FIVE PRIME THERAPEUTICS, INC. You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the related notes included elsewhere in this Annual Report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in "Special Note Regarding Forward-Looking Statements and Industry Data" and "Risk Factors." Overview We are a clinical-stage biotechnology company focused on developing immune modulators and precision therapies to improve the lives of patients with solid tumor cancers. Our primary focus is on developing immuno-oncology and targeted cancer therapies. Each of our product candidates has an innovative mechanism of action and addresses patient populations for which better therapies are needed. In addition, we use companion diagnostics where appropriate to allow us to select patients most likely to benefit from treatment with our product candidates. The most advanced product candidates that we or our partners are developing are identified below.
• Bemarituzumab (FPA144) is an antibody that inhibits fibroblast growth
factor receptor 2b, or FGFR2b, and that induces antibody-dependent
cellular cytotoxicity that we are studying in a clinical trial in
combination with 5-fluorouracil (5-FU), leucovorin and oxaliplatin, astandard-of-care chemotherapy regimen known as mFOLFOX6, as front-line
treatment of patients with FGFR2b+, non-HER2+ gastric (stomach) or
gastroesophageal junction, or GEJ, cancer. In
Zai Lab (Shanghai) Co., Ltd., or Zai Lab, an exclusive license to develop
and commercialize bemarituzumab in
• FPT155 is a soluble CD80 fusion protein that enhances co-stimulation of T
cells through CD28 that we are studying in a clinical trial in multiple
cancers.
• FPA157 is an anti-CCR8 antibody that is engineered to depleteCCR8-expressing intratumoral regulatory CD4+ T cells. We are conducting
IND-enabling activities for FPA157.
• BMS-986258 is an anti-T cell immunoglobulin and mucin domain-3, or TIM-3,
antibody that our partner, BMS, is studying in a clinical trial in
combination with Opdivo (nivolumab) in patients with advanced malignant
tumors.
Our product candidates are typically only-in-class, first-in-class or meaningfully differentiated from other in-class therapeutics. We generally look for single-agent activity or clear activity in, for example, tumor types that are rarely sensitive to checkpoint inhibitors. We have two late-stage research programs. These programs arose from our prior in-house target discovery and validation and protein therapeutic generation and engineering capabilities, which we eliminated in 2019. We expect to advance each of these programs through preclinical development relying mostly on outsourced and contracted capabilities. In addition, we plan to supplement our product pipeline from time to time by selectively acquiring or licensing, on an exclusive basis, rights to product candidates from biotechnology and pharmaceutical companies. We have no products approved for commercial sale and have not generated any revenue from product sales to date. We continue to incur significant research and development and other expenses related to our ongoing operations, and we expect that our expenses will increase as we advance our product candidates into later stages of clinical development and increase the number of product candidates in clinical development. We have incurred losses in almost every period since our inception in 2001. For the years endingDecember 31, 2020 and 2019, we reported a net loss of$84.3 million and$137.2 million , respectively. 63 --------------------------------------------------------------------------------
COVID-19 Business Update
In response to the global spread of the ongoing COVID-19 pandemic, we have implemented business continuity plans designed to address and mitigate the impact of the pandemic on our employees and our business. While we are not experiencing any material financial impacts at this time, given the global economic slowdown, the overall disruption of global healthcare systems and the other risks and uncertainties associated with the pandemic, our business, financial condition, results of operations and growth prospects could be materially adversely affected. We continue to closely monitor the effects of the COVID-19 pandemic as we evolve our business continuity plans and response strategy. InMarch 2020 , our entire workforce, other than those whose job responsibilities require them to be physically present at our offices, transitioned to working remotely, which we have continued through the date of this Annual Report. To date, our remote working arrangements have not significantly impacted our ability to maintain our business operations. The extent of the impact of the ongoing COVID-19 pandemic on our business, including on our clinical and preclinical programs, and the value of and market for our common stock is highly uncertain and will depend on future developments that cannot be predicted with confidence at this time, such as the ultimate duration, spread and severity of the pandemic, travel restrictions, quarantines, social distancing and business closure requirements in the countries in which we and our collaborators, partners and service providers operate, including in the countries where we and our partners are conducting clinical trials, the effectiveness of actions taken globally to contain and treat the disease, including the widespread availability and adoption of safe and effective vaccines against COVID-19, and how quickly and to what extent normal economic and operating conditions resume. We continue to assess the impact of the ongoing COVID-19 pandemic on our business and operations. For additional information on the impacts and risks posed to our business by the COVID-19 pandemic, see Part I, Item 1. Business and Part I, Item 1A. Risk Factors of this Annual Report.
Critical Accounting Policies and Estimates
We based our management's discussion and analysis of financial condition and results of operations upon our financial statements, which we prepared in accordance withU.S. generally accepted accounting principles, or GAAP. The preparation of financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We evaluate our critical accounting policies and estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results under different assumptions and conditions may differ from these estimates. Our significant accounting policies are more fully described in Note 2 to our financial statements. We define our critical accounting policies as those accounting principles that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations as well as the specific manner in which we apply those principles. We believe our critical accounting policies include the recognition of revenue, completeness of clinical trial accruals, stock-based compensation, income taxes and impairment of long-lived assets, each discussed in more detail as follows: Revenue Recognition The terms of our license and collaborative research and development agreements include upfront and license fees, research, development and other funding or reimbursements, milestone and other contingent payments for the achievement of defined collaboration objectives and certain preclinical, clinical, regulatory and sales-based events, as well as royalties on sales of commercialized products. Arrangements that include upfront payments may require deferral of revenue recognition to a future period until we perform obligations under these arrangements. We record research and development funding payable to us as accounts receivable when our right to consideration is unconditional. The event-based milestone and other contingent payments represent variable consideration, and we use the most likely amount method to estimate this variable consideration. Given the high degree of uncertainty around the occurrence of these events, we determine the milestone and other contingent amounts to be fully constrained until the uncertainty associated with these payments is resolved. We will recognize revenue from sales-based royalty payments when or as the sales occur. We will re-evaluate the transaction price in each reporting period as uncertain events are resolved and other changes in circumstances occur. 64
-------------------------------------------------------------------------------- A performance obligation is a promise in a contract to transfer a distinct good or service and is the unit of accounting. A contract's transaction price is allocated among each distinct performance obligation based on relative standalone selling price and recognized when, or as, the applicable performance obligation is satisfied. We elected to use the practical expedient permitted related to adoption, which does not require us to disclose certain information regarding our remaining performance obligations as of the end of the reporting period prior to the initial date of adoption. Additionally, we elected the practical expedient for certain research and development funding which allows us to recognize revenue in the amount for which we have a right to invoice if our right to consideration is an amount that corresponds directly to the value of our performance completed to date. As a result, we effectively bypass the steps of determining the transaction price and allocating that transaction price to the performance obligation.
