ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties, such as statements regarding our plans, objectives, expectations, intentions, and projections. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” section of this Annual Report on Form 10-K.
Overview
We are a biotechnology company that uses our robust, chemistry-driven approach and drug discovery capabilities to become a leader in the discovery and development of small molecule drugs for the treatment of viral infections and liver diseases. We discovered glecaprevir, the second of two protease inhibitors discovered and developed through our collaboration with AbbVie for the treatment of chronic hepatitis C virus, or HCV. Glecaprevir is co-formulated as part of AbbVie’s leading brand of direct-acting antiviral, or DAA, combination treatment for HCV, which is marketed under the tradenames MAVYRET® (U.S.) and MAVIRET® (ex-U.S.) (glecaprevir/pibrentasvir). Our royalties from our AbbVie collaboration provide us funding to support our wholly-owned research and development programs, which are primarily focused on the following disease targets:
Respiratory syncytial virus, or RSV, the most common cause of bronchiolitis and pneumonia in young children and a significant cause of respiratory illness in older adults, with estimates suggesting that on average each year RSV leads to 3 million hospitalizations globally in children under 5 years old and 177,000 hospitalizations in the U.S. in adults over the age of 65;
Hepatitis B virus, or HBV, the most prevalent chronic hepatitis, which is estimated by the World Health Organization to affect close to 300 million individuals worldwide;
SARS-CoV-2, the virus that causes COVID-19; and
Human metapneumovirus, or hMPV, a virus that causes respiratory infection with symptoms similar to RSV
We had $352.4 million in cash and marketable securities at September 30, 2021. In fiscal 2021, we earned $97.1 million in product royalties on AbbVie’s net sales of its HCV regimens. We expect cash flows from our continuing HCV royalties and our existing financial resources will allow us to continue to fund our wholly-owned research and development programs for at least the next two years.
Our Wholly-Owned Programs
Our primary wholly-owned research and development programs are in virology, namely RSV, HBV, SARS-CoV-2 and hMPV:
RSV: We have a clinical stage program for RSV, for which the lead asset is EDP-938.
We discovered EDP-938, a potent N-protein inhibitor of activity of both major subgroups of RSV, referred to as RSV-A and RSV-B, and have been investigating it as our first clinical candidate for RSV. To our knowledge, EDP-938 is the only N-protein inhibitor in clinical development. EDP-938 has been investigated in a Phase 2a challenge study and is currently in three ongoing Phase 2 studies, each in a different patient population.
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RSVP: Our ongoing study with the most advanced enrollment is the RSVP study in adult outpatients with community-acquired RSV infection. This Phase 2b study is designed to help us better understand the feasibility of this direct-acting antiviral therapy by enrolling subjects, within 48 hours of symptom onset, who will then receive EDP-938 or placebo for five days. The mitigation steps to manage the COVID-19 pandemic since March 2020 have suppressed the incidence of RSV and other respiratory illnesses globally (other than COVID-19). We have continued our preparedness efforts to ensure we are ready when RSV re-emerges, including establishing trial sites in North America, Europe, the Asia-Pacific and the Southern Hemisphere, and there have been reports of increased RSV incidence globally, including the United States and Europe. Given that the recent re-emergence of RSV is not following any normal seasonal pattern, as well as the impact of renewed social distancing interventions where the Delta variant has increased the incidence of COVID-19, it is uncertain how significant or sustained the new incidence of RSV will be moving forward. Nonetheless, we expect that enrollment in the RSVP study will be complete during the Northern Hemisphere winter season if there is no further significant increase in social distancing interventions. Assuming this enrollment occurs, we would expect data in the first half of 2022.
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RSVPEDs: We have initiated a Phase 2 RSV study called RSVPEDs in pediatric patients. In this dose-ranging, randomized, double-blind, placebo-controlled study, we plan to enroll 90 infants and children aged 28 days to 36 months with RSV-associated respiratory tract infection, including both hospitalized and non-hospitalized patients who will be dosed in 4 age cohorts and will receive EDP-938 or placebo for 5 days. The study will be conducted in 2-parts. Part 1 will evaluate multiple ascending doses in each age cohort, with a primary endpoint of safety, tolerability, and pharmacokinetics. Part 2 will evaluate the selected dose from Part 1 across the 4 age cohorts, with a primary endpoint of antiviral activity.
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RSVTx: We have also initiated a Phase 2b study called RSVTx in adult hematopoietic cell transplant recipients with acute RSV infection and symptoms of upper respiratory tract infection. We plan to enroll approximately 200 adult subjects 18 to 75 years of age, within 72 hours of symptom onset, who will receive EDP-938 or placebo for 21 days. The primary endpoint is the incidence of lower respiratory tract complications within 28 days of enrollment, while secondary endpoints include change from baseline in RSV RNA viral load, safety and pharmacokinetics.
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L-Inhibitor: We also have initiated an RSV L-protein inhibitor discovery effort centered around potent nanomolar leads active against both RSV-A and RSV-B, for potential use alone or in combination with agents targeting other RSV mechanisms, such as our lead RSV asset, EDP-938.
HBV: Our lead clinical candidate for the treatment of chronic infection with hepatitis B virus, or HBV, is EDP-514, a core inhibitor that displays potent anti-HBV activity in vitro at multiple points in the HBV lifecycle. Our goal is to develop a combination therapy approach, including existing approved treatments such as a nucleoside reverse transcriptase inhibitor (NUC), with EDP-514 and one or more other mechanisms, which could lead to a functional cure for patients with chronic HBV infection.
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EDP-514 - Phase 1a/b- Our initial study of EDP-514 was a randomized, double-blind, placebo-controlled Phase 1a/1b study designed in two parts. Part 1 of the study in healthy subjects demonstrated that EDP-514 is well-tolerated with a favorable safety profile and has a pharmacokinetic profile supportive of once-daily dosing. In Part 2, we studied EDP-514 in chronic HBV patients already being treated with a marketed NUC, which we refer to as NUC-suppressed patients.
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EDP-514 - Phase 1b study in Viremic HBV patients - In addition, we conducted a second Phase 1b study, to evaluate EDP-514 in chronic HBV patients with high viral load not currently on treatment, which we refer to as viremic patients.
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RNA Destabilizer - We initiated a Phase 1 clinical study of EDP-721, an HBV RNA destabilizer, but discontinued development of the compound based on emerging safety observations in the single ascending dose part of the study.
COVID-19: Since we announced our newest discovery program – developing a direct-acting antiviral for the treatment of COVID-19 – we have been leveraging our expertise in protease inhibitors to discover new compounds specifically designed to target the SARS-CoV-2 virus and potentially other coronaviruses. We have completed IND-enabling studies on our lead oral protease inhibitor, EDP-235, which we plan to begin testing in a first-in-human study in early calendar 2022.
hMPV: Since announcing our new drug discovery effort for hMPV in January 2020, we have been optimizing nanomolar inhibitor leads against this virus and are working toward identifying our first clinical candidate for this indication.
In addition to our ongoing wholly owned programs, we currently have two clinically-developed FXR agonists for NASH, EDP-305 and EDP-297, which we are seeking to out-license. These compounds selectively bind to and activate the Farnesoid X receptor, or FXR. Based on an internal interim analysis of a subset of patients in a Phase 2 study of EDP-305 at 12 weeks of treatment, as well
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as results from the Phase 1 clinical study of EDP-297, we made a business decision in 2021 to prioritize combination approaches through an out-licensing strategy for further development of either or both of these FXR agonists and not to continue further development of them internally.
We have utilized our internal chemistry and drug discovery capabilities to generate all of our development-stage programs. We continue to invest substantial resources in research programs to discover back-up compounds as well as new compounds targeting different mechanisms of action, both in our disease areas of focus as well as potentially in other disease areas.
Our Out-Licensed Products
Two protease inhibitors developed through our Collaborative Development and License Agreement with AbbVie have been clinically tested, manufactured, and commercialized by AbbVie as part of its combination regimens for HCV. We have earned all $330.0 million milestone payments under the agreement related to clinical development and commercialization regulatory approvals of these regimens in major markets. Glecaprevir is the protease inhibitor we discovered that was developed by AbbVie in a fixed-dose combination with its NS5A inhibitor, pibrentasvir, for the treatment of HCV. This patented combination, currently marketed under the brand names MAVYRET® (U.S.) and MAVIRET® (ex-U.S.), is referred to in this report as MAVYRET/MAVIRET. This regimen is a once-daily, all-oral, fixed-dose, ribavirin-free treatment for HCV genotypes 1-6, or GT1-6, which is referred to as being pan-genotypic. In the U.S., EU and Japan it is approved as an 8-week treatment for patients with and without compensated cirrhosis and new to treatment. Today, these patients are estimated to represent the majority of HCV patients in over 50 countrieswhere MAVYRET/MAVIRET is sold by AbbVie and where MAVYRET/MAVIRET remains the only 8-week pan-genotypic HCV treatment.
