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Item 7. Management’s Discussion and Analysis

2022-02-28 compared with 2021-03-10 · 224 added, 224 removed, 240 unchanged (65% of the section changed)

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 consolidated financial statements and related notes included elsewhere in this Annual Report.

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 “Item 1A.

Risk Factors” and in other parts of this Annual Report.

We are a biopharmaceutical company with multiple peptide-based new chemical entities in different stages of development, all derived from the Company's proprietary technology platform.

Our clinical programs address two broad categories of diseases;

(i) hematology and blood disorders, and (ii) inflammatory and immunomodulatory diseases.

Our most advanced clinical asset, rusfertide (generic name for PTG-300), is an injectable hepcidin mimetic in development for the potential treatment of erythrocytosis, iron overload and other blood disorders.

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Rusfertide mimics the effect of the natural hormone hepcidin, but with greater potency, solubility and stability.

We initiated Phase 2 proof of concept (“POC”) studies in the blood disorders polycythemia vera (“PV”) in the third quarter of 2019 and hereditary hemochromatosis (“HH”) in January 2020.

In December 2020, we presented four posters and one oral presentation relating to rusfertide at the American Society for Hematology’s virtual annual meeting, including updated interim Phase 2 results for rusfertide in PV.

We believe these interim results provide evidence regarding the potential of rusfertide to eliminate the need for phlebotomy by controlling hematocrit levels below 45% on an individual patient basis.

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 selected PV as our first indication for potential pivotal study in rusfertide and expect to complete patient enrollment in the ongoing Phase 2 clinical trial by mid-2021.

We are consulting with regulatory authorities in the first half of 2021 to discuss the registrational clinical development plan.

In June 2020, the U.S.

Food and Drug Administration (“FDA”) granted orphan drug designation for rusfertide for the treatment of PV.

In October 2020, the European Medicines Agency granted orphan drug designation for rusfertide for the treatment of PV.

In December 2020, the FDA granted Fast Track designation for rusfertide for the treatment of PV.

In addition, we expect to disclose preliminary data from our Phase 2 POC study in HH, our second indication, in the second half of 2021.

We discontinued development of rusfertide for anemia associated with beta-thalassemia and myelodysplastic syndromes during the first half of 2020.

Our clinical assets PTG-943 and PTG-200 are orally delivered investigational drugs currently in development for inflammatory bowel disease (“IBD”), a gastrointestinal (“GI”) disease consisting primarily of ulcerative colitis (“UC”) and Crohn’s disease (“CD”), 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 initiated REVIVE, a Phase 2 proof of concept (“POC”) study in the blood disorder polycythemia vera (“PV”), in the third quarter of 2019.

We initiated a Phase 2 POC study in hereditary hemochromatosis (“HH”) in January 2020, which was completed during the fourth quarter of 2021.

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

In June 2021, we presented updated Phase 2 data supporting the long-term efficacy of rusfertide in PV during an oral presentation at the European Hematology Association (“EHA”) 2021 Virtual Congress.

A n abstract highlighting positive preliminary data from our Phase 2 study of rusfertide in HH was orally presented at The Liver Meeting® 2021, hosted by the American Association for the Study of Liver Diseases (“AASLD”), which took place virtually in November 2021.

In December 2021, two abstracts highlighting positive updated data from our REVIVE and PACIFIC Phase 2 studies of rusfertide in PV were orally presented at the American Society of Hematology (“ASH”) 2021 Annual Meeting, in addition to three poster presentations on rusfertide in PV and HH.

These results provided evidence regarding the potential of rusfertide for managing hematocrit, reducing thrombotic risk and improving iron deficiency symptoms.

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

On September 16, 2021, the FDA placed a clinical hold on our rusfertide clinical studies following our submission to the FDA of findings in a 26-week rasH2 transgenic mouse carcinogenicity study.

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.

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 and enrollment in ongoing clinical trials with rusfertide resumed in the fourth quarter of 2021.

We enrolled 63 patients in the ongoing REVIVE Phase 2 clinical trial of rusfertide in PV prior to the clinical hold, and we are currently enrolling approximately 20 patients to target approximately 50 patients enrolled through the end of a three-year open label extension.

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 VERIFY, a global Phase 3 clinical trial of rusfertide in PV in the first quarter of 2022.

Patient enrollment into VERIFY is expected to be completed in the first half of 2023.

In addition, we completed our Phase 2 POC study in HH, our second indication, during the fourth quarter of 2021 .

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

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

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

● The FDA granted Fast Track designation for rusfertide for the treatment of PV in December 2020;

● 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 compound 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 a targeted therapeutic approach for GI and systemic compartments as needed.

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.

As a result, if successfully developed and approved, we believe they may transform the existing treatment paradigm for IBD.

PN-943 is an investigational, orally delivered, gut-restricted alpha-4-beta-7 (“α4β7”) specific integrin antagonist.

We developed PN-943 as a potentially more potent orally delivered, gut-restricted α4β7 backup compound to PTG-100, our first-generation orally delivered gut-restricted α4β7 inhibitor that was being developed for treatment of IBD.

In 2019, we completed a Phase 1 single ascending dose (“SAD”) and multiple ascending dose (“MAD”) clinical study of PN-943 in healthy volunteers to evaluate safety, pharmacokinetics and pharmacodynamics.

The pharmacodynamic results indicated that the administration of PN-943 was well tolerated and showed results of target engagement that were

suggestive of higher potency for PN-943 as compared to PTG-100.

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

We submitted a U.S.

Investigational New Drug application (“IND”) with the FDA for PN-943 in December 2019, which took effect in January 2020, and we initiated a Phase 2 POC study in UC in the second quarter of 2020 which is expected to be completed in 2022, subject to delays related to the COVID-19 pandemic.

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

Investigational New Drug application with the FDA for PN-943 in December 2019, which took effect in January 2020.

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

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

Patient enrollment in IDEAL was completed during the first quarter of 2022, and topline data from the study, including 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 PTG-200 and certain related compounds for all indications, including IBD.

The agreement with Janssen was amended in May 2019 to expand the collaboration by supporting efforts towards second-generation IL- 23R antagonists, triggering a $25.0 million milestone payment to us.

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.

Due to the uncertain effect on the timing of clinical trials caused by the COVID-19 pandemic, we have suspended guidance on a timeline for completion of the PTG-200 Phase 2 study.

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 2021.

PN-232 is in the late preclinical stage and we expect to initiate and complete a Phase 1 study for PN-232 in 2021.

The advancement of three different oral co-development candidates provides us with several strategic options for development in multiple indications.

We are also continuing our joint research efforts to identify additional IL-23R antagonists.

(“Janssen”), a Johnson & Johnson company, to co-develop and co-detail our IL-23R antagonist compounds, including PTG-200 (JNJ-67864238) and certain related compounds for all indications, including IBD.

