The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Form 10-Q and our Annual Report on Form 10-K (Form 10-K) for the year endedDecember 31, 2021 on file with theSEC . Some of the information contained in this discussion and analysis or set forth elsewhere in this 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 the "Risk Factors" section of this 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 biopharmaceutical company focused on discovering, developing, and commercializing important new medicines to improve the lives of people with cancer. Leveraging our proprietary switch-control kinase inhibitor platform and deep expertise in kinase biology, we design kinase inhibitors to target the switch pocket region of the kinase with the goal of developing potentially transformative medicines. Through our patient-inspired approach, we seek to develop a broad portfolio of innovative medicines to improve treatment outcomes. QINLOCK, our switch-control kinase inhibitor, was engineered using our proprietary drug discovery platform and developed for the treatment of fourth-line GIST. QINLOCK is approved inAustralia ,Canada ,China , theEU ,Hong Kong ,Switzerland ,Taiwan , theU.S. , and theU.K. for the treatment of fourth-line GIST. We wholly own QINLOCK and all of our drug candidates with the exception of a development and commercialization out-license agreement for QINLOCK inGreater China . In addition to QINLOCK, we have identified and advanced multiple product candidates from our platform into clinical studies, including vimseltinib and DCC-3116.
Recent Developments
QINLOCK
QINLOCK, an orally administered kinase switch control inhibitor of the KIT and PDGFRA kinases, is approved in nine territories for the treatment of fourth-line advanced GIST. We also launched QINLOCK inGermany inJanuary 2022 and received authorization for a post-approval paid access program inFrance inApril 2022 , and plan to provide access to QINLOCK to fourth-line GIST patients in additional European countries through other channels. Additionally, inFebruary 2022 , we announced that the National Comprehensive Cancer Network (NCCN) Clinical Practice Guidelines in Oncology for GIST now include the use of QINLOCK 150 mg twice daily (BID) after disease progression if previously treated with QINLOCK 150 mg once daily in fourth-line GIST patients.
Vimseltinib
Vimseltinib is an investigational, orally administered, potent, and highly-selective switch-control kinase inhibitor of the colony stimulating factor 1 receptor (CSF1R).
We are currently studying vimseltinib in a pivotal Phase 3 study in patients with TGCT (MOTION study). The MOTION study is a two-part, randomized, double-blind, placebo-controlled study to assess the efficacy and safety of vimseltinib in patients with TGCT who are not amenable to surgery. InJanuary 2022 , we announced that enrollment is currently underway in our Phase 3 MOTION study. We are also conducting an international, multicenter, ongoing open-label Phase 1/2 study designed to evaluate the safety, efficacy, pharmacokinetics (PK), and pharmacodynamics (PD) of vimseltinib in patients with solid tumors and TGCT, and we expect to provide updated data from the Phase 1/2 study in patients with TGCT in the second half of this year.
DCC-3116
DCC-3116 is a potential first-in-class investigational, orally administered, potent, and highly selective switch-control inhibitor of the ULK kinase.
DCC-3116 is being studied in a Phase 1 study designed to evaluate the safety, tolerability, clinical activity, PK, and PD of DCC-3116 as a single agent and in combination with trametinib, aU.S. Food and Drug Administration (FDA) approved MEK inhibitor, in patients with advanced or metastatic tumors with a RAS or RAF mutation. InFebruary 2022 , we announced that we plan to continue to enroll patients and expect to provide initial Phase 1 single agent dose escalation data on DCC-3116 in the second half of 2022. We also announced that, following and subject to the selection of a recommended Phase 2 dose of 20
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DCC-3116 from the monotherapy dose escalation portion of the Phase 1 study of DCC-3116, in the second half of 2022 we plan to initiate the Phase 1 combination dose escalation cohorts with trametinib and, subject to feedback from regulatory authorities, with sotorasib, a mutant KRASG12C inhibitor, and binimetinib, a MEK inhibitor. Following the dose escalation phase and subject to the selection of a recommended Phase 2 dose of the combinations, expansion cohorts are currently planned with (i) trametinib in patients with advanced or metastatic pancreatic ductal adenocarcinoma with KRAS-driven mutations, non-small cell lung cancer with RAF or RAS-driven mutations, and colorectal cancer with RAF or RAS-driven mutations, (ii) binimetinib in patients with melanoma with NRAS-driven mutations subject to feedback from regulatory authorities, and (iii) sotorasib in patients with non-small cell lung cancer with KRASG12C-driven mutations subject to feedback from regulatory authorities.
Early-Stage Research Programs
We are also making a focused investment in our next generation of research programs, which are designed to provide first-in-class or best-in-class treatments using our proprietary switch-control inhibitor platform. InFebruary 2022 , we announced that our goal for 2022 is to nominate a development candidate for our pan-RAF research program, which targets inhibition of BRAF and CRAF kinases. We also plan to continue to develop our in-licensed research-stage program, pursuant to our agreement with Sprint Bioscience (the Sprint Agreement), which targets the VPS34 kinase.