Completeness of Clinical Trial Accruals
We estimate preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions and CROs and CMOs that conduct and manage preclinical studies and clinical trials on our behalf based on actual time and expenses incurred by such entities. Further, we accrue expenses related to clinical trials based on the level of patient enrollment and activity according to the relevant agreement. We monitor patient enrollment levels and related activity to the extent reasonably possible and adjust estimates accordingly. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates.
Stock-Based Compensation
We recognize compensation expense using a fair value-based method for costs related to all share-based payments. We have granted restricted stock awards, or RSAs, some of which are subject to performance conditions or market conditions. For RSAs subject to performance conditions, stock-based compensation cost is based on the closing market price of our common stock at the date of grant and is recognized as expense using the accelerated attribution recognition method when it is probable that the performance condition will be achieved. For RSAs subject to market conditions, we base the fair value of the awards on a Monte Carlo simulation model and recognize stock-based compensation cost commencing at the grant date over the derived service period. Performance- and market-based awards require estimates as to the probability of certain outcomes-the probability of the achievement of performance conditions and the probability of various market-based outcomes, respectively-which require a high degree of judgment.
Income Taxes
We account for income taxes using the liability method, under which deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. As ofDecember 31, 2020 , our total net deferred tax assets, net of gross deferred tax liabilities, were$182.3 million . Due to our lack of earnings history, the net deferred tax assets have been fully offset by a valuation allowance. In assessing the realizability of deferred tax assets, we considered whether it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences representing net future deductible amounts become deductible. Due to our history of losses and lack of other positive evidence, we determined that it is more likely than not that our net deferred tax assets will not be realized, and therefore, the net deferred tax assets are fully offset by a valuation allowance.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the assets may not be recoverable. Recoverability of
these assets is measured by comparing their carrying amounts to the future
undiscounted cash flows the assets are expected to generate. If an asset is
impaired, the impairment to be recognized equals the amount by which the
carrying value exceeds the asset's fair value. The primary measure of fair value
is discounted cash flows, which includes significant estimates primarily related
to the discount rate and projected cash flows. The discount rate considers the
relevant risk associated with asset-specific characteristics and the uncertainty
related to the ability to achieve the projected cash flows.
65
--------------------------------------------------------------------------------New Accounting Standards
See Note 2 of our financial statements contained elsewhere in this Annual Report.
Financial Overview
The following sections of this Management's Discussion & Analysis generally discuss 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Annual Report can be found in Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , filed with theSEC onFebruary 27, 2020 .
Collaboration Revenue and License Revenue
We have not generated any revenue from product sales. We have derived our revenue to date from upfront payments, research and development funding and milestone payments under agreements with our collaboration partners and licensees. We currently have an active cabiralizumab license and collaboration agreement with BMS, an active collaboration and license agreement with Zai Lab for bemarituzumab and a license agreement with Seagen. We completed the research terms of our immuno-oncology research collaboration with BMS inMarch 2019 . InFebruary 2020 , we entered into a license agreement with Seagen. For additional information on these agreements, see the description of these agreements set forth in this section below. The following is a comparison of collaboration and license revenue by agreement: Year Ended December 31, (in millions) 2020 2019 2018 Milestone payments: (1) Cabiralizumab Collaboration - BMS $ - $ -$ 25.0 Other payments: China Collaboration - Zai Lab 5.5 4.4 5.1 Cabiralizumab Collaboration - BMS 2.6 9.1 13.4 Immuno-oncology Research Collaboration - BMS - 1.4 6.1 License Agreement - Seagen 5.1 - - Other - - 0.3 Total $ 13.2$ 14.9 $ 49.9 (1) Includes milestone payments recognized at a point in time. Other payments may also include milestone payments recognized over time. We expect that the level of revenue we generate will fluctuate from period to period as a result of the timing and amount of milestone, reimbursable expenses and other payments we receive in the course of our existing collaborations and licenses and as a result of the deferred revenue that we recognize, including due to revisions to estimates related to reimbursable activities or estimates of actual or estimated costs as a percentage of total budgeted costs, or as a result of entry into any new collaborations and license agreements. 66 --------------------------------------------------------------------------------
BMS Immuno-Oncology Research Collaboration
InMarch 2014 , we entered into a research collaboration and license agreement, or the immuno-oncology research collaboration, with BMS to carry out a research program to (i) discover novel interacting proteins in two undisclosed immune checkpoint pathways, which we refer to as the checkpoint pathways, using our target discovery platform; (ii) further the understanding of target biology with respect to targets in these checkpoint pathways; and (iii) discover and pre-clinically develop compounds suitable for development for human therapeutic uses against targets in these checkpoint pathways. Under the immuno-oncology research collaboration, we granted to BMS an exclusive, worldwide license to research, develop and commercialize products directed towards certain targets in the checkpoint pathways. BMS has an option to take exclusive licenses to additional targets we may identify in these checkpoint pathways pursuant to the research plan under the immuno-oncology research collaboration. Based on data arising from our activities under the research plan, inJanuary 2016 , we amended the immuno-oncology research collaboration to add an additional checkpoint pathway to the research program, for a total of three immune checkpoint pathways. We received an upfront non-refundable payment of$20.0 million from BMS in connection with the execution of the immuno-oncology research collaboration. BMS also paid us$13.7 million in research funding from 2014 through 2019, during which we performed certain research activities. In connection with entering into the immuno-oncology research collaboration, BMS purchased 994,352 shares of our common stock at a price per share that exceeded the fair value of our common stock by a total of$2.4 million . We are eligible to receive certain