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 in conjunction with the consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, this discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Annual Report on Form 10-K, our actual results could differ materially from the results described or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a clinical-stage precision oncology company focused on developing targeted therapies to inhibit frontier targets in RAS-addicted cancers. We possess sophisticated structure-based drug discovery capabilities built upon deep chemical biology and cancer pharmacology know-how and innovative, proprietary technologies that enable the creation of small molecules tailored to unconventional binding sites. Our understanding of genetic drivers and adaptive resistance mechanisms in cancer, coupled with robust drug discovery and medicinal chemistry capabilities, has guided us to establish a deep pipeline targeting critical signaling nodes within the RAS pathway and associated pathways. This cohesive approach underpins our clinical strategy of exploring mechanism-based dosing paradigms and in-pathway combinations to optimize treatment for cancer patients.
Our research and development pipeline comprises RAS(ON) inhibitors that bind directly to RAS variants, which we refer to as RAS(ON) Inhibitors, and RAS companion inhibitors that target key nodes in the RAS pathway or associated pathways, which we refer to as RAS Companion Inhibitors. Our RAS Companion Inhibitors (e.g., SHP2, mTORC1 and SOS1 inhibitors) are designed primarily for combination treatment strategies involving one or more therapeutic agents, which may include our RAS(ON) Inhibitors. Our long-term goal is to combine our RAS(ON) Inhibitors with selected RAS Companion Inhibitors or other therapies on behalf of patients based on molecular tumor features.
RAS (ON) Inhibitors
Our RAS(ON) Inhibitors are based on our proprietary tri-complex technology platform, which enables a highly differentiated approach to inhibiting the active, GTP-bound form of RAS, which we refer to as RAS(ON). We are developing a portfolio of compounds that we believe are the first and only RAS(ON) Inhibitors to use this mechanism of action. We believe that direct inhibitors of RAS(ON) will suppress cell growth and survival and be less susceptible to adaptive resistance mechanisms recognized for RAS(OFF) Inhibitors. We plan to evaluate our RAS(ON) Inhibitors alone and in combination with other drugs and investigational drug candidates, particularly in-pathway agents.
We currently consider three development-stage candidates as the first wave of RAS(ON) Inhibitors that we are advancing:
RMC-6236
RMC-6236, our RASMULTI(ON) Inhibitor, is designed as a first-in-class, potent, oral, RAS-selective tri-complex inhibitor of multiple RAS(ON) variants including cancer drivers at all three of the major mutation hotspot positions, G12, G13, and Q61. RMC-6236 inhibits all three major RAS isoforms, suppressing the mutant cancer driver and cooperating wild-type RAS proteins.
A monotherapy dose-escalation study of RMC-6236 is ongoing and, based on early observations from this study, we believe that RMC-6236 is orally bioavailable and has achieved dose-dependent exposures in patients that are consistent with our preclinical projections. The compound has been generally well-tolerated, including at dose levels at which we have observed clear signals of anti-tumor activity. We continue in dose escalation and we currently expect to provide additional evidence of first-in-class single agent activity for this compound in mid-2023.
RMC-6291
RMC-6291 is designed as a first-in-class, potent, oral and selective tri-complex inhibitor of KRASG12C(ON). It is designed to exhibit subnanomolar potency for suppressing RAS pathway signaling and growth of KRASG12C-bearing cancer cells and is engineered to be highly selective for KRASG12C over wild type RAS and other cellular targets. RMC-6291 is designed to be differentiated from first-generation KRASG12C(OFF) inhibitors, which sequester the KRASG12C(OFF) form, by its mechanism of directly inhibiting the KRASG12C(ON) form.
A monotherapy dose-escalation study of RMC-6291 is ongoing and, based on early observations from this study, we believe that RMC-6291 is orally bioavailable in patients, that it is exhibiting pharmacokinetics consistent with our expectations based on preclinical experiments and that we are dosing the compound in a pharmacologically active range with acceptable safety and tolerability. We currently expect to provide preliminary evidence of a superior profile for this compound in the second half of 2023.
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RMC-9805
RMC-9805 is designed as a first-in-class, potent, oral and selective, tri-complex inhibitor of KRASG12D(ON). It is designed to exhibit low nanomolar potency for suppressing RAS pathway signaling and growth of KRASG12D-bearing cancer cells and is engineered to covalently inactivate KRASG12D irreversibly. We currently expect to announce dosing of the first patient in a monotherapy dose-escalation study of this compound in mid-2023.
Additional RAS(ON) Inhibitors
Beyond this first wave of RAS(ON) Inhibitors, we have other RAS(ON) Inhibitor compounds currently in our research and development pipeline, including our development candidate RMC-8839, which is designed as a first-in-class, potent, oral and selective, covalent tri-complex inhibitor of KRASG13C(ON) and RMC-0708, which is designed as a first-in-class, potent, oral and selective, non-covalent tri-complex inhibitor of KRASQ61H(ON). RMC-8839 is designed to exhibit picomolar potency for suppressing RAS pathway signaling and growth of KRASG13C-bearing cancer cells and is engineered to covalently inactivate KRASG13C for irreversible inhibition. RMC-0708 is designed to exhibit picomolar potency for suppressing RAS pathway signaling and growth of KRASQ61H-bearing cancer cells and is engineered for selective inhibition of KRASQ61H over other RAS isoforms via non-covalent binding interactions. We are pursuing pipeline expansion programs focused on KRASG12R, KRASG12V, KRASG13D, RASQ61X and other targets.
RAS Companion Inhibitors
RMC-4630
Our RAS Companion Inhibitor RMC-4630 is designed as a potent and selective inhibitor of SHP2, a central node in the RAS signaling pathway. RMC-4630 is being evaluated in a Phase 1/2 clinical program. In 2018, we entered into a collaborative research, development and commercialization agreement with Aventis, Inc. (an affiliate of Sanofi) (the Sanofi Agreement) with respect to SHP2 inhibitors, including RMC-4630. The Sanofi Agreement has been terminated effective as of June 2023, and following the effectiveness of termination, we will regain all global rights granted under the Sanofi Agreement (except as necessary to permit Sanofi to perform any surviving obligations under the Sanofi Agreement), including decision-making regarding research and development, and rights to all commercial proceeds, from RMC-4630.
Our highest priority hypothesis regarding RMC-4630 is that it can deliver additional clinical benefit to patients with RAS-addicted tumors treated with a RAS inhibitor. Below is a list of the clinical studies of RMC-4630 in combination with RAS inhibitors:
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an Amgen-sponsored Phase 1b study of RMC-4630 in combination with Amgen’s KRASG12C(OFF) inhibitor, sotorasib (LUMAKRAS(R));
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RMC-4630-03, a Phase 2 study of RMC-4630 in combination with sotorasib that we are sponsoring under a clinical trial collaboration and supply agreement with Amgen; and
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a Sanofi-sponsored Phase 1/2 study of RMC-4630 in combination with Mirati Therapeutics’ KRASG12C(OFF) inhibitor, adagrasib (KRAZATI(R)).
Amgen is currently evaluating RMC-4630 in a Phase 1b study in combination with Amgen’s KRASG12C(OFF) agent sotorasib in Amgen’s CodeBreaK 101c study. In August 2022, Amgen reported results from this study at the 2022 World Conference on Lung Cancer.
As a complement to the CodeBreaK 101c study, we are sponsoring RMC-4630-03, which is an additional global Phase 2 study of RMC-4630 in combination with sotorasib for patients with non-small cell lung cancer (NSCLC) carrying a KRASG12C mutation who have failed prior standard therapy and who have not previously been treated with a RAS inhibitor. We are sponsoring the RMC-4630-03 study under our global partnership with Sanofi and conducting the trial in collaboration with Amgen, which is supplying sotorasib globally under a clinical collaboration and supply agreement. We currently plan to provide topline data from this study in the second half of 2023.
Sanofi has sponsored a combination study under the Sanofi Agreement and under a clinical trial collaboration and supply agreement between Sanofi and Mirati to evaluate RMC-4630 (also known as SAR442720) in combination with Mirati’s KRASG12C(OFF) inhibitor, adagrasib. We expect that this study will be wound down in connection with the termination of the Sanofi Agreement.
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There are also several clinical studies of RMC-4630 that do not involve combinations with RAS inhibitors:
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RMC-4630-01, a Phase 1 study of RMC-4630 as monotherapy;
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a Sanofi-sponsored Phase 1/2 study of RMC-4630 in combination with the PD-1 inhibitor pembrolizumab (Keytruda®), which we expect will be wound down in connection with the termination of the Sanofi Agreement and
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a combination of RMC-4630 with an ERK inhibitor in patients with pancreatic cancer as part of an investigator-sponsored study by Netherlands Cancer Institute.
RMC-5552
Our RAS Companion Inhibitor RMC-5552 is designed as a selective inhibitor of hyperactivated mTORC1 signaling in tumors. We are evaluating RMC-5552 first as a monotherapy in a Phase 1 study (RMC-5552-001), and plan to evaluate RMC-5552 in combination with RAS inhibitors for patients with cancers harboring a RAS mutation and co-occurring mutations in the mTOR signaling pathway.
We have reported initial findings from the ongoing dose escalation portion of the RMC-5552-001 study and currently expect to provide additional evidence of single agent activity for this compound in 2023.
We have agreed to supply RMC-5552 to the Regents of the University of California on behalf of its San Francisco campus (UCSF) for an investigator-initiated Phase 1/1b trial by UCSF of RMC-5552 in patients with recurrent glioblastoma.
RMC-5845
Our RAS Companion Inhibitor RMC-5845 targets SOS1, a protein that plays a key role in converting RAS(OFF) to RAS(ON) in cells. RMC-5845 is intended for select combination therapies for certain genetically-defined tumors. This compound is ready for preparation of an IND based on our preclinical development. We continue to evaluate whether to advance RMC-5845 into clinical development in the context of other assets in our portfolio.