PTG-200 was a first-generation 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;

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

In October 2020, we and Janssen announced the selection of two second-generation IL23-R antagonists for advancement into clinical development, PN-232 (JNJ-75105186) and PN-235 (JNJ-77242113).

During the fourth quarter of 2021, following a pre-specified interim analysis criteria, a portfolio decision was made by Janssen to stop further development of both PTG-200 and PN-232 favor of advancing PN-235, based on its superior potency and overall pharmacokinetic and pharmacodynamic profile.

A PN-235 Phase 1 study was completed in Q4 2021.

Janssen initiated FRONTIER 1, a Phase 2b clinical study of PN-235 in moderate-to-severe plaque psoriasis, in early 2022, and is expected to initiate a separate Phase 2 study of PN-235 in IBD in the second half of 2022 .

During the fourth quarter of 2021, we received a $7.5 million milestone payment from Janssen triggered by the completion of data collection for PN-235 Phase 1 activities.

We expect to earn a $25.0 million milestone in connection with the dosing of a third patient in the first Phase 2 study of a second-generation candidate, and a $10.0 million milestone in connection with the dosing of a third patient in 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 $87.5 million in milestones already received.

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

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COVID-19 Business Impact

We are subject to risks and uncertainties as a result of the COVID-19 pandemic.

We are subject to risks and uncertainties as a result of the ongoing COVID-19 pandemic.

We are continuing to closely monitor the impact of the COVID-19 pandemic on our business and have taken and continue to take proactive efforts to protect the health and safety of our patients, study investigators, clinical research staff and employees, and to maintain business continuity.

The extent of the impact of the COVID-19 pandemic on our activities is highly 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.

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

Capital markets and economies worldwide have been significantly impacted by the COVID-19 pandemic and may be further impacted in the future.

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

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The severity of the impact of the COVID-19 pandemic on our activities will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic, including the severity of any additional periods of increases or spikes in the number of cases in the areas we, our suppliers and our manufacturers operate and areas where our clinical trial sites are located;

the development and spread of COVID-19 variants;

the timing, extent, effectiveness and durability of COVID-19 vaccine programs or other treatments;

and new or continuing travel and other restrictions and public health measures, such as social distancing, business closures or disruptions.

Accordingly, the extent and severity of the impact on our existing and planned clinical trials, manufacturing, collaboration activities and operations is uncertain and cannot be fully predicted.

We have experienced delays in our existing and planned clinical trials due to the worldwide impacts of the pandemic.

Our future results of operations and liquidity could be adversely impacted by further delays in existing and planned clinical trials and collaboration activities, continued difficulty in recruiting patients for these clinical trials, delays in manufacturing and collaboration activities, supply chain disruptions, the ongoing impact on operating activities and employees, and the ongoing impact of any initiatives or programs that we may undertake to address financial and operational challenges.

of the date of issuance of this Annual Report on Form 10-K, the extent to which the COVID-19 pandemic may materially impact our future financial condition, liquidity or results of operations is uncertain.

Our future results of operations and liquidity could be adversely impacted by further delays in existing and planned clinical trials and collaboration activities, continued difficulty in recruiting patients for these clinical trials, delays in manufacturing and collaboration activities, supply chain disruptions, the ongoing impact on our operating activities and employees, and the ongoing impact of any initiatives or programs that we may undertake to address financial and operational challenges.

As of the date of issuance of this Annual Report on Form 10-K, the extent to which the COVID-19 pandemic may materially impact our future financial condition, liquidity or results of operations is uncertain.

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

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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 and other expenses related to our ongoing operations, product development, including clinical development activities under our worldwide license and collaboration agreement with Janssen, and pre-commercialization activities.

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

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 towards identifying and development 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.

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 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 the fourth quarter of 2021, we received a $7.5 million milestone payment from Janssen triggered by data collection activities for the first Phase 1 clinical trial of a second-generation compound during the fourth quarter of 2021.

See Note 3 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information.

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

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

The preparation of these 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 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.

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Use of Estimates

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets.

Due to the ongoing COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets.

We have taken into consideration any known COVD-19 impacts in our accounting estimates to date and are not aware of any additional specific events or circumstances that would require any additional updates to our estimates or judgments or a revision of the carrying value of our assets or liabilities as of the date of issuance of this Annual Report on Form 10-K.

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Actual results could differ materially from these estimates under different assumptions or conditions.

We adopted Accounting Standards Codification Topic 842, Leases, (“ASC 842”) effective January 1, 2019.

We determine if an arrangement is a lease at inception.

Pursuant to ASC 842, operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities, and noncurrent operating lease liabilities on the consolidated balance sheets.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date.

If our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments.

The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred.

Lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

We record tenant improvement allowances as a reduction to the ROU asset with the impact of the decrease recognized prospectively over the remaining lease term.

The leasehold improvements will be amortized over the shorter of their useful life or the remaining term of the lease.

Revenue Recognition

We follow Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”).

Under ASC 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services.

Under Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”), we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services.

To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform the following five steps:

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Under the expected value method, an entity considers the sum of probability-weighted amounts in a range of possible consideration amounts.

Under the most likely amount method, an entity considers the single most likely amount in a range of possible consideration amounts.

Under the most likely amount method, an entity considers the single most likely amount in a range of possible

consideration amounts.

Whichever method is used, it should be consistently applied throughout the life of the contract;

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Milestone payments that are not within our control or the control of the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received.

If there is more than one performance obligation, the transaction price is then allocated to

each performance obligation on a relative stand-alone selling price basis.

If there is more than one performance obligation, the transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis.

We recognize revenue as or when the performance obligations under the contract are satisfied.

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Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.

Any potential milestone payments that we determine are not associated with performance obligations as defined under the contract are excluded from the transaction price and are recognized as the triggering event occurs.

For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).

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Changes in these estimates that result in material changes to our accruals could materially affect our results of operations.

We have received orphan drug designation from the U.S.

Food and Drug Administration (“FDA”) for our clinical asset rusfertide (generic name for PTG-300) for the treatment of PV and beta-thalassemia and may qualify for a related 25% U.S.

Federal income tax credit on qualifying clinical study expenditures.

Stock-Based Compensation

We recognize compensation costs related to stock options accounted for under Accounting Standards Codification Topic 718 – “ Stock Compensation” based on the estimated fair value of the awards on the date of grant.

We estimate the fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model.

The estimated fair value of the stock-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards.

The Black-Scholes option-pricing model requires the use of subjective assumptions which determine the fair value of stock-based awards.

Expected volatility generally requires significant judgement to determine.

Prior to January 1, 2020, our expected volatility was estimated based on the average volatility for comparable publicly traded biopharmaceutical companies over a period equal to the expected term of the stock option grants.