developmental-, regulatory- and sales-based contingent payments with respect to each target subject to the immuno-oncology research collaboration and royalties on sales of products related to such targets, if any. We identified one performance obligation for the research license to access our technology, the exclusive commercial license and research activities. BMS's option to select additional collaboration targets is not priced at a discount and therefore does not represent one or more performance obligations for which the transaction price would be allocated. The transaction price of$36.1 million includes the$20.0 million upfront fee,$13.7 million of research funding and$2.4 million of equity premium. We concluded that the transaction price should not include the variable consideration related to maintenance fees and unachieved developmental and regulatory milestones as this consideration was considered to be constrained as it is probable that the inclusion of such variable consideration could result in a significant reversal in revenue in the future. Any milestone payments triggered during the periods presented are included in the table at the start of this section. We will recognize any consideration related to sales-based payments (including milestones and royalties) when the related sales occur, as we have determined that these amounts relate predominantly to the license granted and therefore will be recognized on the later to occur of satisfaction of the performance obligation or the occurrence of the related sales. We will re-evaluate the transaction price at each reporting period as uncertain events are resolved and other changes in circumstances occur. For the year endedDecember 31, 2020 , no adjustments were made to the transaction price. Under the input method, we recognize revenue on the basis of our efforts or inputs applicable to the satisfaction of a performance obligation (e.g., resources consumed, labor hours expended, costs incurred or time elapsed) relative to the total expected inputs applicable to the satisfaction of that performance obligation. We concluded that we will recognize revenue based on actual costs incurred as a percentage of total budgeted costs as we complete our performance obligation. As the performance obligation was fully satisfied throughMarch 31, 2019 , the transaction price of$36.1 million was fully recognized as collaboration revenue. Revenue recognized from the performance obligations was$0 million ,$1.4 million and$6.1 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively.
As of
67
--------------------------------------------------------------------------------BMS License and Collaboration Agreement
InOctober 2015 , we entered into a license and collaboration agreement, or the cabiralizumab collaboration agreement, pursuant to which we granted BMS exclusive global rights to develop and commercialize certain colony stimulating factor-1 receptor, or CSF1R, antibodies, including our monoclonal CSF1R-inhibiting antibody that we refer to as cabiralizumab, and all modifications, derivatives, fragments, or variants of such antibodies, each of which we refer to as a licensed antibody. Under the terms of the cabiralizumab collaboration agreement, BMS is responsible, at its expense, for developing products containing licensed antibodies, each of which we refer to as a licensed product, under a development plan, subject to our option, at our own expense, to conduct certain studies, including registration-enabling studies to support approval of cabiralizumab. BMS is responsible for manufacturing and commercializing each licensed product and we retain rights to aU.S. co-promotion option. The cabiralizumab collaboration agreement supersedes the clinical trial collaboration agreement we entered into with BMS inNovember 2014 , or the original collaboration agreement. We assessed the two agreements separately as standalone agreements. InFebruary 2020 , BMS informed us that its randomized, controlled multi-arm Phase 2 clinical trial testing cabiralizumab in combination with Opdivo, with and without chemotherapy, in second-line patients with pancreatic cancer (NCT03336216) did not meet its primary endpoint. BMS informed us that while it has no near-term plans for additional sponsored development of cabiralizumab, it will continue to support the evaluation of cabiralizumab in select, ongoing investigator-sponsored trials and may continue to assess future development opportunities for cabiralizumab. We received an upfront non-refundable payment of$30.0 million from BMS in connection with the execution of the original collaboration agreement. We completed enrollment and treatment of patients in our Phase 1a/1b clinical trial to evaluate the safety, tolerability and preliminary efficacy of combining Opdivo, BMS's programmed-death 1 (PD-1) immune checkpoint inhibitor, with cabiralizumab in multiple tumor types, which we commenced under the original collaboration agreement. BMS bears all costs and expenses relating to this trial, including manufacturing costs for the supply of cabiralizumab, except that we are responsible for our own internal costs, including internal personnel costs. Under the original collaboration agreement, we identified one performance obligation for the execution of a Phase 1a/1b clinical trial of cabiralizumab in combination with Opdivo. The transaction price consists of the$30.0 million upfront fee under the original collaboration agreement. We used the input method to measure progress toward completion of the performance obligation and concluded that we will recognize revenue based on actual costs incurred by our CRO as a percentage of total budgeted costs as we complete our performance obligation. We will recognize revenue from reimbursements when we have the right to invoice BMS. As the performance obligation was fully satisfied throughJune 30, 2020 , the transaction price of$30.0 million was fully recognized as collaboration revenue. We recognized$0.8 million ,$4.4 million and$6.6 million of the transaction price as revenue for the years endedDecember 31, 2020 , 2019 and 2018, respectively. Revenue recognized for reimbursements was$1.8 million ,$4.7 million and$6.9 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively. Under the cabiralizumab collaboration agreement, we identified the following performance obligations: (1) license grant to BMS and (2) transfer of licensed know-how to BMS. The transaction price consisted of a$350.0 million non-refundable up-front fee. As the performance obligations were fully satisfied in 2015, the transaction price of$350.0 million was fully recognized as revenue concurrent with the transfer of the license and know-how in 2015. We concluded that the transaction price should not yet include milestone payments that may become due as they are fully constrained. Any milestone payments triggered during the periods presented are included in the table at the start of this section. We will recognize any consideration related to royalties when the related sales occur, as we have determined that these amounts relate predominantly to the license granted and therefore will be recognized upon the occurrence of the related sales. We will re-evaluate the transaction price in each reporting period as uncertain events are resolved and other changes in circumstances occur. For the year endedDecember 31, 2020 , no adjustments were made to the transaction price.