Coronavirus (COVID-19)
The full extent to which the COVID-19 pandemic, or the future outbreak of any other highly infectious or contagious diseases, may impact our business, including our preclinical studies, clinical trial operations, or commercialization efforts will depend on continuously changing circumstances, which are highly uncertain and cannot be predicted at this time, such as the duration of such pandemic including future waves of infection, new strains of the virus that causes COVID-19, or the impact of effective vaccines, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. The ongoing fluidity of this situation precludes any prediction as to the full impact of the COVID-19 pandemic but it could have a material adverse effect on our business, financial condition, and results of operations. The COVID-19 pandemic may also have the effect of heightening the risks to which we are subject, including various aspects of our preclinical studies and ongoing clinical trials, the reliance on third parties in our supply chain for materials and manufacturing of our drug and drug candidates, disruptions in health regulatory agencies' operations globally, the volatility of our common stock, our ability to access capital markets, and our ability to successfully commercialize and generate revenue from QINLOCK. We are continuing to assess the long-term impact of COVID-19 on our business operations in an effort to mitigate interruption to our clinical programs, research efforts, commercialization of QINLOCK, and other business activities and to ensure the safety and well-being of our employees, as well as the physicians and patients participating in our clinical studies. COVID-19 infections continue to fluctuate in theU.S. and in many countries worldwide as local surges and new waves of infection continue to be reported, in particular as caused by new variants of the virus that causes COVID-19 and the lack of availability of effective vaccines in certain countries or regions, or failure to utilize available vaccines in other geographies. Although some of the restrictions aimed at minimizing the spread of COVID-19 have been and may from time to time be eased or lifted in theU.S. and other countries from the height of the pandemic, in response to local surges and waves of infection, including those caused by certain variants of the virus, some countries, states, and local governments have maintained or reinstituted these restrictions, or may reinstitute these restrictions from time to time, in response to rising rates of infection. In response to the COVID-19 pandemic, we have implemented precautionary measures to protect the health and safety of our employees, partners, and patients, including encouraging all employees, other than those engaged in laboratory research activities, to work-from-home, and requiring adherence to onsite occupancy limits and appropriate safety measures designed to comply with federal, state, and local guidelines. These safety measures may be eased, lifted, or reinstituted in accordance with updates to such guidelines. Our ability to successfully commercialize and generate revenue from QINLOCK may be adversely affected by the impact of the COVID-19 pandemic. While restrictive safety measures are in place, limited hospital access for non-patients, including our sales personnel, social distancing requirements, and precautionary measures due to COVID-19 may impact the ability of our sales personnel to interact in-person with customers in the same manner as they did before the COVID-19 pandemic. In response, we have implemented a virtual sales model to supplement traditional means of customer engagement. Although some of these restrictions have been, and may continue to be lifted in certain healthcare institutions, the impact of prior and continued COVID-19 related safety measures, and the potential for reimposition of restrictions due to local surges and new waves of infection, including those caused by certain variants of the virus, may adversely affect the ability of our sales professionals to effectively market QINLOCK to physicians, which may have a negative impact on our sales and our market penetration. The persistence of the COVID-19 pandemic could also impact the patient treatment paradigm and how patients are diagnosed and monitored. In addition, in theU.S. we are utilizing various programs to help patients afford our products, including patient 21
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assistance programs for eligible patients. Market disruption and higher levels of unemployment caused by the COVID-19 pandemic may lead to increased utilization of our patient assistance programs, which could reduce revenues.
In addition, we continue to actively monitor risks associated with potential interruptions to our clinical studies due to the impact of COVID-19 and are in frequent communication with clinical study sites and contract research organizations (CROs). Some clinical trial sites have maintained or reinstituted restrictions on site visits by sponsors and CROs, initiation of new trials, patient visits, and new patient enrollment as a result of COVID-19. While all of our studies remain open for enrollment, we have provided guidance to our clinical trial sites that new patient enrollment may occur at sites where resources allow these patients to be safely enrolled and closely monitored and enrollment has slowed at, or has been or may in the future be temporarily paused for new patients in some sites. In addition, we continue to work closely with our study sites and CROs to allow for utilization of remote and local assessments, such as televisits, in accordance with FDA and EMA guidance, as well as to ensure availability of study drug for patients. While study activities are continuing in the clinical trials we have underway in sites across the globe, and although some of these restrictions have been, and may from time to time, be eased or lifted, we cannot guarantee that COVID-19 precautions, either now or in the future, or the impact of the pandemic, will not directly or indirectly affect the expected timelines for some of our clinical trials. In light of the changing circumstances surrounding the COVID-19 pandemic, the operating environment remains fluid and uncertain, and the full significance of the impact of the COVID-19 outbreak on our business and the duration for which it may have an impact cannot be determined at this time.