Beginning January 1, 2020, our expected volatility was estimated based upon a mix of 75% of the average volatility for comparable publicly traded biopharmaceutical companies over a period equal to the expected term of the stock option grants and 25% of the volatility of our own stock price since our initial public offering in August 2016.

These comparable companies are chosen based on their similar size, stage in the life cycle, or area of specialty.

We will continue to apply this process until a longer period of historical information regarding the volatility of our own stock price becomes available.

We use the asset and liability method of accounting for income taxes.

Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

We assess the likelihood that the resulting deferred tax assets will be realized.

A valuation allowance is provided when it is more likely than not that all or some portion of a deferred tax asset will not be realized.

At December 31, 2020, our total gross deferred tax assets were $72.9 million and our gross deferred tax liabilities were $1.0 million.

Due to our lack of earnings history and uncertainties surrounding our ability to generate future taxable income, our net deferred tax assets have been offset by a valuation allowance of $71.9 million.

The deferred tax assets were primarily comprised of federal and state tax net operating loss and tax credit carryforwards.

At December 31, 2020, we had $222.8 million of federal net operating loss carryforwards and $214.3 million of state net operating loss carryforwards.

$78.7 million of the federal net operating loss carryforwards will begin to expire in 2033, if not utilized, and the remaining $144.1 million have no expiration date.

The state net operating loss carryforwards will begin to expire in 2035, if not utilized.

As of December 31, 2020, we also had accumulated Australian tax losses of AUD 3.7 million ($2.8 million) available for carry forward against future earnings, which under relevant tax laws do not expire but may not be available under certain circumstances.

Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to ownership changes that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code (the “Code”), and similar state provisions.

These ownership change limitations may limit the amount of net operating loss carryforwards and other tax attributes that can be utilized annually to offset future taxable income and tax, respectively.

In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points (by value) of the outstanding stock of a company by certain stockholders.

Recent Accounting Pronouncements

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We recognize the funds from grants under government programs as a reduction of research and development expenses when the related research costs are incurred.

In addition, we recognize the funds related to our Australian

research and development refundable cash tax incentive that are not subject to refund provisions as a reduction of research and development expenses.

In addition, we recognize the funds related to our Australian research and development refundable cash tax incentive that are not subject to refund provisions as a reduction of research and development expenses.

The research and development tax incentives are recognized when there is reasonable assurance that the incentives will be received, the relevant expenditure has been incurred and the amount of the consideration can be reliably measured.

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Indirect costs allocated to our product candidates on a program specific basis include research and development employee salaries, benefits, and stock-based compensation, and indirect overhead and other administrative support costs.

Program-specific costs are unallocated when the clinical expenses are incurred for our early stage research and drug discovery projects, our internal resources, employees and infrastructure are not tied to any one research or drug discovery project and are typically deployed across multiple projects.

Program-specific costs are unallocated when the clinical expenses are incurred for our early-stage research and drug discovery projects;

our internal resources, employees and infrastructure are not tied to any one research or drug discovery project and are typically deployed across multiple projects.

As such, we do not provide financial information regarding the costs incurred for early stage pre-clinical and drug discovery programs on a program-specific basis prior to the clinical development stage.

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Year Ended December 31,

(Dollars in thousands)

Clinical and development expense — rusfertide (PTG-300)

Clinical and development expense — PN-943

Clinical and development expense — PTG-200

Clinical and development expense — PN-235

Clinical and development expense — PN-232

Clinical and development expense — PTG-200

Clinical and development expense — PTG-100

Preclinical and drug discovery research expense

Milestone payment obligation to former collaboration partner

Pre-clinical and drug discovery research expense

Grants and tax incentives expense reimbursement, net

Total research and development expenses

We expect our research and development expenses will increase as we progress our product candidates into later stage clinical trials, expand the number of ongoing clinical trials, advance development activities under the Janssen License and Collaboration Agreement, advance our discovery research projects into the pre-clinical stage and continue our early-stage research.

The process of conducting research, identifying potential product candidates and conducting pre-clinical and clinical trials necessary to obtain regulatory approval is costly and time intensive.

We expect our research and development expenses will increase as we progress our product candidates into later stage clinical trials, add to the number of ongoing clinical trials, advance our discovery research projects into the pre-clinical stage, continue our early-stage research and prepare for the commercialization of our product candidates.

The process of conducting research, identifying potential product candidates and conducting pre-clinical and clinical trials necessary to obtain regulatory approval and commencing pre-commercialization activities is costly and time intensive.

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.

The probability of success of our product candidates may be affected by numerous factors, including pre-clinical data, clinical data, competition, manufacturing capability, our cost of goods to be sold, 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.

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.

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General and Administrative Expenses

General and administrative expenses consist of personnel costs, allocated facilities costs and other expenses for outside professional services, including legal, human resources, audit and accounting services, and pre-commercial selling and marketing costs.

Personnel costs consist of salaries, benefits and stock-based compensation.

Allocated expenses consist of expenses for rent and maintenance of facilities, information technology, depreciation and amortization expense and other supplies.

We expect to continue to incur expenses to support our continued operations as

a public company, including expenses related to existing and future compliance with rules and regulations of the SEC and those of the national securities exchange on which our securities are traded, insurance expenses, investor relations, professional services and general overhead and administrative costs.

We expect to continue to incur expenses to support our continued operations as a public company, including expenses related to existing and future compliance with rules and regulations of the SEC and those of the national securities exchange on which our securities are traded, insurance expenses, investor relations, audit fees, professional services and general overhead and administrative costs.

Interest Income

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Other expense, net

Loss before income tax (expense) benefit

Income tax (expense) benefit

(1) Includes $4.1 million and $4.4 million of non-cash stock-based compensation expense for the year ended December 31, 2020 and 2019, respectively.

(2) Includes $3.8 million and $4.0 million of non-cash stock-based compensation expense for the year ended December 31, 2020 and 2019, respectively.

*Percentage not meaningful

Loss before income tax expense

Income tax expense

(1) Includes $9.0 million and $4.1 million of non-cash stock-based compensation expense for the years ended December 31, 2021 and 2020, respectively.

(2) Includes $7.4 million and $3.8 million of non-cash stock-based compensation expense for the years ended December 31, 2021 and 2020, respectively.

License and Collaboration Revenue

License and collaboration revenue increased $28.4 million from $0.2 million for the year ended December 31, 2019 to $28.6 million for the year ended December 31, 2020.

The increase in license and collaboration revenue was primarily due to an update in the amounts forecast for future services remaining to be performed under the Janssen License and Collaboration Agreement, correspondingly increasing our overall cumulative percentage of completion of our performance obligation during year ended December 31, 2020, coupled with continued performance and delivery of services under the ongoing Janssen License and Collaboration Agreement.