As of
68
--------------------------------------------------------------------------------Zai Lab China License and Collaboration Agreement
InDecember 2017 , we entered into a license and collaboration agreement, or theChina collaboration agreement, with Zai Lab (Shanghai) Co., Ltd, or Zai Lab, pursuant to which we granted Zai Lab an exclusive license to develop and commercialize bemarituzumab, and all fragments, conjugates, derivatives and modifications thereof, or the licensed antibody, inChina ,Hong Kong ,Macau andTaiwan , each a region and collectively, the territory. Zai Lab will be responsible, at its expense, for (i) developing and commercializing products containing the licensed antibody, each, a licensed product, under a territory development plan and (ii) performing certain development activities to support our global development and registration of licensed products, including our global Phase 2 clinical trial of bemarituzumab in combination with mFOLFOX6 as front-line treatment of patients with advanced FGFR2b+, non-HER2+ gastric or GEJ cancer, or the FIGHT trial, in the territory under a global development plan. We received an upfront non-refundable and non-creditable payment of$5.0 million ($4.2 million after netting of value-added tax withholdings) from Zai Lab in connection with the execution of theChina collaboration agreement. With respect to each licensed product, we are eligible to receive developmental and regulatory milestone payments. Zai Lab will also be obligated to pay us a royalty, on a licensed product-by-licensed product and region-by-region basis. In addition, Zai Lab agreed to reimburse us for the costs of certain global development activities, up to a maximum of$10.0 million , and certain costs for the development of companion diagnostics. We identified the following performance obligations: (1) license grant to Zai Lab together with the transfer of licensed know-how, development drug supply and global development activities, or the license grant, and (2) development of companion diagnostics. Zai Lab has the option to purchase commercial drug supply from us pursuant to a separate commercial supply agreement to be negotiated in the future. The commercial drug supply will be accounted for as a separate contract when Zai Lab exercises this option. As ofDecember 31, 2020 , the transaction price of$9.6 million consists of the$4.2 million upfront fee,$3.7 million of expected reimbursement from Zai Lab for global development activities and a$1.7 million clinical development milestone payment. We have not included the remaining regulatory milestone payments in the transaction price as all such milestone amounts are fully constrained. Any milestone payments triggered during the periods presented are included in the table at the start of this section. We will recognize any consideration related to royalties when the related sales occur, as we determined that these amounts relate predominantly to the license granted and therefore will be recognized upon the occurrence of the related sales. We concluded that the reimbursement of costs incurred for the development of companion diagnostics qualifies for the practical expedient under Topic 606, which allows us to recognize revenue in the amount for which we have a right to invoice if our right to consideration is an amount that corresponds directly to the value to Zai Lab of our performance completed to date. We therefore effectively bypass the steps of determining the transaction price and allocating that transaction price to the performance obligation. We will re-evaluate the transaction price in each reporting period as uncertain events are resolved and other changes in circumstances occur. For the year endedDecember 31, 2020 , the transaction price decreased to$9.6 million from$14.7 million , primarily as a result of our decision to amend the FIGHT trial from a Phase 3 design to a randomized Phase 2 trial. We use the input method to measure progress toward completion of the performance obligation for the license grant. We concluded that revenue will be recognized based on actual costs incurred by our CRO as a percentage of total budgeted costs as we complete our performance obligation. For the year endedDecember 31, 2020 , the total budgeted costs used in our measure of progress decreased as a result of our decision to amend the FIGHT trial from a Phase 3 design to a randomized Phase 2 trial. The decrease in total budgeted costs resulted in further progress made towards satisfying our performance obligation for the license grant and a cumulative catch-up adjustment to revenue. There was a deduction to our contract liabilities as ofDecember 31, 2020 for performance obligations satisfied during the year endedDecember 31, 2020 and for performance obligations satisfied in prior periods related to the update to our measure of progress. We will recognize revenue from reimbursements for the development of companion diagnostics when we have the right to invoice Zai Lab. Revenue recognized for the license grant performance obligation was$3.6 million ,$1.4 million and$1.7 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively. Revenue recognized for the companion diagnostics development performance obligation was$1.9 million ,$3.0 million and$3.3 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively. Of the remaining transaction price of$2.9 million , we recorded$2.1 million in deferred revenue, which we will recognize over the estimated performance period for satisfaction of the performance obligations. The remaining$0.8 million of the transaction price will be recorded in deferred revenue when invoiced as we complete global development activities. 69 --------------------------------------------------------------------------------
As of
Seagen License Agreement
InFebruary 2020 , we entered into a license agreement, or the Seagen license agreement, with Seagen Inc., or Seagen, pursuant to which we granted Seagen an exclusive worldwide license to a family of monoclonal antibodies that are directed to a single target and Seagen is responsible for research, development, manufacturing and commercialization of novel antibody-drug conjugate products based on these antibodies. We received an upfront non-refundable payment of$5.0 million from Seagen in connection with the execution of the Seagen license agreement. We are eligible to receive up to (i)$132.0 million in specified developmental and regulatory milestone payments for the first achievement of such milestone events by the first licensed product, (ii)$68.0 million in specified developmental and regulatory milestone payments for the first achievement of such milestone events by the second licensed product, and (iii)$19.0 million in specified developmental and regulatory milestone payments for each achievement of such milestone events by a subsequent licensed product. We are also eligible to receive up to$162.5 million in sales-based contingent payments per licensed product. Seagen will also be obligated pay us a mid-single-digit percentage royalty on net sales of each licensed product in a region until the latest of: (i) 11 years after the first commercial sale of such licensed product in such region; (ii) the expiration of certain patents covering such licensed product in such region; and (iii) the date on which any applicable regulatory exclusivities with respect to such licensed product expire in such region. We are also eligible to receive annual maintenance fees of$0.2 million and reimbursement for consulting support and certain prosecution and maintenance costs for our patents. We identified one performance obligation for the license grant. The transaction price consists of the$5.0 million upfront fee. As the performance obligation was fully satisfied as ofMarch 31, 2020 , the transaction price of$5.0 million was fully recognized. We concluded that the transaction price should not include the variable consideration related to maintenance fees and unachieved developmental and regulatory milestones as this consideration was considered to be constrained as it is probable that the inclusion of such variable consideration could result in a significant reversal in revenue in the future. Any milestone payments triggered during the periods presented are included in the table at the start of this section. We will recognize any consideration related to sales-based payments when the related sales occur, as we have determined that these amounts relate predominantly to the license granted and therefore will be recognized on the later to occur of satisfaction of the performance obligation or the occurrence of the related sales. We will re-evaluate the transaction price in each reporting period as uncertain events are resolved and other changes in circumstances occur.
