UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________
FORM 10-Q
___________________________________________
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2023
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission file number: 001-38219
___________________________________________
(Exact name of registrant as specified in its charter)
___________________________________________
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||||||
(Address of principal executive offices) | (Zip Code) | |||||||
(781 ) 209-6400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | |||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||||||||
| Emerging growth company | |||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 28, 2023, there were 78,524,562 shares of Common Stock, $0.01 par value per share, outstanding.
Deciphera Pharmaceuticals, Inc.
INDEX
| Page | |||||
Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022 | |||||
Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2023 and 2022 | |||||
Consolidated Statements of Stockholders' Equity for the three months ended March 31, 2023 and 2022 | |||||
Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022 | |||||
2
SUMMARY OF MATERIAL RISKS ASSOCIATED WITH OUR BUSINESS
Our business is subject to numerous risks and uncertainties that you should be aware of before making an investment decision. These risks include, but are not limited to, the following:
•There is no assurance that our commercialization efforts with respect to QINLOCK® (ripretinib), referred to as QINLOCK, including, without limitation, our launch of QINLOCK in the EU4 (Germany, France, Italy, and Spain) and the U.K., which we refer to as key European markets, will be successful or that we will be able to generate revenues at the levels or on the timing we expect, or at levels or on the timing necessary to support our goals.
•Our planned pivotal Phase 3 INSIGHT study of QINLOCK versus sunitinib in second-line gastrointestinal stromal tumor (GIST) patients with mutations in KIT exon 11 and 17 and/or 18 and the absence of mutations in KIT exon 9, 13, and/or 14, which we also refer to as patients with mutations in KIT exon 11 and 17/18 (the INSIGHT study), may not be successful.
•We have limited experience as a commercial company and the marketing and sale of QINLOCK or any future approved drugs may be unsuccessful or less successful than anticipated.
•If we are not able to obtain, or if there are delays in obtaining, required regulatory approvals for our drug and drug candidates and, if applicable, including by a third party, for any related companion diagnostic tests, or if we experience a delay in drug supply, we will not be able to commercialize our drug candidates or continue our European geographic expansion of QINLOCK, and our ability to generate revenue will be materially impaired.
•Our reliance on sole source third-party suppliers could harm our ability to commercialize QINLOCK or any drug candidates that may be approved in the future.
•Our relationships with customers and third-party payors will be subject to applicable anti-kickback, fraud and abuse, and other healthcare laws and regulations, and health information privacy and security laws, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm, and diminished profits and future earnings.
•Failure to obtain or maintain adequate coverage and reimbursement for new or current products could limit our ability to market those products and decrease our ability to generate revenue.
•Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our drug candidates and decrease the prices we may obtain for our approved drug.
•QINLOCK or any current drug candidates, such as vimseltinib and DCC-3116, or future drug candidates, if successfully developed and approved, may cause undesirable side effects that limit the commercial profile or result in other significant negative consequences for approved products; or delay or prevent further development or regulatory approval with respect to drug candidates or new indications, or cause regulatory authorities to require labeling statements, such as boxed warnings.
•We face substantial competition, which may result in others discovering, developing, or commercializing products before or more successfully than we do.
•If the market opportunities for our approved drug or any potential expanded market for our approved drug or drug candidates are smaller than what we estimate or if any approval that we obtain is based on a narrower definition of the patient population, our revenue potential and ability to achieve profitability will be adversely affected.
•The commercial success of QINLOCK, and of any future approved drugs, such as vimseltinib or DCC-3116, if approved, will depend upon the degree of market acceptance by physicians, patients, third-party payors, and others in the medical community.
•Our failure to obtain additional marketing approvals in other foreign jurisdictions would prevent QINLOCK and our drug candidates from being marketed more extensively internationally, and any approval we are granted for QINLOCK or our drug candidates in the United States (U.S.) or key European markets would not assure approval of QINLOCK or our drug candidates in other foreign jurisdictions.
•QINLOCK and any drug candidate for which we obtain marketing approval will be subject to ongoing enforcement of post-marketing requirements and we could be subject to substantial penalties, including withdrawal of QINLOCK or any future approved product from the market, if we fail to comply with all regulatory requirements. In addition, the terms of the marketing approval of QINLOCK, and any future approved products, and ongoing regulation of our products, may limit how we manufacture and market our products and compliance with such requirements may involve substantial resources, which could materially impair our ability to generate revenue.
3
•We may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our drug and drug candidates.
•If we experience delays or difficulties in the enrollment of patients in clinical trials, including in our planned Phase 3 INSIGHT study, and our ongoing clinical trials of vimseltinib and DCC-3116, our receipt of necessary marketing approvals could be delayed or prevented.
•If serious adverse events or unacceptable side effects are identified during the development of our drug or drug candidates, we may need to abandon or limit such development.
•We may not be able to obtain or, if granted, retain orphan drug exclusivity for our drug or drug candidates.
•The COVID-19 pandemic and the future outbreak of other highly infectious or contagious diseases, could seriously harm our research, development, and commercialization efforts, increase our costs and expenses and have a material adverse effect on our business, financial condition, and results of operations.
•We have incurred significant operating losses since our inception and have not generated sufficient revenue to result in a profit from product sales. We expect to incur continued losses for the foreseeable future and may never achieve or maintain profitability.
•We have a limited operating history, have not successfully completed late-stage clinical trials for any drug candidate other than QINLOCK, and have not generated sufficient revenue to result in a profit from product sales or profits from our operations. We may never achieve or sustain profitability.
•If we are unable to raise capital when needed, or on attractive terms, we could be forced to delay, reduce, or eliminate our research or drug development programs or commercialization efforts.
•We rely, and expect to continue to rely, on third parties to conduct our clinical trials and preclinical studies, and those third parties may not perform satisfactorily, or may experience delays in performing these services, including failing to meet deadlines for the completion of such trials or studies, which may harm our ability to obtain regulatory approval for or commercialize our approved drug and drug candidates and our business could be substantially harmed.
•We contract with third parties for the manufacture of our drug candidates for preclinical testing, clinical trials, and for the manufacture of QINLOCK. This reliance on third parties increases the risk that we will not have sufficient quantities of our drug or drug candidates or such quantities at an acceptable cost or quality, which could delay, prevent, or impair our development or commercialization efforts.
•We may not be able to enforce our intellectual property rights throughout the world.
•If we are unable to obtain and maintain sufficient patent protection for our approved drug or drug candidates, or if the scope of the patent protection is not sufficiently broad, third parties, including our competitors, could develop and commercialize products similar or identical to ours, and our ability to commercialize our approved drug or drug candidates successfully may be adversely affected.
The summary risk factors described above should be read together with the text of the full risk factors below in the section entitled "Risk Factors" and the other information set forth in this Quarterly Report on Form 10-Q (Form 10-Q), including our consolidated financial statements and the related notes, as well as in other documents that we file with the U.S. Securities and Exchange Commission (SEC). The risks summarized above or described in full below are not the only risks that we face. Additional risks and uncertainties not precisely known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition, results of operations, and future growth prospects.
4
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements, which reflect our current views with respect to, among other things, our operations and financial performance. All statements other than statements of historical facts contained in this Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plan, objectives of management, and expected market growth are forward-looking statements. You can identify these forward-looking statements by the use of words such as "outlook," "believes," "expects," "potential," "continues," "may," "will," "should," "seeks," "approximately," "predicts," "intends," "plans," "estimates," "anticipates," or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include but are not limited to those described under "Risk Factors" and include, among other things:
•our ability to successfully commercialize or otherwise provide access to QINLOCK for the treatment of adult patients with advanced GIST who have received prior treatment with three or more kinase inhibitors, including imatinib, in the U.S., key European markets, and any other jurisdictions where we may receive marketing approval in the future;
•the success and cost of our plans to research, develop, and commercialize our drug candidates, including the timing of our product development activities and clinical trials, and the timing of our investigational new drug (IND) applications, and clearance thereof, for any other drug candidates;
•our ability to successfully initiate and complete the pivotal Phase 3 INSIGHT study of QINLOCK for the potential treatment of second line GIST patients with mutations in KIT exon 11 and 17/18 and the Phase 3 MOTION study of vimseltinib for the potential treatment of tenosynovial giant cell tumor (TGCT) patients, advance our DCC-3116 program through clinical development, and nominate additional drug candidates from our switch control inhibitor platform;
•if we experience delays or difficulties in the enrollment of patients in clinical trials, including in the INSIGHT study and our ongoing clinical trials of vimseltinib and DCC-3116, our receipt of necessary marketing approvals could be delayed or prevented;
•the timing or likelihood of regulatory actions, filings, and approvals for our current and future drug candidates, including our ability to obtain and maintain regulatory approval for QINLOCK or obtain and maintain regulatory approval for any of our current or future drug candidates, and any related restrictions, limitations, and/or warnings in the label of QINLOCK or any of our current or future drug candidates that may receive marketing approval;
•the rate and degree of market acceptance for QINLOCK or any current or future drug candidate for which we may receive marketing approval;
•our ability and plans in continuing to maintain our commercial infrastructure and successfully marketing and selling QINLOCK and any current or future drug candidate for which we may receive marketing approval, including our plans with respect to the focus and activities of our sales force, the nature of our marketing, market access, patient support activities, and our pricing of QINLOCK;
•the pricing and reimbursement of, and the extent to which patient assistance programs are utilized for, QINLOCK, or any current or future drug candidates for which we may receive marketing approval;
•our expectations regarding the size and growth potential of the markets for QINLOCK or any of our current or future drug candidates for which we may receive marketing approval and our ability to serve those markets;
•our ability to obtain funding for our strategic plans and operations;
•the development of companion diagnostic tests for our drug or any of our current or future drug candidates, if applicable;
•our ability to manufacture or obtain sufficient quantities of QINLOCK or our drug candidates, on a timely basis, to support our planned clinical trials and commercialization of QINLOCK or any of our current or future drug candidates for which we may receive marketing approval;
•the therapeutic benefit, effectiveness, and safety profile of QINLOCK and our drug candidates;
•our commercial preparedness efforts and our ability to successfully commercially launch, or where permitted, otherwise provide access to our drug or drug candidates, if and when they are approved or receive pricing or reimbursement approval;
•the performance and experience of our licensee, Zai Lab (Shanghai) Co., Ltd. (Zai), to successfully develop and commercialize QINLOCK in the People's Republic of China (the PRC), Hong Kong, Taiwan and Macau, these
5
territories collectively referred to as Greater China, under the terms and conditions of our license agreement, and the performance of our distributors in other territories;
•the potential benefits of our combination strategy for DCC-3116;
•our ability to attract additional licensees and/or collaborators or distributors with development, regulatory, and commercialization expertise;
•future agreements with third parties in connection with the commercialization of QINLOCK or any of our current or future drug candidates for which we may receive marketing approval;
•our expectations regarding our ability to obtain, maintain, enforce, and defend our intellectual property protection for QINLOCK or our drug candidates;
•the success and timing of competing therapies that are or may become available;
•our ability to attract and retain key scientific, medical, commercial, and management personnel;
•the accuracy of our estimates regarding expenses, future revenues, capital requirements, use of proceeds, and need for additional financing; and
•the impact of global economic and political developments on our business, including high inflation and capital market disruptions, the war in Ukraine, economic sanctions and economic slowdowns or recessions, including any that may result from such developments and the COVID-19 pandemic, which could harm our commercialization efforts for QINLOCK as well as the value of our common stock and our ability to access capital markets.
These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included elsewhere in this Form 10-Q and our prior filings with the SEC. You should read this Form 10-Q and the documents that we have filed as exhibits to this Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements contained in this Form 10-Q are made as of the date of this Form 10-Q, and we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
NOTE REGARDING TRADEMARKS
The Deciphera logo and the QINLOCK® word mark and logo are registered trademarks and the Deciphera word mark is a trademark of Deciphera Pharmaceuticals, LLC.
We have, in certain cases, omitted the ®, ©, and ™ designations for these and other trademarks used in this Form 10-Q. Nevertheless, all rights to such trademarks are reserved. These and other trademarks referenced in this Form 10-Q are the property of their respective owners.
6
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
Deciphera Pharmaceuticals, Inc.
Consolidated Balance Sheets
(Unaudited, in thousands, except share and per share amounts)
| March 31, 2023 | December 31, 2022 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term marketable securities | |||||||||||
| Accounts receivable, net | |||||||||||
| Inventory | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Long-term marketable securities | |||||||||||
| Long-term investments—restricted and other long-term assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders' Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Operating lease liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Operating lease liabilities, net of current portion | |||||||||||
| Total liabilities | |||||||||||
Commitments and contingencies (Note 7) | |||||||||||
| Stockholders' equity: | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
Additional paid-in capital | |||||||||||
| Accumulated other comprehensive income (loss) | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders' equity | |||||||||||
| Total liabilities and stockholders' equity | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
7
Deciphera Pharmaceuticals, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited, in thousands, except share and per share amounts)
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Revenues: | |||||||||||
| Product revenues, net | $ | $ | |||||||||
| Collaboration revenues | |||||||||||
| Total revenues | |||||||||||
| Cost and operating expenses: | |||||||||||
| Cost of sales | |||||||||||
| Research and development | |||||||||||
| Selling, general, and administrative | |||||||||||
| Total cost and operating expenses | |||||||||||
| Loss from operations | ( | ( | |||||||||
| Other income (expense): | |||||||||||
| Interest and other income, net | |||||||||||
| Total other income (expense), net | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Net loss per share—basic and diluted | $ | ( | $ | ( | |||||||
| Weighted average common shares outstanding—basic and diluted | |||||||||||
| Comprehensive loss: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Other comprehensive income (loss): | |||||||||||
| Unrealized losses on marketable securities | ( | ||||||||||
| Currency translation adjustment | ( | ||||||||||
| Total other comprehensive income (loss) | ( | ||||||||||
| Total comprehensive loss | $ | ( | $ | ( | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
8
Deciphera Pharmaceuticals, Inc.