The increase in license and collaboration revenue for the year ended December 31, 2020 also included the impact of a one-time cumulative adjustment related to the application of revenue recognition principles following the May 2019 amendment of the Janssen License and Collaboration Agreement that reduced 2019 revenue by $9.4 million.

The contract modification resulted in an increase in the transaction price and additional deliverables under the initial performance obligation, leading to an overall corresponding decrease in the cumulative percentage of completion of our performance obligation for the Janssen License and Collaboration Agreement during the second quarter of 2019.

We determined that the transaction price of the Janssen License and Collaboration Agreement was $98.6 million as of December 31, 2020, a decrease of $14.3 million from the transaction price of $112.9 million at December 31, 2019.

License and collaboration revenue decreased $1.3 million, or 4%, from $28.6 million for the year ended December 31, 2020 to $27.4 million for the year ended December 31, 2021.

The decrease in license and collaboration revenue 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 year ended December 31, 2021 following the amendment of our collaboration agreement for the development of IL-23R 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 year ended December 31, 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 year ended December 31, 2020, coupled with continued performance and delivery of services under the Janssen License and Collaboration Agreement.

We have determined that the transaction price of the initial performance obligation under the Restated Janssen License and Collaboration Agreement was $106.5 million as of December 31, 2021, an increase of $7.9 million from the transaction price of $98.6 million as of December 31, 2020 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.

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 $6.8 million of net cost reimbursement to Janssen for services performed.

The decrease in transaction price from December 31, 2019 to December 31, 2020 was due primarily to a decrease in the forecast of remaining services to be provided under the initial performance obligation.

We determined that the transaction price includes $87.5 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 $8.2 million of development cost reimbursement receivable from Janssen, partially offset by $7.1 million of net cost reimbursement due to Janssen for services performed.

The increase in transaction price from December 31, 2020 to December 31, 2021 was due primarily to reductions in both the remaining services to be performed by the Company under the agreement and the Company’s remaining shared development costs following 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.

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Clinical and development expense — PN-943

Clinical and development expense — PTG-200

Clinical and development expense — PN-235

Clinical and development expense — PN-232

Clinical and development expense — PTG-200

Preclinical and drug discovery research expense

Grants and tax incentive expense reimbursement, net

Clinical and development expense — PTG-100

Preclinical and discovery research expense

Milestone payment obligation to former collaboration partner

Grants and tax incentives expense reimbursement, net

Total research and development expenses

1 unchanged sentence

Research and development expenses increased $51.5 million, or 69%, from $74.5 million for the year ended December 31, 2020 to $126.0 million for the year ended December 31, 2021.

The increase included a $14.3 million increase in pre-clinical and discovery research expenses, including pre-clinical costs related to our second-generation research collaboration efforts with Janssen, a $2.4 million increase in PN-943 clinical trial and development expenses following the initiation of the Phase 2 trial in UC in 2020, a $2.1 million increase in rusfertide clinical trial and development expenses, including the ongoing Phase 2 trials in PV and HH, and $0.3 million of Phase 1 clinical trial and development expenses for PN-235.

These increases were partially offset by a decrease of $8.5 million for PTG-200 clinical trial and development expenses under the Janssen License and Collaboration Agreement due to timing of

deliverables and related cost sharing arrangements, and the impact of a $1.3 million reversal of previously recorded reductions to research and development expenses in connection with the tax incentive from Australia in 2019.

Research and development expenses for the year ended December 31, 2020 included increased personnel costs due to an increase in research and development headcount from 54 full-time equivalent employees at December 31, 2019 to 59 full-time equivalent employees at December 31, 2020.

The increase was primarily due to an increase of $23.0 million in rusfertide clinical trial and development costs as clinical trials have enrolled and progressed, including the ongoing REVIVE and PACIFIC 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 support of the REVIVE and PACIFIC Phase 2 trials and planned VERIFY global Phase 3 clinical trial of rusfertide in PV;

$14.3 million in PN-943 clinical trial and development costs and contract manufacturing costs primarily related to the Phase 2 IDEAL trial in UC initiated during the second quarter of 2020;

an increase of $6.5 million in preclinical and drug discovery research expenses;

$4.5 million of clinical trial and development costs for the Phase 1 PN-235 initiated in December 2020;

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

and $2.0 million of clinical trial and development costs for the Phase 1 PN-232 study initiated in May 2021.

These increases were partially offset by a $1.7 million increase in grant and accrued refundable cash tax incentives and a decrease of $0.9 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 prior to 2021.

We had 92 and 59 full-time equivalent research and development employees at December 31, 2021 and 2020, respectively.

Research and development expenses for the year ended December 31, 2021 included increases of $4.9 million in stock-based compensation expense and $5.3 million of other personnel-related expenses compared to the year ended December 31, 2020.

General and Administrative Expenses

General and administrative expenses increased $2.9 million, or 18%, from $15.7 million for the year ended December 31, 2019 to $18.6 million for the year ended December 31, 2020 primarily due to increases of $1.4 million in compensation-related expenses to support the growth of our operations, $1.3 million in legal expenses and $0.8 million in insurance expense, partially offset by a $0.6 decrease in other expenses, including accounting fees, market research, recruiting fees and travel expense.

General and administrative expenses increased $8.6 million, or 46%, from $18.6 million for the year ended December 31, 2020 to $27.2 million for the year ended December 31, 2021, primarily due to increases of $5.2 million in personnel-related expenses;

$1.6 million in consulting expenses, $0.9 million in market research expenses, $0.5 million in recruiting expenses to support the growth of our business;

and $0.3 million increase in insurance expense.

The increase in personnel-related expenses was primarily due to an increase of $3.6 million in stock-based compensation expense and $1.6 million in wages and salaries.

We had 26 and 20 full-time equivalent general and administrative employees as of December 31, 2021 and 2020, respectively.

Interest Income

Interest income decreased $0.5 million, or 51%, from $0.9 million for the year ended December 31, 2020 to $0.4 million for the year ended December 31, 2021.

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

This decrease was primarily due 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 increased $0.4 million, or 254%, from $0.2 million for the year ended December 31, 2019 to $0.6 million for the year ended December 31, 2020.

Interest expense reflects contractual interest, amortization of origination fees and other issuance costs, and accretion of final payment fees on our term loan that funded in October 2019 and was repaid in full in June 2020.

Interest expense of $0.6 million for the year ended December 31, 2020 was comprised of 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 year ended December 31, 2020 was comprised of 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 December 31, 2021.

Other Expense, Net

Other expense, net was $0.1 million for the year ended December 31, 2021 compared to zero for the year ended December 31, 2020.

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

Income Tax Expense

Income tax expense increased by $2.0 million, or 289%, from an income tax benefit of $0.7 million for the year ended December 31, 2019 to income tax expense of $1.3 million for the year ended December 31, 2020.

