EPIZYME, INC. Our management's discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, which have been prepared by us in accordance with accounting principles generally accepted inthe United States , or GAAP, and with Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended. This discussion and analysis should be read in conjunction with these condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q, 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.
Overview
We are a commercial-stage biopharmaceutical company that is committed to rewriting treatment for people with cancer and other serious diseases through the discovery, development, and commercialization of novel epigenetic medicines. By focusing on the genetic drivers of disease, our science seeks to match targeted medicines with the patients who need them. InJanuary 2020 , theU.S. Food and Drug Administration , or FDA, granted accelerated approval of TAZVERIK™ (tazemetostat) for the treatment of adult and pediatric patients aged 16 years and older with metastatic or locally advanced epithelioid sarcoma not eligible for complete resection. This approval was based on overall response rate and duration of response shown in the epithelioid sarcoma cohort of our Phase 2 trial in patients with INI1-negative tumors. We have made TAZVERIK available to eligible patients and their physicians inthe United States . As part of the accelerated approval for epithelioid sarcoma, continued approval for this indication is contingent upon verification and description of clinical benefit in a confirmatory trial. To provide this confirmatory evidence to support a full approval of TAZVERIK for this indication, we are conducting a global, randomized, controlled Phase 1b/3 confirmatory trial assessing TAZVERIK in combination with doxorubicin compared with doxorubicin plus placebo as a front-line treatment for epithelioid sarcoma. The safety run-in portion of the trial is underway, and we expect to complete this portion of the trial in the second half of 2020. InDecember 2019 , we submitted a New Drug Application, or NDA, to the FDA for accelerated approval of TAZVERIK for patients with relapsed or refractory follicular lymphoma, or FL, who have received at least two prior lines of systemic therapy. InFebruary 2020 , the NDA was accepted for filing by the FDA. The FDA granted priority review and has designated the application as a supplemental NDA, or sNDA, with a Prescription Drug User Fee Act, or PDUFA, target action date ofJune 18, 2020 . Priority review is granted to investigational therapies that, if approved, may offer significant improvements in the treatment, prevention or diagnosis of a serious condition. The sNDA submission is based primarily on efficacy and safety data from the cohorts evaluating TAZVERIK as a monotherapy for patients with relapsed or refractory FL, both with and without EZH2 activating mutations, who have received two or more prior systemic therapies in our multi-cohort Phase 2 trial in patients with relapsed or refractory non-Hodgkin's lymphoma, or NHL. As part of our accelerated approval strategy for FL to provide confirmatory evidence to support a full approval of TAZVERIK for this indication, we are conducting a global, randomized, controlled Phase 1b/3 confirmatory trial assessing TAZVERIK in combination with the FDA-approved chemotherapeutic-free regimen known as R2 (REVLIMID plus rituximab) compared with R2 plus placebo in FL patients who have been treated with at least one prior systemic therapy followed by maintenance. The safety run-in portion of the trial is underway and we expect to complete this portion of the trial in the second half of 2020. Through our planned development efforts, our intention is to make TAZVERIK available in all lines of treatment for patients with FL. We plan to leverage the confirmatory trial to expand TAZVERIK into the second-line treatment setting. In collaboration withThe Lymphoma Study Association , or LYSA, and based on clinical activity observed with TAZVERIK in combination with R-CHOP as a front-line treatment for patients with high risk diffuse large B-cell lymphoma, or DLBCL, we plan to investigate this combination as a front-line treatment for high-risk patients with FL. In addition, we are finalizing plans for investigator-sponsored studies to evaluate tazemetostat in combination with rituximab, venetoclax or BTK inhibitors for the treatment of patients with FL in the third-line or later treatment settings. 27 -------------------------------------------------------------------------------- Tazemetostat is an oral, first in class, selective small molecule inhibitor of the EZH2 histone methyltransferase, or HMT, that we are developing for the treatment of a broad range of cancer types in multiple treatment settings. Tazemetostat has shown meaningful clinical activity as an investigational monotherapy in multiple cancer indications and has been generally well-tolerated across clinical trials to date. We believe tazemetostat is a "pipeline in a product" opportunity and plan to explore its utility as a monotherapy and in combinations through both company and investigator-sponsored studies in additional indications, including:
• Lymphomas and B-cell malignancies, such as DLBCL, mantle cell lymphoma, or
MCL, chronic lymphocytic leukemia, or CLL, chronic myeloid leukaemia, or
CML, and others;
• Mutationally defined solid tumors, such as chordoma, melanoma,
mesothelioma, and tumors harboring an EZH2 or SWI/SNF alteration;
• Chemotherapy or treatment-resistant tumors, such as triple-negative breast
cancer, small cell lung cancer, ovarian cancer, and metastatic
castration-resistant prostate cancer; and,
• Immuno-oncology-sensitive tumors, such as colorectal cancer, bladder
cancer, soft tissue sarcomas and non-small cell lung cancer.
