Item 7. Management’s Discussion and Analysis
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in “Item 1A. Risk Factors” of this Annual Report on Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Company Overview
We are a biopharmaceutical company focused on the discovery, development and commercialization of novel antibiotics for serious infectious diseases. We are conducting a Phase 3 clinical program focused on the infectious disease C. difficile infection, or CDI. We are also seeking to expand our product candidate portfolio through the development of new mechanism, precision antibiotics using our proprietary Discuva Platform. Our lead CDI product candidate is ridinilazole (formerly SMT19969), an orally administered small molecule antibiotic.
To date, we have financed our operations primarily through issuances of our common stock (and before the Redomiciliation Transaction issuances of Summit Therapeutics plc’s ordinary shares and American Depositary Shares, or ADSs), payments to us under our license and commercialization agreement with Eurofarma Laboratórios SA, or Eurofarma, payments to us under our now-terminated license and collaboration agreement with Sarepta, and development funding and other assistance from government entities, philanthropic, non-government and not for profit organizations and patient advocacy groups for our product candidates. In particular, we have received funding from BARDA, CARB-X, Innovate UK, Wellcome Trust and a number of not for profit organizations.
We have devoted substantially all of our efforts to research and development, including clinical trials. We have not completed the development of any drugs. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. The net losses we incur may fluctuate significantly from quarter to quarter and year to year, due to the nature and timing of our research and development activities. We anticipate that our expenses will increase substantially in connection with conducting clinical trials for our lead product candidate, ridinilazole (formerly SMT19969), for the treatment of patients with CDI and seeking marketing approval for ridinilazole in the United States, as well as other geographies. In addition, if we obtain marketing approval of ridinilazole in the United States or other jurisdictions where we retain commercial rights, we expect to incur significant sales, marketing, distribution and outsourced manufacturing expenses, as well as ongoing research and development expenses.
Key Components of our Results of Operations
Revenue
Revenue consists of amounts received from the license and commercialization agreement with Eurofarma. Prior periods also include amounts received from the license and collaboration agreement with Sarepta, which was terminated in August 2019, and a research collaboration agreement with F. Hoffmann-La Roche Ltd, which ended in February 2018. We have not generated any revenue from product sales.
Under the terms of the agreement with Eurofarma, we received an upfront payment of $2.5 million in December 2017. We are eligible to receive additional development milestones upon the achievement of staged patient enrollment targets in our ongoing Phase 3 clinical trials of ridinilazole. In February 2020, we achieved the first of these enrollment targets and triggered a milestone payment of $1.0 million from Eurofarma, and we are eligible to receive up to an additional $2.75 million in development milestones upon the achievement of additional enrollment targets. We are also eligible to receive up to an
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additional $21.4 million through other development milestones, commercial milestones, and one-time sales milestones based on cumulative net sales up to $100.0 million in the territory where Eurofarma has commercialization rights. Further, the agreement provides for product supply transfer payments expected to provide a return equivalent of a high single digit to low double-digit percentage of net sales. For each incremental $100.0 million in cumulative net sales achieved, we are entitled to a further milestone payment which, when combined with the aforementioned product supply transfer payments, is expected to provide a return equivalent to a mid- to high-teens percentage of net sales in the territories where we have granted Eurofarma commercialization rights.
Under the terms of the agreement with Sarepta, we received an upfront payment of $40.0 million and a development milestone payment of $22.0 million, which was payable after the first dosing of the last patient in PhaseOut DMD, our Phase 2 clinical trial of ezutromid. We also agreed to collaborate with Sarepta on the research and development of our utrophin modulators, or the licensed products, pursuant to a joint development plan. Until December 31, 2017, we were solely responsible for all research and development costs for the licensed products in the licensed territory, and thereafter we were responsible for 55.0% and Sarepta was responsible for 45.0% of such costs.
In June 2018, we announced the discontinuation of the development of ezutromid after PhaseOut DMD did not meet its primary or secondary endpoints. As a result, we updated the development period over which the revenues were recognized and deemed it to have concluded in June 2018 in line with when the development of ezutromid was discontinued. This resulted in all revenues relating to the Sarepta agreement that were previously deferred in the balance sheet being recognized in full. We continued to receive cost share income for wind-down activities in relation to PhaseOut DMD and our earlier-stage utrophin modulation development activities up until the agreement was terminated in August 2019.
Other Operating Income
Other operating income includes income received and recognized from grants and clinical trial support from government entities, philanthropic, non-government and not for profit organizations and patient advocacy groups. Specifically, the BARDA contract provides for a cost-sharing arrangement under which BARDA funds a specified portion of estimated costs for specified activities related to the continued clinical and regulatory development of ridinilazole for the treatment of CDI. We also have received grant income from a funding arrangement with CARB-X for our gonorrhea program, however, work on this program has since ceased as the series of antibiotics was determined not to have suitable qualities for further development.
Other operating income also includes benefit from two U.K. research and development tax credit cash rebate regimes: Small and Medium Enterprise, or SME, Program and the Research and Development Expenditure Credit, or RDEC, Program. Qualifying expenditures largely comprise employment costs for research staff, consumables, a proportion of relevant, permitted sub-contract costs and certain internal overhead costs incurred as part of research projects for which we do not receive commercial or other funding income. Under both schemes, the Company receives cash rebate payments ranging from 9.7% to 33.4% of eligible research and development expenditure, these payments are not dependent on the Company’s pre-tax net income levels.