Consolidated Statements of Stockholders' Equity
(Unaudited, in thousands, except share amounts)
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders' Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Issuance of common stock, net of underwriting discounts, commissions and offering costs | — | — | |||||||||||||||||||||||||||||||||
| Issuance of common stock upon pre-funded warrant exercise | — | — | — | ||||||||||||||||||||||||||||||||
Issuance of common stock under stock option and incentive and employee stock purchase plans | — | — | |||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders' Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
Issuance of common stock under stock option and incentive and employee stock purchase plans | — | — | |||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
9
Deciphera Pharmaceuticals, Inc.
Consolidated Statements of Cash Flows
(Unaudited, in thousands)
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash flows used in operating activities: | |||||||||||
| Stock-based compensation expense | |||||||||||
| Depreciation expense | |||||||||||
| Noncash lease expense | |||||||||||
| Net (accretion) amortization of (discounts) premium on marketable securities | ( | ||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Inventory | ( | ( | |||||||||
| Prepaid expenses and other current assets | ( | ( | |||||||||
| Accounts payable | |||||||||||
| Accrued expenses and other current liabilities | ( | ( | |||||||||
| Operating lease liabilities | ( | ( | |||||||||
| Net cash flows used in operating activities | ( | ( | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of marketable securities | ( | ||||||||||
| Maturities of marketable securities | |||||||||||
| Sales of marketable securities | |||||||||||
| Purchases of property and equipment | ( | ||||||||||
| Net cash flows (used in) provided by investing activities | ( | ||||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from offerings of common stock, net of underwriting discounts and commissions | |||||||||||
| Proceeds from pre-funded warrant exercise | |||||||||||
| Payments of offering costs | ( | ||||||||||
| Proceeds from stock option exercises and employee stock purchase plan | |||||||||||
| Net cash flows provided by financing activities | |||||||||||
| Net increase in cash and cash equivalents | |||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
10
Deciphera Pharmaceuticals, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
1. Nature of the Business and Summary of Significant Accounting Policies
Nature of the Business
Deciphera Pharmaceuticals, Inc. (the Company) is a biopharmaceutical company focused on discovering, developing, and commercializing important new medicines to improve the lives of people with cancer. Leveraging its proprietary switch-control inhibitor platform and deep expertise in kinase biology, the Company designs kinase inhibitors to target the switch pocket region of the kinase with the goal of developing potentially transformative medicines. Through its patient-inspired approach, the Company seeks to develop a broad portfolio of innovative medicines to improve treatment outcomes. QINLOCK, the Company's switch-control tyrosine kinase inhibitor, was discovered using its proprietary drug discovery platform and designed for the treatment of gastrointestinal stromal tumor (GIST). QINLOCK is approved in Australia, Canada, China, the European Union (EU), Hong Kong, Israel, Macau, New Zealand, Switzerland, Taiwan, the United Kingdom (U.K.), and the United States (U.S.) for the treatment of fourth-line advanced GIST. The Company wholly owns QINLOCK and all of its drug candidates with the exception of a development and commercialization out-license agreement for QINLOCK in Greater China. In addition to QINLOCK, the Company has developed a robust pipeline of novel drug candidates using its switch-control kinase inhibitor platform, including vimseltinib and DCC-3116.
The Company is subject to risks and uncertainties common to companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, dependence on key personnel, market acceptance and the successful commercialization of QINLOCK or any of the Company's current or future drug candidates for which it receives marketing approval, protection of proprietary technology, ability to complete late-stage clinical trials, ability to obtain and maintain regulatory approvals, compliance with government regulations, and the ability to secure additional capital to fund operations. QINLOCK and the Company's drug candidates currently under development will require significant additional research and development efforts, including extensive preclinical and/or clinical testing and regulatory approval. In addition to supporting its research and development efforts, the Company will be required to invest in the Company's commercial capabilities and infrastructure, to support its commercialization of QINLOCK, the Company's first approved drug, and any current or future drug candidate for which the Company obtains marketing approval. These efforts require significant amounts of additional capital, adequate personnel and infrastructure, and extensive compliance-reporting capabilities. Even if the Company's drug development and commercialization efforts are successful, it is uncertain when, if ever, the Company will realize sufficient revenue to result in a profit from product sales of QINLOCK or any current or future drug candidates for which it receives marketing approval.
In April 2022, the Company entered into an underwriting agreement with J.P. Morgan Securities LLC and Jefferies, LLC (Jefferies), as representatives of the several underwriters named therein, relating to the issuance and sale of an aggregate of 7,501,239 shares of its common stock at a public offering price of $10.00 per share to certain investors. In addition, the Company issued and sold pre-funded warrants to purchase 9,748,761 shares of its common stock at a public offering price of $9.99 per pre-funded warrant, which equals the public offering price per share of the common stock less the $0.01 exercise price per share of each pre-funded warrant. The offering closed on April 29, 2022, resulting in net proceeds of $163.4 million after deducting underwriting discounts and commissions and other offering expenses.
As the pre-funded warrants are indexed to the Company’s common stock (and otherwise meet the requirements to be classified in equity), the Company recorded the consideration received from the issuance of the pre-funded warrants as additional paid-in capital on the Company’s consolidated balance sheets.
The pre-funded warrants are exercisable at any time. Certain holders of pre-funded warrants may not exercise the pre-funded warrant if the holder, together with its affiliates, would beneficially own more than 4.99%, 9.99%, or 28.22% of the number of shares of the Company’s common stock outstanding immediately after giving effect to such exercise. A holder of pre-funded warrants may increase or decrease this percentage not in excess of 19.99%, with the exception of one holder, by providing at least 61 days’ prior notice to the Company.
During the three months ended March 31, 2023, 2,427,693 shares of pre-funded warrants were exercised resulting in net proceeds of less than $0.1 million. As of March 31, 2023, there were 6,428,270 pre-funded warrants outstanding.
11
Deciphera Pharmaceuticals, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
In August 2022, the Company entered into an amendment to its existing Open Market Sale Agreement℠ (as amended, Amended Sales Agreement) with Jefferies, pursuant to which the Company may issue and sell shares of its common stock (the Shares) having aggregate offering proceeds of up to $200.0 million from time to time through Jefferies as its sales agent. Upon delivery of a placement notice and subject to the terms and conditions of the Amended Sales Agreement, Jefferies may sell the Shares by any method permitted by law deemed to be an "at the market offering" as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended. The Company may sell the Shares in amounts and at times to be determined by the Company from time to time subject to the terms and conditions of the Amended Sales Agreement, but it has no obligation to sell any Shares under the Amended Sales Agreement. The Company or Jefferies may suspend or terminate the offering of Shares upon notice to the other party and subject to other conditions.
On January 18, 2023, the Company delivered written notice to Jefferies that it was suspending and terminating the prospectus related to the common stock issuable pursuant to the terms of the Amended Sales Agreement. As a result, the Company will not make any sales of its securities pursuant to the Amended Sales Agreement, unless and until a new prospectus, prospectus supplement, or a new registration statement is filed. Other than the termination of the prospectus, the Amended Sales Agreement remains in full force and effect.
In January 2023, the Company entered into an underwriting agreement with J.P. Morgan Securities LLC, Jefferies, Cowen and Company, LLC, and Guggenheim Securities, LLC, as representatives of the several underwriters named therein, relating to the issuance and sale of an aggregate of 7,986,111 shares of its common stock at a public offering price of $18.00 per share. The offering closed on January 24, 2023, resulting in net proceeds of $134.5 million, after deducting underwriting discounts and commissions and other offering expenses.
In May 2023, the Company entered into a new Open Market Sale AgreementSM (the Sales Agreement) with Jefferies, pursuant to which the Company may issue and sell the Shares having aggregate offering proceeds of up to $200.0 million from time to time through Jefferies as its sales agent. Upon delivery of a placement notice and subject to the terms and conditions of the Sales Agreement, Jefferies may sell the Shares by any method permitted by law deemed to be an "at the market offering" as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended. The Company may sell the Shares in amounts and at times to be determined by the Company from time to time subject to the terms and conditions of the Sales Agreement, but it has no obligation to sell any Shares under the Sales Agreement. The Company or Jefferies may suspend or terminate the offering of Shares upon notice to the other party and subject to other conditions.
Basis of Presentation
The accompanying consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets, and the satisfaction of liabilities and commitments in the ordinary course of business. Since inception, the Company has incurred recurring losses, including net losses of $49.6 million and $178.9 million for the three months ended March 31, 2023 and the year ended December 31, 2022, respectively. As of March 31, 2023, the Company had an accumulated deficit of $1.3 billion. The Company expects to continue to generate operating losses for the foreseeable future. The Company expects that its cash, cash equivalents, and marketable securities of $426.3 million as of March 31, 2023, together with anticipated product, royalty, and supply revenues, but excluding any potential future milestone payments under its collaboration or license agreements will be sufficient to fund its operating expenses and capital expenditure requirements through at least 12 months from the issuance date of these consolidated financial statements. The future viability of the Company is dependent on its ability to raise additional capital to fund its operations.
The Company will need to obtain substantial additional funding in connection with continuing operations. If the Company is unable to raise capital when needed, or on attractive terms, it could be forced to delay, reduce, or further terminate its research or drug development programs or certain commercialization efforts. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all.
These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.
12
Deciphera Pharmaceuticals, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
Unaudited Interim Financial Information
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (GAAP).
The consolidated balance sheet as of December 31, 2022 was derived from audited financial statements, but does not include all disclosures required by GAAP. The accompanying unaudited consolidated financial statements as of March 31, 2023 and for the three months ended March 31, 2023 and 2022 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the Company's audited financial statements and the notes thereto for the year ended December 31, 2022 included in the Company's Annual Report on Form 10-K (Form 10-K) on file with the SEC.
In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the Company's consolidated financial position as of March 31, 2023, consolidated results of operations and comprehensive loss for the three months ended March 31, 2023 and 2022, and consolidated cash flows for the three months ended March 31, 2023 and 2022, have been made. The consolidated results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2023.
The significant accounting policies used in preparation of these consolidated financial statements for the three months ended March 31, 2023 are consistent with those discussed in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements in the Company's Form 10-K for the year ended December 31, 2022.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, product revenue reserves, the accrual for research and development expenses, and the valuation of stock-based option awards. Estimates are periodically reviewed in light of changes in circumstances, facts, and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.
For periods in which the Company has reported net losses, diluted net loss per common share is the same as basic net loss per common share, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. The Company reported a net loss for the three months ended March 31, 2023 and 2022.
13
Deciphera Pharmaceuticals, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
| As of March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Options to purchase common stock | |||||||||||
| Unvested restricted common stock units | |||||||||||
| Unvested employee stock purchase plan shares | |||||||||||
| Total | |||||||||||
2. Revenues
Net Product Revenues
To date, the Company's only source of product revenues has been from the sales of QINLOCK, which began in May 2020, following the approval of QINLOCK by the U.S. Food and Drug Administration ( FDA) on May 15, 2020, and during the three months ended March 31, 2023 and 2022 in certain other jurisdictions following regulatory approval or on a named patient basis.
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2023 | 2022 | |||||||||
| U.S. | $ | $ | |||||||||
| Rest of world | |||||||||||
| Total product revenues, net | $ | $ | |||||||||
| (in thousands) | Trade discounts and allowances | Chargebacks and administrative fees | Government rebates and other incentives | Returns | Total | ||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Provision related to sales in the current year | |||||||||||||||||||||||||||||
| Adjustments related to prior period sales | |||||||||||||||||||||||||||||
| Credits and payments made during the period | ( | ( | ( | ( | ( | ||||||||||||||||||||||||
| Balance as of March 31, 2023 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| (in thousands) | As of March 31, 2023 | As of December 31, 2022 | |||||||||
| Reduction of accounts receivable, net | $ | $ | |||||||||
| Component of accrued expenses and other current liabilities | |||||||||||
| Total revenue-related reserves | $ | $ | |||||||||
14
Deciphera Pharmaceuticals, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
Collaboration Revenues
Zai License Agreement
In June 2019, the Company entered into a license agreement (Zai License Agreement) with Zai Lab (Shanghai) Co., Ltd. (Zai), pursuant to which the Company granted Zai exclusive rights to develop and commercialize the Licensed Products in the Territory. The Company retains exclusive rights to, among other things, develop, manufacture, and commercialize the Licensed Products outside the Territory.
Pursuant to the terms of the Zai License Agreement, as of March 31, 2023 the Company has received an upfront cash payment of $20.0 million and three development milestone payments totaling $12.0 million and will be eligible to receive up to $173.0 million in potential development and commercial milestone payments, consisting of up to $38.0 million of development milestones and up to $135.0 million of commercial milestones. In addition, during the term of the Zai License Agreement, Zai will be obligated to pay the Company tiered percentage royalties ranging from low to high teens on annual net sales of the Licensed Products in the Territory, subject to adjustments in specified circumstances. Additionally, certain costs incurred by the Company associated with the Zai License Agreement are reimbursed by Zai.
During the three months ended March 31, 2023 and 2022, the Company recognized royalty revenues under the Zai License Agreement, which the Company began recognizing in the second quarter of 2021 following the approval from the China National Medical Products Administration (China NMPA).
Please read Note 3, Revenues, to the consolidated financial statements in the Company's Form 10-K for the year ended December 31, 2022 for further details on the Zai License Agreement.
Zai Supply Agreement
In February 2020, the Company entered into a Supply Agreement (the Zai Supply Agreement) with Zai, as required by terms in the Zai License Agreement, pursuant to which the Company will supply the Licensed Products to Zai for use in the Territory for clinical trials as well as commercial inventory, if QINLOCK obtained regulatory approval in the Territory. In March 2021, QINLOCK was approved in the People's Republic of China (the PRC) and in Hong Kong. In September 2021, QINLOCK was approved in Taiwan. Subject to the Zai Supply Agreement, costs incurred by the Company for clinical and commercial supply are reimbursed by Zai.
During the second quarter of 2021, following the approvals of QINLOCK in the PRC and Hong Kong in March 2021, the Company began recognizing revenues associated with sales of commercial inventory of QINLOCK under the Zai Supply Agreement.