Since August 2017, substantially all of our royalty revenue has been derived from AbbVie’s net sales of MAVYRET/MAVIRET. Our ongoing royalty revenues from this regimen consist of annually tiered, double-digit, per-product royalties on 50% of the calendar year net sales of the 2-DAA glecaprevir/pibrentasvir combination in MAVYRET/MAVIRET. These royalties are calculated separately from the royalties on AbbVie’s paritaprevir-containing regimens, AbbVie’s initial HCV treatment now replaced by MAVYRET/MAVIRET in most markets worldwide. The annual royalty tiers for each of these royalty-bearing products return to the lowest tier for sales on and after each January 1.
Financial Operations Overview
We are currently funding all research and development for our wholly-owned programs, which are targeted toward the discovery and development of novel compounds for the treatment of viral infections and liver diseases. In 2021, we had three Phase 2 studies ongoing for our wholly-owned program in RSV and three Phase 1 studies in our HBV program. We are also progressing other compounds into preclinical development in our RSV, HBV and SARS-CoV-2 programs as well as pursuing drug discovery efforts in hMPV.
During the second half of fiscal 2020 and into 2021, our business has been impacted by the COVID-19 pandemic. Specifically, we reported lower royalty revenues from our AbbVie agreement as a result of lower treated patient volumes as well as slower enrollment in certain clinical studies in our virology program as a result of suppression of the incidence of respiratory illnesses globally (other than COVID-19) due to mitigation measures intended to suppress SARS-CoV-2.
As a result of our clinical development programs, as well as efforts to advance other compounds into preclinical development, we expect to incur greater expenses in fiscal 2022 than in 2021 as we continue to advance our RSV, HBV, SARS-CoV-2 and hMPV programs. However, if the COVID-19 pandemic further slows our research and development programs, it will reduce our spending in those areas in the near term.
We are funding our operations primarily through royalty payments received under our collaboration agreement with AbbVie and our existing cash, cash equivalents, and short-term and long-term marketable securities. Our revenue is currently dependent on royalty payments we receive from AbbVie on its sales of MAVYRET/MAVIRET. Absent a significant increase in the level of AbbVie’s MAVYRET/MAVIRET sales that generate our royalty revenue, and given the planned increases in our future expenditures for the advancement of our internally developed compounds, we expect to continue to have net losses in fiscal 2022.
Revenue
Our revenue is derived from our collaboration agreement with AbbVie and AbbVie's sales of MAVYRET/MAVIRET, an 8-week treatment regimen that is pan-genotypic.
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The following table is a summary of revenue recognized for the years ended September 30, 2021, 2020, and 2019:
Years Ended September 30,
(in thousands)
AbbVie agreement:
AbbVie Agreement
We currently receive annually tiered, double-digit royalties on our protease inhibitor product glecaprevir included in AbbVie’s net sales of MAVYRET/MAVIRET. Under the terms of our AbbVie agreement, as amended in October 2014, 50% of AbbVie’s net sales of MAVYRET/MAVIRET are allocated to glecaprevir. Beginning with each January 1, the cumulative net sales of MAVYRET/MAVIRET start at zero for purposes of calculating the tiered royalties. For detail regarding the royalty tiers under our AbbVie agreement, see Note 7 in Notes to Consolidated Financial Statements of this report which is incorporated herein by this reference.
Internal Programs
As our internal product candidates are currently in Phase 1 or Phase 2 clinical development, we have not generated any revenue from our own product sales and do not expect to generate any revenue from product sales derived from these product candidates for at least the next several years.
Operating Expenses
The following table summarizes our operating expenses for the years ended September 30, 2021, 2020, and 2019:
Years Ended September 30,
(in thousands)
Research and Development Expenses
Research and development expenses consist of costs incurred to conduct basic research, such as the discovery and development of novel small molecules as therapeutics, as well as any external expenses of preclinical and clinical development activities. We expense all costs of research and development as incurred. These expenses consist primarily of:
personnel costs, including salaries, related benefits and stock-based compensation for employees engaged in scientific research and development functions;
third-party contract costs relating to research, formulation, manufacturing, preclinical study and clinical trial activities;
laboratory consumables;
allocated facility-related costs; and
third-party license fees.
Project-specific expenses reflect costs directly attributable to our clinical development candidates and preclinical candidates nominated and selected for further development. Remaining research and development expenses are reflected in research and drug discovery, which represents early-stage drug discovery programs. At any given time, we typically have several active early stage research and drug discovery projects. Our internal resources, employees and infrastructure are not directly tied to any individual research or drug discovery project and are typically deployed across multiple projects. As such, we do not report information regarding costs incurred for our early-stage research and drug discovery programs on a project-specific basis. We expect that our research and development expenses will continue to increase in the future as we advance our research and development programs.
Our research and drug discovery and development programs are at early stages; therefore, the successful development of our product candidates is highly uncertain and may not result in approved products. Completion dates and completion costs can vary significantly
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for each product candidate and are difficult to predict. Given the uncertainty associated with clinical trial enrollments, particularly in the context of the COVID-19 pandemic, and the risks inherent in the development process, we are unable to determine the duration and completion costs of the current or future clinical trials of our product candidates or if, or to what extent, we will generate revenue from the commercialization and sale of any of our product candidates. We anticipate that we will make determinations as to which development programs to pursue and how much funding to direct to each program on an ongoing basis in response to the preclinical and clinical success and prospects of each product candidate, as well as ongoing assessments of the commercial potential of each product candidate.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel costs, which include salaries, related benefits and stock-based compensation, of our executive, finance, business and corporate development and other administrative functions. General and administrative expenses also include travel expenses, allocated facility-related costs not otherwise included in research and development expenses, directors and officers’ liability insurance premiums, and professional fees for auditing, tax, and legal services and patent expenses.
We expect that general and administrative expenses will increase in the future primarily due to the ongoing expansion of our operating activities in support of our own research and development programs, as well as potential additional costs associated with operating a growing publicly traded company.
Other Income (Expense), Net
Other income (expense), net consists of interest and investment income and the change in fair value of our outstanding Series 1 nonconvertible preferred stock. Interest income consists of interest earned on our cash equivalents and short-term and long-term marketable securities balances as well as interest earned for any refunds received from tax authorities. Investment income consists of the amortization or accretion of any purchased premium or discount on our short-term and long-term marketable securities. The change in fair value of our Series 1 nonconvertible preferred stock relates to the remeasurement of these financial instruments from period to period as these instruments may require a transfer of assets because of the liquidation preference features of the underlying instrument.
Income Tax (Expense) Benefit
Income tax (expense) benefit for the years ended September 30, 2021, 2020, and 2019 is the result of federal and state taxes generated from our domestic operations or the benefit of tax refunds due as a result of tax losses generated in the period which are able to be carried back to prior years under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). Income tax (expense) benefit is based on our best estimate of applicable income tax rates, net research and development tax credits, net operating loss carrybacks, changes in valuation allowance estimates and deferred income taxes, for the entire fiscal year applied to pre-tax profit or loss reported for the year-to-date period, except when a reliable estimate of the annual effective tax rate cannot be made and we instead use the year-to-date effective tax rate.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, equity, revenue, costs and expenses, and related disclosures. We believe that the estimates and assumptions involved in the accounting policies described below may have the greatest potential impact on our consolidated financial statements and, therefore, consider these to be our critical accounting policies. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates under different assumptions and conditions. See also Note 2 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information about these critical accounting policies as well as a description of our other significant accounting policies.
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Research and Development and Pharmaceutical Drug Manufacturing Accruals
We have entered into various contracts with third parties to perform research and development and pharmaceutical drug manufacturing. These include contracts with contract research organizations (“CROs”), clinical manufacturing organizations (“CMOs”), testing laboratories, research hospitals and not-for-profit organizations and other entities to support our research and development activities. We expense the cost of each contract as the work is performed. When billing terms under these contracts do not coincide with the timing of when the work is performed, we are required to make estimates of our outstanding obligation as of period end to those third parties. Our accrual estimates are based on a number of factors, including our knowledge of the research and development programs and pharmaceutical drug manufacturing activities and associated timelines, invoicing to date, and the provisions in the contract. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ from our estimates.
Results of Operations
Comparison of Years Ended September 30, 2021, 2020, and 2019
Years Ended September 30,
(in thousands)
Other income (expense):
Change in fair value of Series 1 nonconvertible preferred stock (27 ) 149 —
Revenue. We recognized revenue of $97.1 million, $122.5 million, and $205.2 million during the years ended September 30, 2021, 2020, and 2019, respectively. The decrease in revenue year-over-year was due to lower numbers of treated HCV patients as a result of the worldwide COVID-19 pandemic which adversely affected all of fiscal 2021 and at least seven months of fiscal 2020.
Our weighted average royalty rate on the portion of AbbVie’s sales allocable to our protease inhibitor products was approximately 11% in fiscal 2021 versus 13% in both fiscal 2020 and 2019. The decrease in the weighted average royalty rate in 2021 compared to previous years was due to sales levels being in lower royalty tiers as a result of lower protease inhibitor sales due to the COVID-19 pandemic.
