Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included in Item 8 “Financial Statements and Supplementary Data” and included elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements based upon our current beliefs, estimates, plans and expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those contained in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this Annual Report.
Overview
We are a biopharmaceutical company focused on the identification, acquisition, development and commercialization of novel therapies for debilitating rare and orphan diseases. We focus on diseases for which the unmet medical need is high and the biology for treatment is clear.
Our lead product LIVMARLI (maralixibat) oral solution (“Livmarli”), a novel, oral, minimally-absorbed agent designed to selectively inhibit ASBT, also known as the IBAT, is approved for the treatment of cholestatic pruritus in patients with ALGS 1 year of age and older in the United States. We market and commercialize Livmarli in the United States through our specialized and focused commercial team. We have also filed for approval in Europe of Livmarli for the treatment of cholestatic liver disease in patients with ALGS and plan to commercialize Livmarli in Western Europe with our international team based in Switzerland. We have entered license and distribution agreements with several rare disease companies for the commercialization of Livmarli in additional countries. We are also developing Livmarli for PFIC and BA. Livmarli has been granted breakthrough designation for ALGS and PFIC type 2.
We are advancing our second product candidate, volixibat, a novel, oral, minimally-absorbed agent designed to inhibit IBAT, for the treatment of adult patients with cholestatic liver diseases. We are developing volixibat for the treatment of ICP, PSC and PBC. Volixibat has been studied in over 400 adults for up to 48 weeks. Clinical trials of volixibat have shown significant activity on ASBT and bile acid markers such as 7αC4, fecal bile acids and cholesterol, demonstrating potent biological activity.
We were incorporated in May 2018 and commenced operations in November 2018. To date, we have focused primarily on acquiring and in-licensing our product candidates, organizing and staffing our company, business planning, raising capital, advancing our product candidates through clinical development, preparing for commercialization of our product candidates, commercializing Livmarli, and conducting business development activities relating to, among other things, portfolio expansion through collaborations.
We have a limited operating history and incurred significant operating losses since our inception and expect to continue to incur significant operating losses for the foreseeable future. We have only one product approved for commercial sale and have not generated significant revenues from product sales as of December 31, 2021. Since inception, we have funded our operations to date primarily through debt, equity and revenue interest financings.
Financing Transactions
In January 2020, we completed a follow-on public offering of our common stock pursuant to which we sold an aggregate of 2,400,000 shares of common stock at a public offering price of $20.00 per share, resulting in net proceeds of $44.7 million after deducting underwriting discounts, commissions and offering expenses payable by us.
In August 2020, the Securities and Exchange Commission (“SEC”) declared effective a registration statement on Form S-3 (“Shelf Registration”) covering the sale of up to $300.0 million of our securities. Also, in August 2020, we entered into a sales agreement (“Sales Agreement”) with SVB Leerink LLC (“SVB Leerink”) pursuant to which we may elect to issue and sell, from time to time, shares of common stock having an aggregate offering price of up to $75.0 million under the Shelf Registration through SVB Leerink acting as the sales agent and/or principal. During the year ended December 31, 2020, we sold 305,969 shares of common stock in at-the-market offerings pursuant to the Sales Agreement at a weighted-average price of $21.55 per share, resulting in gross proceeds of $6.6 million. The net proceeds after deducting sales commissions to SVB Leerink and other issuance expenses were
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approximately $6.3 million. The remaining capacity under the Sales Agreement is approximately $68.4 million as of December 31, 2021. In January and February 2022, we sold 992,389 shares of common stock in at-the-market offerings pursuant to the Sales Agreement at a weighted-average price of $18.04 per share, resulting in net proceeds of $17.4 million.
In December 2020, we completed an underwritten public offering of our common stock pursuant to the Shelf Registration. We sold 3,750,000 shares of common stock at a price of $20.00 per share, resulting in net proceeds of $70.0 million after deducting underwriting discounts, commissions and offering expenses. In addition, we granted the underwriters an option, exercisable for 30 days, to purchase up to 562,500 additional shares of our common stock at the public offering price, less the underwriting discounts and commissions. In January 2021, the underwriters exercised their option for 375,654 shares of our common stock, resulting in net proceeds of $7.1 million after deducting underwriting discounts.
In December 2020, we entered into a Revenue Interest Purchase Agreement, as amended in September 2021 (“RIPA”), with Mulholland SA LLC, an affiliate of Oberland Capital LLC (“Oberland”), as agent for purchasers party thereto (the “Purchasers”), and the Purchasers named therein, pursuant to which the Purchasers paid us $50.0 million on closing, less certain issuance costs. In April 2021, upon acceptance for filing by the FDA of our NDA for the treatment of cholestatic pruritus in patients with ALGS, we received an additional $65.0 million, less certain transaction costs, from the Purchasers. We may also be entitled to up to an additional $50.0 million at the option of the Purchasers to finance in-license or other acquisitions (“Purchaser Payments”). We were entitled to receive an additional $35.0 million upon FDA approval of Livmarli, which we elected to forgo. As consideration for the Purchaser Payments, the Purchasers have the right to receive the Revenue Interests from us based on the net sales of Livmarli, which will be tiered payments ranging from 2.00% to 9.75% of our net sales in the covered territory. The initial Revenue Interest rate of 9.75% will decrease upon certain revenue achievements. The Purchasers’ rights to receive such payments shall terminate on the date on which the Purchasers have received payments totaling 195.0% of the total payments made by the Purchasers to us, exclusive of transaction expenses, unless the RIPA is terminated earlier.
Concurrently with our entry into the RIPA, we entered into a Common Stock Purchase Agreement (the “Stock Purchase Agreement”) with TPC Investments II LP, TPC Investments Solutions LP and TPC Investments Solutions Co-Invest LP, each of which is an affiliate of Oberland. Pursuant to the Stock Purchase Agreement, we issued an aggregate of 509,164 shares of our common stock at a price per share of $19.64, resulting in net proceeds to us of $10.0 million.
In November 2021, we entered into a definitive agreement to sell the PRV that we received from the FDA in connection with the approval of Livmarli for the treatment of cholestatic pruritus in patients with ALGS one year of age and older, for cash proceeds of $110.0 million. In December 2021, we completed our sale of the PRV and received net proceeds of $108.0 million, after deducting commission costs.
Financial Overview
Our net loss was $84.0 million and $103.3 million for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, we had an accumulated deficit of $257.2 million and cash, cash equivalents, restricted cash equivalents and investments of $261.5 million, of which $100.0 million is restricted from use under terms of the RIPA.
We expect our expenses and operating losses will increase substantially as we conduct our ongoing and planned clinical trials, continue our research and development activities, continue commercial activities for Livmarli, and seek regulatory approvals for our product candidates, as well as hire additional personnel and protect our intellectual property. In addition, as our product candidates progress through development and toward commercialization, we will need to make milestone payments to the licensors and other third parties from whom we have in-licensed or acquired our product candidates. We have also entered into collaboration arrangements with other companies whereby we are entitled to receive upfront and license fees, research and development funding, development and sales-based milestones, and tiered royalties based on sales of commercialized products. Arrangements that include upfront payments may require deferral of revenue recognition to a future period until we perform obligations under these arrangements. The event-based milestone and other contingent payments represent
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variable consideration, and we use the most likely amount method or expected value method to estimate this variable consideration, depending on the nature of the contingency and the variable payments. Given the high degree of uncertainty around the occurrence of these events, we generally determine the milestone and other contingent amounts to be fully constrained until the uncertainty associated with these payments is resolved. We will recognize revenue from sales-based royalty payments when or as the sales occur. We will re-evaluate the transaction price in each reporting period as uncertain events are resolved and other changes in circumstances occur. The timing of these activities may fluctuate significantly. As a result, our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending in particular on the timing of our clinical trials and non-clinical studies and our expenditures on other research and development activities.
We expect our revenue from product sales, net will increase in the future from the launch of Livmarli. However, the timing and amount of product sales, net are unknown. Accordingly, until such time as we can generate substantial product revenues to support our cost structure and sustain operating activities, if ever, we expect to finance our cash needs through equity offerings, debt financings or other capital sources, collaborations, licenses and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. If we are unable to raise additional capital when needed, we could be forced to delay, limit, reduce or terminate the development of one or more of our product candidates or future commercialization efforts or grant rights to develop and market our product candidates even if we would otherwise prefer to develop and market such product candidates ourselves.
Prior to the regulatory approval of Livmarli, the manufacturing and related costs were expensed as research and development as any future economic benefit was not considered probable; accordingly, these costs were not capitalized and as a result gross margins resulting from product sales, net will initially be higher until we deplete inventories that we had expensed prior to receiving approval.
COVID-19
The coronavirus (including its variants, “COVID-19”) pandemic has had a significant economic impact across the global marketplace presenting challenges to maintaining business continuity and dramatically changing the ways in which we live and interact with others. Although the initial impact of the pandemic has subsided, we are uncertain as to how more transmissible variants may impact our business. We are working diligently to ensure the advancement of all of our clinical development programs in the safest manner possible. While we are unable to reliably estimate the duration or extent of any potential business disruption or financial impact during this time, we remain committed to (i) prioritizing the safety, health and well-being of patients, their caregivers, healthcare providers and our employees; (ii) ensuring patients are well supported and have continued uninterrupted access to our product candidates, for which we currently do not expect any supply disruption; and (iii) advancing our clinical trials. Examples include a “Work from Home Policy” for our employees and access to home health care to assist families with safer participation in our trials.
Although we did not see a significant financial impact to our business operations as a result of COVID-19 for the year ended December 31, 2021, there may be potential impacts to our business in the future that are highly uncertain and difficult to predict such as temporary closures of our offices or those of our third-party manufacturers or suppliers, disruptions or restrictions on our employees’ ability to travel, disruptions to or delays in ongoing non-clinical trials, clinical trials, third-party manufacturing supply and other operations, inability for patients to see their healthcare providers and access our products, the potential diversion of healthcare resources away from the conduct of clinical trials to focus on pandemic concerns, interruptions or delays in the operations of the FDA or other regulatory authorities, and our ability to raise capital and conduct business development activities. The ultimate impact of the COVID-19 pandemic, including any lasting effects on our revenue and the way we conduct our business, is highly uncertain and subject to continued change. We recognize that this pandemic may continue to present unique challenges for us throughout 2022.
We continue to believe that existing cash equivalents and investments, excluding restricted cash equivalents, and existing sources of and access to financing are adequate to satisfy our needs for working capital, capital expenditures, debt service requirements and other business development initiatives that we plan to strategically
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pursue in the 12 months from the issuance of the consolidated financial statements included in this Annual Report. However, should the COVID-19 pandemic and any associated recession or depression continue for a prolonged period, our results of operations, financial condition, liquidity and cash flows could be materially impacted as a result of a lower likelihood of effectively and efficiently developing new medicines and successfully commercializing our products.
License Agreements
Assignment and License Agreement with Shire (Takeda)
In November 2018, we entered into the Shire License Agreement with Shire, which was subsequently acquired by Takeda Pharmaceutical Company Limited (“Takeda”), in which we were granted an exclusive, royalty bearing worldwide license to develop and commercialize our two product candidates, Livmarli and volixibat. As part of the Shire License Agreement, we were assigned license agreements held by Shire with Satiogen Pharmaceuticals, Inc. (“Satiogen” and altogether, the “Satiogen License”), Pfizer Inc., and Sanofi, collectively the Assigned License Agreements (“Assigned License Agreements”). In partial consideration for the rights granted to us under the Shire License Agreement, we made an upfront payment to Shire of $7.5 million and issued Shire 1,859,151 shares of our common stock with an estimated fair value of $7.0 million.
Under the Shire License Agreement and Assigned License Agreements, to date, we have paid aggregate development and regulatory milestones of $51.0 million related to our Livmarli and volixibat programs.