Operating Expenses
The majority of our operating expenses since inception have consisted of research and development activities and general and administrative costs.
Research and Development Expenses
Research and development expenses consist of all costs associated with our research and development activities.
These include:
• costs incurred in conducting our preclinical studies and clinical trials through contract research organizations, including preclinical toxicology, pharmacology, formulation and manufacturing work;
• laboratory and vendor expenses incurred in relation to our preclinical and non-clinical studies;
• costs incurred in supply chain development and scale up activities to support product registration;
• employee related expenses, which include salary, benefits and stock-based compensation, for our research and development staff; and
• facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies.
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We utilize our employee and infrastructure resources across multiple research projects. We track expenses related to our clinical programs and certain preclinical programs on a per project basis. We expect our research and development expenses to continue to increase as compared to prior periods as we continue to enroll our Phase 3 clinical trials of ridinilazole for the treatment of CDI, continue our early-stage research programs for the treatment of Enterobacteriaceae infections, and continue our activities and initiate preclinical programs for future product candidates, including under our Discuva Platform. The timing and amount of these expenses will depend upon the outcome of our clinical trials and the associated costs. The timing and amount of these expenses will also depend on the costs associated with potential future clinical trials of our product candidates and the related expansion of our research and development organization, regulatory requirements, advancement of our preclinical programs and product candidate manufacturing costs.
The table below summarizes our research and development expenses by category. Our CDI program expenses, antibiotic pipeline development activities and DMD program expenses include costs paid to contract research organizations, manufacturing costs for our clinical trials and laboratory testing costs and research related expenses. Other research and development costs include staff and travel costs (including those of our internal CDI, antibiotic development and DMD teams), research and development related legal costs, patent registration fees, an allocation of facility-related costs and other non-core program related expenses.
Year ended Eleven months ended Year ended
December 31, December 31, January 31,
2020 2019 2019
CDI program $ 37,485 $ 26,731 $ 23,784
Antibiotic pipeline research and development costs 1,765 3,213 2,546
DMD program 11 320 12,631
Other research and development costs 14,013 9,545 13,042
Total $ 53,274 $ 39,809 $ 52,003
From inception to December 31, 2020, our total CDI program expenses were $118.5 million, our total antibiotic pipeline research and development expenses were $7.5 million and our total DMD program expenses were $69.8 million. We no longer expect to incur future costs related to the DMD program with the close-out activities related to ezutromid complete and the research collaboration with the University of Oxford terminated.
The successful development and commercialization of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the remainder of the development of ridinilazole or any of our future product candidates. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of:
• the progress, costs and results of clinical trials of ridinilazole for CDI;
• the scope, rate of progress, costs and results of preclinical development, laboratory testing and clinical trials for our future product candidates;
• the costs, timing and outcome of regulatory review of our product candidates;
• the efficacy and potential advantages of our product candidates compared to alternative treatments, including any standard of care, and our ability to achieve market acceptance for any of our product candidates that receive marketing approval;
• the costs and timing of commercialization activities, including product sales, marketing, distribution and manufacturing, for any of our product candidates that receive marketing approval and the rate we expand our physical presence; and
• the costs and timing of preparing, filing and prosecuting patent applications, maintaining, enforcing and protecting our intellectual property rights and defending against any intellectual property-related claims.
A change in the outcome of any of these variables with respect to the development of ridinilazole or any other product candidate that we may develop could result in a significant change in the costs and timing associated with the development of that product candidate. For example, if the U.S. Food and Drug Administration, or the FDA, the European Medicines Agency, or EMA, or another regulatory authority were to require us to conduct clinical trials or other testing beyond those that we currently contemplate for the completion of clinical development of ridinilazole or any other product candidate, or if we
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experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional resources and time on the completion of clinical development of that product candidate.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and benefits related to our executive, finance, business development, human resources and other support functions. Other general and administrative expenses include stock-based compensation expenses, market research costs, facility-related costs, consulting costs and expenses associated with the requirements of being a publicly traded company in the United States, including insurance, legal, audit and taxation services fees.
We anticipate that our general and administrative expenses will continue to increase in the future as we increase our headcount to support our continued research and development and potential commercialization of our product candidates. We also anticipate continued accounting, audit, regulatory, compliance, insurance and investor and public relations expenses associated with being a publicly traded company in the United States. Prior to the Redomiciliation Transaction, our American Depositary Shares, or ADSs, had traded on the Nasdaq Global Market and, until we canceled the admission on February 24, 2020, our ordinary shares had traded on AIM in the United Kingdom. Our common stock is currently traded on the Nasdaq Global Market, and therefore, we only anticipate incurring future expenses associated with being a listed public company in the United States.
Taxation
As a U.S. tax resident trading entity we are subject to U.S. corporate taxation. Prior to the Redomiciliation Transaction we were a U.K. resident trading entity and were subject to U.K. corporate taxation on group-wide taxable income. Our U.K. resident trading subsidiaries are still individually subject to U.K. corporate taxation. Due to the nature of our business, we have generated losses since inception. We have recorded a full valuation allowance against the deferred tax assets with respect to these tax losses in excess of our deferred tax liabilities because we do not consider it probable that there will be suitable taxable profits in the foreseeable future based on the evidence available against which to offset these losses.