Income tax expense decreased $1.3 million, or 100%, from $1.3 million for the year ended December 31, 2020 to zero for the year ended December 31, 2021.

Our effective income tax rate was 0% for the year ended December 31, 2021 as compared to 2.0% for the year ended December 31, 2020.

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Income tax expense for year ended December 31, 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.

Income tax benefit for the year ended December 31, 2019 included a discrete tax benefit of approximately $1.1 million for the 2017 Australia refundable R&D tax offset.

We maintained a full valuation allowance on our tax position as of December 31, 2021.

Comparison of the Years ended December 31, 2020 and 2019

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Interest expense

Loss on early repayment of debt

Other expense, net

Loss before income tax benefit

Income tax benefit

(1) Includes $4.4 million and $3.4 million of non-cash stock-based compensation expense for the year ended December 31, 2019 and 2018, respectively.

(2) Includes $4.0 million and $3.5 million of non-cash stock-based compensation expense for the year ended December 31, 2019 and 2018, respectively.

Loss before income tax (expense) benefit

Income tax (expense) benefit

(1) Includes $4.1 million and $4.4 million of non-cash stock-based compensation expense for the years ended December 31, 2020 and 2019, respectively.

(2) Includes $3.8 million and $4.0 million of non-cash stock-based compensation expense for the years ended December 31, 2020 and 2019, respectively.

*Percentage not meaningful

License and Collaboration Revenue

License and collaboration revenue decreased $30.7 million, or 99%, from $30.9 million for the year ended December 31, 2018 to $0.2 million for the year ended December 31, 2019.

The decrease in license and collaboration revenue was primarily due to a contract modification for the First Amendment to the Janssen License and Collaboration Agreement and the related cumulative catchup adjustment during the second quarter of 2019.

The contract modification resulted in an increase in the transaction price and additional deliverables under the performance obligation, leading to an overall corresponding decrease in the cumulative percentage of completion of our performance obligation for the Janssen License and Collaboration Agreement.

We determined that the transaction price of the Janssen License and Collaboration Agreement was $112.9 million as of December 31, 2019, an increase of $52.2 million from the transaction price of $60.7 million at December 31, 2018.

In order to determine the transaction price, we evaluated all payments to be received during the duration of the contract, net of Phase 2 development costs reimbursement expected to be payable to Janssen.

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, $18.3 million of reimbursement from Janssen for services performed for PTG-200 Phase 2 and for second-generation compound research costs and other services, and $14.6 million of estimated variable consideration, which includes a $7.5 million milestone payment subject to the completion of a Phase 1 study for a second-generation compound.

The increase in transaction price from December 31, 2018 to December 31, 2019 was due to an increase in fixed and variable consideration related to the contract modification for First Amendment to the Janssen License and Collaboration Agreement effective May 7, 2019.

License and collaboration revenue increased $28.4 million from $0.2 million for the year ended December 31, 2019 to $28.6 million for the year ended December 31, 2020.

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

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Clinical and development expense — PN-943

Clinical and development expense — PN-235

Clinical and development expense — PTG-200

Clinical and development expense — PTG-100

Milestone payment obligation to former collaboration partner

Preclinical and drug discovery research expense

Grants and tax incentive expense reimbursement, net

Grants and tax incentives expense reimbursement, net

Total research and development expenses

1 unchanged sentence

Research and development expenses increased $9.5 million, or 15%, from $65.0 million for the year ended December 31, 2019 to $74.5 million for the year ended December 31, 2020.

The increase included $20.4 million of PN-943 clinical trial and development expenses, an increase of $16.0 million in rusfertide clinical trial and development expenses and a $1.3 million reversal of previously recorded reductions to research and development expenses in connection with the tax incentive from Australia, partially offset by a decrease of $20.1 million in PTG-100 clinical trial and development expenses due to the halting of further development during 2018 and related credit adjustments, a decrease of $6.7 million for PTG-200 clinical trial and development expenses under the Janssen License and Collaboration Agreement due to timing of deliverables and a decrease of $5.7 million in pre-clinical and discovery research expenses.

Research and development expenses for the year ended December 31, 2019 included increased personnel costs due to an increase in research and development headcount from 49 employees at December 31, 2018 to 54 employees at December 31, 2019.

These increases were partially offset by a decrease of $8.5 million for PTG-200 clinical trial and development expenses under the Janssen License and Collaboration Agreement due to timing of deliverables and related cost sharing arrangements, and the impact of a $1.3 million reversal of previously recorded reductions to research and development expenses in connection with the tax incentive from Australia in 2019.

General and Administrative Expenses

General and administrative expenses increased $2.0 million, or 15%, from $13.7 million for the year ended December 31, 2018 to $15.7 million for the year ended December 31, 2019 primarily due to increases of $1.0 million in personnel costs to support the growth of our operations, $0.7 million in professional fees and $0.3 million in insurance expense.

The increase in personnel costs for the year ended December 31, 2019 reflected an increase in general and administrative headcount from 15 employees at December 31, 2018 to 19 employees at December 31, 2019.

General and administrative expenses increased $2.9 million, or 18%, from $15.7 million for the year ended December 31, 2019 to $18.6 million for the year ended December 31, 2020 primarily due to increases of $1.4 million in compensation-related expenses to support the growth of our operations, $1.3 million in legal expenses and $0.8 million in insurance expense, partially offset by a $0.6 million decrease in other expenses, including accounting fees, market research, recruiting fees and travel expense.

Interest Income

Interest income increased $0.2 million, or 10%, from $2.6 million for the year ended December 31, 2018 to $2.8 million for the year ended December 31, 2019 primarily due to higher interest income related to an increase in marketable securities balances.

Income Tax Benefit

Income tax benefit decreased $0.1 million, or 14%, from $0.8 million for the year ended December 31, 2018, representing an effective income tax rate of 2.0%, to $0.7 million for the year ended December 31, 2019, representing an effective income tax rate of 0.9%.

Our effective income tax rate differs from our federal statutory rate of 21%, primarily because our U.S.

loss cannot be benefited due to the full valuation allowance position and reduced by foreign taxes.

Interest income decreased $1.9 million, or 68%, from $2.8 million for the year ended December 31, 2019 to $0.9 million for the year ended December 31, 2020.

Interest Expense

Interest expense increased $0.4 million, or 254%, from $0.2 million for the year ended December 31, 2019 to $0.6 million for the year ended December 31, 2020.

Income Tax Expense

Our effective income tax rate was (2.0)% for the year ended December 31, 2020 as compared to 0.9% for the year ended December 31, 2019.

Our effective income tax rate differs from our federal statutory rate of 21% primarily because our losses cannot be benefited due to our full valuation allowance position.

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 benefit for the year ended December 31, 2019 included a discrete tax benefit of approximately $1.1 million for the 2017 Australia refundable R&D tax offset.

