Viridian Therapeutics, Inc.\DE 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read together with our condensed consolidated financial statements and the related notes thereto included in Part I, Item 1 of this Quarterly Report and our consolidated financial statements and related notes thereto for the year ended December 31, 2022 included in our Annual Report on Form 10-K filed with the SEC on March 9, 2023 (“2022 Annual Report on Form 10-K”). This discussion and other parts of this report contain forward-looking statements reflecting our current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, intentions, and beliefs. See “Forward-Looking Statements” for a discussion of the uncertainties, risks, and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled “Risk Factors” included elsewhere in this Quarterly Report. Overview and Recent Developments We are a biopharmaceutical company focused on discovering and developing potential best-in-class medicines for serious and rare diseases. We target under-competitive disease areas where marketed therapies often leave room for improvements in efficacy, safety, and/or dosing convenience. We believe that first-generation medicines rarely represent optimal solutions, especially in rare disease areas, and that there is potential to develop differentiated, best-in-class medicines that could lead to improved patient outcomes, reduced side effects, improved quality of life, expanded market access, and augmented market competition. Our business model is designed to identify and evaluate product opportunities in disease areas where trial data establishes proof-of-concept for a drug target in the clinic, but the competitive evolution of the product life cycle management and number of entrants appears incomplete. We intend to prioritize indications where a fast-follower and a potentially differentiated drug candidate, or overall product profile, could create significant medical benefit for patients. We are engineering medicines to address unmet medical needs for patients and further advance drug innovation. Our most advanced program, VRDN-001, is a differentiated humanized monoclonal antibody targeting IGF-1R. VRDN-001 is being evaluated in clinical trials for the treatment of active and chronic thyroid eye disease (“TED”). In July 2023, we reported positive data from the Phase 2 portion of the ongoing Phase 1/2 clinical trial of VRDN-001 in patients with chronic TED, which we believe established clinical proof-of-concept for VRDN-001 in patients with chronic TED. VRDN-001 previously established clinical proof-of-concept in patients with active TED following positive data from multiple Phase 1/2 trial cohorts in late 2022 and early 2023. The THRIVE Phase 3 trial evaluating the efficacy and safety of VRDN-001 in patients with active TED remains ongoing, with topline results expected in mid-2024. Initiation of the THRIVE-2 Phase 3 trial evaluating the efficacy and safety of VRDN-001 in patients with chronic TED is planned for the third quarter of 2023, with topline results expected by year-end 2024. We are also advancing VRDN-001, VRDN-002, and VRDN-003 as subcutaneous (“SC”) program candidates, each with the potential to be developed into a convenient, SC, self-administered pen device. VRDN-001 IV’s low-dose data support its potential as a SC candidate. VRDN-002 is a novel anti-IGF-1R monoclonal antibody incorporating half-life extension technology. VRDN-003 is an anti-IGF-1R monoclonal antibody with the same amino acid sequence as VRDN-001, except for the addition of the half-life extension technology that is incorporated in VRDN-002. We expect preliminary data from the ongoing Phase 1 trial evaluating IV and SC cohorts of VRDN-001 in healthy volunteers in the fourth quarter of 2023. Following clearance of the investigational new drug (IND) application submission for VRDN-003 in July 2023, we are in the study startup stages of a Phase 1 trial evaluating IV and SC dose cohorts of VRDN-003 in healthy volunteers. We expect preliminary data from the 33 Table of Contents Phase 1 trial of VRDN-003 in the fourth quarter of 2023. We also expect preliminary data from the ongoing Phase 1 trial of VRDN-002 in healthy volunteers before the end of 2023. We expect to select our lead SC program based on the preclinical and clinical data available across all three programs by year-end 2023, and plan to advance the selected SC program into a Phase 2/3 trial in the middle of 2024. We believe that the differentiated mechanism of action for VRDN-003 and VRDN-001 SC acting as full-antagonists of IGF-1R have the highest potential to bring the best SC product profile to patients in the long term. We are also developing multiple preclinical assets in rare and autoimmune diseases. We plan to announce additional information on at least one of these programs in 2023. In January 2023, we entered a partnership to utilize Enable Injections’ enFuse on-body drug delivery system for one of its preclinical programs outside of TED. Global Economic Considerations The global macroeconomic environment is uncertain, and could be negatively affected by, among other