We own the global development and commercialization rights to tazemetostat
outside of
TAZVERIK is available to eligible patients inthe United States via a specialty distribution network. To commercialize TAZVERIK for the epithelioid sarcoma indication inthe United States , we have built a focused field presence and marketing capabilities. This includes an efficiently sized field-based organization of 19 individuals. Our FL launch readiness activities are completed and we have expanded our infrastructure to support the launch and marketing of tazemetostat for FL inthe United States , if approved. Our sales leadership team is in place, and we have completed the hiring and onboarding of our sales representatives forthe United States . For geographies outsidethe United States , we are evaluating the most efficient path to reach patients, including through potential collaborations. Tazemetostat is covered by claims ofU.S. and European composition of matter patents, which are expected to expire in 2032, exclusive of any patent term or other extensions. Tazemetostat has been granted Fast Track designation by the FDA in patients with relapsed or refractory FL, relapsed or refractory DLBCL with EZH2 activating mutations and metastatic or locally advanced epithelioid sarcoma who have progressed on or following an anthracycline-based treatment regimen. The FDA has also granted orphan drug designation to tazemetostat for the treatment of patients with FL, malignant rhabdoid tumors, or MRT, soft tissue sarcoma, or STS, and mesothelioma. Beyond tazemetostat, we are progressing preclinical efforts to pursue additional development candidates for our pipeline and to further support our leadership position in epigenetics. We have collaborations withBoehringer Ingelheim International GmbH , or Boehringer Ingelheim, focused on the research, development and commercialization of novel small molecule inhibitors, discovered by us, directed toward previously unaddressed epigenetic targets as potential therapies for people with cancer, withGlaxo Group Limited (an affiliate of GlaxoSmithKline), or GSK, focused on the development of PRMT inhibitors discovered by us, and with Celgene Corporation, which was recently acquired by Bristol-Myers Squibb, andCelgene RIVOT Ltd. , an affiliate of Celgene Corporation, which we collectively refer to as Celgene, focused on the development of pinometostat and small molecule inhibitors directed to three HMT targets. InMarch 2020 , we and Boehringer Ingelheim amended the agreement to extend the research period for the shared program targeting enzymes within helicase families with Boehringer Ingelheim providing researching funding of$0.4 million . Additionally, inMarch 2020 , we received a notice of termination for the program targeting enzymes with HAT families, which program termination will be effective 90 days following receipt of the notice. ThroughMarch 31, 2020 , we have raised an aggregate of$1,356.9 million to fund our operations. This includes$243.3 million of non-equity funding through our collaboration agreements,$198.1 million of funding received through agreements withRoyalty Pharma andPharmakon Advisors consisting of$100.0 million in consideration received from the sale of shares of our common stock, a warrant to purchase shares of our stock and rights to receive royalties from Eisai with respect to net sales by Eisai of tazemetostat products inJapan ,$50.0 million from the sale of shares of our common stock pursuant to our right to sell shares of our common stock toRoyalty Pharma ,$50.0 million of borrowings under our loan facility with BioPharma Credit PLC, or the Collateral Agent, andBioPharma Credit Investments V (Master) LP , or the Lenders, less debt issuance costs of$1.7 million ,$839.5 million from the sale of common stock and series A convertible preferred stock in our public offerings and$76.0 million from the sale of redeemable convertible preferred stock in private financings prior to our initial public offering inMay 2013 . 28 --------------------------------------------------------------------------------
As of
We commenced active operations in early 2008, and since inception, have incurred significant operating losses. As ofMarch 31, 2020 , our accumulated deficit totaled$808.0 million . We expect to continue to incur significant expenses and operating losses over the next several years. Our net losses may fluctuate significantly from quarter to quarter and year to year. We expect our expenses to increase in connection with our ongoing activities, particularly as we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. In addition, we expect our expenses to increase as we fund our tazemetostat development program; make any milestone payments provided for and achieved under the amended and restated collaboration and license agreement with Eisai; continue our collaborations with Boehringer Ingelheim and Celgene; and continue research and development and initiate clinical trials of, and seek regulatory approval for, any future product candidates.