For the year ended
Research and Development Research and development expenses consist of costs we incur in performing internal and collaborative research and development activities. Expenses incurred related to collaborative research and development agreements generally approximate the revenue recognized under these agreements. Research and development costs consist of salaries and benefits, including associated stock-based compensation, laboratory supplies and facility costs, as well as fees paid to other entities that conduct certain research and development activities, including manufacturing, on our behalf.
We are conducting research and development activities on several disease targets and product candidates.
We have a research and development team that designs, manages and evaluates the results of all our research and development activities. Historically, we conducted most of our core target discovery and early research and preclinical activities internally and relied more heavily on third parties, such as CROs and CMOs, for the execution of our IND-enabling and development activities, such as GLP toxicology studies, drug substance and drug product manufacturing, lab-developed test and companion diagnostic development, and the conduct of our clinical trials. In connection with ourOctober 2019 corporate restructuring, we eliminated our in-house target discovery and validation and protein therapeutics generation and engineering capabilities. Because we now have a significantly reduced scope of in-house and preclinical capabilities, we expect to continue to advance our late-stage research and preclinical programs, including FPA157, and any future programs through preclinical development relying mostly on out-sourced and contracted capabilities. In addition, we are increasingly relying on third-party service providers with respect to cell line and process development activities, as well as the manufacturing of quantities of our product candidates for use in preclinical studies. 70 -------------------------------------------------------------------------------- We account for research and development costs on a program-by-program basis. In the early phases of research and discovery, our costs are often related to evaluation and validation activities and research activities that are not necessarily allocable to a specific program. We assign costs for such activities to a distinct non-program related project code. We allocate research and development management, overhead, common usage laboratory supplies and facility costs on a full-time equivalent basis.
The following is a comparison of our research and development expenses:
Year Ended December 31,
(in millions) 2020 2019 2018
Development programs:
Cabiralizumab $ 2.7 $ 9.1 $ 15.8
Bemarituzumab 28.2 42.9 63.1
FPA150 7.5 24.3 18.8
FPT155 16.6 13.0 -
FP-1039 - - 0.1
Subtotal development programs 55.0 89.3 97.8
Preclinical programs 6.8 - 19.1
Discovery collaborations - 0.6 3.3
Early research and discovery 3.7 24.2 36.2
Total research and development expenses
We expect that most of the research and development expenses we incur will continue to relate to activities to support our clinical development programs and our preclinical and late-stage research programs. Our research and development expenses may increase as we advance our current product candidates through clinical development and our preclinical and late-stage research programs into and through preclinical and clinical development and if we add candidates to our product pipeline through strategic acquisitions or licensing of product candidates from other biotechnology or pharmaceutical companies. In particular, our research and development expenses may increase if we increase the number and size of our clinical trials, including by advancing into registrational trials. InJanuary 2019 , we implemented a corporate restructuring, or theJanuary 2019 restructuring, to focus our resources on clinical development and late-stage research programs. Pursuant to theJanuary 2019 restructuring, we eliminated 41 employee positions, representing approximately 20% of our then-current headcount, primarily in areas relating to research, pathology and manufacturing. TheJanuary 2019 restructuring was completed during the first quarter of 2019, and restructuring charges to-date amounted to approximately$1.9 million for research and development employee-related costs.
In
• We reduced our workforce by 63 positions across all functions.
• Due to our reduced focus on research activities, we sold the majority of
the laboratory equipment we owned through an auction conducted by a
third-party vendor in
the proceeds of such auction against research and development expense
within our statement of operations and comprehensive loss, all during the
second quarter of 2020. As the laboratory equipment was not allocable to a
specific program, we allocated the gain against all of our programs on a
full-time equivalent basis.
• In order to reduce our corporate facilities footprint, in
we entered into a sublease agreement, or the facility sublease, with Sutro
the approximately 115,466 rentable square feet of office and laboratory
space that we currently lease at
Francisco,
underlying corporate facility lease. In connection with our entry into the
facility sublease, in
laboratory space, which we refer to as the laboratory facility lease. We
began occupying this space in
regarding the facility sublease and laboratory facility lease, see Note 5
of our financial statements contained elsewhere in this Annual Report.
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The October 2019 restructuring was completed during the fourth quarter of 2020,
and restructuring charges to-date amounted to approximately $4.0 million for
research and development employee-related costs.