Jumpstart Our Business Startups Act of 2012
As of January 1, 2021, we are no longer an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act. Formerly, as an emerging growth company, we were able to take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:
• an exemption from compliance with the auditor attestation requirement on the effectiveness of our internal controls over financial reporting;
• an exemption from compliance with any requirement that the Public Company Accounting Oversight Board may adopt regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;
• reduced disclosure about our executive compensation arrangements; and
• exemptions from the requirements to obtain a non-binding advisory vote on executive compensation or a shareholder approval of any golden parachute arrangements.
The last day of the fiscal year following the fifth anniversary of our initial public offering in March 2015 was December 31, 2020, hence we have ceased to be an emerging growth company. Accordingly, from January 1, 2021, we will no longer benefit from the above provisions.
In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We had irrevocably elected not to avail ourselves of delayed adoption of new or revised accounting standards and, therefore, we will continue to be subject to the same requirements to adopt new or revised accounting standards as other public companies that are not emerging growth companies.
Business Impact of COVID-19 Pandemic
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In December 2019, an outbreak of respiratory illness caused by a novel coronavirus, commonly referred to as COVID-19, began in Wuhan, China and has now spread worldwide. On March 11, 2020, the World Health Organization declared the outbreak a global pandemic and public health emergency, and on March 13, 2020, the President of the United States declared the virus as a national emergency. In addition to those who have been directly affected, millions more have been affected by government efforts in the United States, the United Kingdom, the European Union and around the world to slow the spread of the pandemic through quarantines, travel restrictions, heightened border scrutiny and other measures. The pandemic and measures taken in response by governments, private industry, individuals and others have also had significant direct and indirect adverse impacts on businesses and commerce as supply chains have been disrupted; facilities and production have been suspended; and demand for certain goods and services has spiked, while demand for other goods and services has decreased significantly.
The COVID-19 pandemic and measures taken to contain it have affected our business and operations in several ways. These include, but are not limited to, the following:
• A substantial portion of our employees are remote working and expect to continue working remotely for the foreseeable future. We have been unable to undertake certain activities directly at the same level as prior to the pandemic, including clinical trial visits and investigator meetings, with such activities being done remotely where possible. We have been relying on remote means of working and communication both internally and externally. We are continuing to monitor and support the health and well-being of our employees and their productivity as remote working continues.
• Certain of our clinical trial sites have suspended enrollment due to facility closures, reduced staff and operations, quarantine travel restrictions and other governmental restrictions. Additionally, we have experienced, and may continue to experience, patient enrollment at a slower pace at certain of our clinical trial sites than expected. We may also face difficulties in recruiting and retaining patients in our clinical trials to the extent patients are affected by the virus or are fearful of visiting or traveling to our clinical trial sites because of the pandemic. As a result, we expect the results from our clinical trials to be delayed, which we expect will have a material adverse impact on our clinical trial timelines and result in increased clinical development costs.
• As a result of the slower pace of patient enrollment, our clinical supplies of ridinilazole and vancomycin manufactured for our Phase 3 clinical trials may not be utilized prior to their expiration and may need to be replaced. While we do not currently anticipate significant interruptions in our clinical supply chain, quarantines, travel restrictions and other measures may significantly impact the ability of employees of our third-party suppliers to get to their places of work to manufacture and deliver additional clinical supplies, which could cause the results from our clinical trials to be delayed even further and may increase the costs of our clinical trials.
• Many of our clinical trial sites have been operating with reduced staff and other restrictions. We have increased our efforts to engage with our clinical trial sites with a focus on retaining patients and maintaining scheduled visits and treatments, and where possible, instituted practices such as addition of home healthcare provider services for patients and remote monitoring.
• The pandemic has caused significant disruption to the financial markets and has caused volatility in the price of our stock and that of other companies in the biotechnology industry.
The progression of the COVID-19 pandemic continues to evolve and its enduring impact on our business remains uncertain. There may be other material adverse impacts on our business, operations and financial condition that are unpredictable at this time, including delays in the development and regulatory approval of our product candidates and difficulties in retaining qualified personnel during the pandemic and once it subsides. The extent to which the pandemic may impact our business will depend on future developments, such as the duration of the pandemic, quarantines, travel restrictions and other measures in the United States, the United Kingdom, the European Union and around the world, business closures or business disruptions and the effectiveness of actions taken to contain the pandemic.
Results of Operations
Comparison of the Year Ended December 31, 2020, to the Eleven Months Ended December 31, 2019
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Following the change in the Company's fiscal year end from January 31 to December 31, effective December 31, 2019, the following table summarizes the results of our operations for the year ended December 31, 2020, and the eleven months ended December 31, 2019, together with the changes to those items:
Period ended Change 2020 vs. 2019
December 31, 2020 December 31, 2019 Increase/(Decrease)
(in thousands, except percentages)
Revenue $ 860 $ 743 $ 117 15.7 %
Operating expenses:
Research and development 53,274 39,809 13,465 (33.8)
General and administrative 19,232 11,279 7,953 (70.5)
Impairment of goodwill and intangible assets 859 — 859 100.0
Total operating expenses 73,365 51,088 22,277 43.6
Other operating income 19,312 22,872 (3,560) (15.6)
Loss from operations (53,193) (27,473) (25,720) 93.6
Other income (expense), net 283 (1,618) 1,901 117.5
Loss before income tax (52,910) (29,091) (23,819) 81.9
Benefit (charge) from income taxes 213 (36) 249 (691.7)
Net loss $ (52,697) $ (29,127) $ (23,570) 80.9 %
Revenue
Revenue was $0.9 million for the year ended December 31, 2020, compared to $0.7 million for the eleven months ended December 31, 2019.