things, increased U.S. trade tariffs and trade disputes with other countries, instability in the global capital and credit markets, supply chain weaknesses, and instability in the geopolitical environment, including as a result of the ongoing Russian invasion of Ukraine, rising tensions between China and Taiwan and other political tensions, and lingering effects of the COVID-19 pandemic. Such challenges have caused, and may continue to cause, recession fears, concerns regarding potential sanctions, rising interest rates, foreign exchange volatility and inflationary pressures. At this time, we are unable to quantify the potential effects of this economic instability on our future operations. Financial Operations Overview Revenue Our revenue has historically consisted primarily of up-front payments for licenses, milestone payments, and payments for other research and development services earned under license and collaboration agreements as well as for amounts earned under certain grants we have been awarded. In October 2020, we became party to a license agreement with Zenas BioPharma. Since February 2021, we have entered into several letter agreements with Zenas BioPharma in which we agreed to provide assistance to Zenas BioPharma with certain development activities, including manufacturing (collectively with the license agreement, the “Zenas Agreements”). Under the terms of the Zenas Agreements, we granted Zenas BioPharma an exclusive license to develop, manufacture, and commercialize certain IGF-1R directed antibody products for non-oncology indications in the greater area of China in exchange for upfront non-cash consideration and non-refundable milestone payments upon achieving specific milestone events during the contract term. Zenas BioPharma announced that it had obtained IND approval in China in July 2022. Under the license agreement, we received a $1.0 million milestone payment from Zenas BioPharma. Additionally, we are eligible to receive royalty payments based on a percentage of the annual net sales of any licensed products sold on a country-by-country basis in the greater area of China. The royalty percentage may vary based on different tiers of annual net sales of the licensed products made. Zenas BioPharma is obligated to make royalty payments to us for the royalty term in the Zenas Agreements. In May 2022, we entered into a Manufacturing Development and Supply Agreement with Zenas BioPharma to manufacture and supply, or have manufactured and supplied, clinical drug product for development purposes. In the future, we expect to continue to generate revenue from a combination of license fees and other up-front payments, payments for research and development services, milestone payments, product sales, and royalties in connection with strategic alliances. We expect that any revenue we generate could fluctuate from quarter to 34 Table of Contents quarter as a result of the timing of our achievement of development and commercial milestones, the timing and amount of payments relating to such milestones, and the extent to which any of our product candidates are approved and successfully commercialized by us or our strategic alliance collaborators, if any. If we or our strategic alliance collaborators, if any, fail to develop product candidates in a timely manner or to obtain regulatory approval for them, then our ability to generate future revenue, and our results of operations and financial position would be adversely affected. Research and Development Expenses Research and development expenses consist of costs incurred for the research and development of our therapeutic programs and product candidates, which include: • employee-related expenses, including salaries, severance, retention, benefits, insurance, and share-based compensation expense; • expenses incurred under agreements with clinical research organizations (“CROs”), investigative sites that conduct our clinical trials, and other clinical trial-related vendors, and consultants; • the costs of acquiring, developing, and manufacturing and testing clinical and preclinical materials, including costs incurred under agreements with contract manufacturing organizations (“CMOs”); • costs associated with non-clinical activities and regulatory operations; • license fees and milestone payments related to the acquisition and retention of certain licensed technology and intellectual property rights; and • facilities, depreciation, market research, and other expenses, which include allocated expenses for rent and maintenance of facilities, depreciation of leasehold improvements and equipment, and laboratory supplies. We make non-refundable advance payments for goods and services that will be used in future research and development activities. These payments are recorded as expense in the period in which we receive or take ownership of the goods or when the services are performed. We record up-front and milestone payments to acquire and retain contractual rights to in-licensed technology and intellectual property rights as research and development expenses when incurred if there is uncertainty in our receiving future