RMC-6236
Our RASMULTI(ON) Inhibitor, RMC-6236, is designed to inhibit essentially all RAS(ON) proteins, including normal or wild-type RAS proteins that may help augment oncogenic signaling to tumor cells that have a mutant RAS as a primary driver. Given this broad activity of RMC-6236, we believe it may also be useful as a RAS Companion Inhibitor and we may evaluate the potential benefit from combining RMC-6236 with a RAS inhibitor, including with a RAS(ON) mutant-selective inhibitor such as RMC-6291.
Collaboration agreement with Sanofi
In June 2018, we entered into the Sanofi Agreement with Aventis, Inc. (an affiliate of Sanofi) to research and develop SHP2 inhibitors, including RMC-4630, for any indications. The Sanofi Agreement was assigned to Genzyme Corporation, a Sanofi affiliate, in December 2018. For the purposes of this discussion, we refer to Genzyme Corporation as Sanofi. In December 2022, the Sanofi Agreement was terminated effective as of June 2023, and all rights and obligations described below will terminate and revert to us upon effectiveness of this termination, except as necessary to permit Sanofi to perform any surviving obligations under the Sanofi Agreement
Pursuant to the Sanofi Agreement, we granted Sanofi a worldwide, exclusive, sublicensable (subject to our consent in certain circumstances) license under certain of our patents and know-how to research, develop, manufacture, use, sell, offer for sale, import and otherwise commercialize SHP2 inhibitors, including RMC-4630, for any and all uses, subject to our exercise of rights and performance of obligations under the Sanofi Agreement. Such intellectual property exclusively licensed to Sanofi includes our interest under any of our solely-owned or jointly-owned inventions arising out of activities undertaken pursuant to the development of SHP2 inhibitor product candidates under the Sanofi Agreement.
Under the Sanofi Agreement, we have primary responsibility for early clinical development of RMC-4630 pursuant to an approved development plan. Sanofi is responsible to reimburse us for all internal and external costs and expenses to perform our activities under approved development plans, except for costs and expenses related to studies designated in the Sanofi Agreement as RevMed Studies, for which we will bear all costs and expenses, and for the RMC-4630-03 study, for which we have agreed that Sanofi will reimburse us for 50% of the costs and expenses. Unreimbursed costs borne by us for any RevMed Studies and for our 50% share of the RMC-4630-03 collaboration study are subject to future reimbursement by Sanofi through a buy-in payment pursuant to the terms of the Sanofi Agreement if they use data from a RevMed Study or the RMC-4630-03 study in support of a marketing approval application. There currently are no active RevMed Studies.
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We are responsible for the manufacture of SHP2 inhibitors for Phase 1 and non-registrational Phase 2 clinical trials pursuant to an approved development plan, while Sanofi is responsible for manufacturing SHP2 inhibitors for all other clinical trials and commercial supply. Sanofi has the sole right and responsibility to perform all regulatory activities under the Sanofi Agreement, except with respect to certain trials conducted by us or otherwise conducted under our IND, including our current clinical trials evaluating RMC-4630.
Unless otherwise delegated to us by the joint commercialization committee, during the term of the Sanofi Agreement, Sanofi also has the sole right and responsibility for all aspects of the commercialization of SHP2 inhibitors in the world for any and all uses, at its expense, subject to our right to elect to co-promote SHP2 inhibitors in the United States. Sanofi agrees to provide us, and we agree to provide Sanofi, with research, development and commercialization updates through the joint committees.
During the term of the Sanofi Agreement, we may not, alone or with any affiliate or third party, conduct certain research activities with respect to, or develop or commercialize, any product that contains a SHP2 inhibitor outside of the Sanofi Agreement.
Pursuant to the Sanofi Agreement, we received an upfront payment of $50 million from Sanofi in July 2018. The Sanofi Agreement includes obligations for Sanofi to make certain milestone payments and royalty payments, all of which will expire upon effectiveness of termination of the Sanofi Agreement.
During the term of the Sanofi Agreement, Sanofi has the sole and exclusive right to file, prosecute and maintain any patents licensed to it pursuant to the Sanofi Agreement, as well as to enforce infringement of or defend claims against such patents that relate to SHP2 inhibitor products.
Upon effectiveness of the termination of the Sanofi Agreement, the licenses granted to Sanofi thereunder shall become fully paid-up, royalty-free, perpetual and irrevocable and all rights and obligations of Sanofi under the Sanofi Agreement will revert to us.
Through December 31, 2022, we have received an aggregate of $176.9 million from Sanofi, including the upfront payment and research and development expense reimbursements.
Financial Operations Overview
Collaboration revenue
Collaboration revenue consists of revenue under the Sanofi Agreement for our SHP2 program. We received a $50.0 million upfront payment from Sanofi in July 2018 and receive reimbursement for research and development services. The Sanofi Agreement is expected to terminate in June 2023.
For further information on our revenue recognition policies, see “Note 2. Summary of significant accounting policies” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.
Research and development expenses
We substantially rely on third parties to conduct our preclinical studies, clinical trials and manufacturing. We estimate research and development expenses based on estimates of services performed, and rely on third party contractors and vendors to provide us with timely and accurate estimates of expenses of services performed to assist us in these estimates. Research and development expenses consist primarily of costs incurred for the development of our product candidates and costs associated with identifying compounds through our discovery platform, which include:
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expenses incurred under agreements with third-party contract organizations, investigative clinical trial sites that conduct research and development activities on our behalf and consultants;
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costs related to production of clinical and preclinical materials, including fees paid to contract manufacturers;
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laboratory and vendor expenses related to the execution of discovery programs, preclinical and clinical trials;
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employee-related expenses, which include salaries, benefits and stock-based compensation; and
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facilities and other expenses, which include allocated expenses for rent and maintenance of facilities, depreciation and amortization expense, information technology and other supplies.
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We expense all research and development costs in the periods in which they are incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors, collaborators and third-party service providers. Nonrefundable advance payments for goods or services to be received in future periods for use in research and development activities are deferred and recorded as prepaid assets. The prepaid amounts are then expensed as the related goods are delivered or as services are performed.
Up to the termination date of the Sanofi Agreement, Sanofi is responsible to reimburse us for all internal and external costs and expenses to perform our activities under approved development plans, except for 50% of the RMC-4630-03 study. These reimbursements from Sanofi are recorded as collaboration revenue.
We expect our research and development expenses to increase for the foreseeable future as we continue to invest in discovering and developing product candidates and advancing product candidates into later stages of development, which may include conducting larger clinical trials. The process of conducting the necessary research and development and clinical trials to seek regulatory approval for product candidates is costly and time-consuming, and the successful development of our product candidates is highly uncertain. As a result, we are unable to determine the duration and completion costs of our research and development projects or clinical trials or if and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.
General and administrative expenses
General and administrative expenses consist primarily of personnel-related costs, consultants and professional services expenses, including legal, audit, accounting and human resources services, insurance, allocated facilities and information technology costs, and other general operating expenses not otherwise classified as research and development expenses. Personnel-related costs consist of salaries, benefits and stock-based compensation. Facilities costs consist of rent, utilities and maintenance of facilities. We expect our general and administrative expenses to increase for the foreseeable future due to anticipated increases in headcount and as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the Securities and Exchange Commission, the Nasdaq Global Select Market, investor relations activities and other administrative and professional services.
Interest income
Interest income primarily consists of interest earned on and accretion of our cash equivalents and marketable securities.
Interest expense
Interest expense primarily consists of interest related to our finance lease and interest on other outstanding obligations.
Benefit from income taxes
Benefit from income taxes relates to net changes in the deferred tax liability associated with our Warp Drive acquisition resulting from changes in the effective state tax rate and changes in our valuation allowance.
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Results of operations
Comparison of the years ended December 31, 2022 and 2021
Years Ended December 31,
(in thousands)
Revenue:
Operating expenses:
Other income (expense), net:
Interest expense — (12 ) 12
Benefit from income taxes 420 — 420
Collaboration revenue
Collaboration revenue consists of revenue under the Sanofi Agreement, which is expected to terminate in 2023. As a result of the expected termination of the agreement and development plan adjustments during the year, we revised our estimate of the accounting transaction price and increased our percentage of completion under the agreements with Sanofi, which resulted in total cumulative catch-up adjustments that increased collaboration revenue by $3.0 million for the year ended December 31, 2022.
In August 2021, we entered into a Letter Agreement with Sanofi to include RMC-4630-03 under the development plan for RMC-4630 and decided to no longer enroll new patients in RMC-4630-02. As a result of these development plan adjustments, we revised the estimate of the accounting transaction price and decreased our estimated percentage of completion under the agreements with Sanofi, and resulted in a cumulative catch-up adjustment that reduced collaboration revenue by $8.5 million for the year ended December 31, 2021.
Collaboration revenue increased by $6.0 million, or 20%, during the year ended December 31, 2022 compared to the same period in 2021. The increase was due to the cumulative catch-up adjustments resulting from the Sanofi Agreement termination and development plan adjustments, partially offset by lower reimbursable SHP2 program research and development costs under the Sanofi Agreement for the year ended December 31, 2022.
Research and development expenses
Research and development expenses increased by $66.1 million, or 35%, during the year ended December 31, 2022 compared to the same period in 2021. The increase in research and development expenses during the year ended December 31, 2022 was primarily due to a $16.1 million increase in third-party costs for our preclinical research portfolio, primarily driven by higher chemistry contract research organization, material sourcing and manufacturing costs; a $16.1 million increase in salaries and other employee-related expenses due to increased headcount to support our research and development programs; a $14.8 million increase in RMC-6236 costs, which commenced clinical trials in the second quarter of 2022; a $10.2 million increase in facilities and other allocated expenses as a result of higher rent, utilities and information technology expenses associated with increased headcount; a $6.3 million increase in stock-based compensation; and a $5.2 million increase in RMC-6291 costs, which commenced clinical trials in the third quarter of 2022.
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General and administrative expenses
General and administrative expenses increased by $10.1 million, or 33%, during the year ended December 31, 2022 compared to the same period in 2021. The increase in general and administrative expenses during the year ended December 31, 2022 was primarily due to an increase of $4.2 million in stock-based compensation expense; an increase of $3.9 million in salaries and other employee-related expenses due to increased headcount; a $0.7 million increase in facilities and other allocated expenses as a result of higher rent, utilities and information technology expenses associated with increased headcount; and a $0.8 million increase in legal and accounting fees.