The Company recognized revenue of $0.9 million during the year ended December 31, 2020 and $0.6 million during the eleven months ended December 31, 2019, relating to the receipt of a $2.5 million upfront payment and a $1.0 million enrollment milestone payment in respect of the license and commercialization agreement signed with Eurofarma in December 2017.
Revenues in the period ended December 31, 2019, also included $0.1 million relating to the Company’s license and collaboration agreement with Sarepta which was terminated, effective August 2019, following the Company’s decision to discontinue development of ezutromid in June 2018 and has no material ongoing obligations for either party.
Other Operating Income
Other operating income was $19.3 million for the year ended December 31, 2020, as compared to $22.9 million for the eleven months ended December 31, 2019. Other operating income for these periods primarily related to the Company's funding contract with BARDA for the development of ridinilazole for the treatment of CDI. Specifically, the Company recognized other operating income of $9.5 million during the year ended December 31, 2020, as compared to $16.6 million during the eleven months ended December 31, 2019, from the BARDA contract. This decrease of $7.1 million is due to reaching the funding limit on certain work segments of the contract. This decrease is partially offset by an increase in U.K. Research and Development Expenditure Credits as research and development expenses not funded by third parties may be eligible for these credits, see below for details.
The Company also recognized other operating income of $0.5 million during the year ended December 31, 2020, as compared to $0.8 million during the eleven months ended December 31, 2019, related to the Company's funding arrangements with CARB-X for its gonorrhea program. With the Company's decision not to advance the DDS-01 series of antibiotics and to cease work on the gonorrhea program, it is expected CARB-X will cover its remaining share of the work that has been funded under the award.
In addition, $9.4 million was recognized in respect of U.K. Research and Development Expenditure Credits for the year ended December 31, 2020 as compared to $5.5 million for the eleven months ended December 31, 2019. This increase of $3.9 million is due primarily to additional research and development expenses incurred during the year ended December 31, 2020 that were not funded by third parties.
Operating Expenses
Research and Development Expenses
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Research and development expenses increased by $13.5 million to $53.3 million for the year ended December 31, 2020 from $39.8 million for the eleven months ended December 31, 2019. There was increased expenditure related to the Company's CDI program and the research and development related staffing and facilities costs, offset by decreased expenditure related to antibiotic pipeline research and development activities and the discontinued DMD program. This net increase is also due, in part, to the comparison of a twelve month period to an eleven month period. When comparing these results with the year ended December 31, 2019 rather than the eleven month period, research and development costs would have increased by $10.0 million.
Expenses in connection with the CDI program increased by $10.8 million to $37.5 million for the year ended December 31, 2020, from $26.7 million for the eleven months ended December 31, 2019. This increase primarily related to clinical and manufacturing activities related to the Phase 3 clinical trials of ridinilazole that commenced in February 2019.
Investment in the Company's antibiotic pipeline development activities decreased by $1.4 million to $1.8 million for the year ended December 31, 2020, compared to $3.2 million for the eleven months ended December 31, 2019. This decrease primarily related to the decision not to advance the DDS-01 series of antibiotics and to cease work on the gonorrhea program.
Expenses related to the DMD program decreased by $0.3 million to $nil for the year ended December 31, 2020, from $0.3 million for the eleven months ended December 31, 2019. This was driven by the decision to discontinue development of ezutromid in June 2018 as well as ending all the next and future generation utrophin modulation research activities.
Other research and development expenses increased by $4.4 million to $14.0 million during the year ended December 31, 2020, as compared to $9.6 million during the eleven months ended December 31, 2019. This was primarily due to an increase in supporting staff and facilities costs related to the CDI program.
General and Administrative Expenses
General and administrative expenses increased by $7.9 million to $19.2 million for the year ended December 31, 2020, from $11.3 million for the eleven months ended December 31, 2019. This increase is primarily due to additional legal and professional fees incurred in connection with the Redomiciliation Transaction, increased support staff related costs and commercial preparatory activities, such as market research. This net increase is also due, in part, to the comparison of a twelve month period to an eleven month period. When comparing these results with the year ended December 31, 2019 rather than the eleven month period, general and administrative would have increased by $7.1 million.
Impairment of Intangible Assets
During the year ended December 31, 2020, the Company identified an impairment related to our option over non-financial asset pursuant to an Evaluation and Option Agreement with a collaboration partner. The partner is no longer conducting antibiotic candidate programs over which the Company had the option, management therefore determined that the fair value of our option to acquire the assignment of the proprietary rights for antibiotic candidates is $nil. Accordingly, the asset was written off in its entirety resulting in an impairment charge of $0.9 million.
Other income (expense), net
Other income, net was $0.3 million for the year ended December 31, 2020, compared to other expense, net of $1.6 million for the eleven months ended December 31, 2019. This net movement was primarily due to a net positive movement in foreign currency gains (losses) of $1.4 million and a gain of $0.5 million for a revaluation recorded during the year ended December 31, 2020 in relation to the assumed contingent liabilities for potential payments to certain employees, former employees and former directors of Discuva Limited, based on specified development and clinical milestones related to proprietary product candidates developed under the Discuva Platform. Other interest expense remained consistent.