Liquidity and Capital Resources

Liquidity and Capital Expenditures

As of December 31, 2020, we had $307.8 million of cash, cash equivalents and marketable securities and an accumulated deficit of $283.8 million.

Our operations have been financed primarily by net proceeds from the sale of shares of our capital stock and payments under the Janssen License and Collaboration Agreement.

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

During the second quarter of 2019, we received a nonrefundable $25.0 million payment from Janssen upon execution of the First Amendment.

During the first quarter of 2020, we received a nonrefundable $5.0 million payment from Janssen.

In September 2017, we filed a registration statement on Form S-3 with the Securities and Exchange Commission (File No.

333-220314) that was declared effective as of October 5, 2017 and permits the offering, issuance, and sale by us of up to a maximum aggregate offering price of $200.0 million of our common stock, preferred stock and certain debt securities (the “2017 Form S-3”).

Up to a maximum of $50.0 million of the maximum aggregate offering price of $200.0 million could be issued and sold pursuant to an at-the-market (“ATM”) financing facility under a sales agreement (the “2017 Sales Agreement”).

The 2017 Sales Agreement was terminated in 2019.

During the year ended December 31, 2019, prior to the termination of the 2017 Sales Agreement, we sold 2,846,641 shares of our common stock for net proceeds of $34.5 million, after deducting issuance costs.

We sold 151,273 shares of our common stock pursuant to the 2017 Sales Agreement during the year ended December 31, 2018 for net proceeds of $1.5 million, after deducting issuance costs.

The 2017 Form S-3 expired in October 2020.

In August 2018, we entered into a Securities Purchase Agreement with certain accredited investors (each, an “Investor” and, collectively, the “Investors”), pursuant to which we sold an aggregate of 2,750,000 shares of our common stock at a price of $8.00 per share, for aggregate net proceeds of $21.7 million, after deducting offering expenses payable by us.

In a concurrent private placement, we issued the Investors warrants to purchase an aggregate of 2,750,000 shares of our common stock (each, a “Warrant” and, collectively, the “Warrants”).

Each Warrant is exercisable from August 8, 2018 through August 8, 2023.

Warrants to purchase 1,375,000 shares of our common stock have an exercise price of $10.00 per share and Warrants to purchase 1,375,000 shares of our common stock have an exercise price of $15.00 per share.

The exercise price and number of shares of common stock issuable upon the exercise of the Warrants (the “Warrant Shares”) are subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described in the Warrants.

Under certain circumstances, the Warrants may be exercisable on a “cashless” basis.

In connection with the issuance and sale of the common stock and Warrants, we granted the Investors certain registration rights with respect to the Warrants and the Warrant Shares.

The common stock and Warrants are classified as equity in accordance with Accounting Standards Codification Topic 480 , Distinguishing Liabilities from Equity (“ASC 480”) , and the net proceeds from the transaction were recorded as a credit to additional paid-in capital.

As of December 31, 2020, none of the Warrants have been exercised.

In December 2018, we entered into an exchange agreement (the “Exchange Agreement”) with an Investor and its affiliates (the “Exchanging Stockholders”), pursuant to which we exchanged an aggregate of 1,000,000 shares of our common stock, par value $0.00001 per share, owned by the Exchanging Stockholders for pre-funded warrants (the “Exchange Warrants”) to purchase an aggregate of 1,000,000 shares of common stock (subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described in the Exchange Warrants), with an exercise price of $0.00001 per share.

The Exchange Warrants will expire ten years from the date of issuance.

The Exchange Warrants are exercisable at any time prior to expiration except that the Exchange Warrants cannot be exercised by the Exchanging Stockholders if, after giving effect thereto, the Exchanging Stockholders would beneficially own more than 9.99% of our common stock, subject to certain exceptions.

In accordance with Accounting Standards Codification Topic 505, Equity , we recorded the retirement of the common stock exchanged as a reduction of common stock shares outstanding and a corresponding debit to additional paid-in-capital at the fair value of the Exchange Warrants on the issuance date.

The Exchange Warrants are classified as equity in accordance with ASC 480 , and fair value of the Exchange Warrants was recorded as a credit to additional paid-in capital and is not subject to remeasurement.

We determined that the fair value of the Exchange Warrants is substantially similar to the fair value of the retired shares on the issuance date due to the negligible exercise price for the Exchange Warrants.

During the year ended December 31, 2019, Exchange Warrants to purchase 600,000 shares were net exercised, resulting in the issuance of 599,997 shares of common stock.

As of December 31, 2020, 400,000 of the Exchange Warrants remain unexercised.

Sources of Liquidity

Historically, we have funded our operations primarily from net proceeds from the sale of shares of our common stock and payments under collaboration agreements.

In December 2020, we filed an automatic registration statement on Form S-3ASR and an accompanying prospectus (File No.

333-251254), pursuant to which we completed an underwritten public offering of 4,761,904 shares of common stock at a public offering price of $21.00 per share and issued an additional 714,285 shares of our common stock at a price of $21.00 per share following the underwriters’ exercise of their option to purchase additional shares.

Net proceeds, after deducting underwriting commissions and offering costs paid by us, were $107.6 million.

In June 2021, pursuant to the Form S-3ASR (File No.

333-251254), we completed an underwritten public offering of 3,046,358 shares of common stock at a public offering price of $37.75 per share and issued an additional 456,953 shares of common stock at a public offering price of $37.75 per share following the underwriters’ exercise of their option to purchase additional shares.

Net proceeds, after deducting underwriting commission and offering costs paid by us, were $123.8 million.

This Form S-3ASR expires in December 2023.

In October 2019, we filed a registration statement on Form S-3 (File No.

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Up to a maximum of $75.0 million of the maximum aggregate offering price of $250.0 million may be issued and sold pursuant to an ATM financing facility under a sales agreement we entered into on November 27, 2019 (the “2019 Sales Agreement”).

In May 2020, we completed an underwritten public offering of 7,000,000 shares of common stock at a public offering price of $14.00 per share and issued an additional 1,050,000 shares of our common stock at a price of $14.00 per share following the underwriters’ exercise of their option to purchase additional shares.

Net proceeds, after deducting underwriting commissions and offering costs paid us, were $105.3 million.

We sold 2,483,719 shares of our common stock pursuant to the 2019 Sales Agreement during the year ended December 31, 2020 for net proceeds of $41.9 million, after deducting issuance costs.

As of December 31, 2020, 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.

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, including a $10.0 million term loan which was funded at closing (October 30, 2019), with the ability to access the remaining $40.0 million in two additional tranches of $20.0 million, subject to specified availability periods, the achievement of certain clinical development milestones, minimum cash requirements and other customary conditions.

In June 2020, we prepaid the outstanding $10.0 million balance on the term loan as well as $0.6 million for related prepayment and exit fees.