Licensing Agreement with Takeda
In September 2021, we entered into an exclusive licensing agreement with Takeda for the development and commercialization of Livmarli in Japan for ALGS, PFIC and BA. Under the terms of the agreement, Takeda will be responsible for regulatory approval and commercialization of Livmarli in Japan. Takeda will also be responsible for development, including conducting clinical studies in cholestatic indications. We are responsible for commercial supply to Takeda. In exchange, we are eligible to receive a percentage of Takeda’s annualized net sales, which range from high-double digits declining to mid-double digits over the first four years from commercial launch and thereafter remains at mid-double digits.
Components of Results of Operations
Revenue
Product Sales, Net
To date, we have not generated significant revenue from product sales. Our approved product, Livmarli, was approved by the FDA in September 2021 for the treatment of cholestatic pruritus in patients with ALGS one year of age and older. We recorded our first product sales of Livmarli in October 2021. We expect our product sales of Livmarli will increase as a result of our continued commercial activities. However, as it is early in our product launch, we do not yet have a trend and while we believe revenue will increase as we further engage with health care providers in the United States and globally, we cannot predict revenues with any certainty.
Our revenue from product sales, net further depends on our prescription mix of U.S. commercial payors, Medicaid and free drugs under our patient assistance program. Our experience to date in our recent product launch is not sufficient to allow us to reliably estimate the payor mix and resulting gross to net adjustments.
License Revenue
Under the exclusive licensing agreements with CANbridge and GC Pharma, we have recognized as revenue the upfront nonrefundable payments related to the licenses granted upon satisfaction of certain performance obligations. Pursuant to the agreements, we are eligible to receive future milestone payments. These milestone payments were fully constrained and not recognized currently in revenue due to the degree of uncertainty in achieving the milestones associated with these payments. We are also eligible to receive royalty payments related to the agreements, which will be recognized as the underlying product sales occur.
Cost of Product Sales
Cost of product sales consist of third party manufacturing costs, personnel, facility and other costs of manufacturing commercial products, transportation and freight, amortization of capitalized intangibles associated
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with contractual milestone payments paid to licensors upon certain regulatory approval and sales-based events and royalty payments payable on net sales of Livmarli under licensing agreements. Cost of product sales may also include period costs related to certain manufacturing services and inventory adjustment charges. Prior to receiving approval from the FDA in September 2021 to market and sell Livmarli in the United States, we expensed all costs incurred related to the manufacture of Livmarli as research and development expense because of the inherent risks associated with the development of a drug candidate, the uncertainty about the regulatory approval process and the lack of history as a company of regulatory approval of drug candidates. Our inventory of Livmarli produced prior to FDA approval is available for commercial or clinical use.
Operating Expenses
Research and Development Expenses
Research and development expenses primarily relate to clinical development and manufacturing activities of our product candidates. Our research and development expenses include, among other things:
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salaries and related expenses for employee personnel, including benefits, travel and expenses related to stock-based compensation granted to personnel in development functions;
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external expenses paid to clinical trial sites, contract research organizations and consultants that conduct our clinical trials;
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expenses related to drug formulation development and the production of clinical trial supplies, including fees paid to contract manufacturers;
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licensing milestone payments related to development or regulatory events;
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research and development funding for collaboration arrangements;
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expenses related to non-clinical studies;
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expenses related to compliance with drug development regulatory requirements; and
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other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of equipment, and other supplies.
We expense research and development costs as incurred. Nonrefundable 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. Upfront payments, research and development funding and milestone payments made to third parties in connection with licenses and research and development collaborations are expensed as incurred.
We anticipate that our research and development expenses will increase in the future as we continue the clinical and development activity for further indications of Livmarli, as well as expand the clinical and development activity associated with our volixibat pipeline. These increases will likely include increased costs related to hiring of additional development personnel and fees to outside clinical development organizations that support clinical trial activity.
Selling, General and Administrative Expense
Selling expenses consist of professional fees related to preparation and commercialization of Livmarli, finished goods warehousing costs, as well as salaries and related employee benefits for commercial employees, including stock-based compensation.
General and administrative expenses consist primarily of salaries and employee-related costs, including stock-based compensation, for personnel in executive, finance and other administrative functions. Other significant costs include facility-related costs, legal fees relating to intellectual property and corporate matters, professional fees for accounting and consulting services and insurance costs.
We anticipate that our selling, general and administrative expenses will increase in the future to support our continued commercialization efforts of Livmarli in the United States and internationally as well as increased costs of operating as a global commercial stage biopharmaceutical public company. These increases will likely include
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increased costs related to hiring of additional personnel and fees to outside consultants to support further marketing, legal and accounting activities.
Interest Income
Interest income consists of interest earned on our cash equivalents and investments.
Interest Expense
Interest expense for the year ended December 31, 2021 was related to the RIPA. Costs during the year consist primarily of costs associated with our liability and non-cash interest costs associated with the amortization of the related debt discount and deferred issuance costs. We impute interest expense associated with this liability using the effective interest rate method which is calculated based on the rate that would enable the debt to be repaid in full over the anticipated life of the arrangement.
Change in Fair Value of Derivative Liability
Change in fair value of derivative liability consists of the gain or loss from remeasurement of the compound derivative liability related to the revenue interest liability during the period.
Gain from Sale of Priority Review Voucher, Net
Gain from the sale of priority review voucher represents the sale of the PRV that was granted by the FDA in September 2021 with the approval of Livmarli for the treatment of cholestatic pruritus in patients with ALGS one year of age and older.
Other Income (Expense), Net
Other income (expense), net consists of transactional currency exchange gain or loss.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“GAAP”) and our discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported, including the amount of assets, liabilities, expenses and the disclosure of contingent assets and liabilities. Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. Management bases its estimates on historical experience, known trends and events, and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ materially from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report, we believe the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations.
Product Sales, Net
Revenues from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with our customers, including amounts from payors and other third parties on behalf of our customers. The transaction price, which may include fixed or variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the product sales price only to the extent that it is probable that a significant reversal of the amount of the cumulative revenue recognized will not occur in a future period. Estimates are reviewed and updated quarterly as additional information becomes known. Actual amounts may ultimately differ from our estimates. If actual results vary, we adjust these estimates, which could have an effect on earnings in the period of adjustment.
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Government Rebates.We are obligated to pay rebates for mandated discounts under the Medicaid Drug Rebate Program. Our rebate calculations may require estimates, including estimates of customer mix, to determine which sales will be subject to rebates and the amount of such rebates. We update estimates and assumptions on a quarterly basis and record any necessary adjustments to revenue in the period identified. Estimated rebates are recorded as a reduction of revenue in the period the related sale is recognized. To date, actual government rebates have not differed materially from our estimates.
Revenue Interest Liability, Net
We impute interest expense associated with this liability using the effective interest rate method. The effective interest rate is calculated based on the rate that would enable the debt to be repaid in full over the anticipated life of the arrangement. The effective interest rate on the liability may vary during the term of the agreement depending on a number of factors, including the level of actual and forecasted product sales, net. We evaluate the interest rate quarterly based on actual product sales, net and on our current product sales, net forecasts utilizing the prospective method. A significant increase or decrease in product sales, net will materially impact the revenue interest liability, interest expense and the time period for repayment.
At December 31, 2021, the revenue interest liability is calculated using our current estimate of global forecasted net sales of Livmarli and impacted by a debt discount comprising the estimated value of a bifurcated derivative liability and issuance costs incurred.
The fair value of the derivative liability is valued using a “with-and-without” method. The “with-and-without” methodology involves valuing the whole instrument on an as-is basis and then valuing the instrument without the individual embedded derivative. The difference between the entire instrument with the embedded derivative compared to the instrument without the embedded derivative was the fair value of the derivative liability. The estimated probability and timing of underlying events triggering the exercisability of the derivative liability bifurcated from within the RIPA, forecasted cash flows and the discount rate are significant unobservable inputs used to determine the estimated fair value of the entire instrument with the embedded derivative.
Accrued Research and Development Expenses
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued expenses as of each balance sheet date. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. We accrue and expense clinical trial activities performed by third parties based upon estimates of the proportion of work completed over the life of the individual study and patient enrollment rates in accordance with agreements established with clinical research organizations, clinical trial sites and other vendors associated with the clinical trials. We determine the estimates by reviewing contracts, vendor agreements and purchase orders and through discussions with internal clinical personnel and external service providers as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services.
We make estimates of accrued expenses as of each balance sheet date based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments, if necessary. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the accrual accordingly. Nonrefundable advance payments for goods and services, including fees for process development or manufacturing and distribution of clinical supplies that will be used in future research and development activities, are deferred and recognized as expense in the period that the related goods are consumed or services are performed.
Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred.
Uncertain Tax Positions
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We are subject to income taxes in the United States and certain foreign jurisdictions. The evaluation of uncertain tax positions involves significant judgment in the interpretation and application of GAAP and complex tax laws. Although management believes our reserves are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our reserves. Reserves are adjusted considering changing facts and circumstances, such as the closing of a tax examination or the refinement of an estimate. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on our financial condition and operating results.
Legal and Other Contingencies
We are subject to various legal proceedings and claims that arise in the ordinary course of business, the outcomes of which are inherently uncertain. We record a liability when it is probable that a loss has been incurred and the amount can be reasonably estimated, the determination of which requires significant judgment. Resolution of legal matters in a manner inconsistent with management’s expectations could have a material impact on our financial condition and operating results.
Recent Accounting Pronouncements
A description of recent accounting pronouncements that may potentially impact our financial position, results of operations or cash flows is disclosed in Note 2 to our consolidated financial statements included elsewhere in this Annual Report.
Results of Operations for the Years Ended December 31, 2021 and 2020
The following table summarizes our results of operations for the years ended December 31, 2021 and 2020 (in thousands):
Year Ended December 31,
Revenue:
Operating expenses:
Other income (expense):
Change in fair value of derivative liability (732 ) — (732 )
Gain from sale of priority review voucher, net 108,000 — 108,000
Provision for income taxes 37 6 31
Product Sales, Net
Product sales, net was $3.1 million for the year ended December 31, 2021, compared to zero for the year ended December 31, 2020 as a result of our commercial launch of Livmarli in the United States in September 2021.
License Revenue
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License revenue was $16.0 million for the year ended December 31, 2021, compared to zero for the year ended December 31, 2020. The increase in license revenue was due to the satisfaction of certain performance obligations associated with the licenses granted under the license agreements with CANbridge and GC Pharma.
Cost of Sales
For the year ended December 31, 2021, cost of sales was $1.9 million, compared to zero for the year ended December 31, 2020, and primarily consisted of amortization of capitalized intangible assets, royalties payable on net sales of Livmarli under licensing agreements and indirect overhead costs associated with the manufacturing and distribution of Livmarli. There were minimal inventory costs reflected in cost of sales as inventory related to current product sold were expensed as research and development costs prior to Livmarli approval in September 2021.