Benefit (charge) from income tax
The income tax benefit for the year ended December 31, 2020, was $0.2 million as compared to a charge of $0.04 million for the eleven months ended December 31, 2019. These amounts relate to the Company's U.S. corporate taxation due in relation to the U.S. tax resident trading entity. The Company has recorded a full valuation allowance against the deferred tax assets in excess of our deferred tax liabilities, as the deferred tax liability represents future reversals of existing taxable temporary differences.
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Comparison of Eleven Months Ended December 31, 2019 and Year Ended January 31, 2019
The following table summarizes the results of our operations for the eleven months ended December 31, 2019 and year ended January 31, 2019, together with the changes to those items:
Period ended Change December 2019 vs. January 2019
December 31, 2019 January 31, 2019 Increase/(Decrease)
(in thousands, except percentages)
Revenue $ 743 $ 57,088 $ (56,345) (98.7) %
Operating expenses:
Research and development 39,809 52,003 (12,194) 23.4 %
General and administrative 11,279 17,014 (5,735) 33.7 %
Impairment of goodwill and intangible assets — 5,290 (5,290) 100.0 %
Total operating expenses 51,088 74,307 (23,219) (31.2) %
Other operating income 22,872 22,608 264 1.2 %
(Loss) income from operations (27,473) 5,389 (79,300) 1,471.5 %
Other (expense) income, net (1,618) 3,694 (5,312) 143.8 %
(Loss) income before income tax (29,091) 9,083 (84,612) 931.5 %
(Charge) benefit from income taxes (36) 1,786 (1,822) (102.0) %
Net (loss) income $ (29,127) $ 10,869 $ (86,434) 795.2 %
Revenue
Revenue was $0.7 million for the eleven months ended December 31, 2019, compared to $57.1 million for the year ended January 31, 2019.
The Company recognized $0.6 million of revenue during the eleven months ended December 31, 2019, relating to the receipt of a $2.5 million upfront payment in respect of the license and commercialization agreement signed with Eurofarma in December 2017.
Revenues in the period ended January 31, 2019, related primarily to the Company’s license and collaboration agreement with Sarepta following the recognition of all remaining deferred revenue related to the Sarepta agreement following the Company’s decision to discontinue development of ezutromid in June 2018. This recognition of deferred revenues did not impact the Company's cash flows. The agreement with Sarepta was terminated, effective August 2019, with no material ongoing obligations for either party.
Other Operating Income
Other operating income was $22.9 million for the eleven months ended December 31, 2019, as compared to $22.6 million for the year ended January 31, 2019. Other operating income for these periods primarily was related to the Company's funding contract with BARDA for the development of ridinilazole for the treatment of CDI. Specifically, the Company recognized other operating income of $16.6 million during the eleven months ended December 31, 2019, as compared to $17.4 million during the year ended January 31, 2019, from the BARDA contract.
The Company also recognized other operating income of $0.8 million during the eleven months ended December 31, 2019, related to the Company's funding arrangements with CARB-X for its gonorrhea program.
In addition, $5.5 million was recognized in respect of U.K. Research and Development Expenditure Credits for the eleven months ended December 31, 2019 as compared to $2.9 million for the year ended January 31, 2019. This increase of $2.6 million is due to the use of some of the R&D tax credit for the year ended January 31, 2019 to offset taxable income.
Operating Expenses
Research and Development Expenses
Research and development expenses decreased by $12.2 million to $39.8 million for the eleven months ended December 31, 2019, from $52.0 million for the year ended January 31, 2019. This decrease was primarily caused by the discontinuation of the
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DMD program and related research and development staffing and facilities costs. This decrease is also due to the comparison of an eleven month period to a twelve month period. When comparing the year ended December 31, 2019 rather than the eleven month period, research and development costs would have decreased by $10.0 million.
Expenses related to the DMD program decreased by $12.3 million to $0.3 million for the eleven months ended December 31, 2019, from $12.6 million for the year ended January 31, 2019. This was driven by the decision to discontinue development of ezutromid in June 2018 as well as ending all the next and future generation utrophin modulation research activities.
Investment in expenses in connection with the CDI program increased by $2.9 million to $26.7 million for the eleven months ended December 31, 2019, from $23.8 million for the year ended January 31, 2019. This increase primarily related to clinical and manufacturing activities related to the Phase 3 clinical trials of ridinilazole that commenced in February 2019.
Investment in the Company's antibiotic pipeline development activities was $3.2 million for the eleven months ended December 31, 2019, compared to $2.5 million for the year ended January 31, 2019. This increase primarily related to research activities in relation to the DDS-01 and DDS-04 programs for gonorrhea and Enterobacteriaceae infections.
Other research and development expenses decreased by $3.5 million to $9.5 million during the eleven months ended December 31, 2019, as compared to $13.0 million during the year ended January 31, 2019. This was due to a decrease in staff and facilities costs related to the DMD program, a non-cash charge related to the acceleration of stock-based payment expenses resulting from the surrender of share option awards and a non-cash charge for amortization of our proprietary Discuva Platform in the prior period.
General and Administrative Expenses
General and administrative expenses decreased by $3.8 million to $12.6 million for the eleven months ended December 31, 2019, from $16.4 million for the year ended January 31, 2019. The higher expenses in the year ended January 31, 2019 were primarily due to a non-cash charge for the acceleration of stock-based payment expenses resulting from the surrender of share option awards and a loss on recognition of contingent consideration payable relating to the acquisition of Discuva Limited.