Funding Agreements with
We executed a purchase agreement with RPI onNovember 4, 2019 , or the RPI Purchase Agreement. Pursuant to the RPI Purchase Agreement, we sold to RPI 6,666,667 shares of our common stock and a warrant to purchase up to 2,500,000 shares of our common stock at an exercise price of$20.00 per share, or the Warrant. We also sold our rights to receive royalties from Eisai with respect to net sales by Eisai of tazemetostat products inJapan , or the Japan Royalty, pursuant to the amended and restated collaboration and license agreement between us and Eisai, dated as ofMarch 12, 2015 , or the Eisai License Agreement. In consideration for the sale of shares of our common stock, the Warrant and the Japan Royalty, RPI paid us$100.0 million upon the closing of the RPI Purchase Agreement inNovember 2019 . In addition, RPI agreed, in connection with RPI's acquisition from Eisai of the right to receive royalties from us under the Eisai License Agreement, to reduce our royalty obligation by low single digits upon the achievement of specified annual net sales levels. We also had the option to sell to RPI$50.0 million of shares of common stock for an 18-month period beginningNovember 4, 2019 , or the Put Option. OnFebruary 11, 2020 , we sold 2,500,000 shares of common stock to RPI for an aggregate of$50.0 million in proceeds at a sale price of$20.00 per share of common stock pursuant to the Put Option. OnNovember 4, 2019 , we also entered into a Loan Agreement with BioPharma Credit PLC, or the Collateral Agent, andBioPharma Credit Investments V (Master) LP , or the Lenders, providing for up to$70.0 million in secured term loans to be advanced in up to three tranches, or the Loan Agreement. We may borrow$25.0 million under each of the first two tranches and$20.0 million under the third tranche. We also have the right to request up to an additional$300.0 million in secured term loans, subject to the approval ofBioPharma Credit Investments V (Master) LP and BioPharma Credit PLC, following FDA approval of tazemetostat for the treatment of FL inthe United States , provided that we have not prepaid any outstanding term loans at the time of such request and such request is made beforeNovember 18, 2021 . OnNovember 18, 2019 , we borrowed the first tranche of$25.0 million , or the Tranche A Loan. OnMarch 27, 2020 , we borrowed the second tranche of$25.0 million , or the Tranche B Loan. Our right to borrow, and the Lenders' obligation to lend, under the third tranche is subject to FDA approval of tazemetostat for the treatment of FL inthe United States , among other closing conditions. Unless the conditions are satisfied and the amounts are borrowed prior to such dates, the Lenders' obligation to lend funds under the third tranche will expire onDecember 31, 2020 . Under the terms of the Loan Agreement, we are required to make quarterly interest only payments following the closing of Tranche A Loan and eight equal quarterly payments of principal startingFebruary 28, 2023 throughNovember 18, 2024 . In addition, under the terms of the Loan Agreement, we are required to make quarterly interest only payments following the closing of Tranche B Loan onMarch 27, 2020 and eight equal quarterly payments of principal startingFebruary 28, 2023 throughNovember 18, 2024 . Interest rates for the term loans will be determined by reference to a Eurodollar rate plus 7.75% above such Eurodollar rate. The Eurodollar rate will have a 2.00% floor. The term loans will be due in eight equal quarterly principal payments commencing on the first business day on or following the 39th month anniversary ofNovember 18, 2019 . All accrued and unpaid interest under any tranches actually borrowed will be due and payable on the 60th month anniversary ofNovember 18, 2019 . We may prepay the term loans before maturity in whole or in part. If we prepay any term loan, in whole or in part, during the first 36 months afterNovember 18, 2019 , then we must pay a prepayment premium equal to the greater of the amount of interest that would have accrued on the principal amount to be prepaid in the absence of any prepayment and a premium equal to 0.03 multiplied by the principal amount to be prepaid. If we prepay a term loan, in whole or in part, between the 36th month and 48th month afterNovember 18, 2019 , then we must pay a prepayment premium equal to 0.02 multiplied by the principal amount to be prepaid. If we prepay a term loan, in whole or in part, between the 48th month and 60th month fromNovember 18, 2019 , then we must pay a prepayment premium equal to 0.01 multiplied by the principal amount to be prepaid.
The obligations under the Loan Agreement are secured by a first priority security interest in and a lien on substantially all of our assets, subject to certain exceptions.