15
Deciphera Pharmaceuticals, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
3. Marketable Securities and Fair Value Measurements
The following tables present marketable securities by contractual maturity and security type:
| As of March 31, 2023 (in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||||||||
| Due within one year: | |||||||||||||||||||||||
| Commercial paper | $ | $ | $ | ( | $ | ||||||||||||||||||
| Corporate debt securities | ( | ||||||||||||||||||||||
| U.S. government securities | ( | ||||||||||||||||||||||
| Certificates of deposit | ( | ||||||||||||||||||||||
| Due after one year through five years: | |||||||||||||||||||||||
| Corporate debt securities | ( | ||||||||||||||||||||||
| U.S. government securities | |||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||
| As of December 31, 2022 (in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||||||||
| Due within one year: | |||||||||||||||||||||||
| Corporate debt securities | $ | $ | $ | ( | $ | ||||||||||||||||||
| Commercial paper | ( | ||||||||||||||||||||||
| Certificates of deposit | ( | ||||||||||||||||||||||
| U.S. government securities | ( | ||||||||||||||||||||||
| Due after one year through five years: | |||||||||||||||||||||||
| Corporate debt securities | ( | ||||||||||||||||||||||
| U.S. government securities | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||
16
Deciphera Pharmaceuticals, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
The following tables present information about the Company's financial assets measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:
| As of March 31, 2023 (in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Certificates of deposit | |||||||||||||||||||||||
| Marketable securities: | |||||||||||||||||||||||
| Corporate debt securities | |||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| U.S. government securities | |||||||||||||||||||||||
| Certificates of deposit | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| As of December 31, 2022 (in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Corporate debt securities | |||||||||||||||||||||||
| Marketable securities: | |||||||||||||||||||||||
| Corporate debt securities | |||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| U.S. government securities | |||||||||||||||||||||||
| Certificates of deposit | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
The tables above exclude certificates of deposit totaling $3.1
17
Deciphera Pharmaceuticals, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
4. Inventory
| (in thousands) | As of March 31, 2023 | As of December 31, 2022 | |||||||||
| Raw materials | $ | $ | |||||||||
| Work in process | |||||||||||
| Finished goods | |||||||||||
| Total inventory | $ | $ | |||||||||
5. Accrued Expenses and Other Current Liabilities
| (in thousands) | As of March 31, 2023 | As of December 31, 2022 | |||||||||
| External research and development expenses | $ | $ | |||||||||
| Payroll and related expenses | |||||||||||
| Revenue-related reserves | |||||||||||
| Professional fees | |||||||||||
| Other | |||||||||||
| Total accrued expenses and other current liabilities | $ | $ | |||||||||
6. Stock-Based Awards
Equity Plans
The Company grants stock-based awards under its 2017 Stock Option and Incentive Plan (the 2017 Plan) and is authorized to issue common stock under its 2017 Employee Stock Purchase Plan (ESPP). In February 2023, the Company granted performance-based restricted stock unit awards under the 2017 Plan. No performance-based restricted stock units vested and no performance-based restricted stock units were forfeited during the three months ended March 31, 2023. The Company also has outstanding stock options under its 2015 Equity Incentive Plan but is no longer granting awards under this plan. As of March 31, 2023, 1,721,074 shares of common stock were available for issuance under the 2017 Plan. As of March 31, 2023, 2,081,188 shares of common stock were available for issuance to participating employees under the ESPP.
In January 2022, the Company adopted an inducement plan (the Inducement Plan) pursuant to which the Company initially reserved 800,000 shares of common stock to be used exclusively for grants of equity-based awards to individuals who were not previously employees or directors of the Company, as an inducement material to the individual’s entry into employment with the Company within the meaning of Rule 5635(c)(4) of the Marketplace Rules of the Nasdaq Stock Market, Inc. In February 2023, the Inducement Plan was amended and the number of shares reserved for issuance under the Inducement Plan was increased by 270,000 . The Inducement Plan provides for the grant of equity-based awards in the form of nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, unrestricted stock awards, and dividend equivalent rights. The Inducement Plan was adopted by the Company without stockholder approval pursuant to Rule 5635(c)(4) of the Marketplace Rules of the Nasdaq Stock Market, Inc. As of March 31, 2023, 800,000 shares of common stock were available for issuance under the Inducement Plan.
18
Deciphera Pharmaceuticals, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
Stock-based compensation expense was classified in the consolidated statements of operations and comprehensive loss as follows:
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2023 | 2022 | |||||||||
| Research and development | $ | $ | |||||||||
| Selling, general, and administrative | |||||||||||
| Total stock-based compensation | $ | $ | |||||||||
As of March 31, 2023, total unrecognized compensation cost related to the unvested share-based awards was $82.4 million, which is expected to be recognized over a weighted average of 2.2 years.
7. Commitments and Contingencies
Purchase Commitments Associated with Commercial Supply Agreements
The Company has entered into commercial supply agreements related to the supply of QINLOCK that require the Company to make binding forecasts for a certain amount of purchases. The related cancellation clauses would as a general matter require the Company to pay the full amount of these binding forecasts. As of March 31, 2023, the Company's contractual commitments for its commercial supply agreements were $8.7 million, of which $7.9 million is expected to be paid within one year.
Legal Proceedings
The Company is not currently a party to any material legal proceedings. At each reporting date, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company expenses the costs related to its legal proceedings as they are incurred.
Indemnification Agreements
In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors and senior management that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result of such indemnifications. The Company is not aware of any claims under indemnification arrangements, and it has not accrued any liabilities related to such obligations in its consolidated financial statements as of March 31, 2023 or December 31, 2022.
19
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Form 10-Q and our Annual Report on Form 10-K (Form 10-K) for the year ended December 31, 2022 on file with the SEC. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-Q, including information with respect to our plans and strategy for our business, includes forward looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the "Risk Factors" section of this Form 10-Q, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.
Overview
We are a biopharmaceutical company focused on discovering, developing, and commercializing important new medicines to improve the lives of people with cancer. Leveraging our proprietary switch-control kinase inhibitor platform and deep expertise in kinase biology, we design kinase inhibitors to target the switch pocket region of the kinase with the goal of developing potentially transformative medicines. Through our patient-inspired approach, we seek to develop a broad portfolio of innovative medicines to improve treatment outcomes. QINLOCK, our switch-control tyrosine kinase inhibitor, was discovered using our proprietary drug discovery platform and designed for the treatment of GIST. QINLOCK is approved in Australia, Canada, China, the EU, Hong Kong, Israel, Macau, New Zealand, Switzerland, Taiwan, the U.K., and the U.S. for the treatment of fourth-line advanced GIST. We wholly own QINLOCK and all of our drug candidates with the exception of a development and commercialization out-license agreement for QINLOCK in Greater China. In addition to QINLOCK, we have developed a robust pipeline of novel drug candidates using our switch-control kinase inhibitor platform, including vimseltinib and DCC-3116.
Recent Developments
QINLOCK
QINLOCK, an orally administered kinase switch control inhibitor of the KIT and PDGFRA kinases, is approved in twelve territories for the treatment of fourth-line advanced GIST.
In January 2023, we announced findings from an exploratory analysis using circulating tumor DNA (ctDNA) from the Phase 3 INTRIGUE study demonstrating substantial clinical benefit of QINLOCK in second-line GIST patients with mutations in KIT exon 11 and 17/18. Based on the results of the ctDNA analysis and discussions with the FDA, we expect to initiate the pivotal Phase 3 INSIGHT study of QINLOCK versus sunitinib in this patient population in the second half of 2023.
In March 2023, we announced that QINLOCK has been included in the latest National Comprehensive Cancer Network® Clinical Practice Guidelines in Oncology as a preferred regimen for second-line GIST patients intolerant to sunitinib. We also announced that the FDA granted Breakthrough Therapy Designation (BTD) for QINLOCK for the treatment of adult patients with unresectable or metastatic GIST who received prior treatment with imatinib, and who harbor a KIT exon 11 mutation and co-occurring KIT exon 17 and/or 18 mutations.
Vimseltinib
Vimseltinib is an investigational, orally administered, potent, and highly-selective switch-control kinase inhibitor of the colony stimulating factor 1 receptor (CSF1R).
We are currently studying vimseltinib in the pivotal Phase 3 MOTION study in patients with TGCT (MOTION study). The MOTION study is a two-part, randomized, double-blind, placebo-controlled study to assess the efficacy and safety of vimseltinib in patients with TGCT who are not amenable to surgery. In March 2023, we announced the completion of enrollment in the MOTION study. We expect to report top-line results in the fourth quarter of 2023.
We are also conducting an international, multicenter, ongoing open-label Phase 1/2 study designed to evaluate the safety, efficacy, pharmacokinetics (PK), and pharmacodynamics (PD) of vimseltinib in patients with solid tumors and TGCT. In the second half of 2023, we plan to provide updated data from our Phase 1/2 study of vimseltinib in TGCT patients.
DCC-3116
DCC-3116 is a potential first-in-class investigational, orally administered, potent, and highly selective switch-control inhibitor of the ULK kinase.
20
DCC-3116 is being studied in a Phase 1/2 study designed to evaluate the safety, tolerability, clinical activity, PK, and PD of DCC-3116 as a single agent and in combination with trametinib, a U.S. Food and Drug Administration (FDA) approved MEK inhibitor, in patients with advanced or metastatic tumors with a RAS or RAF mutation. We are currently in the combination dose escalation phase of the Phase 1/2 study.
In January 2023, we announced a clinical trial collaboration and supply agreement with Pfizer Inc. (Pfizer) for a new dose escalation study evaluating DCC-3116 in combination with encorafenib and cetuximab in patients with colorectal cancer. Under the terms of the agreement, we will sponsor the trial and Pfizer will supply encorafenib at no cost. We expect to initiate the study in the second half of 2023.
In April 2023, we presented preclinical data on new clinical combinations with DCC-3116 at the American Association for Cancer (AACR) Annual Meeting 2023, including preclinical models in combination with QINLOCK in GIST and encorafenib and cetuximab in patients with colorectal cancer.
In the second half of 2023, we plan to present updated data from the single agent dose escalation phase of the study. Also in the second half of 2023, we expect to initiate one or more expansion cohorts in the ongoing Phase 1/2 study in combination with either trametinib, binimetinib, or sotorasib; and initiate new combination studies evaluating DCC-3116 in combinations with ripretinib in patients with GIST and in combination with encorafenib and cetuximab in patients with colorectal cancer.
Platform Development and Preclinical Pipeline
We are also making a focused investment in our next generation of research programs, which are designed to provide first-in-class or best-in-class treatments using our proprietary switch-control inhibitor platform. We announced the nomination of DCC-3084 as our pan-RAF development candidate in November 2022 and DCC-3009 as our next generation KIT inhibitor in April 2023. We also plan to continue to develop our in-licensed research-stage program, which targets the VPS34 kinase.
DCC-3084
DCC-3084 is a potential best-in-class pan-RAF inhibitor that broadly inhibits Class I, II, and III BRAF mutations, BRAF fusions, and BRAF/CRAF heterodimers. In April 2023, we presented preclinical data for DCC-3084 at the AACR Annual Meeting 2023. We expect to submit an IND application to the FDA for DCC-3084 in the second half of 2023.
DCC-3009
DCC-3009 is a potential best-in-class next generation KIT inhibitor that is designed to inhibit the broad spectrum of known primary and secondary drug resistant mutations in GIST, spanning KIT exons 9, 11, 13, 14, 17, and 18. In April 2023, we presented preclinical data for DCC-3009 at the AACR Annual Meeting 2023. We expect to submit an IND application to the FDA for DCC-3009 in the first half of 2024.
Components of Our Results of Operations
Revenues
QINLOCK is approved in Australia, Canada, China, the EU, Hong Kong, Israel, Macau, New Zealand, Switzerland, Taiwan, the U.S. and the U.K. for the treatment of fourth-line advanced GIST. We may generate revenue in the future from a combination of product sales or payments from collaboration, distribution, or any potential additional license agreements that we may enter into with third parties. We expect that our revenue in the foreseeable future will be derived primarily from sales of QINLOCK and, payments owed to us under the license (Zai License Agreement) and supply (Zai Supply Agreement) agreements we entered into with Zai in June 2019 and February 2020, respectively, including royalty revenues under the Zai License Agreement following the approvals of QINLOCK in the PRC and Hong Kong in March 2021. We cannot provide assurance as to what extent we will generate revenue from the commercialization of QINLOCK or if, when, or to what extent we will generate revenue from the commercialization and sale of our drug candidates for which we may receive marketing approval, if any. Additionally, we cannot provide assurance as to the extent of future royalty payments, the timing of future milestone payments, or that we will achieve and receive any future milestone payments at all. We may never succeed in obtaining regulatory approval for any of our drug candidates other than QINLOCK.
Product Revenues, Net
During the three months ended March 31, 2023 and 2022, our only source of product revenues was from the sales of QINLOCK. Product revenues are recorded net of estimates of variable consideration. Please read Note 2, Revenues, of these
21
consolidated financial statements included in this Form 10-Q for further details of the reserves recorded for variable considerations.
Collaboration Revenues
For the three months ended March 31, 2023 and 2022, collaboration revenues were associated with the Zai License Agreement and Zai Supply Agreement, as applicable.
Zai License Agreement
Pursuant to the terms of the Zai License Agreement, as of March 31, 2023 we have received an upfront cash payment of $20.0 million and three development milestone payments totaling $12.0 million and will be eligible to receive up to $173.0 million in potential development and commercial milestone payments, consisting of up to $38.0 million of development milestones and up to $135.0 million of commercial milestones. In addition, during the term of the Zai License Agreement, Zai will be obligated to pay us tiered percentage royalties ranging from low to high teens on annual net sales of the Licensed Products in the Territory, subject to adjustments in specified circumstances. Additionally, certain costs we incur associated with the Zai License Agreement are reimbursed by Zai.
During the second quarter of 2021, following the approvals of QINLOCK in the PRC and Hong Kong in March 2021, we began recognizing royalty revenues under the Zai License Agreement.
Zai Supply Agreement
Pursuant to the terms of the Zai Supply Agreement, costs incurred by us for external manufacturing services associated with the production of QINLOCK for use in the Territory for clinical trials and commercial inventory are reimbursed by Zai. During the second quarter of 2021, following the approvals of QINLOCK in the PRC and Hong Kong in March 2021, we began recognizing revenues associated with sales of commercial inventory of QINLOCK under the Zai Supply Agreement.