Impairment of Goodwill and Intangible Assets
As a result of discontinuing the development of ezutromid, the Company recognized a full impairment charge during the year ended January 31, 2019, of $5.3 million relating to the utrophin program intangible asset and goodwill associated with the acquisition of MuOx Limited.
Other income (expense), net
Other expense, net was $1.6 million for the eleven months ended December 31, 2019, compared to other income, net of $3.7 million for the year ended January 31, 2019. This net movement was primarily due to a net negative movement in foreign currency gains (losses) of $1.9 million and a revaluation of $3.7 million recognized during the year ended January 31, 2019 in relation to the Company's financial liabilities on funding arrangements relating to DMD-related U.S. not for profit organizations following the discontinuation of the development of ezutromid in June 2018.
Benefit (charge) from income taxes
The income tax charge for the eleven months ended December 31, 2019, was less than $0.1 million as compared to a benefit of $1.8 million for the year ended January 31, 2019. This movement primarily relates to the recognition of available carried forward group tax losses. The Company has recorded a full valuation allowance against the deferred tax assets in excess of our deferred tax liabilities, as the deferred tax liability represents future reversals of existing taxable temporary differences.
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Liquidity and Capital Resources
Sources of liquidity
To date, we have financed our operations primarily through issuances of our common stock (and before the Redomiciliation Transaction issuances of Summit Therapeutics plc’s ordinary shares and American Depositary Shares, or ADSs), payments to us under our former license and collaboration agreement with Sarepta and our license and commercialization agreement with Eurofarma and development funding and other assistance from government entities, philanthropic, non-government and not for profit organizations and patient advocacy groups for our product candidates. In particular, we have received funding from BARDA, CARB-X, Innovate UK, Wellcome Trust and a number of not for profit organizations.
In March 2018, we received net proceeds of $19.8 million from the issuance and sale of 1,666,667 shares of common stock to investors in Europe. In January 2019, we received net proceeds of $24.4 million from the issuance and sale of 15,625,000 shares of common stock to a single investor, Mr. Robert W. Duggan. In December 2019, we received net proceeds of $49.1 million from the issuance and sale of 35,075,690 shares of common stock to three existing investors. As part of the equity placing, the participating investors were granted warrants with the right to subscribe for 5,261,353 new shares of common stock at an exercise price of $1.58 per share. On November 6, 2020, we received net proceeds of $50.0 million from the issuance and sale of 14,970,060 shares of common stock to three existing investors. Following the issuance of an unsecured promissory note on March 24, 2021, we received net proceeds of $55.0 million.
Funding requirements
Since our inception, we have incurred significant operating losses. We anticipate that we will continue to incur losses for at least the next several years. We expect that our research and development and general and administrative expenses will continue to increase in connection with conducting clinical trials for our lead product candidate, ridinilazole, for the treatment of CDI, conducting preclinical research and development activities and seeking marketing approval for ridinilazole in the United States as well as other geographies where we retain commercialization rights. In addition, our expenses will increase if and as we:
• continue the research and development of ridinilazole, as well as our early-stage programs targeting infections caused by Enterobacteriaceae;
• seek to identify and develop additional future product candidates, including through our bacterial genetics-based Discuva Platform for the discovery and development of new mechanism antibiotics, and specifically our research activities against a group of bacteria that collectively are known as the ESKAPE pathogens;
• seek marketing approvals for any product candidates that successfully complete clinical development;
• ultimately establish a sales, marketing and distribution infrastructure in jurisdictions where we have retained commercialization rights and scale up external manufacturing capabilities to commercialize any product candidates for which we receive marketing approval;
• acquire or in-license other product candidates and technology;
• maintain, expand and protect our intellectual property portfolio;
• hire additional clinical, regulatory and scientific personnel;
• expand our physical presence; and
• add operational, financial and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts.
As of December 31, 2020, we had cash and cash equivalents of $66.4 million. We believe that the proceeds of $55 million received in March 2021 from Mr. Robert W. Duggan, our Executive Chairman and Chief Executive Officer and primary stockholder in exchange for the issuance of an unsecured promissory note combined with our existing cash resources, funding agreements and research and development tax credits receivable, will be sufficient to enable us to fund our current operating plans until the second quarter of 2022. While these capital resources have allowed us to conduct our two Phase 3 clinical trials of ridinilazole, we do not expect to be able to complete all activities associated with these trials without additional capital. Our failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on our business, results of operations and financial condition.
On March 25, 2021, the Company’s Board of Directors approved a rights offering available to all holders of record of the Company’s common stock, as of the close of business on April 9, 2021. Assuming the rights offering is fully subscribed, the Company will receive gross proceeds of up to $75.0 million, less expenses related to the rights offering.