Components of Our Results of Operations
Revenues
QINLOCK is approved inAustralia ,Canada ,China , theEU ,Hong Kong ,Switzerland ,Taiwan , theU.S. and theU.K. for the treatment of fourth-line GIST. We may generate revenue in the future from a combination of product sales or payments from collaboration, distribution, or any potential additional license agreements that we may enter into with third parties. We expect that our revenue in the foreseeable future will be derived primarily from sales of QINLOCK and, payments owed to us under the license (the Zai License Agreement) and supply (the Zai Supply Agreement) agreements we entered into with Zai inJune 2019 andFebruary 2020 , respectively, including royalty revenues under the Zai License Agreement following the approvals of QINLOCK in the PRC andHong Kong inMarch 2021 . We cannot provide assurance as to what extent we will generate revenue from the commercialization of QINLOCK or if, when, or to what extent we will generate revenue from the commercialization and sale of our drug candidates for which we may receive marketing approval, if any. Additionally, we cannot provide assurance as to the extent of future royalty payments, the timing of future milestone payments, or that we will achieve and receive any future milestone payments at all. We may never succeed in obtaining regulatory approval for any of our drug candidates other than QINLOCK.
Product Revenues, Net
During the three months endedMarch 31, 2022 and 2021, our only source of product revenues was from the sales of QINLOCK. Product revenues are recorded net of estimates of variable consideration. Please read Note 2, Revenues, to the consolidated financial statements included in this Form 10-Q for further details of the reserves recorded for variable consideration.
Collaboration Revenues
For the three months ended
Zai License Agreement
Pursuant to the terms of the Zai License Agreement, we received an upfront cash payment of$20.0 million and three development milestone payments totaling$12.0 million and will be eligible to receive up to$173.0 million in potential development and commercial milestone payments, consisting of up to$38.0 million of development milestones and up to$135.0 million of commercial milestones. In addition, during the term of the Zai License Agreement, Zai will be obligated to pay us tiered percentage royalties ranging from low to high teens on annual net sales of the Licensed Products in the Territory, subject to adjustments in specified circumstances. Additionally, certain costs we incur associated with the Zai License Agreement are reimbursed by Zai. 22
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During the second quarter of 2021, following the approvals of QINLOCK in the PRC andHong Kong inMarch 2021 , we began recognizing royalty revenues under the Zai License Agreement. Zai Supply Agreement Pursuant to the terms of the Zai Supply Agreement, costs incurred by us for external manufacturing services associated with the production of QINLOCK for use in the Territory for clinical trials and commercial inventory are reimbursed by Zai. During the second quarter of 2021, following the approvals of QINLOCK in the PRC andHong Kong inMarch 2021 , we began recognizing revenues associated with sales of commercial inventory of QINLOCK under the Zai Supply Agreement.
Cost of Sales
Our cost of sales includes external costs of producing and distributing inventories that are related to product revenue during the respective period of the associated sales. In addition, shipping and handling costs for product shipments are recorded in cost of sales as incurred. Further, cost of sales includes the external costs of producing and distributing commercial inventories sold under the Zai Supply Agreement. Cost of sales also includes charges related to inventory written down as a result of excess, obsolescence, unmarketability, or other reasons. Cost of sales for newly launched products will not include the full cost of manufacturing until the initial pre-launch inventory is depleted, and additional inventory is manufactured and sold. The gross margin on sales of QINLOCK for the three months endedMarch 31, 2022 and 2021 was enhanced by sales of the initial pre-launch inventory, and therefore, use of active pharmaceutical ingredients and components that were previously expensed as research and development expenses prior to the launch of QINLOCK, referred to as zero cost inventories. However, we do not expect that the cost of sales as a percentage of net sales of QINLOCK will increase significantly after we have sold all zero cost inventories and commenced the sales of inventories which will reflect the full cost of manufacturing.
