announced the selection of two second-generation IL-R antagonists for advancement into clinical development, PN-235 (also referenced as JNJ-77242113) and PN-232 (also referenced as JNJ-75105186).

A Phase 1 study was initiated for PN-235 in December 2020 and is expected to be completed in the fourth quarter of 2021.

A Phase 1 study was initiated for PN-232 in May 2021 and is expected to be completed in the second quarter of 2022.

The current development plan contemplates parallel development of multiple collaboration compounds against multiple indications in the IL-23 pathway.

and in July 2021 to, among other things, enable Janssen to develop collaboration compounds for multiple indications and further align our financial interests around potential multiple compound development for multiple indications in the IL-23 pathway.

Following a pre-specified interim analysis criteria, a portfolio decision was made to stop further development of first generation IL-23R antagonist candidate PTG-200 (JNJ-67864238), in favor of continued development of two second-generation candidates PN-235 (JNJ-77242113) and PN-232 (JNJ-75105186) with superior product profiles.

In particular:

● The Phase 1 study of PN-235 is completed, and a Phase 2 study in psoriasis is anticipated to initiate in early 2022.

● The Phase 1 study with PN-232 is under progress with study completion expected by mid-2022.

● Additional development in IBD is expected to initiate in 2022.

In October 2021, we became eligible to receive a $7.5 million milestone payment from Janssen triggered by the completion of data collection for PN-235 Phase 1 activities.

We will earn a $25.0 million milestone in connection with the initiation of the first Phase 2 study of a second-generation candidate, and a $10.0 million milestone in connection with the initiation of the second Phase 2 study of a second-generation candidate.

We remain eligible for up to approximately $900.0 million in development-related milestone payments, in addition to the $87.5M in milestones already earned.

Our clinical assets are all derived from our proprietary discovery platform.

6 unchanged sentences

The extent of the impact of the COVID-19 pandemic on our activities is uncertain and difficult to predict, as the pandemic and the response to the pandemic continue to evolve.

Capital markets and economies worldwide have been significantly impacted by the COVID-19 pandemic, and the pandemic has contributed

to a global economic recession.

Capital markets and economies worldwide have been significantly impacted by the COVID-19 pandemic, and the pandemic has contributed to a global economic recession.

Such economic disruption could have a material adverse effect on our business.

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We have incurred net losses in each year since inception and we do not anticipate achieving sustained profitability in the foreseeable future.

Our net loss was $30.8 million and $54.8 million for the three and six months ended June 30, 2021, respectively.

Our net loss was $19.4 million and $39.5 million for the three and six months ended June 30, 2020, respectively.

As of June 30, 2021, we had an accumulated deficit of $338.7 million.

Our net loss was $33.8 million and $88.6 million for the three and nine months ended September 30, 2021, respectively.

Our net loss was $7.8 million and $47.3 million for the three and nine months ended September 30, 2020, respectively.

As of September 30, 2021, we had an accumulated deficit of $372.5 million.

Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations.

We expect to continue to incur significant research, development, commercialization and other expenses related to our ongoing operations and product development, including clinical development activities under our worldwide license and collaboration agreement with Janssen, and, as a result, we expect to continue to incur losses in the future as we continue our development of, and seek regulatory approval for, our product candidates.

We expect to continue to incur significant research, development, commercialization and other expenses related to our ongoing operations and product

development, including clinical development activities under our worldwide license and collaboration agreement with Janssen, and, as a result, we expect to continue to incur losses in the future as we continue our development of, and seek regulatory approval for, our product candidates.

Janssen License and Collaboration Agreement

On May 26, 2017, we and Janssen, one of the Janssen Pharmaceutical Companies of Johnson & Johnson, entered into an exclusive license and collaboration agreement for the clinical development, manufacture and potential commercialization of PTG-200 worldwide for the treatment of CD and UC (the “Janssen License and Collaboration Agreement”), which was subsequently amended effective May 7, 2019 (the “First Amendment”).

The First Amendment expanded the scope of the Janssen License and Collaboration Agreement by supporting efforts toward identifying and developing second-generation compounds.

On July 27, 2021, we entered into an amended and restated License and Collaboration Agreement (“Restated Agreement”) with Janssen.

The Restated Agreement amends and restates the License and Collaboration Agreement, dated May 26, 2017, by and between us and Janssen (as amended by the First Amendment thereto, effective May 7, 2019, the “Original Agreement”).

Janssen is a related party to us as Johnson & Johnson Innovation - JJDC, Inc., a significant stockholder of ours, and Janssen are both subsidiaries of Johnson & Johnson.

During the third quarter of 2017, we received a non-refundable, upfront cash payment of $50.0 million from Janssen.

During the second quarter of 2019, we received a non-refundable cash payment of $25.0 million upon execution of the First Amendment.

During the first quarter of 2020, we received a cash payment of $5.0 million upon the successful nomination of a second-generation development candidate.

See Note 3 and Note 17 to the condensed consolidated financial statements included elsewhere in this report for additional information.

The Original Agreement became effective on July 13, 2017.

Upon the effectiveness of the Original Agreement, we received a non-refundable, upfront cash payment of $50.0 million from Janssen.

Upon the effectiveness of the First Amendment, we received a $25.0 million payment from Janssen in 2019.