Our royalty revenues eligible to be earned in the future will depend on AbbVie’s HCV market share, the pricing of the MAVYRET/MAVIRET regimen and the number of patients treated. In addition, at the beginning of each calendar year (the second quarter of our fiscal year), our royalty rate resets to the lowest tier for each of our royalty-bearing products licensed to AbbVie. (See Note 7 to our consolidated financial statements for further details on our royalty rate tier.)
Research and development expenses.
Years Ended September 30,
(in thousands)
R&D programs:
Research and development expense increased by $37.4 million for the year ended September 30, 2021 as compared to the same period in 2020. The increase year-over-year was primarily driven by the timing of our clinical studies in our virology programs, offset by a decrease in clinical trial expenses in our liver disease program. For our virology program, we had two Phase 1b studies of EDP-514 in chronic HBV as well as three Phase 2 studies of EDP-938 in RSV, including the expanded RSVP study which was ongoing in 2021, and a Phase 1a study of EDP-721, an HBV RNA destabilizer that was discontinued in November 2021. In the prior year, we had our
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clinical study of EDP-514 in a Phase 1a study and our ongoing Phase 2 RSVP study of EDP-938. For our liver disease program in 2021, we had our ongoing Phase 2 study (ARGON-2) of EDP-305 expanding to additional sites and our Phase 1 study of our FXR follow-on candidate, EDP-297, whereas in 2020 we had the launch of ARGON-2 and we were in the process of completing our ARGON-1 study.
Research and development expense decreased by $5.5 million for the year ended September 30, 2020 as compared to the same period in 2019. The decrease year-over-year was primarily due to the timing of our clinical studies in our virology and liver disease programs as well as the impact of the COVID-19 pandemic. For our virology program, we initiated our Phase 2 RSVP study in 2020, continued our Phase 1a/1b study of EDP-514, and initiated a separate Phase 1b study in viremic patients with chronic HBV infection. We also initiated our ARGON-2 study in our liver disease program in 2020. However, in March 2020, we paused enrollment of the ARGON-2 and HBV nuc-suppressed study but were able to resume recruitment of both studies in July 2020. In fiscal 2019, we had initiated and completed part 1 of a Phase 2a human challenge study of EDP-938 and initiated a Phase 1a/1b clinical study of EDP-514, both of which are part of our virology programs. We also had two Phase 2 studies of EDP-305 ongoing, one in NASH patients and one in PBC patients, in our liver disease program.
We expect our research and development expenses will continue to increase in the future as we conduct more clinical development activities.
General and administrative expenses. General and administrative expenses increased to $32.5 million for the year ended September 30, 2021 as compared to $27.4 million for the same period in 2020. The increase was primarily due to increases in headcount and related compensation expense in support of expansion of our research and development operations.
General and administrative expenses increased by $1.1 million for the year ended September 30, 2020 as compared to the same period in 2019. The increase was primarily due to an increase in patent costs to support our broadening patent portfolio and premiums on directors and officers insurance.
We expect our general and administrative expenses will continue to increase in the future as our operations grow to support further research and development.
Other income (expense), net. Changes in components of other income (expense), net were as follows:
Interest and investment income, net. Interest and investment income, net, decreased by $4.5 million for the year ended September 30, 2021 compared to the same period in 2020, primarily due to lower invested cash balances and lower investment yield on our marketable securities purchased in 2021 compared to 2020.
Interest and investment income, net, decreased by $2.3 million for the year ended September 30, 2020 compared to the same period in 2019, primarily due to more purchases of our debt securities at a premium in fiscal 2020.
Income tax (expense) benefit. We recorded an income tax benefit of $28.6 million and income tax (expense) of ($1.1) million for the years ended September 30, 2021 and 2020, respectively. The effective tax rate used to calculate our income tax benefit for the year ended September 30, 2021 was 26.6% and for the year ended September 30, 2020 it was an effective tax rate of 3.3%. We recorded an income tax benefit in 2021 due to our pre-tax loss and a federal net operating loss carryback under the CARES Act. In 2020, we recorded income tax expense due to a valuation allowance charge recorded against the majority of our deferred tax assets of $18.3 million, partially offset by a federal net operating loss carryback under the CARES Act, research and development tax credits generated during the year and release of an uncertain tax position reserve related to the close of a tax audit. A valuation allowance was recorded against the majority of our deferred tax assets in 2020 because it was more likely than not that we would not have sufficient taxable income in the future that would allow us to realize the majority of our deferred tax assets. As of September 30, 2021, we continue to record a valuation allowance against all of our deferred tax assets.
In 2019, we recorded an income tax benefit of $0.8 million driven by a federal income tax benefit associated with foreign-derived royalty income, federal research and development tax credits and tax deductions from employee stock-award related activity during the year.
Liquidity and Capital Resources
We fund our operations with cash flows from our royalty revenue and our existing financial resources. At September 30, 2021, our principal sources of liquidity were cash and cash equivalents and short-term and long-term marketable securities of $352.4 million.
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The following table shows a summary of our cash flows for each of the years ended September 30, 2021, 2020, and 2019:
Years Ended September 30,
(in thousands)
Cash provided by (used in):
Net cash provided by (used in) operating activities
Cash used in operating activities was $70.0 million for the year ended September 30, 2021 as compared to cash provided by operating activities of $7.1 million for the same period in 2020. The decrease in cash provided by operating activities was primarily driven by a decrease in royalty payments received under our collaboration with AbbVie and an increase in research and development costs incurred year-over-year.
Cash provided by operating activities was $7.1 million for the year ended September 30, 2020 as compared to $71.4 million for the same period in 2019. The decrease in cash provided by operating activities was primarily driven by a decrease in royalty payments received under our collaboration with AbbVie and an increase in research and development costs incurred year-over-year, which were partially offset by a decrease in cash taxes paid.
For the foreseeable future, we expect to incur substantial costs associated with research and development for our internally developed programs.
Net cash provided by (used in) investing activities
The increase of $17.2 million in cash provided by investing activities for the year ended September 30, 2021 as compared to the same period in 2020 was driven by timing of purchases, sales and maturities of marketable securities.
The increase of $106.5 million in cash provided by investing activities for the year ended September 30, 2020 as compared to the same period in 2019 was driven by timing of purchases, sales and maturities of marketable securities.
Net cash provided by financing activities
The decrease in cash provided by financing activities of $5.9 million for the year ended September 30, 2021 as compared to the same period in 2020 was driven by a decrease in proceeds from stock option exercises in 2021 as compared to 2020.
The increase in cash provided by financing activities of $6.4 million for the year ended September 30, 2020 as compared to the same period in 2019 was driven by an increase in proceeds from stock option exercises in 2020 as compared to 2019 as well as a decrease in withholding tax payments for the settlement of share-based awards.
Funding Requirements
As of September 30, 2021, we had $352.4 million in cash, cash equivalents and short-term and long-term marketable securities. We believe that our existing cash, cash equivalents and marketable securities as of September 30, 2021 will be sufficient to meet our anticipated cash requirements for at least the next two years. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially.
Our future capital requirements are difficult to forecast and will depend on many factors, including:
the amount of royalties generated from MAVYRET/MAVIRET sales under our existing collaboration with AbbVie;
any continuing impact of the COVID-19 pandemic on the numbers of treated HCV patients;
the number and characteristics of our research and development programs;
the scope, progress, results and costs of researching and developing any of our product candidates on our own, including conducting advanced clinical trials;
delays and additional expense in our clinical trials as a result of the COVID-19 pandemic continuing;
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the cost of manufacturing our product candidates for clinical development and any products we successfully commercialize independently;
our ability to establish new collaborations, licensing or other arrangements, if any, and the financial terms of such arrangements;
opportunities to in-license or otherwise acquire new technologies and therapeutic candidates;
the timing of, and the costs involved in, obtaining regulatory approvals for any product candidates we develop independently;
the cost of commercialization activities, if any, of any product candidates we develop independently that are approved for sale, including marketing, sales and distribution costs;
the timing and amount of any sales of our product candidates, if any, or royalties thereon;
the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patents, including any litigation costs and the outcomes of any such litigation; and
potential fluctuations in foreign currency exchange rates.
We do not believe that inflation had a material effect on our business, financial condition or results of operations in the last three fiscal years. If our costs were to become subject to significant inflationary pressures, we could not offset such higher costs through revenue increases because our revenues are substantially outside of our control. Our inability to do so could harm our business, financial condition and results of operations.
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet financing activities. We do not have any interest in entities referred to as variable interest entities or unconsolidated entities, which include special purpose entities and other structured finance entities.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is set forth in Note 2 to the consolidated financial statements included in this Annual Report on Form 10-K.
Contractual Obligations and Commitments
We lease space in Watertown, Massachusetts under two separate lease agreements.
The first lease, located at 500 Arsenal Street, commenced on October 1, 2011 and was amended in 2015 to expand the rented space and extend the lease term through September 2022. In November 2021, the Company exercised its option to extend this lease for an additional 5 years through September 1, 2027. This lease is for office and laboratory space. In conjunction with the amendment of the lease, the Company entered into a capital lease agreement to fund certain leasehold improvements and the purchase of lab equipment.
The second lease, located at 400 Talcott Avenue, commenced on September 24, 2018 for office space and extends through August 1, 2024.