Interest income
Interest income increased by $8.2 million for the year ended December 31, 2022, compared to the same period in 2021 due to a larger cash, cash equivalents and marketable securities balance and higher interest rates.
Interest expense
Interest expense was zero for the year ended December 31, 2022 and less than $0.1 million for the year ended December 31, 2021.
Benefit from income taxes
Benefit from income taxes was $0.4 million for the year ended December 31, 2022 and zero for the year ended December 31, 2021 and related to net changes in the valuation allowance resulting from the Warp Drive acquisition.
Comparison of the years ended December 31, 2021 and 2020
Years Ended December 31,
(in thousands)
Revenue:
Operating expenses:
Other income (expense), net:
Interest expense (12 ) (71 ) 59
Benefit from income taxes — 371 (371 )
Collaboration revenue
In August 2021, we entered into a Letter Agreement with Sanofi to include RMC-4630-03 under the development plan for RMC-4630 and ceased enrollment of new patients in RMC-4630-02. As a result of these development plan adjustments, we revised our estimate of the accounting transaction price and our percentage of completion under the agreements with Sanofi, which resulted in a cumulative catch-up adjustment that reduced collaboration revenue by $8.5 million for the year ended December 31, 2021.
Collaboration revenue decreased by $13.6 million, or 32%, during the year ended December 31, 2021 compared to the same period in 2020. The decreases in collaboration revenue during the year ended December 31, 2021 was primarily due to the cumulative catch-up adjustment and lower reimbursed manufacturing costs.
Research and development expenses
Research and development expenses increased by $54.7 million, or 41%, during the year ended December 31, 2021 compared to the same period in 2020. The increase in research and development expenses during the year ended December 31, 2021 was primarily
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due to a $34.5 million increase in third-party costs for our preclinical research portfolio, primarily driven by higher chemistry contract research organization, material sourcing and manufacturing costs; a $9.2 million increase in salaries and other employee-related expenses due to increased headcount to support our research and development programs, a $7.0 million increase in stock-based compensation, and a $5.4 million increase in facilities and other allocated expenses as a result of higher rent, utilities and information technology expenses associated with increased headcount.
General and administrative expenses
General and administrative expenses increased by $9.0 million, or 42%, during the year ended December 31, 2021 compared to the same period in 2020. The increase in general and administrative expenses during the year ended December 31, 2021 was primarily due to an increase of $4.8 million in stock-based compensation expense; an increase of $2.3 million in salaries and other employee-related expenses due to increased headcount; and an increase of $0.8 million in insurance.
Interest income
Interest income decreased by $1.3 million for the year ended December 31, 2021, compared to the same period in 2020 due to lower interest rates.
Interest expense
Interest expense was less than $0.1 million for both years ended December 31, 2021 and 2020.
Benefit from income taxes
Benefit from income taxes was zero for the year ended December 31, 2021 and $0.4 million for the year ended December 31, 2020 and related to net changes in the valuation allowance resulting from the Warp Drive acquisition.
Liquidity and capital resources
In February 2020, we closed our IPO and issued 16,100,000 shares of our common stock at a price to the public of $17.00 per share for net proceeds of approximately $250.7 million, after deducting underwriting discounts and commissions of $19.2 million and expenses of $3.8 million.
In July 2020, we issued 6,900,000 shares of our common stock in an underwritten public offering at a price to the public of $26.00 per share for net proceeds of $167.8 million, after deducting underwriting discounts and commissions of $10.8 million and offering expenses of $0.8 million.
In February 2021, we issued 6,666,666 shares of our common stock in an underwritten public offering at a price to the public of $45.00 per share for net proceeds of $281.1 million, after deducting underwriting discounts and commissions of $18.0 million and offering expenses of $0.9 million.
In November 2021, we entered into a sales agreement with Cowen and Company, LLC (Cowen) to sell shares of our common stock, from time to time, with aggregate gross proceeds of up to $250 million, through an at-the-market equity offering program (ATM) under which Cowen agreed to act as our sales agent. In 2021, we sold an aggregate of 339,302 shares of common stock under the ATM resulting in gross proceeds to us of $10.4 million. After deducting commissions and expenses of $0.3 million, net proceeds to us were $10.1 million.
In July 2022, we issued 13,225,000 shares of our common stock in an underwritten public offering at a price to the public of $20.00 per share, for net proceeds of $248.1 million, after deducting underwriting discounts and commissions of $15.9 million and estimated offering expenses of $0.5 million.
During the year ended December 31, 2022, we sold an aggregate of 2,385,846 shares of common stock under the ATM resulting in gross proceeds of $51.3 million. After deducting commissions and expenses of $1.4 million, our net proceeds under the ATM were $49.9 million.
Our operations have been financed primarily by our public offerings of common stock, net proceeds of $230.6 million from the issuance of our preferred stock and $176.9 million received under the Sanofi Agreement for upfront payments and for research and development cost reimbursement.
As of December 31, 2022, we had $644.9 million in cash, cash equivalents and marketable securities.
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As of December 31, 2022, we had an accumulated deficit of $701.3 million. Our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures related to our product candidates and our preclinical research portfolio, and to a lesser extent, general and administrative expenditures. We expect our expenses to continue to increase in connection with our ongoing activities, particularly as we continue to advance our product candidates and preclinical research portfolio.
We believe that our existing cash, cash equivalents and marketable securities will enable us to fund our planned operations for at least 12 months following the date of this report.
The timing and amount of our future funding requirements depends on many factors, including:
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the scope, progress, results and costs of researching and developing our product candidates and programs, and of conducting preclinical studies and clinical trials;
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the timing of, and the costs involved in, obtaining marketing approvals for product candidates we develop if clinical trials are successful;
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the successful wind-up of our collaboration with Sanofi, which has been terminated effective as of June 2023, including the continued reimbursement by Sanofi of our research and development costs for our SHP2 program in accordance with the Sanofi Agreement prior to the effectiveness of termination;
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the cost of commercialization activities for any product candidates we develop, whether alone or in collaboration, including marketing, sales and distribution costs if any product candidate we develop is approved for sale;
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the cost of manufacturing our current and future product candidates for clinical trials in preparation for marketing approval and in preparation for commercialization;
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our ability to establish and maintain strategic licenses or other arrangements and the financial terms of such agreements;
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the costs involved in preparing, filing, prosecuting, maintaining, expanding, defending and enforcing patent claims, including litigation costs and the outcome of such litigation;
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the timing, receipt and amount of sales of, profit share or royalties on, our future products, if any;
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the emergence of competing cancer therapies or other adverse market developments; and
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any plans to acquire or in-license other programs or technologies.
We expect to need to obtain substantial additional funding in the future to continue the preclinical and clinical development of our current and future programs and to prepare for their potential commercialization. If we need to raise additional capital to fund our operations, funding may not be available to us on acceptable terms, or at all. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of or suspend one or more of our clinical trials, research and development programs or commercialization efforts. We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings and collaborations or licensing arrangements. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, and if the debt is convertible into our common stock, the ownership interest of our stockholders may be diluted. If we are unable to raise capital, we may need to delay, reduce or terminate planned activities to reduce costs. Doing so will likely harm our ability to execute our business plans.
Cash flows
The following table summarizes our consolidated cash flows for the periods indicated:
Year Ended December 31,
(in thousands)
Net cash provided by (used in):
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Cash used in operating activities
During the year ended December 31, 2022, cash used in operating activities of $224.4 million was attributable to a net loss of $248.7 million partially offset by $37.8 million in non-cash charges and by a net change of $13.5 million in our operating assets and liabilities. The non-cash charges primarily consisted of stock-based compensation expense of $31.2 million, depreciation and amortization of $5.0 million, amortization of operating lease right-of-use asset of $4.6 million offset by net amortization of premium on marketable securities of $3.1 million. The change in operating assets and liabilities was primarily due to a $3.8 million increase in prepaid expenses and other current assets primarily resulting from the timing of prepayments made for research and development activities, a $14.5 million decrease in deferred revenue associated with the Sanofi Agreement, a $2.4 million decrease in operating lease liability, offset by a $7.3 million increase in accounts payable, $1.5 million increase in accrued expenses and other current liabilities and a $1.3 million decrease in accounts receivable.
During the year ended December 31, 2021, cash used in operating activities of $147.2 million was attributable to a net loss of $187.1 million partially offset by $31.2 million in non-cash charges and by net change of $8.7 million in our operating assets and liabilities. The non-cash charges primarily consisted of stock-based compensation expense of $20.7 million, depreciation and amortization of $4.2 million, net amortization of premium on marketable securities of $3.0 million and amortization of operating lease right-of-use asset of $3.2 million. The change in operating assets and liabilities was primarily due to an $11.0 million increase in accrued expenses and accounts payable partially offset by a $1.7 million decrease in deferred revenue associated with the Sanofi Agreement and a $1.5 million decrease in operating lease liability.
During the year ended December 31, 2020, cash used in operating activities of $100.1 million was attributable to a net loss of $108.2 million and a net change of $8.3 million in our operating assets and liabilities, partially offset by $16.4 million in non-cash charges. The non-cash charges primarily consisted of stock-based compensation expense of $8.9 million, depreciation and amortization of $3.7 million, net amortization of premium on marketable securities of $0.1 million and amortization of operating lease right-of-use asset of $2.9 million. The change in operating assets and liabilities was primarily due to an $11.3 million decrease in deferred revenue associated with the Sanofi Agreement partially offset by a $4.9 million increase in accrued expenses and other current assets.
Cash used in investing activities
During the year ended December 31, 2022, cash used in investing activities of $24.1 million was primarily comprised of purchases of marketable securities of $612.8 million and purchases of property and equipment of $10.8 million, offset by cash provided by maturities of marketable securities of $599.5 million.
During the year ended December 31, 2021, cash used in investing activities of $142.1 million was primarily comprised of purchases of marketable securities of $671.3 million and purchases of property and equipment of $6.5 million, offset by cash provided by maturities of marketable securities of $526.8 million and sale of marketable securities of $9.0 million.
