PFENEX INC. Forward-Looking Statements
The following discussion and analysis should be read together with our consolidated financial statements and the notes to those statements included elsewhere in this Form 10-Q. This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are based on our management's beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in the section entitled "Risk Factors" and this Management's Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements include, but are not limited to:
• the sufficiency of our cash and cash equivalents and cash generated from
operations to meet our working capital and capital expenditure needs for
the next 12 months;
• the performance of our collaboration partner Alvogen, upon which we are
dependent on to commercialize Teriparatide Injection;
• whether the results of our and our collaboration partners' trials and
studies will be sufficient to support domestic or global regulatory
filings and approvals for PF708;
• whether and when we are able to obtain an "A" therapeutic equivalence
designation from the FDA for Teriparatide Injection relative to the listed
drug Forteo;
• our reliance on
Beijing Kangchen Biological Technology Co., Ltd. (Kangchen), Merck & Co., Inc. (Merck),Serum Institute of India Private Ltd. (SII) and any future collaboration partner's performance over which we do not have control; • our expectations regarding the potential impacts on our business, access
to capital, supply chain, preclinical programs and clinical trials of the
novel coronavirus (COVID-19) pandemic;
• our and any potential future collaboration partner's ability to enroll
patients in our clinical studies at the pace that we project;
• our expectation to expand our product pipeline;
• our expectations regarding the initiation, timing, progress and the
success of the design, primary and secondary end points, and duration of
the clinical trials and planned clinical trials and studies for our
current product candidates and reporting results from same;
• our and our collaboration partners' ability to maintain regulatory
approval of Teriparatide Injection or seek and obtain regulatory approval
for PF708 and our other product candidates, and if approved, maintain
regulatory approval and the timing of such potential regulatory approvals;
• our expectations with respect to the commercialization of Teriparatide
Injection by Alvogen;
• our reliance on third-parties to conduct clinical studies;
• our reliance on third-party contract manufacturers and Alvogen tomanufacture and supply Teriparatide Injection, PF708 and our other product
candidates for us;
• the benefits of the use of Teriparatide Injection, PF708, or any of our
other product candidates;
• the rate and degree of market acceptance of Teriparatide Injection, PF708
or any of our other product candidates, if approved for sale;
• regulatory developments in the United States and foreign countries;
• our expectations regarding government and third-party payor coverage and
reimbursement;
• our and our collaboration partners' ability to manufacture Teriparatide
Injection, PF708 and our other product candidates in conformity with
regulatory requirements and to scale up manufacturing of Teriparatide
Injection, PF708 and our other product candidates to commercial scale;
24
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• our ability to successfully build a specialty sales force, or collaborate
with third-parties including our existing collaboration partners, Alvogen
and Kangchen, to commercialize Teriparatide Injection, PF708 and our other
product candidates;
• our and our collaboration partners' ability to compete with companies
currently producing the listed products, including Forteo;
• our ability to compete with companies that may also seek and obtain
approval for therapeutically equivalent versions of Forteo;
• our ability to retain and recruit key personnel, including development of
a sales and marketing function;
• our ability to obtain and maintain intellectual property protection for
Teriparatide Injection, PF708, our Pfenex Expression Technology® or any
other product candidates;
• our estimates of our expenses, ongoing losses, future revenue, capital
requirements and our needs for or ability to obtain additional financing;
• our expectations regarding the market size, size of patient populations,
opportunity and growth potential for Teriparatide Injection, PF708 and our
product candidates, if approved for commercial use;
• our estimates of the expected patent expiration timelines for Forteo and
other branded listed drugs and biologics;
• our ability to develop new products and product candidates;
• our ability to successfully establish and successfully maintainappropriate collaborations and derive significant revenue from those
collaborations;
• our financial performance; and
• developments and projections relating to our competitors and our industry.
Forward-looking statements include statements that are not historical facts and can be identified by terms such as "anticipates," "believes," "could," "seeks," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would," or similar expressions and the negatives of those terms. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in Part II, Item 1A, "Risk Factors," elsewhere in this Form 10-Q filed with theSecurities and Exchange Commission , orSEC . Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management's beliefs and assumptions only as of the date of this Form 10-Q. In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Form 10-Q, and although we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted a thorough inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. You should read this Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. This Quarterly Report on Form 10-Q also contains estimates, projections and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market, and other data from reports, research surveys, studies, and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data, and similar sources. PfenexTM, Pfenex Biopharmaceuticals™, the Pfenex Biopharmaceuticals logo, and Pfenex Expression Technology® are among our primary trademarks. Other trademarks referred to in this Form 10-Q are the property of their respective owners.