economic benefit from the acquired contractual rights. We consider future economic benefits from acquired contractual rights to licensed technology to be uncertain until such a drug candidate is approved by the FDA or when other significant risk factors are abated. We expect that our research and development expenses will increase as we expand our clinical development programs and initiate new clinical trials. The process of conducting clinical trials and preclinical studies necessary to obtain regulatory approval is costly and time consuming. We, or our strategic alliance collaborators, if any, may never succeed in achieving marketing approval for any of our product candidates. The probability of success for each product candidate may be affected by numerous factors, including clinical data, preclinical data, competition, manufacturability, and commercial viability of our product candidates. Successful development of future product candidates is highly uncertain and may not result in approved products. Completion dates and completion costs can vary significantly for each future product candidate and are difficult to predict. We anticipate we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to our ability to maintain or enter into new strategic alliances with respect to each program or potential product candidate, the scientific and clinical 35 Table of Contents success of each future product candidate, and ongoing assessments as to each future product candidate’s commercial potential. For example, based on the preclinical and clinical data across all three SC candidates available by year-end 2023, we expect to select which of VRDN-001, VRDN-002, or VRDN-003 will be our lead program by year-end 2023 and advance the lead program into a pivotal Phase 2/3 trial in the middle of 2024. We will need to raise additional capital and may seek additional strategic alliances in the future in order to advance the various clinical trials that are part of our clinical development program described above. General and Administrative Expenses General and administrative expenses consist primarily of salaries and related benefits, including share-based compensation, and severance and retention benefits related to our finance, accounting, human resources, legal, business development, and other support functions, professional fees for auditing, tax, and legal services, as well as insurance, board of director compensation, consulting, and other administrative expenses. As of June 30, 2023, the market capitalization of outstanding shares of our common stock owned by non-affiliates exceeded $700 million, which triggered the Company being classified as a large accelerated filer with respect to SEC regulations and filing requirements effective December 31, 2023. As a result, our annual assessment of the effectiveness of our internal control over financial reporting must be audited by our external audit firm, and the result of that audit will be included in our next Annual Report on Form 10-K in compliance with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002. We expect that preparations to comply and continued compliance with this new requirement will significantly increase our compensation expense, professional fees and other administrative costs. Other Income, net Other income, net consists primarily of interest income, net of fees, and various income items of a non-recurring nature. Interest expense consists of cash and non-cash interest expense on our long-term debt. We earn interest income from interest-bearing accounts, money market funds, and short-term investments. Critical Accounting Policies and Estimates There were no changes to our critical accounting policies as disclosed in our 2022 Annual Report on Form 10-K during the six months ended June 30, 2023. Our significant accounting policies are disclosed in Note 2. Summary of Significant Accounting Policies to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report. 36 Table of Contents Results of Operations Comparison of the Three Months Ended June 30, 2023 and 2022. Three Months Ended June 30, Increase (Decrease) 2023 2022 (in thousands) Collaboration revenue - related party $ 72 $ 256 $ (184) Research and development expenses 40,083 21,712 18,371 General and administrative expenses 19,264 8,108 11,156 Other income, net 4,212 73 4,139 Revenue Revenue for both the three months ended June 30, 2023 and 2022 was attributable to our collaboration agreement with Zenas BioPharma. The $0.2 million decrease in revenue is due to the timing of activities performed under the collaboration agreement. Research and Development Expenses Research and development expenses were $40.1 million during the three months ended June 30, 2023, compared to $21.7 million during three months ended June 30, 2022. The $18.4 million increase in research and development expenses is primarily attributable to: an increase of $4.5 million in chemistry, manufacturing and controls costs for both the VRDN-001 and VRDN-003 programs; an increase of $5.0 million in clinical trial costs mainly due to expenses associated with our THRIVE and THRIVE-2 clinical