We did not exercise our option to borrow the $20.0 million second tranche of Term Loans, which expired on December 31, 2020, and therefore have one remaining $20.0 million tranche available under the Term Loan Credit Agreement and no related outstanding balance as of December 31, 2020.

Additional information about this credit facility and our long-term debt is presented in Note 9 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

In December 2020, we filed an automatic registration statement on Form S-3ASR and an accompanying prospectus (Registration Statement No.

In May 2020, we completed an underwritten public offering of 7,000,000 shares of common stock at a public offering price of $14.00 per share, and we issued an additional 1,050,000 shares of our common stock at a price of $14.00 per share following the underwriters’ exercise of their option to purchase additional shares.

Net proceeds, after deducting underwriting commissions and offering costs paid by us, were $105.3 million.

This Form S-3ASR expires in December 2023.

Our primary uses of cash are to fund operating expenses, primarily research and development expenditures and pre-commercialization costs.

Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued 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 have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.

If our planned pre-clinical and clinical trials are successful, or our other product candidates enter clinical trials or advance beyond the discovery stage, we will need to raise additional funding, which may come from raising additional capital, seeking access to additional debt, and additional collaborative or other arrangements with corporate sources in order to further advance our product candidates towards potential regulatory approval, but such funding may not be available at terms acceptable to us, if at all.

We will continue to require additional financing to advance our current product candidates through clinical development, to develop, acquire or in-license other potential

product candidates and to fund operations for the foreseeable future.

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 year ended December 31, 2021.

As of December 31, 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 $87.5 million in non-refundable payments from Janssen since the inception of the Janssen License and Collaboration Agreement in 2017 through December 31, 2021, as follows:

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

● Upon effectiveness of the First Amendment, we became eligible to receive a $25.0 million payment from Janssen, which was received during the second quarter of 2019;

● 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;

● During the fourth quarter of 2021, we received $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.

Pursuant to the amended and restated License and Collaboration Agreement with Janssen executed July 27, 2021 (the “Restated Agreement”), we will be eligible to receive clinical development, regulatory and sales milestones, if and as achieved.

Upcoming potential development milestones for second-generation products include:

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

● $10.0 million for dosing of the third patient in the first Phase 2 clinical trial for any second-generation product for a second indication.

Capital Requirements

As of December 31, 2021, we had $326.9 million of cash, cash equivalents and marketable securities and an accumulated deficit of $409.4 million.

Our capital expenditures were $1.1 million, $0.5 million and $1.0 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Our primary uses of cash are to fund operating expenses, primarily our research and development expenditures, general and administrative costs and pre-commercialization costs.

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 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 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.

Such additional funding may come from raising additional capital, seeking access to debt, and additional collaborative or other arrangements with corporate sources, but such funding may not be available at terms acceptable to us, if at all.

We anticipate that we will need to raise substantial additional funding, the requirements of which will depend on many factors, including:

● the progress, timing, scope, results and costs of our pre-clinical studies and clinical trials for our product candidates, including the ability to enroll patients in a timely manner for our clinical trials;

● the progress, timing, scope, results and costs of our clinical trials and pre-clinical studies for our product candidates, including the ability to enroll patients in a timely manner for our clinical trials;

● the costs of and ability to obtain clinical and commercial supplies and any other product candidates we may identify and develop;

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● the selling and marketing costs associated with our current product candidates and any other product candidates we may identify and develop, including the cost and timing of expanding our sales and marketing capabilities;

● 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 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 achievement of development, regulatory and sales milestones resulting in payments to us from Janssen under the Janssen License and Collaboration Agreement, as amended, or other such arrangements 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 IL23-R antagonists 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;

10 unchanged sentences

If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated product development programs.

The following table summarizes our cash flows for the periods indicated:

Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to fully estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated product development programs.

The following table includes our cash flow data for the periods indicated (in thousands):

Year Ended December 31,

(In thousands)

Consolidated Statements of Cash Flows Data:

Cash used in operating activities

Cash (used in) 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 year ended December 31, 2020 was $72.5 million, consisting or our net loss of $66.2 million and a net change of $19.0 million in net operating assets and liabilities, partially offset by non-cash charges of $12.7 million.

Non-cash charges were primarily comprised of $7.9 million of stock-based compensation, $1.8 million of operating lease ROU asset amortization, a $1.4 million change in net deferred tax asset, $0.8 million of depreciation and amortization, a $0.6 million loss on early prepayment of long-term debt and $0.2 million of amortization of debt issuance costs and accretion of debt discount.

The change in net operating assets and liabilities was primarily due to a decrease of $27.0 million in deferred revenue related to the Janssen License and Collaboration Agreement, a $1.9 million decrease in operating lease liability, a $1.1 million increase in prepaid expenses and other assets and a $1.0 million increase in Australia research and development refundable cash tax incentive receivable, partially offset by an increase of $5.8 million in accrued expenses and other liabilities, a decrease of $4.3 million in receivable from collaboration partner, an increase of $1.5 million in payable to collaboration partner, an increase of $0.3 million in accounts payable, and an increase of $0.1 million in other liability.

Cash used in operating activities for the year ended December 31, 2019 was $41.5 million, consisting of our net loss of $77.2 million, partially offset by a net change of $26.1 million in net operating assets and liabilities and non-cash charges of $9.5 million.

The change in net operating assets and liabilities was primarily due to a net increase of $33.5 million in deferred revenue related to the Janssen License and Collaboration Agreement, a decrease of $1.4 million in research and development refundable cash tax incentive receivable and an increase of $1.1 million in accrued expenses and other payables, partially offset by an decrease of $3.0 million in accounts payable, an increase of $2.8 million in prepaid expenses and other assets, an increase of $2.2 million in receivable from collaboration partner and a decrease of $1.9 million in operating lease liability.

Non-cash charges were primarily comprised of $8.4 million of stock-based compensation, $1.8 million of operating lease right-of-use asset amortization and $0.7 million of depreciation and amortization, partially offset by a $0.8 million increase in deferred tax assets and $0.6 million of net accretion of discount on marketable securities.

Cash used in operating activities for the year ended December 31, 2018 was $49.9 million, consisting of our net loss of $38.9 million and a net change of $18.0 million in net operating assets and liabilities, partially offset by non-cash charges of $7.0 million.

The change in net operating assets and liabilities was primarily due to a net decrease of $23.5 million in deferred revenue related to the Janssen License and Collaboration Agreement and an increase of $2.8 million in receivable from collaboration partner, partially offset by an increase of $4.4 million in accounts payable, an increase of $1.9 million in accrued expenses and other payables, an increase of $1.1 million in payable to collaboration partner and a decrease of $1.1 million in prepaid expenses and other assets.