In this Form 10-Q, "we," "us" and "our" refer to
25
--------------------------------------------------------------------------------Overview
We are a development and licensing biopharmaceutical company with commercial stage products and product candidates focused on leveraging our proprietary protein production platform, Pfenex Expression Technology®, a Pseudomonas fluorescens expression platform, to develop partnered and wholly-owned peptides and complex proteins including VHH single domain antibodies for next generation and novel therapeutics to meaningfully improve existing therapies and create therapies for biological targets linked to critical diseases still waiting to successfully be addressed. Our experience in protein therapeutic development and our proven platform enable deliberate and rapid candidate selection and drug development, and potentially higher success rates for a wide range of complex modalities. We aim to leverage existing drug development successes into a broad pipeline that is diversified across multiple assets, including an FDA-approved product and next generation and novel biopharmaceutical product candidates. We believe our patented protein production platform, Pfenex Expression Technology, confers several important competitive advantages compared to traditional techniques for protein production, including the ability to produce complex proteins with higher accuracy and greater degree of protein purity, as well as speed and cost advantages. The development of proteins requires several competencies which represent both challenges and barriers to entry. Due to their inherent complexity, proteins require the use of living organisms to efficiently produce them at a large scale. Traditional techniques for protein production employ a trial and error approach to production organism, or strain, selection and process optimization, which is inherently inefficient and typically produces suboptimal results. This historically inefficient process provides barriers to creating or replicating complex proteins, adds significant time to market and results in the high cost of goods typical of biologic therapeutics. Together, these limitations pose significant hurdles for companies interested in entering the market with novel biologics, biosimilars and therapeutic equivalents. Our platform utilizes a proprietary high throughput fully automated parallel approach, which allows the construction and testing of thousands of unique protein production strains in parallel, thereby allowing us to produce and characterize complex proteins while reducing the time and cost of development and long-term production. Over the past twelve months,Pfenex has expanded the capabilities of thePfenex Expression Technology platform to include the development of VHH single domain antibodies. VHH single domain antibodies contain a single variable domain and two constant domains consisting of only heavy chains. VHH antibodies have are fully functional and attractive attributes from a biopharmaceutical development perspective, including their smaller size (12-15 kD), ability to be linked together for multivalency and/or half-life extension, nano to picomolar affinities, stability, and their opportunities to address biologic targets of interest covering a variety of disease states that have not been remedied by existing therapies. Given our extensive experience and demonstrated success in protein production we enter into partnership, collaboration, and funded programs with third parties who have products and/or platforms that are compatible with and could be enabled by the Pfenex Expression Technology platform.
Our primary development, collaboration, and commercial assets consist of the teriparatide injection product, PF743, PF745, PF690, CRM197, PF753, PF754, PF810, and PF901.
26
--------------------------------------------------------------------------------Our FDA-Approved Product, Our Product Candidates and Collaborations
The following summarizes certain information about the FDA-approved product that we developed, our pipeline candidates, and collaborations:
Our FDA-Approved Product,
Product Candidates and
Collaborations Partner Program
Teriparatide Injection Alvogen • Approved in the United States
in 2019
PF708 (teriparatide Alvogen • Product candidate in EU, MENA,
injection) and ROW
Kangchen • Product candidate in Mainland
China, Hong Kong, Singapore,
Malaysia, Thailand
Recombinant Erwinia Jazz • PF743 (JZP-458); Phase 3
asparaginase clinical trial
• PF745 (JZP-341); Preclinical
Pegaspargase Wholly-owned* •PF690 product candidate
Peptide based next Wholly-owned • PF810 product candidate
generation therapeutic
sparX programs Arcellx • PF753 product candidate
• PF754 product candidate
VHH single chain Wholly-owned • PF901 product candidate
antibody-based novel
therapeutic
Unique strains of CRM197 Wholly-owned • Pre-clinical and cGMP sales
carrier protein
Merck • V114, a 15-valent pneumococcal
conjugate vaccine; Phase 3
clinical trial
SII • Pneumosil®; WHO prequalified;
approved in India
• Pentavalent meningococcal
vaccine product candidate;
completed Phase 3 clinical
*Jazz retains an exclusive option to license this product pursuant to certain option triggers.
Teriparatide Injection Product
Teriparatide Injection is a drug indicated for uses including the treatment of osteoporosis in certain patients at high risk for fracture. Teriparatide Injection was approved by theU.S. Food and Drug Administration (FDA) in 2019 in accordance with the 505(b)(2) regulatory pathway, with Forteo® (teriparatide injection) as the listed drug. InNovember 2019 , we transferred the NDA to Alvogen. Our commercial partner, Alvogen, launched the product inJune 2020 inthe United States . Outside theU.S. , PF708 remains in various stages of regulatory and marketing application processes and, upon approval, may be marketed as Teriparatide Injection or under various tradenames, such as Bonsity, Livogiva, or Qutavina. The Company refers to the product as Teriparatide Injection for discussions related to the U.S. market, as PF708 in markets where regulatory approval is pending or outstanding, and as teriparatide injection product in general discussions of the product. We have issued exclusive licenses to Alvogen to commercialize and manufacture the teriparatide injection product inthe United States ,European Union , certain countries in theMiddle East andNorth Africa , and the rest of the world, excluding Mainland China,Hong Kong ,Singapore ,Malaysia andThailand . We have granted exclusive licenses to NT Pharma to commercialize PF708, upon receipt of applicable marketing authorizations, in Mainland China,Hong Kong ,Singapore ,Malaysia andThailand . NT Pharma subsequently assigned its rights and obligations under its licenses to Kangchen in 2020. Our commercialization partners have submitted regulatory and marketing applications associated with the global commercialization of PF708. The teriparatide injection product has been included within six regulatory and marketing submissions, including one that has achieved approval, with the remaining five under review. Subject to applicable regulatory approvals, PF708 will be commercialized inEurope and other 27 -------------------------------------------------------------------------------- jurisdictions by Alvogen's current and/or future commercialization partners including Theramex inEurope , SAJA, aTamer Group company in MENA, JAMP Pharma inCanada , Kamada Ltd. inIsrael ,Pharmbio Korea, Inc. inSouth Korea ,Juno Pharmaceuticals Pty Ltd inAustralia and New Zealand and a large multinational pharmaceutical company inSouth America . Alvogen is responsible for overseeing any clinical development, regulatory, litigation, commercial manufacturing or commercialization activities of its partners in these jurisdictions. InEurope , a centralized application was submitted to theEuropean Medicines Agency (EMA) for PF708 and accepted inMay 2019 . InJune 2020 , the Committee for Medicinal Products for Human Use (CHMP) of the EMA recommended marketing authorization for PF708. The CHMP's recommendation will be considered by theEuropean Commission , which typically issues a decision within 67 days of the CHMP's recommendation. If theEuropean Commission affirms the CHMP opinion, it will grant a marketing authorization with unified labeling that is valid in the more than 25 countries that are members of theEuropean Union , as well as European Economic Area members,Iceland ,Liechtenstein andNorway . Accordingly, we believe that PF708 could be approved in the EU as early as the second half of 2020, pending marketing authorization by theEuropean Commission under the EU centralized procedure and other factors. We believe our regulatory, commercial and manufacturing collaborations leverage our partners' established international experience and expertise in regulatory, IP and supply chain activities, as well as its established network of specialty pharmaceutical companies to conduct sales and marketing activities in these regions. The FDA approval of Teriparatide Injection was supported by data from Study PF708-301, which compared the effect of Teriparatide Injection and Forteo in osteoporosis patients. The PF708-301 study enrolled a total of 181 patients, with 90 patients receiving Teriparatide Injection and 91 patients receiving Forteo. Eighty-two patients completed the study in Teriparatide Injection treatment group, compared with 81 patients in the Forteo treatment group. The primary study endpoint was anti-drug antibody (ADA) incidence after 24 weeks of drug treatment. 2.2% (2/90) of patients who received Teriparatide Injection and 2.2% (2/91) of patients who received Forteo had detectable antibodies to teriparatide, and one of the two patients who received Teriparatide Injection developed neutralizing antibodies to teriparatide. The secondary study endpoints included mean percentage changes in lumbar-spine bone mineral density (BMD) and median percentage changes in bone turnover markers (BTM) after 24 weeks of drug treatment, as well as pharmacokinetic (PK) parameters for up to four hours after the first dose. Safety endpoints were incidences of adverse events (AE) and serious adverse events (SAE). The PF708-301 study showed comparable overall profiles between Teriparatide Injection and Forteo across multiple endpoints. These results from the PF708-301 study, along with bioequivalence findings from Study PF708-101 in healthy subjects, supported the Teriparatide Injection NDA submitted inDecember 2018 pursuant to the 505(b)(2) pathway. The NDA was approved by the FDA in 2019 and subsequently transferred to Alvogen pursuant to our license agreement. In addition to obtaining FDA approval of Teriparatide Injection, we continue to pursue an "A" therapeutic equivalence designation from the FDA for the product relative to its listed drug, Forteo. A determination of therapeutic equivalence (as shown by an "A" rating) may permit Teriparatide Injection to be automatically substituted for Forteo, depending on applicable laws and policies within each of the 50 states in theU.S. Consistent with our interactions with the FDA and the agency's draft guidance document on comparative use human factors studies for demonstrating the therapeutic equivalence of drug-device combination products, we completed a Teriparatide Injection CUHF study and submitted the final study report to the FDA inOctober 2019 . The CUHF study was a simulated use study intended to evaluate the effect of each product's delivery device and user interface on critical task performance by untrained osteoporosis patients and caregivers. The study used a paired design of Teriparatide Injection and Forteo products and included both naïve and Forteo experienced users. OnApril 9, 2020 , the FDA informed Alvogen that the submitted CUHF study was insufficient to support a TE determination. InJuly 2020 , the FDA provided additional direction via General Advice Letter about the methodology to be used in a new CUHF study necessary to support a TE determination. Alvogen has provided an updated CUHF protocol to the FDA and intends to commence the study after receiving feedback from the FDA. TheFDA's July 2020 letter also indicated that its feedback on the CUHF Study is not intended to suggest that all other aspects of the Teriparatide Injection TE determination have been demonstrated. For a discussion of certain significant risks relating to Teriparatide Injection, please see the following Risk Factors: "Teriparatide Injection, PF708 and our other product candidates, if approved, face significant competition from the listed products and from therapeutic equivalent products of the listed products, and from other products. Our or our collaboration partners' failure to effectively compete may prevent us from achieving significant market penetration and expansion." and "If Teriparatide Injection does not receive an "A" therapeutic equivalence designation from the FDA, our business may suffer." 