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We have based the foregoing estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. This estimate assumes, among other things, that we do not obtain any additional funding through grants and clinical trial support or through new collaboration arrangements. Our future capital requirements will depend on many factors, including:
• the progress, costs and results of clinical trials of ridinilazole for CDI;
• the number and development requirements of other future product candidates that we pursue;
• the costs, timing and outcome of regulatory review of ridinilazole and our other product candidates we develop;
• the costs and timing of commercialization activities, including product sales, marketing, distribution and manufacturing, for any of our product candidates that receive marketing approval;
• subject to receipt of marketing approval, revenue received from commercial sales of ridinilazole or any other product candidates;
• the costs and timing of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against any intellectual property-related claims;
• our contract with BARDA and whether BARDA elects to pursue its final designated option beyond the base period and two exercised options;
• the amounts we receive from Eurofarma under our license and commercialization agreement, including for the achievement of development, commercialization and sales milestones and for product supply transfers;
• our ability to establish and maintain collaborations, licensing or other arrangements and the financial terms of such arrangements;
• the extent to which we acquire or invest in other businesses, products and technologies;
• the rate of the expansion of our physical presence; and
• the extent to which we change our physical presence.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of some, or all, of the following: equity and debt offerings, collaborations, strategic alliances, grants and clinical trial support from government entities, philanthropic, non-government and not-for-profit organizations and patient advocacy groups, and marketing, distribution or licensing arrangements. We do not have any committed external source of funds other than amounts we may receive from BARDA and Eurofarma under our arrangements with them and our research and development tax credits receivable. As a result, we will need additional capital to fund our operations. Additional capital, when needed, may not be available to us on acceptable terms, or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends or other distributions. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Cash Flows
The following table summarizes the results of our cash flows for the year ended December 31, 2020, the eleven months ended December 31, 2019 and the year ended January 31, 2019.
Year ended December 31, 2020 Eleven months ended December 31, 2019 Year ended January 31, 2019
Net cash used in operating activities $ (48,111) $ (20,757) $ (35,106)
Net cash used in investing activities (421) (341) (331)
Net cash provided by financing activities 50,551 49,505 44,510
Operating Activities
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Net cash used in operating activities for the year ended December 31, 2020, was $48.1 million, consisting primarily of operating costs of $70.1 million, offset by $16.9 million received from licensing agreements and funding arrangements, $5.0 million U.K. research and development tax credits received and a net taxation refund received of $0.1 million. Net loss of $52.7 million for the year ended December 31, 2020 included net $4.6 million of non-cash items. Significant non-cash items include stock-based compensation expense of $1.8 million, depreciation and amortization expense of $2.0 million and an impairment charge of $0.9 million relating to our option over non-financial asset. The significant items in the change in operating assets that impacted our use of cash in operations was an increase in deferred revenue and income of $5.4 million and an increase in research and development tax credit receivable of $4.4 million.
Net cash used in operating activities for the eleven months ended December 31, 2019, was $20.8 million, consisting primarily of a net loss of $29.1 million adjusted for non-cash items including stock-based compensation expense and deferred income taxes of $1.4 million, depreciation and amortization expense of $1.6 million, and a net decrease in operating assets and liabilities of $5.2 million. The significant items in the change in operating assets that impacted our use of cash in operations was a decrease in accounts receivable of $5.4 million.
Net cash used in operating activities for the year ended January 31, 2019, was $35.3 million consisting primarily of net income of $10.9 million adjusted for non-cash items including stock-based compensation expense and impairment of goodwill of $7.9 million, depreciation and amortization expense of $2.0 million, an impairment charge of $5.3 million and a net decrease in operating assets and liabilities of $55.0 million. The significant items in the change in operating assets that impacted our use of cash in operations was a decrease in deferred revenue and income of $49.0 million due to the recognition of all revenue from Sarepta due to the decision to terminate the DMD project in June 2019, as well as increases of $2.5 million and $2.2 million, respectively, on both accounts receivable and current taxes receivable.
Investing Activities
Net cash outflow in investing activities for the year ended December 31, 2020, was $0.4 million which represents amounts paid to acquire property and equipment.
Net cash outflow in investing activities for the eleven months ended December 31, 2019, was $0.3 million which represents amounts paid to acquire property and equipment and intangible assets.
Net cash outflow from investing activities for the year ended January 31, 2019, was $0.3 million which represents $0.2 million contingent consideration paid in connection with the acquisition of Discuva Limited and $0.1 million paid to acquire property and equipment and intangible assets.
Financing Activities
Net cash inflow from financing activities for the year ended December 31, 2020, was $50.6 million. This includes $50.0 million of net proceeds received following the issuance and sale in a private placement of shares of common stock in November 2020, and $0.6 million received following the exercise of RSUs and share options.
Net cash inflow from financing activities for the eleven months ended December 31, 2019, was $49.1 million, which represents the net proceeds received following our equity placing of ordinary shares on the AIM market of the London Stock Exchange in December 2019.
Net cash generated from financing activities for the year ended January 31, 2019, was $44.5 million. This includes $20.0 million of net proceeds received following our equity placing of ordinary shares on the AIM market of the London Stock Exchange in March 2018, $24.4 million of net proceeds received following our private placement of ADSs in the United States in January 2019, and $0.1 million received following the exercise of RSUs and share options.
Contractual obligations and commitments
The following table summarizes our contractual obligations as of December 31, 2020.
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Payment due by period
Total Less that 1 year Between 1 and 3 years Between 3 and 5 years More that 5 years
(in thousands)
Operating lease obligations $ 477 $ 401 $ 76 $ — $ —
The preceding table excludes contingent payment obligations which primarily consist of commitments under our agreements with the Wellcome Trust, the University College London and certain employees, former employees and former directors of Discuva, pursuant to which we will be required to pay royalties or make milestone payments. As of December 31, 2020, we were unable to estimate the amount, timing or likelihood of achieving the milestones or making future product sales that these contingent payment obligations relate to. For additional information regarding these agreements, see “Business—Our Collaborations and Funding Arrangements” in this Annual Report on Form 10-K.