As of September 30, 2021, we had 1.9 million outstanding shares of Series 1 nonconvertible preferred stock, all of which we classified as long-term liabilities on our consolidated balance sheet and recorded at fair value of $1.5 million. The fair value of the preferred stock was measured based on significant inputs not observable in the market, which represented a Level 3 measurement within the fair value hierarchy. The fair value of these instruments represents less than 10% of liabilities measured at fair value as of September 30, 2021. The Series 1 nonconvertible preferred stock issued would require the payment of $2.0 million in the event of a qualifying merger or sale of the company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We had cash, cash equivalents and short-term and long-term marketable securities of $352.4 million and $419.3 million at September 30, 2021 and 2020, respectively, which consisted of cash, money market funds, agency securities, commercial paper, treasury notes and corporate bonds. Interest income is sensitive to changes in the general level of interest rates; however, due to the nature of these investments, a change in market interest rates of 1% would not be expected to have a material impact on our financial condition or results of operations for either period. We had no debt outstanding as of September 30, 2021 or 2020.
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Foreign Exchange Risk
As we continue to progress our wholly-owned programs into clinical development, we will conduct clinical trials and clinical manufacturing outside of the U.S. and thus will face exposure to movements in foreign currency exchange rates, primarily the British Pound and Euro, against the U.S. Dollar, arising from our accounts payable and accrued expenses. During fiscal 2021 and 2020, the impact of foreign currency exposure was immaterial and thus did not have a significant impact on our consolidated financial statements. Our operations may become subject to more significant fluctuations in foreign currency exchange rates in the future if we continue to contract with vendors outside of the U.S.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements, together with the report of our independent registered public accounting firm, appear on pages F-1 through F-32 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures and Internal Control over Financial Reporting
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as the Companies are designed to do, and management necessarily was required to apply its judgment in evaluating the risk related to controls and procedures.
In connection with the preparation of this Form 10-K, as of September 30, 2021, an evaluation was performed under the supervision and with the participation of our management, including the CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2021. These conclusions were communicated to the Audit Committee.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act. Our internal control system is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Our management has assessed the effectiveness of our internal control over financial reporting as of September 30, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its 2013 Internal Control—Integrated Framework. Based on this assessment, our management has concluded that as of September 30, 2021 our internal control over financial reporting is effective.
The effectiveness of the Company’s internal control over financial reporting as of September 30, 2021, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in Item 8 above.
62
ITEM 9B. OTHER INFORMATION
None.
63
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Portions of the response to this item are incorporated herein by reference from the discussion responsive thereto under the captions “Proposal 1 - Election of Directors—Nominees for Director and Current Directors”, “Delinquent Section 16(a) Reports”, “Executive Officers” and “Corporate Governance—Board and Committee Matters” in the Company’s Definitive Proxy Statement relating to the 2022 Annual Meeting of Stockholders, also referred to as the 2022 Proxy Statement, which will be filed within 120 days after September 30, 2021.
We have adopted a Code of Business Conduct and Ethics (the code of ethics) that applies to all of our employees, officers and directors. The code of ethics is available on our website at http://www.enanta.com. In addition, if we make any substantive amendments to the code of ethics or grant any waiver, including any implicit waiver, from a provision of the code to any of our executive officers or directors, we will disclose the nature of such amendment or waiver as required by applicable law on our website or on a Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated herein by reference from the discussion responsive thereto under the following captions in the 2022 Proxy Statement, which will be filed within 120 days after September 30, 2021: “Executive Compensation” and “Corporate Governance—Certain Relationships and Related Transactions.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The response to this item is incorporated herein by reference in part from the discussion responsive thereto under the caption “Beneficial Ownership of Common Stock” in the 2022 Proxy Statement, which will be filed within 120 days after September 30, 2021.
The following table provides information about the securities authorized for issuance under the Company’s equity compensation plans as of September 30, 2021:
Equity Compensation Plan Information
(in thousands, except per share information)
(a) (b) (c)
Equity compensation plans not approved by security holders — — —
(1)
Consists of the Company’s 2019 Equity Incentive Plan, the Company’s 2012 Equity Incentive Plan, as amended, the Company’s Amended and Restated 1995 Equity Incentive Plan, as amended, and the Company’s Employee Stock Purchase Plan.
(2)
Consists of shares of the Company’s common stock issuable upon exercise of outstanding options issued under the Company’s 2019 Equity Incentive Plan, the Company’s Amended and Restated 2012 Equity Incentive Plan and the Company’s Amended and Restated 1995 Equity Incentive Plan.
(3)
Consists of shares of the Company’s common stock reserved for future issuance under the Company’s 2019 Equity Incentive Plan and the Company’s Employee Stock Purchase Plan.
64
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The response to this item is incorporated herein by reference from the discussion responsive thereto under the caption “Corporate Governance—Certain Relationships and Related Transactions” and “Corporate Governance—Board and Committee Matters” in the 2022 Proxy Statement, which will be filed within 120 days after September 30, 2021.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The response to this item is incorporated herein by reference from the discussion responsive thereto under the captions “Corporate Governance—Board and Committee Matters” and “Audit Committee Report—Audit Fees” in the 2022 Proxy Statement, which will be filed within 120 days after September 30, 2021.
65
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) 1. FINANCIAL STATEMENTS
The financial statements are included under Part II, Item 8 of this Report.
2. FINANCIAL STATEMENTS SCHEDULE
Schedules are omitted because they are not applicable, or are not required, or because the information is included in the consolidated financial statements and notes thereto.
3. EXHIBITS –
The exhibits are listed below under Part IV, Item 15(b) of this Report.
(b) EXHIBITS
Incorporated by Reference
66
10.28# Consulting Agreement with Nathalie Adda X
21.1 Subsidiaries of the Company. X
67
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)
# Management contract or compensatory plan, contract or agreement.
† Confidential treatment granted as to portions of this Exhibit. The confidential portions of this Exhibit have been omitted and are marked by asterisks.
†† This Exhibit has been filed separately with the commission pursuant to an application for confidentiality treatment. The confidential portions of this Exhibit have been omitted and are marked by asterisks.
ITEM 16. FORM 10-K SUMMARY
None.
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 24th day of November, 2021.
ENANTA PHARMACEUTICALS, INC.
By: /s/ Jay R. Luly, Ph.D.
Jay R. Luly, Ph.D.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company in the capacities and on the dates indicated.
Signature Title Date
/s/ Bruce L.A. Carter, Ph.D. Bruce L.A. Carter, Ph.D. Director November 24, 2021
/s/ Mark G. Foletta Mark G. Foletta Director November 24, 2021
/s/ Yujiro S. Hata Yujiro S. Hata Director November 24, 2021
/s/ Kristine Peterson Kristine Peterson Director November 24, 2021
/s/ Terry Vance Terry Vance Director November 24, 2021
69
ENANTA PHARMACEUTICALS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Comprehensive Income (Loss) F-6
Consolidated Statements of Stockholders’ Equity F-7
Consolidated Statements of Cash Flows F-9
Notes to Consolidated Financial Statements F-10
F-1
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Enanta Pharmaceuticals, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Enanta Pharmaceuticals, Inc. and its subsidiary (the “Company”) as of September 30, 2021 and 2020, and the related consolidated statements of operations, of comprehensive income (loss), of stockholders’ equity and of cash flows for each of the three years in the period ended September 30, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of September 30, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2021,based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases as of October 1, 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
F-2
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Research and Development and Pharmaceutical Drug Manufacturing Accruals
As described in Notes 2 and 6 to the consolidated financial statements, the Company has entered into various contracts with third parties to perform research and development and pharmaceutical drug manufacturing. When billing terms under these contracts do not coincide with the timing of when the work is performed, management is required to make estimates of outstanding obligations as of period end to those third parties. Within accrued expenses and other current liabilities, total accrued research and development expenses and accrued pharmaceutical drug manufacturing amounted to $6.1 million and $8.4 million as of September 30, 2021, respectively. The accrual estimates are based on a number of factors, including management’s knowledge of the research and development programs and pharmaceutical drug manufacturing activities and associated timelines, invoicing to date, and the provisions in the contract. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period.
The principal considerations for our determination that performing procedures relating to research and development and pharmaceutical drug manufacturing accruals is a critical audit matter are the significant judgment by management in developing the accrual estimates, as the estimates are based on a number of factors, including management’s knowledge of the research and development programs and pharmaceutical drug manufacturing activities and associated timelines, invoicing to date, and the provisions in the contracts, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumptions related to progress towards completion of the research and development programs and pharmaceutical drug manufacturing activities.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to accrued research and development expenses and accrued pharmaceutical drug manufacturing, including controls over the review of contracts and assessment of progress of the accrued research and development programs and accrued pharmaceutical drug manufacturing activities. These procedures also included, among others (i) testing management’s process for developing estimates based upon the progress of the research and development programs and pharmaceutical drug manufacturing activities; (ii) evaluating the appropriateness of the method used by management to develop the estimates; (iii) reading research and development and pharmaceutical drug manufacturing contracts on a test basis; (iv) evaluating the completeness and accuracy of data used by management; and (v) evaluating the reasonableness of significant assumptions related to the progress towards completion. Evaluating management’s assumptions related to progress towards completion of the research and development programs and pharmaceutical drug manufacturing activities included evaluating whether the assumptions were reasonable considering the associated timelines, invoicing to date and the provisions in the contracts.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
November 24, 2021
We have served as the Company’s auditor since 1999.