28 -------------------------------------------------------------------------------- In accordance with ourU.S. license agreement with Alvogen, we received a payment of$2.5 million upon signing theU.S. agreement and were additionally eligible to receive additional payments of up to$25 million based on the achievement of certain development and regulatory milestone payments. As ofJune 30, 2020 , we have earned$7.5 million of these milestones and remain eligible to earn$15 million tied to achieving the "A" therapeutic equivalence designation if achieved byOctober 4, 2020 . If the "A" therapeutic equivalence designation is not achieved byOctober 4, 2020 , we become eligible to receive up to$7.5 million in support and regulatory milestone payments. If an "A" therapeutic equivalence designation is not achieved byOctober 4, 2021 , we are not eligible to receive any additional regulatory milestone payments in connection with theU.S. Agreement. In addition, we are eligible to receive tiered royalties on the gross profits ofU.S. product sales between 25% and 40% prior to an "A" therapeutic equivalence designation, which increases to a flat 50% if an "A" rating is achieved. In accordance with our EU, MENA and ROW agreements with Alvogen, we are eligible to receive additional upfront and milestone payments of$1.5 million and we may also be eligible to receive up to 60% of Alvogen's gross profit derived from product sales and regional license fees, if approved, depending on geography, cost of goods sold and sublicense fees. As ofJune 30, 2020 , we have earned$2.9 million in licenses fees, of which we have deferred$0.3 million atJune 30, 2020 . In accordance with our license agreement with NT Pharma, we received a payment of$2.5 million upon signing and may be eligible to receive additional payments of up to$22.5 million based on the achievement of certain development, regulatory, and sales-related milestones. We may also be eligible to receive double-digit royalties on net sales of PF708. After NT Pharma's assignment of our development and license agreement to Kangchen in 2020, Kangchen is responsible for any further development required to achieve regulatory approval as well as commercialization activities in the applicable territories. InMay 2019 , we entered into an agreement with Alvogen for us to provide PF708 drug substance batches and pen components in exchange for$2.3 million . This product sold to Alvogen was initially manufactured by our CMO for manufacturing process validation purposes as part of the Teriparatide Injection NDA submission to the FDA for approval. We do not expect to have similar transactions in the future.
During the quarter ended
Jazz Collaboration
We are developing hematologic oncology products pursuant to a 2016 collaboration agreement with Jazz including PF743 (JZP-458), a recombinant Erwinia asparaginase, PF745 (JZP-341), a long-acting Erwinia asparaginase, and PF690, a pegaspargase. Both PF743 and PF745 are being developed for the treatment of acute lymphoblastic leukemia and other hematological malignancies. Jazz has worldwide rights to develop and commercialize PF743 and PF745 and an exclusive option to license PF690 subject to certain triggers. PF743 received fast track designation from the FDA inOctober 2019 . Jazz announced it is currently enrolling patients in a Phase 3 study and expects to file a biologics license application (BLA) with the FDA as early as the fourth quarter of 2020. In accordance with the Jazz agreement, as amended, total upfront payments and potential milestone payments total$224.5 million . We have received upfront payments of$20.0 million upon the execution of the initial agreement and subsequent amendment and$42 million in total payments connected to milestone achievements and may be eligible to receive additional payments of up to$162.5 million based on the achievement of certain development, regulatory, and sales-related milestones. As ofJune 30, 2020 , we have earned$62 million of these milestones and remain eligible to earn$162.5 million . We may also be eligible to receive tiered royalties on worldwide sales of any product resulting from the collaboration.
In September and
Jazz maintains an exclusive option to license PF690 pursuant to certain option triggers.
CRM197
CRM197 is a non-toxic mutant of diphtheria toxin. It is a well-characterized
protein and functions as a carrier for polysaccharides and haptens, making them
immunogenic. We have developed unique CRM197 production strains based on our
Pfenex Expression Technology platform. We supply preclinical grade and cGMP
CRM197 to several vaccine development focused pharmaceutical customers and have
exclusively licensed unique production strains to Merck and SII for use in their
conjugate vaccine
29
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products including candidates for pneumococcal and meningitis bacterial infections. Pneumococcus bacterium is a leading cause of severe pneumonia and major cause of morbidity and mortality worldwide.
SII began commercialization of its 10-valent pneumococcal conjugate vaccine, Pneumosil in the second quarter of 2020. Pneumosil achieved WHO Prequalification inDecember 2019 , allowing the product to be procured byUnited Nations agencies and Gavi, theVaccine Alliance , and subsequently achieved Indian Marketing Authorization inJuly 2020 , allowing the product to be sold inIndia . Additionally, SII is currently testing a meningococcal conjugate vaccine in a Phase 3 study inIndia . Merck's 15-valent pneumococcal conjugate vaccine, PCV-15 (V114) is in late stage clinical development with 17 Phase 3 clinical trials. InJune 2020 , Merck released positive data from two initial Phase 3 studies evaluating the safety, tolerability and immunogenicity of V114 and announced its plans to continue to work with the FDA and other regulatory authorities around the world on filing plans for licensure of this vaccine as additional data from the Phase 3 programs become available. In accordance with our CRM197 commercial license agreements, we have received upfront, maintenance, and milestone payments totaling$4.7 million . In addition, we may be eligible to receive milestone payments of up to$4.0 million per product and may also be eligible to receive up to low to mid-single digit royalties derived from net sales, depending on territory. As ofJune 30, 2020 , the Company has earned$4.7 million of the upfront, maintenance, and milestone payments and remains eligible to earn an additional$11.6 million .