Cost of Sales
Our cost of sales includes external costs of producing and distributing inventories that are related to product revenue during the respective period of the associated sales. In addition, shipping and handling costs for product shipments are recorded in cost of sales as incurred. Further, cost of sales includes the external costs of producing and distributing commercial inventories sold under the Zai Supply Agreement. Cost of sales also includes charges related to inventory written down as a result of excess, obsolescence, unmarketability, or other reasons.
Cost of sales for newly launched products will not include the full cost of manufacturing until the initial pre-launch inventory is depleted, and additional inventory is manufactured and sold. The gross margin on sales of QINLOCK for the three months ended March 31, 2022 was enhanced by sales of the initial pre-launch inventory, and therefore, use of active pharmaceutical ingredients and components that were previously expensed as research and development expenses prior to the launch of QINLOCK, referred to as zero cost inventories. We began selling inventory with the full cost of manufacturing in the fourth quarter of 2022, and we do not expect that the cost of sales as a percentage of net sales of QINLOCK will increase significantly.
Operating Expenses
The successful development and commercialization of our drug and drug candidates is highly uncertain. This is due to the numerous risks and uncertainties, including the following:
•successfully commercializing or otherwise providing access to QINLOCK for the treatment of fourth-line advanced GIST in the U.S., key European markets, and any other jurisdictions where we may receive marketing approval in the future;
•successful initiation and completion of our planned Phase 3 INSIGHT study of QINLOCK and our Phase 3 MOTION study for vimseltinib in TGCT patients, advancing our DCC-3116 program through clinical development, and nominating additional drug candidates from our switch control inhibitor platform;
•the rate and degree of market acceptance of QINLOCK or any current or future drug candidate for which we may receive marketing approval;
•developing and implementing marketing and reimbursement strategies;
22
•raising additional funds necessary to fund ongoing operations and capital expenditure requirements, including to complete clinical development of and commercialize any current or future drug candidates for which we receive approval;
•making arrangements with third-party manufacturers, or establishing manufacturing capabilities, for both clinical and commercial supplies of our drug and drug candidates;
•maintaining a continued acceptable safety profile of our products following approval;
•obtaining and maintaining patent, trade secret, and other intellectual property protection, and regulatory exclusivity for our drug and drug candidates;
•protecting and enforcing our rights in our intellectual property portfolio;
•effectively competing with other therapies; and
•attracting additional licensees and/or collaborators or distributors with development, regulatory, and commercialization expertise.
A change in the outcome of any of these variables with respect to the commercialization of QINLOCK or the development of our drug or any of our drug candidates would significantly change the costs and timing associated with the commercialization of QINLOCK or development of our drug or that drug candidate. We may never succeed in obtaining regulatory approval for any of our drug candidates other than QINLOCK.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery efforts and the development of our drug and drug candidates, which include:
•employee-related expenses, including salaries, related benefits, travel, and stock-based compensation expense for employees engaged in research and development functions;
•expenses incurred in connection with the preclinical and clinical development of our drug candidates, including under agreements with clinical research organizations (CROs);
•the cost of consultants and contract manufacturing organizations (CMOs) that manufacture drug products for use in our preclinical studies and clinical trials as well as all expenses associated with the pre-launch manufacturing of commercial inventory of QINLOCK prior to FDA approval; and
•facilities, depreciation, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance, supplies, and technology-related costs.
We expense research and development costs to operations as incurred. Advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses within our consolidated balance sheets. The prepaid amounts are expensed as the related goods are delivered or the services are performed.
Our direct research and development expenses are tracked on a program-by-program basis and consist primarily of external costs, such as fees paid to consultants, central laboratories, contractors, CMOs, and CROs in connection with our preclinical and clinical development activities. We do not allocate employee costs, costs associated with our proprietary switch-control kinase inhibitor platform technology, or facility expenses, including depreciation or other indirect costs, to specific drug or drug candidate development programs because these costs are deployed across multiple drug or drug candidate development programs and, as such, are not separately classified.
Research and development activities are central to our business model. Drugs and drug candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect research and development expenses associated with our drug and drug candidate programs will increase in 2023 as these programs progress. We do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of our drug and any of our drug candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans.
23
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses consist primarily of salaries and related costs, including stock-based compensation, for personnel in executive, legal, finance, commercial, human resources, and administrative functions. Selling, general, and administrative expenses also include direct and allocated facility- and technology-related costs as well as professional fees for legal, patent, consulting, accounting, and audit services.
We anticipate that our selling, general, and administrative expenses will increase modestly overall due to increased selling, general, and administrative expenses to be incurred related to the continued planned launches of QINLOCK in new jurisdictions in 2023. We also anticipate that we will continue to incur accounting, audit, legal, regulatory, compliance, and investor and public relations expenses associated with the business and continued operations as a public company.
Other Income (Expense)
Interest and Other Income, net
Interest income consists of interest earned on our cash, cash equivalents, and marketable securities balances. Other income, net, consists of insignificant amounts of miscellaneous income and expenses unrelated to our core operations, including the impacts of foreign currency exchange differences.
Income Taxes
On October 2, 2017, immediately prior to the completion of our initial public offering (IPO), we engaged in a series of transactions whereby Deciphera Pharmaceuticals, LLC became a wholly owned subsidiary of Deciphera Pharmaceuticals, Inc., a Delaware corporation (the Conversion). Prior to the Conversion, we were treated as a partnership for tax purposes and had not been subject to U.S. federal or state income taxation. Upon the Conversion, we became subject to typical corporate U.S. federal and state income taxation; however, we do not have net operating loss carryforwards from periods prior to October 2, 2017 available to offset taxable income earned in future periods in which we will be treated as a corporation.
Consistent with our income tax disclosures described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations—Components of Our Results of Operations" in our Form 10-K for the year ended December 31, 2022 on file with the SEC, as of March 31, 2023, we have not recorded any U.S. federal or state income tax benefits for either the net losses we have incurred or our earned research and orphan drug credits, due to the uncertainty of realizing a benefit from those items in the future.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures in the consolidated financial statements. We believe that our critical accounting policies that involve the most judgment and complexity are those relating to:
•product revenue reserves;
•accrued research and development expenses; and
•stock-based compensation.
Accordingly, we believe the policies set forth above are critical to fully understanding and evaluating our financial condition and results of operations. If actual results or events differ materially from the estimates, judgments, and assumptions used by us in applying these policies, our reported financial condition and results of operations could be materially affected.
For a description of our critical accounting policies, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Significant Judgments and Estimates" in our Form 10-K for the year ended December 31, 2022 on file with the SEC. There have been no significant changes to our critical accounting policies since December 31, 2022.
24
Results of Operations
Comparison of the Three Months Ended March 31, 2023 and 2022
The following table summarizes our results of operations for the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2023 | 2022 | |||||||||
| Revenues: | |||||||||||
| Product revenues, net | $ | 33,222 | $ | 28,809 | |||||||
| Collaboration revenues | 223 | 414 | |||||||||
| Total revenues | 33,445 | 29,223 | |||||||||
| Cost and operating expenses: | |||||||||||
| Cost of sales | 488 | 382 | |||||||||
| Research and development | 54,765 | 47,412 | |||||||||
| Selling, general, and administrative | 31,449 | 28,321 | |||||||||
| Total cost and operating expenses | 86,702 | 76,115 | |||||||||
| Loss from operations | (53,257) | (46,892) | |||||||||
| Other income (expense): | |||||||||||
| Interest and other income, net | 3,648 | — | |||||||||
| Total other income (expense), net | 3,648 | — | |||||||||
| Net loss | $ | (49,609) | $ | (46,892) | |||||||
Revenues
Product Revenues, Net
During the three months ended March 31, 2023 and 2022, our only source of product revenues was from the sales of QINLOCK. During the three months ended March 31, 2023 and 2022, net product revenues by geography consisted of the following:
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2023 | 2022 | |||||||||
| U.S. | $ | 24,624 | $ | 23,409 | |||||||
| Rest of world | 8,598 | 5,400 | |||||||||
| Total product revenues, net | $ | 33,222 | $ | 28,809 | |||||||
For the three months ended March 31, 2023 compared to the same period in 2022, U.S. net product revenues increased $1.2 million, primarily due to increased sales volume and an increase in net price.
For the three months ended March 31, 2023 compared to the same period in 2022, rest of world net product revenues increased $3.2 million, primarily due to increased sales volume of QINLOCK in Germany, which launched in January 2022, France, where we have conducted a post-approval paid access program since April 2022, and other jurisdictions as we continued our commercialization efforts.
Collaboration Revenues
For the three months ended March 31, 2023 compared to the same period in 2022, collaboration revenues decreased $0.2 million, which was primarily due to a decrease in royalty revenues under the Zai License Agreement.
25
Cost of Sales
During the three months ended March 31, 2023 and 2022, cost of sales by type consisted of the following:
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2023 | 2022 | |||||||||
| Cost of product sales | $ | 430 | $ | 366 | |||||||
| Cost of collaboration sales | 58 | 16 | |||||||||
| Total cost of sales | $ | 488 | $ | 382 | |||||||
For the three months ended March 31, 2023 compared to the same period in 2022, cost of sales increased $0.1 million, primarily due to increased product sales of QINLOCK in the U.S., Germany and France, partially offset by a credit received for inventory previously written down during the year ended December 31, 2022. During the three months ended March 31, 2023 and 2022, no amounts for inventory were written down as a result of excess, obsolescence, unmarketability, or other reasons.
For the three months ended March 31, 2022, cost of sales associated with product sales of QINLOCK was primarily related to the sales of zero cost inventories, which consisted of packaging, labeling, shipping, and distribution costs.
Prior to receiving FDA approval for QINLOCK in May 2020, we manufactured inventory to be sold and recorded approximately $6.0 million related to this inventory build-up as research and development expense. We did not record any such costs related to the build-up of this inventory as research and development expense during the three months ended March 31, 2023 and 2022.
Utilizing the actual direct costs to manufacture QINLOCK prior to receiving FDA approval, had the previously expensed inventory been capitalized and recognized when sold, the total cost of sales with these manufacturing costs included for the three months ended March 31, 2022 would have increased by approximately $0.6 million. We began selling inventory with the full cost of manufacturing in the fourth quarter of 2022.
We do not expect our cost of sales for QINLOCK to increase significantly as a percentage of net sales in future periods as we continue to produce inventory for future sales, which will reflect the full cost of manufacturing, and then sell such inventory.
26
Operating Expenses
Research and Development Expenses
QINLOCK
For the three months ended March 31, 2023 compared to the same period in 2022, research and development expenses related to QINLOCK increased primarily as a result of increased clinical trial expenses of $1.5 million and increased manufacturing expenses of $0.7 million. Clinical trial expenses for QINLOCK increased primarily as a result of increased expenses associated with INTRIGUE, our Phase 3 study of QINLOCK for the treatment of second-line GIST, and our Phase 3 INSIGHT study of QINLOCK versus sunitinib in patients with mutations in KIT exon 11 and 17/18. Manufacturing costs increased primarily due to timing of processing of inventory for clinical and commercial use.
Vimseltinib
For the three months ended March 31, 2023 compared to the same period in 2022, research and development expenses related to our vimseltinib program increased primarily as a result of increased clinical trial expenses of $0.9 million, increased manufacturing expenses of $0.7 million, and increased preclinical expenses of $0.6 million. Clinical trial expenses increased primarily due to increased activities associated with our Phase 3 study of vimseltinib in patients with TGCT, MOTION, which was initiated in the fourth quarter of 2021, partially offset by a decrease in clinical trial expenses associated with our Phase 1/2 study of vimseltinib to assess the safety, tolerability, PK, and PD in patients with TGCT. Manufacturing expenses increased primarily due to inventory process developments. Preclinical expenses increased primarily due to increased activities related to toxicology and biology studies.
DCC-3116
For the three months ended March 31, 2023 compared to the same period in 2022, research and development expenses related to our DCC-3116 program increased primarily as a result of increase clinical trial expenses of $1.7 million associated with our Phase 1/2 study of DCC-3116, which we initiated in June 2021, partially offset by decreased manufacturing costs of $0.5 million due to the timing of inventory production for product to be used in our Phase 1/2 study of DCC-3116.
27
Preclinical
For the three months ended March 31, 2023 compared to the same period in 2022, research and development expenses related to preclinical costs increased $0.8 million primarily due to increased activities for our early-stage drug discovery programs.
Unallocated Expenses
For the three months ended March 31, 2023 compared to the same period in 2022, the increase in unallocated research and development expenses were primarily associated with increased other research and development of $1.8 million, primarily related to manufacturing expenses not allocated to specific projects and temporary employment services, partially offset by decreased personnel-related costs of $0.8 million, including a decrease in stock-based compensation expense of $0.8 million.
We expect research and development expenses associated with our drug and drug candidate programs will increase in 2023 as these programs progress.
Selling, General, and Administrative Expenses
For the three months ended March 31, 2023 compared to the same period in 2022, the increase in selling, general, and administrative expenses was primarily associated with increased professional and consultant fees of $3.3 million and increased personnel-related costs of $1.5 million, partially offset by a decrease in stock-based compensation expense of $0.9 million and a decrease in other selling, general, and administrative expenses of $0.7 million, primarily due to an increase in sublease income, which began during the second quarter of 2022. The increase in professional and consultant fees is primarily due to an increase in professional, consulting, and other expenses related to the commercialization of QINLOCK and temporary employment services.
We anticipate that our selling, general, and administrative expenses will increase modestly overall due to increased selling, general, and administrative expenses to be incurred related to the continued launch of QINLOCK in additional jurisdictions in 2023.
Interest and Other Income, Net
For the three months ended March 31, 2023 compared to the same period in 2022, the increase in interest and other income, net, was primarily due to increased interest income on our cash equivalents and marketable securities associated with an increase in our investment holdings.
Liquidity and Capital Resources
Since our inception in 2003, we have focused substantially all of our efforts and financial resources on organizing and staffing our company, business planning, raising capital, developing product and technology rights, conducting research and development activities for our drug candidates, building a commercial and marketing organization, and commercializing our first approved product, QINLOCK. Our only product approved for sale is QINLOCK and we have not generated sufficient revenues to result in a profit.