F-3
ENANTA PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
September 30, September 30,
Assets
Current assets:
Prepaid expenses and other current assets 14,188 13,655
Deferred tax assets — 345
Operating lease, right-of-use assets 4,711 7,020
Other long-term assets 92 92
Liabilities and Stockholders' Equity
Current liabilities:
Accrued expenses and other current liabilities 22,429 14,159
Operating lease liabilities, net of current portion 1,126 3,838
Series 1 nonconvertible preferred stock 1,506 1,479
Other long-term liabilities 558 1,078
Commitments and contingencies (Note 13)
Stockholders' equity:
Accumulated other comprehensive income (loss) (382 ) 844
Total liabilities and stockholders' equity $ 438,791 $ 486,132
The accompanying notes are an integral part of these consolidated financial statements.
F-4
ENANTA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended September 30,
Revenue
Operating expenses:
Other income (expense), net:
Change in fair value of Series 1 nonconvertible preferred stock (27 ) 149 —
Net income (loss) per share:
Weighted average shares outstanding:
The accompanying notes are an integral part of these consolidated financial statements.
F-5
ENANTA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Years Ended September 30,
Other comprehensive income (loss):
Total other comprehensive income (loss), net of tax (1,226 ) 698 544
The accompanying notes are an integral part of these consolidated financial statements.
F-6
ENANTA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Accumulated
Additional Other Total
Common Stock Paid-In Comprehensive Retained Stockholders'
Shares Amount Capital Income (Loss) Earnings Equity
Vesting of restricted stock units, net of withholding 77 1 (4,189 ) — — (4,188 )
Stock-based compensation expense — — 19,226 — — 19,226
Other comprehensive loss, net of tax — — — 544 — 544
Vesting of restricted stock units, net of withholding 47 — (1,498 ) — — (1,498 )
Stock-based compensation expense — — 19,575 — — 19,575
Other comprehensive income, net of tax — — — 698 — 698
Vesting of restricted stock units, net of withholding 32 — (534 ) — — (534 )
Stock-based compensation expense — — 20,991 — — 20,991
Other comprehensive loss — — — (1,226 ) — (1,226 )
The accompanying notes are an integral part of these consolidated financial statements.
F-7
F-8
ENANTA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended September 30,
Cash flows from operating activities
Premium paid on marketable securities (4,028 ) (3,575 ) (1,491 )
Other non-cash items (97 ) (51 ) 25
Change in operating assets and liabilities:
Prepaid expenses and other current assets (533 ) (7,270 ) (1,929 )
Operating lease, right-of-use assets 5,418 3,184 —
Income taxes payable — — (1,388 )
Operating lease liabilities (5,879 ) (3,535 ) —
Net cash provided by (used in) operating activities (69,996 ) 7,088 71,418
Cash flows from investing activities
Purchase of property and equipment (750 ) (1,445 ) (5,417 )
Cash flows from financing activities
Proceeds from exercise of stock options and warrants 3,614 10,481 6,848
Payments for settlement of share-based awards (534 ) (1,498 ) (4,188 )
Payments of capital lease obligations — — (86 )
Net increase (decrease) in cash and cash equivalents (29,925 ) 35,901 (12,672 )
Supplemental disclosure of cash flow information:
Non-cash items:
The accompanying notes are an integral part of these consolidated financial statements.
F-9
ENANTA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
1. Nature of the Business
Enanta Pharmaceuticals, Inc. (the “Company”), incorporated in Delaware in 1995, is a biotechnology company that uses its robust, chemistry-driven approach and drug discovery capabilities to become a leader in the discovery and development of small molecule drugs for the treatment of viral infections and liver diseases. The Company discovered glecaprevir, the second of two protease inhibitors discovered and developed through its collaboration with AbbVie for the treatment of chronic hepatitis C virus, or HCV. Glecaprevir is co-formulated as part of AbbVie’s leading direct-acting antiviral, or DAA, combination treatment for HCV, which is marketed under the tradenames MAVYRET® (U.S.) and MAVIRET® (ex-U.S.) (glecaprevir/pibrentasvir). Royalties from the Company’s AbbVie collaboration and its existing financial resources provide funding to support the Company’s wholly-owned research and development programs, which are primarily focused on the following disease targets: respiratory syncytial virus (“RSV”), hepatitis B virus (“HBV”), SARS-CoV-2, and human metapneumovirus (“hMPV”).
The Company is subject to many of the risks common to companies in the biotechnology industry, including but not limited to, the uncertainties of research and development, competition from technological innovations of others, dependence on collaborative arrangements, protection of proprietary technology, dependence on key personnel and compliance with government regulation. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approvals, prior to commercialization. These efforts require significant amounts of capital, adequate personnel and infrastructure, and extensive compliance reporting capabilities.
COVID-19
In March 2020, the World Health Organization declared COVID-19 a global pandemic and countries worldwide implemented various measures to contain the spread of the virus. National, state and local governments in affected regions have implemented and may continue to implement safety precautions, including quarantines, border closures, increased border controls, travel restrictions, shelter-in-place orders and shutdowns, business closures, cancellations of public gatherings and other measures. The extent and severity of the impact on the Company’s business and clinical trials will be determined largely by the extent to which there are disruptions in the supply chains for its research and product candidates, delays in the conduct of ongoing and future clinical trials, or reductions in the number of patients accessing AbbVie’s HCV regimens, or any combination of those events. During the second half of fiscal 2020 and through 2021, AbbVie experienced a decline in HCV sales compared to prior years as a result of a decline in patients accessing AbbVie’s HCV regimens due to the COVID-19 pandemic. This resulted in a decline in the Company’s royalty revenue earned for the years ended September 30, 2021 and 2020.
The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19 and public health actions taken to contain it, as well as the cumulative economic impact of both of those factors.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include those of the Company and its subsidiary, Enanta Pharmaceuticals Security Corporation, after elimination of all intercompany accounts and transactions. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, management’s judgments with respect to its revenue arrangements; valuation of stock-based awards and the accrual of research and development expenses. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. The future developments of the COVID-19 pandemic also may directly or indirectly impact the Company’s business. The Company has made estimates of the impact of COVID-19 in the Company’s consolidated financial statements as of September 30, 2021. Actual results could differ from the Company’s estimates.
F-10
Cash Equivalents and Marketable Securities
The Company considers all short-term, highly liquid investments with original maturities of ninety days or less at acquisition date to be cash equivalents. Marketable securities with original maturities of greater than ninety days and remaining maturities of less than one year from the balance sheet date are classified as short-term marketable securities. Marketable securities with remaining maturities of greater than one year from the balance sheet date are classified as long-term marketable securities.
The Company classifies all of its marketable securities as available-for-sale. The Company continually evaluates the credit ratings of its investment portfolio and underlying securities. The Company invests in accordance with its investment policy and invests at the date of purchase in securities with a rating of A3/A- or higher according to Moody’s or S&P or A- by Fitch. The Company reports available-for-sale investments at fair value as of each balance sheet date and records any unrealized gains or losses as a component of stockholders’ equity. The cost of securities sold is determined on a specific identification basis, and realized gains and losses are included in other income (expense), net within the consolidated statements of operations. When the fair value is below the amortized cost of a marketable security, an estimate of expected credit losses is made. The credit-related impairment amount is recognized in the consolidated statements of operations. Credit losses are recognized through the use of an allowance for credit losses account in the consolidated balance sheet and subsequent improvements in expected credit losses are recognized as a reversal of an amount in the allowance account. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis, then the allowance for the credit loss is written-off and the excess of the amortized cost basis of the asset over its fair value is recorded in the consolidated statements of operations. There were no credit losses recorded during the years ended September 30, 2021, 2020, and 2019.
Restricted Cash
As of September 30, 2021 and 2020 the Company had an outstanding letter of credit collateralized by a money market account of $608 to the benefit of the landlord of one of the Company’s existing building leases. This amount was classified as long-term restricted cash as of September 30, 2021 and 2020.
Concentration of Credit Risk and of Significant Customers and Suppliers
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, marketable securities and accounts receivable. The Company has all cash and investment balances at one accredited financial institution, including cash in amounts that exceed federally insured limits. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
The Company has historically generated the majority of its revenue from its collaborative research and license agreements. As of September 30, 2021 and 2020, accounts receivable consisted of amounts due from the Company’s principal collaborator (see Note 7).
The Company is completely dependent on third-party manufacturers for product supply for preclinical and clinical research activities. The Company relies and expects to continue to rely exclusively on several manufacturers to supply the Company with its drug supply requirements related to these activities. These research programs would be adversely affected by a significant interruption in the supply from these third-party manufacturers.