Arcellx
Pursuant to a 2018 Development, Evaluation and License Agreement, we are advancing Arcellx's proprietary sparX proteins that activate, silence and reprogram Antigen- Receptor Complex T cell-based therapies. We have completed various development services for both sparX 1 (PF753) and sparX 2 (PF754) and Arcellx has opted into the commercial license for both production strains. In accordance with the Arcellx agreement, potential milestone payments total is$17.6 million per protein. We have received service payments of$2.4 million and may be eligible to receive additional payments of up to$35.2 million based on the achievement of certain development, regulatory, and sales-related milestones. As ofJune 30, 2020 , the Company has not earned any payments in connection with milestones and remains eligible to earn up to$35.2 million . The Company may also be eligible to receive royalties on net sales of the commercialized products.
Other Collaborations and Service Arrangements
We have several other collaborations and service arrangements with third-party companies developing pharmaceutical products based on the use of thePfenex Expression Technology and our know-how. These fee arrangements typically consist of upfront payments, license fees, development milestones, regulatory milestones, sales-based milestones, and royalties on the future sale of products arising from the arrangements.
Wholly-Owned Product Candidates
Our wholly-owned product portfolio and pipeline is focused on the development of next generation molecules and novel biopharmaceutical VHH single domain antibody based product candidates for validated biological targets. Each of our wholly-owned products is in preclinical development. The portfolio includes PF810, a peptide-based next generation therapeutic candidate, and PF901 a VHH single domain antibody product candidate.
Capital and Funding
Our revenue for the three and six months endedJune 30, 2020 was$0.8 million and$1.5 million , respectively. Our historical revenue has been primarily derived from monetizing our Pfenex Expression Technology through collaboration agreements, service agreements, government contracts and reagent protein product sales, which provide for various types of payments, including upfront payments, funding of research and development, milestone payments, intellectual property access fees and licensing fees. As ofJune 30, 2020 , we had an accumulated deficit of$218.2 million , of which$89.8 million was attributable to recognizing the accretion in the redemption value of our convertible preferred stock in previous periods. Net losses for the three and six months endedJune 30, 2020 were$10.3 million and$20.5 million , respectively. As we continue to develop and invest more resources into the development and commercialization of our product candidates, our net operating losses may increase over the next several years. Research and development expenses will continue to be material as 30
-------------------------------------------------------------------------------- we incur further costs of development. We are currently developing our wholly-owned therapeutics, establishing additional product development partnerships, and investigating and targeting novel modalities for possible future lead candidates, and we do not yet have an extensive sales organization. We will need substantial additional funding to support our operating activities, especially as we approach anticipated regulatory approval inthe United States ,Europe and other territories, and begin to establish our commercialization capabilities to the extent we determine to develop and commercialize the future lead candidates internally. Adequate funding may not be available to us on commercially reasonable terms, or at all. Since our inception, we have funded our operations primarily through the sale and issuance of common stock in our public offerings, revenue from our collaboration agreements, government contracts, service agreements, and reagent protein product sales, our prior credit facility and the private placement of equity securities. We have devoted substantially all of our capital resources to the research and development of our product candidates and working capital requirements.
Recent Developments
COVID-19 Pandemic
The COVID-19 pandemic has had and likely will continue to have significant effects on businesses and health care institutions around the world. While it is not possible at this time to estimate the overall impact that the COVID-19 pandemic could have on our business, the continued rapid spread of COVID-19, both acrossthe United States and through much of the world, and the measures taken by the governments of countries and local authorities have disrupted and could delay advancing our product pipeline, delay our and our collaboration partners' clinical trials, delay our overall preclinical activities, and disrupt the manufacture or shipment of both drug substance and finished drug product for our product candidates for preclinical testing and clinical trials and adversely impact our and our collaboration partners' business, financial condition or operating results. The health and safety of our people and their families continues to be our primary focus. As the COVID-19 pandemic has developed, we have taken numerous steps to help ensure the health and safety of our employees and their families. We are maintaining social distancing and enhanced cleaning protocols and usage of personal protective equipment, where appropriate. Since the stay at home order was put in place in the state ofCalifornia , the volume of ongoing lab work has been reduced, and only critical program work in the lab has continued with staggered lab employee work shifts to minimize risk of exposure to COVID-19, which has and may continue to disrupt or delay our ability to conduct clinical and preclinical research activities. Employees whose tasks can be performed offsite have been instructed to work from home. We have been and continue to actively monitor our supply chain during the COVID-19 pandemic, including third-party materials and service suppliers for us as well as our partners. To date, there have not been any known supply disruptions due to the pandemic, but contingency planning is ongoing with our partners to reduce the possibility of an interruption to manufacturing or the availability of necessary materials. The COVID-19 pandemic, among other factors, could cause delays in initiating and conducting a CUHF study to generate the additional data requested by the FDA to evaluate the therapeutic equivalence of Teriparatide Injection and Forteo. Any such delay could adversely affect our and Alvogen's ability to timely obtain a TE determination for Teriparatide Injection, and any delay in and/or failure to obtain TE designation for Teriparatide Injection could have a material adverse effect on our business and financial results.
COVID-19 has also caused volatility in the global financial markets and threatened a slowdown in the global economy, which may negatively affect our ability to raise additional capital on attractive terms or at all.
We have not made any changes to our internal control over financial reporting in the current quarter.
We are continuing to assess the potential impact of the COVID-19 pandemic on our business and operations. For additional information on the various risks posed by the COVID-19 pandemic, refer to Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q.