The process to obtain marketing approval of a drug candidate, including
preclinical and clinical development and the development of manufacturing
processes, is costly and time-consuming. We or our partners may never succeed in
achieving marketing approval for any of our drug candidates. Numerous factors
may affect the probability of success for each drug candidate, including
preclinical and clinical results, competition, manufacturing capability and
commercial viability.
The successful development of our drug candidates is highly uncertain and may
not result in products that are approved for marketing by the FDA or any
comparable foreign regulatory authority. The costs and duration of the processes
necessary to achieve marketing approval for each drug candidate can vary
significantly and are difficult to predict. Given the uncertainty associated
with clinical trial patient enrollment and the risks inherent in the development
process, estimating the duration and completion costs of current or future
clinical trials of our drug candidates or if, or to what extent, we will
generate revenues from the commercialization and sale of any of our approved
drug candidates is difficult and uncertain. We anticipate we will make
determinations as to which programs to pursue and how much funding to direct to
each program on an ongoing basis in response to the outcome of research,
preclinical and clinical activities with respect to each drug candidate, as well
as ongoing assessments as to each drug candidate's commercial potential. We will
need to raise additional capital and may seek to enter into additional
collaborations in the future to advance and complete the development and
commercialization of our current and future drug candidates.
General and Administrative
General and administrative expenses consist primarily of salaries and related benefits, including associated stock-based compensation, related to our executive, finance, legal, business development, human resource and support functions. Other general and administrative expenses include allocated facility-related costs not otherwise included in research and development expenses, travel expenses and professional fees for auditing and tax and legal services, including intellectual property-related legal services. Our general and administrative expenses may increase in the event that we need to expand operations to support future potential increases in research and development activities. Also, we expect our intellectual property-related legal expenses, including those related to preparing, filing and prosecuting patent applications and maintaining patents, to increase as our intellectual property portfolio expands. In connection with ourOctober 2019 restructuring, we incurred approximately$1.3 million of restructuring charges to-date for general and administrative employee-related costs. Other Income, Net Other income, net consists primarily of interest income earned on our cash, cash equivalents and marketable securities and sublease income (beginning in the fourth quarter of 2020). Results of Operations Year Ended December 31, (in millions) 2020 2019 2018 Revenue: Collaboration revenue$ 8.2 $ 14.9 $ 49.9 License revenue 5.0 - - Total revenue 13.2 14.9 49.9 Operating expenses: Research and development 65.5 114.1 156.4 General and administrative 40.5 42.7 39.6 Total operating expenses 106.0 156.8 196.0 Other income, net 1.9 4.7 5.7 Loss before income tax (90.9 ) (137.2 ) (140.4 ) Income tax benefit 6.6 - - Net loss$ (84.3 ) $ (137.2 ) $ (140.4 ) 72
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Collaboration Revenue and License Revenue
Collaboration revenue and license revenue decreased by$1.7 million , or 11%, to$13.2 million for the year endedDecember 31, 2020 from$14.9 million for the year endedDecember 31, 2019 . This decrease was primarily due to a$6.5 million decrease from progress made towards satisfying our performance obligation under the original cabiralizumab collaboration with BMS, a$1.4 million decrease as we completed the research term of our immuno-oncology research collaboration with BMS and a$1.1 million decrease in the reimbursement of costs incurred for the development of companion diagnostics from ourChina collaboration with Zai Lab. The decrease was offset by a$5.1 million increase in license revenue and other activity under the Seagen license agreement executed inFebruary 2020 and a$2.2 million increase in collaboration revenue from ourChina collaboration with Zai Lab resulting from a decrease in the budgeted costs used to measure progress toward completion of the performance obligation as a result of our decision to amend the FIGHT trial from a Phase 3 design to a randomized Phase 2 trial.
Research and Development
Research and development expenses decreased by$48.6 million , or 43%, to$65.5 million for the year endedDecember 31, 2020 from$114.1 million for the year endedDecember 31, 2019 . This decrease was primarily due to a$19.2 million decrease in overall compensation costs due to theOctober 2019 restructuring, a$7.9 million decrease in clinical trial expenses across all clinical trials, a$6.0 million decrease in manufacturing costs related to our bemarituzumab and FPA150 programs, a$5.3 million decrease in costs related to our preclinical programs, a$4.6 million decrease in allocated costs, a$3.4 million decrease in companion diagnostics costs related to our bemarituzumab program, a$3.4 million decrease related to a gain recorded from the sale of laboratory equipment inApril 2020 , a$3.3 million decrease in bioanalytics and central laboratory costs related to the reduction of activities in the FIGHT trial and the winding down of our cabiralizumab and FPA150 clinical trials, a$1.2 million decrease in other clinical and specialty laboratory costs related to our bemarituzumab program and the winding down of our cabiralizumab and FPA150 clinical trials and a$1.0 million decrease due to reducing our use of temporary resources. The decrease was offset by a$5.4 million increase in impairment charges related to long-lived assets (a$7.3 million impairment charge on the operating lease right-of-use asset and related leasehold improvements and furniture and fixtures recorded in the third quarter of 2020 in connection with the facility sublease, as compared to a$1.9 million impairment charge on our laboratory equipment recorded primarily during the fourth quarter of 2019 in connection with theOctober 2019 restructuring) and a$1.3 million increase in other miscellaneous research and development costs.
General and Administrative
General and administrative expenses decreased by$2.2 million , or 5%, to$40.5 million for the year endedDecember 31, 2020 from$42.7 million for the year endedDecember 31, 2019 . This decrease was primarily due to a$9.4 million decrease in overall compensation costs due to theOctober 2019 restructuring, a$2.1 million decrease in depreciation expense as a result of the sale of laboratory equipment inApril 2020 and a$1.8 million net decrease in other miscellaneous general and administrative costs. The decrease was offset by a$6.5 million impairment charge on the operating lease right-of-use asset and related leasehold improvements and furniture and fixtures recorded in the third quarter of 2020 in connection with the facility sublease and a$4.6 million increase in allocated costs.