Operating Expenses
The successful development and commercialization of our drug and drug candidates is highly uncertain. This is due to the numerous risks and uncertainties, including the following:
•continuing to establish sales, marketing, and distribution capabilities to support the commercialization of QINLOCK or our drug candidates, if and when approved, whether alone or in collaboration with others such as Zai, our licensee for QINLOCK inGreater China ;
•successful completion of preclinical studies and clinical trials;
•receipt and related terms of marketing approvals from applicable regulatory authorities;
•acceptance of QINLOCK or our drug candidates, if and when approved, by patients, the medical community, and third-party payors;
•developing and implementing marketing and reimbursement strategies;
•raising additional funds necessary to fund ongoing operations and capital expenditure requirements, including to complete clinical development of and commercialize any current or future drug candidates for which we receive approval;
•making arrangements with third-party manufacturers, or establishing manufacturing capabilities, for both clinical and commercial supplies of our drug and drug candidates;
•maintaining a continued acceptable safety profile of our products following approval;
•obtaining and maintaining patent, trade secret, and other intellectual property protection, and regulatory exclusivity for our drug and drug candidates;
•protecting and enforcing our rights in our intellectual property portfolio;
•effectively competing with other therapies; and
•attracting additional licensees and/or collaborators or distributors with development, regulatory, and commercialization expertise.
A change in the outcome of any of these variables with respect to the commercialization of QINLOCK or the development of our drug or any of our drug candidates would significantly change the costs and timing associated with the commercialization 23
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of QINLOCK or development of our drug or that drug candidate. We may never succeed in obtaining regulatory approval for any of our drug candidates other than QINLOCK.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery efforts and the development of our drug and drug candidates, which include:
•employee-related expenses, including salaries, related benefits, travel, and stock-based compensation expense for employees engaged in research and development functions;
•expenses incurred in connection with the preclinical and clinical development of our drug candidates, including under agreements with CROs;
•the cost of consultants and contract manufacturing organizations (CMOs) that manufacture drug products for use in our preclinical studies and clinical trials as well as all expenses associated with the pre-launch manufacturing of commercial inventory of QINLOCK prior to FDA approval; and
•facilities, depreciation, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance, supplies, and technology-related costs.
We expense research and development costs to operations as incurred. Advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses within our consolidated balance sheets. The prepaid amounts are expensed as the related goods are delivered or the services are performed. Our direct research and development expenses are tracked on a program-by-program basis and consist primarily of external costs, such as fees paid to consultants, central laboratories, contractors, CMOs, and CROs in connection with our preclinical and clinical development activities. We do not allocate employee costs, costs associated with our proprietary switch-control kinase inhibitor platform technology, or facility expenses, including depreciation or other indirect costs, to specific drug or drug candidate development programs because these costs are deployed across multiple drug or drug candidate development programs and, as such, are not separately classified. Research and development activities are central to our business model. Drugs and drug candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect research and development expenses associated with vimseltinib and DCC-3116 will increase in 2022 as our drug and drug candidate development programs progress. However, we expect research and development expenses will decrease overall as compared to 2021 due to the cost reduction measures included in the corporate restructuring implemented in the fourth quarter of 2021. We do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of our drug and any of our drug candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses consist primarily of salaries and related costs, including stock-based compensation, for personnel in executive, legal, finance, commercial, human resources, and administrative functions. Selling, general, and administrative expenses also include direct and allocated facility- and technology-related costs as well as professional fees for legal, patent, consulting, accounting, and audit services. We anticipate that our selling, general, and administrative expenses will decrease overall due to the cost reduction measures included in the corporate restructuring implemented in the fourth quarter of 2021, despite increased selling, general, and administrative expenses to be incurred related to the launch of QINLOCK inGermany andFrance in 2022. We also anticipate that we will continue to incur accounting, audit, legal, regulatory, compliance, and investor and public relations expenses associated with the business and continued operations as a public company. 24
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Other Income (Expense)
Interest and Other Income, net
Interest income consists of interest earned on our cash, cash equivalents, and marketable securities balances. Other income, net, consists of insignificant amounts of miscellaneous income and expenses unrelated to our core operations, including the impacts of foreign currency exchange differences.
Income Taxes
OnOctober 2, 2017 , immediately prior to the completion of our initial public offering (IPO), we engaged in a series of transactions wherebyDeciphera Pharmaceuticals, LLC became a wholly owned subsidiary ofDeciphera Pharmaceuticals, Inc. , aDelaware corporation (the Conversion). Prior to the Conversion, we were treated as a partnership for tax purposes and had not been subject toU.S. federal or state income taxation. Upon the Conversion, we became subject to typical corporateU.S. federal and state income taxation; however, we do not have net operating loss carryforwards from periods prior toOctober 2, 2017 available to offset taxable income earned in future periods in which we will be treated as a corporation. Consistent with our income tax disclosures described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations-Components of Our Results of Operations" in our Form 10-K for the year endedDecember 31, 2021 on file with theSEC , as ofMarch 31, 2022 , we have not recorded anyU.S. federal or state income tax benefits for either the net losses we have incurred or our earned research and orphan drug credits, due to the uncertainty of realizing a benefit from those items in the future.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in theU.S. (GAAP). The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures in the consolidated financial statements. We believe that our critical accounting policies that involve the most judgment and complexity are those relating to:
•product revenue reserves;
•accrued research and development expenses; and
•stock-based compensation.