As a result, we have incurred significant operating losses since our inception. We have generated limited revenue to date primarily from our product sales and under the Zai License Agreement and Zai Supply Agreement. QINLOCK is approved in twelve territories for the treatment of fourth-line advanced GIST. During the three months ended March 31, 2023 and 2022, our product revenues were primarily derived from sales of QINLOCK in the U.S. Additionally, we launched QINLOCK in Germany in January 2022 and have conducted the post-approval paid access program in France since April 2022. We have also entered into exclusive distributor arrangements to facilitate product sales of QINLOCK in select geographies where we do not currently intend to distribute QINLOCK on our own. During the second quarter of 2021, following the approvals of QINLOCK in the PRC and Hong Kong in March 2021, we also began to recognize royalty revenues under the Zai License Agreement. However, we cannot provide assurance as to what extent we will generate revenue from the commercialization of QINLOCK by us or our partners. We do not expect to generate revenue from sales of any drug candidates in the near future, if at all, unless and until we obtain marketing approval for, and begin to sell, such drug candidates. We may never generate revenues that are significant enough to achieve profitability.
On October 2, 2017, we completed our IPO of our common stock. Since October 2017, we have primarily supported our operations by completing issuances of our common stock through our IPO, subsequent follow-on offerings, including our underwritten public offerings in April 2022 and January 2023, and the Sales Agreement and the Amended Sales Agreement with Jefferies. Through such issuances, we have issued and sold 45,156,736 shares of our common stock and pre-funded warrants to
28
purchase 9,748,761 shares of our common stock resulting in net proceeds of $1.3 billion after deducting underwriting discounts and commissions and other offering expenses.
In April 2022, we entered into an underwriting agreement with J.P. Morgan Securities LLC and Jefferies, as representatives of the several underwriters named therein, relating to the issuance and sale of an aggregate of 7,501,239 shares of our common stock at a public offering price of $10.00 per share to certain investors. In addition, we issued and sold pre-funded warrants to purchase 9,748,761 shares of our common stock at a purchase price of $9.99 per pre-funded warrant, which equals the public offering price per share of the common stock less the $0.01 exercise price per share of each pre-funded warrant. The offering closed on April 29, 2022, resulting in net proceeds of $163.4 million after deducting underwriting discounts and commissions and other offering expenses.
During the three months ended March 31, 2023, 2,427,693 shares of pre-funded warrants were exercised resulting in net proceeds of less than $0.1 million. As of March 31, 2023, there were 6,428,270 pre-funded warrants outstanding.
In August 2022, we entered into an amendment to our existing Sales Agreement with Jefferies, pursuant to which we may issue and sell shares of our common stock having aggregate offering proceeds of up to $200.0 million (the Shares) from time to time through Jefferies as our sales agent. Upon delivery of a placement notice and subject to the terms and conditions of the Amended Sales Agreement, Jefferies may sell the Shares by any method permitted by law deemed to be an "at the market offering" as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended. We may sell the Shares in amounts and at times to be determined by us from time to time subject to the terms and conditions of the Amended Sales Agreement, but we have no obligation to sell any Shares under the Amended Sales Agreement. We or Jefferies may suspend or terminate the offering of Shares upon notice to the other party and subject to other conditions.
In January 2023, we delivered written notice to Jefferies that we were suspending and terminating the prospectus related to the common stock issuable pursuant to the terms of the Amended Sales Agreement. As a result, we will not make any sales of our securities pursuant to the Amended Sales Agreement, unless and until a new prospectus, prospectus supplement, or a new registration statement is filed. Other than the termination of the prospectus, the Amended Sales Agreement remains in full force and effect.
In January 2023, we entered into an underwriting agreement with J.P. Morgan Securities LLC, Jefferies, Cowen and Company, LLC, and Guggenheim Securities, LLC, as representatives of the several underwriters named therein, relating to the issuance and sale of an aggregate of 7,986,111 shares of our common stock at a public offering price of $18.00 per share. The offering closed on January 24, 2023, resulting in net proceeds of $134.5 million, after deducting underwriting discounts and commissions and other offering expenses.
In May 2023, the Company entered into the Sales Agreement with Jefferies, pursuant to which the Company may issue and sell shares of its common stock having aggregate offering proceeds of up to $200.0 million from time to time through Jefferies as its sales agent. Upon delivery of a placement notice and subject to the terms and conditions of the Sales Agreement, Jefferies may sell the Shares by any method permitted by law deemed to be an "at the market offering" as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended. The Company may sell the Shares in amounts and at times to be determined by the Company from time to time subject to the terms and conditions of the Sales Agreement, but it has no obligation to sell any Shares under the Sales Agreement. The Company or Jefferies may suspend or terminate the offering of Shares upon notice to the other party and subject to other conditions.
Cash Flows
As of March 31, 2023, our principal sources of liquidity were cash, cash equivalents, and marketable securities of $426.3 million, which consisted of cash, money market funds, U.S. government securities, commercial paper, corporate debt securities, and certificates of deposit. The primary objectives of our investment activities are to preserve principal, provide liquidity, and maximize income without significantly increasing risk. Given the nature of these investments, we believe that the market for these instruments is not illiquid.
29
The following table summarizes our sources and uses of cash and cash equivalents for each of the periods presented:
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2023 | 2022 | |||||||||
| Net cash flows used in operating activities | $ | (49,455) | $ | (51,352) | |||||||
| Net cash flows (used in) provided by investing activities | (35,414) | 59,652 | |||||||||
| Net cash flows provided by financing activities | 134,686 | 83 | |||||||||
| Net increase in cash and cash equivalents | $ | 49,817 | $ | 8,383 | |||||||
Operating Activities
During the three months ended March 31, 2023 compared to the same period in 2022, net cash flows used in operating activities decreased $1.9 million, primarily resulting from a decrease in net cash flows related to changes in our operating assets and liabilities of $8.2 million, partially offset by an increase in our net loss of $2.7 million and a decrease in net non-cash charges of $3.6 million, including a decrease in share-based compensation of $1.8 million. The decrease in net cash flows related to changes in our operating assets and liabilities were generally due to the timing of vendor invoicing and payments and the completion of payments under our restructuring program initiated during the fourth quarter of 2021.
Investing Activities
During the three months ended March 31, 2023 compared to the same period in 2022, net cash flows used in investing activities increased $95.1 million, primarily resulting from an increase in purchases of marketable securities of $122.9 million, partially offset by an increase in proceeds from maturities and sales of marketable securities of $28.2 million.
Financing Activities
During the three months ended March 31, 2023 compared to the same period in 2022, net cash flows provided by financing activities increased $134.6 million, primarily resulting from net proceeds from an offering of our common stock in a follow-on public offering in January 2023 for $134.5 million.
Funding Requirements
Our ability to generate product revenues sufficient to achieve profitability will depend heavily on the successful commercialization of QINLOCK and eventual commercialization of one or more of our drug candidates. Our net loss was $49.6 million for the three months ended March 31, 2023 and $178.9 million for the year ended December 31, 2022. As of March 31, 2023, we had an accumulated deficit of $1.3 billion. We expect to continue to incur significant expenses and operating losses for the foreseeable future. We expect that our expenses and capital requirements will continue to increase in connection with our ongoing activities, particularly as we:
•continue to commercialize QINLOCK in the U.S., and continue to build our global commercial capability as we actively prepare to bring QINLOCK to eligible patients around the world, including in key European markets;
•initiate and conduct our planned Phase 3 INSIGHT study of QINLOCK, the development of companion diagnostic tests related to INSIGHT and other expenses that may be borne as a result of the new trial;
•continue with our ongoing and planned clinical programs for vimseltinib as a potential single agent therapy for the treatment of TGCT;
•develop DCC-3116, our ULK kinase inhibitor, for the potential treatment of mutant RAS or RAF cancers;
•continue research and development and drug discovery activities and initiate additional clinical trials;
•seek marketing approval for our drug or any of our drug candidates that successfully complete clinical development;
•develop and scale up our capabilities to support our ongoing preclinical activities and clinical trials for our drug candidates and commercialization of any of our drug candidates for which we obtain marketing approval;
•make payments, if any, pursuant to any license or collaboration agreement we may enter into, including those associated with the Sprint Agreement;
•maintain, expand, protect, and enforce our intellectual property portfolio; and
30
•maintain our operational, financial, and management systems and personnel, including to support our clinical development and commercialization efforts and our operations as a public company, including international operations in key European markets and other potential geographies.
As we continue to seek regulatory approval for our drug candidates, we expect to incur significant expenses related to our ongoing clinical development efforts and activities related to maintaining and expanding our internal commercialization capability to support product sales, marketing, and distribution except to the extent we enter into a commercialization partnership that covers such expenses. Further, we expect to continue to incur costs associated with operating as a public company.
As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Even if we are able to generate substantial product sales of QINLOCK, we may not become profitable. Until we become profitable, if ever, we expect to finance our operations primarily through a combination of equity, debt, or other financings, product, royalty, and supply revenues, collaborations, strategic alliances, and marketing, distribution, or additional licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. Market volatility resulting from global economic developments, political unrest, and high inflation, the COVID-19 pandemic or other factors could also adversely impact our ability to access capital as and when needed. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, limit, reduce, or terminate our research, product development, or commercialization efforts or grant rights to develop and market drugs and drug candidates that we would otherwise prefer to develop and market ourselves.
To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of existing equity holders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures, or declaring dividends. If we raise additional funds through collaborations, strategic alliances or marketing, distribution, or licensing arrangements with third parties (such as the Zai License Agreement), we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, drugs, or drug candidates, or grant licenses on terms that may not be favorable to us.
Because of the numerous risks and uncertainties associated with pharmaceutical product development and commercialization, we are unable to accurately predict the timing or amount of increased expenses and capital requirements or when or if we will be able to achieve or maintain profitability. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to further reduce or terminate our operations. The timing and amount of our operating expenditures will depend largely on:
•the timing and progress of preclinical and clinical development activities;
•successful enrollment in and completion of clinical trials;
•the success of our commercialization efforts and market acceptance for QINLOCK or any of our future approved drugs;
•the timing and outcome of regulatory review of our drug and drug candidates;
•the cost to develop companion diagnostic tests as needed for each of our drug candidates;
•our ability to establish and manage agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing;
•addition and retention of key research and development and commercial, including sales and marketing, personnel;
•the costs and timing of commercialization activities, including product manufacturing, marketing, sales, and distribution, for QINLOCK, including our commercial launch of QINLOCK in key European markets, and any of our drug candidates for which we obtain marketing approval;
•the legal and patent costs involved in prosecuting patent applications and enforcing patent claims and other intellectual property claims; and
•the terms and timing of any collaboration, license, distribution, or other arrangement, including the terms and timing of any upfront, milestone, and/or royalty payments thereunder.
We believe that our cash, cash equivalents, and marketable securities as of March 31, 2023 of $426.3 million, together with anticipated product, royalty, and supply revenues, but excluding any potential future milestone payments under our collaboration or license agreements will enable us to fund our operating expenses and capital expenditure requirements into 2026.
31
We have based these estimates on assumptions that may not be achieved, and we could utilize our available capital resources sooner than we expect.
Contractual Obligations and Commitments
As of March 31, 2023, there have been no material changes to our contractual obligations and commitments outside the ordinary course of business from those that were presented in our Form 10-K for the year ended December 31, 2022.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Recently Issued Accounting Pronouncements
Based on our review of recently issued accounting pronouncements, we do not believe there are any such pronouncements that will have a material impact on our financial position or results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
For the Company’s disclosures about market risk, please see “Part II—Item 7A—Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Form 10-K for the year ended December 31, 2022 on file with the SEC. There have been no material changes to the Company’s disclosures about market risk in Part II—Item 7A of the Company’s Form 10-K for the year ended December 31, 2022 on file with the SEC.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2023. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2023, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
32
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
We are not currently a party to any material legal proceedings.
Item 1A. Risk Factors.
Our business is subject to numerous material and other risks. You should carefully consider the risks and uncertainties described below together with all of the other information contained in this Form 10-Q, including our consolidated financial statements and the related notes, and in our other filings with the SEC. If any of the following risks actually occur, our business, prospects, operating results, and financial condition could suffer materially. In such event, the trading price of our common stock could decline and you might lose all or part of your investment.
Risks Related to Our Business and Commercialization
Risks Related to Business Development and Commercialization
Our business depends heavily on our ability to successfully commercialize QINLOCK in the U.S., key European markets, and in other jurisdictions where we may obtain marketing approval. There is no assurance that our commercialization efforts with respect to QINLOCK including, without limitation, our launch of QINLOCK in key European markets, will be successful or that we will be able to generate revenues at the levels or on the timing we expect, or at levels or on the timing necessary to support our goals.
To date, we have not generated sufficient revenue to result in a profit from the sale of products. On May 15, 2020, QINLOCK was approved in the U.S. by the FDA for the treatment of adult patients with advanced GIST who have received prior treatment with three or more kinase inhibitors, including imatinib. Our business currently depends heavily on our ability to successfully commercialize QINLOCK as a treatment for GIST in the U.S., key European markets, and in other jurisdictions where we may obtain marketing approval. In November 2021, we announced that the European Commission (EC) approved QINLOCK in the EU for the treatment of adult patients with advanced GIST who have received prior treatment with three or more kinase inhibitors, including imatinib. We launched QINLOCK in Germany in January 2022, and have conducted the post-approval paid access program in France since April 2022. We also plan to continue the European expansion of QINLOCK in 2023, with planned commercial launches following conclusion of pricing and reimbursement negotiations in other key European markets. This process is conducted on a country-by-country basis and is time-consuming and complex, and we may not be successful in obtaining reimbursements and other approvals in a timely manner with acceptable terms, or at all. Furthermore, we may never be able to successfully commercialize our product or meet our expectations with respect to revenues. We have never marketed, sold, or distributed for commercial use any pharmaceutical product other than QINLOCK in fourth-line advanced GIST and have a limited history of commercial sales. There is no guarantee that the infrastructure, systems, processes, policies, relationships, and materials we have built for the commercialization of QINLOCK in the U.S. in GIST, or those for the commercialization of QINLOCK in key European markets in GIST, will be sufficient for us to achieve success at the levels we expect. Furthermore, there is no guarantee that we will be able to expand patient access to QINLOCK in additional European countries through any channels that we may pursue.