We also received a $5.0 million payment triggered by the successful nomination of a second-generation IL-23R antagonist development compound during the first quarter of 2020.

In October 2021, we became eligible to receive a $7.5 million milestone payment from Janssen triggered by completion of the data collection for PN-235 Phase 1 activities.

Following a pre-established interim analysis criteria, a portfolio decision was made to discontinue further development of first generation candidate PTG-200, in favor of further development of two second-generation candidates PN-235 and PN-232 with superior product profiles.

See Note 3 to the condensed consolidated financial statements included elsewhere in this report for additional information.

Critical Accounting Polices and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles.

The preparation of these unaudited condensed consolidated 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 unaudited condensed consolidated financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods.

The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the unaudited condensed consolidated financial statements, as well as the reported revenue generated and 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.

20 unchanged sentences

The total fair value of the PSUs granted in February 2021 was $2.6 million.

There have been no other material changes in our critical accounting policies during the three and six months ended June 30, 2021, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 10, 2021.

There have been no other material changes in our critical accounting policies during the three and nine months ended September 30, 2021, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 10, 2021.

Components of Our Results of Operations

27 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

6 unchanged sentences

Preclinical and drug discovery research expense

Milestone payment obligation to former collaboration partner

Grants and tax incentives expense reimbursement, net

3 unchanged sentences

We may never succeed in achieving marketing approval for our product candidates regardless of our costs and efforts.

The probability of success of our product candidates may be affected by numerous factors, including pre-clinical data, clinical data, competition, manufacturing capability, our ability to receive, and the timing of, regulatory approvals, market conditions, and our ability to successfully commercialize our products if they are approved for marketing.

conditions, and our ability to successfully commercialize our products if they are approved for marketing.

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.

11 unchanged sentences

Loss on early repayment of debt consists of prepayment and final payment fees paid upon the early repayment of our long-term debt.

Other Expense (Income), Net

Other (expense) income, net consists primarily of amounts related to foreign exchange gains and losses and related items.

Other Expense, Net

Other expense, net consists primarily of amounts related to foreign exchange gains and losses and related items.

Results of Operations

Comparison of the Three Months Ended June 30, 2021 and 2020

Comparison of the Three Months Ended September 30, 2021 and 2020

Three Months Ended

September 30,

(Dollars in thousands)

7 unchanged sentences

Interest expense

Loss on early repayment of debt

Other (expense) income, net

Other expense, net

Loss before income tax expense

Income tax expense

(1) Includes $2.2 million and $1.0 million of non-cash stock-based compensation expense for the three months ended June 30, 2021 and 2020, respectively.

(2) Includes $1.8 million and $1.0 million of non-cash stock-based compensation expense for the three months ended June 30, 2021 and 2020, respectively.

(1) Includes $2.6 million and $1.0 million of non-cash stock-based compensation expense for the three months ended September 30, 2021 and 2020, respectively.

(2) Includes $2.2 million and $0.9 million of non-cash stock-based compensation expense for the three months ended September 30, 2021 and 2020, respectively.

License and Collaboration Revenue

License and collaboration revenue decreased $4.0 million, or 64%, from $6.2 million for the three months ended June 30, 2020 to $2.3 million for the three months ended June 30, 2021, which was primarily related to a decrease in services provided under the Janssen License and Collaboration Agreement recognized based on proportional performance.

The level of services has decreased as the Company nears completion of its performance obligations delivered pursuant to the collaboration, including the anticipated completion of its ongoing PN-235 Phase 1 trial in the fourth quarter of 2021 and its ongoing PN-232 Phase 1 trial in the first half of 2022.

We have determined that the transaction price of the initial performance obligation under the Janssen License and Collaboration Agreement was $95.8 million as of June 30, 2021, a decrease of $0.5 million from the transaction price of $96.3 million as of March 31, 2021.

License and collaboration revenue decreased $2.8 million, or 22%, from $13.1 million for the three months ended September 30, 2020 to $10.3 million for the three months ended September 30, 2021.

We recognized $8.0 million as a cumulative catch-up amount during the three months ended September 30, 2021, following the amendment of our collaboration agreement for the development of IL23R assets with Janssen.

This cumulative catch-up was primarily the result of an acceleration of our cumulative performance completed under our obligation, following the amendment to the collaboration which reduced the remaining services that we are responsible to provide We are nearing completion of our remaining services to be provided to Janssen under the collaboration, in particular, both the Phase 1 trials in PN-235 & PN-232, which are expected to be completed in the fourth quarter of 2021 and second quarter 2022, respectively.

Revenue for the prior year’s third quarter of 2020 also included an estimate update for services completed versus remaining services to be performed under the Janssen collaboration agreement which accelerated revenue recognition.

We have determined that the transaction price of the initial performance obligation under the Restated Janssen License and Collaboration Agreement was $105.7 million as of September 30, 2021, an increase of $9.9 million from the transaction price of $95.8 million as of June 30, 2021 under the Original Agreement.

In order to determine the transaction price, we evaluated all payments expected to be received during the duration of the contract, net of development costs reimbursement expected to be payable to Janssen.

variable consideration consisting of a $7.5 million milestone payment subject to the completion of a Phase 1 study for a second-generation compound, offset by $9.6 million of net cost reimbursement to Janssen for services performed.