Teriparatide Injection Comparative Use Human Factors Data
InApril 2020 , the Company announced that the FDA informed Alvogen that the submitted CUHF study was insufficient to support a TE determination. InJuly 2020 , the FDA provided additional feedback and direction regarding the methodology to be used in a new CUHF study necessary to support a TE evaluation. Alvogen has provided an updated CUHF protocol to the FDA and intends to commence the study after theFDA's review of the protocol. 31 --------------------------------------------------------------------------------
NT Pharma Deed of Assignment and Amendment
EffectiveApril 21, 2020 , we entered into a Deed of Assignment and Amendment (Deed) with NT Pharma,NT Pharma International Company Limited (NT International ), and Kangchen. Pursuant to the Deed, we agreed to allow NT Pharma to assign its rights and obligations under the Development and License Agreement with us to Kangchen. NT Pharma subsequently assigned its rights and obligations under the agreement to Kangchen. In a related transaction, NT Pharma, throughNT International , obtained an equity interest in Kangchen and each ofNT Pharma and Beijing Konruns Pharmaceutical Co., Ltd. (Konruns), as the ultimate parents of Kangchen, will jointly and severally with NT Pharma guarantee for the benefit ofPfenex the obligations of Kangchen under the Development and License Agreement.
InJune 2020 , our commercialization partner for Teriparatide Injection, Alvogen, initiated theU.S. commercial launch of Teriparatide Injection. We are eligible to receive tiered royalties on the gross profits ofU.S. product sales between 25% and 40% prior to an "A" therapeutic equivalence designation, which increases to a flat 50% if an "A" rating is achieved.
PF708 CHMP Positive Opinion
InJune 2020 , the Committee for Medicinal Products for Human Use (CHMP) of theEuropean Medicines Agency adopted a positive opinion recommending marketing authorization for PF708. The CHMP's recommendation will be considered by theEuropean Commission , which typically issues a decision within 67 days of the CHMP's recommendation. If theEuropean Commission affirms the CHMP opinion, it will grant a marketing authorization with unified labeling that is valid in the more than 25 countries that are members of theEuropean Union , as well as European Economic Area members,Iceland ,Liechtenstein andNorway .
Critical Accounting Policies, Significant Judgments and Use of Estimates
Our management's discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States , or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue and expenses during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions. The accompanying unaudited consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and related footnotes included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Except as otherwise disclosed, there have been no material changes in our critical accounting policies and estimates in the preparation of our financial statements during the three months endedJune 30, 2020 compared to those disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , as filed with theSEC onMarch 11, 2020 . 32
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Results of Operations
Comparison of the three and six months ended
The following table summarizes our net loss during the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands,
except percentages) 2020 2019 Change 2020
2019 Change
Revenue $ 781 $ 2,811 (72 )% $ 1,463 $ 10,673 (86 )%
Cost of revenue 680 1,119 (39 )% 1,020 2,686 (62 )%
Gross profit 101 1,692 (94 )% 443 7,987 (94 )%
Operating expense
Research and
development 5,535 4,812 15 % 11,345 12,691 (11 )%
Selling, general
and administrative 4,895 4,520 8 % 9,627 9,063 6 %
Total operating
expense 10,430 9,332 12 % 20,972 21,754 (4 )%
Loss from
operations (10,329 ) (7,640 ) 35 % (20,529 ) (13,767 ) 49 %
Other income, net 3 71 (96 )% 51 140 (64 )%
Net loss from
before income taxes (10,326 ) (7,569 ) 36 % (20,478 ) (13,627 ) 50 %
Income tax
provision 5 - 100 % 4 1 300 %
Net loss $ (10,331 ) $ (7,569 ) 36 % $ (20,482 ) $ (13,628 ) 50 %
Revenue
Our revenue is generated primarily through research and development services,
intellectual property license agreements, and product sales. Our agreements
frequently contain multiple deliverables including intellectual property
licenses, development services, and products. Consideration received under these
arrangements may include upfront payments, research and development funding,
cost reimbursements, milestone payments, payments for product sales and royalty
payments.
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands, except
percentages) 2020 2019 Change 2020 2019 Change
Revenue $ 781 $ 2,811 (72 )% $ 1,463 $ 10,673 (86 )%
Revenue decreased by $2.0 million , or 72%, to $0.8 million in the three months
ended June 30, 2020 , compared to $2.8 million in the same period in 2019. The
decrease in revenue was primarily due to a decrease in revenue from services
provided to BARDA and Arcellx and license revenue related to the Jazz agreement.
During the three months ended June 30, 2020 , royalty revenue from the U.S. sales
of Teriparatide Injection was $0.4 million and service-based revenue was $0.4
million .
Revenue decreased by $9.2 million , or 86%, to $1.5 million in the six month
period ended June 30, 2020 , compared to $10.7 million in the same period in
2019. The decrease in revenue was due to a decline in research and development
activity related to our collaboration agreements with Jazz and Alvogen, a
decrease in license and service activity related to Arcellx, a decrease on
CRM197 product sales, the wind down of the BARDA contract, partially offset by
an increase on license and service activity related to new customers.