trials; an increase of $5.0 million in personnel related costs, including share-based compensation, due to an increase in headcount; and an increase of $2.0 million in milestone fees due to the $5.0 million upfront payment for an exclusive license and collaboration agreement entered into in May 2023, offset by a decrease in milestone expenses of $3.0 million incurred during the three months ended June 30, 2022. We expect our research and development expenses to increase as we work to progress our clinical and preclinical programs. General and Administrative Expenses General and administrative expenses were $19.3 million during the three months ended June 30, 2023, compared to $8.1 million during the three months ended June 30, 2022. The $11.2 million increase in general and administrative expenses is due primarily to an increase of $7.4 million in personnel-related costs, including share-based compensation, due to an increase in headcount. Additionally, professional and license fees increased by approximately $2.3 million during the three months ended June 30, 2023 compared to the same period in 2022 due to market research, accounting, and other professional fees. Other Income, net Other income, net was $4.2 million during the three months ended June 30, 2023 compared to $0.1 million during the three months ended June 30, 2022. Other income, net for the three months ended June 30, 2023, is comprised of $4.3 million of interest income earned on short-term investments as well as $0.1 million of sub-lease income, offset by $0.2 million in interest expense related to our Hercules Loan and Security Agreement. Other income, net for the three months ended June 30, 2022, is comprised of interest income earned on short-term investments as well as sub-lease income. 37 Table of Contents Comparison of the Six Months Ended June 30, 2023 and 2022. Six Months Ended June 30, Increase (Decrease) 2023 2022 (in thousands) Collaboration revenue - related party $ 170 $ 472 $ (302) Research and development expenses 90,823 39,458 51,365 General and administrative expenses 41,095 16,467 24,628 Other income, net 8,534 269 8,265 Revenue Revenue for both the six months ended June 30, 2023 and 2022 was attributable to our collaboration agreement with Zenas BioPharma. The $0.3 million decrease in revenue is due to the timing of activities performed under the collaboration agreement. Research and Development Expenses Research and development expenses were $90.8 million during the six months ended June 30, 2023, compared to $39.5 million during the six months ended June 30, 2022. The $51.4 million increase in research and development expenses is primarily attributable to: a net increase of $14.5 million in milestone, license and option fees due to the $15.0 million upfront payment for development of subcutaneous delivery systems in the first quarter of 2023 and the $5.0 million upfront payment for an exclusive license and collaboration agreement in the second quarter of 2023, offset by an upfront payment of $2.5 million for certain agreed upon development activities and a $3.0 million milestone payment for clinical trial activities for VRDN-001 in the six months ended June 30, 2022; an increase of $12.3 million in chemistry, manufacturing and controls costs for our on-going and planned clinical trials, subcutaneous development costs for VRDN-001, as well as IND-enabling activities for VRDN-003; an increase of $9.7 million in personnel related costs, including share-based compensation, due to an increase in headcount; an increase of $6.2 million in clinical trial costs mainly due to expenses associated with our THRIVE and THRIVE-2 clinical trials; and an increase of $4.1 million in costs associated with our preclinical programs. General and Administrative Expenses General and administrative expenses were $41.1 million during the six months ended June 30, 2023 compared to $16.5 million during the six months ended June 30, 2022. The $24.6 million increase in general and administrative expenses is due primarily to an increase of $19.0 million in personnel costs, including share-based compensation, due to increased headcount as well as $6.9 million of share-based compensation related to the modification of options and $0.9 million in severance costs related to the separation agreement with our former Chief Executive Officer. Additionally, professional and license fees increased by approximately $4.3 million during the six months ended June 30, 2023 compared to the same period in 2022 due to market research, accounting, and other professional fees. Other Income, net Other income, net was $8.5 million during the six months ended June 30, 2023 compared to $0.3 million during the six months ended June 30, 2022. Other income, net for the six months ended June 30, 2023, is comprised of $8.7 million of interest income earned on short-term investments as well as $0.2 million of sub-lease income, offset by $0.3 million in interest expense related to our Hercules Loan and Security Agreement. Other income, 38 Table of Contents net for the six months ended June 30, 2023, is comprised of interest income earned on short-term