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The Loan Agreement contains certain customary representations and warranties,
affirmative and negative covenants and events of default applicable to us and
our subsidiaries. We will be required to comply at all times with a minimum
liquidity financial covenant. If an event of default occurs and is continuing,
the Collateral Agent may, among other things, accelerate the loans and foreclose
on the collateral.
Collaborations
Refer to Note 10, Collaborations, of the notes to our condensed consolidated
financial statements included in this Quarterly Report on Form 10-Q for a
description of the key terms of our arrangements with Boehringer Ingelheim,
Celgene, GSK, Eisai and
Results of Operations
Revenues
The following is a comparison of total revenues for the three months endedMarch 31, 2020 and 2019: Three Months Ended March 31, 2020 2019 Change (In millions) Product revenues, net$ 1.3 $ -$ 1.3 Collaboration revenue 0.1 7.9 (7.8 ) Total revenues$ 1.4 $ 7.9 $ (6.5 ) Product Revenues, net Net product revenues representU.S. sales from our sole commercial product, TAZVERIK, which was approved by the FDA onJanuary 23, 2020 . During the three months endedMarch 31, 2020 , net product revenues were$1.3 million . Sales allowances and accruals consisted of patient financial assistance, distribution fees, discounts, and chargebacks. We did not have product revenues in 2019.
Collaboration Revenue
Our revenue during the periods consisted of collaboration revenue, including
amounts recognized from deferred revenue related to upfront payments for
licenses or options to obtain licenses in the future, research and development
services revenue earned and milestone payments earned under collaboration and
license agreements with our collaboration partners.
Three Months Ended March 31,
2020 2019 Change %
(In millions)
Collaboration Partner
Boehringer Ingelheim: $ 0.1 $ 7.9 $ (7.8 ) -98.7 %
$ 0.1 $ 7.9 $ (7.8 ) -98.7 %
In the three months ended March 31, 2020 , we recognized $0.1 million in
collaboration revenue. This collaboration revenue was earned as part of our
Boehringer Ingelheim collaboration. The revenue recognized during the three
months ended March 31, 2020 was related to an amendment to extend the research
period under the collaboration agreement under which Boehringer Ingelheim agreed
to fund up to $0.4 million of additional research activities. Through March 31,
2020 , we have recognized $25.6 million in total collaboration revenue under our
agreement with Boehringer Ingelheim.
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In three months ended March 31, 2019 , we recognized $7.9 million in
collaboration revenue as part of our Boehringer Ingelheim collaboration. Under
the agreement we received $15.0 million in an upfront payment from Boehringer
Ingelheim for our license to inhibitor technology of two undisclosed targets and
will receive $5.0 million in research funding and $5.5 million development
milestone for selection of a lead optimization candidate for the shared program
targeting enzymes within helicase families in 2019. Through March 31, 2019 , we
had recognized $9.6 million in total collaboration revenue under our agreement
with Boehringer Ingelheim.
Cost of Product Revenue
The following is a comparison of cost of product revenue for the three months
ended
Three Months Ended
March 31,
2020 2019 Change
(In millions)
Cost of product revenue $ 0.6 $ - $ 0.6
The cost of product revenue consists of costs related to the sales of TAZVERIK.
These costs include materials, labor, manufacturing overhead, amortization of
milestone payments, and royalties payable on net sales of TAZVERIK. During the
three months ended March 31, 2020 , the cost of product revenue was $0.6 million
and consisted of $0.1 million in costs associated with manufacturing TAZVERIK,
$0.3 million in amortization expense related to the $25.0 million milestone
payment under our agreement with Eisai upon regulatory approval of tazemetostat
for epithelioid sarcoma, and $0.2 million in world-wide royalties owed to
Royalty Pharma on net sales of TAZVERIK in the three months ended March 31,
2020 . All product costs incurred prior to FDA approval of TAZVERIK in January
2020 were expensed as R&D expenses. We expect our cost of product revenues
(excluding amortization of intangible assets) to continue to be positively
impacted during 2020 and 2021, as we sell through certain inventory that was
expensed prior to FDA approval of TAZVERIK in January 2020 .
Research and Development
The following is a comparison of research and development expenses for the three
months ended
Three Months Ended
March 31,
2020 2019 Change
(In millions)
Research and development $ 25.2 $ 26.9 $ (1.7 )
During the three months ended March 31, 2020 , total research and development
expenses decreased by $1.7 million compared to the three months ended March 31,
2019 . The decrease in the three months ended March 31, 2020 primarily relates to
decreases in clinical trial expenses, tazemetostat manufacturing costs, and
discovery research activities related to tazemetostat in other indications,
which were offset by increased costs associated with the buildout of our
regulatory and late-stage development groups.