The decrease in transaction price from March 31, 2021 to June 30, 2021 was due primarily to a decrease in the forecast of cost reimbursements to Janssen for services performed.

We determined that the transaction price includes $80.0 million of nonrefundable payments received to date, $17.9 million of reimbursement from Janssen for services performed for IL-23R antagonist compound research costs and other services, and estimated variable consideration consisting of a $7.5 million milestone payment subject to the completion of the clinical data collection Phase 1 activities for PN-235 and $8.4 million of development cost reimbursement receivable from Janssen, partially offset by $8.1 million of net cost reimbursement due to Janssen for services performed.

The increase in transaction price from June 30, 2021 to September 30, 2021 was primarily due to changes related to the Second Amendment to the Janssen License and Collaboration Agreement.

We re-evaluate the transaction price each reporting period and as uncertain events are resolved or other changes in circumstances occur.

1 unchanged sentence

Three Months Ended

September 30,

(Dollars in thousands)

6 unchanged sentences

Preclinical and drug discovery research expense

Milestone payment obligation to former collaboration partner

Grants and tax incentives expense reimbursement, net

1 unchanged sentence

*Percentage not meaningful

Research and development expenses increased $6.2 million, or 30%, from $20.3 million for the three months ended June 30, 2020 to $26.4 million for the three months ended June 30, 2021.

The increase was primarily due to an increase of $4.4 million in rusfertide clinical trial and development costs, including the ongoing Phase 2 trials in PV, which began in December 2019, and HH, which began in early 2020, and clinical and contract manufacturing activities in preparation for a planned global Phase 3 clinical trial of rusfertide in PV;

Research and development expenses increased $21.0 million, or 131%, from $16.0 million for the three months ended September 30, 2020 to $37.0 million for the three months ended September 30, 2021.

The increase was primarily due to an increase of $7.1 million in PN-943 clinical trial and development costs following the initiation of the Phase 2 trial in UC in 2020;

an increase of $6.6 million in rusfertide clinical trial and development costs, including the ongoing Phase 2 trials in PV, which began in December 2019 and the first quarter of 2021, respectively, and HH, which began in early 2020, and clinical and contract manufacturing activities in preparation for a planned global Phase 3 clinical trial of rusfertide in PV;

$4.0 million of expenses related to milestone payments and obligations under the Zealand Agreement for rusfertide pursuant to the resolution of related arbitration;

an increase of $2.3 million in preclinical and drug discovery research expenses;

$0.8 million of Phase 1 clinical trial and development costs for PN-232;

an increase of $0.7 million in PN-943 clinical trial and development costs following the initiation of the Phase 2 trial in UC in 2020, and an increase of $0.3 million in preclinical and drug discovery research expenses.

These increases were partially offset by a decrease of $0.8 million increase in grant and accrued refundable cash tax incentives.

We had 81 and 52 full-time equivalent research and development employees as of June 30, 2021 and 2020, respectively.

and $0.6 million of Phase 1 clinical trial and development costs for PN-235.

We had 92 and 57 full-time equivalent research and development employees as of September 30, 2021 and 2020, respectively.

Research and development expenses for the three months ended September 30, 2021 included increases $1.6 million in stock-based compensation expense and $1.6 million of other personnel related expenses compared to the three months ended September 30, 2020.

General and Administrative Expenses

General and administrative expenses increased $2.5 million, or 61%, from $4.2 million for the three months ended June 30, 2020 to $6.7 million for the three months ended June 30, 2021 primarily due to an increase of $1.5 million in personnel expenses, a $0.4 million increase in market research expenses, and a $0.3 million increase in consulting fees to support the growth of our business, and a $0.2 million increase in legal fees.

General and administrative expenses increased $2.4 million, or 48%, from $4.9 million for the three months ended September 30, 2020 to $7.3 million for the three months ended September 30, 2021 primarily due to an increase of $1.6 million in personnel expenses, a $1.0 million increase in consulting fees to support the growth of our business, and a $0.2 million increase in insurance costs, partially offset by a $0.4 million decrease in legal fees.

The increase in personnel expenses was primarily due to increases of $1.3 million in stock-based compensation expense and $0.2 million in wages and benefits.

We had 20 and 17 full-time equivalent general and administrative employees as of June 30, 2021 and 2020, respectively.

Interest Income

Interest income decreased $0.1 million, or 53%, from $0.2 million for the three months ended June 30, 2020 to $0.1 million for the three months ended June 30, 2021.

This decrease was due primarily to the recent record low interest

rate environment and a change in the mix of marketable securities compared to the prior year period, despite higher interest-earning asset balances.

Interest Expense

Interest expense decreased $0.2 million, or 100%, from $0.2 million for the three months ended June 30, 2020 to zero for the three months ended June 30, 2021.

The decrease in interest expense was due to the prepayment of our outstanding long-term debt under our term credit facility during the second quarter of 2020.

We had no debt outstanding under our term loan facility during the three months ended June 30, 2021.

Loss on Early Repayment of Debt

Loss on early repayment of debt of $0.6 million for the three months ended June 30, 2020 reflects prepayment and final payment fees in connection with the early repayment of our term loan in June 2020.

We had no debt outstanding during the three months ended June 30, 2021.