Cost of Revenue
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands, except
percentages) 2020 2019 Change 2020 2019 Change
Cost of revenue $ 680 $ 1,119 (39 )% $ 1,020 $ 2,686 (62 )%
33
-------------------------------------------------------------------------------- Cost of revenue decreased by approximately$0.4 million , or 39%, to$0.7 million in the three month period endedJune 30, 2020 , compared to$1.1 million in the same period in 2019. The decrease was primarily due to a decrease in sales of our CRM197 product and declining service revenue. Cost of revenue decreased by approximately$1.7 million , or 62%, to$1.0 million in the six month period endedJune 30, 2020 , compared to$2.7 million in the same period in 2019. The decrease was primarily due to a decrease in sales of our CRM197 product and declining service revenue. Research and Development Three Months Ended Six Months Ended June 30, June 30, (in thousands, except percentages) 2020 2019 Change 2020 2019 Change
Research and development$ 5,535 $ 4,812 15 %$ 11,345 $ 12,691 (11 )% Research and development expenses increased by approximately$0.7 million , or 15%, to$5.5 million in the three month period endedJune 30, 2020 , compared to$4.8 million in the same period in 2019. The increase was primarily due to increased investments in our novel biopharmaceutical program development, partially offset by reductions in PF708 development expenses. Research and development expenses decreased by approximately$1.4 million , or 11%, to$11.3 million in the six month period endedJune 30, 2020 , compared to$12.7 million in the same period in 2019. The decrease was due to a reduction in PF708 development expenses, partially offset by increased investments in our novel biopharmaceutical program development. We expect research and development expenses to vary in the near future depending on the phase of the programs we are advancing. The timing and amount of expenses incurred for our product candidates will depend largely upon the outcomes of current or future clinical studies for our product candidates, as well as the related regulatory requirements, manufacturing costs and any costs associated with the advancement of our preclinical programs.
Selling, General and Administrative
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands, except
percentages) 2020 2019 Change 2020 2019 Change
Selling, general and
administrative $ 4,895 $ 4,520 8 % $ 9,627 $ 9,063 6 %
Selling, general and administrative expenses increased by approximately
$0.4 million , or 8%, to $4.9 million in the three month period ended June 30,
2020 , compared to $4.5 million in the same period in 2019. The increases were
primarily due to legal fees.
Selling, general and administrative expenses increased by approximately
Liquidity and Capital Resources
We have funded our operations primarily through the sale and issuance of common stock in our public offerings, revenue from our collaboration agreements, government contracts, service agreements, and reagent protein product sales, debt financing, our prior credit facility and the private placement of equity securities. AtJune 30, 2020 , we had$61.0 million in cash and cash equivalents and$0.2 million in restricted cash as bank collateral for our corporate credit card program compared to$55.6 million in cash and cash equivalents and$0.2 million in restricted cash as ofDecember 31, 2019 . We believe that our existing cash and cash equivalents and our cash inflow from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for product development and commercialization sooner than planned. 34
-------------------------------------------------------------------------------- In accordance with our development, commercialization and other license agreements with Alvogen, Kangchen, Jazz, Merck, SII, and Arcellx, we are eligible to receive additional payments based on the achievement of certain development, regulatory, and sales-related milestones and royalties on product sales. Certain of these additional payments may relate to development activities for programs not yet initiated by our licensing partners. As ofJune 30, 2020 , we remain eligible to earn up to approximately$240 million under these agreements. Remaining development, regulatory, and sales-based Partner Drug Candidate milestones Royalties Teriparatide Tiered between 25% and Alvogen Injection$15 million (a) 40% of gross profits (b) Kangchen PF708 (teriparatide$22.5 million 25% of net sales injection) Jazz PF743, PF745$162.5 million Tiered low to mid-single digits SII Pneumosil®$0.1 million Low-single digits (a) - The remaining$15 million is tied to achieving an "A" therapeutic equivalence designation within defined periods subsequent to theOctober 2019 NDA approval. The Company may be eligible to earn$15 million if the "A" therapeutic equivalence designation is achieved byOctober 4, 2020 ,$7.5 million if the "A" therapeutic equivalence designation is achieved byOctober 4, 2021 , and$0 thereafter. (b) - The Company may be eligible to receive tiered royalties on the gross profits ofU.S. product sales between 25% and 40% prior to an "A" therapeutic equivalence designation, which increases to a flat 50% if an "A" rating is achieved.