Other Income, Net
Other income, net decreased by$2.8 million , or 60%, to$1.9 million for the year endedDecember 31, 2020 from$4.7 million for the year endedDecember 31, 2019 . This decrease was primarily due to a$3.9 million decrease in interest income resulting from overall lower investment balances until the closing of our public offering inNovember 2020 as well as lower interest rates. This decrease was offset by a$1.1 million increase in sublease income in connection with the facility sublease that was entered into inSeptember 2020 .
Income Taxes
We recorded an income tax benefit of$6.6 million for the year endedDecember 31, 2020 for a tax refund of minimum tax paid for 2015. The refund was available to us after we carried back our 2017 net operating losses. As provided by the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act, we were able to request the refund of the 2015 alternative minimum tax upon the filing of our 2019 income tax return. We did not record an income tax provision for the year endedDecember 31, 2019 as we expected to be in a taxable loss position for that year, and the net deferred tax assets are fully offset by a valuation allowance as we believe it is not more likely than not that the benefit will be realized. 73
-------------------------------------------------------------------------------- OnMarch 27, 2020 , the CARES Act was signed into law in response to the COVID-19 pandemic. GAAP requires recognition of the tax effects of new legislation during the reporting period that includes the enactment date. The CARES Act includes changes to the tax provisions that benefit business entities and makes certain technical corrections to the 2017 Tax Cuts and Jobs Act. The tax relief measures for businesses include a five-year net operating loss carryback, suspension of the annual deduction limitation of 80% of taxable income from net operating losses generated in a tax year beginning afterDecember 31, 2017 , changes in the deductibility of interest, acceleration of alternative minimum tax credit refunds, payroll tax relief, technical corrections on net operating loss carryforwards for fiscal year taxpayers and acceleration of depreciation for qualified improvement property. The CARES Act also provides other non-tax benefits to assist those impacted by the pandemic. We made a request to refund alternative minimum tax credits in the third quarter of 2020 by filing our 2019 income tax return. OnJune 29, 2020 , GovernorGavin Newsom signed California Assembly Bill 85, or AB 85, into law. AB 85 suspends theCalifornia net operating loss deductions for 2020, 2021 and 2022 for certain taxpayers and imposes a limitation of certainCalifornia tax credits for 2020, 2021 and 2022. AB 85 disallows the use ofCalifornia net operating loss deductions if the taxpayer recognizes business income and its adjusted gross income is greater than$1,000,000 . The carryover periods for net operating loss deductions disallowed by this provision will be extended. Additionally, any business credit will only offset a maximum of$5,000,000 ofCalifornia tax. Given our expected loss position in the current year, AB 85 will not impact the current year provision. We will continue to monitor possibleCalifornia net operating loss and credit limitations and their impact in future periods.
Liquidity and Capital Resources
As ofDecember 31, 2020 , we had$287.3 million in cash, cash equivalents and marketable securities invested in money market funds,U.S. Treasury securities, agency bonds, and commercial paper. Our cash equivalents and marketable securities have an average maturity of approximately eight months and the longest maturity is 18 months. InNovember 2020 , we closed on a public offering of 8,280,000 shares of our common stock, or theNovember 2020 offering, which included 1,080,000 shares sold upon the underwriters' full exercise of their option to purchase additional shares, resulting in aggregate gross proceeds of$163.4 million , before deducting underwriting discounts and commissions and offering expenses payable by us, and net proceeds of approximately$163.2 million after deducting these amounts. InAugust 2020 , we entered into a sales agreement withCowen and Company, LLC , or Cowen, acting as sales agent, pursuant to which we may offer and sell, from time to time through Cowen, shares of our common stock having an aggregate offering price of up to$75.0 million in a series of one or more at-the-market equity offerings, or collectively, the ATM facility. All shares of our common stock sold have been or will be issued pursuant to our shelf registration statement on Form S-3 (File No. 333-228206). During 2020, we raised approximately$7.1 million in net proceeds under the ATM facility. InJanuary 2018 , we closed on a public offering of 5,897,435 shares of our common stock, which included 769,230 shares sold upon the underwriters' full exercise of their option to purchase additional shares, resulting in aggregate gross proceeds of$115.0 million , before deducting underwriting discounts and commissions and offering expenses payable by us, and net proceeds of approximately$107.6 million after deducting these amounts. In addition to our existing cash and cash equivalents, we are eligible to receive research and development funding and to earn milestone and other contingent payments for the achievement of defined collaboration objectives and certain nonclinical, clinical, regulatory and sales-based events and royalty payments under our collaboration and license agreements. Our ability to earn these milestone and contingent payments and royalties and the timing of these milestones and royalties is primarily dependent upon the outcome of our collaborators' and licensees' research and development activities and remains uncertain. Our rights to payment under our collaboration and license agreements are our only committed external sources of funds.
Funding Requirements
Our primary uses of capital are, and we expect will continue to be, compensation
and related expenses, third-party clinical and preclinical research and
development services, including clinical trial, manufacturing, laboratory and
related supplies, legal, patent and other regulatory expenses and general
overhead costs. We believe our use of CROs and CMOs provides us with flexibility
in managing our spending and limits our cost commitments at any point in time.