Research and Development Expenses
The following tables summarize the period-over-period changes in research and development expenses relating to our product candidates in development for the periods indicated (in thousands):
Year Ended December 31,
Product-specific costs:
Non product-specific costs:
Research and development expenses were $131.4 million for the year ended December 31, 2021, an increase of $49.8 million compared to the year ended December 31, 2020. The increase was primarily due to:
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for Livmarli programs, a decrease of $6.9 million, primarily due to a decrease of $8.2 million manufacturing activities as a result of prior year completion of NDA registrational production offset by a net increase of $1.1 million clinical trial expenses due to increases for the Phase 2b EMBARK clinical trial in BA, the Phase 3 MARCH clinical trial in PFIC, an infant safety study and an expanded access program, which were partially offset by $2.2 million in research and development funding pursuant to our license agreements with CANbridge and GC Pharma which was recorded as a reduction of clinical trial expenses, and $0.1 million of regulatory fees and other general development expenses;
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for volixibat programs, an increase of $8.2 million, primarily due to an increase of $3.2 million in clinical trial expenses for PSC, PBC and ICP, $4.4 million related manufacturing activities supporting clinical supply, and $0.6 million in other general development expenses;
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for collaboration funding, an increase of $18.9 million, due to Vivet Collaboration Agreement program development funding. We terminated this agreement in December 2021 and we do not expect to incur additional funding;
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for stock-based compensation, an increase of $4.8 million, related to an increase in employee headcount as well as expense associated with performance-based restricted stock units that vested upon achievement of FDA approval of Livmarli;
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for personnel related expenses, an increase of $8.7 million, related to an increase in employee headcount to support our development pipeline;
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for license fees, an increase of $13.2 million, related to calendar year 2021 developmental milestone payments of $19.0 million consisting of $15.0 million associated with the acceptance of our NDA for
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filing for Livmarli for the treatment of cholestatic pruritus in patients with ALGS one year of age and older, $4.0 million associated with the initiation of the Phase 2b VISTAS clinical trial in PSC and the Phase 2b EMBARK clinical trial in BA and a $4.2 million upfront fee in connection with our Vivet Collaboration Agreement compared to $10.0 million in calendar year 2020 upon acceptance of an MAA filing to the EMA for Livmarli for the treatment of PFIC2; and
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for other general expense, an increase of $3.0 million, primarily due to outside consulting expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $59.2 million for the year ended December 31, 2021, an increase of $36.5 million compared to the year ended December 31, 2020. The increase was primarily due to an increase of $14.1 million in professional and consulting service expenses associated with commercial launch activities for Livmarli, $17.1 million of personnel and other compensation related expenses, including an increase of $5.7 million in stock-based compensation, reflecting an increase in the number of our administrative employees to support commercial launch activities for Livmarli and increased requirements of operating as a public company, such as regulatory compliance, an increase of $2.5 million in expenses primarily related to general legal and public relations activities, an increase of $1.5 million in consulting and professional services general corporate compliance and support, and an increase of $1.4 million in other general administrative expenses.
Interest Income
Interest income was $0.4 million for the year ended December 31, 2021, a decrease of $1.2 million compared to the year ended December 31, 2020. The decrease was primarily due to lower interest earned on our cash equivalents and investment balances compared to the prior year largely a result of current economic conditions.
Interest Expense
Interest expense was $17.6 million for the year ended December 31, 2021, an increase of $17.3 million compared to the year ended December 31, 2020. The increase reflected a full year of accreted interest recognized on the revenue interest liability in connection with the RIPA.
Change in Fair Value of Derivative Liability
Change in fair value of derivative liability was $0.7 million for the year ended December 31, 2021 compared to zero for the year ended December 31, 2020. The change was related to the remeasurement of the derivative liability at December 31, 2021 and reflects an increase in value of the put option associated with the RIPA primarily resulting from changes in forecast product sales, net.
Gain from Sale of Priority Review Voucher, Net
Gain from sale of the PRV, net of transaction costs, totaled $108.0 million for the year ended December 31, 2021. We did not sell a PRV in the year ended December 31, 2020.
Liquidity and Capital Resources
Overview
To date, we have funded our operations primarily from the sale of our equity securities, revenue interest financings and collaboration arrangements and to a lesser extent from product revenue from the sales of Livmarli.
We had $261.5 million of cash, cash equivalents, restricted cash equivalents and investments as of December 31, 2021, inclusive of $100.0 million restricted cash equivalents, compared to $231.8 million as of December 31, 2020. Since inception, we have incurred operating losses and negative cash flows from operations. As of December 31, 2021, we had an accumulated deficit of $257.2 million.
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In January 2020, we completed a follow-on public offering of our common stock pursuant to which we sold an aggregate of 2,400,000 shares of common stock at a price of $20.00 per share, resulting in net proceeds of $44.7 million after deducting underwriting discounts, commissions and offering expenses payable by us.
In August 2020, the SEC declared effective the Shelf Registration covering the sale of up to $300.0 million of our securities. Also, in August 2020, we entered into the Sales Agreement with SVB Leerink, pursuant to which we may elect to issue and sell, from time to time, shares of common stock having an aggregate offering price of up to $75.0 million under the Shelf Registration through SVB Leerink acting as the sales agent and/or principal. During the year ended December 31, 2021, we did not sell any common stock pursuant to the Sales Agreement. As of December 31, 2020, we had sold 305,969 shares of common stock in an at-the-market offering pursuant to the Sales Agreement at a weighted-average price of $21.55 per share, resulting in gross proceeds of $6.6 million. The net proceeds after deducting sales commissions to SVB Leerink and other issuance expenses were approximately $6.3 million. The remaining capacity under the Sales Agreement is approximately $68.4 million as of December 31, 2021. In January and February 2022, we sold 992,389 shares of common stock in at-the-market offerings pursuant to the Sales Agreement at a weighted-average price of $18.04 per share, resulting in net proceeds of $17.4 million.
In December 2020, we completed an underwritten public offering of our common stock pursuant to the Shelf Registration. We sold 3,750,000 shares of common stock at a public offering price of $20.00 per share, resulting in net proceeds of $70.0 million after deducting underwriting discounts, commissions and offering expenses. In addition, we granted the underwriters an option, exercisable for 30 days, to purchase up to 562,500 additional shares of our common stock at the public offering price, less the underwriting discounts and commissions. In January 2021, the underwriters exercised their option for 375,654 shares of our common stock resulting in net proceeds of $7.1 million after deducting underwriting discounts.
Pursuant to the RIPA, we received $115.0 million from the Purchasers consisting of an upfront cash payment of $50.0 million and an additional $65.0 million as a result of acceptance for filing of our NDA for Livmarli. We may also be entitled to receive up to an additional $50.0 million at the option of the Purchasers to finance in-license or other acquisitions. In return, the Purchasers have a right to receive Revenue Interests based on net product sales of Livmarli. We were entitled to receive an additional $35.0 million upon FDA approval of Livmarli, which we elected to forgo.
Pursuant to the Stock Purchase Agreement, entered into concurrently with our entry into the RIPA, we issued an aggregate of 509,164 shares of our common stock at a price per share of $19.64, resulting in net proceeds to us of $10.0 million.
In December 2021, we received net cash proceeds of $108.0 million, after deducting commission costs, related to the sale of the PRV which we received from the FDA in connection with the approval of Livmarli for the treatment of cholestatic pruritus in patients with ALGS one year of age and older. Of these proceeds, $100.0 million was placed in a segregated bank account as restricted cash, per the terms of the RIPA.
Based on our current and anticipated level of operations, we believe our unrestricted cash, cash equivalents and investments will be sufficient to fund current operations through at least the next 12 months from the filing of this Annual Report. Our unrestricted cash, cash equivalents and investments include money market funds, government agency securities, corporate debt and commercial paper. We maintain established guidelines relating to diversification and maturities of our investments to preserve principal and maintain liquidity.
We anticipate that we will continue to incur net losses for the foreseeable future as we continue research efforts and the development of our product candidates, continue commercial activities for Livmarli and potentially expand into additional markets, hire additional staff, including clinical, scientific, operational, financial and management personnel and pay potential development and commercial milestones in connection with our license agreements.
Our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures, and to a lesser extent, selling, general and administrative expenditures, including commercial expenses. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.
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Although Livmarli has been approved by the FDA for the treatment of cholestatic pruritus in patients with ALGS one year of age and older, and we expect product revenues to increase as we continue commercial activities, Livmarli may not achieve commercial success. Our principal sources of liquidity are cash from the sale of our equity securities, revenue interest financings and collaboration arrangements and, to a lesser extent, from product revenue from the sale of Livmarli. Until such time, if ever, as we can generate substantial product revenue from sales of Livmarli, our current product candidates or any future product candidates, if approved, we expect to finance our cash needs through a combination of equity offerings, debt financings, revenue interest purchase agreements and potential collaboration, license or development agreements. Our primary cash needs are for day-to-day operations, to pay our debt obligations under the RIPA and to fund our working capital requirements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect rights as a stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.
If we raise additional funds through the RIPA, collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may be required to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. As a result of the COVID-19 pandemic and actions taken to slow its spread, the global credit and financial markets have experienced volatility and disruptions, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. If the equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult, more costly and more dilutive. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our drug development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Contractual Obligations
In addition to ongoing capital needs to fund our ongoing operations, the Company’s material cash requirements include the following contractual and other obligations.
Pursuant to the RIPA, the Purchasers have a right to receive Revenue Interests based on net product sales of Livmarli. The amounts of quarterly Revenue Interest Payments will change each reporting period based upon the underlying net product sales of Livmarli and will initially be 9.75% of net product sales. Per the terms of the agreement, every $100.0 million of net sales generated, less than or equal to $350 million in an annual aggregate, would result in a repayment obligation of approximately $9.8 million. Additionally, every $100.0 million of net sales generated in excess of $350.0 million in an annual aggregate would result in a repayment obligation of approximately $2.0 million. In the future, as net sales thresholds set forth in the agreement are met and the repayment percentage rate changes, the amount of the obligation and timing of payment is likely to change. A significant increase or decrease in actual and forecast net sales will materially impact the revenue interest liability, interest expense and the time period for repayment.
Under the Shire License Agreement, as well as our other license and acquisition agreements, we have payment obligations that are contingent upon future events such as our achievement of specified development, regulatory and commercial milestones and are required to make royalty payments in connection with the sale of products developed under those agreements. The amount and timing of milestone obligations are unknown or uncertain as we are unable to estimate the timing or likelihood of achieving the milestone events. Additionally, the amount of royalty payments are based upon future product sales, which we are unable to predict with certainty. These potential obligations are further described in Note 7 to the consolidated financial statements.
We additionally have contractual obligations for our operating leases for our corporate headquarters. These obligations are further described in Note 9 to our consolidated financial statements.
We are party to certain license and collaboration agreements, which contain a number of contractual obligations. Those contractual obligations may entitle us to receive, or may obligate us to make, certain payments. The amount and timing of those payments are unknown or uncertain as we are unable to estimate the timing or likelihood of the events that will obligate those payments.
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We enter into contracts in the normal course of business with clinical research organizations and clinical sites for the conduct of clinical trials, non-clinical research studies, professional consultants for expert advice and other vendors for clinical supply manufacturing or other services. These contracts generally provide for termination on notice, and therefore are cancelable contracts.
Cash Flows
The following table provides a summary of the net cash flow activity for the periods indicated (in thousands):
Year Ended December 31,
Net cash used in operating activities $ (132,758 ) $ (89,075 )
Net cash provided by investing activities 48,547 37,874
Net cash provided by financing activities 73,466 181,288
Effect of exchange rate on cash and cash equivalents (1 ) 29
Net increase (decrease) in cash and cash equivalents $ (10,746 ) $ 130,116
Net Cash Used in Operating Activities
Net cash used in operating activities was $132.8 million for the year ended December 31, 2021, reflecting our net loss of $84.0 million partially offset by non-cash items of $42.2 million and a non-cash gain of $108.0 million from the sale of the PRV. Non-cash items consisted primarily of $23.1 million of stock-based compensation, $17.6 million of effective interest expense in connection with the RIPA, $0.7 million related to the change in fair value of the derivative liability, and $1.0 million of depreciation and amortization of our fixed assets and operating lease right-of use assets. Additionally, cash used in operating activities reflected changes in net operating assets of $17.0 million, consisting primarily of a $22.7 million increase in accounts payable, accrued expenses and other liabilities primarily associated with clinical, manufacturing and commercial planning activities and collaboration funding pursuant to the Vivet Collaboration Agreement and $5.0 million increase in prepaid expenses, inventory and other assets, partially offset by a $0.6 million decrease in our operating lease liability.
Net cash used in operating activities was $89.1 million for the year ended December 31, 2020, reflecting our net loss of $103.3 million partially offset by non-cash items of $13.6 million. Non-cash items consisted primarily of $12.6 million of stock-based compensation, $0.6 million of depreciation and amortization of our fixed assets and our operating lease right-of use assets and $0.3 million of interest expense in connection with the RIPA. Additionally, cash used in operating activities reflected changes in net operating assets of $0.6 million, consisting primarily of a $3.7 million increase in accounts payable, accrued expenses and other liabilities due to clinical and manufacturing activities, offset by a $1.8 million increase to prepaid expenses primarily associated with clinical and manufacturing activities, $1.0 million increase in long term assets primarily associated with advances to vendors associated with our clinical trials, and a $0.4 million decrease in our operating lease liability.