Fair Value Measurements
Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. A fair value hierarchy is based on three levels of inputs which are used to measure fair value, of which the first two levels are considered observable and the last is considered unobservable:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs (other than Level 1 quoted prices) such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
F-11
The Company’s instruments that are carried at fair value are cash equivalents, marketable securities and the Series 1 nonconvertible preferred stock. The carrying values of accounts receivable, prepaid and other assets, accounts payable and accrued expenses approximate their fair value due to the short-term nature of these assets and liabilities.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation expense is recognized using the straight-line method over the following estimated useful lives:
Laboratory and office equipment 5 years
Leasehold improvements Shorter of life of lease or estimated useful life
Purchased software 3 years
Computer equipment 3 years
Furniture 7 years
Expenditures for repairs and maintenance of assets are charged to expense as incurred. Costs of major additions and betterments are capitalized and depreciated on a straight-line basis over their useful lives. Upon retirement or sale, the cost and related accumulated depreciation of assets disposed are removed from the accounts and any resulting gain or loss is included in income from operations in the consolidated statements of operations.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, primarily property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows. To date, the Company has not recorded any impairment losses on long-lived assets.
Revenue Recognition
The Company’s revenue has been generated primarily through collaborative research and license agreements. The terms of these agreements contain multiple deliverables, which may include (i) licenses, (ii) research and development activities, and (iii) participation in joint research and development steering committees. The terms of these agreements may include nonrefundable upfront license fees, payments for research and development activities, payments based upon the achievement of certain milestones, and royalty payments based on product sales derived from the collaboration.
The Company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The Company receives sales-based royalties for which the license is deemed to be the predominant item to which the royalties relate and thus the Company recognizes sales-based royalties as the underlying sales are earned.
Research and Development Costs
Included in research and development costs are wages, stock-based compensation and benefits of employees performing research and development, third-party license fees and other operational costs related to the Company’s research and development activities, including facility-related expenses and external costs of outside contractors engaged to conduct both preclinical and clinical studies and manufacture quantities of product for preclinical and clinical studies. The Company expenses the cost of each contract as the work is performed.
Upfront payments and milestone payments made for the licensing of technology are expensed as research and development in the period in which they are 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. The prepaid amounts are expensed as the related goods are delivered or the services are performed.
F-12
Research and Development and Pharmaceutical Drug Manufacturing Accruals
The Company has entered into various contracts with third parties to perform research and development and pharmaceutical drug manufacturing. This includes contracts with contract research organizations (“CROs”), clinical manufacturing organizations (“CMOs”), testing laboratories, research hospitals and not for profit organizations and other entities to support our research and development activities. When billing terms under these contracts do not coincide with the timing of when the work is performed, the Company is required to make estimates of outstanding obligations as of period end to those third parties. The accrual estimates are based on a number of factors, including the Company’s knowledge of the research and development programs and pharmaceutical drug manufacturing activities and associated timelines, invoicing to date, and the provisions in the contract. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ from our estimates.
Patent Costs
All patent-related costs incurred in connection with filing and prosecuting patent applications are recorded as general and administrative expenses as incurred.
Stock-Based Compensation
The Company measures all stock options and other stock-based awards granted to employees at fair value on the date of grant. The Company uses the Black-Scholes option-pricing model in the valuation of its stock options. The fair value of performance-based awards and restricted stock units is based on the fair value of the stock on the date of grant. The Company uses the Monte-Carlo model in order to calculate the fair value of the market-based awards. The fair value of options is recognized as stock-based compensation expense over the requisite service period, which is generally the vesting period of the respective award. The Company accounts for stock-based compensation expense related to forfeitures as the forfeitures occur. For awards with graded vesting, the straight-line method of expense recognition is applied to all awards with service-only based conditions. The Company records stock-based compensation expense related to performance-based awards when the performance-based targets are probable of being achieved. The Company classifies stock-based compensation expense in the consolidated statements of operations in the same manner in which the award recipient’s payroll costs are classified.
Income Taxes
The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or in the Company’s tax returns. Deferred taxes are determined based on the difference between the financial reporting and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in income tax expense.
The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes based upon the weight of available evidence, that it is more likely than not that all or a portion of deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. The realization of deferred tax assets is dependent upon the Company’s ability to generate future taxable income during the periods in which those temporary differences become deductible. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies.
Uncertain tax positions represent tax positions for which reserves have been established. The Company accounts for uncertainty in income taxes recognized in the consolidated financial statements by applying a two-step process to determine the amount to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more likely than not to be sustained, the tax position is then assessed to determine the amount of benefit to be recognized in the financial statements. The amount that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. Income tax expense includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties.
Net Income (Loss) per Share
Basic net income (loss) per common share is computed by dividing the net income by the weighted average number of shares of common stock outstanding for the period. Diluted net income per common share is computed by dividing net income by the weighted average number of common shares outstanding for the period, including potential dilutive common shares assuming the dilutive effect of outstanding stock options and unvested restricted stock units. Market-based awards are included in diluted net income per common share to the extent they would have vested if the period end date was the market criteria measurement date. In the event the Company reports a net loss for the period, the dilutive effect of options or awards is considered anti-dilutive and disclosed accordingly.
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Segment Data
The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions. The Company is a biotechnology company focused on discovering and developing small molecule drugs for the treatment of viral infections and liver diseases. Revenue is generated exclusively from transactions occurring with partners located in the United States and all assets are held in the United States.
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income (loss) as well as other changes in stockholders’ equity that result from transactions and economic events other than those with stockholders. The Company’s only element of other comprehensive income (loss) is unrealized gains and losses on available-for-sale marketable securities.
Going Concern
In August 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40) (“ASU 2014-15”). The Company adopted this standard as of September 30, 2017. The standard requires the Company to assess its ability to continue as a going concern one year beyond the date of filing and, in certain circumstances, provide additional footnote disclosures. Based on a detailed cash forecast incorporating current research and development activities and related spending plans, the Company believes that its current cash, cash equivalents and short-term and long-term marketable securities on hand at September 30, 2021 is sufficient to fund operations for at least the next twelve months beyond the date of issuance of these consolidated financial statements. The amount of capital available will depend on the Company’s management of its existing cash, cash equivalents and short-term and long-term marketable securities, as well as the level of future royalties the Company earns under its agreement with AbbVie. If the Company should require financing beyond these resources to fund its research and development efforts, it may not be able to obtain financing on acceptable terms, or at all.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326) (“ASU 2016-13”), which introduces a new methodology for accounting for credit losses on financial instruments, including available-for-sale debt securities. The guidance establishes a new “expected loss model” that requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. The Company adopted ASU 2016-13 as of October 1, 2020. For available-for-sale debt securities with unrealized losses, the Company measures credit losses in a manner similar to previous U.S. GAAP, except that losses will be recognized as allowances instead of reductions in the amortized cost of the debt securities. The adoption of ASU 2016-13 did not have a material impact on the consolidated financial statements.
The Company adopted ASU No. 2016-02, Leases (Topic 842), as of October 1, 2019, using the modified retrospective method under ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. The transition method allows entities to apply the transition requirements at the effective date rather than at the beginning of the earliest comparative period presented. The Company’s reporting for comparative periods is presented in accordance with ASC 840, Leases. Adoption of the new standard resulted in the recording of right of use (“ROU”) assets and lease liabilities of $7,151 and $8,622, respectively. The adoption of the standard did not have a material impact on the Company’s results of operations or cash flows. The Company elected to use the transition package of three practical expedients, which among other things, allowed the Company to carry forward the historical lease classification. The Company has elected, under Topic 842, the further practical expedient not to separate non-lease components from the lease components to which they relate and instead to combine them and account for them as a single lease component. The Company also elected the accounting policy election to keep leases with a term of twelve months or less off the balance sheet and to recognize payments for those leases on a straight-line basis over the lease term.
ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. At the inception of the arrangement, the Company determines if an arrangement is a lease based on an assessment of the terms and conditions of the contract. Operating lease ROU assets and lease liabilities are recognized at the commencement date, and thereafter, if modified, based on the present value of lease payments over the lease term. The lease term includes any renewal or early-termination options that the Company is reasonably assured to exercise. The present value of lease payments is determined by using the interest rate implicit in the lease, if that rate is readily determinable; otherwise, the Company uses its estimated secured incremental borrowing rate for that lease term. The underlying assets of the Company’s leases as of the adoption date consisted of office and laboratory space.
In March 2017, the FASB issued ASU No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”) which requires companies to amend the amortization period for premiums on debt securities with explicit call features to be the period through the earliest call date rather than through the contractual life of the debt instrument. This amendment aims to more closely align the recognition of interest income with the manner
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in which market participants price such instruments. The Company adopted the new standard on the effective date of October 1, 2019. The adoption of the standard did not have a material impact on the Company’s financial position and results of operations.
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740), which removes certain exceptions to the general principles in Topic 740 – Income Taxes and improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective for the Company beginning October 1, 2021 and interim periods within that year, with early adoption permitted. The Company does not expect the adoption of the standard to have a material impact on the Company's financial position or results of operations.