The following table illustrates the components of our research and development
expenses:
Three Months Ended
March 31,
Product Program 2020 2019 Change %
(In millions)
External research and development
expenses:
Tazemetostat and related EZH2 programs $ 8.6 $ 11.8 $ (3.2 ) -27.1 %
Pinometostat and related DOT1L programs 0.0 0.0 0.0 0.0
Discovery and preclinical stage product
programs, collectively 3.6 5.0 (1.4 ) -42.0
Unallocated personnel and other expenses 12.9 10.1
2.8 35.6
Total research and development expenses
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-------------------------------------------------------------------------------- External research and development expenses for tazemetostat and related EZH2 programs decreased$3.2 million during the three months endedMarch 31, 2020 , compared to the three months endedMarch 31, 2019 . The decrease for the three months endedMarch 30, 2020 relates to a decrease in tazemetostat manufacturing costs, as the Company began to capitalize the cost of manufacturing following the approval of TAZVERIK inJanuary 2020 , decreased clinical trial expenses and decreased discovery research activities related to tazemetostat in other indications, which were offset by increased costs associated with the buildout of our regulatory and late stage development groups. There were no costs incurred related to pinometostat for the three months endedMarch 31, 2020 andMarch 31, 2019 , respectively. In general, costs related to pinometostat primarily associate with costs attributed to theCooperative Research and Development Agreement, or CRADA, with theNational Cancer Institute , or NCI, to evaluate tazemetostat in clinical trials in a variety of hematologic malignancies and solid tumors. External research and development expenses for discovery and preclinical stage product programs decreased$1.4 million during the three months endedMarch 30, 2020 compared to the three months endedMarch 30, 2019 . This decrease is primarily related to reduced spending for discovery research activities and decreased development activities related to our G9a preclinical program. Unallocated personnel and other expenses are comprised of compensation expenses for our full-time research and development employees and other general research and development expenses. Unallocated personnel and other expenses increased by$2.8 million during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 , as a result of allocation of expenses to projects and increases in facilities and equipment related expenses offset by an increase in unallocated personnel costs.
We expect that research and development expenses will increase in 2020, as we increase our clinical trial activity for tazemetostat and utilize our drug discovery platform to progress preclinical efforts and pursue additional development candidates to expand our pipeline.
Selling, General and Administrative
The following is a comparison of selling, general and administrative expenses
for the three months ended
Three Months Ended
March 31,
2020 2019 Change
(In millions)
Selling, general and administrative
For the three months endedMarch 31, 2020 , our selling, general and administrative expenses increased$14.9 million compared to the three months endedMarch 31, 2019 . The increases in expenses for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 are due to increased commercialization activities, including the build out of our salesforce and commercial infrastructure to support the launch of TAZVERIK in the ES indication, and an expansion of our infrastructure to support a potential commercial launch in FL, and increased personnel related expenses. We expect that selling, general and administrative expenses will increase during the remainder of 2020, as we continue to increase our commercial activities for tazemetostat. Other Income, Net The following is a comparison of other income, net for the three months endedMarch 31, 2020 and 2019: Three Months Ended March 31, 2020 2019 Change (In thousands) Other income, net Interest income$ 1,490 $ 1,659 $ (169 ) Interest expense (734 ) (1 ) (733 ) Other (expense) income, net (48 ) (6 ) (42 ) Non-cash interest expense related to sale of future royalties (295 ) - (295 ) Other income, net$ 413 $ 1,652 $ (1,239 ) 32
-------------------------------------------------------------------------------- Other income, net consists of interest income earned on our cash equivalents and marketable securities, net of imputed interest expense paid under our capital lease obligation. The decrease in other income is principally due to an increase in interest expense of$0.7 million incurred in connection with our long-term debt obligations, non-cash interest expense related to the sale of future royalties of$0.3 million , and a decrease in net interest income of$0.1 million during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 . Income Tax Expense We did not record a federal or state income tax provision or benefit for the three months endedMarch 31, 2020 and 2019 due to the expected and known loss before income taxes to be incurred, or incurred, as applicable, for the years endedDecember 31, 2020 and 2019, as well as our continued maintenance of a full valuation allowance against our net deferred tax assets, with the exception of the deferred tax asset related to alternative minimum tax credit.