We may encounter issues and challenges in commercializing QINLOCK and generating sufficient revenues to result in a profit. We may also encounter challenges related to reimbursement of QINLOCK, including potential limitations in the scope, breadth, availability, or amount of reimbursement covering QINLOCK. Similarly, healthcare settings or patients may determine that the financial burdens of treatment are not acceptable. We may face other limitations or issues related to the price of QINLOCK. Our results may also be negatively impacted if we have not adequately sized our field teams or our physician segmentation and targeting strategy is inadequate or if we encounter deficiencies or inefficiencies in our infrastructure or processes. Other factors that may hinder our ability to successfully commercialize QINLOCK, or any of our future approved drugs, and generate sufficient revenues to result in a profit, include:
•the acceptance of QINLOCK by patients and the medical community;
•our ability to successfully initiate and complete our Phase 3 INSIGHT study of QINLOCK;
•the ability of our third-party manufacturer(s) to manufacture commercial supplies of QINLOCK at acceptable costs, to remain in good standing with regulatory agencies, and to maintain commercially viable manufacturing processes that are, to the extent required, compliant with current good manufacturing practice (cGMP) regulations;
•our ability to remain compliant with laws and regulations that apply to us and our commercial activities;
33
•FDA- or EMA-mandated package insert requirements and successful completion of any related FDA or EMA post-marketing requirements;
•the actual market size for QINLOCK, which may be different than expected;
•the length of time that patients who are prescribed our drug remain on treatment;
•the sufficiency of our drug supply to meet commercial and clinical demands which could be negatively impacted if our projections regarding the potential number of patients are inaccurate, we are subject to unanticipated regulatory requirements, or our current drug supply is destroyed, or negatively impacted at our manufacturing sites, storage sites, or in transit;
•our ability to effectively compete with other therapies; and
•our ability to maintain, enforce, and defend third party challenges to our intellectual property rights in and to QINLOCK.
Any of these issues could impair our ability to successfully commercialize our product or to generate sufficient revenues to result in a profit or profits or to meet our expectations with respect to the amount or timing of revenues or profits. Any issues or hurdles related to our commercialization efforts may materially adversely affect our business, results of operations, financial condition, and prospects. There is no guarantee that we will be successful in our commercialization efforts with respect to QINLOCK in fourth-line advanced GIST. We may also experience significant fluctuations in sales of QINLOCK from period to period and, ultimately, we may never generate sufficient revenues from QINLOCK to reach or maintain profitability or sustain our anticipated levels of operations. Any inability on our part to successfully commercialize QINLOCK in the U.S., key European markets, and any other international markets where it may subsequently be approved or any significant delay, could have a material adverse impact on our company.
We have limited experience as a commercial company and the marketing and sale of QINLOCK or any future approved drugs may be unsuccessful or less successful than anticipated.
While we are commercializing QINLOCK in the U.S. in fourth-line and fourth-line plus GIST, and continuing our European geographic expansion of QINLOCK in key European markets, we have limited experience as a commercial company and there is limited information about our ability to successfully overcome many of the risks and uncertainties encountered by companies commercializing drugs in the biopharmaceutical industry. To execute our business plan, in addition to successfully marketing and selling QINLOCK, we will need to successfully:
•establish and maintain our relationships with healthcare providers who will be treating the patients who may receive our drug and any future drugs;
•obtain adequate pricing and reimbursement for QINLOCK and any future drugs;
•obtain regulatory authorization for the development and commercialization of the drug candidates in our pipeline;
•develop and maintain successful strategic alliances; and
•manage our spending as costs and expenses increase due to clinical trials, marketing approvals, and commercialization.
If we are unsuccessful in accomplishing these objectives, we may not be able to successfully develop drug candidates, commercialize QINLOCK or any future drugs, raise capital, expand our business, or continue our operations.
Our reliance on sole source third-party suppliers could harm our ability to commercialize QINLOCK or any drug candidates that may be approved in the future.
We have scaled up our manufacturing process for QINLOCK, and may continue to scale up as needed to satisfy greater drug requirements for commercialization. We do not currently own or operate manufacturing facilities for the production of QINLOCK or any drug candidates that may be approved in the future. We rely on sole source third-party suppliers to manufacture and supply QINLOCK which may not be able to produce sufficient inventory to meet commercial demand in a cost-efficient, timely manner, or at all. Our third-party suppliers may not be required to, or may be unable to, provide us with any guaranteed minimum production levels or have sufficient dedicated capacity for our drug. As a result, there can be no assurances that we will be able to obtain sufficient quantities of QINLOCK or any drug candidates that may be approved in the future, which could have a material adverse effect on our business as a whole.
34
Our relationships with customers and third-party payors will be subject to applicable anti-kickback, fraud and abuse, and other healthcare laws and regulations, and health information privacy and security laws, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm, and diminished profits and future earnings.
Healthcare providers, physicians, and third-party payors play a primary role in the recommendation and prescription of QINLOCK and any drug candidates for which we obtain marketing approval. Our arrangements with third-party payors, customers, and other third parties may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell, and distribute QINLOCK and any other products for which we obtain marketing approval. These laws impact, among other things, our research activities and proposed sales, marketing and education programs and constrain our business and financial arrangements and relationships with third-party payors, healthcare professionals, and other parties through which we market, sell and distribute QINLOCK and any other products for which we obtain marketing approval. In addition, we may be subject to patient data privacy and security regulation by both the U.S. federal government and the states in which we conduct our business, along with foreign regulators (including European data protection authorities). Finally, our current and future operations are subject to additional healthcare-related statutory and regulatory requirements and enforcement by foreign regulatory authorities in jurisdictions in which we conduct our business. For more information regarding the risks related to such laws, regulations, and patient assistance programs please see "Business—Government Regulation—Other Healthcare Laws" in our Form 10-K for the year ended December 31, 2022.
The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of healthcare reform. Federal and state enforcement bodies have recently increased their scrutiny of interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Even if precautions are taken, it is possible that governmental authorities will conclude that our business practices could, despite efforts to comply, be subject to challenge under current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion of drugs from government funded healthcare programs, such as Medicare and Medicaid, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, reputational harm and the curtailment or restructuring of our operations. If any of the physicians or other healthcare providers or entities with whom we expect to do business is found not to be in compliance with applicable laws, that person or entity may be subject to significant criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs. Prohibitions or restrictions on sales or withdrawal of future marketed products could materially affect our business in an adverse way.
Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. The shifting compliance environment and the need to build and maintain robust and expandable systems to comply with multiple jurisdictions with different compliance or reporting requirements increases the possibility that a healthcare company may run afoul of one or more of the requirements.
The insurance coverage and reimbursement status of our drug is uncertain. QINLOCK and our drug candidates may become subject to unfavorable pricing regulations, third-party coverage and reimbursement practices, or healthcare reform initiatives, which would harm our business. Failure to obtain or maintain adequate coverage and reimbursement for new or current products could limit our ability to market those products and decrease our ability to generate revenue.
The regulations that govern marketing approvals, pricing, coverage, and reimbursement for new drugs vary widely from country to country. In the U.S., recently enacted legislation may significantly change the approval requirements in ways that could involve additional costs and cause delays in obtaining approvals. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, including certain European countries, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay our commercial launch of the product, possibly for lengthy time periods, and negatively impact the revenue we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability to recoup our investment in QINLOCK or one or more of our drug candidates, even if such drug candidates obtain marketing approval. For more information regarding the risks related to insurance coverage and reimbursement please see "Business—Government Regulation—Coverage and Reimbursement" in our Form 10-K for the year ended December 31, 2022.
35
Our ability to successfully commercialize our drug and drug candidates also will depend in part on the extent to which coverage and adequate reimbursement for these products and related treatments will be available from government health administration authorities, private health insurers, and other organizations. Government authorities and other third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. The availability of coverage and extent of reimbursement by governmental and private payors is essential for most patients to be able to afford cancer treatments. Sales of these or other drug candidates that we may identify will depend substantially, both domestically and abroad, on the extent to which the costs of our drug and drug candidates will be paid by health maintenance, managed care, pharmacy benefit, and similar healthcare management organizations, or reimbursed by government health administration authorities, private health coverage insurers, and other third-party payors. If coverage and adequate reimbursement is not available, or is available only to limited levels, we may not be able to successfully commercialize our drug or drug candidates. Even if coverage is provided, the approved reimbursement amount may not be high enough to allow us to establish or maintain pricing sufficient to realize a sufficient return on our investment.
Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our drug candidates and decrease the prices we may obtain for our approved drug.
In the U.S. and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of our drug candidates, restrict or regulate post-approval activities, and affect our ability to profitably sell our approved drug and any drug candidates for which we obtain marketing approval. Among policy-makers and payers in the U.S. and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access to healthcare. In the U.S., the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives. There have been, and likely will continue to be, legislative and regulatory proposals at the federal and state levels directed at broadening the availability of healthcare and containing or lowering the cost of healthcare. For more information regarding the risks related to such recently enacted and future legislation please see “Business—Government Regulation—U.S. Healthcare Reform” in our Form 10-K for the year ended December 31, 2022.
We expect that the healthcare reform measures that have been adopted and may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any approved product and could seriously harm our future revenues. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize our products.
QINLOCK or any current drug candidates, such as vimseltinib and DCC-3116, or future drug candidates, if successfully developed and approved, may cause undesirable side effects that limit the commercial profile or result in other significant negative consequences for approved products; or delay or prevent further development or regulatory approval with respect to drug candidates or new indications, or cause regulatory authorities to require labeling statements, such as boxed warnings.
Undesirable side effects caused by QINLOCK or any current drug candidates, such as vimseltinib and DCC-3116, or future approved drugs could limit the commercial profile of such drug or result in significant negative consequences such as a more restrictive label or other limitations or restrictions.
Undesirable side effects caused by our drug candidates could cause us or regulatory authorities to interrupt, delay or halt non-clinical studies and clinical trials or could result in a more restrictive label or the delay or denial of regulatory approval by the FDA, the EMA, or other regulatory authorities.
Clinical trials by their nature utilize a sample of the potential patient population. With a limited number of patients and limited duration of exposure, certain side effects of QINLOCK or of our current drug candidates, such as vimseltinib and DCC-3116, or future drug candidates may only be uncovered with a significantly larger number of patients exposed to the drug, and those side effects could be serious or life-threatening. If we or others identify undesirable side effects caused by QINLOCK or any future approved drug (or any other similar drugs), a number of potentially significant negative consequences could result, including:
•regulatory authorities may withdraw or limit their approval of such drugs;
•regulatory authorities may require the addition of labeling statements, such as a “boxed” warning or additions to an existing boxed warning, or a contraindication, including as a result of inclusion in a class of drugs for a particular disease;
36
•regulatory authorities may refuse to approve label expansion for additional indications for QINLOCK or any approved drugs;
•we may be required to change the way such drugs are distributed or administered, conduct additional clinical trials or change the labeling of the drugs;
•we may be subject to regulatory investigations and government enforcement actions;
•we may decide to remove such drugs from the marketplace;
•we could be sued and held liable for injury caused to individuals exposed to or taking such drugs; and
•our reputation may suffer.
We believe that any of these events could prevent us from advancing clinical development or achieving or maintaining market acceptance of the affected drug, and could substantially increase the costs of commercializing such drugs and significantly impact our ability to successfully commercialize such drugs and generate revenues.
We may incur significant liability if enforcement authorities allege or determine that we are engaging in commercial activities or promoting QINLOCK or any future approved drug in a way that violates applicable regulations.
Physicians have the discretion to prescribe drug products for uses that are not described in the product's labeling and that differ from those approved by the FDA or other applicable regulatory agencies. Off-label uses are common across medical specialties. Although the FDA and other regulatory agencies do not regulate a physician's choice of treatments, the FDA and other regulatory agencies regulate a manufacturer's communications regarding off-label use and prohibit off-label promotion, as well as the dissemination of false or misleading labeling or promotional materials. Manufacturers may not promote drugs for off-label uses. Accordingly, we may not promote QINLOCK in the U.S. or Europe for use in any indications other than the treatment of adult patients with advanced GIST who have received prior treatment with three or more kinase inhibitors, including imatinib. The FDA, competent authorities of the Member States in the EU, and other regulatory and enforcement authorities actively enforce laws and regulations prohibiting promotion of off-label uses and the promotion of products for which marketing approval has not been obtained. A company that is found to have improperly promoted off-label uses, including promoting unapproved dosing regimens, may be subject to significant liability, which may include civil and administrative remedies as well as criminal sanctions.
Notwithstanding regulations related to product promotion, the FDA, competent authorities of the Member States of the EU, and other regulatory authorities allow companies to engage in truthful, non-misleading, and non-promotional scientific exchange concerning their products. We intend to engage in medical education activities and communicate with healthcare providers in compliance with all applicable laws and regulatory guidance.
Laws and regulations governing our current international operations or international operations we may have in the future may preclude us from developing, manufacturing, and selling certain drug candidates and products outside of the U.S. and require us to develop and implement costly compliance programs.
As we expand our operations outside of the U.S. in key European markets, we must dedicate additional resources to comply with numerous laws and regulations in each jurisdiction in which we plan to operate. The Foreign Corrupt Practices Act (FCPA) prohibits any U.S. individual or business from paying, offering, authorizing payment, or offering anything of value, directly or indirectly, to any foreign official, political party, or candidate for the purpose of influencing any act or decision of such third party in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the U.S. to comply with certain accounting provisions requiring the company to maintain books and records that accurately and fairly reflect all transactions of the company, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations.
Compliance with the FCPA is expensive and difficult, particularly in countries in which corruption is a recognized problem. In addition, the FCPA presents particular challenges in the pharmaceutical industry, because, in many countries, hospitals are operated by the government, and doctors and other hospital employees are considered foreign officials. Certain payments to hospitals in connection with clinical trials and other work have been deemed to be improper payments to government officials and have led to FCPA enforcement actions. Similar laws in other countries, such as the U.K. Bribery Act 2010, may apply to our operations.
Various laws, regulations, and executive orders also restrict the use and dissemination outside of the U.S., or the sharing with certain non-U.S. nationals, of information classified for national security purposes, as well as certain products and technical
37
data relating to those products. As we expand our presence outside of the U.S. in key European markets, we must dedicate additional resources to comply with these laws, and such laws may preclude us from developing, manufacturing, or selling certain drug candidates and products outside of the U.S., which could limit our growth potential and increase our development costs.