Other (Expense) Income, Net

Other expense, net was $0.1 million for the three months ended June 30, 2021 compared to other income, net of $0.5 million for the three months ended June 30, 2020.

The change was due primarily to a $0.5 million foreign currency revaluation gain recorded for the three months ended June 30, 2020.

Income Tax Expense

Income tax expense decreased $1.1 million, or 100%, from $1.1 million for the three months ended June 30, 2020 to zero for the three months ended June 30, 2021.

Our effective income tax rate was 0% for the three months ended June 30, 2021 as compared to 6.2% for the three months ended June 30, 2020.

During the second quarter of 2020, our Australia subsidiary sold beneficial rights to discovery intellectual property to our U.S.

entity, and the U.S.

entity reimbursed the Australia subsidiary for certain direct development costs.

Upon completion of the sale, we analyzed tax planning strategies and future income and concluded that a valuation allowance is necessary for our Australia subsidiary.

Income tax expense for the three months ended June 30, 2020 reflects this sale of intellectual property rights, cost reimbursements and related adjustments to the deferred tax asset, establishing a valuation allowance and certain uncertain tax position liabilities.

We maintained a full valuation allowance on our tax position as of June 30, 2021.

Comparison of the Six Months Ended June 30, 2021 and 2020

Six Months Ended

We had 24 and 19 full-time equivalent general and administrative employees as of September 30, 2021 and 2020, respectively.

Comparison of the Nine Months Ended September 30, 2021 and 2020

Nine Months Ended

September 30,

(Dollars in thousands)

8 unchanged sentences

Loss on early repayment of debt

Other (expense) income, net

Other expense, net

Loss before income tax expense

Income tax expense

(1) Includes $3.6 million and $2.1 million of non-cash stock-based compensation expense for the six months ended June 30, 2021 and 2020, respectively.

(2) Includes $3.0 million and $2.0 million of non-cash stock-based compensation expense for the six months ended June 30, 2021 and 2020, respectively.

(1) Includes $6.3 million and $3.1 million of non-cash stock-based compensation expense for the nine months ended September 30, 2021 and 2020, respectively.

(2) Includes $5.1 million and $2.8 million of non-cash stock-based compensation expense for the nine months ended September 30, 2021 and 2020, respectively.

License and Collaboration Revenue

License and collaboration revenue decreased $1.4 million, or 14%, from $9.9 million for the six months ended June 30, 2020 to $8.5 million for the six months ended June 30, 2021, which was primarily related to a decrease in services provided under the Janssen License and Collaboration Agreement recognized based on proportional performance.

We have determined that the transaction price of the initial performance obligation under the Janssen License and Collaboration Agreement was $95.8 million as of June 30, 2021, a decrease of $2.8 million from the transaction price of $98.6 million as of December 31, 2020.

License and collaboration revenue decreased $4.2 million, or 18%, from $23.0 million for the nine months ended September 30, 2020 to $18.7 million for the nine months ended September 30, 2021, which was primarily related to a decrease in services provided under the Janssen License and Collaboration Agreement recognized based on proportional performance partially offset by an $8.0 million cumulative catch-up amount recognized during the nine months ended September 30, 2021, following the amendment of our collaboration agreement for the development of IL23R assets with Janssen.

This cumulative catch-up was primarily the result of an acceleration of our cumulative performance completed under our obligation, following the amendment to the collaboration which reduced the remaining services that we are responsible to provide Revenue for the nine months ended September 30, 2020 included an update in the amounts forecast for future services remaining to be performed under the Janssen License and Collaboration Agreement, which correspondingly increased our overall cumulative percentage of completion of our performance obligation during the third quarter of 2020, coupled with continued performance and delivery of services under the ongoing Janssen License and Collaboration Agreement.

We are nearing completion of our remaining services to be provided to Janssen under the collaboration, in particular, both the Phase 1 trials in PN-235 & PN-232, which are expected to be completed in the fourth quarter of 2021 and second quarter 2022, respectively.

We have determined that the transaction price of the initial performance obligation under the Restated Janssen License and Collaboration Agreement was $105.7 million as of September 30, 2021, an increase of $7.1 million from the transaction price of $98.6 million as of December 31, 2020 under the Original Agreement.

We determined that the transaction price includes the $50.0 million upfront payment, the $25.0 million payment received upon the effectiveness of the First Amendment, the $5.0 million payment triggered by the successful nomination of a second-generation compound, $17.9 million of reimbursement from Janssen for services performed for PTG-200 Phase 2 and for second-generation compound research costs and other services, and estimated variable consideration consisting of a $7.5 million milestone payment subject to the completion of a Phase 1 study for a second-generation compound, offset by $9.6 million of net cost reimbursement to Janssen for services performed.

The decrease in transaction price from December 31, 2020 to June 30, 2021 was due primarily to a decrease in the forecast of remaining services to be provided under the initial performance obligation and an increase in the forecast for cost reimbursements to Janssen for services performed.

The increase in transaction price from December 30, 2020 to September 30, 2021 was due primarily to changes related to the Second Amendment to the

Janssen License and Collaboration Agreement.

We re-evaluate the transaction price each reporting period and as uncertain events are resolved or other changes in circumstances occur.