Accordingly, we believe the policies set forth above are critical to fully understanding and evaluating our financial condition and results of operations. If actual results or events differ materially from the estimates, judgments, and assumptions used by us in applying these policies, our reported financial condition and results of operations could be materially affected. For a description of our critical accounting policies, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Significant Judgments and Estimates" in our Form 10-K for the year endedDecember 31, 2021 on file with theSEC . There have been no significant changes to our critical accounting policies sinceDecember 31, 2021 . 25
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Results of Operations
Comparison of the Three Months Ended
The following table summarizes our results of operations for the three months
ended
Three Months Ended March 31, (in thousands) 2022 2021 Revenues: Product revenues, net$ 28,809 $ 19,962 Collaboration revenues 414 5,194 Total revenues 29,223 25,156 Cost and operating expenses: Cost of sales 382 222 Research and development 47,412 55,681 Selling, general, and administrative 28,321
30,747
Total cost and operating expenses 76,115
86,650
Loss from operations (46,892)
(61,494)
Other income (expense): Interest and other income, net -
196
Total other income (expense), net - 196 Net loss$ (46,892) $ (61,298) Revenues Product Revenues,Net During the three months endedMarch 31, 2022 and 2021, our only source of product revenues was from the sales of QINLOCK. During the three months endedMarch 31, 2022 and 2021, net product revenues by geography consisted of the following: Three Months Ended March 31, (in thousands) 2022 2021 U.S.$ 23,409 $ 19,287 Rest of world 5,400 675 Total product revenues, net$ 28,809 $ 19,962 For the three months endedMarch 31, 2022 compared to the same period in 2021, net product revenues increased$8.8 million , primarily due to increased sales volume in theU.S. andGermany , which launched inJanuary 2022 , as we continued our commercialization efforts.
Collaboration Revenues
For the three months endedMarch 31, 2022 compared to the same period in 2021, collaboration revenues decreased$4.8 million primarily due to a decrease in milestone revenues of$5.0 million under the Zai License Agreement. The decrease in milestone revenues was due to the recognition of a$5.0 million development milestone in the first quarter of 2021 associated with the approval of QINLOCK for the treatment of adult patients with advanced GIST who have received prior treatment with three or more kinase inhibitors, including imatinib, by theChina NMPA inMarch 2021 . The decrease in milestone revenue was partially offset by an increase in revenues from the Zai Supply Agreement and an increase from royalty revenues, which we began recognizing in the second quarter of 2021 following the approvals of QINLOCK in the PRC andHong Kong . 26
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Cost of Sales
During the three months endedMarch 31, 2022 and 2021, cost of sales by type consisted of the following: Three Months Ended March 31, (in thousands) 2022 2021 Cost of product sales $ 366$ 222 Cost of collaboration sales 16 - Total cost of sales $ 382$ 222 For the three months endedMarch 31, 2022 compared to the same period in 2021, cost of sales increased$0.2 million , primarily due to increased product sales of QINLOCK in theU.S. andGermany . During the three months endedMarch 31, 2021 , cost of sales also included a charge of less than$0.1 million for inventory written down as a result of excess, obsolescence, unmarketability, or other reasons. Cost of sales associated with product sales of QINLOCK was primarily related to the sales of zero cost inventories, which consisted of packaging, labeling, shipping, and distribution costs. As a result, the full costs of manufacturing QINLOCK inventory are not included in cost of sales during the three months endedMarch 31, 2022 and 2021. Prior to receiving FDA approval for QINLOCK inMay 2020 , we manufactured inventory to be sold and recorded approximately$6.0 million related to this inventory build-up as research and development expense. We did not record any such costs related to the build-up of this inventory as research and development expense during the three months endedMarch 31, 2022 and 2021. Utilizing the actual direct costs to manufacture QINLOCK prior to receiving FDA approval, had the previously expensed inventory been capitalized and recognized when sold, the total cost of sales with these manufacturing costs included for the three months endedMarch 31, 2022 would have increased by approximately$0.6 million and$0.4 million in the prior year comparative period. We do not expect our cost of sales for QINLOCK to increase significantly as a percentage of net sales in future periods as we continue to produce inventory for future sales, which will reflect the full cost of manufacturing, and then sell such inventory. We expect to continue to sell the zero cost inventories of QINLOCK in theU.S. during 2022.