Liquidity and Capital Resources
ThroughMarch 31, 2020 , we have raised an aggregate of$1,356.9 million to fund our operations. This includes$243.3 million of non-equity funding through our collaboration agreements,$198.1 million of funding received through agreements withRoyalty Pharma andPharmakon Advisors consisting of$100.0 million in consideration received from the sale of shares of our common stock, a warrant to purchase shares of our common stock, or the Warrant, and rights to receive royalties from Eisai with respect to net sales by Eisai of tazemetostat products inJapan , or the Japan Royalty,$50.0 million from the sale of shares of our common stock pursuant to the exercise of our right to sell shares of our common stock toRoyalty Pharma ,$50.0 million of borrowings under our loan facility with the Collateral Agent, and the Lenders, less debt issuance costs of$1.7 million ,$839.5 million was from the sale of common stock and series A convertible preferred stock in our public offerings and$76.0 million was from the sale of redeemable convertible preferred stock in private financings prior to our initial public offering inMay 2013 . As ofMarch 31, 2020 , we had$376.5 million in cash, cash equivalents and marketable securities. InNovember 2019 , we raised approximately$123.1 million in net proceeds from the sale to RPI of 6,666,667 shares of our common stock, the Warrant and the Japan Royalty for, as well as from proceeds of the Tranche A Loan borrowings under the Loan Agreement. OnFebruary 11, 2020 , we sold 2,500,000 shares of common stock to RPI for an aggregate of$50.0 million in proceeds at a sale price of$20.00 per share of common stock pursuant to the Put Option. OnMarch 27, 2020 , we received proceeds of the Tranche B Loan borrowings of$25.0 million under the Loan Agreement. InMarch 2019 , we raised approximately$122.7 million in net proceeds (after deducting underwriting discounts and commissions and estimated offering expenses, but excluding any expenses and other costs reimbursed by the underwriters) from the sale of 11,500,000 shares of our common stock in a public offering at a price of$11.50 per share. We also raised approximately$37.4 million in net proceeds (after deducting underwriting discounts and commissions and estimated offering expenses, but excluding any expenses and other costs reimbursed by the underwriters) from the sale of 350,000 shares of series A convertible preferred stock in a public offering at a price of$115 per share. The series A convertible preferred stock is convertible into 3,500,000 shares of our common stock. InOctober 2018 , we raised approximately$81.6 million in net proceeds (after deducting underwriting discounts and commissions and offering expenses, but excluding any expenses and other costs reimbursed by the underwriters) from the sale of 9,583,334 shares of our common stock in a public offering at a price of$9.00 per share. In addition to our existing cash, cash equivalents and marketable securities, we may receive research and development co-funding and are eligible to earn a significant amount of option exercise and milestone payments under our collaboration agreements. Our ability to earn these payments and the timing of earning these payments is dependent upon the outcome of our research and development activities and is uncertain at this time.
Funding Requirements
Our primary uses of capital are clinical trial costs, third-party research and
development services, expenses related to commercialization, compensation and
related expenses, laboratory and related supplies, our potential future
milestone payment obligations to Eisai and Roche Molecular under the amended
Eisai collaboration agreement and Roche Molecular companion diagnostics
agreement, legal and other regulatory expenses and general overhead costs.
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Because our product candidates are in various stages of clinical and preclinical
development and the outcome of these efforts is uncertain, we cannot estimate
the actual amounts necessary to successfully complete the development and
commercialization of TAZVERIK, our product candidates or whether, or when, we
may achieve profitability. Until such time, if ever, as we can generate
substantial product revenues, we expect to finance our cash needs through a
combination of equity or debt financings and collaboration arrangements. Except
for any obligations of our collaborators to make license, milestone or royalty
payments under our agreements with them, and remaining amounts available to us
under the Loan Agreement with the Lenders, which are subject to certain
conditions, we do not have any committed external sources of liquidity. To the
extent that we raise additional capital through the future sale of equity or
debt, the ownership interest of our stockholders may be diluted, and the terms
of these securities may include liquidation or other preferences that adversely
affect the rights of our existing common stockholders. Debt financing and
preferred equity 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.
If we raise additional funds through collaboration arrangements in the future,
we may have to relinquish valuable rights to our technologies, future revenue
streams or product candidates or grant licenses on terms that may not be
favorable to us. If we are unable to raise any additional funds that may be
needed through equity or debt financings 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.