investments as well as sub-lease income. Liquidity and Capital Resources We have funded our operations to date principally through proceeds received from the sale of our common stock, our Series A Preferred Stock, our Series B Preferred Stock and other equity securities, debt financings, license fees, and reimbursements received under collaboration agreements. As of June 30, 2023, we had $334.3 million in cash, cash equivalents, and short-term investments and $4.7 million in long-term debt. We believe that our current cash, cash equivalents and short-term investments, including amounts already drawn down under the Term Loan (as defined below), will be sufficient to fund our operations, including our clinical development plan described above, into the second half of 2025. We have no products approved for commercial sale and have not generated any revenue from product sales. Since our inception and through June 30, 2023, we have generated an accumulated deficit of $611.4 million. Substantially all of our operating losses resulted from expenses incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We will continue to require substantial additional capital to continue the development of our product candidates, and potential commercialization activities, and to fund our ongoing operations, including our clinical development plan described above. The amount and timing of future funding requirements will depend on many factors, including the pace and results of our clinical development efforts, equity financings, securing additional license and collaboration agreements, and issuing debt or other financing vehicles. Our ability to secure capital is dependent upon a number of factors, including success in developing our technology and product candidates. Failure to raise capital as and when needed, on favorable terms or at all, would have a negative impact on our financial condition and our ability to develop our product candidates. Changing circumstances, such as changes in the scope and timing of our clinical studies, may cause us to consume capital significantly faster or slower than we currently anticipate. If we are unable to acquire additional capital or resources, we will be required to modify our operational plans to complete future milestones. We have based these estimates on assumptions that may prove to be wrong, and we could exhaust our available financial resources sooner than we currently anticipate. We may be forced to reduce our operating expenses and raise additional funds to meet our working capital needs, principally through the additional sales of our securities or debt financings or entering into strategic collaborations. Our material cash requirements include obligations as of June 30, 2023, as well as resources required to fulfill our research and development activities and the effects that such obligations and activities are expected to have on our liquidity and cash flows in future periods. We expect that our operating losses will fluctuate significantly from quarter to quarter and year to year due to timing of our development activities and efforts to achieve regulatory approval. If we raise additional funds through the issuance of debt, the obligations related to such debt could be senior to rights of holders of our capital stock and could contain covenants that may restrict our operations. Should additional capital not be available to us in the near term, or not be available on acceptable terms, we may be unable to realize value from our assets and discharge our liabilities in the normal course of business, which may, among other alternatives, cause us to further delay, substantially reduce, or discontinue operational activities to conserve our cash resources. Loan and Security Agreement with Hercules Capital, Inc. On April 1, 2022, we entered into a loan and security agreement (the “Hercules Loan and Security Agreement”) among the Company, certain of our subsidiaries from time to time party thereto (together with the Company, collectively, the “Borrower”), Hercules Capital, Inc. (“Hercules”) and certain other lenders party thereto (the 39 Table of Contents “Lenders”). Under the Hercules Loan and Security Agreement, the Lenders provided us with access to a term loan with an aggregate principal amount of up to $75.0 million, in four tranches (collectively the “Term Loan”), consisting of: (1) an initial tranche of $25.0 million, which was available through June 15, 2023; (2) a second tranche of $10.0 million, subject to the achievement of certain regulatory milestones, which was available through June 15, 2023; (3) a third tranche of $15.0 million, subject to the achievement of certain regulatory milestones, available through March 15, 2024; and (4) a fourth tranche of $25.0 million, subject to approval by the Lenders’ investment committee(s), available through December 15, 2024. The milestone related to the third tranche has not been achieved yet. The first and second tranches of $25.0 million and $10.0 million, respectively, were available to us through June 15, 2023. Upon signing we drew an initial principal amount of $5.0 million. The Term