Operating Expenses
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Research and Development Expenses
QINLOCK
For the three months endedMarch 31, 2022 compared to the same period in 2021, research and development expenses related to QINLOCK decreased primarily as a result of decreased clinical trial expenses of$6.4 million and decreased manufacturing costs of$1.9 million . Clinical trial expenses for QINLOCK decreased primarily as a result of decreased expenses associated with INTRIGUE, our Phase 3 study of QINLOCK for the treatment of second-line GIST, which we initiated inDecember 2018 and for which enrollment was completed inDecember 2020 , our Phase 1 trial of QINLOCK, and INVICTUS, our Phase 3 study of QINLOCK for the treatment of fourth-line GIST, which we initiated inJanuary 2018 and announced top-line results from inAugust 2019 . Manufacturing costs decreased primarily due to timing of processing of inventory for clinical and commercial use and due to the discontinuation of certain clinical trials as a result of the corporate restructuring implemented in the fourth quarter of 2021.
Vimseltinib
For the three months endedMarch 31, 2022 compared to the same period in 2021, expenses related to our vimseltinib program increased primarily as a result of increases in clinical trial expenses of$1.7 million , partially offset by decreases in manufacturing costs of$0.9 million . Clinical trial expenses increased primarily due to increased activities associated with our Phase 3 study of vimseltinib in patients with TGCT, MOTION, which was initiated in the fourth quarter of 2021 and increased clinical pharmacology study activities. Manufacturing costs for the vimseltinib program decreased as a result of increased manufacturing in the prior year period to prepare for the initiation of the MOTION study. Rebastinib For the three months endedMarch 31, 2022 compared to the same period in 2021, expenses related to our rebastinib program decreased primarily as a result of decreases in clinical trial expenses of$3.2 million and manufacturing costs of$1.3 million . The decrease in clinical trial expenses and manufacturing costs was primarily due to the discontinuation of our rebastinib program in the fourth quarter of 2021 following the corporate restructuring implemented in the fourth quarter of 2021. DCC-3116 For the three months endedMarch 31, 2022 compared to the same period in 2021, expenses related to our DCC-3116 program increased primarily as a result of increased manufacturing costs of$1.7 million and increased clinical trial expenses of$0.7 million associated with our Phase 1 study of DCC-3116, which we initiated inJune 2021 . Preclinical
For the three months ended
Unallocated Expenses
For the three months endedMarch 31, 2022 compared to the same period in 2021, the increase in unallocated research and development expenses were primarily associated with increased personnel-related costs of$2.4 million , including increases in stock-based compensation expense of$1.4 million , primarily due stock-based compensation grants issued in the fourth quarter of 2021 in connection with our corporate restructuring, as well as an increase in employee expenses related to our international employees, who were primarily hired in the second half of 2021. We expect research and development expenses associated with vimseltinib and DCC-3116 will increase in 2022 as we continue to invest in the development of these programs. However, we expect research and development expenses will decrease overall as compared to 2021 due to the cost reduction measures included in the corporate restructuring implemented in the fourth quarter of 2021.
Selling, General, and Administrative Expenses
For the three months endedMarch 31, 2022 compared to the same period in 2021, the decrease in selling, general, and administrative expenses was primarily associated with a decrease in professional and consultant fees of$3.0 million . The decreases in professional and consultant fees were primarily due to a decrease in various advisory fees related to establishing, in the prior year period, a targeted commercial infrastructure and commercialization preparedness in key European markets to support the launch of QINLOCK inGermany , which launched inJanuary 2022 , and the post-approval paid access program inFrance , which received authorization inApril 2022 . 28
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We anticipate that our selling, general, and administrative expenses will decrease overall due to the cost reduction measures included in the corporate restructuring implemented in the fourth quarter of 2021, despite increased selling, general, and administrative expenses to be incurred related to the launch of QINLOCK inGermany and the post-approval paid access program inFrance in 2022.
Interest and Other Income, Net
For the three months endedMarch 31, 2022 compared to the same period in 2021, the decrease in interest and other income, net, was primarily due to decreased interest income on our cash equivalents and marketable securities associated with a decreased balance of our investment holding, offset by foreign currency exchange differences. Restructuring
In
As a result of the restructuring, we recognized a one-time charge in the fourth quarter of 2021 of approximately$26.2 million . This charge includes approximately$9.8 million of employee-related termination costs and approximately$16.4 million of discontinuation costs such as contract termination fees and non-cancellable commitments related to the rebastinib and ripretinib programs.