During the year ended December 31, 2020, cash used in investing activities of $234.2 million was primarily comprised of purchases of marketable securities of $544.1 million and purchases of property and equipment of $2.9 million, partially offset by cash provided by maturities of marketable securities of $309.8 million and sale of marketable securities of $3.0 million.
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Cash provided by financing activities
During the year ended December 31, 2022, cash provided by financing activities of $301.4 million was comprised of $248.1 million in net proceeds from the July 2022 underwritten public offering, $49.9 million in net proceeds from the issuance of common stock under the ATM, $1.9 million in proceeds from the issuance of common stock under the employee stock purchase plan and $1.5 million in proceeds from the issuance of common stock upon the exercise of stock options.
During the year ended December 31, 2021, cash provided by financing activities of $294.2 million was comprised of $281.1 million in net proceeds from the issuance of common stock related from the February 2021 underwritten public offering, $10.1 million in net proceeds from the issuance of common stock under the ATM, $1.9 million in proceeds from the issuance of common stock under the employee stock purchase plan and $ 1.5 million in proceeds from the issuance of common stock upon the exercise of stock options.
During the year ended December 31, 2020, cash provided by financing activities of $422.8 million was comprised of $420.1 million in net proceeds from the issuance of common stock related to our IPO in February 2020 and our underwritten public offering in July 2020, $1.9 million in proceeds from the issuance of common stock upon the exercise of stock options and $0.8 million in proceeds from the issuance of common stock under the employee stock purchase plan.
Contractual obligations and commitments
We have contractual obligations related to office and laboratory space leases in Redwood City, California and Cambridge, Massachusetts, described in “Note 7. Commitments and contingencies” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.
We enter into agreements in the ordinary course of business with contract research organizations for clinical trials, contract manufacturing organizations to provide clinical trial materials and with vendors for preclinical studies and other services and products for operating purposes which are generally cancelable at any time by us upon 30 to 90 days prior written notice.
Indemnification agreements
We enter into standard indemnification arrangements in the ordinary course of business. Pursuant to these arrangements, we indemnify, hold harmless and agree to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third party with respect to its technology. The term of these indemnification agreements is generally perpetual any time after the execution of the agreement. The maximum potential amount of future payments we could be required to make under these arrangements is not determinable. We have never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the fair value of these agreements is minimal.
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Critical accounting policies, significant judgments and use of estimate
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles (U.S. GAAP). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
Revenue recognition
We recognize revenue is accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC 606). Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which such entity expects to receive in exchange for those goods or services. In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under arrangements, we perform the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies the performance obligation. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
We enter into collaboration agreements under which we may obtain upfront license fees, research and development funding, and development, regulatory and commercial milestone payments and royalty payments. Our performance obligations under these arrangements may include licenses of intellectual property, sales and distribution rights, research and development services, delivery of manufactured product and/or participation on joint steering committees.
Licenses of intellectual property: If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenue from upfront license fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring proportional performance for purposes of recognizing revenue from non-refundable, upfront fees. We evaluate the measure of proportional performance each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.
Research, development and regulatory milestone payments: At the inception of each arrangement that includes research, development, or regulatory milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price. We use the most likely amount method for research, development and regulatory milestone payments. Under the most likely amount method, an entity considers the single most likely amount in a range of possible consideration amounts. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price.
Sales-based milestones and royalties: For arrangements that include sales-based milestone or royalty payments based on the level of sales, and in which the license is deemed to be the predominant item to which the sales-based milestone or royalties relate to, we recognize revenue in the period in which the sales-based milestone is achieved and in the period in which the sales associated with the royalty occur. To date, we have not recognized any sales-based milestone or royalty revenue resulting from our collaboration arrangements.
The transaction price for each collaboration agreement is determined based on the amount of consideration we expect to be entitled for satisfying all performance obligations within the agreement. Significant judgment may be required in determining the amount of variable consideration to be included in the transaction price. We use the most likely amount method to determine variable consideration and will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.
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Revenue is recognized based on actual costs incurred as a percentage of total estimated costs to be incurred over the performance obligation as we fulfill our performance obligations. A cost-based input method of revenue recognition requires management to make estimates of costs to complete our performance obligations. In making such estimates, significant judgment is required to evaluate assumptions related to cost estimates. The cumulative effect of revisions to estimated costs to fulfill our performance obligations will be recorded in the period in which changes are identified and amounts can be reasonably estimated.
Accrued research and development expenses
We record accrued expenses for estimated preclinical studies and clinical trial expenses. Estimates are based on the services performed pursuant to contracts with research institutions and contract research organizations and clinical manufacturing organizations that conduct and manage preclinical studies and clinical trials on our behalf based on actual time and expenses incurred by them. Further, we accrue expenses related to clinical trials based on the level of patient enrollment and activity according to the related agreement. We monitor patient enrollment levels and related activity to the extent reasonably possible and make judgments and estimates in determining the accrued balance in each reporting period. If we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates. To date, we have not experienced significant changes in our estimates of preclinical studies and clinical trial accruals.
Stock-based compensation
We maintain an equity incentive plan as a long-term incentive for employees, consultants and members of our board of directors. The plan allows for the issuance of non-statutory options, or NSOs, incentive stock options, or ISOs, restricted stock unit awards, or RSUs to employees and NSOs and RSUs to nonemployees.
Stock-based compensation is measured using estimated grant date fair value and recognized as compensation expense over the service period in which the awards are expected to vest. The grant date fair value of an RSU award is based on our stock price on the date of grant. For options, we estimate the grant date fair value, and the resulting stock-based compensation, using the Black-Scholes option-pricing model, and we use the straight-line method for expense attribution. The Black-Scholes model requires us to make assumptions and judgments about the variables used in the calculations, including the expected term (weighted-average period of time that the options granted are expected to be outstanding), the expected volatility of our common stock, the related risk-free interest rate and the expected dividend. We have elected to recognize forfeitures of stock-based awards as they occur.
The Black-Scholes option-pricing model requires the use of highly subjective assumptions to determine the fair value of stock-based awards. These assumptions include:
•
Expected Term—The expected term is calculated using the simplified method, which is available where there is insufficient historical data about exercise patterns and post-vesting employment termination behavior. The simplified method is based on the vesting period and the contractual term for each grant, or for each vesting-tranche for awards with graded vesting. The mid-point between the vesting date and the maximum contractual expiration date is used as the expected term under this method.
•
Expected Volatility—Given that we do not have sufficient trading history for our common stock, the expected volatility was estimated based on the average volatility of the Company and comparable publicly traded biotechnology companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on their similar size, stage in the life cycle or area of specialty.
•
Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the option.
•
Expected Dividend—We have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we used an expected dividend yield of zero.
Recent accounting pronouncements
For a description of the expected impact of recent accounting pronouncements, see “Note 2. Summary of significant accounting policies” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest rate risk
We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate sensitivities. The primary objective of our investment activities is to preserve capital to fund our operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of investments in a variety of securities of high credit quality and short-term duration, invested in compliance with our policy.
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We held cash, cash equivalents and marketable securities of $644.9 million and $577.1 million as of December 31, 2022 and December 31, 2021, respectively, which consisted of bank deposits, money market funds, U.S. government debt securities, U.S. government agency bonds, commercial paper and corporate bonds. Such interest-earning instruments carry a degree of interest rate risk; however, historical fluctuations in interest income have not been significant for us. Due to the short-term maturities of our cash equivalents and marketable securities, an immediate one percent change in interest rates would not have a material effect on the fair value of our cash equivalents and marketable securities.
Foreign currency risk
Our expenses are generally denominated in U.S. dollars. However, we have entered into a limited number of contracts with vendors for research and development services with payments denominated in foreign currencies, including the Euro, British Pound and Chinese Yuan. We are subject to foreign currency transaction gains or losses on our contracts denominated in foreign currencies. To date, foreign currency transaction gains and losses have not been material to our consolidated financial statements, and we have not had a formal hedging program with respect to foreign currency. A 10% increase or decrease in current exchange rates would not have a material effect on our financial results.
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Item 8. Financial Statements and Supplementary Data.
REVOLUTION MEDICINES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 238) 94
Consolidated Balance Sheets 96
Consolidated Statements of Operations 97
Consolidated Statements of Comprehensive Loss 98
Consolidated Statements of Cash Flows 100
Notes to Consolidated Financial Statements 101
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Revolution Medicines, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Revolution Medicines, Inc. and its subsidiary (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, of comprehensive loss, of redeemable convertible preferred stock and stockholders’ equity (deficit) and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition - Actual Costs Incurred under the Collaboration Agreement with Sanofi
As described in Note 8 to the consolidated financial statements the Company’s consolidated revenue was $35.4 million for the year ended December 31, 2022. Revenue is recognized under the collaboration agreement with Sanofi based on actual costs incurred as a percentage of total estimated costs to be incurred over the performance obligation as the Company completes its performance obligation. A cost-based input method of revenue recognition requires management to make estimates of costs to fulfill their performance obligation. A percentage of the actual costs incurred under approved research and development plans are reimbursed by Sanofi under the collaboration agreement. The research and development plans are determined by a joint research and development committee, over which Sanofi has final decision-making, subject to certain exceptions.
The principal considerations for our determination that performing procedures relating to revenue recognition – actual costs incurred under the collaboration agreement with Sanofi is a critical audit matter are a high degree of auditor effort in performing procedures and evaluating audit evidence related to the Company’s revenue recognition and determination of actual costs incurred subject to approved development plans related to the collaboration agreement with Sanofi. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the inputs and assumptions used to estimate the total effort required to complete the performance obligation. These procedures also included, among others, (i) testing management’s process for recognizing revenue under the collaboration agreement with Sanofi, (ii) testing the mathematical accuracy of the cost-based input method; (iii) evaluating the terms of the master service agreement; (iv) testing the accuracy and existence of actual costs used in the cost-based input method; and (v) testing the accuracy, existence and classification of costs that are reimbursable by the collaborative partner under the approved research and development plans.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 27, 2023
We have served as the Company’s auditor since 2017.