Loan bears interest at a floating per annum rate equal to the greater of (1) 7.45% and (2) 4.2% above the Prime Rate, provided that the Term Loan interest rate shall not exceed a per annum rate of 8.95%. Interest is payable monthly in arrears on the first day of each month. Per the terms of the Hercules Loan and Security Agreement, we were originally obligated to make interest-only payments through April 1, 2024. However, upon the achievement of a development milestone the interest-only period was extended to October 1, 2024. If additional development milestones are met, the interest-only period will be extended to April 1, 2025 pursuant to a second extension. We are required to repay the Term Loan amount in equal monthly installments of the principal amount and interest between the end of the interest-only period and the maturity date of October 1, 2026. In addition, we are required to pay an end-of-term fee equal to 6% of the principal amount of funded Term Loan Advances at maturity, which are being accreted as additional interest expense over the term of the loan. In August 2023, the Company executed an amendment to the Hercules Loan and Security Agreement (the “Hercules Amendment”), which increased the available aggregate principal amount of the Term Loan to $150.0 million and revised the available tranches and interest-only payment dates. Upon execution of the Hercules Amendment, the Company drew an initial principal amount of $15.0 million. ATM Agreement In September 2022, we entered into an Open Market Sale Agreement SM (the “September 2022 ATM Agreement”) with Jefferies, LLC (“Jeffries”) pursuant to which we may offer and sell shares of our common stock having an aggregate offering price of up to $175.0 million from time to time at prices and on terms to be determined by market conditions at the time of offering, with Jefferies acting as the sales agent. Jefferies will receive a commission of 3.0% of the gross proceeds of any shares of common stock sold under the September 2022 ATM Agreement. During the three months ended December 31, 2022, we sold 964,357 shares under the September 2022 ATM Agreement at a weighted average price of $26.01 per share, for aggregate net proceeds of approximately $24.2 million, including commissions to Jefferies as a sales agent. There were no shares sold under the September 2022 ATM Agreement during the six months ended June 30, 2023. 40 Table of Contents Summarized cash flows for the six months ended June 30, 2023 and 2022 are as follows: Six Months Ended June 30, Increase (Decrease) 2023 2022 (in thousands) Net cash provided by (used in): Operating activities $ (107,187) $ (39,128) $ (68,059) Investing activities 27,418 22,826 4,592 Financing activities 11,272 5,296 5,976 Total $ (68,497) $ (11,006) $ (57,491) Operating Activities Net cash used in operating activities was $107.2 million for the six months ended June 30, 2023, and primarily consisted of our net loss of $123.2 million, adjusted for non-cash items of $27.0 million (primarily share-based compensation of $27.5 million), and changes in working capital of $11.0 million. Net cash used in operating activities was $39.1 million for the six months ended June 30, 2022, and primarily consisted of a net loss of $55.2 million, adjusted for non-cash items of $10.3 million (primarily share-based compensation of $9.5 million), and changes in working capital of $5.8 million. Investing Activities Net cash provided by investing activities was $27.4 million during the six months ended June 30, 2023, and consisted primarily of $27.9 million in net sales and maturities of short-term investments, offset by $0.4 million in purchases of property and equipment. Net cash provided by investing activities was $22.8 million during the six months ended June 30, 2022, and consisted primarily of $23.3 million in net proceeds from maturities and purchases of short term investments, and offset by $0.5 million in purchases of property and equipment. Financing Activities Net cash provided by financing activities was $11.3 million during the six months ended June 30, 2023, and consisted of proceeds from the exercise of warrants, stock options, and the sale of shares under our employee stock purchase plan. Net cash provided by financing activities was $5.3 million during the six months ended June 30, 2022, and consisted primarily of $4.6 million in net proceeds from the Hercules Loan and Security Agreement, as well as $0.7 million in proceeds from the exercise of stock options, and $0.1 million in proceeds from the issuance of common stock under our employee stock purchase plan. Contractual Obligations and Commitments We are a smaller reporting company, as defined by Rule 12b-2 under the Securities Exchange Act of 1934 as amended (the “Exchange Act”) and in Item 10(f)(1) of Regulation S-K, and are not required to provide the information under this item. 41 Table of Contents ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a smaller reporting company, as defined by Rule 12b-2 under the Exchange Act and in Item 10(f)(1) of Regulation S-K, and are not required to provide the information under this item.