Research and Development Expenses

Six Months Ended

Nine Months Ended

September 30,

(Dollars in thousands)

6 unchanged sentences

Preclinical and discovery research expense

Milestone payment obligation to former collaboration partner

Grants and tax incentives expense reimbursement, net

1 unchanged sentence

*Percentage not meaningful

Research and development expenses increased $11.7 million, or 30%, from $39.0 million for the six months ended June 30, 2020 to $50.7 million for the six months ended June 30, 2021.

The increase was primarily due to an increase of $7.7 million in rusfertide clinical trial and development costs, including the ongoing Phase 2 trials in PV, which began in December 2019, and HH, which began in early 2020, and clinical and contract manufacturing activities incurred in 2021 in preparation for a planned global Phase 3 clinical trial of rusfertide in PV;

$3.2 million of Phase 1 clinical trial and development costs for PN-235 beginning in December 2020;

an increase of $1.5 million in PN-943

clinical trial and development costs following the initiation of the Phase 2 trial in UC during the second quarter of 2020;

and an increase of $1.3 million in preclinical and drug discovery research expenses, including pre-clinical costs related to our research collaboration efforts with Janssen which were completed during the second quarter of 2021.

Research and development expenses increased $32.6 million, or 59%, from $55.0 million for the nine months ended September 30, 2020 to $87.6 million for the nine months ended September 30, 2021.

The increase was primarily due to an increase of $14.2 million in rusfertide clinical trial and development costs as the clinical trials have enrolled and progressed, including the ongoing Phase 2 trials in PV, which began in December 2019 and the first quarter of 2021, respectively, and HH, which began in early 2020, and clinical and contract manufacturing activities incurred in 2021 in preparation for the ongoing Phase 2 trials and a planned global Phase 3 clinical trial of rusfertide in PV;

$8.5 million in PN-943 clinical trial and development costs following the initiation of the Phase 2 trial in UC during the second quarter of 2020 and related contract manufacturing activities incurred in 2021;

$4.0 million of expenses related to milestone payments and obligations under the Zealand Agreement for rusfertide pursuant to the resolution of related arbitration;

$3.8 million of Phase 1 clinical trial and development costs for PN-235 beginning in December 2020, an increase of $3.7 million in preclinical and drug discovery research expenses, and $0.9 million of Phase 1 clinical trial and development costs for PN-232 initiated in May 2021.

These increases were partially offset by a $1.4 million increase in grant and accrued refundable cash tax incentives and a decrease of $1.1 million in PTG-200 clinical trial and development expenses under the Janssen License and Collaboration Agreement due to our delivery of substantially all agreed-upon services for the PTG-200 Phase 2 clinical trial.

We had 81 and 52 full-time equivalent research and development employees as of June 30, 2021 and 2020, respectively.

We had 92 and 57 full-time equivalent research and development employees as of September 30, 2021 and 2020, respectively.

Research and development expenses for the nine months ended September 30, 2021 included increases of $3.1 million in stock-based compensation expense and $3.1 million of other personnel-related expenses compared to the nine months ended September 30, 2020.

General and Administrative Expenses

General and administrative expenses increased $3.9 million, or 45%, from $8.8 million for the six months ended June 30, 2020 to $12.7 million for the six months ended June 30, 2021 primarily due to an increase of $2.0 million in personnel expenses, $0.6 million in market research expenses, $0.4 million in consulting expenses, and $0.3 million in recruiting expenses to support the growth of our operations, and a $0.6 million increase in legal fees due primarily to an arbitration matter with a former research and collaboration partner.

General and administrative expenses increased $6.3 million, or 46%, from $13.6 million for the nine months ended September 30, 2020 to $19.9 million for the nine months ended September 30, 2021 primarily due to an increase of $3.5 million in personnel expenses, $1.4 million in consulting expenses, $0.7 million in market research expenses, and $0.5 million in recruiting expenses to support the growth of our operations, and a $0.2 million increase in legal fees.

The increase in personnel expenses was primarily due to increases of $2.3 million in stock-based compensation expense and $1.2 million in wages and salaries.

We had 20 and 17 full-time equivalent general and administrative employees as of June 30, 2021 and 2020, respectively.

We had 24 and 19 full-time equivalent general and administrative employees as of September 30, 2021 and 2020, respectively.

Interest Income

Interest income decreased $0.5 million, or 73%, from $0.7 million for the six months ended June 30, 2020 to $0.2 million for the six months ended June 30, 2021.

Interest income decreased $0.5 million, or 61%, from $0.8 million for the nine months ended September 30, 2020 to $0.3 million for the nine months ended September 30, 2021.

This decrease was due primarily to the recent record low interest rate environment and a change in the mix of marketable securities compared to the prior year period, despite higher interest-earning asset balances.

Interest Expense

Interest expense decreased $0.5 million, or 100%, from $0.5 million for the six months ended June 30, 2020 to zero for the six months ended June 30, 2021.

The decrease in interest expense was due to the prepayment of our outstanding long-term debt under our term credit facility during the second quarter of 2020.

We had no debt outstanding under our term loan facility during the six months ended June 30, 2021.

Interest expense of $0.5 million for the nine months ended September 30, 2020 reflects interest expense on our long-term debt under our term credit facility.

We prepaid our outstanding long-term debt under our term credit facility during the second quarter of 2020.

We executed a payoff letter to release all obligations under the term credit facility during the third quarter of 2021.