3. Fair Value of Financial Assets and Liabilities
The following tables present information about the Company’s financial assets and liabilities that were subject to fair value measurement on a recurring basis as of September 30, 2021 and 2020 and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value:
Fair Value Measurements at September 30, 2021 Using:
Level 1 Level 2 Level 3 Total
(in thousands)
Assets:
Cash equivalents:
Marketable securities:
Liabilities:
Series 1 nonconvertible preferred stock — — 1,506 1,506
Fair Value Measurements at September 30, 2020 Using:
Level 1 Level 2 Level 3 Total
(in thousands)
Assets:
Cash equivalents:
Marketable securities:
Liabilities:
Series 1 nonconvertible preferred stock — — 1,479 1,479
Cash equivalents at September 30, 2021 and 2020 consist of money market funds which are readily convertible to cash and with less than 90 days until maturity.
During the years ended September 30, 2021, 2020, and 2019, there were no transfers between Level 1, Level 2 and Level 3.
The fair value of Level 2 instruments classified as marketable securities were determined through third-party pricing services. The pricing services use many observable market inputs to determine value, including reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, and current spot rates.
The outstanding shares of Series 1 nonconvertible preferred stock as of September 30, 2021 and 2020 were measured at fair value. These outstanding shares were financial instruments that might have required a transfer of assets because of the liquidation features in the contract and were therefore recorded as liabilities and measured at fair value. The fair value of the outstanding shares were based on significant inputs not observable in the market, which represented a Level 3 measurement within the fair value hierarchy. The Company utilized a probability-weighted valuation model which takes into consideration various outcomes that may require the Company to transfer assets upon liquidation. Changes in the fair values of the Series 1 nonconvertible preferred stock are recognized in other income (expense), net in the consolidated statements of operations.
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The recurring Level 3 fair value measurements of the Company’s Series 1 nonconvertible preferred stock using probability-weighted discounted cash flow include the following significant unobservable inputs:
Range
September 30,
Probabilities of payout 0%-65% 0%-60%
The following table provides a rollforward of the aggregate fair value of the Company’s outstanding Series 1 nonconvertible preferred stock for which fair value is determined by Level 3 inputs:
Series 1 Nonconvertible Preferred Stock
(in thousands)
No change in fair value —
Decrease in fair value (149 )
Increase in fair value 27
4. Marketable Securities
As of September 30, 2021 and 2020, the fair value of available-for-sale marketable securities, by type of security, was as follows:
(in thousands)
(in thousands)
As of September 30, 2021 and 2020, marketable securities consisted of investments that mature within one year, with the exception of certain corporate bonds and U.S. Treasury notes, which have maturities between one and three years and an aggregate fair value of $108,416 and $32,634, respectively.
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5. Property and Equipment, Net
Property and equipment, net consisted of the following as of September 30, 2021 and 2020:
September 30,
(in thousands)
Construction in progress 20 —
Less: Accumulated depreciation and amortization (18,926 ) (15,674 )
Depreciation and amortization expense for property and equipment, including assets acquired under capital leases, was $3,334, $3,644 and $3,258 for the years ended September 30, 2021, 2020, and 2019, respectively.
6. Accrued Expenses and Other Current Liabilities and Other Long-Term Liabilities
Accrued expenses and other current liabilities and other long-term liabilities consisted of the following as of September 30, 2021 and 2020:
September 30,
Accrued expenses and other current liabilities: (in thousands)
Accrued research and development expenses $ 6,062 $ 5,407
Accrued payroll and related expenses 6,094 4,777
Accrued pharmaceutical drug manufacturing 8,402 2,885
Accrued professional fees 700 478
Other long-term liabilities:
Uncertain tax positions $ 558 $ 788
Asset retirement obligation — 290
7. Collaboration Agreements
AbbVie Collaboration
On November 27, 2006, the Company entered into a Collaborative Development and License Agreement (the “AbbVie Agreement”) with Abbott Laboratories to identify, develop and commercialize HCV NS3 and NS3/4A protease inhibitor compounds, including paritaprevir and glecaprevir. The agreement was assigned by Abbott to AbbVie Inc. on January 1, 2013 in connection with Abbott’s transfer of its research-based pharmaceuticals business to AbbVie.
Under the terms of the AbbVie Agreement, as amended, AbbVie paid the Company upfront license payments and full-time equivalent (“FTE”) reimbursements to fund research activities. The Company is also eligible to receive milestone payments for the successful development by AbbVie of one or more HCV compounds, as well as annually tiered, per-product royalties on the portion of AbbVie’s net sales of its HCV treatment regimens allocated to the protease inhibitor product.
The Company determined that the deliverables under the AbbVie Agreement included (i) the non-exclusive, royalty-free, worldwide research license and the exclusive, royalty-bearing development and commercialization license, (ii) the research services, and (iii) a commitment to participate on a steering committee, all of which were to be delivered over a three-year period. The Company concluded that the license did not have standalone value as it was dependent, in part, upon the Company’s continuing involvement in the HCV protease inhibitor research and its involvement in the joint steering committee. Additionally, the undelivered items, including the Company’s participation in the joint steering committee, which was considered participatory due to its decision making
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responsibilities, and the research services, did not have vendor-specific objective evidence (“VSOE”) or vendor objective evidence (“VOE”) of fair value. Therefore, the license, the research services, and the joint steering committee participation were treated as a single unit of accounting. Accordingly, all amounts received were deferred, and revenue was recognized using the proportional performance model over the period during which the Company performed research services in connection with the AbbVie Agreement, as amended.
Subsequent to the research and evaluation period, which ended in June 2011, all decisions related to the development, commercialization and marketing have been made by AbbVie. The Company has the right to continue to attend the joint steering committee meetings to monitor the development and marketing plans; however, the Company has no decision-making rights. As such, the joint steering committee commitment became protective in nature as of June 16, 2011.
From commencement of the collaboration through September 30, 2021 the Company has received an upfront license payment, research funding, milestone payments, and preferred stock financing totaling $396,000 under the AbbVie agreement. Since the Company completed all its performance obligations under the AbbVie Agreement by the end of fiscal 2011, any milestone payments earned since then have been recognized as revenue when the associated milestone was achieved by AbbVie.
The Company is also receiving annually tiered royalties per Company protease product ranging from ten percent up to twenty percent, or on a blended basis from the low double digits up to the high teens, on the portion of AbbVie’s calendar year net sales of each HCV regimen that is allocated to the protease inhibitor product in the regimen. Beginning with each January 1, the cumulative net sales of a given royalty-bearing protease inhibitor product start at zero for purposes of calculating the tiered royalties on a product-by-product basis. The following table details the royalty tiers associated with cumulative calendar year net sales allocated to each royalty-bearing product as provided in the AbbVie Agreement:
Calendar Year Net Sales Royalty Tier
(in thousands) (%)
Royalties owed to the Company under the agreement can be reduced by AbbVie in certain circumstances, including (i) if AbbVie exercises its right to license or otherwise acquire rights to intellectual property controlled by a third party where a product could not be legally developed or commercialized in a country without the third-party intellectual property right, (ii) where a product developed under the collaboration agreement is sold in a country and not covered by a valid patent claim in such country, and (iii) where sales of a generic product are equal to at least a specified percentage of AbbVie’s market share of its product in a country.
AbbVie’s obligation to pay royalties on a product developed under the agreement expires on a country-by-country basis upon the later of (i) the date of expiration of the last of the licensed patents with a valid claim covering the product in the applicable country, or (ii) ten years after the first commercial sale of the product in the applicable country.
Subject to certain exceptions, a party’s rights and obligations under the agreement continue until (i) such time as AbbVie is no longer developing a product candidate or (ii) if, as of the time AbbVie is no longer developing any product candidates, AbbVie is commercializing any other protease inhibitor product, such time as all royalty terms for all covered products have ended. Accordingly, the final expiration date of the agreement is currently indeterminable.
Either party may terminate the agreement for cause in the event of a material breach, subject to prior notice and the opportunity to cure, or in the event of the other party’s bankruptcy. Additionally, AbbVie may terminate the agreement for any reason upon specified prior notice.
If the Company terminates the agreement for cause or AbbVie terminates without cause, any licenses and other rights granted to AbbVie will terminate and AbbVie will be deemed to have granted the Company (i) a non-exclusive, perpetual, fully-paid, worldwide, royalty-free license, with the right to sublicense, under AbbVie’s intellectual property used in any product candidate, and (ii) an exclusive (even as to AbbVie), perpetual, fully-paid, worldwide, royalty-free license, with the right to sublicense, under AbbVie’s interest in any joint intellectual property rights to develop product candidates resulting from covered compounds and to commercialize any products derived from such compounds. Upon the Company’s request, AbbVie will also transfer to the Company all right, title and interest in any related product trademarks, regulatory filings and clinical trials.
If AbbVie terminates the agreement for the Company’s uncured breach, the milestone and royalty payments payable by AbbVie may be reduced, the licenses granted to AbbVie will remain in place, the Company will be deemed to have granted AbbVie an exclusive license under the Company’s interest in joint intellectual property, AbbVie will continue to have the right to commercialize any covered products, and all rights and licenses granted to the Company by AbbVie will terminate.
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8. Stockholders’ Equity
The Company is authorized to issue 100,000 shares of common stock at a par value of $0.01 per share. Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are entitled to receive such dividends as may be declared by the board of directors, if any.