During the three months ended
InMarch 2018 , we entered into an equity sales agreement (2018 Sales Agreement) to sell shares of our common stock having aggregate sales proceeds of up to$20.0 million , from time to time, through an ATM equity offering program. During the three months endedMarch 31, 2020 , we sold a total of 1.8 million shares of our common stock through the "at-the-market" equity offering program for aggregate gross proceeds of approximately$20.0 million , at which point the 2018 Sales Agreement automatically terminated. InMay 2020 , we entered into an equity sales agreement (2020 Sales Agreement) to sell shares of our common stock having aggregate sales proceeds of up to$60.0 million , from time to time, through an ATM equity offering program. As ofAugust 6, 2020 , we have not sold any shares under the 2020 Sales Agreement. We may need to raise additional capital to fund our operations in the near future. We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing and distribution arrangements. To the extent that we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we do raise additional capital through public or private equity offerings, 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 our stockholders' rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Funding may not be available to us on acceptable terms, or at all and our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to and volatility in the credit and financial markets inthe United States and worldwide resulting from the COVID-19 pandemic. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of or suspend one or more of our clinical trials, research and development programs or commercialization efforts. We currently have no credit facility or committed sources of capital although we may receive milestone and other contingent payments under our current license and collaboration agreements. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates and the extent to which we may enter into additional agreements with third parties to participate in their development and commercialization, we are unable to estimate the amounts of increased capital 35 -------------------------------------------------------------------------------- outlays and operating expenditures associated with our current and anticipated clinical trials. Our future capital requirements will depend on many factors, including:
• the timing and extent of spending on our research and development efforts;
• our ability to enter into and maintain collaboration, licensing,
commercialization and other arrangements and the terms and timing of such
arrangements;
• whether we and Alvogen obtain, in a timely manner or at all, an "A"
therapeutic equivalence designation for Teriparatide Injection that may
allow such product to be automatically substituted for Forteo depending on
applicable laws and policies within each of the 50 states;
• our ability to retain Alvogen as a collaboration partner for Teriparatide
Injection and PF708 on commercially acceptable terms;
• the timing of the marketing authorization for PF708, if any, in
jurisdictions outside the United States ;
• the cost to us of development, manufacturing and commercialization
activities for our product candidates, if any;
• the cost of preparing, filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights;
• the receipt of any collaboration or milestone payments;
• the scope, rate of progress, results and FDA acceptance of the results,
and cost of our clinical trials, preclinical testing and other related
activities for our product candidates;
• the emergence of competing technologies or other adverse market developments;
• the time and costs involved in seeking and obtaining regulatory and
marketing approvals in multiple jurisdictions for our product candidates
that successfully complete clinical trials;
• the introduction of new product candidates and the number and
characteristics of product candidates that we pursue;
• the timing, receipt and amount of sales, profit sharing or royalties, if
any, from Teriparatide Injection, PF708, and any other potential products;
• the degree and rate of market acceptance and coverage and reimbursement by
payors of Teriparatide Injection, PF708 and any of our other product
candidates launched by us or our collaboration partners;
• the impact of any natural disasters or public health crises, such as the
COVID-19 pandemic;
• the potential expansion of our sales and marketing activities; and
• the potential acquisition and in-licensing of other technologies, products
or assets.
If we were to experience any delays or encounter issues with any of the above, including with respect to obtaining an "A" therapeutic equivalence designation for Teriparatide Injection, clinical holds, failed studies, inconclusive or hard-to-interpret results, safety or efficacy issues, or other regulatory challenges that require longer follow-up of existing studies, additional major studies, or additional supportive studies in order to pursue marketing approval, it could further increase the costs associated with the above and delay or suspend revenue.
Cash Flows
The following table sets forth the primary sources and uses of cash, cash equivalents and restricted cash for each of the periods presented below:
Six Months Ended
June 30,
(in thousands) 2020 2019
Net cash (used in) provided by:
Operating activities $ (13,982 ) $ (14,220 )
Investing activities (1,246 ) (445 )
Financing activities 20,640 65
Net increase (decrease) in cash, cash equivalents and
restricted
cash $ 5,412 $ (14,600 )
36
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Net cash used in operating activities
Net cash used in operating activities was$14.0 million during the six months endedJune 30, 2020 compared to$14.2 million during the same period in 2019. The cash used in operating activities in the six months endedJune 30, 2020 was primarily due to operating expenditures during the period. The cash used in operating activities in the six months endedJune 30, 2019 was primarily due to operating expenditures during the period, partially offset by revenue activity related to our collaboration agreements with Jazz, Alvogen, Arcellx, and BARDA contract.
Net cash used in investing activities
Net cash used in investing activities was$1.2 million during the six months endedJune 30, 2020 compared to$0.4 million used in the same period in 2019. The cash used in investing activities in the six months endedJune 30, 2020 and 2019 was due to the purchase of property and equipment, with a greater amount of lab equipment acquired in the six months endedJune 30, 2020 to support planned development activities.
Net cash provided by financing activities
Cash provided by financing activities was$20.6 million during the six months endedJune 30, 2020 compared to cash provided in financing activities of$65 thousand during the same period in 2019. The cash provided in financing activities in the six months endedJune 30, 2020 was primarily due to Company shares sold in the first quarter of 2020 for net proceeds of$19.3 million and$1.4 million in proceeds for stock option exercises. The cash provided in financing activities in the six months endedJune 30, 2019 was primarily due to proceeds received from stock option exercises.
Off-Balance Sheet Arrangements
In the normal course of business, we enter into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. Our exposure under these agreements is unknown because it involves claims that may be made against us in the future but have not yet been made. As ofJune 30, 2020 , we have not paid any claims or been required to defend any action related to our indemnification obligations. However, we may record charges in the future as a result of these indemnification obligations.
Contractual Obligations and Commitments
There have been no material changes during the six months ended
Recently Issued Accounting Pronouncements
InDecember 2019 , the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application of Topic 740. ASU 2019-12 is effective for fiscal years beginning afterDecember 15, 2020 , and interim periods within those fiscal years, with early adoption permitted in any interim period for which financial statements have not yet been made available for issuance. The Company is currently evaluating the effect that ASU 2019-12 will have on its consolidated financial statements and related disclosures. 37
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