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Because our product candidates are in various stages of clinical and preclinical
development and the outcome of these efforts is uncertain, we cannot predict the
actual amounts necessary to successfully complete the development and
commercialization of our product candidates or whether or when we may achieve
profitability. Until such time that we can generate substantial product
revenues, if ever, we expect to finance our cash needs through collaboration and
license agreements and, if necessary, equity or debt financings. Except for any
obligations of our collaborators or licensees to reimburse us for research and
development expenses or to make milestone or royalty payments under our
agreements with them, we do not have any committed external sources of
liquidity. To the extent that we raise additional capital through the future
sale of equity or debt, the ownership interests of our stockholders will be
diluted, and the terms of these securities may include liquidation or other
preferences that adversely affect the rights of our existing stockholders. If we
raise additional funds through collaboration or license arrangements in the
future, we may have to relinquish valuable rights to our technologies, future
revenue streams or product candidates or grant licenses on terms that may not be
favorable to us. The ongoing COVID-19 pandemic has resulted in a significant
disruption of global financial markets. If the disruption persists and deepens,
and if we need or desire to access additional capital in the future, we may be
unable to do so and our operations may be negatively impacted. If we are unable
to raise additional funds through equity or debt financings when needed, we may
be required to delay, limit, reduce or terminate our product development or
future commercialization efforts or grant rights to develop and market product
candidates that we would otherwise prefer to develop and market ourselves.
Based on our research and development plans and our timing expectations related
to the progress of our programs, we expect that our existing cash and cash
equivalents and marketable securities as of December 31, 2020 will enable us to
fund our operating expenses and capital expenditure requirements for at least
the next twelve months.
Cash Flows
Year Ended December 31,
(in millions) 2020 2019 2018
Net cash used in operating activities $ (64.7 ) $ (113.9 ) $ (122.5 )
Net cash (used in) provided by investing activities (110.6 ) 126.2 (2.5 ) Net cash provided by (used in) financing activities 188.9 (0.5 ) 109.2
Operating Activities
Net cash used in operating activities includes our net loss, working capital changes and net non-cash charges, all of which are highly variable.
For the year endedDecember 31, 2020 , net cash used in operating activities was$64.7 million and consisted of net loss of$84.3 million and$7.0 million from changes in working capital, offset by$26.6 million in net non-cash charges.
• The primary drivers of our changes in working capital included a reduction
in deferred revenue from progress made towards satisfying our performance
obligation under the
decision to amend the FIGHT trial from a Phase 3 design to a randomized
Phase 2 trial, ongoing payments under our operating leases and
personnel-related payments made in 2020 in connection with the completion
of activities related to the
• Net non-cash charges included approximately
compensation expense,
assets,
depreciation and amortization expense,
of right-of-use assets and
assets, offset by a
million for amortization of premiums on marketable securities.
75
-------------------------------------------------------------------------------- For the year endedDecember 31, 2019 , net cash used in operating activities was$113.9 million and consisted of net loss of$137.2 million and$7.0 million from changes in working capital, offset by$30.3 million in net non-cash charges.
• The primary drivers of our changes in working capital included a reduction
in deferred revenue from progress made towards satisfying our performance
obligation under the original cabiralizumab collaboration with BMS and
completion of the research term of our immuno-oncology research
collaboration with BMS in March 2019 , as well as ongoing payments under
our operating leases.
• Net non-cash charges included approximately
compensation expense, $5.3 million of depreciation and amortization
expense, $2.4 million from the amortization of right-of-use assets and
$2.0 million from the impairment of laboratory equipment, offset by $2.2
million for amortization of premiums on marketable securities.
Investing Activities
For the year endedDecember 31, 2020 , net cash used in investing activities was$110.6 million and consisted of the purchase of marketable securities of$286.3 million , offset by the maturities of marketable securities of$169.0 million and$6.7 million received from the sale of fixed assets. For the year endedDecember 31, 2019 , net cash provided by investing activities was$126.2 million and consisted of the maturities of marketable securities of$321.0 million , offset by the purchase of marketable securities of$193.1 million and payments for purchases of property and equipment of$1.7 million .
Financing Activities
For the year endedDecember 31, 2020 , net cash provided by financing activities was$188.9 million and consisted of$163.2 million in net proceeds from theNovember 2020 offering,$7.1 million in net proceeds from sales of our common stock under the ATM facility,$16.7 million in proceeds from disgorgement of a stockholder's short-swing profits and$4.2 million received from employee stock option exercises, offset by$2.3 million paid to satisfy tax withholding obligations from the net share issuance of restricted stock awards. For the year endedDecember 31, 2019 , net cash used in financing activities was$0.5 million and consisted of$1.6 million paid to satisfy tax withholding obligations from the net share issuance of restricted stock awards, offset by$1.1 million received from employee stock option exercises.
Contractual Obligations and Contingent Liabilities
The following table summarizes our significant contractual obligations as ofDecember 31, 2020 : Less Than More Than (in millions) Total 1 Year 1 to 3 Years 3 to 5 Years 5 Years Facility leases, operating (1)$ 60,777 $ 8,389 $ 17,221 $ 16,973 $ 18,194 Facility sublease, operating (2) (40,367 ) (2,547 ) (6,310 ) (15,213 ) (16,297 ) Total obligations, net$ 20,410 $ 5,842 $
10,911
(1) Represents future minimum lease payments under the corporate facility lease
and the laboratory facility lease. The minimum lease payments for our
corporate office and laboratory facilities do not include common area
maintenance charges or real estate taxes.
(2) Represents future minimum lease payments under the facility sublease.
The contractual obligations table above does not include any potential future
milestone payments to third parties as part of certain collaboration and
in-licensing agreements, which could total up to $102.1 million , or any
potential future royalty payments we may be required to make under our license
agreements, including with:
• Galaxy, under which we were granted an exclusive worldwide license for the
development, manufacturing and commercialization of anti-FGFR2b
antibodies; and
• BioWa-Lonza, under which we were granted a non-exclusive license to use
their Potelligent® CHOK1SV technology, including the CHOK1SV cell line,
and a non-exclusive license to related know-how and patents.
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Payments under these agreements are not included in the above contractual obligations table due to the uncertainty of the occurrence of the events requiring payment under these agreements, including our share of potential future milestone and royalty payments. These payments generally become due and payable only upon achievement of certain developmental-, regulatory- or sales-based milestones or sales-based events.
Off-Balance Sheet Arrangements
During the periods presented, we did not have, and we do not currently have, any
off-balance sheet arrangements, as defined under
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