Outlook
Based on our current operating plan, we expect that our existing cash, cash equivalents and marketable securities as ofMarch 31, 2020 will be sufficient to fund our planned operating expenses and capital expenditure requirements into 2022, without giving effect to any potential option exercise fees or milestone payments we may receive under our collaboration agreements. We have based this estimate on assumptions that may prove to be wrong, particularly as the process of testing drug candidates in clinical trials is costly and the timing of progress in these trials is uncertain. As a result, we could use our capital resources sooner than we expect.
Cash Flows
The following is a summary of cash flows for the three months endedMarch 31, 2020 and 2019: Three Months Ended March 31, 2020 2019 Change (In millions) Net cash (used in) operating activities$ (58.3 ) $ (31.6 ) $ (26.7 ) Net cash provided by (used in) investing activities 19.5 (72.5 ) 92.0 Net cash provided by financing activities 78.5 161.6 (83.1 )
Net cash used in operating activities during the three months endedMarch 31, 2020 primarily relates to our net loss of$50.9 million and changes in working capital of$14.5 million , partially offset by net depreciation and amortization of$0.3 million , non-cash stock-based compensation of$6.5 million , and non-cash interest expense associated with the sale of future royalties of$0.3 million . Net cash used in operating activities for the three months endedMarch 31, 2019 primarily relates to our net loss of$29.3 million , changes in working capital of$4.9 million and net depreciation and amortization of$0.2 million , partially offset by non-cash stock-based compensation of$3.2 million .
Net Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities during the three months ended
Net cash used in investing activities during the three months ended
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--------------------------------------------------------------------------------Net Cash Provided by Financing Activities
Net cash provided by financing activities of$78.5 million during the three months endedMarch 31, 2020 primarily reflects cash received from the sale of common stock of$50.0 million in connection with our exercise of our put option to sell shares of our common stock toRoyalty Pharma , net cash received during the period from Tranche B Loan borrowings of$25.0 million under the Loan Agreement, stock option exercises of$3.1 million , and the purchases of shares under our employee stock purchase plan of$0.6 million , partially offset by payments of debt issuance costs of$0.1 million and offering costs of$0.1 million . Net cash provided by financing activities of$161.6 million during the three months endedMarch 31, 2019 primarily reflects cash received from the sale of common and preferred stock of$160.4 million , stock option exercises of$0.9 million , and the purchases of shares under our employee stock purchase plan of$0.4 million . Contractual Obligations There were no material changes to our contractual obligations and commitments described under "Management's Discussion and Analysis and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 .
Critical Accounting Policies and Use of Estimates
Our management's discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these condensed consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the balance sheets and the reported amounts of collaboration revenue, inventories and expenses during the reporting periods. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances at the time such estimates are made. Actual results and outcomes may differ materially from our estimates, judgments and assumptions. We periodically review our estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates are reflected in the condensed consolidated financial statements prospectively from the date of the change in estimate. We define our critical accounting policies as those accounting principles generally accepted inthe United States of America that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations as well as the specific manner in which we apply those principles. Management has determined that our most critical accounting policies are those relating to revenue recognition, inventories, stock-based compensation and research and development expenses, including our accounting for clinical trial expense and accruals. As our clinical development plan for tazemetostat progresses, we expect research and development expenses and, in particular, our accounting for clinical trial accruals to be an increasingly important critical accounting policy. Except as described below with respect revenue recognition for product revenue, during the three months endedMarch 31, 2020 , there have been no material changes with respect to our critical accounting policies disclosed in our Annual Report on Form 10-K for our fiscal year endedDecember 31, 2019 . Revenue Recognition We recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. We sell TAZVERIK inthe United States principally to a limited number of specialty pharmacies, which dispense the product directly to patients, and specialty distributors, which in turn sell the product to hospital pharmacies and community practice pharmacies (collectively, healthcare providers) for the treatment of patients. The specialty pharmacies and specialty distributors are referred to as our customers. 35
-------------------------------------------------------------------------------- Revenue is recognized by us when the customer obtains control of the product, which occurs at a point in time, typically when the product is received by our customers. We provide a right of return to our customers for unopened product for a limited time before and after its expiration date, which lapses upon shipment to a patient. Healthcare providers to whom specialty distributors sell TAZVERIK hold limited inventory that is designated for patients, and we are able to monitor inventory levels in the distribution channel, thereby limiting the risk of return.