Net Cash Provided by Investing Activities
Net cash provided by investing activities was $48.5 million for the year ended December 31, 2021, primarily due to $108.0 million of net proceeds received from the sale of the PRV, proceeds of $155.6 million from maturities of investments, and proceeds of $2.0 million from paydowns of investments partially offset by $198.0 million used in purchases of investments and $19.0 million in milestone payments triggered under license agreements.
Net cash provided by investing activities was $37.9 million for the year ended December 31, 2020 primarily due to proceeds of $85.9 million from maturities of investments and proceeds of $26.8 million from paydowns of investments, partially offset by $74.6 million used in purchases of investments and $0.2 million used for purchases of property and equipment.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $73.5 million for the year ended December 31, 2021, due to net proceeds of $64.6 million pursuant to the RIPA, net proceeds of $6.9 million received from the underwriters when they exercised their option to purchase 375,654 shares of our common stock in January 2021 following the follow-on underwritten public offering of our common stock in December 2020, and proceeds of $2.1 million from
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employee equity award exercises, partially offset by $0.1 million of revenue interest payments made under the RIPA.
Net cash provided by financing activities was $181.3 million for the year ended December 31, 2020, due to net proceeds of $44.7 million received from the completion of a follow-on public offering of our common stock pursuant to which we sold an aggregate of 2,400,000 shares of common stock at a price of $20.00 per share, net proceeds of $70.0 million received from completion of a public offering of our common stock pursuant to which we sold an aggregate of 3,750,000 shares of common stock at $20.00 per share, net proceeds of $49.6 million pursuant to the RIPA, net proceeds of $10.0 million pursuant to the Stock Purchase Agreement entered into in connection with the RIPA for the sale of an aggregate of 509,164 shares of our common stock at a price per share of $19.64, net proceeds of $6.3 million from the sale of common stock under the Sales Agreement with SVB Leerink, pursuant to which we sold an aggregate of 305,969 shares of common stock at a weighted-average price of $21.55 per share, and proceeds of $0.8 million from the issuance of common stock pursuant to the exercise of outstanding options pursuant to our equity incentive plans. These proceeds were offset by the payment of $0.2 million for deferred offering costs associated with the Shelf Registration. The deferred offering costs are reflected as other assets on our consolidated balance sheet until such time as we complete sales of shares under the Shelf Registration.
JOBS Act
As an emerging growth company under the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), we can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. We intend to rely on other exemptions provided by the JOBS Act, including without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002, as amended (“Sarbanes-Oxley Act”).
We will remain an emerging growth company until the earliest of (i) December 31, 2024, (ii) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, (iii) the last day of the fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (“Exchange Act”), or (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Interest Rate Risk
Our cash, cash equivalents, restricted cash equivalents and investments as of December 31, 2021 consist of readily available checking, money market funds, and investments. The primary objective of our investment activities is to preserve our capital to fund operations. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. However, due to the short-term nature of the instruments in our portfolio and the low risk profile of our investments, a hypothetical change in interest rates of 100 basis points would not have a material impact on the fair market value of our cash equivalents, restricted cash equivalents and investments as of December 31, 2021. In addition, we maintain significant amounts of cash and cash equivalents at one financial institution that is in excess of federally insured limits.
We have entered into the RIPA. Our primary exposure to interest rate risk is that the effective interest rate on the liability may vary during the term of the RIPA primarily due to the level of actual forecast net product sales. Due to the nature of the RIPA instrument, the total interest due under this facility is fixed. However, a significant increase or decrease in net product sales may materially impact the interest expense recognized each reporting period.
Foreign Currency Rate Risk
Our operations include activities in the United States and Switzerland. In addition, we contract with vendors that are located outside of the United States and certain invoices are denominated in foreign currencies. While our operating results are exposed to changes in foreign currency exchange rates between the U.S. dollar and various
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foreign currencies, the most significant of which are the Swiss Franc and the Euro, we do not currently believe that foreign currency could have a significant impact.
Effects of Inflation
Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation and changing prices had a significant impact on our results of operations for any periods presented herein.
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Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) 114
Consolidated Balance Sheets 115
Consolidated Statements of Operations 116
Consolidated Statements of Comprehensive Loss 117
Consolidated Statements of Stockholders’ Equity 118
Consolidated Statements of Cash Flows 119
Notes to Consolidated Financial Statements 120
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Mirum Pharmaceuticals, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Mirum Pharmaceuticals, Inc. (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the 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 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 financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2019.
Irvine, California
March 9, 2022
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Mirum Pharmaceuticals, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share data)
December 31,
Assets
Current assets:
Accounts receivable 3,267 —
Prepaid expenses and other current assets 5,271 4,530
Restricted cash equivalents 100,000 —
Long-term investments 4,983 —
Property and equipment, net 981 1,293
Operating lease right-of-use assets 1,569 1,949
Intangible assets, net 18,740 —
Liabilities and Stockholders’ Equity
Current liabilities:
Operating lease liabilities 711 636
Operating lease liabilities, noncurrent 1,903 2,627
Other liabilities 17 29
Commitments and contingencies
Stockholders’ equity:
Accumulated other comprehensive (loss) income (35 ) 83
Total liabilities and stockholders’ equity $ 294,651 $ 240,864
The accompanying notes are an integral part of these consolidated financial statements.
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Mirum Pharmaceuticals, Inc.
Consolidated Statements of Operations
(In thousands, except share and per share data)
Year Ended December 31,
Revenue:
Product sales, net $ 3,138 $ —
Operating expenses:
Cost of sales 1,903 —
Other income (expense):
Change in fair value of derivative liability (732 ) —
Other expense, net (582 ) (192 )
Gain from sale of priority review voucher, net 108,000 —
Net loss before provision for income taxes (83,951 ) (103,264 )
Provision for income taxes 37 6
Net loss per share, basic and diluted $ (2.77 ) $ (4.09 )
The accompanying notes are an integral part of these consolidated financial statements.
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Mirum Pharmaceuticals, Inc.
Consolidated Statements of Comprehensive Loss
(In thousands)
Year Ended December 31,
Other comprehensive gain (loss):
Unrealized loss on available-for-sale investments (117 ) (75 )
Cumulative translation adjustments (1 ) 29
The accompanying notes are an integral part of these consolidated financial statements.
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Mirum Pharmaceuticals, Inc.
Consolidated Statements of Stockholders’ Equity
(In thousands, except share and per share data)
Shares Amount Shares Amount Capital Deficit Income (Loss) Equity
Restricted common stock vested in the period — — 133,593 — — — — —
Other comprehensive loss — — — — — — (46 ) (46 )
Restricted common stock vested in the period — — 133,592 — — — — —
Other comprehensive loss — — — — — — (118 ) (118 )
The accompanying notes are an integral part of these consolidated financial statements.
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Mirum Pharmaceuticals, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
Operating activities
Reconciliation of net loss to net cash used in operating activities:
Depreciation and amortization 595 305
Amortization of operating lease right-of-use assets 380 318
Net (accretion) amortization of discounts on investments (137 ) 72
Non-cash interest expense related to the revenue interest liability 17,590 335
Change in fair value of derivative liability 732 —
Gain on sale of priority review voucher, net (108,000 ) —
Change in operating assets and liabilities:
Prepaid and other current assets (4,009 ) (1,827 )
Operating lease right-of-use assets — 94
Inventory (495 ) —
Accounts payable, accrued expenses and other liabilities 22,655 3,683
Operating lease liabilities (649 ) (385 )
Net cash used in operating activities (132,758 ) (89,075 )
Investing activities
Proceeds from paydown of investments 2,000 26,761
Purchase of property and equipment (24 ) (225 )
Proceeds from sale of priority review voucher, net 108,000 —
Additions to intangible assets (19,000 ) —
Net cash provided by investing activities 48,547 37,874
Financing activities
Proceeds from issuance of common stock pursuant to equity award plans 2,098 784
Proceeds from revenue interest liability, net of issuance costs 64,575 49,575
Payments on revenue interest liability (121 ) —
Net cash provided by financing activities 73,466 181,288
Supplemental disclosure of cash flow information:
Inventory purchases in accrued liabilities $ 1,018 $ —
Cash paid for income taxes $ — $ 11
Operating cash flows paid for operating lease $ 864 $ 576
Noncash investing and financing activities:
Deferred offering costs included in accrued liabilities $ — $ 129
Compound derivative liability related to revenue interest liability $ — $ 1,264
The accompanying notes are an integral part of these consolidated financial statements.
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Mirum Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
1. Organization and Description of Business
Mirum Pharmaceuticals, Inc. (the “Company”) was incorporated in the State of Delaware on May 2, 2018, and is headquartered in Foster City, California. The Company is a biopharmaceutical company focused on the identification, acquisition, development and commercialization of novel therapies for debilitating rare diseases.
The Company received U.S. Food and Drug Administration (“FDA”) approval for LIVMARLI® (maralixibat) oral solution (“Livmarli”), the first and only FDA-approved medication for the treatment of cholestatic pruritus in patients with Alagille syndrome (“ALGS”) one year of age and older, on September 29, 2021.
The Company’s development pipeline consists of two clinical-stage product candidates, Livmarli and volixibat. The Company commenced significant operations in November 2018.
The Company views its operations and manages its business as one operating segment.
Liquidity
The Company has a limited operating history, has incurred significant operating losses since its inception, and the revenue and income potential of the Company’s business and market are unproven. As of December 31, 2021, the Company had an accumulated deficit of $257.2 million and cash, cash equivalents, restricted cash equivalents and investments of $261.5 million. The Company believes that its unrestricted cash, cash equivalents and investments of $161.5 million as of December 31, 2021, provide sufficient capital resources to continue its operations for at least twelve months from the issuance date of the accompanying consolidated financial statements. The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty. Management expects to continue to incur additional substantial losses in the foreseeable future as a result of the Company’s research and development activities.
In December 2021, the Company completed the sale of the Rare Pediatric Disease Priority Review Voucher (“PRV”), for net proceeds of $108.0 million, after deducting commission costs. In addition, in January and February 2022, the Company sold 992,389 shares of common stock in an at-the-market offering pursuant to a Sales Agreement entered into with SVB Leerink LLC in August 2020, at a weighted-average price of $18.04 per share, resulting in net proceeds of $17.4 million.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that impact the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in the financial statements and accompanying notes. The most significant estimates in the Company’s consolidated financial statements relate to the calculation of estimated rebates for applicable discounts and allowances that are offered within contracts to customers, payors and other third parties, the calculation of the revenue interest liability, effective interest rate and corresponding expense, accrued research and development expenses, the valuation of derivative liabilities and the valuation allowance of deferred tax assets resulting from net operating losses. These estimates and assumptions are based upon historical experience, knowledge of current events and various other factors believed to be reasonable under the circumstances, the results
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of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual results could differ materially from those estimates.
In December 2019, a novel strain of coronavirus, which causes COVID-19, was identified. Due to the rapid and global spread of the virus, on March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. To slow the proliferation of COVID-19, governments have implemented extraordinary measures, which include the mandatory closure of businesses, restrictions on travel and gatherings, and quarantine and physical distancing requirements.
There were no significant estimates contained in the preparation of the Company’s consolidated financial statements or impacts to the Company’s consolidated financial statements for the year ended December 31, 2021 that were directly a result of the COVID-19 pandemic. The Company is not aware of any specific event or circumstance that would require an update to its estimates, judgments and assumptions or a revision of the carrying value of the Company’s assets or liabilities as of the date of this filing.
Cash, Cash Equivalents and Restricted Cash Equivalents
The Company considers all highly liquid investments that are readily convertible into cash without penalty and with original maturities of three months or less at the date of purchase to be cash equivalents. The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents are valued at cost, which approximate their fair value.