The Company also is authorized to issue 5,000 shares of preferred stock at a par value of $0.01 per share, of which 2,000 shares are designated as Series 1 Nonconvertible preferred stock and 3,000 shares are undesignated and unissued.
9. Series 1 Nonconvertible Preferred Stock and Warrants
The Company’s Certificate of Incorporation authorizes the issuance of up to 2,000 shares of Series 1 nonconvertible preferred stock at a par value of $0.01 per share. Holders of Series 1 nonconvertible preferred stock are not entitled to receive dividends. In the event of any liquidation, deemed liquidation, dissolution or winding up of the Company, the Series 1 nonconvertible preferred stockholders are entitled to receive in preference to all other stockholders, an amount equal to $1.00 per share, adjusted for any stock dividends, stock splits or reclassifications. Series 1 nonconvertible preferred stockholders will not be entitled to vote unless required by the Company pursuant to the laws of the State of Delaware. The Company may redeem the Series 1 nonconvertible preferred stock with the approval of the holders of a majority of the outstanding shares of Series 1 nonconvertible preferred stock at a redemption price of $1.00 per share. The Company must redeem the stock within 60 days of such election. Shares that are redeemed will be retired or canceled and not reissued by the Company. As these shares qualify as a derivative, they are classified as a liability on the Company’s consolidated balance sheet.
In October and November 2010, a total of 2,000 warrants to purchase Series 1 nonconvertible preferred stock were issued. The warrants had an expiration date of October 4, 2017 and any warrants exercised by that date were converted into Series 1 nonconvertible preferred stock. A total of 1,930 shares of Series 1 nonconvertible preferred stock were outstanding as of September 30, 2021 and 2020. For the years ended September 30, 2021, 2020, and 2019, the remeasurement of the Series 1 nonconvertible preferred stock resulted in income (expense) of $(27), $149, and $0, respectively, which was recorded in other income (expense), net in the consolidated statements of operations. The total fair value of the Series 1 nonconvertible preferred stock was $1,506 and $1,479 as of September 30, 2021 and 2020, respectively.
10. Stock-Based Awards
The Company’s 2019 Equity Incentive Plan (the “2019 Plan”) permits the Company to sell or issue awards of common stock or restricted common stock or to grant awards of incentive stock options or nonqualified stock options for the purchase of common stock, restricted stock units, performance units, stock appreciation rights or other cash incentive awards, to employees, members of the board of directors and consultants of the Company. The number of shares of common stock that may be issued under the 2019 Plan is subject to increase by the number of shares forfeited under any options forfeited and not exercised under the 2019 Plan or any predecessor plans such as the 2012 Equity Incentive Plan or the 1995 Equity Incentive Plan. As of September 30, 2021, 1,093 shares remained available for future awards under the 2019 Plan.
The 2019 Plan replaces and is the successor to the 2012 Equity Incentive Plan (the “2012 Plan”) and the 1995 Equity Incentive Plan (the “1995 Plan”). The 2012 and 1995 Plans provided for the Company to sell or issue awards of common stock or restricted common stock, or to grant awards of incentive stock options or nonqualified stock options for the purchase of common stock, to employees, members of the board of directors and consultants of the Company. Sales, issuances or grants of shares entitle the holder to purchase common stock from the Company, for a specified exercise price, during a period specified by the applicable equity award agreement. Upon the closing of the Company’s initial public offering, all remaining shares reserved for issuance under the 1995 Plan were transferred to the 2012 Plan and no further awards were made under the 1995 Plan. Upon the approval of the 2019 Plan by the Company’s shareholders in February 2019, all remaining shares reserved for issuance under the 2012 Plan were transferred to the 2019 Plan and no further awards have been made under the 2012 Plan.
Under the Company’s Employee Stock Purchase Plan (“ESPP”) a total of 186 shares of common stock are reserved for issuance. As of September 30, 2021, the Company had not commenced any offering under the ESPP and no ESPP shares have been issued.
The Company applies the fair value recognition provisions for all stock-based awards granted or modified. In the case of service-based awards, the compensation cost is recorded over the requisite service period of the award on the straight-line method based on the grant-date fair value. The requisite service period for service-based option awards is generally four years. Options granted under the 2019 Plan to employees generally vest over four years and to non-employee directors over one year, and expire after ten years.
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Stock Option Valuation
The fair value of each stock option award is determined on the date of grant using the Black-Scholes option-pricing model. The volatility has been determined using the Company’s traded stock price following our March 2013 IPO to estimate expected volatility. The expected term of the Company’s options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. The expected dividend yield is zero on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future. As required under our equity plans, the exercise price for awards granted is not to be less than the fair value of common shares as estimated by the Company as of the date of grant. The relevant data used to determine the value of the stock option awards are as follows, presented on a weighted average basis:
Years Ended September 30,
Expected volatility 52 % 53 % 55 %
Expected dividends 0 % 0 % 0 %
Weighted average grant date fair value $ 21.76 $ 30.47 $ 44.66
The following table summarizes stock option activity, including aggregate intrinsic value for the year ended September 30, 2021:
(in thousands) (in thousands)
The aggregate intrinsic value of options is calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock. The following tables summarize additional exercise and grant date information:
Years Ended September 30,
(in thousands)
Aggregate intrinsic value of stock options exercised $ 2,704 $ 7,850 $ 13,855
Proceeds to Company from stock options exercised $ 3,614 $ 10,481 $ 6,848
Market and Performance-Based Stock Unit Awards
The Company awards both performance share units, or PSUs, and relative total stockholder return units, or rTSRUs, to its executive officers.
The PSUs vest and result in issuance, or settlement, of common shares for each recipient, based upon the recipient’s continued employment with the Company through the settlement date of the award and the Company’s achievement of specified research and development milestones. The requisite service period of the PSUs is generally 2 years. The fair value of PSUs is based on the fair value of the stock on the date of grant which is determined to be the closing price of our common stock. The fair value of PSUs is recorded in the financial statements when it is probable that the specified research and development milestone is achieved.
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The rTSRUs vest and result in the issuance of common stock based upon the recipient’s continuing employment with the Company through the settlement date of the award and the relative ranking of the total stockholder return, or TSR, of the Company’s common stock in relation to the TSR of the component companies in the NASDAQ Biotech Index over two specified periods that are two years apart, based on a comparison of average closing stock prices in specified periods noted in the award agreement. The number of market-based rTSRUs awarded represents the target number of shares of common stock that may be earned; however, the actual number of shares that may be earned ranges from 0% to 150% of the target number, depending on the award agreement and the year of the award. The Company used a Monte Carlo model to estimate the grant-date fair value of the rTSRUs. Assumptions and estimates utilized in the calculation of the fair value of the rTSRUs include the risk-free interest rate, dividend yield, expected volatility based on the historical volatility of publicly traded peer companies and the remaining performance period of the award. The table below sets forth the weighted average grant date fair value assumptions used to value the rTSRUs:
Years Ended September 30,
Dividend yield 0 % 0 % 0 %
Expected volatility 74 % 68 % 62 %
Remaining performance period (years) 1.97 2.03 2.03
The following table summarizes PSU and rTSRU activity (at target) for the year ended September 30, 2021:
PSUs rTSRUs
(in thousands, except per share data)
Vested — — — —
A total of 80% of target PSUs and 200% of target rTSRUs granted in January 2017 vested during the year ended September 30, 2019, resulting in the issuance of an aggregate of 125 common shares, net of share withholding for income taxes. A total of 15% of target PSUs and 90% of target rTSRUs granted in March 2018 vested during the year ended September 30, 2020, resulting in the issuance of 23 common shares, net of share withholding for income taxes. The total fair value of PSUs and rTSRUs vested during the years ended September 30, 2021, 2020, and 2019 were $0, $1,227 and $11,074, respectively.
Restricted Stock Units
In November 2016, the Company awarded restricted stock units to its employees, which vest as to 50% of the units on the third anniversary of the award and 50% on the fourth anniversary of the award, provided the employee remains employed with the Company at the time of vesting. The fair value of these awards was determined based on the fair value of the stock on the date of grant which is determined to be the closing price of the common stock on November 15, 2016 and is recognized as stock-based compensation expense over the requisite service period. The following table summarizes the restricted stock unit activity for the year to date period ending September 30, 2021:
RestrictedStock Units Weighted Average Grant Date Fair Value perShare
(in thousands, except per share data)
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The total fair value of restricted stock units vested during the years ended September 30, 2021, 2020, and 2019 were $1,897, $3,149 and $0, respectively.
Stock-Based Compensation Expense
The Company recorded the following stock-based compensation expense for the years ended September 30, 2021, 2020, and 2019:
Years Ended September 30,
(in thousands)
Years Ended September 30,
(in thousands)
As of September 30, 2021, the Company had an aggregate of $42,222 of unrecognized stock-based compensation cost, which is expected to be recognized over a weighted average period of 2.3 years.
11. Net Income (Loss) Per Share
Basic and diluted net income (loss) per common share was calculated as follows for the years ended September 30, 2021, 2020, and 2019:
Years Ended September 30,