The following table summarizes the charges and spending related to the Company's restructuring efforts during the first quarter of 2022:
Workforce
Pipeline
(in thousands) Reduction Programs Total
Restructuring reserve as of
(6,614) (3,410) (10,024) Restructuring reserve as of March 31, 2022$ 769
Liquidity and Capital Resources
Since our inception in 2003, we have focused substantially all of our efforts and financial resources on organizing and staffing our company, business planning, raising capital, developing product and technology rights, conducting research and development activities for our drug candidates, building a commercial and marketing organization, and commercializing our first approved product, QINLOCK. Our only product approved for sale is QINLOCK and we have not generated sufficient revenues to result in a profit. As a result, we have incurred significant operating losses since our inception. We have generated limited revenue to date primarily from our product sales and under the Zai License Agreement and Zai Supply Agreement. QINLOCK is approved in nine territories for the treatment of fourth-line GIST. During the three months endedMarch 31, 2022 and 2021, our product revenues were primarily derived from sales of QINLOCK in theU.S. We have also entered into exclusive distributor arrangements to facilitate product sales of QINLOCK in select geographies where we do not currently intend to distribute QINLOCK on our own. During the second quarter of 2021, following the approvals of QINLOCK in the PRC andHong Kong inMarch 2021 , we also began to recognize royalty revenues under the Zai License Agreement. However, we cannot provide assurance as to what extent we will generate revenue from the commercialization of QINLOCK by us or our partners. We do not expect to generate revenue from sales of any drug candidates in the near future, if at all, unless and until we obtain marketing approval for, and begin to sell, such drug candidates. We may never generate revenues that are significant enough to achieve profitability. OnOctober 2, 2017 , we completed an IPO of our common stock. SinceOctober 2017 , we have primarily supported our operations by completing issuances of our common stock through our IPO, subsequent follow-on offerings, including our underwritten public offering announced inApril 2022 , and an Open Market Sale Agreement? (the Sales Agreement) withJefferies LLC (Jefferies). Through such issuances, we have issued and sold 37,170,625 shares of our common stock and pre-funded warrants to purchase 9,748,761 shares of our common stock resulting in net proceeds of$1.1 billion after deducting underwriting discounts and commissions and other offering expenses. 29
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InAugust 2020 , we entered into the Sales Agreement with Jefferies, pursuant to which we may issue and sell shares of our common stock having aggregate offering proceeds of up to$200.0 million (the Shares) from time to time through Jefferies as our sales agent. Upon delivery of a placement notice and subject to the terms and conditions of the Sales Agreement, Jefferies may sell the Shares by any method permitted by law deemed to be an "at the market offering" as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended. We may sell the Shares in amounts and at times to be determined by us from time to time subject to the terms and conditions of the Sales Agreement, but we have no obligation to sell any Shares under the Sales Agreement. We or Jefferies may suspend or terminate the offering of Shares upon notice to the other party and subject to other conditions. OnApril 26, 2022 , we delivered written notice to Jefferies that we were suspending and terminating the prospectus related to our common stock (the ATM Prospectus) issuable pursuant to the Sales Agreement. As a result, we will not make any sales of our securities pursuant to the Sales Agreement, unless and until a new prospectus, prospectus supplement or a new registration statement is filed. Other than the termination of the ATM Prospectus, the Sales Agreement remains in full force and effect. InApril 2022 , we entered into an underwriting agreement withJ.P. Morgan Securities LLC and Jefferies, as representatives of the several underwriters named therein, relating to the issuance and sale of an aggregate of 7,501,239 shares of our common stock at a public offering price of$10.00 per share of common stock to certain investors. In addition, we offered pre-funded warrants to purchase 9,748,761 shares of our common stock at a purchase price of$9.99 per pre-funded warrant, which equals the public offering price per share of the common stock less the$0.01 exercise price per share of each pre-funded warrant. The offering closed onApril 29, 2022 , resulting in net proceeds of$163.4 million after deducting underwriting discounts and commissions and other offering expenses. Cash Flows
As of
The following table summarizes our sources and uses of cash and cash equivalents for each of the periods presented:
Three Months Ended March 31, (in thousands) 2022 2021 Net cash flows used in operating activities$ (51,352) $ (67,682) Net cash flows provided by investing activities 59,652 123,908 Net cash flows provided by financing activities 83 9,524 Net increase in cash and cash equivalents $ 8,383$ 65,750 Operating Activities During the three months endedMarch 31, 2022 compared to the same period in 2021, net cash flows used in operating activities decreased$16.3 million , primarily resulting from a decrease in our net loss of$14.4 million and increases in net non-cash charges of$3.2 million , primarily due to an increase in share-based compensation of$3.1 million , partially offset by increases in net cash flows related to changes in our operating assets and liabilities of$1.3 million . The increase in net cash flows related to changes in our operating assets and liabilities were generally due to the timing of vendor invoicing and payments, capitalization of inventory and settlement of accounts receivable.
Investing Activities
During the three months endedMarch 31, 2022 compared to the same period in 2021, net cash flows from investing activities decreased$64.3 million , primarily resulting from a decrease in proceeds from maturities of marketable securities, partially offset by a decrease in purchases of marketable securities and a decrease in purchases of property and equipment.