Loss on Early Repayment of Debt

Loss on early repayment of debt of $0.6 million for the six months ended June 30, 2020 reflects prepayment and final payment fees paid in connection with the early repayment of our term loan in June 2020.

We had no debt outstanding during the six months ended June 30, 2021.

Other (Expense) Income, Net

Other expense, net was $0.1 million for the six months ended June 30, 2021 compared to zero for the six months ended June 30, 2020.

Loss on early repayment of debt of $0.6 million for the nine months ended September 30, 2020 reflects prepayment and final payment fees paid in connection with the early repayment of our term loan in June 2020.

We had no debt outstanding as of September 30, 2021.

Other Expense, Net

Other expense, net was $0.1 million for the nine months ended September 30, 2021 compared to zero for the nine months ended September 30, 2020.

The change was due primarily to an increase in foreign exchange losses.

Income Tax Expense

Income tax expense decreased $1.3 million, or 100%, from $1.3 million for the six months ended June 30, 2020 to zero for the six months ended June 30, 2021.

Our effective income tax rate was 0% for the six months ended June 30, 2021 as compared to 3.4% for the six months ended June 30, 2020.

During the second quarter of 2020, our

Australia subsidiary sold beneficial rights to discovery intellectual property to our U.S.

Income tax expense decreased $1.3 million, or 100%, from $1.3 million for the nine months ended September 30, 2020 to zero for the nine months ended September 30, 2021.

Our effective income tax rate was 0% for the nine months ended September 30, 2021 as compared to 2.8% for the nine months ended September 30, 2020.

During the second quarter of 2020, our Australia subsidiary sold beneficial rights to discovery intellectual property to our U.S.

entity, and the U.S.

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Upon completion of the sale, we analyzed tax planning strategies and future income and concluded that a valuation allowance is necessary for our Australia subsidiary.

Income tax expense for the six months ended June 30, 2020 reflects this sale of intellectual property rights, cost reimbursements and related adjustments to the deferred tax asset, establishing a valuation allowance and certain uncertain tax position liabilities.

We maintained a full valuation allowance on our tax position as of June 30, 2021.

Income tax expense for the nine months ended September 30, 2020 reflects this sale of intellectual property rights, cost reimbursements and related adjustments to the deferred tax asset, establishing a valuation allowance and certain uncertain tax position liabilities.

We maintained a full valuation allowance on our tax position as of September 30, 2021.

Liquidity and Capital Resources

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During the year ended December 31, 2020, we issued 2,483,719 shares under our ATM facility for net proceeds of $41.9 million.

No shares were issued under the ATM facility during the three and six months ended June 30, 2021.

As of June 30, 2021, a total of $94.2 million of common stock remained available for sale under the 2019 Form S-3, $31.9 million of which remained available for sale under the ATM financing facility.

No shares were issued under the ATM facility during the three and nine months ended September 30, 2021.

As of September 30, 2021, a total of $94.2 million of common stock remained available for sale under the 2019 Form S-3, $31.9 million of which remained available for sale under the ATM financing facility.

This Form S-3 expires in October 2022.

We have received $80.0 million in non-refundable payments from Janssen since the inception of the Janssen License and Collaboration Agreement in 2017 through June 30, 2021, as follows:

We have received $80.0 million in non-refundable payments from Janssen since the inception of the Janssen License and Collaboration Agreement in 2017 through September 30, 2021, as follows:

● Upon effectiveness of the agreement, we received a non-refundable, upfront cash payment of $50.0 million from Janssen;

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● In December 2019, we became eligible to receive a $5.0 million payment triggered by the successful nomination of a second-generation development compound, which was received during the first quarter of 2020.

In October 2021, we became eligible to receive a $7.5 million milestone payment from Janssen triggered by completion of the data collection for PN-235 Phase 1 activities.

We also receive payments for services provided under the collaboration agreement and in-kind reimburses Janssen for certain costs they have incurred based on the cost sharing terms of the agreement.

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Upcoming potential development milestones for second-generation products include:

● $7.5 million for completion of the first Phase 1 clinical trial of a second-generation product;

● $25.0 million for dosing of the third patient in the first Phase 2 clinical trial for any second-generation product for any indication;

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an indication different than the indication which triggered the $25.0 million milestone described directly above).

The next potential development milestone for initial product PTG-200 is $50.0 million for dosing of the third patient in a Phase 2b clinical trial for CD.

In October 2019, we entered into a credit and security agreement pursuant to which the lenders party thereto agreed to make term loans available to us for working capital and general business purposes, in a principal amount of up to $50.0 million, at our option, until September 30, 2021.

$20.0 million remains available under this term loan facility through September 30, 2021 subject to the satisfaction of certain conditions, including the achievement of certain clinical development milestones.

We had no outstanding debt balance as of June 30, 2021.

Additional information about this credit facility is presented in Note 9 to the condensed consolidated financial statements included elsewhere in this report.

Capital Requirements

As of June 30, 2021, we had $380.4 million of cash, cash equivalents and marketable securities and an accumulated deficit of $338.6 million.

Our capital expenditures for six months ended June 30, 2021 were $0.6 million.

As of September 30, 2021, we had $352.5 million of cash, cash equivalents and marketable securities and an accumulated deficit of $372.5 million.

Our capital expenditures for nine months ended September 30, 2021 were $0.9 million.