Reserves for Variable Consideration
Revenues from product sales are recorded at the net sales price (transaction
price), which includes estimates of variable consideration for which reserves
are established and which result from discounts, returns, chargebacks, rebates,
co-pay assistance and other allowances that are offered within contracts between
us and our Customers, health care providers, payors and other indirect customers
relating to our product sales. These reserves are based on the amounts earned or
to be claimed on the related sales and are classified as reductions of accounts
receivable (if the amount is payable to the Customer) or a current liability (if
the amount is payable to a party other than a Customer). Where appropriate,
these estimates take into consideration a range of possible outcomes that are
probability-weighted for relevant factors such as our historical experience,
current contractual and statutory requirements, specific known market events and
trends, industry data and forecasted customer buying and payment patterns.
Overall, these reserves reflect our best estimates of the amount of
consideration to which we are entitled based on the terms of the contract. The
amount of variable consideration that is included in the transaction price may
be constrained, and is included in the net sales price only to the extent that
it is probable that a significant reversal in the amount of the cumulative
revenue recognized will not occur in a future period. Actual amounts of
consideration ultimately received may differ from our estimates. If actual
results in the future vary from our estimates, we will adjust these estimates,
which would affect net product revenue and earnings in the period such variances
become known.
Trade Discounts and Allowances: We generally provide Customers with discounts
that include incentive fees that are explicitly stated in our contracts and are
recorded as a reduction of revenue in the period the related product revenue is
recognized. In addition, we receive sales order management, data and
distribution services from certain Customers. To the extent the services
received are distinct from our sale of products to the Customer, these payments
are classified in selling, general and administrative expenses in the
consolidated statements of operations and comprehensive loss.
Product Returns: Consistent with industry practice, we generally offer Customers
a limited right of return based on the product's expiration date for product
that has been purchased from us, which lapses upon shipment to a patient. We
estimate the amount of our product sales that may be returned by our Customers
and record this estimate as a reduction of revenue in the period the related
product revenue is recognized. We currently estimate product return liabilities
using available industry data and our own historical sales information,
including our visibility into the inventory remaining in the distribution
channel.
Provider Chargebacks and Discounts: Chargebacks for fees and discounts to
providers represent the estimated obligations resulting from contractual
commitments to sell products to qualified healthcare providers at prices lower
than the list prices charged to Customers who directly purchase the product from
us. Customers charge us for the difference between what they pay for the product
and the ultimate selling price to the qualified healthcare providers. These
reserves are established in the same period that the related revenue is
recognized, resulting in a reduction of product revenue and accounts receivable.
Chargeback amounts are generally determined at the time of resale to the
qualified healthcare provider by Customers, and we generally issue credits for
such amounts within a few weeks of the Customer's notification to us of the
resale. Reserves for chargebacks consist of credits that we expect to issue for
units that remain in the distribution channel inventories at each reporting
period end that we expect will be sold to qualified healthcare providers, and
chargebacks that Customers have claimed but for which we have not yet issued a
credit.
Government Rebates: We are subject to discount obligations under state Medicaid
programs and Medicare. We estimate our Medicaid and Medicare rebates based upon
a range of possible outcomes that are probability-weighted for the estimated
payor mix. These reserves are recorded in the same period the related revenue is
recognized, resulting in a reduction of product revenue and the establishment of
a current liability that is included in accrued expenses on the consolidated
balance sheet. For Medicare, we also estimate the number of patients in the
prescription drug coverage gap for whom we will owe an additional liability
under the Medicare Part D program. Our liability for these rebates consists of
invoices received for claims from prior quarters that have not been paid or for
which an invoice has not yet been received, estimates of claims for the current
quarter, and estimated future claims that will be made for product that has been
recognized as revenue, but remains in the distribution channel inventories at
period end.
Payor Rebates: We may contract with various private payor organizations,
primarily insurance companies and pharmacy benefit managers, for the payment of
rebates with respect to utilization of our products. We estimate these rebates
and record such estimates in the same period the related revenue is recognized,
resulting in a reduction of product revenue and the establishment of a current
liability.
36
-------------------------------------------------------------------------------- Other Incentives: Other incentives that we offer include voluntary patient assistance programs such as co-pay assistance. Co-pay assistance programs are intended to provide financial assistance to qualified commercially insured patients with prescription drug co-payments required by payors. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with product that has been recognized as revenue, but remains in in the distribution channel inventories at period end.
Recently Adopted Accounting Pronouncements
For detailed information regarding recently issued accounting pronouncements and the expected impact on our condensed consolidated financial statements, see Note 2, Summary of Significant Accounting Policies-Recently Adopted Accounting Pronouncements, in the accompanying Notes to Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.
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