The failure to comply with laws governing international business practices may result in substantial civil and criminal penalties and suspension or debarment from government contracting. The SEC also may suspend or bar issuers from trading securities on U.S. exchanges for violations of the FCPA's accounting provisions.
Governments outside of the U.S. tend to impose strict price controls, which may adversely affect our revenues, if any.
In some countries, particularly Canada and the countries of Europe, including without limitation, Germany and France, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing authorization to evaluate the product for reimbursement. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our drug candidate to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be harmed.
The U.K.'s exit from the EU may have a negative effect on our business and increase our regulatory burden of conducting business in the U.K. and EU.
On June 23, 2016, the U.K. held a referendum in which voters approved an exit from the EU, commonly referred to as “Brexit.” During the Brexit transition period, which ended on December 31, 2020, the U.K. continued to follow all of the EU's rules and maintained its current trading relationship with the EU. In December 2020, the U.K. and EU signed the EU-U.K. Trade and Cooperation Agreement (TCA), which became provisionally applicable on January 1, 2021 and has been formally applicable since May 1, 2021. The TCA sets out the arrangements between the U.K. and EU on trade in certain areas (e.g. goods and some services, energy, fisheries, social security coordination), however there are still key aspects of the U.K.’s relationship with the EU which are not covered by the TCA, such as in respect of financial services. The withdrawal will, among other outcomes, disrupt the free movement of goods, services and people between the U.K. and the EU, and result in increased legal and regulatory complexities, as well as potential higher costs of conducting business in Europe.
For example, the TCA includes limited specific provisions concerning medicinal products, primarily regarding the mutual recognition of good manufacturing practice (GMP) inspections of manufacturing facilities for medicinal products and GMP documents issued, but does not foresee wholesale mutual recognition of U.K. and EU pharmaceutical regulations. Since the regulatory framework in the U.K. covering the quality, safety and efficacy of medicinal products, clinical trials, marketing authorizations, commercial sales and distribution of medicinal products is derived from EU directives and regulations, Brexit could materially impact the future regulatory regime with respect to the approval of our current or future drug candidates in Great Britain (GB) now that the legislation has the potential to diverge from EU legislation. For instance, GB (under the Northern Ireland Protocol, the EU regulatory framework will continue to apply in Northern Ireland and centralized EU authorizations will continue to be recognized) will now no longer be covered by the centralized procedure for obtaining marketing authorizations for medicinal products which are valid throughout the European Economic Area (EEA) (which comprises the 27 member states that comprise the EU (the Member States) plus Norway, Iceland, and Liechtenstein), and a separate process for authorization of drug products will be required in GB, resulting in an authorization covering the U.K. or GB only. Any of these effects of Brexit, and others we cannot anticipate, could adversely affect our business, business opportunities, results of operations, financial condition, and cash flows. Likewise, similar actions taken by European and other countries in which we operate could have a similar or even more profound impact.
We may fail to comply with evolving U.S. federal and state and foreign privacy and data protection laws, which could adversely affect our business, results of operations and financial condition.
In California, the California Consumer Privacy Act (CCPA) was enacted in June 2018, became effective on January 1, 2020, and became subject to enforcement by the California Attorney General's office on July 1, 2020. The CCPA broadly defines personal information, gives California residents expanded individual privacy rights and protections and provides for civil penalties for violations and a private right of action for data breaches. Further, a new California privacy law, the California Privacy Rights Act (CPRA) was passed by California voters on November 3, 2020. The CPRA will create additional obligations with respect to processing and storing personal information took effect on January 1, 2023 (with certain provisions having retroactive effect to January 1, 2022). We will continue to monitor developments related to the CPRA and anticipate additional costs and expenses associated with CPRA compliance. While there is an exception for protected health information that is subject to HIPAA and clinical trial regulations, the CCPA and CPRA may impact our business activities if we become a "Business"
38
regulated by the scope of the CCPA or are subject to CPRA and there continues to be some uncertainly about how certain provisions of the CCPA will be interpreted and how the law will be enforced.
In addition, on January 1, 2023, Virginia's governor Glenn Youngkin signed the Consumer Data Protection Act (CDPA) into law. The CDPA became effective January 1, 2023. The CDPA regulates how businesses (which the CDPA refers to as “controllers”) collect and share personal information. While the CDPA incorporates many similar concepts of the CCPA and CPRA, there are also several key differences in the scope, application, and enforcement of the law that will change the operational practices of controllers. The new law will impact how controllers collect and process personal sensitive data, conduct data protection assessments, transfer personal data to affiliates, and respond to consumer rights requests.
Also, on July 8, 2021, Colorado’s governor signed the Colorado Privacy Act (CPA) into law. The CPA is rather similar to the CPDA but also contains additional requirements. The new measure applies to companies conducting business in Colorado or who produce or deliver commercial products or services intentionally targeted to its residents of the state that either: (1) control or process the personal data of at least 100,000 consumers during a calendar year; or (2) derive revenue or receive a discount on the price of goods or services from the sale of personal data and process or control the personal data of at least 25,000 consumers.
In addition, Utah became the fourth state to enact a comprehensive privacy law but when Governor Cox signed the Utah Consumer Privacy Act (UCPA) into law on March 24, 2022. In May 2022, Connecticut Governor Lamont signed the Connecticut Data Privacy Act (CTDPA) into law. The UCPA and CTDPA draw heavily upon their predecessors in Virginia and Colorado. With the CTDPA, Connecticut became the fifth state to enact a comprehensive privacy law.
With the bills proposed in many other jurisdictions, it remains quite possible that other states will follow suit. New privacy and data security laws have been proposed in more than half of the states in the U.S. and in the U.S. Congress, reflecting a trend toward more stringent privacy legislation in the U.S., which trend may accelerate with the new U.S. presidential administration. The existence of comprehensive privacy laws in different states in the country will make our compliance obligations more complex and costly and may require us to modify our data processing practices and policies and to incur substantial costs and potential liability in an effort to comply with such legislation.
In the EU and the U.K., we may also face particular privacy, data security, and data protection risks in connection with requirements of the General Data Protection Regulation (EU) 2016/679 (GDPR), the GDPR as it existed on December 31, 2020 but subject to certain U.K. specific amendments incorporated into U.K. law on January 1, 2021 under the U.K. GDPR, and other data protection requirements. The GDPR applies to any company established in the EU as well as to those outside the EU if they collect and use personal data in connection with the offering of goods or services to individuals in the EU or the monitoring of their behavior. The GDPR has enhanced data protection obligations for controllers of personal data, including, for example, expanded disclosures about how personal information is to be used, limitations on retention of information, mandatory data breach notification requirements, restrictions on transfers outside of the EU to third countries deemed to lack adequate privacy protections (such as the U.S.), and has created onerous new obligations and liabilities on services providers or data processors. Non-compliance with the GDPR may result in monetary penalties of up to €20 million or 4% of worldwide revenue, whichever is higher. Moreover, data subjects can claim damages resulting from infringement of the GDPR. The GDPR further grants non-profit organizations the right to bring claims on behalf of data subjects. The GDPR and other changes in laws or regulations associated with the enhanced protection of certain types of personal data, such as healthcare data or other sensitive information, could greatly increase our cost of providing our products and services or even prevent us from offering certain services in jurisdictions that we may operate in. The GDPR may increase our responsibility and liability in relation to personal data that we process where such processing is subject to the GDPR, and we may be required to put in place additional mechanisms to ensure compliance with the GDPR, including as implemented by individual countries. Compliance with the GDPR will be a rigorous and time-intensive process that may increase our cost of doing business or require us to change our business practices, and despite those efforts, there is a risk that we may be subject to fines and penalties, litigation, and reputational harm in connection with our European activities.
In addition, further to the U.K.'s exit from the EU on January 31, 2020, the GDPR ceased to apply in the U.K. at the end of the transition period on December 31, 2020. However, as of January 1, 2021, the U.K.'s European Union (Withdrawal) Act 2018 incorporated the U.K. GDPR into U.K. law. The U.K. GDPR and the U.K. Data Protection Act 2018 set out the U.K.'s data protection regime, which is independent from but aligned to the EU's data protection regime. Non-compliance with the U.K. GDPR may result in monetary penalties of up to £17.5 million or 4% of worldwide revenue, whichever is higher. In addition, on June 28, 2021, the EC adopted an adequacy decision in respect of transfers of personal data to the U.K. for a four-year period (until June 27, 2025). Similarly, the U.K. has determined that it considers all of the EEA to be adequate for the purposes of data protection. This ensures that data flows between the U.K. and the EEA remain unaffected.
39
We currently conduct clinical trials and engage in regulatory and commercial operations in the EEA and the U.K. As a result, we are subject to additional privacy laws, including the GDPR and U.K. GDPR. The GDPR imposes a broad range of strict requirements on companies subject to the GDPR, including requirements relating to having legal bases for processing personal information relating to identifiable individuals and transferring such information outside the EEA or the U.K., including to the U.S., providing details to those individuals regarding the processing of their personal information, where required obtaining consent from data subjects to process their personal information, keeping personal information secure, having data processing agreements with third parties who process personal information, responding to individuals' requests to exercise their rights in respect of their personal information, reporting security breaches involving personal data to the competent national data protection authority and affected individuals, appointing data protection officers, conducting data protection impact assessments, and record-keeping.
Over the past few years, the number of enforcement actions and the fines have both steadily increased. U.S. data privacy laws, such as the CCPA, CPRA, and others that may be passed, similarly introduce requirements with respect to personal information, and non-compliance with the CCPA may result in liability through private actions (subject to defined statutory damages in the event of certain data breaches) and enforcement. Failure to comply with these current and future laws, policies, industry standards, or legal obligations or any security incident resulting in the unauthorized access to, corruption of, or acquisition, release, or transfer of personal information may result in government enforcement actions, litigation, fines, and penalties, or adverse publicity and could cause our customers, business partners, and investors to lose trust in us which could have a material adverse impact on our business and results of our operations. We continue to face uncertainty as to the exact interpretation of the new requirements on our trials and we may be unsuccessful in implementing all measures required by data protection authorities or courts in interpretation of the new law.
In particular, the Member States have implemented national laws which may partially deviate from the GDPR and impose different and more restrictive obligations from country to country, so that we do not expect to operate in a uniform legal landscape in the EU. Also, as it relates to processing and transfer of genetic data, the GDPR specifically allows the Member States to enact laws that impose additional and more specific requirements or restrictions, and European laws have historically differed quite substantially in this field, leading to additional uncertainty.
In addition, we must also ensure that we maintain adequate safeguards to enable the transfer of personal data outside of the EEA or the U.K., in particular to the U.S., in compliance with European and U.K. data protection laws. We expect that we will continue to face uncertainty as to whether our efforts to comply with our obligations under European privacy laws will be sufficient. In some cases, we rely upon the recently updated standard contractual clauses (new standard contractual clauses) to legitimize transfers of personal data out of the EEA from controllers or processors established outside the EEA (and not subject to the GDPR). Transition to the new standard contractual clauses requires significant effort and cost particularly given the burdensome requirements of transfer impact assessments and the substantial obligations that the new standard contractual clauses impose upon exporters. The U.K. is not subject to the EC's new standard contractual clauses but has published its own transfer mechanism, the International Data Transfer Agreement, which enables transfers from the U.K. On June 28, 2021, the EC announced a decision of “adequacy” concluding that the U.K. ensures an equivalent level of data protection to the GDPR, which provides some relief regarding the legality of continued personal data flows from the EEA to the U.K. Some uncertainty remains, however, as this adequacy determination must be renewed after four years and may be modified or revoked in the interim. The U.K. Government has confirmed that transfers from the U.K. to the EEA may currently continue to flow freely. Changes with respect to any of these matters may lead to additional costs and increase our overall risk exposure. In addition, although EU and U.S. negotiators have announced in March 2022 an agreement in principle on an EU-U.S. Data Privacy Framework and President Biden signed on October 7, 2022 Executive Order on 'Enhancing Safeguards for United States Signals Intelligence Activities', there remains much to be worked out before this program becomes a potential valid transfer mechanism.
If we are investigated by a European data protection authority, we may face fines and other penalties. Any such investigation or charges by European data protection authorities could have a negative effect on our existing business and on our ability to attract and retain new clients or pharmaceutical partners. We may also experience hesitancy, reluctance, or refusal by European or multi-national clients or pharmaceutical partners to continue to use our products due to the potential risk exposure as a result of the current (and, in particular, future) data protection obligations imposed on them by certain data protection authorities in interpretation of current law, including the GDPR. Such clients or pharmaceutical partners may also view any alternative approaches to compliance as being too costly, too burdensome, too legally uncertain, or otherwise objectionable and therefore decide not to do business with us. Any of the foregoing could materially harm our business, prospects, financial condition, and results of operations.
40
In addition, many jurisdictions outside of Europe are also considering and/or enacting comprehensive data protection legislation. For example, as of August 2020, the Brazilian General Data Protection Law imposes stringent requirements similar to GDPR with respect to personal information collected from individuals in Brazil.
In China, there have also been recent significant developments concerning privacy and data security. On June 10, 2021, the Standing Committee of the PRC National People’s Congress published the Data Security Law of the People’s Republic of China (Data Security Law), which took effect on September 1, 2021. The Data Security Law requires data processing (which includes the collection, storage, use, processing, transmission, provision and publication of data), to be conducted in a legitimate and proper manner. The Data Security Law imposes data security and privacy obligations on entities and individuals carrying out data processing activities and also introduces a data classification and hierarchical protection system based on the importance of data in economic and social development and the degree of harm it may cause to national security, public interests, or legitimate rights and interests of individuals or organizations if such data are tampered with, destroyed, leaked, illegally acquired or illegally used. The appropriate level of protection measures is required to be taken for each respective category of data.
Also in China, on August 20, 2021, the Standing Committee of the National People’s Congress of the PRC promulgated the Personal Information Protection Law, which took effect on November 1, 2021. The Personal Information Protection Law raises the protection requirements for processing personal information, and many specific requirements of the Personal Information Protection Law remain to be clarified. We may be required to make further significant adjustments to our business practices to comply with the personal information protection laws and regulations in China including the Personal Information Protection Law.