Non-cash charges were primarily comprised of $6.9 million of stock-based compensation, $0.5 million of depreciation and amortization and $0.2 million of net amortization of premium on marketable securities, partially offset by a $0.7 million increase in deferred tax assets.

Cash Flows from Investing Activities

Stock-based compensation

(Decrease) increase in deferred revenue - related party

Cash Used in Operating Activities

Cash used in operating activities during the year ended December 31, 2021 of $107.9 million consisted primarily of our net loss of $125.6 million, partially offset by certain non-cash items including $16.4 million of stock-based compensation expense.

The $35.4 million increase in cash flow used in operating activities during the year ended December 31, 2021, as compared to the year ended December 31, 2020, was primarily due to a $59.4 million increase in our net loss, partially offset by certain non-cash items including an increase of $8.5 million of stock-based compensation expense, and a $14.2 million change in decrease in deferred revenue.

Cash used in operating activities for the year ended December 31, 2020 of $72.5 million consisted primarily of our net loss of $66.2 million and net changes of $19.0 million in net operating assets and liabilities, partially offset by certain non-cash items including $7.9 million of stock-based compensation expense and a $1.4 million decrease in deferred tax asset.

Changes in net operating assets and liabilities included a $27.1 million decrease in deferred revenue, partially offset by a $5.8 million increase in accrued expenses and other payables and a $4.3 decrease in receivable from collaboration partner.

The $31.0 million increase in cash flow used in operating activities during the year ended December 31, 2020, as compared to the year ended December 31, 2019, was primarily due to a $60.4 million change in decrease in deferred revenue, partially offset by an $11.0 million decrease in our net loss, a $15.2 million net increase due to changes in other operating assets and liabilities, and a $2.2 million change in decrease in deferred tax asset.

Cash Used in Investing Activities

Cash used in investing activities for the year ended December 31, 2021 was $15.9 million, consisting of purchases of marketable securities of $286.6 million and purchases of property and equipment of $1.1 million, partially offset by proceeds from maturities of marketable securities of $271.8 million.

The $75.1 million decrease in cash used in investing activities for the year ended December 31, 2021, as compared to the year ended December 31, 2020, was primarily due to an increase of $82.3 million in proceeds from maturities of marketable securities.

Purchases of property and equipment were primarily related to purchases of laboratory equipment, furniture and computer equipment.

Cash used in investing activities for the year ended December 31, 2020 was $91.0 million, consisting of purchases of marketable securities of $280.0 million and purchases of property and equipment of $0.5 million, partially offset by proceeds from maturities of marketable securities of $189.5 million.

Purchases of property and equipment were primarily related to purchases of scientific equipment and leasehold improvements.

Cash provided by investing activities for the year ended December 31, 2018 was $2.2 million, consisting of proceeds from marketable securities of $73.8 million, partially offset by purchases of marketable securities of $71.1 million and purchases of property and equipment of $0.5 million.

Purchases of property and equipment were primarily related to purchases of scientific equipment.

Cash Flows from Financing Activities

The $37.3 million increase in cash used in investing activities for the year ended December 31, 2020, as compared to the year ended December 31, 2019, was primarily due to an increase of $113.0 million in purchases of marketable securities, partially offset by an increase of $75.3 million of proceeds from maturities of marketable securities.

Purchases of property and equipment were primarily related to purchases of laboratory equipment, furniture and computer equipment.

Cash Provided by Financing Activities

Cash provided by financing activities for the year ended December 31, 2021 was $129.9 million, consisting primarily of cash proceeds from our public offerings of common stock of $123.8 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 $6.3 million.

The $117.7 million decrease in cash provided by financing activities for the year ended December 31, 2021, as compared to the year ended December 31, 2020, was primarily due to an $89.5 million decrease in cash proceeds from our public offerings of common stock, a $42.1 million decrease in cash proceeds from ATM sales, and a $3.5 million decrease in proceeds from the issuance of common stock upon exercise of stock options and purchases of common stock under our employee stock purchase plan.

These decreases were partially offset by $10.5 million related to the early repayment of long-term debt in 2020.

Cash provided by financing activities for the year ended December 31, 2020 was $247.6 million, consisting primarily of cash proceeds from our public offerings of common stock of $213.3 million, cash proceeds from ATM sales of $42.1 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 $2.8 million, partially offset by early repayment of long-term debt of $10.5 million.

Cash provided by financing activities for the year ended December 31, 2019 was $46.0 million, consisting of $34.5 million of net proceeds from sales of common stock through our ATM financing facility, $9.8 million of net proceeds from long-term debt and $1.8 million from the issuance of common stock upon exercise of stock options and purchases of common stock under our employee stock purchase plan.

Cash provided by financing activities for the year ended December 31, 2018 was $24.1 million, consisting of $21.7 million of net proceeds from issuance of our common stock and warrants in a private placement, $1.5 million of net proceeds from sales through our ATM financing facility and $0.9 million from the issuance of common stock upon exercise of stock options and purchases of common stock under our employee stock purchase plan.

The $201.6 million increase in cash provided by financing activities for the year ended December 31, 2020, as compared to the year ended December 31, 2019, was primarily due to an increase of $213.3 million in cash

proceeds from our public offerings of common stock and a $7.6 million increase in cash proceeds from ATM sales, and a decrease of $9.8 million in proceeds received from the issuance of long-term debt, partially offset by $10.5 million related to the repayment of long-term debt in 2021.

Contractual Obligations and Other Commitments

In the normal course of business, we enter into agreements with contract service providers to assist in the performance of our R&D and clinical and commercial manufacturing activities.

Subject to required notice periods and our obligations under binding commitments, we can elect to discontinue the work under these agreements at any time.

We expect to enter into additional clinical development, contract research, clinical and commercial manufacturing, supplier and collaborative research agreements in the future, which may require upfront payments and long-term commitments of capital resources.

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 consolidated financial statements elsewhere in this Annual Report on Form 10-K for additional information.

We enter into agreements in the normal course of business with contract research organizations for clinical trials and with vendors for pre-clinical studies and other services and products for operating purposes, which are cancelable at any time by us, generally upon 30 to 60 days prior written notice.

On July 27, 2021, we entered into an amended and restated License and Collaboration Agreement with 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).

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.

See Note 3 to the consolidated financial statements elsewhere in this Annual Report on Form 10-K for additional information.

In June 2012, we entered into a Research Collaboration and License Agreement with Zealand Pharma A/S to identify, optimize and develop novel disulfide-rich peptides to discover a hepcidin mimetic.

We amended this agreement on February 28, 2014, at which point Protagonist assumed responsibility for the development program.

Legal Proceedings”, “Item 7.

Management’s Discussion and Analysis – Contractual Obligations and Other Commitments” and Note 7 and Note 11 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K 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 A/S.

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

See Note 7 and Note 11 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information.

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-K

Item 7. Management’s Discussion and Analysis