Additionally, we enter into contracts in the normal course of business with various third parties for clinical trials, preclinical research studies and testing, manufacturing and other services and products for operating purposes. These contracts generally provide for termination upon notice, and therefore are cancellable contracts and not included in the table of contractual obligations and commitments.
Off‑Balance Sheet Arrangements
Other than the contractual obligations and commitments described above, we did not have during the periods presented, and we do not currently have, any off‑balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, accrued research and development expenses, income taxes, and stock-based compensation. We base our estimates on historical experience, known trends and events, and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 3 to our consolidated financial statements appearing elsewhere in this Report, we believe the following accounting policies to be most critical to understanding the judgments and estimates used by management in the preparation of our financial statements.
Other operating income
The Company generates income from government contracts that reimburse the Company for certain allowable costs for funded projects. For contracts with government agencies, when the Company has concluded that it is the principal in conducting the research and development activities, and where the funding arrangement is considered central to the Company’s ongoing operations, the funding is classified as other operating income, rather than as a reduction of research and development expenses. This funding income is not recorded as revenue as the Company's primary business activity is not to do research and development on behalf of government bodies, but rather to ultimately produce and sell pharmaceutical products commercially.
Income from government grants is recognized in the consolidated statement of operations and comprehensive income (loss) as the qualifying expenses related to the contracts are incurred, provided that there is reasonable assurance of recoverability and to the extent the conditions of the grant are met. If the government agency approves the project proposed by the Company, the government agency funds the project upon receipt of the support for the costs incurred up to the contract limit. Amounts received from these sources are recorded either as deferred income or recognized as accrued income (a component of other current assets) in the consolidated balance sheets, as appropriate depending on timing of receipts. The related costs incurred by
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the Company are included in research and development expenses in the Company’s consolidated statements of operations and comprehensive (loss) income.
Credits related to the two U.K. research and development tax credit cash rebate regimes (SME Program and RDEC), received in respect of qualifying expenditure are recorded as other operating income in the consolidated statements of operations and other comprehensive (loss) income.
Research and development costs
Research and development costs are expensed as incurred. Research and development expenses consist of costs incurred to discover, research and develop drug candidates, including personnel expenses, stock-based compensation expense, allocated facility-related and depreciation expenses, third-party license fees and external costs of outside vendors engaged to conduct preclinical and clinical development activities and clinical trials as well as to manufacture clinical trial materials. Non - refundable prepayments for goods or services that will be used or rendered for future research and development activities are recorded as prepaid expenses. Such amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered, or the services rendered. Milestone and other payments made to third-parties with respect to in-process research and development, in accordance with the Company’s license, acquisition and other similar agreements are expensed when determined to be probable and estimable.
The Company has entered into various research and development contracts with other companies. These agreements are generally cancellable, and related payments are recorded as research and development expenses as incurred. The Company records accruals for estimated ongoing research and development costs or prepaid expenses where the payments made exceeds the estimated costs. When evaluating the adequacy of these balances, the Company analyzes progress of the studies, including the estimated costs to complete each study or activity, the estimation of the current stage of completion and the invoices received, as well as predetermined milestones which are not reflective of the current stage of development for prepaid expenses. Actual results could differ from the Company’s estimates. In all cases, the full cost of each study or activity is expensed by the time the final report or where applicable, product, has been received. The Company’s historical estimates have not been materially different from the actual costs.
Income Taxes
The provision for income taxes is determined using the asset and liability approach. Tax laws may require items to be included in tax filings at different times than the items are reflected in the financial statements. A current asset or liability is recognized for the estimated taxes receivable or payable for the current year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. Deferred taxes are initially recognized at enacted tax rates in force at the time of initial recognition and are subsequently adjusted for any enacted changes in tax rates and tax laws. Subsequent changes to deferred taxes originally recognized in equity are recognized in income. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The Company has recorded a full valuation allowance against the deferred tax assets in excess of our deferred tax liabilities, as the deferred tax liability represents future reversals of existing taxable temporary differences. These deferred tax balances both arise in the U.K. tax jurisdiction, accordingly these are offset in the consolidated balance sheet. We record interest and penalties related to income tax matters as part of income tax expense.
Assumed Contingent Liabilities
As part of the acquisition of Discuva Limited in December 2017, the Company assumed certain contingent liabilities as certain employees, former employees and former directors of Discuva Limited are eligible for payments from Discuva Limited based on specified development and clinical milestones related to proprietary product candidates developed under the Discuva Platform. The timing of these potential payments is uncertain. The fair value of the assumed contingent liability was estimated using the expected value of the payments. The assumed contingent liabilities are subsequently measured at amortized cost using discounted cash flow models which calculate the risk adjusted net present values of estimated potential future cash flows of the payments. The assumed contingent liabilities are remeasured when there is a specific significant event that provides evidence of a significant change in the probability of successful development and clinical milestones being achieved. The models will be updated for changes in the probability of successful development and clinical milestones being achieved and other associated assumptions with the discount factor remaining unchanged within the model. A discount factor of 13% has been used to discount the contingent liabilities back to net present value. This discount factor has been calculated using appropriate measures and rates which could have been obtained in the period that the contingent liabilities were assumed. Accretion of the discount factor, or interest expense, is recognized as part of other income (expense), net in the Consolidated Statement of Operations and Comprehensive (Loss) Income.
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Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, please see Note 4 to our consolidated financial statements contained in this Report.
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