Our capital expenditures for the years ended December 31, 2020 and 2019 were $0.5 million and $1.0 million, respectively.

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Cash used to fund operating expenses is impacted by the timing of when we pay these expenses.

We believe, based on our current operating plan and expected expenditures, that our existing cash, cash equivalents and marketable securities and access to our term loan facility will be sufficient to meet our anticipated operating and capital expenditure requirements for at least the next 12 months from the date of this filing.

We believe, based on our current operating plan and expected expenditures, that our existing cash, cash equivalents and marketable securities will be sufficient to meet our anticipated operating and capital expenditure requirements for at least the next 12 months from the date of this filing.

We have based this estimate on assumptions that may prove to be wrong.

We could utilize our available capital resources sooner than we currently expect if our planned pre-clinical and clinical trials are successful, our product candidates enter new and more advanced stages of clinical development or our newer product clinical trials or advance beyond the discovery stage.

We could utilize our available capital resources sooner than we currently expect if our planned pre-clinical and clinical trials are successful or expanded, our product candidates enter new and more advanced stages of clinical development or our newer product clinical trials or advance beyond the discovery stage.

We expect to require additional financing to advance our product candidates through clinical development and toward potential regulatory approval and to develop, acquire or in-license other potential product candidates.

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● the achievement of development, regulatory and sales milestones resulting in payments to us from Janssen under the Janssen License and Collaboration Agreement or other such arrangements that we may enter into, and the timing of receipt of such payments, if any;

● the timing, receipt and amount of royalties under the Janssen License and Collaboration Agreement on worldwide net sales of PTG-200, including any second-generation compounds, upon regulatory approval or clearance, if any;

● the timing, receipt and amount of royalties under the Janssen License and Collaboration Agreement on worldwide net sales of IL-23 receptor antagonist compounds, upon regulatory approval or clearance, if any;

● the amount and timing of sales and other revenues from our current product candidates and any other product candidates we may identify and develop, including the sales price and the availability of adequate third-party reimbursement;

● the timing, payment and amount of potential milestones and royalties due under our collaboration agreements;

● the cash requirements of any future acquisitions or discovery of product candidates;

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The following table summarizes our cash flows for the periods indicated (in thousands):

Six Months Ended

Nine Months Ended

September 30,

Cash used in operating activities

Cash provided by investing activities

Cash used in investing activities

Cash provided by financing activities

Cash Flows from Operating Activities

Cash used in operating activities for the six months ended June 30, 2021 was $52.5 million, consisting of our net loss of $54.8 million and a net change of $6.3 million in net operating assets and liabilities, partially offset by $8.7 million in non-cash charges.

Non-cash charges were primarily comprised of $6.6 million of stock-based compensation, $0.9 million of operating lease right-of-use asset amortization, $0.8 million of net amortization of discount on marketable securities, and $0.4 million of depreciation and amortization.

The change in net operating assets and liabilities was primarily due to a decrease of $12.5 million in deferred revenue related to the Janssen License and Collaboration Agreement, an increase of $4.7 million in receivable from collaboration partner, an increase of $1.7 million in research and development tax incentive receivable, an increase in prepaid expenses and other assets of $1.4 million, and a decrease of $1.0 million in operating lease liability, partially offset by an increase of $8.7 million in payable to collaboration partner, an increase of $4.9 million in accounts payable and an increase of $1.4 million in accrued expenses and other payables.

Cash used in operating activities for the six months ended June 30, 2020 was $37.3 million, consisting of our net loss of $39.5 million and a net change of $5.0 million in net operating assets, partially offset by $7.1 million in non-cash charges.

Cash used in operating activities for the nine months ended September 30, 2021 was $80.9 million, consisting of our net loss of $88.6 million and a net change of $6.9 million in net operating assets and liabilities, partially offset by $14.6 million in non-cash charges.

Non-cash charges were primarily comprised of $11.4 million of stock-based compensation, $1.4 million of operating lease right-of-use asset amortization, $1.3 million of net amortization of discount on marketable securities, and $0.6 million of depreciation.

The change in net operating assets and liabilities was primarily due to a decrease of $12.2 million in deferred revenue related to the Janssen License and Collaboration Agreement, an increase of $0.2 million in receivable from collaboration partner, an increase of $0.9 million in research and development tax incentive receivable, an increase in prepaid expenses and other assets of $2.6 million, a decrease of $1.5 million in operating lease liability, a decrease of $1.6 million in payable to collaboration partner, a decrease of $2.3 million in accounts payable and partially offset by an increase of $14.4 million in accrued expenses and other payables.

Cash used in operating activities for the nine months ended September 30, 2020 was $53.6 million, consisting of our net loss of $47.3 million and a net change of $16.0 million in net operating assets, partially offset by $9.7 million in non-cash charges.

Non-cash charges were primarily comprised of $5.9 million of stock-based compensation, a $1.4 million change in net deferred tax asset, $1.3 million of operating lease right-of-use asset amortization, a $0.6 million loss on early prepayment of long-term debt and $0.6 million of depreciation and amortization, partially offset by $0.2 million of net accretion of discount on marketable securities.