Financing Activities
During the three months endedMarch 31, 2022 compared to the same period in 2021, net cash flows provided by financing activities decreased$9.4 million , primarily resulting from a decrease in net proceeds from offerings of our common stock of$8.6 million and a decrease in proceeds from stock option exercises and employee stock purchase plan activity of$0.9 million . 30
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Funding Requirements
Our ability to generate product revenues sufficient to achieve profitability will depend heavily on the successful commercialization of QINLOCK and eventual commercialization of one or more of our drug candidates. Our net loss was$46.9 million for the three months endedMarch 31, 2022 and$300.0 million for the year endedDecember 31, 2021 . As ofMarch 31, 2022 , we had an accumulated deficit of$1.1 billion . We expect to continue to incur significant expenses and operating losses for the foreseeable future. We expect that our expenses and capital requirements will increase in connection with our ongoing activities, particularly as we:
•continue to commercialize QINLOCK in the
•continue with our ongoing and planned clinical programs for vimseltinib as a potential single agent therapy for the treatment of TGCT;
•develop DCC-3116, our ULK kinase inhibitor, for the potential treatment of mutant RAS or RAF cancers;
•continue research and development and drug discovery activities and initiate additional clinical trials;
•seek marketing approval for our drug or any of our drug candidates that successfully complete clinical development;
•develop and scale up our capabilities to support our ongoing preclinical activities and clinical trials for our drug candidates and commercialization of any of our drug candidates for which we obtain marketing approval;
•make payments, if any, pursuant to any license or collaboration agreement we may enter into, including those associated with the Sprint Agreement;
•maintain, expand, protect, and enforce our intellectual property portfolio; and
•maintain our operational, financial, and management systems and personnel, including to support our clinical development and commercialization efforts and our operations as a public company, including international operations in key European markets and other potential geographies. As we continue to seek regulatory approval for our drug candidates, we expect to incur significant expenses related to our ongoing clinical development efforts and activities related to maintaining and expanding our internal commercialization capability to support product sales, marketing, and distribution except to the extent we enter into a commercialization partnership that covers such expenses. Further, we expect to continue to incur costs associated with operating as a public company. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Even if we are able to generate substantial product sales of QINLOCK, we may not become profitable. Until we become profitable, if ever, we expect to finance our operations primarily through a combination of equity, debt, or other financings, collaborations, strategic alliances, and marketing, distribution, or additional licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. Market volatility resulting from the COVID-19 pandemic or other factors could also adversely impact our ability to access capital as and when needed. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, limit, reduce, or terminate our research, product development, or commercialization efforts or grant rights to develop and market drugs and drug candidates that we would otherwise prefer to develop and market ourselves. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of existing equity holders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of 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 acquisitions or capital expenditures, or declaring dividends. If we raise additional funds through collaborations, strategic alliances or marketing, distribution, or licensing arrangements with third parties (such as the Zai License Agreement), we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, drugs, or drug candidates, or grant licenses on terms that may not be favorable to us. Because of the numerous risks and uncertainties associated with pharmaceutical product development and commercialization, we are unable to accurately predict the timing or amount of increased expenses and capital requirements or when or if we will be able to achieve or maintain profitability. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to further reduce or terminate our operations. The timing and amount of our operating expenditures will depend largely on:
•the timing and progress of preclinical and clinical development activities;
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•successful enrollment in and completion of clinical trials;
•the success of our commercialization efforts and market acceptance for QINLOCK or any of our future approved drugs;
•the timing and outcome of regulatory review of our drug and drug candidates;
•the cost to develop companion diagnostics as needed for each of our drug candidates;
•our ability to establish and manage agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing;
•addition and retention of key research and development and commercial, including sales and marketing, personnel;
•the costs and timing of commercialization activities, including product manufacturing, marketing, sales, and distribution, for QINLOCK, including our commercial launch of QINLOCK in key European markets, and any of our drug candidates for which we obtain marketing approval;
•the legal and patent costs involved in prosecuting patent applications and enforcing patent claims and other intellectual property claims; and
•the terms and timing of any collaboration, license, distribution, or other arrangement, including the terms and timing of any upfront, milestone, and/or royalty payments thereunder. We believe that our cash, cash equivalents, and marketable securities as ofMarch 31, 2022 of$275.4 million , together with anticipated product, royalty, and supply revenues, and the net proceeds from our underwritten public offering completed inApril 2022 , but excluding any potential future milestone payments under our collaboration or license agreements will enable us to fund our operating expenses and capital expenditure requirements into 2025. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect.
Contractual Obligations and Commitments
As ofMarch 31, 2022 , there have been no material changes to our contractual obligations and commitments outside the ordinary course of business from those that were presented in our Form 10-K for the year endedDecember 31, 2021 .
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of theSEC .
Recently Issued Accounting Pronouncements
Based on our review of recently issued accounting pronouncements, we do not believe there are any such pronouncements that will have a material impact on our financial position or results of operations.
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