We also continue to see jurisdictions imposing data localization laws. These regulations may interfere with our intended business activities, inhibit our ability to expand into those markets or prohibit us from continuing to offer services in those markets without significant additional costs.
Because the interpretation and application of many privacy and data protection laws (including the GDPR), commercial frameworks, and standards are uncertain, it is possible that these laws, frameworks, and standards may be interpreted and applied in a manner that is inconsistent with our existing data management practices and policies. If so, in addition to the possibility of fines, lawsuits, breach of contract claims, and other claims and penalties, we could be required to fundamentally change our business activities and practices or modify our solutions, which could have an adverse effect on our business. Any inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable privacy and security or data security laws, regulations, and policies, could result in additional cost and liability to us, damage our reputation, inhibit our ability to conduct trials, and adversely affect our business.
Unfavorable global economic conditions could adversely affect our business, financial condition or results of operations.
Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. Portions of our future clinical trials may be conducted outside of the U.S. and unfavorable economic conditions resulting in the weakening of the U.S. dollar would make those clinical trials more costly to operate. In addition, regarding the war in Ukraine, while we do not have any clinical trial sites or operations in Ukraine or Russia, if the war expands into the surrounding region, resulting heightened economic sanctions from the U.S. and the international community could limit our ability to procure or use certain materials or manufacturing slots for the products needed for our clinical trials, which could lead to delays in these trials. Furthermore, the most recent global financial crisis caused extreme volatility and disruptions in the capital and credit markets. Similarly, the volatility associated with the COVID-19 pandemic has caused significant instability and disruptions in the capital and credit markets and, in recent months, the global economy has been impacted by increasing interest rates and high inflation, as well as by the war in Ukraine and the possibility of a wider European or global conflict. A severe or prolonged economic downturn (including inflation or uncertainty caused by political violence and chaos) could result in a variety of risks to our business, including a reduced ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy or international trade disputes could also strain our suppliers, some of which are located outside of the U.S., possibly resulting in supply disruption. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact our business.
Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults, or non-performance by financial institutions or transactional counterparties, could adversely affect our current and projected business operations and our financial condition and results of operations.
Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry
41
generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems. For example, on March 10, 2023, Silicon Valley Bank (SVB) was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. Similarly, on March 12, 2023, Signature Bank and Silvergate Capital Corp. were each swept into receivership; since then, additional financial institutions have experienced similar failures and have been placed into receivership. It is possible that other banks will face similar difficulty in the future. Although a statement by the Department of the Treasury, the Federal Reserve, and the FDIC indicated that all depositors of SVB would have access to all of their money after only one business day of closure, including funds held in uninsured deposit accounts, borrowers under credit agreements, letters of credit, and certain other financial instruments with financial institutions that have been placed into receivership by the FDIC may be unable to access undrawn amounts thereunder. Although we do not have investments with any financial institution currently in receivership, if any financial institution with which we have a relationship were to be placed into receivership, we may be unable to access such funds. In addition, if any parties with whom we conduct business are unable to access funds pursuant to instruments or lending arrangements with such a financial institution, such parties’ ability to pay their obligations to us or to enter into new commercial arrangements requiring additional payments to us could be adversely affected. In this regard, counterparties to credit agreements and arrangements with banks in receivership or other financial difficulty, and third parties (such as beneficiaries of letters of credit, among others), may experience direct impacts from the closure or reorganization of such financial institutions and uncertainty remains over liquidity concerns in the broader financial services industry. Similar impacts have occurred in the past, such as during the 2008-2010 financial crisis.
Inflation and rapid increases in interest rates have led to a decline in the trading value of previously issued government securities with interest rates below current market interest rates. Although the U.S. Department of Treasury, FDIC, and Federal Reserve Board have announced a program to provide up to $25 billion of loans to financial institutions secured by certain government securities held by financial institutions to mitigate the risk of potential losses on the sale of such instruments, widespread demands for customer withdrawals or other liquidity needs of financial institutions for immediate liquidity may exceed the capacity of such program. Additionally, there is no guarantee that the U.S. Department of Treasury, FDIC, and Federal Reserve Board will provide access to uninsured funds in the event of the closure of other banks or financial institutions in the future, or that they would do so in a timely fashion.
Although we assess our banking relationships as we believe necessary or appropriate, our access to funding sources in amounts adequate to finance or capitalize our current and projected future business operations could be significantly impaired by factors that affect us, the financial institutions with which we have financial arrangements directly, or the financial services industry or economy in general. These factors could include, among others, events such as liquidity constraints or failures, the ability to perform obligations under various types of financial, credit, or liquidity agreements or arrangements, disruptions or instability in the financial services industry or financial markets, or concerns or negative expectations about the prospects for companies in the financial services industry. These factors could involve financial institutions or financial services industry companies with which we have financial or business relationships, but could also include factors involving financial markets or the financial services industry generally.
The results of events or concerns that involve one or more of these factors could include a variety of material and adverse impacts on our current and projected business operations and our financial condition and results of operations. These could include, but may not be limited to, the following:
•delayed access to deposits or other financial assets or the uninsured loss of deposits or other financial assets;
•potential or actual breach of contractual obligations that require us to maintain letters of credit or other credit support arrangements; or
•termination of cash management arrangements and/or delays in accessing or actual loss of funds subject to cash management arrangements.
In addition, investor concerns regarding the U.S. or international financial systems could result in less favorable commercial financing terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more difficult for us to acquire financing on acceptable terms or at all. Any decline in available funding or access to our cash and liquidity resources could, among other risks, adversely impact our ability to meet our operating expenses, financial obligations, or fulfill our other obligations, result in breaches of our financial and/or contractual obligations or result in violations of federal or state wage and hour laws. Any of these impacts, or any other impacts resulting from the factors described above or other related or similar factors not described above, could have material adverse impacts on our liquidity and our current and/or projected business operations and financial condition and results of operations.
42
In addition, any further deterioration in the macroeconomic economy or financial services industry could lead to losses or defaults by any parties with whom we conduct business, which in turn, could have a material adverse effect on our current and/or projected business operations and results of operations and financial condition. For example, a third party with whom we conduct business may fail to make payments when due, default under their agreements with us, become insolvent or declare bankruptcy. In addition, a third party with whom we conduct business could be adversely affected by any of the liquidity or other risks that are described above as factors that could result in material adverse impacts on us, including but not limited to, delayed access or loss of access to uninsured deposits or loss of the ability to draw on existing credit facilities involving a troubled or failed financial institution. Any bankruptcy or insolvency by a third party with whom we conduct business, or the failure of such party to make payments when due, or any breach or default by such party, or the loss of any significant relationships, could result in material losses to us and may have a material adverse impact on our business.
Our future success depends on our ability to retain key executives and to attract, retain, and motivate qualified personnel.
Our future operations will depend in large part on the efforts of our President and Chief Executive Officer, Steven L. Hoerter. In addition, we are highly dependent on the research, development, and management expertise of the other principal members of our executive team, including, without limitation, the research expertise on switch-control kinase inhibitors of Daniel L. Flynn, Ph.D., our founder and Chief Scientific Officer, and the clinical development expertise of Matthew L. Sherman, M.D., our Chief Medical Officer. Although we have entered into employment agreements with our executive officers, each of them may terminate their employment with us at any time. We maintain "key person" insurance for Dr. Flynn, but not for any of our other executives or employees.
Recruiting and retaining qualified scientific, clinical, manufacturing, and sales and marketing personnel will also be critical to our success. The loss of the services of our executive officers or other key employees could impede the achievement of our research, development, and commercialization objectives and seriously harm our ability to successfully implement our business strategy. Furthermore, replacing executive officers and key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to successfully develop, gain marketing approval of, and commercialize products. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain, or motivate these key personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us. If we are unable to continue to attract and retain high quality personnel, our ability to pursue our growth strategy will be limited.
Risks Related to Sales, Marketing, and Competition
We face substantial competition, which may result in others discovering, developing, or commercializing products before or more successfully than we do.
The development and commercialization of new pharmaceutical and biotechnology products is highly competitive. We face competition with respect to our approved drug and current clinical-stage drug candidates and will face competition with respect to any drugs and drug candidates that we may seek to develop or commercialize in the future, from major pharmaceutical companies, specialty pharmaceutical companies, and biotechnology companies worldwide. There are a number of large pharmaceutical and biotechnology companies that currently market and sell products or are pursuing the development of products for the treatment of the disease indications for which we are developing our drug candidates and commercializing our approved drug. Some of these competitive products and therapies are based on scientific approaches that are similar to our approach, and others are based on entirely different approaches. Potential competitors also include academic institutions, government agencies, and other public and private research organizations that conduct research, seek patent protection, and establish collaborative arrangements for research, development, manufacturing, and commercialization.
Specifically, there are a large number of pharmaceutical and biotechnology companies developing or marketing treatments for cancer that would be competitive with QINLOCK and the drug candidates we are developing, if such drug candidates are approved. Many of these companies are developing cancer therapeutics that are also kinase inhibitors. Although there are currently marketed drugs that have activity in GIST through their targeting of primary and secondary KIT mutants, other than avapritinib for GIST PDGFRA exon 18 mutations only, no currently marketed drug directly targets certain secondary resistance mutations in KIT and PDGFRA, and no currently marketed drug provides coverage of all KIT and PDGFRA mutants. With respect to QINLOCK, there are a number of large pharmaceutical companies and biotechnology companies marketing small
43
molecule drugs or biologic drugs for the treatment of GIST, including Blueprint Medicines Corporation, Novartis AG (Novartis), Pfizer and Bayer AG. We are also aware of pharmaceutical and biotechnology companies developing drugs for the treatment of GIST including AB Sciences S.A., Ascentage Pharma Group Inc. (APGI), Arog Pharmaceuticals, Inc. (Arog), Chia Tai Tianqing Pharmaceutical Group CO., LTD (CTTPG), Cogent Biosciences, Inc. (Cogent), Immunicum AB (Immunicum), Jiangsu HengRui, Inc. (Jiangsu), Ningbo Tai Kang Medical Technology Co. Ltd. (NTKMT), Novartis, Taiho Pharmaceutical Co. Ltd (Taiho), Theseus Pharmaceuticals (Theseus), and IDRx, Inc. (IDRx). Several of these programs are in clinical studies, including but not limited to APGI, Arog, CTTPG, Cogent, Immunicum, Jiangsu, NTKMT, Theseus, and IDRx. Further, there are numerous companies marketing or developing antibodies and small molecules targeting CSF1R for TGCT, including Abbisko Therapeutics Co., Ltd., AmMax Bio, Inc., Daiichi, Dragonboat Biopharmaceutical Company Limited, HXPharma, SynOx Therapeutics Ltd, and HUTCHMED (China) Limited. These programs are also in clinical studies for TGCT. In addition, pexidartinib is the only FDA approved product, which is indicated for the treatment of adult patients with symptomatic TGCT associated with severe morbidity or functional limitations and not amenable to improvement with surgery. With respect to DCC-3116, an ULK inhibitor designed to address mutant RAS and RAF cancers being studied in a Phase 1/2 clinical study, we are aware of other companies that are advancing programs targeting ULK, including Erasca, Inc. (Erasca), Txinno Bioscience Inc., and Ailon Pharma Oy. With respect to DCC-3084, we are also aware of pharmaceutical and biotechnology companies developing pan-RAF development candidates, including Day One Biopharmaceuticals, Inc. (Day One), Jazz Pharma Pharmaceuticals, Inc. (Jazz Pharma), F. Hoffmann-La Roche AG (Roche), Kinnate Biopharma Inc. (Kinnate), Erasca, Pfizer, Black Diamond Therapeutics, Inc., SpringWorks Therapeutics, Inc. (SpringWorks), Nested Therapeutics, METiS Therapeutics (METiS), Verastem, Inc. (Verastem), and Xynomic Pharmaceuticals Holdings, Inc (Xynomic). Several of these programs are in clinical studies, including but not limited to Day One, Jazz Pharma, Roche, Kinnate, Erasca, Pfizer, SpringWorks, Verastem, and Xynomic.
Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are approved for broader indications or patient populations, are approved for specific sub-populations, are more convenient, or are less expensive than QINLOCK or any other products that we may develop. Our competitors also may obtain FDA, EMA, or other marketing approval for their products more rapidly than any approval we may obtain for ours, which could result in our competitors establishing a strong market position before we are able to enter the market. In addition, our ability to compete may be affected in many cases by insurers or other third-party payors seeking to encourage the use of generic products.
Many of the companies against which we are competing or against which we may compete in the future have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining marketing approvals, and marketing and selling approved products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller and other early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific, management, and sales and marketing personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.
If the FDA, EMA, or other foreign regulatory authorities approve generic versions of QINLOCK or any future approved products, or such authorities do not grant any future approved products appropriate periods of exclusivity before approving generic versions of those products, the sales of our products, if approved, could be adversely affected.
Once an NDA is approved, the product covered thereby becomes a “reference listed drug” in the FDA’s Orange Book. Manufacturers may seek approval of generic versions of reference listed drugs through submission of an ANDA in the United States. In support of an ANDA, a generic manufacturer need not conduct clinical trials to assess safety and efficacy. Rather, the applicant generally must show that its product has the same active ingredient(s), dosage form, strength, route of administration, and conditions of use or labelling as the reference listed drug and that the generic version is bioequivalent to the reference listed drug, meaning it is absorbed in the body at the same rate and to the same extent. Generic products may be significantly less costly to bring to market than the reference listed drug and companies that produce generic products are generally able to offer them at lower prices. Thus, following the introduction of a generic drug, a significant percentage of the sales of any branded product or reference listed drug is typically lost to the generic product.
Generic products are currently on the market for some of the indications that we are pursuing, and additional products are expected to become available on a generic basis over the coming years. Generic drug manufacturers may seek to launch generic products following the expiration of QINLOCK’s exclusivity period or any exclusivity period we obtain for any future approved products even if we still have patent protection for such products. We expect that QINLOCK, and any future approved products will be priced at a significant premium over any competitive generic products. Competition that QINLOCK or any future
44
approved products could face from generic versions could materially and adversely affect our future