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REVOLUTION MEDICINES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31, December 31,
Assets
Current assets:
Prepaid expenses and other current assets 10,569 6,790
Liabilities and stockholders' equity
Current liabilities:
Accrued expenses and other current liabilities 29,446 27,721
Operating lease liability, current 6,773 6,214
Deferred revenue, noncurrent — 6,573
Operating lease liability, noncurrent 57,432 60,419
Other noncurrent liabilities 301 634
Commitments and contingencies (Note 7)
Stockholders' equity:
Accumulated other comprehensive loss (1,780 ) (376 )
Total liabilities and stockholders' equity $ 811,930 $ 737,988
The accompanying notes are an integral part of these Consolidated Financial Statements.
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REVOLUTION MEDICINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Year Ended December 31,
Revenue:
Operating expenses:
Other income (expense), net:
Interest expense — (12 ) (71 )
Benefit from income taxes 420 — 371
The accompanying notes are an integral part of these Consolidated Financial Statements.
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REVOLUTION MEDICINES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Year Ended December 31,
Other comprehensive income (loss):
Unrealized gain (loss) on investments, net (1,404 ) (492 ) 42
The accompanying notes are an integral part of these Consolidated Financial Statements.
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REVOLUTION MEDICINES, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, except share and per share data)
Accumulated
Redeemable Convertible Additional Other Total
Preferred Stock Common Stock Paid-in Comprehensive Accumulated Stockholders'
Shares Amount Shares Amount Capital Income/ (Loss) Deficit Equity/(Deficit)
Vesting of early exercised stock options — — — — 199 — — 199
Repurchases of early exercised stock — — (18,158 ) — — — — —
Stock-based compensation expense — — — — 8,886 — — 8,886
Net unrealized gain on marketable securities — — — — — 42 — 42
Vesting of early exercised stock options — — — — 148 — — 148
Repurchases of early exercised stock — — (5,793 ) — — — — —
Stock-based compensation expense — — — — 20,724 — — 20,724
Net unrealized loss on marketable securities — — — — — (492 ) — (492 )
Repurchases of early exercised stock — — (272 ) — — — — —
Vesting of early exercised stock options — — — — 143 — — 143
Stock-based compensation expense — — — — 31,196 — 31,196
Net unrealized loss on marketable securities — — — — — (1,404 ) — (1,404 )
The accompanying notes are an integral part of these Consolidated Financial Statements.
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REVOLUTION MEDICINES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
Cash flows from operating activities
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on disposal of fixed assets 19 119 —
Amortization of operating lease right-of-use asset 4,615 3,180 2,866
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (3,779 ) 198 (1,924 )
Accrued expenses and other current liabilities 1,502 8,720 4,855
Deferred tax liability (419 ) — (375 )
Cash flows from investing activities
Sales of marketable securities — 8,992 3,005
Cash flows from financing activities
Payments of deferred offering costs 42 (424 ) —
Net increase in cash, cash equivalents and restricted cash 52,915 4,882 88,479
Supplemental disclosure of non-cash investing and financing activities
Vesting of early exercised options and restricted stock $ 143 $ 149 $ 199
Advance payments for property and equipment 82 — —
Unpaid deferred offering costs 2 110 —
The accompanying notes are an integral part of these Consolidated Financial Statements.
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REVOLUTION MEDICINES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization
Revolution Medicines, Inc. (the Company) is a clinical-stage precision oncology company focused on developing targeted therapies to inhibit frontier targets in RAS-addicted cancers. The Company was founded in October 2014 and is headquartered in Redwood City, California.
Liquidity
The Company has incurred net operating losses in each year since inception. As of December 31, 2022, the Company had an accumulated deficit of $701.3 million. Management believes that its existing cash, cash equivalents and marketable securities will enable the Company to fund its planned operations for at least 12 months following the issuance date of these consolidated financial statements. The Company has been able to fund its operations through the issuance and sale of common stock and redeemable convertible preferred stock in addition to upfront payments and research and development cost reimbursement received under the Company’s collaboration agreement with Genzyme Corporation, an affiliate of Sanofi. Future capital requirements will depend on many factors, including the timing and extent of spending on research and development. There can be no assurance that, in the event the Company requires additional financing, such financing will be available at terms acceptable to the Company, if at all. Failure to generate sufficient cash flows from operations, raise additional capital and reduce discretionary spending should additional capital not become available could have a material adverse effect on the Company’s ability to achieve its business objectives.
Public offerings
In February 2021, the Company issued and sold 6,666,666 shares of its common stock in an underwritten public offering at a price of $45.00 per share (including the exercise in full by the underwriters of their option to purchase an additional 869,565 shares of its common stock) for net proceeds of $281.1 million, after deducting underwriting discounts and commissions of $18.0 million and expenses of $0.9 million.
In November 2021, the Company entered into a sales agreement with Cowen and Company, LLC (Cowen) to sell shares of its common stock, from time to time, with aggregate gross proceeds of up to $250 million, through an at-the-market equity offering program (ATM). During the year ended December 31, 2021, the Company sold an aggregate of 339,302 shares of common stock under the ATM resulting in gross proceeds of $10.4 million. After deducting commissions and expenses of $0.3 million, net proceeds to the Company for the year ended December 31, 2021 were $10.1 million. During the year ended December 31, 2022, the Company sold an aggregate of 2,385,846 shares of common stock under the ATM resulting in gross proceeds of $51.3 million. After deducting commissions and expenses of $1.4 million, net proceeds to the Company for the year ended December 31, 2022 were $49.9 million.
In July 2022, the Company issued and sold 13,225,000 shares of its common stock in an underwritten public offering (including the exercise in full by the underwriters of their option to purchase an additional 1,725,000 shares of the Company’s common stock) at a price to the public of $20.00 per share, for net proceeds of $248.1 million, after deducting underwriting discounts and commissions of $15.9 million and expenses of $0.5 million.
2.
Summary of significant accounting policies
Basis of presentation
The consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (GAAP) and applicable rules of the Securities and Exchange Commission (SEC) regarding financial reportingand, in the opinion of management, include all normal and recurring adjustments which are necessary to state fairly the Company’s financial position and results of operations for the reported periods. The consolidated financial statements for the years ended December 31, 2022, 2021 and 2020 include the accounts of the Company and its wholly owned subsidiary, Warp Drive Bio, Inc. (Warp Drive). All intercompany balances and transactions have been eliminated in consolidation. The functional and reporting currency of the Company and its subsidiary is the U.S. dollar.
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Reverse stock split
On February 7, 2020, the Company amended and restated its amended and restated certificate of incorporation to effect a 1-for-4.8661 reverse stock split of the Company’s common stock and redeemable convertible preferred stock. The par value and authorized shares of the common stock and redeemable convertible preferred stock were not adjusted as a result of the reverse stock split. All issued and outstanding common stock, options to purchase common stock and per share amounts contained in the financial statements have been retroactively adjusted to give effect to the reverse stock split for all periods presented.
Use of estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, clinical accruals, valuation of in-process research and development and developed technologies, income taxes, useful lives of property and equipment and intangible assets, impairment of goodwill and intangibles, the incremental borrowing rate for determining operating lease assets and liabilities, and stock-based compensation. The extent to which the COVID-19 pandemic may directly or indirectly impact the Company’s business, financial condition and results of operations is highly uncertain and subject to change. The Company considered the potential impact of the COVID-19 pandemic on its estimates and assumptions and there was not a material impact to the Company’s consolidated financial statements as of and for the twelve months ended December 31, 2022. Actual results could materially differ from the Company’s estimates, and there may be changes to the estimates in future periods.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less at the date of purchase to be cash equivalents. As of December 31, 2022 and 2021, cash equivalents consist of amounts invested in money market funds, commercial paper and corporate bonds with original maturities of three months or less at the date of purchase.
Marketable securities
Investments in marketable securities primarily consist of U.S. government debt securities, U.S. government agency bonds, commercial paper, Canadian government securities and corporate bonds. The Company has classified its marketable securities as available-for-sale and may sell these securities prior to their stated maturities. The Company views these marketable securities as available to support current operations and classifies marketable securities with maturities beyond 12 months as current assets. The Company’s investments in marketable securities are carried at estimated fair value, which is derived from independent pricing sources based on quoted prices in active markets for similar securities. Unrealized gains and losses are reported as a component of accumulated other comprehensive loss. The amortized cost of marketable securities is adjusted for amortization of premiums and accretion of discounts to maturity, which is included in interest income on the consolidated statements of operations. Realized gains and losses are included in interest income on the consolidated statements of operations.
The Company periodically evaluates its investments to assess whether those with unrealized loss positions are other than temporarily impaired. The Company considers various factors in determining whether to recognize an impairment charge. If the Company determines that the decline in an investment’s fair value is other-than-temporary, the difference is recognized as an impairment loss in the consolidated statements of operations. As of December 31, 2022, no other-than-temporary-impairment has been recorded.
Restricted cash
As of December 31, 2022 and 2021, the Company had $1.7 million and $1.7 million, respectively, of noncurrent restricted cash related to Company issued letters of credit in connection with leases. These amounts are held in separate bank accounts to support letter of credit agreements for the leases.
Concentration of credit risk and other risks and uncertainties
Financial instruments that potentially subject the Company to concentration of credit risk consist of cash, cash equivalents and marketable securities. The Company’s cash is held by two financial institutions in the United States, which management believes to be of high credit quality. The Company invests in money market funds, U.S. government debt securities, U.S. government agency bonds, commercial paper and corporate bonds. The Company has not experienced any losses on its deposits of cash and cash equivalents.
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The Company is subject to credit risk as its receivable and collaboration revenue are entirely related to its collaboration agreement with Sanofi. For more information, see Note 8, “Sanofi collaboration agreement.”
The Company’s clinical trial sites may be affected by the COVID-19 outbreak due to prioritization of hospital resources toward the COVID-19 outbreak, travel or quarantine restrictions imposed by governments, and the inability to access sites for initiation and patient monitoring and enrollment. As a result, patient screening, new patient enrollment, monitoring and data collection may be affected or delayed. The Company is aware that several clinical sites involved in its clinical studies temporarily stopped or delayed enrolling new patients, with exemptions if appropriate, and it is possible that these or other clinical sites may be similarly affected in the future. These developments may delay the Company’s clinical trial timelines. Some of the Company’s third-party manufacturers which it uses for the supply of materials for product candidates or other materials necessary to manufacture product to conduct preclinical tests and clinical trials and contract research organizations may be impacted by COVID-19, and should they experience disruptions, such as temporary closures or suspension of services, the Company would likely experience delays in advancing clinical trials.
Fair value measurement
The carrying amounts of the Company’s certain financial instruments, including cash equivalents, accounts payable and accrued expenses and other current liabilities approximate fair value due to their relatively short maturities and market interest rates, if applicable. For more information, refer to Note 4 regarding the fair value of the Company’s available-for-sale securities.
Assets and liabilities recorded at fair value on a recurring basis in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:
Level 1—Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; and
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Property and equipment, net
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets, which is generally three to five years. Leasehold improvements are amortized using the straight-line method over the shorter of the assets’ estimated useful lives or the remaining term of the lease. Maintenance and repairs are charged to operations as incurred. Upon sale or retirement of assets, the cost and related accumulated depreciation are removed from the consolidated balance sheet and the resulting gain or loss is reflected in the consolidated statement of operations.
Useful lives of property and equipment are as follows:
Property and equipment Estimated useful life
Laboratory equipment 4-5 years
Leasehold improvements Lesser of estimated useful life or remaining lease term
Computer equipment and software 3 years
Furniture and fixtures 5 years
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Leases
The Company determines if an arrangement is, or contains, a lease at inception and then classifies the lease as operating or financing based on the underlying terms and conditions of the contract. Leases with terms greater than one year are initially recognized on the balance sheet as right-of-use assets and lease liabilities based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes the incremental borrowing rate, which is the rate incurred to borrow, on a collateralized basis, an amount equal to the lease payments over a similar term and in a similar economic environment of the applicable country or region. Variable lease payments are excluded from the right-of-use assets and operating lease liabilities and are recognized in the period in which the obligation for those payments is incurred. Leases with a term of 12 months or less are not recognized on the consolidated balance sheets.
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 or asset group may not be recoverable. Recoverability is measured by comparison of the carrying amounts of the asset group 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.
Acquired intangible assets
Indefinite-lived intangible assets represent the estimated fair value assigned to in-process research and development (IPR&D) acquired in a business combination. The Company reviews indefinite-lived intangible assets for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying value of the assets might not be recoverable. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, then it is written down to its adjusted fair value. As of December 31, 2022, there have been no such impairments. For IPR&D, if a product candidate derived from the indefinite-lived intangible asset is developed and commercialized, the useful life will be determined, and the carrying value will be amortized prospectively over that estimated useful life. Alternatively, if a product candidate is abandoned, the carrying value of the intangible asset will be charged to research and development expenses in the consolidated statements of operations.
Finite-lived intangible assets acquired in a business combination are recognized separately from goodwill and are initially recognized at their fair value at the acquisition date and are carried at cost less accumulated amortization and impairment. Amortization is computed using the straight-line method over the estimated useful lives of the respective finite-lived intangible assets and is included in research and development expenses in the consolidated statement of operations. Intangible assets are reviewed for impairment at least annually or more frequently if indicators of potential impairment exist. As of December 31, 2022, no such impairment has been recorded.
Goodwill
Goodwill represents the excess of the purchase price over the estimated fair value of the net tangible and intangible assets acquired in a business combination. The Company reviews goodwill for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. Goodwill is tested for impairment at the reporting unit level by first assessing the qualitative factors to determine whether it is more likely than not that the fair value of the Company’s single reporting unit is less than its carrying amount. Qualitative indicators assessed include consideration of macroeconomic, industry and market conditions, the Company’s overall financial performance and personnel or strategy changes. Based on the qualitative assessment, if it is determined that it is more likely than not that its fair value is less than its carrying amount, the fair value of the Company’s single reporting unit is compared to its carrying value. Any excess of the goodwill carrying amount over the fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to fair value. As of December 31, 2022, no goodwill impairment has been identified.
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Redeemable convertible preferred stock
The Company records all shares of redeemable convertible preferred stock at their respective fair values on the dates of issuance, net of issuance costs. The redeemable convertible preferred stock is recorded outside of permanent equity because while it is not mandatorily redeemable, in the event of certain events considered not solely within the Company’s control, such as a merger, acquisition or sale of all or substantially all of the Company’s assets (each, a deemed liquidation event), the redeemable convertible preferred stock would have become redeemable at the option of the holders of at least a majority of the then outstanding such shares. The Company did not adjust the carrying values of the redeemable convertible preferred stock to the liquidation preferences of such shares because it was uncertain whether or when a deemed liquidation event would occur that would obligate the Company to pay the liquidation preferences to holders of shares of redeemable convertible preferred stock.
Revenue recognition
The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
The Company enters into collaboration agreements under which it may obtain upfront license fees, research and development funding, and development, regulatory and commercial milestone payments and royalty payments. The Company’s performance obligations under these arrangements may include licenses of intellectual property, sales and distribution rights, research and development services, delivery of manufactured product and/or participation on joint steering committees.
Licenses of intellectual property: If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue from upfront license fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring proportional performance for purposes of recognizing revenue from non-refundable, upfront fees. The Company evaluates the measure of proportional performance each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
Research, development and regulatory milestone payments: At the inception of each arrangement that includes research, development, or regulatory milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price. The Company uses the most likely amount method for research, development and regulatory milestone payments. Under the most likely amount method, an entity considers the single most likely amount in a range of possible consideration amounts. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price.
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Sales-based milestones and royalties: For arrangements that include sales-based milestone or royalty payments based on the level of sales, and in which the license is deemed to be the predominant item to which the sales-based milestone or royalties relate to, the Company recognizes revenue in the period in which the sales-based milestone is achieved and in the period in which the sales associated with the royalty occur. To date, the Company has not recognized any sales-based milestone or royalty revenue resulting from its collaboration arrangements.
Deferred revenue represents amounts received by the Company for which the related revenues have not been recognized because one or more of the revenue recognition criteria have not been met. The current portion of deferred revenue represents the amount to be recognized within one year from the balance sheet date based on the estimated performance period of the underlying performance obligation. The noncurrent portion of deferred revenue represents amounts to be recognized after one year through the end of the performance period of the performance obligation.
Research and development expenditures
Research and development expenses consist of costs incurred for the Company’s own and for collaborative research and development activities. Research and development costs are expensed as incurred. Research and development costs consist of salaries and benefits, including associated stock-based compensation, and laboratory supplies and facility costs, as well as fees paid to other entities that conduct certain research and development activities on the Company’s behalf. The Company estimates preclinical studies and clinical trial expenses based on the services performed pursuant to contracts with research institutions, contract research organizations and clinical manufacturing organizations that conduct and manage preclinical studies and clinical trials on the Company’s behalf based on actual time and expenses incurred by them. Further, the Company accrues expenses related to clinical trials based on the level of patient activity according to the related agreement. The Company monitors patient enrollment levels and related activity to the extent reasonably possible and adjusts estimates accordingly.
Stock-based compensation
The Company measures its stock-based awards granted to employees and directors based on the estimated fair values of the awards and recognizes the compensation on a straight-line basis over the requisite service period. The fair value of options issued under the employee stock purchase plan is calculated using the Black-Scholes option-pricing model. Restricted stock units are valued based on the closing price of the Company’s common stock on the date of grant.
Comprehensive loss
For the years ended December 31, 2022, 2021 and 2020, other comprehensive loss includes net unrealized gains or losses on marketable securities.
Income taxes
Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Management makes an assessment of the likelihood that the resulting deferred tax assets will be realized. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. Due to the Company’s historical operating performance and the recorded cumulative net losses in prior fiscal periods, the net deferred tax assets have been fully offset by a valuation allowance.
The Company recognizes uncertain income tax positions at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Changes in recognition or measurement are reflected in the period in which judgment occurs. The Company’s policy is to recognize interest and penalties related to the underpayment of income taxes as a component of interest expense.
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Net loss per share attributable to common stockholders
Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common stock and potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, redeemable convertible preferred stock, stock options, common stock subject to repurchase related to unvested restricted stock awards and early exercise of stock options are considered to be potentially dilutive securities. Basic and diluted net loss attributable to common stockholders per share is presented in conformity with the two-class method required for participating securities as the redeemable convertible preferred stock is considered a participating security because it participates in dividends with common stock. The Company also considers the shares issued upon the early exercise of stock options subject to repurchase to be participating securities because holders of such shares have non-forfeitable dividend rights in the event a dividend is paid on common stock. The holders of all series of redeemable convertible preferred stock and the holders of early exercised shares subject to repurchase do not have a contractual obligation to share in the Company’s losses. As such, the net loss was attributed entirely to common stockholders. Because the Company has reported a net loss for all periods presented, diluted net loss per share is the same as basic net loss per share for those periods.
Deferred offering costs
The Company capitalizes certain legal, accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs are recorded in stockholders’ deficit (equity) as a reduction of additional paid-in capital generated as a result of the equity financing. Should an in-process equity financing be abandoned, the deferred offering costs will be expensed immediately as a charge to operating expenses in the consolidated statements of operations. As of December 31, 2022 and 2021, $0.6 million and $0.5 million of deferred offering costs, respectively, were capitalized in other noncurrent assets on the consolidated balance sheets.
Segment reporting
The Company has one operating and reportable segment. The Company’s chief operating decision maker, its Chief Executive Officer, manages the Company’s operations on a consolidated basis for the purposes of allocating resources and evaluating financial performance. All of the Company’s long-lived assets are located in the United States.
401(k) retirement plans
The Company maintains a 401(k) retirement plan for its employees. The Company is responsible for administrative costs of the 401(k) plan. The Company may, at its discretion, make matching or profit-sharing contributions to the 401(k) plan. For the years ended December 31, 2022, 2021 and 2020, the Company made $1.3 million, $0.9 million and $0.2 million matching contributions, respectively, under the plan.
Recent accounting pronouncements
From time to time, new accounting pronouncements are issued by the FASB, under its ASC or other standard setting bodies, and adopted by the Company as of the specified effective date, unless otherwise discussed below.
Recently adopted accounting pronouncements
In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs (ASU 2020-08). ASU 2020-08 clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Early application is not permitted. All entities should apply ASU 2020-08 on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The Company adopted the standard for the fiscal year beginning on January 1, 2022 and concluded that adoption of the standard did not have a material impact on its consolidated financial statements.
In October 2020, FASB issued ASU 2020-10, Codification Improvements (ASU 2020-10). ASU 2020-10 updates various codification topics by clarifying or improving disclosure requirements to align with the SEC’s regulations. The amendments are effective for the Company for fiscal years beginning after December 15, 2021, including interim period within those fiscal years. Early
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adoption is permitted. Adoption shall be applied retrospectively. The Company adopted the standard for the fiscal year beginning on January 1, 2022 and concluded that adoption of the standard did not have a material impact on its consolidated financial statements.
3.
Fair value measurements
The following table presents information about the Company’s financial assets that are measured at fair value and indicates the fair value hierarchy of the valuation:
Total Level 1 Level 2 Level 3
(in thousands)
Assets:
U.S. and Canadian government and agency securities(2) 251,830 — 251,830 —
Total Level 1 Level 2 Level 3
(in thousands)
Assets:
U.S. and Canadian government and agency securities(2) 87,745 — 87,745 —
(1)
Included in cash and cash equivalents on the consolidated balance sheets.
(2)
Included in marketable securities on the consolidated balance sheets.
Money market funds are measured at fair value on a recurring basis using quoted prices. U.S. and Canadian government debt securities, government agency bonds, commercial paper and corporate bonds are measured at fair value, which is derived from independent pricing sources based on quoted prices in active markets for similar securities.
There were no transfers between Levels 1, 2 or 3 for any of the periods presented.
4.
Available-for-sale securities
The following tables summarize the estimated value of the Company’s available-for-sale marketable securities and cash equivalents and the gross unrealized gains and losses:
Gross Gross
Amortized unrealized unrealized Estimated
cost gain loss fair value
(in thousands)
Marketable securities:
Cash equivalents:
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Gross Gross
Amortized unrealized unrealized Estimated
cost gain loss fair value
(in thousands)
Marketable securities:
U.S. and Canadian government and agency securities 87,926 — (181 ) 87,745
Cash equivalents:
The amortized cost and estimated fair value of the Company’s available-for-sale marketable securities and cash equivalents by contractual maturity are summarized below as of December 31, 2022:
Gross Gross
Amortized unrealized unrealized Estimated
cost gain loss fair value
(in thousands)
5.
Balance sheet components
Property and equipment, net
Property and equipment, net consists of the following:
December 31,
(in thousands)
Computer equipment and software 3,965 2,186
Furniture and fixtures 616 69
Construction in progress — 129
Less: accumulated depreciation and amortization (14,489 ) (10,812 )
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Depreciation and amortization expense for property and equipment amounted to $4.0 million, $3.1 million and $2.6 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consist of the following:
December 31,
(in thousands)
Accrued professional services 499 540
Total accrued expenses and other current liabilities $ 29,446 $ 27,721
6.
Intangible assets and goodwill
Intangible assets, net
Intangible assets, net consist of the following as of December 31, 2022:
(in thousands) (in years)
In-process research and development — RAS Programs $ 55,800 $ — $ 55,800 n/a
Amortization expense for the years ended December 31, 2022, 2021 and 2020 were $1.1 million, $1.1 million and $1.1 million, respectively.
As of December 31, 2022, future amortization expense is as follows:
Amount
(in thousands)
Intangible assets, net consist of the following as of December 31, 2021:
(in thousands) (in years)
In-process research and development — RAS Programs $ 55,800 $ — $ 55,800 n/a
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Goodwill
Goodwill consists of the following:
Amount
(in thousands)
Adjustment —
No impairment has been recognized as of December 31, 2022. Goodwill is not deductible for income tax purposes.
7.
Commitments and contingencies
Leases
In January 2015, as amended in September 2016, the Company entered into an operating lease for approximately 42,000 square feet of office and laboratory space located at 700 Saginaw Drive, Redwood City, California (the 700 Building), with a term through April 2023. In April 2020, the Company amended the lease to lease an additional 19,000 square feet of office, laboratory and research and development space located at 300 Saginaw Drive, Redwood City, California (the 300 Building), and to extend the lease term through December 2030. In November 2021, the Company amended the lease to lease an additional 41,000 square feet of office, laboratory and research and development space located at 800 Saginaw Drive, Redwood City, California (the 800 Building), and to extend the lease term through November 2033. The Company has the option to extend the lease for an additional ten years after November 30, 2033.
The Company maintains letters of credit for the benefit of the landlord which is disclosed as restricted cash in the consolidated balance sheets. Restricted cash related to letters of credit due to the landlord was $1.5 million and $1.5 million as of December 31, 2022 and December 31, 2021, respectively.
Through December 31, 2022, the landlord had provided the Company with $3.4 million in tenant improvement allowances for the 700 Building, and $4.6 million for the 300 building, which were recognized as lease incentives. The lease incentives are being amortized as an offset to rent expense over the lease term in the consolidated statements of operations.
Upon the execution of the lease in April 2020, which was deemed to be a lease modification, the Company re-evaluated the assumptions used during the adoption of ASC 842 for the lease. The Company determined the amendment consists of two separate contracts under ASC 842. One contract is related to a new right-of-use asset for the 300 Building, which is being accounted for as an operating lease, and the other is related to the modification of the original lease term for the 700 Building. As a result, the Company recorded a right-of-use asset of $6.4 million and a lease liability of $9.0 million for the 300 Building and an increase of $14.8 million to the right-of-use asset and lease liability for the 700 Building upon execution of the lease amendment. The Company is recognizing rent expense for both buildings on a straight-line basis through the remaining extended term of the lease.
Upon the execution of the lease amendment in November 2021, which was deemed to be a lease modification, the Company re-evaluated the assumptions used during the lease amendment in April 2020. The Company determined the amendment consists of two separate contracts under ASC 842. One contract is related to a new right-of-use asset for the 800 Building, which is being accounted for as an operating lease, and the other is related to the modification of the lease term, as amended in April 2020, for the 700 Building and 300 Building. As a result, the Company recorded a right-of-use asset and a lease liability of $26.8 million for the 800 Building and an aggregate increase of $8.6 million to the right-of-use assets and lease liabilities for the 700 Building and 300 Building upon execution of the lease amendment. The Company is recognizing rent expense for the buildings on a straight-line basis through the remaining extended term of the lease.
As part of the Warp Drive acquisition in October 2018, the Company assumed an operating lease for approximately 22,000 square feet of office and laboratory space located in Cambridge, Massachusetts (Cambridge Lease), which expires in February 2023, with an option to extend the term through February 2028, subject to certain conditions. In March 2019, the Company fully subleased the Cambridge Lease to Casma Therapeutics, Inc. (Casma), a related party, on financial terms substantially the same as the original lease. The sublease term with Casma is through the remainder of the Cambridge Lease term. The sublease by Casma and related sublease payments by Casma to the Company are fully guaranteed by Third Rock Ventures, LLC, a related party. In conjunction with the Cambridge Lease, the Company issued a letter of credit for $0.2 million, which is included in restricted cash on the consolidated balance sheets as of December 31, 2022 and 2021.
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The balance sheet classification of the Company’s operating lease liabilities was as follows:
December 31,
(in thousands)
Operating lease liabilities:
Operating lease liability – current $ 6,773
Operating lease liability – noncurrent 57,432
Total operating lease liabilities $ 64,205
For the years ended December 31, 2022 and 2021, operating lease cost was $6.4 million and $3.4 million, respectively, net of sublease income of $2.5 million and $2.1 million, respectively. The operating cash flows for operating leases were $2.4 million and $1.5 million year ended December 31, 2022 and 2021, respectively. Short-term lease costs were immaterial for the years ended December 31, 2022 and 2021.
As of December 31, 2022, the maturities of the Company’s operating lease liabilities were as follows (in thousands):
Total undiscounted lease payments $ 89,438
Less: Imputed interest (25,233 )
Less: Tenant improvement allowance —
Total operating lease liabilities $ 64,205
The amounts reflected in the table above include the Company’s lease payments for the Cambridge lease, but do not reflect any offset for the sublease payments the Company is entitled to receive from Casma.
Operating lease liabilities are based on the net present value of the remaining lease payments over the remaining lease term. In determining the present value of lease payments, the Company uses its incremental borrowing rate. The weighted-average discount rate used to determine the operating lease liability was 6.1%. As of December 31, 2022 and 2021, the weighted-average remaining lease term is 10.9 years and 11.6 years, respectively.
Legal matters
From time to time, the Company may be involved in litigation related to claims that arise in the ordinary course of its business activities. The Company accrues for these matters when it is probable that losses will be incurred and these losses can be reasonably estimated. As of December 31, 2022 and 2021, the Company does not believe that any such matters, individually or in the aggregate, will have a material adverse effect on the Company’s financial position, results of operations or cash flows.
Indemnification
The Company enters into standard indemnification arrangements in the ordinary course of business. Pursuant to these arrangements, the Company indemnifies, holds harmless and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third party with respect to its technology. The term of these indemnification agreements is generally perpetual any time after the execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these arrangements is not determinable. The Company has not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the fair value of these agreements is minimal.
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Other
The Company enters into agreements in the ordinary course of business with contract research organizations for clinical trials, contract manufacturing organizations to provide clinical trial materials and with vendors for preclinical studies and other services and products for operating purposes which are generally cancelable at any time by us upon 30 to 90 days prior written notice.
8.
Sanofi collaboration agreement
In June 2018, the Company entered into a collaborative research, development and commercialization agreement (the Sanofi Agreement) with Aventis, Inc. (an affiliate of Sanofi) to research and develop SHP2 inhibitors, including RMC-4630, for any indications. The Sanofi Agreement was assigned to Genzyme Corporation, a Sanofi affiliate, in December 2018. For the purposes of this discussion, we refer to Genzyme Corporation as Sanofi. Pursuant to the Sanofi Agreement, the Company granted Sanofi a worldwide, exclusive, sublicensable (subject to the Company’s consent in certain circumstances) license under certain of the Company’s patents and know-how to research, develop, manufacture, use, sell, offer for sale, import and otherwise commercialize SHP2 inhibitors, including RMC-4630, for any and all uses, subject to the Company’s exercise of rights and performance of obligations under the Sanofi Agreement. In December 2022, the Company received notice of Sanofi’s decision to terminate for convenience under the Sanofi Agreement, with a termination date in June 2023. Upon effectiveness of the termination of the Sanofi Agreement (the termination date), the licenses granted to Sanofi thereunder shall become fully paid-up, royalty-free, perpetual and irrevocable and all rights and obligations of Sanofi under the Sanofi Agreement will revert to the Company.
In October 2018, the Company acquired Warp Drive in exchange for issuance of shares of the Company’s Series B redeemable convertible preferred stock and payment of cash. Sanofi was a stockholder of Warp Drive and received the Company’s Series B redeemable convertible preferred stock during the transaction and accordingly became an investor and related party of the Company. As a result of the Company’s underwritten offering of common stock in February 2021, Sanofi’s ownership percentage in the Company decreased and Sanofi is no longer considered a related party.
Under the Sanofi Agreement, the Company received a non-refundable, upfront cash payment of $50 million in July 2018.
Prior to the termination date, the Company has primary responsibility for early clinical development of RMC-4630 and is responsible for the manufacture of SHP2 inhibitors for Phase 1 and non-registrational Phase 2 clinical trials pursuant to an approved development plan. In August 2021, the Company entered into a letter agreement with Sanofi (the Letter Agreement) to include an additional clinical study, RMC-4630-03, as part of the Company’s responsibilities under the development plan. Sanofi is responsible to reimburse the Company all internal and external costs and expenses to perform the Company’s activities under approved development plans up to the termination date, except for the RMC-4630-03 study, for which Sanofi will reimburse the Company for 50% of the costs and expenses up to the termination date.
In addition to the ongoing development plan, the Company was also primarily responsible for performing preclinical research on SHP2 inhibitors pursuant to a research plan through 2021. Sanofi was responsible to reimburse the Company for all internal and external costs and expenses incurred to perform activities under approved research plan for 2021.
The Company identified the following promises in the agreement (1) the license related to SHP2 inhibitors, (2) the performance of research and development services for Phase 1 clinical studies and Phase 2 clinical trials that are non-registrational clinical trials and (3) the performance of manufacturing services for the non-registrational clinical trials. The Company determined that the license is not distinct from the services within the context of the agreement because the research, development and manufacturing significantly increase the utility of the intellectual property. The intellectual property (IP) related to SHP2 inhibitors, which is proprietary to the Company, is the foundation for the research and development activities. The manufacturing services are a necessary and integral part of the research and development services as they could only be conducted utilizing the outcomes of these services. Given the research and development services under the Sanofi Agreement are expected to involve significant further development of the initial IP, the Company has concluded that the research, development and manufacturing services are not distinct from the license, and thus the license, research and development services and manufacturing services are combined into a single performance obligation.
For revenue recognition purposes, the Company determined that the duration of the contract begins on the effective date of the Sanofi Agreement in July 2018 and ends on the termination date in June 2023.
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The Company determined that the transaction price of the Sanofi Agreement was $186.9 million as of December 31, 2022. In order to determine the transaction price, the Company evaluated all the payments to be received during the duration of the contract. The Company determined that the $50.0 million upfront payment and $136.9 million of estimated variable consideration for expense reimbursements from Sanofi for agreed upon research and development services as of December 31, 2022 constituted consideration to be included in the transaction price, which is to be allocated to the combined performance obligation. The Company will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.
The license, research, development and manufacturing services are combined as one performance obligation that will be performed over the duration of the contract, which is from the effective date of the Sanofi Agreement through the termination date. The Company concluded that it would utilize a cost-based input method to measure proportional performance and to calculate the corresponding amount of revenue to recognize. In applying the cost-based input method of revenue recognition, the Company uses actual costs incurred relative to estimated costs to fulfill the combined performance obligation. These costs consist primarily of internal full-time equivalent efforts and third-party costs. As noted above, a percentage of the actual costs incurred under approved research and development plans are reimbursed by Sanofi under the collaboration agreement. The research and development plans are determined by a joint research and development committee, over which Sanofi has final decision-making subject to certain exceptions. Revenue is recognized under the collaboration agreement with Sanofi, based on actual costs incurred as a percentage of total estimated costs to be incurred over the performance obligation as the Company completes its performance obligation. The cumulative effect of revisions to estimated costs to complete the Company’s performance obligations will be recorded in the period in which changes are identified and amounts can be reasonably estimated.
Pursuant to the termination noticed provided by Sanofi in December 2022, effective as of the termination date, Sanofi will have no further reimbursement obligations post termination. As a result of the termination and development plan adjustments during the year, the Company updated the accounting transaction price for the estimated consideration to be received and updated the estimated costs to fulfill the performance obligation, which increased the Company’s percentage of completion under the agreement with Sanofi, and resulted in total cumulative catch-up adjustments that increased collaboration revenue by $3.0 million for the year ended December 31, 2022.
As a result of entering into the Letter Agreement for the RMC-4630-03 study in August 2021, the Company updated the transaction price for the estimated consideration to be received, and updated the estimated costs to fulfill the performance obligation, which decreased the estimated percentage of completion to date and resulted in a cumulative catch-up adjustment that reduced collaboration revenue by $8.5 million for the year ended December 31, 2021.
During the years ended December 31, 2022, 2021 and 2020, the Company recognized $35.4 million, $29.4 million and $43.0 million of collaboration revenue associated with this agreement, respectively.
As of December 31, 2022 and 2021, $4.5 million and $12.4 million of deferred revenue is classified as current and zero and $6.6 million is classified as noncurrent, respectively.
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9.
Redeemable convertible preferred stock
Upon the closing of the Company’s initial public offering in February 2020, all shares of redeemable convertible preferred stock then outstanding converted into 39,600,423 shares of common stock. There were no shares of redeemable convertible preferred stock outstanding as of December 31, 2022 and 2021.
10.
Common stock
As of December 31, 2022 and 2021, the Company’s certificate of incorporation authorized the Company to issue 300,000,000 shares of common stock, at a par value of $0.0001 per share. Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors, subject to prior rights of the redeemable convertible preferred stockholders. As of December 31, 2022, no dividends have been declared to date.
The Company has reserved shares of common stock for future issuance as follows:
December 31, December 31,
11.
Stock-based compensation
2020 Incentive Award Plan
In February 2020, the Company adopted the 2020 Equity Incentive Plan (the 2020 Plan). The 2020 Plan became effective on February 11, 2020. The 2020 Plan provides for a variety of stock-based compensation awards, including stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance bonus awards, performance stock unit awards, dividend equivalents, or other stock or cash based awards. Under the 2020 Plan, the Company generally grants stock-based awards with service-based vesting conditions only. Options and restricted stock unit awards granted typically vest over a four-year period, but may be granted with different vesting terms.
Following the effectiveness of the 2020 Plan, the Company will not make any further grants under the 2014 Equity Incentive Plan (the 2014 Plan). However, the 2014 Plan will continue to govern the terms and conditions of the outstanding awards granted under it. Shares of common stock subject to awards granted under the 2014 Plan that are forfeited or lapse unexercised and which following the effective date of the 2020 Plan were not issued under the 2014 Plan are available for issuance under the 2020 Plan.
2020 Employee Stock Purchase Plan
In February 2020, the Company adopted the 2020 Employee Stock Purchase Plan (the ESPP). Under the ESPP, employees have the ability to purchase shares of the Company’s common stock through payroll deductions at a discount during a series of offering periods of 24 months, each comprised of four six-month purchase periods. The purchase price will be the lower of 85% of the closing
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trading price per share of the Company’s common stock on the first day of an offering period in which an employee is enrolled or 85% of the closing trading price per share on the purchase date, which will occur on the last trading day of each purchase period.
As of December 31, 2022, there have been 235,555 shares of common stock purchased under the ESPP. As of December 31, 2022, a total of 1,700,887 shares of common stock were available for future issuance under the ESPP. As of December 31, 2022, there was $3.2 million of unrecognized compensation cost related to the ESPP.
Stock options
The following summarizes option activity under both the 2020 Plan and the 2014 Plan:
(in years) (in thousands)
The aggregate intrinsic values of options outstanding, exercisable, vested and expected to vest were calculated as the difference between the exercise price of the options and the estimated fair value of the Company’s common stock by the Board of Directors. The intrinsic value of the options exercised for the years December 31, 2022, 2021 and 2020 was $3.8 million, $13.1 million and $21.7 million, respectively.
During the years ended December 31, 2022, 2021 and 2020, the weighted-average grant-date fair value of options granted was $12.33, $25.13 and $15.59 per share, respectively. As of December 31, 2022, there was $48.8 million of unrecognized stock-based compensation expense related to unvested stock options that is expected to be recognized over a weighted-average period of 2.57years.
The fair value of employee and director stock option awards was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions:
Year Ended December 31,
Expected term (years) 6 6 6
Dividend yield 0% 0% 0%
Non-employee stock option awards were measured at fair value at each reporting period using a Black-Scholes option-pricing model with the following assumptions:
Year Ended December 31,
Expected term (years) 6 6 6-10
Dividend yield 0% 0% 0%
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The Black-Scholes model assumptions that determine the fair value of stock-based awards include:
Expected term—The expected term is calculated using the simplified method, which is available where there is insufficient historical data about exercise patterns and post-vesting employment termination behavior. The simplified method is based on the vesting period and the contractual term for each grant, or for each vesting-tranche for awards with graded vesting. The mid-point between the vesting date and the maximum contractual expiration date is used as the expected term under this method.
Expected volatility—Given the Company does not have sufficient trading history for its common stock, the expected volatility was estimated based on the average volatility of the Company and comparable publicly traded biotechnology companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on their similar size, stage in the life cycle or area of specialty.