Restricted cash equivalents consists of deposits placed in a segregated bank account as required under the terms of the Company’s RIPA in connection with the sale of the PRV in December 2021.
The following table provides a reconciliation of cash, cash equivalents and restricted cash equivalents reported within the consolidated balance sheets that together reflect the same amounts shown in the consolidated statements of cash flows:
December 31,
Restricted cash equivalents 100,000 —
Concentrations of Credit Risk and Off-Balance Sheet Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, accounts receivable, and short and long-term investments. The Company limits the amount of credit exposure by investing cash that is not required for immediate operating needs in money market funds, government obligations and/or commercial paper with short maturities. Additionally, the Company has established guidelines regarding diversification of its investments and their maturities, which are designed to maintain principal and maximize liquidity. To date, the Company has not experienced any losses associated with this credit risk and continues to believe that this exposure is not significant.
The Company relies on a specialty pharmacy and a single distributor for all of the Company's sales of Livmarli in the United States.
The Company sources materials and services through several vendors. Certain materials are sourced from a single vendor. The loss of certain vendors could result in a temporary disruption of the Company’s commercialization efforts.
Investments
The Company classifies all investments as available-for-sale, as the sale of such securities may be required prior to maturity. Management determines the appropriate classification of its investments in debt securities at the time of purchase. Investments with original maturities beyond three months at the date of purchase and which mature at, or less than twelve months from the balance sheet date, are classified as a current asset.
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Investments are recorded at fair value, with unrealized gains and losses reported as accumulated other comprehensive income (loss) until realized. The Company periodically evaluates whether declines in fair values of its available-for-sale securities below their book value are other-than-temporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss as well as the Company’s ability and intent to hold the available-for-sale security until a forecasted recovery occurs. Additionally, the Company assesses whether it has plans to sell the security or it is more likely than not it will be required to sell any available-for-sale securities before recovery of its amortized cost basis. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion, as well as interest and dividends, are included in interest income. Realized gains and losses from the sale of available-for-sale securities, if any, are determined on a specific identification basis and are also included in interest income (loss). To date, the Company has not identified any other than temporary declines in fair value of its investments.
Fair Value of Financial Instruments
The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1: Observable inputs (unadjusted) such as quoted prices in active markets for identical assets or liabilities;
Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly for similar assets or liabilities; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The carrying amounts of all cash equivalents, available-for sale investments, accounts payable and accrued liabilities are reasonable estimates of their fair value.
Accounts Receivable
Accounts receivable are recorded net of allowances for sales discounts and any allowance for doubtful accounts. Management estimates the allowance for doubtful accounts based on existing contractual payment terms, actual payment patterns of customers and individual customer circumstances. To date, an allowance for doubtful accounts has not been material.
Inventory
Inventory is valued at the lower of cost or net realizable value, with cost determined on a first-in, first-out (FIFO) basis. The Company periodically reviews the composition of inventory to identify excess, obsolete, slow-moving or otherwise unsaleable items. If unsaleable items are observed and there are no alternate uses for the inventory, the Company will record a write-down to net realizable value in the period that the decline in value is recognized through a charge to cost of sales. The determination of whether inventory costs will be realizable requires estimates by management. If actual market conditions are less favorable than projected by management, additional write-downs of inventory may be required.
Prior to the initial regulatory approval for Livmarli, the Company expensed costs relating to raw materials and production of inventory as research and development expense in the accompanying consolidated statements of operations, in the period incurred.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets, ranging from three to five years. Leasehold
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improvements are amortized over the shorter of their useful lives or the related lease term. As of December 31, 2021, property and equipment consisted primarily of leasehold improvements of $1.3 million and furniture and equipment of $0.2 million. As of December 31, 2020, property and equipment consisted primarily of leasehold improvements of $1.3 million and furniture and equipment of $0.3 million. Accumulated depreciation as of December 31, 2021 and 2020 was $0.7 million and $0.3 million, respectively.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for indications of possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amounts to the future undiscounted cash flows attributable to these assets. An impairment loss is recognized to the extent an asset group is not recoverable, and the carrying amount exceeds the projected discounted future cash flows arising from these assets. There were no impairments of long-lived assets for any of the periods presented.
Intangible Assets, Net
Upon FDA approval of Livmarli in September 2021, contractual milestone payments the Company was then obligated to pay to licensors were evaluated as intangible assets for the completed regulatory approval and right to commercialize the product. The evaluation of intangible assets includes assessing the amortization period for which the asset is expected to contribute to the expected future cash flows of the Company. The Company determined the pattern of intangible asset expected future cash flows could not be readily determined with a high level of precision. As a result, the intangible asset is being amortized on a straight-line basis over the estimated useful life of 18 years. The Company tests its definite lived intangible assets for impairment annually if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. If it is determined that the asset becomes impaired, the carrying value is written down to its fair value with the related impairment charge recognized in the consolidated statements of operations in the period in which the impairment occurs. The Company has not recorded any impairments to its intangible assets.
The following table provides detail of the carrying amount of the Company's intangible assets:
December 31,
Gross carrying value $ 19,000
Less accumulated amortization (260 )
Net carrying value $ 18,740
The following table summarizes the estimated future amortization expense associated with our intangible assets (in thousands):
Years Ended December 31, Amount
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Leases
The Company determines if a contractual arrangement is or contains a lease at inception. Operating lease right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset during the lease term, and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating leases are included in ROU assets, current operating lease liabilities, and long-term operating lease liabilities on the accompanying consolidated balance sheets. Operating lease ROU assets and lease liabilities are initially recognized based on the present value of the future minimum lease payments over the lease term at commencement date calculated using the Company’s incremental borrowing rate applicable to the lease asset, unless the implicit rate is readily determinable. Operating lease ROU assets also include any lease payments made at or before lease commencement and exclude any lease incentives received. The Company determines the lease term as the noncancelable period of the lease and may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Leases with a term of 12 months or less are not recognized on the consolidated balance sheet. The Company’s leases do not contain any residual value guarantees. Lease expense for minimum lease payments is recognized as rent expense on a straight-line basis over the lease term. Variable lease payments include lease operating expenses.
Accrued Research and Development Expenses
The Company accrues and expenses clinical trial activities performed by third parties based upon estimates of the proportion of work completed over the life of the individual study and patient enrollment rates in accordance with agreements established with clinical research organizations and clinical trial sites. The Company determines the estimates by reviewing contracts, vendor agreements and purchase orders and through discussions with internal clinical personnel and external service providers as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services.
The Company makes estimates of accrued expenses as of each balance sheet date based on facts and circumstances known to the Company at that time. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. The Company has not experienced any material differences between accrued costs and actual costs incurred for the periods presented. Nonrefundable advance payments for goods and services are deferred and recognized as expense in the period that the related goods are consumed or services are performed.
Revenue Interest Liability, Net
The revenue interest liability, net, associated with the RIPA that the Company entered into in December 2020with Mulholland SA LLC, an affiliate of Oberland Capital LLC (“Oberland”), as agent for purchasers party thereto (the “Purchasers”), and the Purchasers, is presented net of issuance costs and a debt discount on the consolidated balance sheets. The Company imputes interest expense associated with this liability using the effective interest rate method. The effective interest rate is calculated based on the rate that would enable the debt to be repaid in full over the anticipated life of the arrangement. The interest rate on the liability may vary during the term of the agreement depending on a number of factors, including the level of actual and forecasted product sales, net. The Company evaluates the interest rate quarterly based on actual product sales, net and forecast product sales, net, utilizing the prospective method. A significant increase or decrease in product sales, net will materially impact the revenue interest liability, interest expense and the time period for repayment.
Derivative Liability
The RIPA contains certain features that meet the definition of being an embedded derivatives requiring bifurcation as a separate compound financial instrument apart from the RIPA. The derivative liability is initially measured at fair value on issuance and is subject to remeasurement at each reporting period with changes in fair value recognized as other income (expense) in the accompanying consolidated statements of operations as the change in fair value of derivative liability.
Revenue Recognition
The Company recognizes revenue when a customer obtains control of promised goods or services, in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services.
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Product Sales, Net
The Company recognizes product sales, net when the customer obtains control of our product, which occurs at a point in time, typically upon delivery of the Company's product to the customer.
Revenues from product sales are recorded at the net sales price, or the transaction price, which may include fixed or variable consideration for discounts, government rebates, co-pay assistance, returns and other allowances that are offered within contracts with a customer relating to the sale of Livmarli. Estimates of variable consideration are calculated based on the actual product sales each reporting period. Overall, these estimates reflect the Company's best estimate of the amount of consideration to which the Company expects to be entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may be constrained and is included in product sales, net only to the extent that it is considered probable that a significant reversal in the amount of the cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Estimates are reviewed and updated quarterly as additional information becomes known. Actual amounts of consideration ultimately received may differ materially from estimates. If actual results in the future vary from estimates, the Company will adjust these estimates, which would affect product sales, net and earnings in the period such variances are adjusted. Significant categories of sales discounts and allowances are as follows:
Government Rebates: The Company records rebates payable under Medicaid and other government programs as a reduction of revenue at the time product revenues are generated. The Company’s rebate calculations may require estimates, including estimates of customer mix, to determine which sales will be subject to rebates and the amount of such rebates. The Company updates its estimates and assumptions on a quarterly basis and records any necessary adjustments to revenue in the period identified. The liability for unpaid rebates is included in accrued expenses in the accompanying consolidated balance sheets. To date, actual government rebates have not differed materially from the Company's estimates.
Other Incentives: Other incentives include a branded co-pay assistance program for eligible patients with commercial insurance in the United States. The branded co-pay assistance program assists commercially insured patients who have coverage for Livmarli and is intended to reduce each participating patient’s portion of the financial responsibility of the purchase price up to a specified dollar amount of assistance. The calculation of the accrual for co-pay assistance is based upon an identification of claims and the cost per claims associated with product that has been recognized as revenue. The Company records amounts paid under the brand specific co-pay assistance program for each patient as a reduction of revenue from product sales. To date, actual other incentives have not differed materially from the Company's estimates.
Product Returns: The Company records revenue for product sales, net of estimated product returns. Customers have limited return rights related only to the product’s damage or defect identified upon delivery of the product. The Company estimates the amount of product sales that may be returned and records the estimate as a reduction of revenue and a refund liability in the period the related product revenue is recognized. To date, actual returns have not differed materially from the Company's estimates.
License and Collaboration Arrangements
The Company enters into collaborative arrangements with partners and analyzes the collaboration arrangements to assess whether they are within the scope of Collaborative Arrangements (Topic 808) (“ASC 808”) and determine whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities. This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement. The accounting for some of the activities under collaboration arrangements may be subject to Revenue from Contracts with Customers (Topic 606) (“ASC 606”) for distinct units of account that are reflective of a vendor-customer relationship. For other elements of collaboration arrangements, such as assistance with development of the drug products, the Company applies the illustrative examples in ASC 808 and generally records reimbursements received as a reduction of research and development expenses.
In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under each of its agreements, the Company performs the following steps: (i) identification of the contracts with
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customers; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) determination and measurement of the transaction price, including any constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
The terms of the Company’s license and collaborative research and development agreements include upfront license fees, research, development and other funding or reimbursements, milestone and other contingent payments for the achievement of defined collaboration objectives and certain development, regulatory and sales-based events, as well as royalties on sales of commercialized products. Arrangements that include upfront payments may require deferral of revenue recognition to a future period until we satisfy performance obligations under these arrangements.
A performance obligation is a promise in a contract to transfer a distinct good or service and is the unit of accounting in Topic 606. A contract’s transaction price is allocated among each distinct performance obligation based on relative standalone selling price and recognized as revenue when, or as, the applicable performance obligation is satisfied.
If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues attributed to the license when the license is transferred to the customer and the customer is able to use and benefit from the license.
At the inception of each arrangement that includes development milestone payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price as variable consideration using the most likely amount method or expected value method, depending on the nature of the contingency and the variable payments. If it is probable that a significant reversal of cumulative revenue recognized for the contract would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not generally considered probable of being achieved until those approvals are received. Given the high degree of uncertainty around the occurrence of these events, the Company generally determines the milestone and other contingent amounts to be fully constrained until the uncertainty associated with these payments is resolved. At the end of each reporting period, the Company re-evaluates the probability of achievement of any development milestones, and if necessary, adjusts its estimate of the transaction price. Any such adjustments would be recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.
For arrangements that include sales-based royalties, including milestone payments based on the level of sales, the Company recognizes revenue at the later of (i) when or as the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
Accounting for these arrangements requires the Company to develop assumptions that require judgment to determine the stand-alone selling price of each performance obligation identified in the contract. The Company has never sold the performance obligations in its collaborative arrangements separately; therefore, an observable stand-alone selling price does not exist. Accordingly, the Company estimates a stand-alone selling price through maximizing the use of observable inputs such as market data, project cost estimates, and targeted margins.
Cost of Product Sales
Prior to receiving approval from the FDA in September 2021 to sell Livmarli in the United States, the Company expensed all costs incurred related to the manufacture of Livmarli as research and development expense because of the inherent risks associated with the development of a drug candidate, the uncertainty about the regulatory approval process and the lack of history for the Company of regulatory approval of drug candidates. Subsequent to receiving FDA approval when commercialization was considered probable and the future economic benefit is expected to be realized, the Company began capitalizing inventory costs incurred. At December 31, 2021, the Company capitalized $1.5 million of inventory recorded as a component of other current assets on the consolidated balance sheet.
Cost of product sales consist of manufacturing costs, transportation and freight, amortization of capitalized intangibles, royalties and indirect overhead costs associated with the manufacturing and distribution of Livmarli. Cost of product sales may also include period costs related to certain manufacturing services and inventory adjustment charges.
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Research and Development Expenses
Research and development expenses consists primarily of fees paid to contract research organizations and other vendors for clinical, non-clinical and manufacturing services, salaries and employee benefits, including stock-based compensation, consultant expenses, costs related to acquiring manufacturing materials, costs related to compliance with regulatory requirements and license payments related to acquiring intellectual property rights for the Company’s product candidates. Research and development expenses are expensed as incurred.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses relate to sales and marketing, finance, human resources, legal and other administrative activities. SG&A expenses consist primarily of personnel costs, facilities and overhead costs, outside marketing, advertising and legal expenses, and other general and administrative costs.
We expense the costs of advertising, including promotional expenses, as incurred. Advertising expenses were $9.2 million and $0.6 million for the years ended December 31, 2021 and 2020, respectively.
Stock-Based Compensation
The Company recognizes stock-based compensation for all stock-based awards based on the grant date fair value of the award. For stock-based awards with service conditions, the fair value of the awards is amortized on a straight-line basis over the requisite service period in which the awards are expected to vest. For stock-based awards with performance vesting conditions, stock-based compensation is recognized when it is considered probable that the performance conditions will be satisfied. At each reporting period, the Company reassesses the probability of the achievement of the performance vesting conditions. Any change in stock-based compensation resulting from an adjustment in the vesting is treated as a cumulative catch-up in the period of adjustment. For stock-based awards with market conditions, stock-based compensation is recognized over the appropriate requisite service period. The Company accounts for forfeitures as they occur.
Income Taxes
Income taxes are recorded using the liability method, under which deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are recorded against deferred tax assets, including net operating losses and tax credits, when it is determined it is more-likely-than-not that some or all of the tax benefits will not be realized.
The Company accounts for uncertain tax positions in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification No. 740, Income Taxes (“ASC 740”). When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit would more likely than not be realized assuming examination by the taxing authority. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances.
Interest and penalties related to unrecognized tax benefits, if any, are recorded as a component of income tax expense.
Net Loss Per Share
Basic net loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average shares of common stock outstanding for the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average shares of common stock and potentially dilutive securities outstanding for the period determined using the treasury-stock and if-converted methods. Diluted net loss per share excludes the potential impact of the Company’s common stock subject to repurchase, common stock options, contingently issuable employee stock purchase plan shares and contingently issuable overallotment shares because their effect would be anti-dilutive due to the Company’s net loss. Since the Company incurred a net loss in each of the periods presented, basic and diluted net loss per share were the same.
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The following outstanding potentially dilutive shares have been excluded from the calculation of diluted net loss per share for the periods presented due to their anti-dilutive effect:
December 31,
Options to purchase common stock and restricted stock units 6,940,566 5,071,740
Employee stock purchase plan contingently issuable 23,116 12,931
Underwriter option shares contingently issuable — 562,500
Recently Adopted Accounting Pronouncements
In November 2018, the FASB issued Accounting Standards Update (“ASU”) No.2018-18, Collaborative Arrangements (Topic 818): Clarifying the Interaction Between Topic 808 and Topic 606, which clarifies when transactions between participants in a collaborative arrangement are within the scope of the FASB’s revenue standard, Topic 606. The standard is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, with early adoption permitted. The Company adopted this standard on January 1, 2021, as it had no collaboration arrangements prior to that date. There was no impact on the accompanying consolidated financial statements as of the adoption date.
Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires an entity to utilize a new impairment model that requires measurement and recognition of expected credit losses for most financial assets and certain other instruments, including but not limited to available-for-sale debt securities. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security. The new guidance requires the use of forward-looking expected credit loss models based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount, which may result in earlier recognition of credit losses under the new guidance. The new guidance also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. Subsequent to the issuance of ASU 2016-13, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. This ASU does not change the core principle of the guidance in ASU 2016-13, instead these amendments are intended to clarify and improve operability of certain topics included within the credit losses guidance. The FASB also subsequently issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Derivatives and Hedging (Topic 815), and Financial Instruments (Topic 842), which did not change the core principle of the guidance in ASU 2016-13 but clarified that expected recoveries of amounts previously written off and expected to be written off should be included in the valuation account and should not exceed amounts previously written off and expected to be written off. In March 2020, the FASB issued ASU No. 2020-3, Codification Improvements to Financial Instruments which makes narrow-scope improvements to various financial instruments topics, including the new credit losses standard and clarifies the following areas (i) the contractual term of a net investment in a lease should be the contractual term used to measure expected credit losses; (ii) when an entity regains control of financial assets sold, an allowance for credit losses should be recorded. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019 for public business entities, excluding smaller reporting companies. For smaller reporting companies, the guidance will be effective during the first quarter of 2023. The Company is in the process of assessing the impact adoption will have on its consolidated financial statements.
In October 2021, the FASB, issued Accounting Standards Update No. 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires an entity (acquirer) to recognize and measure contract assets and liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers. This update is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, with early adoption permitted. The amendments should be applied prospectively to business combinations occurring on or after the effective date of the amendments. The Company is currently evaluating the impact the standard will have on its consolidated financial statements.
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3. Fair Value Measurements
Financial assets and liabilities subject to fair value measurements on a recurring basis and the level of inputs used in such measurements by major security type are presented in the following table (in thousands):
Level 1 Level 2 Level 3 Total
Financial assets:
Financial liabilities:
Total financial liabilities $ — $ — $ 1,996 $ 1,996
Level 1 Level 2 Level 3 Total
Financial assets:
Financial liabilities:
Total financial liabilities $ — $ — $ 1,264 $ 1,264
The carrying amounts of certain financial instruments such as cash and cash equivalents, accounts receivable, prepaid expenses, other current assets, accounts payable, accrued expenses, and other current liabilities as of December 31, 2021 and 2020 approximate their related fair values due to the short-term maturities of these instruments. Certain financial instruments classified within Level 2 of the fair value hierarchy include the types of instruments that trade in markets that are not considered to be active, but are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The carrying amount of the revenue interest liability as of December 31, 2021 and 2020 approximates its fair value and is based on the Company’s contractual repayment obligation to the Purchasers, based on current estimates of future revenues, over the life of the RIPA. The derivative liability is considered a Level 3 input based on the three-level hierarchy. Refer to Note 6 “Revenue Interest Purchase Agreement” for further information.
Derivative Liability
The debt pursuant to the RIPA contains an embedded derivatives requiring bifurcation as a single compound derivative instrument. The Company estimated the fair value of the derivative liability using a “with-and-without” method. The “with-and-without” methodology involves valuing the whole instrument on an as-is basis and then valuing the instrument without the individual embedded derivative. The difference between the entire instrument with the embedded derivative compared to the instrument without the embedded derivative was the fair value of the derivative liability at December 31, 2021 and 2020. The estimated probability and timing of underlying events triggering the exercisability of the put options contained within the RIPA, forecasted cash flows and the discount rate are significant unobservable inputs used to determine the estimated fair value of the entire instrument with the embedded derivative. As of December 31, 2021 and 2020, the discount rate used for valuation of the derivative liability is 15.7% and 15.9%, respectively.
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The following table provides a summary of the change in the estimated fair value of the Company’s derivative liability, classified as Level 3 in the fair value hierarchy:
Balance at January 1, 2020 $ —
Initial fair value of derivative liability 1,264
Change in fair value of derivative liability 732
4. Financial Instruments
The fair value and amortized cost of cash equivalents and available-for-sale investments by major security type are presented in the following table (in thousands):
AmortizedCost UnrealizedGain UnrealizedLoss EstimatedFairValue
Cash equivalents and investments:
Classified as:
Cash equivalents - Restricted 100,000
Long-term investments 4,983
Total cash equivalents and investments $ 258,604
AmortizedCost UnrealizedGain UnrealizedLoss EstimatedFairValue
Cash equivalents and investments:
Classified as:
Short-term investments 89,734
Total cash equivalents and investments $ 229,513
As of December 31, 2021, the remaining contractual maturities of available-for-sale debt securities were as follows: (in thousands):
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EstimatedFair Value
One to two years 4,983
During the year ended December 31, 2021 and 2020, there have been no significant realized gains or losses on available-for-sale investments, no investments had been in a continuous unrealized loss position for more than 12 months, and the Company did not recognize any other-than-temporary impairment losses on these securities.
5. Balance Sheet Components
Inventory
The following is a summary of the Company’s inventory by category:
December 31,
Raw material $ 856
Work in progress 570
Finished goods 87
Total inventory $ 1,513
The Company did not have any inventory as of December 31, 2020.
Accrued Expenses
Accrued expenses consist of the following (in thousands):
December 31,
Accrued professional service fees 3,068 2,157
Accrued contract manufacturing and non-clinical costs 4,635 2,780
Accrued compensation and related benefits 9,988 4,801
Accrued collaboration funding 6,300 —
6. Revenue Interest Purchase Agreement
In December 2020, the Company entered into the RIPA, as amended in September 2021 with Oberland and the Purchasers to obtain financing for the commercialization and further development of Livmarli and other working capital needs. Pursuant to the RIPA, the Company has received $115.0 million consisting of an upfront payment of $50.0 million in December 2020 and $65.0 million in April 2021 associated with the acceptance for filing by the FDA of an NDA for Livmarli for the treatment of cholestatic pruritus in patients with ALGS, less certain transaction expenses.
The Company may also be entitled to receive up to approximately $50.0 million at the option of the Purchasers to finance in-licenses or other acquisitions on or prior to December 31, 2022. The Company was entitled to receive an additional $35.0 million upon FDA approval of Livmarli, which it elected to forgo.
As consideration for such payments, the Purchasers have the right to receive the Revenue Interests from the Company based on annual product sales, net of Livmarli, if approved, which will be tiered payments (the “Revenue Interest Payments”) based on whether such annual product sales, net are (i) less than or equal to $350.0 million
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(“Tier 1”), (ii) exceeding $350.0 million and less than or equal to $1.1 billion (“Tier 2”), or (iii) exceeding $1.1 billion (“Tier 3”).
The Revenue Interest Payments will initially be 9.75% (at Tier 1) and 2.00% (at Tier 2 and Tier 3) of such annual net sales. If the Purchasers have received Revenue Interest Payments in an amount equal to or greater than 110.0% of the total payments actually made by the Purchasers to the Company, exclusive of transaction expenses (the “Cumulative Purchaser Payments”), on or prior to December 31, 2026, the Revenue Interests shall be reduced to 2.00% at Tier 1 and 0.00% at Tier 3 for all subsequent calendar years beginning on January 1, 2027. If the Purchasers have not received Revenue Interest Payments in an amount equal to or greater than 110.0% of the Cumulative Purchaser Payments on or prior to December 31, 2026, the Revenue Interests shall be increased for all subsequent calendar years beginning on January 1, 2027 to a single defined rate (with no separate tiers) that would have provided the Purchasers with an amount equal to 110.0% of the Cumulative Purchaser Payments on or prior to December 31, 2026 had such rate applied to Tier 1 of initial Revenue Interest Payments. The Purchasers’ rights to receive the Revenue Interest Payments shall terminate on the date on which the Purchasers have received Revenue Interest Payments of 195.0% of the Cumulative Purchaser Payments, unless the RIPA is terminated earlier.
Under the RIPA, the Company has an option (the “Call Option”) to terminate the RIPA and repurchase future Revenue Interests at any time upon advance written notice. Additionally, the Purchasers have an option (the “Put Option”) to terminate the RIPA and to require the Company to repurchase future Revenue Interests upon enumerated events such as a bankruptcy event, an uncured material breach, a material adverse effect or a change of control, or upon the 12th anniversary of the first payment made by Purchasers. If the Put Option is exercised prior to the first anniversary of the closing date by the Purchasers (except pursuant to a change of control), the required repurchase price will be 120.0% of the Cumulative Purchaser Payments (minus all payments Company has made to the Purchasers in connection with the Revenue Interests). In all other cases, if the Put Option or the Call Option are exercised, the required repurchase price will be 175.0% of the Cumulative Purchaser Payments (minus all payments Company has made to the Purchasers in connection with the Revenue Interests), if such option is exercised prior to the third anniversary of the closing date, and 195.0% of the Cumulative Purchaser Payments (minus all payments Company has made to the Purchasers in connection with the Revenue Interests) if such option is exercised thereafter.
In addition, the RIPA contains various representations and warranties, information rights, non-financial covenants, indemnification obligations and other provisions that are customary for a transaction of this nature. The Purchaser’s obligations to fund the scheduled installments are subject to certain customary conditions as set forth in the RIPA.
Concurrently with the RIPA, the Company entered into a Common Stock Purchase Agreement (“CSPA”) with certain affiliates of Oberland, pursuant to which the Company sold an aggregate of 509,164 shares of its common stock for an aggregate purchase price of $10.0 million. The $50.0 million received pursuant to the RIPA and $10.0 million received pursuant to the CSPA was allocated between the resulting financial instruments on a relative fair value basis, with $49.2 million allocated to the debt under the RIPA and $10.8 million allocated to the common stock issued under the CSPA.
The Put Options under the RIPA that are exercisable by Purchasers upon certain contingent events were determined to be embedded derivatives requiring bifurcation and separately accounted for as a single compound derivative instrument. The Company recorded the initial fair value of the derivative liability of $1.3 million as a debt discount, which is amortized to interest expense over the expected term of the debt using the effective interest method.
In connection with the RIPA, as of December 31, 2021 and 2020, $129.9 and $47.7 million, respectively, was recorded as a revenue interest liability on the accompanying consolidated balance sheet. The Company imputes interest expense associated with this liability using the effective interest rate method. The effective interest rate is calculated based on the rate that would enable the debt to be repaid in full over the anticipated life of the arrangement. The interest rate on this liability may vary during the term of the agreement depending on a number of factors, including the level of forecasted product sales, net. The Company evaluates the interest rate quarterly based on its actual product sales, net and forecast product sales, net utilizing the prospective method. A significant increase or decrease in product sales, net will materially impact the revenue interest liability, interest expense and the time
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period for repayment. The Company recorded $17.6 million and $3.8 million in interest expense related to this arrangement for the year ended December 31, 2021 and 2020, respectively.
As of December 31, 2021, the Company had incurred $0.9 million of issuance costs in connection with the RIPA, which are amortized to interest expense over the estimated term of the debt.
Revenue Interest Payments made as a result of the Company’s product sales, net reduce the revenue interest liability. During the year ended December 31, 2021, the Company made a payment of $0.1 million in connection with the RIPA.
The following table summarizes the revenue interest liability activity during the years ended December 31, 2021 and 2020 (in thousands):
Revenue interest liability at inception $ 49,234
Interest expense recognized 335
Capitalized issuance costs (654 )
Debt discount from embedded derivatives (1,264 )
Revenue interest liability at December 31, 2020 $ 47,651
Proceeds from purchaser payments 65,000
Interest expense recognized 17,590
Capitalized issuance costs (197 )
Revenue interest payments (121 )
7. Asset Acquisitions
Assignment and License Agreement with Shire International GmbH (Takeda)
In November 2018, the Company entered into an Assignment and License Agreement (the “Shire Agreement”) with Shire International GmbH (“Shire”), which was subsequently acquired by Takeda Pharmaceutical Company Limited, and made an upfront payment to Shire of $7.5 million and issued Shire 1,859,151 shares of redeemable common stock with an estimated fair value of $7.0 million, or $3.76 per share. Under the terms of the Shire Agreement, Shire granted the Company an exclusive, royalty bearing worldwide license to develop and commercialize its two product candidates, Livmarli and volixibat. As part of the Shire Agreement, the Company was assigned license agreements held by Shire with Satiogen Pharmaceuticals, Inc. (“Satiogen”), Pfizer Inc. (“Pfizer”) and Sanofi-Aventis Deutschland GmbH (“Sanofi”). The Company has the right to sublicense under the Shire Agreement and additionally has the right to sublicense under the Satiogen, Pfizer and Sanofi licenses subject to the terms of those license agreements.
The Company is obligated to pay Shire up to an aggregate of $109.5 million upon the achievement of certain clinical development and regulatory milestones for Livmarli in certain indications and an additional $25.0 million upon regulatory approval of Livmarli for each and every other indication. In addition, the Company is required to pay up to an aggregate of $30.0 million upon the achievement of certain clinical development and regulatory milestones for volixibat solely for the first indication sought. Upon commercialization, the Company is obligated to pay Shire product sales milestones on total licensed products up to an aggregate of $30.0 million. The Company is also obligated to pay tiered royalties with rates ranging from low double-digits to mid-teens based upon annual worldwide net sales for all licensed products; however, these royalties are reduced in part by royalties due under the Satiogen and Sanofi licenses, as discussed below, related to Livmarli and volixibat, as applicable. The Company’s royalty obligations will continue on a licensed product-by-licensed product and country-by-country basis until the later to occur of the expiration of the last valid claim in a licensed patent covering the applicable licensed product in such country, expiration of any regulatory exclusivity for the licensed product in a country and ten years after the first commercial sale of a licensed product in such country. The Company paid $32.0 million and $10.0 million Livmarli development and regulatory milestones for the year ended December 31, 2021 and 2020, respectively and $2.0 million and none volixibat development and regulatory milestones for the year ended December 31, 2021 and
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2020, respectively. As of December 31, 2021, no milestones had been accrued as there were no potential milestones yet considered probable.
Satiogen License
Through the Shire Agreement, the Company was assigned a license agreement with Satiogen pursuant to which the Company obtained an exclusive, worldwide license to certain patents and know-how, with the right to sublicense to a third party subject to certain financial considerations. The Company is obligated to pay to Satiogen up to an aggregate of $10.5 million upon the achievement of certain milestones, of which $0.5 million was for initiation of certain development activities, $5.0 million for the completion of regulatory approvals and $5.0 million for commercialization activities. Additionally, the Company will be required to pay a low single-digit royalty on net sales. The Company’s royalty obligations continue on a licensed product-by-licensed product and country-by-country basis until the expiration of the last valid claim in a licensed patent covering the applicable licensed product in such country. Royalty obligations under the Satiogen license are creditable against the royalty obligations to Shire under the Shire Agreement. In October 2021, the Company paid $4.0 million associated with milestones for the FDA approval and for the first commercial sale of Livmarli. As of December 31, 2021, no milestones had been accrued as there were no potential milestones yet considered probable.
Pfizer License
Through the Shire Agreement, the Company was assigned a license agreement with Pfizer pursuant to which the Company obtained an exclusive, worldwide license to certain Pfizer know-how with a right to sublicense. Upon commercialization of any product utilizing the licensed product, the Company will be required to pay to Pfizer a low single-digit royalty on net sales of product sold by the Company, its affiliates or sublicensees. The Company’s royalty obligations continue on a licensed product-by-licensed product basis until the eighth anniversary of the first commercial sale of such licensed product anywhere in the world.
Sanofi License
Through the Shire Agreement, the Company was assigned a license agreement with Sanofi pursuant to which the Company obtained an exclusive, worldwide license to certain patents and know-how with the right to sublicense to a third party subject to certain financial considerations. The Company is obligated to pay up to an aggregate of $36.0 million upon the achievement of certain regulatory, commercialization and product sales milestones. Additionally, upon commercialization, the Company is required to pay tiered royalties in the mid to high single-digit range based upon net sales of licensed products sold by the Company and sublicensees in a calendar year, subject to adjustments in certain circumstances. The Company’s royalty obligations continue on a licensed product-by-licensed product and country-by-country basis until the later to occur of the expiration of the last valid claim in a licensed patent covering the applicable licensed product in such country and ten years after the first commercial sale of a licensed product in such country. Royalty obligations under the Sanofi license are creditable against the royalty obligations to Shire under the Shire Agreement. As of December 31, 2021, no milestones had been accrued as there were no potential milestones yet considered probable.
8. Collaboration and License Agreement
License and Collaboration Agreement with CANbridge
In April 2021, the Company entered into an exclusive license and collaboration agreement with CANbridge Pharmaceuticals, Inc. (“CANbridge”). Under the terms of the agreement, CANbridge has obtained the exclusive right to develop and commercialize Livmarli within the Greater China regions (China, Hong Kong, Macau and Taiwan). In connection with the agreement, the Company received an upfront payment of $11.0 million, which, upon satisfaction of the performance obligation and receipt by CANbridge of the right to use and benefit from the license, was recorded as license revenue in the accompanying consolidated statements of operations. Additionally, the Company is eligible to receive up to $5.0 million in research and development funding, and up to $109.0 million for the achievement of future regulatory and commercial milestones, with double-digit tiered royalties based on product net sales. The Company concluded at inception of the agreement that the transaction price should not include the variable consideration related to unachieved developmental and regulatory milestones as this consideration was considered to be constrained as it is probable that the inclusion of such variable consideration could result in a significant reversal in cumulative revenue. The Company will recognize any consideration related to sales-based payments (including milestones and royalties) when the related sales occur, as the Company has determined that these amounts relate predominantly to the license granted and therefore will be recognized at the later of (i) when or as the related sales occur, or (ii) when the performance obligation to which some or all of the
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royalty has been allocated has been satisfied (or partially satisfied). The Company re-evaluates the transaction price at each reporting period as uncertain events are resolved and other changes in circumstances occur. For the year ended December 31, 2021, no adjustments were made to the transaction price. For the year ended December 31, 2021, the Company recorded research and development funding of $1.9 million, payable by CANbridge to the Company which is reflected as a reduction of research and development expense in the accompanying consolidated statements of operations. As of December 31, 2021, such research and development funding of $0.8 million was recorded as a receivable which was included in prepaids and other current assets on the accompanying consolidated balance sheets. In January 2022, CANbridge achieved a regulatory milestone, triggering a milestone payment to the Company of $2.0 million.
License and Collaboration Agreement with GC Pharma
In July 2021, the Company entered into an exclusive license and collaboration agreement with GC Pharma. Under the terms of the agreement, GC Pharma has obtained the exclusive right to develop and commercialize Livmarli within South Korea for ALGS, PFIC, and BA. In connection with the agreement, the Company received a $5.0 million upfront payment, which, upon satisfaction of the performance obligation and receipt by GC Pharma of the right to use and benefit from the license, was recorded as license revenue in the accompanying consolidated financial statements of operations. Additionally, the Company is entitled to certain research and development funding and up to $23.0 million for the achievement of future regulatory and commercial milestones, with double-digit tiered royalties based on product net sales. At inception of the agreement, the Company concluded that the transaction price should not include the variable consideration related to unachieved developmental and regulatory milestones as this consideration was considered to be constrained as it is probable that the inclusion of such variable consideration could result in a significant reversal in cumulative revenue for this contract when the uncertainty is resolved in the future. The Company will recognize any consideration related to sales-based payments (including milestones and royalties) when the related sales occur, as the Company has determined that these amounts relate predominantly to the license granted and therefore will be recognized on the later to occur of satisfaction of the performance obligation or the occurrence of the related sales. The Company will re-evaluate the transaction price at each reporting period as uncertain events are resolved and other changes in circumstances occur. For the year ended December 31, 2021, no adjustments were made to the transaction price. For the year ended December 31, 2021, the Company recorded research and development funding of $0.3 million payable by GC Pharma to the Company which is reflected as a reduction of research and development expense in the accompanying consolidated statements of operations. As of December 31, 2021, such research and development funding of $0.3 million was recorded as a receivable which was included in prepaids and other current assets on the accompanying consolidated balance sheets.
Licensing Agreement with Takeda
In September 2021, the Company entered into an exclusive licensing agreement with Takeda for the development and commercialization of Livmarli in Japan for ALGS, PFIC, and BA. Under the terms of the agreement, Takeda will be responsible for regulatory approval and commercialization of Livmarli in Japan. Takeda will also be responsible for development, including conducting clinical studies in cholestatic indications. The Company is responsible for commercial supply to Takeda. In exchange, the Company is eligible to receive a percentage of Takeda’s annualized net sales, which range from high double digits declining to mid double digits over the first four years from commercial launch and thereafter remains at mid double digits.
Option, License and Collaboration Agreement with Vivet
In April 2021, the Company entered into an Option, License and Collaboration Agreement (“Vivet Collaboration Agreement”) with Vivet Therapeutics SAS (“Vivet”). Pursuant to the Vivet Collaboration Agreement, Vivet granted the Company the exclusive option, at the Company's discretion, to develop and subsequently commercialize Vivet’s two proprietary AAV gene therapy programs for PFIC, subtypes 3 and 2. Under the terms of the Vivet Collaboration Agreement, the Company paid an upfront fee of $4.2 million and agreed to provide funding to support certain research and development costs associated with the two gene therapy programs through July 2023. In December 2021, the Company elected not to exercise its option, terminating the agreement. The Company made a final payment of $6.3 million in January 2022 under terms of the agreement, which was reflected in accrued expenses at December 31, 2021 on the accompanying consolidated balance sheets.
For the year ended December 31, 2021, pursuant to the terms of the Vivet Collaboration Agreement, the Company recorded research and development expense of $18.9 million in the accompanying consolidated statements of operations.
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9. Leases
In January 2019, the Company entered into an operating lease agreement for office space which consisted of approximately 5,600 square feet (the “initial lease”). The lease term is approximately four years with an option to extend the term for one five-year term, which at the time was not reasonably assured of exercise and therefore, not included in the lease term. The lease contained a tenant improvement allowance of $0.4 million, which has been recorded as leasehold improvements in the accompanying consolidated balance sheets with a corresponding reduction of the ROU asset at inception of the lease. Rent payments commenced in August 2019.
In November 2019, the Company amended the operating lease agreement (the “amended agreement”) to extend the term of the initial lease through March 2025. This extension was accounted for as a lease modification and the Company recorded an increase to the ROU asset and lease liability of $0.6 million at the time of the amendment.
Additionally, pursuant to the amended agreement, the Company expanded the office space by 5,555 square feet for a five-year term expiring in March 2025 (the “expanded space”). The Company accounted for the expanded space as a separate contract as there were material additional rights of use that were not included in the initial lease. The amended lease contained a tenant improvement allowance of $0.8 million in connection with the expanded space, which has been recorded as leasehold improvements on the accompanying consolidated balance sheet with a corresponding reduction of the ROU asset at inception of the lease for the expanded space.
The ROU and corresponding lease liabilities were estimated using a weighted-average incremental borrowing rate of 8.0%.
As of December 31, 2021, the Company recorded an aggregate ROU asset of $1.6 million and an aggregate lease liability of $2.6 million on the accompanying consolidated balance sheet. The weighted-average remaining lease term is 3.1 years.
As of December 31, 2021, undiscounted future minimum payments under the Company’s operating leases are as follows (in thousands):
Years Ended December 31, UndiscountedRent Payments
Total undiscounted lease payments 2,962
Less: imputed interest (348 )
Total lease liability $ 2,614
Rent expense was $0.7 million and $0.6 million for the years ended December 31, 2021 and 2020, respectively. Variable lease payments for lease operating expenses were immaterial for the years ended December 31, 2021 and 2020.
10. Stockholders’ Equity (Deficit)
Common Stock
In January 2020, the Company completed a follow-on public offering of its common stock, pursuant to which the Company sold 2,400,000 shares of common stock at a price of $20.00 per share, resulting in net proceeds of $44.7 million after deducting underwriting discounts, commissions and offering expenses.
In August 2020, the SEC declared effective a registration statement on Form S-3 (“Shelf Registration”) covering the sale of up to $300.0 million of the Company’s securities. Also, in August 2020, the Company entered into a sales agreement (“Sales Agreement”) with SVB Leerink LLC (“SVB Leerink”) pursuant to which the Company may elect to issue and sell, from time to time, shares of common stock having an aggregate offering price
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of up to $75.0 million under the Shelf Registration through SVB Leerink acting as the sales agent and/or principal. During the year ended December 31, 2020, the Company sold 305,969 shares of common stock in an at-the-market offering pursuant to the Sales Agreement at a weighted-average price of $21.55 per share, resulting in gross proceeds of $6.6 million. The net proceeds after deducting sales commissions to SVB Leerink and other issuance expenses were approximately $6.3 million. The remaining capacity under the Sales Agreement is approximately $68.4 million as of December 31, 2021. In January and February 2022, the Company sold 992,389 shares of common stock in at-the-market offerings pursuant to the Sales Agreement at a weighted-average price of $18.04 per share, resulting in net proceeds of $17.4 million.
In December 2020, the Company completed an underwritten public offering of its common stock pursuant to the Shelf Registration. The Company sold 3,750,000 shares of common stock at a price of $20.00 per share, resulting in net proceeds of $70.0 million after deducting underwriting discounts, commissions and offering expenses. In addition, the Company granted the underwriters an option, exercisable for 30 days, to purchase up to 562,500 additional shares of its common stock at the public offering price, less the underwriting discounts and commissions. In January 2021, the underwriters partially exercised their option and purchased 375,654 shares of the Company’s common stock at a price of $20.00 per share, resulting in net proceeds of $7.1 million after deducting underwriting discounts.
As of December 31, 2021 and 2020, 122,464 and 256,056 shares of common stock, respectively, were subject to repurchase by the Company. The unvested stock liability related to these shares is immaterial to all periods presented.
Common Stock Reserved for Issuance
Common stock reserved for issuance is as follows:
December 31,
Reserved for underwriter option shares — 562,500
11. Stock-Based Compensation
Equity Incentive Plans
In November 2018, the Company adopted the 2018 Equity Incentive Plan (the “2018 Plan”) which permits the granting of stock awards and incentive and nonstatutory stock options to employees, directors and consultants of the Company.
In July 2019, the Company’s board of directors and stockholders approved and adopted the 2019 Equity Incentive Plan (the “2019 Plan”). The 2019 Plan became effective on July 17, 2019. Under the 2019 Plan, the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units and other stock or cash-based awards to individuals who are then employees, officers, directors or consultants of the Company. A total of 1,401,443 shares of common stock were approved to be initially reserved for issuance under the 2019 Plan, including 101,443 shares that remained available for issuance under the 2018 Plan as of July 17, 2019. Shares subject to outstanding awards under the 2018 Plan as of the effective date of the 2019 Plan that are subsequently canceled, forfeited or repurchased by the Company will be added to the shares reserved under the 2019 Plan. In addition, the number of shares of common stock available for issuance under the 2019 Plan will be automatically increased on the first day of each calendar year during the ten-year term of the 2019 Plan, beginning with January 1, 2020 and ending with January 1, 2029, by an amount equal to 5% of the outstanding number of shares of the Company’s common stock on December 31st of the preceding calendar year or such lesser amount as determined by the Company’s board of directors. As of December 31, 2021, 1,362,583 shares of common stock were available for issuance under the 2019 Plan.
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In March 2020, the compensation committee of the Company’s board of directors approved and adopted the 2020 Inducement Plan (the “2020 Inducement Plan”). Under the 2020 Inducement Plan, the Company may grant nonstatutory stock options, stock appreciation rights, restricted stock and restricted stock units to new employees entering into employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4). At adoption, the 2020 Inducement Plan authorized 750,000 shares of the Company’s common stock for future issuance. In 2021 and 2020, the Company’s board of directors authorized an additional 1,000,000 and 750,000 shares of the Company’s common stock for future issuance, respectively. As of December 31, 2021, 1,072,036 shares of common stock were available for issuance under the 2020 Inducement Plan.
Stock Options
The following table summarizes stock option activity during the year ended December 31, 2021 (in thousands, except share and per share data):
Intrinsic value is calculated as the difference between the exercise price of the underlying options and the fair value of the common stock for the options that had exercise prices that were lower than the per share fair value of the common stock on the date of exercise. The weighted-average grant date fair value per share of stock options granted during the year ended December 31, 2021 and 2020 was $13.39 and $12.70 per share, respectively. The total intrinsic value of options exercised during the year ended December 31, 2021 and 2020 was $1.3 million and $0.5 million, respectively. As of December 31, 2021, the total unrecognized stock-based compensation related to unvested stock option awards granted was $40.9 million, which the Company expects to recognize over a weighted-average period of approximately 2.5 years.
The fair value of each employee and non-employee stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. Due to the Company’s limited operating history and a lack of company specific historical and implied volatility data, the Company estimated expected volatility based on the historical volatility of a group of similar companies that are publicly traded. The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards. Due to the lack of historical exercise history, the expected term of the Company’s stock options for employees has been determined utilizing the “simplified” method for awards. 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. Expected dividend yield is zero based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.
The following assumptions were used to estimate the fair value of stock option awards granted during the following period:
Year ended December 31,
Expected dividend yield — —
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Performance Stock Units
In March 2021, the Company granted PSUs to employees which are subject to a performance condition of FDA marketing approval of Livmarli (“NDA Approval”) by a certain date. Upon achievement, 50% vest immediately and 50% vest on June 30, 2023, subject to the employees’ continuous service through each vesting date. As of September 29, 2021, the Company determined achievement of the NDA Approval performance condition was met. As a result, 76,027 of the PSUs vested on that date.
Additionally, in March 2021, the Company granted an aggregate of 75,688 PSUs to certain executive participants (“Executive PSUs”). The Executive PSUs are subject to performance and market conditions: (1) NDA Approval by a certain date and (2) achievement of a specified stock price. As of December 31, 2021, the NDA approval criteria was met; however, the Company did not achieve the specified stock price. As a result, the Executive PSU’s were forfeited.
As the Executive PSU’s contained a market condition, the grant date fair value was determined using a Monte Carlo simulation model and the weighted-average grant date fair value of these Executive PSU’s was $7.09 per share.
As of December 31, 2021, the Company determined achievement of the NDA Approval performance condition was met as applied under the Accounting Standards Codification 718, Compensation — Stock Compensation (Topic 718). The total unrecognized stock-based compensation related to the PSUs and the Executive PSUs was $0.8 million as of December 31, 2021.
The following table summarizes the activity related to PSUs for the year ended December 31, 2021:
Number of Shares Weighted-Average Grant Date Fair Value