The change in net operating assets and liabilities was primarily due to a decrease of $7.5 million in deferred revenue related to the Janssen License and Collaboration Agreement, a $1.0 million decrease in operating lease liability, a $0.3 million increase in Australia research and development incentive receivable, a $0.3 million decrease in payable to collaboration partner and a $0.3 million increase in prepaid expenses and other assets, partially offset by a decrease of $3.8 million in receivable from collaboration partner and an increase of $0.4 million in accrued expenses and other payables.

The change in net operating assets and liabilities was primarily due to a decrease of $20.7 million in deferred revenue related to the Janssen License and Collaboration Agreement, a $1.6 million decrease in prepaid expenses and other assets, a $1.5 million decrease in operating lease liability, and a $0.5 million increase in Australia research and development incentive receivable, partially offset by a decrease of $4.0 million in receivable from collaboration partner, an increase of $3.1 million in accrued expenses and other payables, an increase of $0.8 million in payable to collaboration partner, and an increase of $0.2 million in other liability.

Cash Flows from Investing Activities

Cash provided by investing activities for the six months ended June 30, 2021 was $1.0 million, consisting of proceeds from maturities of marketable securities of $165.1 million, offset by purchases of marketable securities of $163.5 million and purchases of property and equipment of $0.6 million.

Cash provided by investing activities for the six months ended June 30, 2020 was $37.6 million, consisting of proceeds from maturities of marketable securities of $104.6 million, partially offset by purchases of marketable securities of $66.8 million and purchases of property and equipment of $0.3 million.

Cash used in investing activities for the nine months ended September 30, 2021 was $43.7 million, consisting of proceeds from maturities of marketable securities of $213.1 million, offset by purchases of marketable securities of $255.9 million and purchases of property and equipment of $0.9 million.

Cash used in investing activities for the nine months ended September 30, 2020 was $16.6 million, consisting of proceeds from maturities of marketable securities of $131.4 million, partially offset by purchases of marketable securities of $147.6 million and purchases of property and equipment of $0.3 million.

Cash Flows from Financing Activities

Cash provided by financing activities for the six months ended June 30, 2021 was $126.4 million, consisting of $124.0 million of cash proceeds from our public offering of common stock and $2.6 million from the issuance of common stock upon exercise of stock options and purchases of common stock under our employee stock purchase plan, partially offset by $0.2 million of tax withholding payments related to net settlement of restricted stock units.

Cash provided by financing activities for the six months ended June 30, 2020 was $113.0 million, consisting primarily of cash proceeds from our public offering of common stock of $105.7 million, cash proceeds from ATM sales

of $16.8 million, and proceeds from the issuance of common stock upon exercise of stock options and purchases of common stock under our employee stock purchase plan of $1.0 million, partially offset by early repayment of long-term debt of $10.5 million.

Cash provided by financing activities for the nine months ended September 30, 2021 was $127.8 million, consisting of $124.0 million of cash proceeds from our public offering of common stock and $3.9 million from the issuance of common stock upon exercise of stock options and purchases of common stock under our employee stock purchase plan, partially offset by $0.2 million of tax withholding payments related to net settlement of restricted stock units.

Cash provided by financing activities for the nine months ended September 30, 2020 was $120.6 million, consisting primarily of cash proceeds from our public offering of common stock of $105.5 million, cash proceeds from ATM sales of $23.2 million, and proceeds from the issuance of common stock upon exercise of stock options and purchases of common stock under our employee stock purchase plan of $2.5 million, partially offset by early repayment of long-term debt of $10.5 million.

Contractual Obligations and Other Commitments

During the three and six months ended June 30, 2021, there were no material changes to our contractual obligations and commitments described under Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 10, 2021.

Our contractual obligations include minimum lease payments under our operating lease obligations.

On July 2, 2021, we entered into an amendment to our facility lease agreement dated as of March 2017, as amended, to lease approximately 15,000 square feet of additional office space in Newark, California.

See Note 10 to the condensed consolidated financial statements elsewhere in this Quarterly Report on Form 10-Q for additional information.

Under the Janssen License and Collaboration Agreement, we share with Janssen certain development, regulatory and compound supply costs.

The actual amounts that we pay Janssen or that Janssen pays us will depend on numerous factors, some of which are outside of our control and some of which are contingent upon the success of certain development and regulatory activities.

On July 27, 2021, we entered into an amended and restated License and Collaboration Agreement (“Restated Agreement”) with Janssen Biotech, Inc., a Pennsylvania corporation (“Janssen”).

The Restated Agreement amends and restates the License and Collaboration Agreement, dated May 26, 2017, by and between the Company and Janssen (as amended by the First Amendment thereto, effective May 7, 2019, the “Original Agreement”).

See Note 3 to the condensed consolidated financial statements elsewhere in the Quarterly Report on Form 10-Q for additional information.

On January 23, 2020, we initiated arbitration proceedings with the International Court of Arbitration of the International Chamber of Commerce against Zealand Pharma related to a collaboration agreement we and Zealand entered into in 2012 and terminated in 2014.

The agreement provides for certain post-termination payment obligations to Zealand with respect to compounds related to the collaboration that we elect to further develop and meet specified conditions.

On August 4, 2021, we and Zealand agreed to resolve the dispute and reached an Arbitration Resolution Agreement.

See Note 11 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.

During the three and nine months ended September 30, 2021, there were no other material changes to our contractual obligations and commitments described under Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 10, 2021.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis