dcph-20200930
false2020Q30001654151--12-3100016541512020-01-012020-09-30xbrli:shares00016541512020-10-30iso4217:USD00016541512020-09-3000016541512019-12-31iso4217:USDxbrli:shares0001654151us-gaap:ProductMember2020-07-012020-09-300001654151us-gaap:ProductMember2019-07-012019-09-300001654151us-gaap:ProductMember2020-01-012020-09-300001654151us-gaap:ProductMember2019-01-012019-09-300001654151dcph:CollaborationArrangementMember2020-07-012020-09-300001654151dcph:CollaborationArrangementMember2019-07-012019-09-300001654151dcph:CollaborationArrangementMember2020-01-012020-09-300001654151dcph:CollaborationArrangementMember2019-01-012019-09-3000016541512020-07-012020-09-3000016541512019-07-012019-09-3000016541512019-01-012019-09-300001654151us-gaap:PreferredStockMember2020-06-300001654151us-gaap:CommonStockMember2020-06-300001654151us-gaap:AdditionalPaidInCapitalMember2020-06-300001654151us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-06-300001654151us-gaap:RetainedEarningsMember2020-06-3000016541512020-06-300001654151us-gaap:CommonStockMember2020-07-012020-09-300001654151us-gaap:AdditionalPaidInCapitalMember2020-07-012020-09-300001654151us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-07-012020-09-300001654151us-gaap:RetainedEarningsMember2020-07-012020-09-300001654151us-gaap:PreferredStockMember2020-09-300001654151us-gaap:CommonStockMember2020-09-300001654151us-gaap:AdditionalPaidInCapitalMember2020-09-300001654151us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-09-300001654151us-gaap:RetainedEarningsMember2020-09-300001654151us-gaap:PreferredStockMember2019-12-310001654151us-gaap:CommonStockMember2019-12-310001654151us-gaap:AdditionalPaidInCapitalMember2019-12-310001654151us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-12-310001654151us-gaap:RetainedEarningsMember2019-12-310001654151us-gaap:CommonStockMember2020-01-012020-09-300001654151us-gaap:AdditionalPaidInCapitalMember2020-01-012020-09-300001654151us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-01-012020-09-300001654151us-gaap:RetainedEarningsMember2020-01-012020-09-300001654151us-gaap:PreferredStockMember2019-06-300001654151us-gaap:CommonStockMember2019-06-300001654151us-gaap:AdditionalPaidInCapitalMember2019-06-300001654151us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-06-300001654151us-gaap:RetainedEarningsMember2019-06-3000016541512019-06-300001654151us-gaap:CommonStockMember2019-07-012019-09-300001654151us-gaap:AdditionalPaidInCapitalMember2019-07-012019-09-300001654151us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-07-012019-09-300001654151us-gaap:RetainedEarningsMember2019-07-012019-09-300001654151us-gaap:PreferredStockMember2019-09-300001654151us-gaap:CommonStockMember2019-09-300001654151us-gaap:AdditionalPaidInCapitalMember2019-09-300001654151us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-09-300001654151us-gaap:RetainedEarningsMember2019-09-3000016541512019-09-300001654151us-gaap:PreferredStockMember2018-12-310001654151us-gaap:CommonStockMember2018-12-310001654151us-gaap:AdditionalPaidInCapitalMember2018-12-310001654151us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-12-310001654151us-gaap:RetainedEarningsMember2018-12-3100016541512018-12-310001654151us-gaap:CommonStockMember2019-01-012019-09-300001654151us-gaap:AdditionalPaidInCapitalMember2019-01-012019-09-300001654151us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-01-012019-09-300001654151us-gaap:RetainedEarningsMember2019-01-012019-09-300001654151us-gaap:CommonStockMemberdcph:FollowOnOfferingMember2018-06-012018-06-300001654151us-gaap:CommonStockMemberdcph:FollowOnOfferingMember2018-06-300001654151us-gaap:CommonStockMemberdcph:FollowOnOfferingMember2019-07-012019-09-300001654151us-gaap:CommonStockMemberdcph:FollowOnOfferingMember2019-09-300001654151us-gaap:CommonStockMemberdcph:FollowOnOfferingMember2020-02-012020-02-290001654151us-gaap:CommonStockMemberdcph:FollowOnOfferingMember2020-02-290001654151dcph:OpenMarketSaleAgreementMember2020-08-012020-08-310001654151dcph:OpenMarketSaleAgreementMember2020-07-012020-09-300001654151dcph:OpenMarketSaleAgreementMember2020-01-012020-09-3000016541512019-01-012019-12-310001654151us-gaap:EmployeeStockOptionMember2020-01-012020-09-300001654151us-gaap:EmployeeStockOptionMember2019-01-012019-09-300001654151dcph:UnvestedTimeBasedRestrictedCommonStockUnitsMemberMember2020-01-012020-09-300001654151dcph:UnvestedTimeBasedRestrictedCommonStockUnitsMemberMember2019-01-012019-09-300001654151us-gaap:PerformanceSharesMember2020-01-012020-09-300001654151us-gaap:PerformanceSharesMember2019-01-012019-09-300001654151us-gaap:EmployeeStockMember2020-01-012020-09-300001654151us-gaap:EmployeeStockMember2019-01-012019-09-300001654151us-gaap:ProductMembercountry:US2020-07-012020-09-300001654151us-gaap:NonUsMemberus-gaap:ProductMember2020-07-012020-09-300001654151us-gaap:ProductMembercountry:US2020-01-012020-09-300001654151us-gaap:NonUsMemberus-gaap:ProductMember2020-01-012020-09-30xbrli:pure0001654151us-gaap:CustomerConcentrationRiskMemberus-gaap:RevenueFromContractWithCustomerMemberdcph:CustomerOneMember2020-07-012020-09-300001654151dcph:CustomerTwoMemberus-gaap:CustomerConcentrationRiskMemberus-gaap:RevenueFromContractWithCustomerMember2020-07-012020-09-300001654151us-gaap:CustomerConcentrationRiskMemberdcph:CustomerThreeMemberus-gaap:RevenueFromContractWithCustomerMember2020-07-012020-09-300001654151us-gaap:CustomerConcentrationRiskMemberus-gaap:RevenueFromContractWithCustomerMemberdcph:CustomerOneMember2020-01-012020-09-300001654151dcph:CustomerTwoMemberus-gaap:CustomerConcentrationRiskMemberus-gaap:RevenueFromContractWithCustomerMember2020-01-012020-09-300001654151us-gaap:CustomerConcentrationRiskMemberdcph:CustomerThreeMemberus-gaap:RevenueFromContractWithCustomerMember2020-01-012020-09-300001654151us-gaap:AccountsReceivableMemberus-gaap:CustomerConcentrationRiskMemberdcph:CustomerOneMember2020-09-300001654151us-gaap:AccountsReceivableMemberdcph:CustomerTwoMemberus-gaap:CustomerConcentrationRiskMember2020-09-300001654151dcph:SECSchedule1209AllowanceTradeDiscountsAndAllowancesMember2019-12-310001654151dcph:SECSchedule1209AllowanceChargebacksAndAdministrativeFeesMember2019-12-310001654151dcph:SECSchedule1209AllowanceGovernmentRebatesAndOtherIncentivesMember2019-12-310001654151dcph:SECSchedule1209AllowanceReturnsMember2019-12-310001654151dcph:SECSchedule1209AllowanceTradeDiscountsAndAllowancesMember2020-01-012020-09-300001654151dcph:SECSchedule1209AllowanceChargebacksAndAdministrativeFeesMember2020-01-012020-09-300001654151dcph:SECSchedule1209AllowanceGovernmentRebatesAndOtherIncentivesMember2020-01-012020-09-300001654151dcph:SECSchedule1209AllowanceReturnsMember2020-01-012020-09-300001654151dcph:SECSchedule1209AllowanceTradeDiscountsAndAllowancesMember2020-09-300001654151dcph:SECSchedule1209AllowanceChargebacksAndAdministrativeFeesMember2020-09-300001654151dcph:SECSchedule1209AllowanceGovernmentRebatesAndOtherIncentivesMember2020-09-300001654151dcph:SECSchedule1209AllowanceReturnsMember2020-09-300001654151us-gaap:AccountsReceivableMember2020-09-300001654151dcph:AccruedExpensesAndOtherCurrentLiabilitiesMember2020-09-300001654151dcph:ZaiLicenseAgreementMember2019-06-300001654151dcph:ZaiLicenseAgreementMembersrt:MaximumMemberdcph:DevelopmentAndCommercialMilestoneMember2019-06-012019-06-300001654151dcph:DevelopmentMilestoneMemberdcph:ZaiLicenseAgreementMembersrt:MaximumMember2019-06-012019-06-300001654151dcph:CommercialMilestoneMemberdcph:ZaiLicenseAgreementMembersrt:MaximumMember2019-06-012019-06-300001654151dcph:ZaiLicenseAgreementMemberdcph:CollaborationArrangementMember2019-04-012019-06-300001654151dcph:ZaiLicenseAgreementMember2019-04-012019-06-300001654151dcph:DevelopmentMilestoneMemberdcph:ZaiLicenseAgreementMemberdcph:IntrigueStudyRelatedMilestoneMember2019-04-012019-06-300001654151dcph:ZaiLicenseAgreementMemberdcph:CollaborationArrangementMember2020-07-012020-09-300001654151dcph:ZaiLicenseAgreementMemberdcph:CollaborationArrangementMember2020-01-012020-09-300001654151dcph:ZaiLicenseAgreementMember2020-07-012020-09-300001654151dcph:ZaiLicenseAgreementMemberdcph:RegulatoryRelatedDevelopmentMilestoneMember2020-01-012020-09-300001654151dcph:ZaiLicenseAgreementMember2020-01-012020-09-300001654151dcph:CollaborationArrangementMemberdcph:ZaiSupplyAgreementMember2020-07-012020-09-300001654151dcph:CollaborationArrangementMemberdcph:ZaiSupplyAgreementMember2020-01-012020-09-300001654151us-gaap:USGovernmentDebtSecuritiesMember2020-09-300001654151us-gaap:USGovernmentDebtSecuritiesMember2020-01-012020-09-300001654151us-gaap:CommercialPaperMember2019-12-310001654151us-gaap:CommercialPaperMember2019-01-012019-12-310001654151us-gaap:USGovernmentDebtSecuritiesMember2019-12-310001654151us-gaap:USGovernmentDebtSecuritiesMember2019-01-012019-12-310001654151us-gaap:CertificatesOfDepositMember2019-12-310001654151us-gaap:CertificatesOfDepositMember2019-01-012019-12-310001654151us-gaap:FairValueInputsLevel1Memberus-gaap:MoneyMarketFundsMember2020-09-300001654151us-gaap:FairValueInputsLevel2Memberus-gaap:MoneyMarketFundsMember2020-09-300001654151us-gaap:FairValueInputsLevel3Memberus-gaap:MoneyMarketFundsMember2020-09-300001654151us-gaap:MoneyMarketFundsMember2020-09-300001654151us-gaap:USGovernmentDebtSecuritiesMemberus-gaap:FairValueInputsLevel1Member2020-09-300001654151us-gaap:USGovernmentDebtSecuritiesMemberus-gaap:FairValueInputsLevel2Member2020-09-300001654151us-gaap:USGovernmentDebtSecuritiesMemberus-gaap:FairValueInputsLevel3Member2020-09-300001654151us-gaap:FairValueInputsLevel1Member2020-09-300001654151us-gaap:FairValueInputsLevel2Member2020-09-300001654151us-gaap:FairValueInputsLevel3Member2020-09-300001654151us-gaap:FairValueInputsLevel1Memberus-gaap:MoneyMarketFundsMember2019-12-310001654151us-gaap:FairValueInputsLevel2Memberus-gaap:MoneyMarketFundsMember2019-12-310001654151us-gaap:FairValueInputsLevel3Memberus-gaap:MoneyMarketFundsMember2019-12-310001654151us-gaap:MoneyMarketFundsMember2019-12-310001654151us-gaap:FairValueInputsLevel1Memberus-gaap:CertificatesOfDepositMember2019-12-310001654151us-gaap:FairValueInputsLevel2Memberus-gaap:CertificatesOfDepositMember2019-12-310001654151us-gaap:FairValueInputsLevel3Memberus-gaap:CertificatesOfDepositMember2019-12-310001654151us-gaap:CertificatesOfDepositMember2019-12-310001654151us-gaap:FairValueInputsLevel1Memberus-gaap:CommercialPaperMember2019-12-310001654151us-gaap:FairValueInputsLevel2Memberus-gaap:CommercialPaperMember2019-12-310001654151us-gaap:FairValueInputsLevel3Memberus-gaap:CommercialPaperMember2019-12-310001654151us-gaap:CommercialPaperMember2019-12-310001654151us-gaap:USGovernmentDebtSecuritiesMemberus-gaap:FairValueInputsLevel1Member2019-12-310001654151us-gaap:USGovernmentDebtSecuritiesMemberus-gaap:FairValueInputsLevel2Member2019-12-310001654151us-gaap:USGovernmentDebtSecuritiesMemberus-gaap:FairValueInputsLevel3Member2019-12-310001654151us-gaap:FairValueInputsLevel1Member2019-12-310001654151us-gaap:FairValueInputsLevel2Member2019-12-310001654151us-gaap:FairValueInputsLevel3Member2019-12-310001654151us-gaap:LetterOfCreditMemberus-gaap:CertificatesOfDepositMember2020-09-300001654151us-gaap:LetterOfCreditMemberus-gaap:CertificatesOfDepositMember2019-12-310001654151dcph:TheInitialSpaceMember2019-10-31utr:sqft0001654151dcph:TheAdditionalSpaceMember2019-04-012019-04-300001654151dcph:ThePremisesMember2019-04-30dcph:renewal_option0001654151dcph:TheAdditionalSpaceMember2020-01-012020-09-300001654151dcph:TheAdditionalSpaceMember2020-09-300001654151dcph:TheAdditionalSpaceMember2020-07-310001654151dcph:ThePremisesMemberus-gaap:LetterOfCreditMemberus-gaap:CertificatesOfDepositMember2020-09-300001654151dcph:ThePremisesMemberus-gaap:LetterOfCreditMemberus-gaap:CertificatesOfDepositMember2019-12-310001654151us-gaap:LetterOfCreditMemberdcph:TheAdditionalSpaceMemberus-gaap:SubsequentEventMemberus-gaap:CertificatesOfDepositMember2020-10-012020-12-310001654151stpr:KS2020-01-012020-09-300001654151stpr:KS2020-09-300001654151dcph:AccruedExpensesAndOtherCurrentLiabilitiesMember2019-12-310001654151dcph:TwoThousandSeventeenEquityIncentivePlanMember2020-09-300001654151dcph:EmployeeStockPurchasePlanEsppMember2020-09-300001654151us-gaap:ResearchAndDevelopmentExpenseMember2020-07-012020-09-300001654151us-gaap:ResearchAndDevelopmentExpenseMember2019-07-012019-09-300001654151us-gaap:ResearchAndDevelopmentExpenseMember2020-01-012020-09-300001654151us-gaap:ResearchAndDevelopmentExpenseMember2019-01-012019-09-300001654151us-gaap:SellingGeneralAndAdministrativeExpensesMember2020-07-012020-09-300001654151us-gaap:SellingGeneralAndAdministrativeExpensesMember2019-07-012019-09-300001654151us-gaap:SellingGeneralAndAdministrativeExpensesMember2020-01-012020-09-300001654151us-gaap:SellingGeneralAndAdministrativeExpensesMember2019-01-012019-09-300001654151dcph:PresidentAndChiefExecutiveOfficerMember2019-01-012019-09-300001654151us-gaap:PerformanceSharesMember2020-07-012020-09-30dcph:award0001654151dcph:KBAGrantsMember2013-12-312013-12-310001654151dcph:KBAGrantsMember2013-12-012013-12-31
Table of Contents

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 September 30, 2020
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
___________________________________________
https://cdn.kscope.io/8e06d194d252b9ff099fd39da3a1750b-dcph-20200930_g1.jpg
DECIPHERA PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
___________________________________________
Delaware
(State or other jurisdiction of incorporation or organization)
30-1003521
(I.R.S. Employer Identification Number)
200 Smith Street, Waltham, MA
(Address of principal executive offices)
02451
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 Par Value Per ShareDCPHThe Nasdaq Global Select Market
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.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller 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 October 30, 2020, there were 56,933,424 shares of Common Stock, $0.01 par value per share, outstanding.



Table of Contents
Deciphera Pharmaceuticals, Inc.
INDEX
Page
Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019

2

Table of Contents
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (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 launch and commercialize QINLOCK® (ripretinib), referred to as QINLOCK, for the treatment of adult patients with advanced gastrointestinal stromal tumor (GIST) who have received prior treatment with three or more kinase inhibitors, including imatinib, in the United States (U.S.), Canada, Australia, and any other jurisdictions where we may receive marketing approval in the future;
the success, cost, and timing of our product development activities and clinical trials, including the timing of our ongoing Phase 3 trial of QINLOCK for the treatment of second line GIST patients and results therefrom;
our ability to maintain and receive additional 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 build out our commercial infrastructure and successfully launching, 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, and 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 of target patient populations for QINLOCK, or any of our current or future drug candidates for which we receive marketing approval;
our ability to obtain funding for our operations;
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 receive marketing approval;
the therapeutic benefit and effectiveness of QINLOCK and our drug candidates;
the safety profile and related adverse events of QINLOCK and our drug candidates;
our commercial preparedness efforts and our ability to commercially launch our drug or drug candidates, if and when they are approved, including, without limitation, QINLOCK in Europe;
our plans to research, develop, and commercialize our drug candidates, including the timing of our ongoing Phase 3 trial of QINLOCK for the treatment of second line GIST patients, and the timing of investigational new drug (IND) applications, including, without limitation, the success of IND-enabling studies for, and the expected timing of, an IND application for our DCC-3116 program;
the performance and experience of our licensee, Zai Lab (Shanghai) Co., Ltd. (Zai), to successfully develop and commercialize QINLOCK, if approved, in Mainland China, Hong Kong, Macau, and Taiwan, also referred to as Greater China or the Greater China region, under the terms and conditions of our license agreement;
our ability to attract additional licensees and/or collaborators or distributors with development, regulatory, and commercialization expertise;
our expectations regarding our ability to obtain, maintain, enforce, and defend our intellectual property protection for QINLOCK or our drug candidates;
3

Table of Contents
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;
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;
regulatory and legal developments in the U.S. and foreign countries;
our ability to comply with healthcare laws and regulations in the U.S. and any foreign countries, including, without limitation, those applying to the marketing and sale of commercial drugs;
the performance and experience of our third-party suppliers and manufacturers;
the success and timing of competing therapies that are or may become available;
our ability to attract and retain key scientific or management personnel;
the accuracy of our estimates regarding expenses, future revenues, capital requirements, and needs for additional financing;
the impact of global economic and political developments on our business, including economic slowdowns or recessions that may result from the outbreak of the novel coronavirus (COVID-19), which could harm our commercialization efforts for QINLOCK as well as the value of our common stock and our ability to access capital markets;
natural and manmade disasters, including pandemics such as COVID-19, and other force majeures, which could impact our operations, and those of our partners and other participants in the health care industry, and which could adversely impact our clinical studies, preclinical research activities, and drug supply; and
our use of the proceeds from our follow-on public offerings and any other financing transaction we may undertake.
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 Securities and Exchange Commission (SEC). 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 QINLOCK® word mark and logo are registered trademarks, and Deciphera and the Deciphera logo are trademarks, of Deciphera Pharmaceuticals, LLC.
4

Table of Contents
PART I—FINANCIAL INFORMATION
Item 1.    Financial Statements.
Deciphera Pharmaceuticals, Inc.
Consolidated Balance Sheets
(Unaudited, in thousands, except share and per share amounts)
September 30, 2020December 31, 2019
Assets
Current assets:
Cash and cash equivalents$111,154 $120,320 
Short-term marketable securities434,171 459,256 
Accounts receivable, net11,814  
Inventory4,596  
Prepaid expenses and other current assets9,723 13,832 
Total current assets571,458 593,408 
Long-term marketable securities38,989  
Long-term investments—restricted2,125 1,510 
Property and equipment, net9,925 6,333 
Operating lease assets37,171 21,158 
Total assets$659,668 $622,409 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable$10,237 $19,575 
Accrued expenses and other current liabilities48,941 38,716 
Operating lease liabilities2,010 1,747 
Total current liabilities61,188 60,038 
Operating lease liabilities, net of current portion29,394 15,904 
Total liabilities90,582 75,942 
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, $0.01 par value per share; 5,000,000 shares authorized; no shares issued or outstanding
  
Common stock, $0.01 par value per share; 125,000,000 shares authorized; 56,641,065 shares and 51,617,639 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively
566 516 
Additional paid-in capital
1,260,209 1,033,819 
Accumulated other comprehensive income (loss)39 111 
Accumulated deficit(691,728)(487,979)
Total stockholders' equity569,086 546,467 
Total liabilities and stockholders' equity$659,668 $622,409 
The accompanying notes are an integral part of these consolidated financial statements.
5

Table of Contents
Deciphera Pharmaceuticals, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited, in thousands, except share and per share amounts)
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Revenues:
Product revenues, net$15,164 $ $19,989 $ 
Collaboration revenues285  2,612 25,000 
Total revenues15,449  22,601 25,000 
Cost and operating expenses:
Cost of sales90  98  
Research and development49,213 40,374 146,682 110,974 
Selling, general, and administrative30,143 17,979 84,012 44,379 
Total cost and operating expenses79,446 58,353 230,792 155,353 
Loss from operations(63,997)(58,353)(208,191)(130,353)
Other income (expense):
Interest and other income, net296 2,174 4,442 5,368 
Interest expense (17) (55)
Total other income (expense), net296 2,157 4,442 5,313 
Net loss$(63,701)$(56,196)$(203,749)$(125,040)
Net loss per share—basic and diluted$(1.13)$(1.28)$(3.68)$(3.12)
Weighted average common shares outstanding—basic and diluted56,390,748 43,803,508 55,296,775 40,041,321 
Comprehensive loss:
Net loss$(63,701)$(56,196)$(203,749)$(125,040)
Other comprehensive income (loss):
Unrealized gains (losses) on marketable securities47 (114)(72)61 
Total other comprehensive income (loss)47 (114)(72)61 
Total comprehensive loss$(63,654)$(56,310)$(203,821)$(124,979)
The accompanying notes are an integral part of these consolidated financial statements.
6

Table of Contents
Deciphera Pharmaceuticals, Inc.
Consolidated Statements of Stockholders' Equity
(Unaudited, in thousands, except share amounts)
Preferred StockCommon StockAdditional Paid-in CapitalAccumulated Other Comprehensive Income (Loss)Accumulated
Deficit
Total
Stockholders'
Equity
SharesAmountSharesAmount
Balance, June 30, 2020 $ 56,081,993 $561 $1,247,158 $(8)$(628,027)$619,684 
Issuance of common stock upon exercise of stock options
— — 559,072 5 3,223 — — 3,228 
Stock-based compensation expense— — — — 9,828 — — 9,828 
Unrealized gains (losses) on marketable securities
— — — — — 47 — 47 
Net loss— — — — — — (63,701)(63,701)
Balance, September 30, 2020 $ 56,641,065 $566 $1,260,209 $39 $(691,728)$569,086 

Preferred StockCommon StockAdditional Paid-in CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal Stockholders' Equity
SharesAmountSharesAmount
Balance, December 31, 2019 $ 51,617,639 $516 $1,033,819 $111 $(487,979)$546,467 
Issuance of common stock sold in public offering, net of underwriting discounts, commissions and offering costs
— — 3,659,090 37 188,348 — — 188,385 
Issuance of common stock upon exercise of stock options
— — 1,364,336 13 10,611 — — 10,624 
Stock-based compensation expense
— — — — 27,431 — — 27,431 
Unrealized gains (losses) on marketable securities
— — — — — (72)— (72)
Net loss— — — — — — (203,749)(203,749)
Balance, September 30, 2020 $ 56,641,065 $566 $1,260,209 $39 $(691,728)$569,086 
The accompanying notes are an integral part of these consolidated financial statements.
7

Table of Contents
Deciphera Pharmaceuticals, Inc.
Consolidated Statements of Stockholders' Equity (continued)
(Unaudited, in thousands, except share amounts)
Preferred StockCommon StockAdditional Paid-in CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal Stockholders' Equity
SharesAmountSharesAmount
Balance, June 30, 2019 $ 38,215,108 $382 $586,888 $175 $(364,567)$222,878 
Issuance of common stock sold in public offering, net of underwriting discounts, commissions and offering costs
— — 12,432,431 124 431,656 — — 431,780 
Issuance of common stock upon exercise of stock options
— — 396,373 4 2,472 — — 2,476 
Stock-based compensation expense— — — — 4,729 — — 4,729 
Unrealized gains (losses) on marketable securities
— — — — — (114)— (114)
Net loss— — — — — — (56,196)(56,196)
Balance, September 30, 2019 $ 51,043,912 $510 $1,025,745 $61 $(420,763)$605,553 

Preferred StockCommon StockAdditional Paid-in CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal Stockholders' Equity
SharesAmountSharesAmount
Balance, December 31, 2018 $ 37,676,760 $377 $575,327 $ $(295,723)$279,981 
Issuance of common stock sold in public offering, net of underwriting discounts, commissions and offering costs
— — 12,432,431 124 431,656 — — 431,780 
Issuance of common stock upon exercise of stock options
— — 934,721 9 3,697 — — 3,706 
Stock-based compensation expense
— — — — 15,065 — — 15,065 
Unrealized gains (losses) on marketable securities
— — — — — 61 — 61 
Net loss— — — — — — (125,040)(125,040)
Balance, September 30, 2019 $ 51,043,912 $510 $1,025,745 $61 $(420,763)$605,553 
The accompanying notes are an integral part of these consolidated financial statements.
8

Table of Contents
Deciphera Pharmaceuticals, Inc.
Consolidated Statements of Cash Flows
(Unaudited, in thousands)
Nine Months Ended September 30,
20202019
Cash flows from operating activities:
Net loss$(203,749)$(125,040)
Adjustments to reconcile net loss to net cash flows used in operating activities:
Stock-based compensation expense27,431 15,065 
Depreciation expense1,610 385 
Noncash lease expense1,948 433 
(Gain) loss on disposal of equipment(7) 
Net accretion of discounts on marketable securities(1,850)(2,270)
Changes in operating assets and liabilities:
Accounts receivable(11,814) 
Inventory(2,455) 
Prepaid expenses and other current assets1,030 (427)
Accounts payable(9,908)6,462 
Accrued expenses and other current liabilities8,339 12,038 
Operating lease liabilities(1,130)(446)
Other long-term liabilities 337 
Net cash flows used in operating activities(190,555)(93,463)
Cash flows from investing activities:
Purchases of marketable securities(969,005)(618,190)
Maturities of marketable securities452,663 137,952 
Sales of marketable securities504,216 21,687 
Purchases of property and equipment(4,886)(3,210)
Proceeds from sale of equipment7  
Increase in restricted investments(615)(441)
Net cash flows used in investing activities(17,620)(462,202)
Cash flows from financing activities:
Proceeds from public offerings, net of underwriting discounts and commissions189,037 432,400 
Repayment of notes payable to related party (140)
Payments of public offering costs(652)(353)
Proceeds from exercise of stock options10,624 3,706 
Net cash flows provided by financing activities199,009 435,613 
Net increase (decrease) in cash and cash equivalents(9,166)(120,052)
Cash and cash equivalents at beginning of period120,320 293,764 
Cash and cash equivalents at end of period$111,154 $173,712 
Supplemental disclosure of cash flow information:
Cash paid for interest$ $55 
Property and equipment purchases included in accounts payable and accrued expenses and other current liabilities$316 $883 
Offering costs included in accounts payable and accrued expenses and other current liabilities
$ $267 
The accompanying notes are an integral part of these consolidated financial statements.
9

Table of Contents
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. The Company is leveraging its proprietary switch-control kinase inhibitor platform and deep expertise in kinase biology to develop a broad portfolio of innovative medicines. On May 15, 2020, QINLOCK® (ripretinib), referred to as QINLOCK, was approved by the United States (U.S.) Food and Drug Administration (FDA) for the treatment of adult patients with advanced gastrointestinal stromal tumor (GIST) who have received prior treatment with three or more kinase inhibitors, including imatinib. QINLOCK is currently being investigated in a Phase 3 study for the treatment of patients with second-line GIST. In addition to QINLOCK, the Company is advancing multiple drug candidates from its platform in various stages of clinical development. The Company wholly owns its drug and all of its drug candidates with the exception of a development and commercialization out-license agreement for QINLOCK in Mainland China, Hong Kong, Macau, and Taiwan, also referred to as Greater China. The Company is preparing for a potential launch of QINLOCK in Europe and the Company has, and intends in the future to, enter into select distributor arrangements to offer QINLOCK in geographies where the Company does not intend to build a local presence, such as Australia and Canada.
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, competition for 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, the impact of the novel coronavirus (COVID-19) pandemic on its operations, 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 launch and commercialization of QINLOCK, the Company's first and recently approved drug in the U.S., 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 significant revenue from product sales of QINLOCK or any current or future drug candidates for which it receives marketing approval.
The full extent to which the COVID-19 pandemic, or the future outbreak of any other highly infectious or contagious diseases, may impact the Company's business, including its preclinical studies, clinical trial operations, or commercialization efforts, will depend on continuously changing circumstances, which are highly uncertain and cannot be predicted at this time, such as the duration of such pandemic including future waves of infection, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. The Company is continuing to monitor the long-term impact of COVID-19, if any, on its financial condition and results of operations. The ongoing fluidity of this situation precludes any prediction as to the full impact of the COVID-19 pandemic but it could have a material adverse effect on the Company's business, financial condition, and results of operations. The COVID-19 pandemic may also have the effect of heightening the risks to which the Company is subject, including various aspects of the Company's preclinical studies and ongoing clinical trials, the reliance on third parties in the Company's supply chain for materials and manufacturing of the Company's drug and drug candidates, disruptions in health regulatory agencies' operations globally, the volatility of the Company's common stock, and its ability to access capital markets, and the Company's ability to successfully launch, commercialize, and generate revenue from sales of QINLOCK.
In June 2018, the Company issued and sold 4,945,000 shares of its common stock in a follow-on public offering at a public offering price of $40.00 per share, resulting in net proceeds of $185.3 million after deducting underwriting discounts and commissions and other offering expenses. In the third quarter of 2019, the Company issued and sold 12,432,431 shares of its common stock in a follow-on public offering at a public offering price of $37.00 per share, resulting in net proceeds of $431.8 million after deducting underwriting discounts and commissions and other offering expenses. In February 2020, the Company issued and sold 3,659,090 shares of its common stock in a follow-on public offering at a public offering price of $55.00 per share, resulting in net proceeds of $188.4 million after deducting underwriting discounts and commissions and other offering expenses.
10

Table of Contents
Deciphera Pharmaceuticals, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)

In August 2020, the Company entered into an Open Market Sale Agreement℠ (the Sales Agreement) with Jefferies LLC (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 (the Shares) 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. As of September 30, 2020, the Company had not made any sales of Shares pursuant to the Sales Agreement.
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 $203.7 million and $192.3 million for the nine months ended September 30, 2020 and the year ended December 31, 2019, respectively. As of September 30, 2020, the Company had an accumulated deficit of $691.7 million. The Company expects to continue to generate operating losses for the foreseeable future. The Company expects that its cash, cash equivalents, and marketable securities 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 eliminate 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.
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, 2019 was derived from audited financial statements, but does not include all disclosures required by GAAP. The accompanying unaudited consolidated financial statements as of September 30, 2020 and for the three and nine months ended September 30, 2020 and 2019 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, 2019 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 September 30, 2020 and consolidated results of operations and comprehensive loss for the three and nine months ended September 30, 2020 and 2019 and consolidated cash flows for the nine months ended September 30, 2020 and 2019 have been made. The consolidated results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2020.
Certain prior year amounts have been reclassified to conform to current year presentation.
The significant accounting policies used in preparation of these consolidated financial statements for the three and nine months ended September 30, 2020 are consistent with those discussed in Note 2, Summary of Significant Accounting Policies, to
11

Table of Contents
Deciphera Pharmaceuticals, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)

the consolidated financial statements in the Company's Form 10-K for the year ended December 31, 2019, except as noted within the section "Significant Accounting Policies" with respect to the Company's accounting policies for product revenues, accounts receivable, and inventory and within the section "Recently Issued Accounting Pronouncements."
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, revenue recognition, the accrual for research and development expenses, and the valuation of stock-based 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.
Net Loss per Share
Basic net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing the diluted net income (loss) by the weighted average number of common shares, including potential dilutive common shares assuming the dilutive effect as determined using the treasury stock method.
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 and nine months ended September 30, 2020 and 2019.
The following potential dilutive securities, presented based on amounts outstanding at the end of each reporting period, have been excluded from the calculation of diluted net loss per share because including them would have had an anti-dilutive impact:
As of September 30,
20202019
Options to purchase common stock6,351,397 6,891,125 
Unvested time-based restricted common stock units419,235 67,000 
Unvested performance-based restricted common stock units55,200  
Unvested employee stock purchase plan shares39,600  
Total6,865,432 6,958,125 
Significant Accounting Policies
Product Revenues
In May 2020, the Company began generating product revenue from sales of QINLOCK to specialty distributors and specialty pharmacies in the U.S. following the approval of QINLOCK by the FDA on May 15, 2020 for the treatment of adult patients with advanced GIST who have received prior treatment with three or more kinase inhibitors, including imatinib.
The Company recognizes product revenues, net of variable consideration related to certain allowances and accruals, when the customer takes control of the product, which is typically upon delivery to the customer. Product revenue is recorded at the net sales price, or transaction price. The Company records product revenue reserves, which are classified as a reduction in product revenues, to account for the components of variable consideration. Variable consideration includes the following components: chargebacks, government rebates, trade discounts and allowances, product returns, and other incentives, which are described below.
These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the Company's customer) or a liability (if the amount is payable to a party other than the Company's customer). The Company's estimates of reserves established for variable consideration are
12

Table of Contents
Deciphera Pharmaceuticals, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)

calculated based upon a consistent application of the expected value method, which is the sum of probability-weighted amounts in a range of possible consideration amounts. These estimates reflect the Company's historical experience, current contractual and statutory requirements, specific known market events and trends, industry data, forecasted customer buying, and payment patterns. The amount of variable consideration that is included in the transaction price may be subject to constraint and is included in net product revenues only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration received may ultimately differ from the Company's estimates. If actual results vary, the Company adjusts these estimates, which could have an effect on earnings in the period of adjustment.
Chargebacks and administrative fees: Chargebacks for discounts represent the Company's estimated obligations resulting from contractual commitments to sell product to qualified healthcare providers and government agencies at prices lower than the list prices charged to the customers who directly purchase the product from the Company. The customers charge the Company for the difference between what the customers pay the Company for the product and the customer's ultimate contractually committed or government required lower selling price to the qualified healthcare providers. As part of the Company's contractual commitments to sell product to qualified healthcare providers, the Company pays fees for administrative services, such as account management and data reporting.
Government rebates: Government rebates consist of Medicare, Tricare, and Medicaid rebates. These reserves are recorded in the same period the related revenue is recognized. For Medicare, the Company also estimates the number of patients in the prescription drug coverage gap for whom it will owe a rebate under the Medicare Part D program.
Trade discounts and allowances: The Company provides the customers with discounts that are explicitly stated in the contracts and recorded in the period the related product revenue is recognized. In addition, the Company also receives sales order management, inventory management, and data services from the customers in exchange for certain fees.
Product returns: The Company estimates the amount of its product sales that may be returned by its customers and records this estimate in the period the related product revenue is recognized. The Company currently estimates product return liabilities based on available industry data and its visibility into the inventory remaining in the distribution channel.
Other incentives: Other incentives include co-payment assistance provided to qualified patients, whereby the Company may provide financial assistance to patients with prescription drug co-payments required by the patient's insurance provider. Reserves for co-payment assistance are recorded in the same period the related revenue is recognized.
Accounts Receivable
Accounts receivable arise from product sales and amounts due from the Company's collaboration partners and have standard payment terms that generally require payment within 30 to 90 days. The amount from product sales represents amounts due from specialty distributors and specialty pharmacies in the U.S., which are recorded net of reserves for customer chargebacks, trade discounts and allowances, and other incentives to the extent such amounts are payable to the customer by the Company. The Company monitors economic conditions to identify facts or circumstances that may indicate that its receivables are at risk of collection. The Company provides reserves against accounts receivable for estimated losses, if any, that may result from a customer's inability to pay based on the composition of its accounts receivable, current economic conditions, and historical credit loss activity. Amounts determined to be uncollectible are charged or written-off against the reserve. During the three and nine months ended September 30, 2020, the Company did not record any expected credit losses related to outstanding accounts receivable.
Inventory
Inventories are stated at the lower of cost or estimated net realizable value with cost based on the first-in first-out method. Inventory that can be used in either the production of clinical or commercial products is expensed as research and development costs when identified for use in clinical trials.
Prior to the regulatory approval of its drug candidates, the Company incurs expenses for the manufacture of drug product supplies to support clinical development that could potentially be available to support the commercial launch of those drugs. Until
13

Table of Contents
Deciphera Pharmaceuticals, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)

the date at which regulatory approval has been received or is otherwise considered probable, the Company records all such costs as research and development expenses.
The Company performs an assessment of the recoverability of capitalized inventories during each reporting period and writes down any excess and obsolete inventory to its net realizable value in the period in which the impairment is first identified. Such impairment charges, should they occur, are recorded as a component of cost of sales in the Company's consolidated statements of operations and comprehensive loss. The determination of whether inventory costs will be realizable requires the use of estimates by management. If actual market conditions are less favorable than projected by management, additional write-downs of inventory may be required.
The Company commenced the capitalization of QINLOCK inventory in May 2020 upon receiving FDA approval of QINLOCK. Capitalized inventory consisted of the following:
(in thousands)As of September 30, 2020
Raw materials$1,352 
Work in process3,160 
Finished goods84 
Total inventory$4,596 
There were no inventory amounts written down as a result of excess, obsolescence, unmarketability, or other reasons charged to cost of sales during the three and nine months ended September 30, 2020.
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies that the Company adopts as of the specified effective date. Unless otherwise discussed below, the Company does not believe that the adoption of recently issued standards have or may have a material impact on its consolidated financial statements or disclosures.
Credit Losses
In June 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). The FASB subsequently issued amendments to ASU 2016-13, which have the same effective date and transition date of January 1, 2020. This standard requires entities to estimate an expected lifetime credit loss on financial assets and report credit losses using an expected losses model rather than the incurred losses model that was previously used, and establishes additional disclosures related to credit risks. For available-for-sale debt securities with unrealized losses, the standard now requires allowances to be recorded instead of reducing the amortized cost of the investment. This standard limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases.
This standard became effective for the Company on January 1, 2020, and adoption of this standard did not have a material impact on the consolidated financial statements and related disclosures.
2. Revenues
Net Product Revenues
On May 15, 2020, QINLOCK was approved 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.
As of September 30, 2020, the Company's only source of product revenues were from the sales of QINLOCK. For the three months ended September 30, 2020, product revenues were $15.2 million, which consisted of $14.7 million of revenues in the U.S.
14

Table of Contents
Deciphera Pharmaceuticals, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)

and $0.5 million of revenues in the rest of the world. For the nine months ended September 30, 2020, product revenues were $20.0 million, which consisted of $19.5 million of revenues in the U.S. and $0.5 million of revenues in the rest of the world.
The Company primarily sells QINLOCK through specialty distributors and specialty pharmacies. The Company recognized revenues from three customers accounting for 56%, 25%, and 12% of gross product revenues for the three months ended September 30, 2020, and 54%, 27%, and 11% of gross product revenues for the nine months ended September 30, 2020. As of September 30, 2020, two customers individually accounted for approximately 59% and 24% of accounts receivable associated with the Company's product sales.
Activity in each of the product revenue allowance and reserve categories is summarized as follows:
(in thousands)Trade discounts and allowances
Chargebacks and administrative fees
Government rebates and other incentivesReturnsTotal
Balance as of December 31, 2019$ $ $ $ $ 
Provision related to sales in the current year302 854 886 662 2,704 
Credits and payments made(152)(607)(127)(215)(1,101)
Balance as of September 30, 2020$150 $247 $759 $447 $1,603 
The total reserves described above are summarized as components of the Company's consolidated balance sheets as follows:
(in thousands)As of September 30, 2020
Reduction of accounts receivable, net$343 
Component of accrued expenses and other current liabilities1,260 
Total revenue-related reserves$1,603 

Collaboration Revenues
In June 2019, the Company entered into a License Agreement (the Zai License Agreement) with Zai Lab (Shanghai) Co., Ltd. (Zai), pursuant to which the Company granted Zai exclusive rights to develop and commercialize QINLOCK, including certain follow-on compounds (the Licensed Products), in Greater China (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, the Company received an upfront cash payment of $20.0 million and became eligible to receive up to $185.0 million in potential development and commercial milestone payments, consisting of up to $50.0 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 potential annual net sales of the Licensed Products in the Territory, subject to adjustments in specified circumstances.
Under the Zai License Agreement, the Company recognized revenue of $25.0 million during the second quarter of 2019, which consisted of the $20.0 million upfront payment and a $5.0 million INTRIGUE study-related development milestone payment, which the Company believed to be probable of achievement in the second quarter of 2019 and was achieved in July 2019.
Under the Zai License Agreement, the Company recognized revenues of $0.1 million and $2.2 million during the three and nine months ended September 30, 2020, respectively, which, during the three months ended September 30, 2020 consisted of $0.1 million in reimbursable costs, and during the nine months ended September 30, 2020 consisted of the achievement of a $2.0 million development milestone in the second quarter of 2020 and $0.2 million in reimbursable costs.
15

Table of Contents
Deciphera Pharmaceuticals, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)

Subject to the terms and conditions of the Zai License Agreement, Zai will be responsible for conducting the development and commercialization activities in the Territory related to the Licensed Products. Please read Note 3, License Agreement, to the consolidated financial statements in the Company's Form 10-K for the year ended December 31, 2019 for further details on the Zai License 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 obtains regulatory approval in the Territory. Subject to the Zai Supply Agreement, costs incurred by the Company for external manufacturing services are reimbursed by Zai.
Under the Zai Supply Agreement, the Company recognized revenues of $0.2 million and $0.4 million for external manufacturing services provided during the three and nine months ended September 30, 2020, respectively.
3. Marketable Securities and Fair Value Measurements
The following tables present marketable securities by contractual maturity and security type:
As of September 30, 2020 (in thousands)Amortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair Value
Due within one year:
U.S. government securities434,134 42 (5)434,171 
Due after one year through five years:
U.S. government securities38,987 4 (2)38,989 
Total$473,121 $46 $(7)$473,160 

As of December 31, 2019 (in thousands)Amortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair Value
Due within one year:
Commercial paper$314,292 $74 $(23)$314,343 
U.S. government securities78,612 48 (3)78,657 
Certificates of deposit66,241 17 (2)66,256 
Total$459,145 $139 $(28)$459,256 
The following tables present information about the Company's financial assets measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:
As of September 30, 2020 (in thousands)Level 1Level 2Level 3Total
Cash equivalents:
Money market funds$ $41,204 $ $41,204 
U.S. government securities 27,497  27,497 
Marketable securities:
U.S. government securities 473,160  473,160 
Total$ $541,861 $ $541,861 

16

Table of Contents
Deciphera Pharmaceuticals, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)

As of December 31, 2019 (in thousands)Level 1Level 2Level 3Total
Cash equivalents:
Money market funds$ $28,192 $ $28,192 
Certificates of deposit 20,500  20,500 
Marketable securities:
Commercial paper 314,343  314,343 
U.S. government securities 78,657  78,657 
Certificates of deposit 66,256  66,256 
Total$ $507,948 $ $507,948 
The table above excludes certificates of deposit totaling $2.1 million and $1.5 million as of September 30, 2020 and December 31, 2019, respectively, that the Company held to secure a letter of credit associated with its leases and to secure a credit card account. The Company increased its credit card limit and corresponding certificate of deposit in the first quarter of 2020. The certificates of deposit are Level 2 instruments and are measured at carrying value in the consolidated balance sheets in long-term investments—restricted and approximate fair value. For additional information on the letter of credit associated with the Company's leases, please read Note 4, Leases, to these consolidated financial statements.
The fair value of Level 2 instruments classified as cash equivalents and marketable securities were determined through third-party pricing services. The pricing services use many observable market inputs to determine value, including reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, current spot rates, and other industry and economic events.
4. Leases
The Company leases real estate, including office and laboratory space.
In May 2018, the Company entered into a lease for office space (the Initial Space) at 200 Smith Street in Waltham, Massachusetts (the Premises). In October 2019, the lease for the Initial Space commenced under Accounting Standards Codification (ASC) Topic 842, Leases (ASC 842), and resulted in the addition of an operating lease asset of $21.2 million and a corresponding lease liability of $17.0 million in the fourth quarter of 2019. The Premises became the Company's new headquarters in October 2019. For additional information on the Initial Space, please read Note 6, Leases, to the consolidated financial statements in the Company's Form 10-K for the year ended December 31, 2019.
In April 2019, the Company amended its lease for office space at the Premises to add an additional 38,003 square feet (the Additional Space) for a total of 82,346 square feet of space. The initial term of the lease for the Additional Space will expire in November 2029 unless terminated earlier in accordance with the terms of the lease and the Company is entitled to two five-year options to extend the lease. The initial annual base rent for the Additional Space is approximately $1.9 million and will increase annually for a total of $18.2 million over the lease term.
In July 2020, the lease for the Additional Space commenced under ASC 842 and resulted in the addition of an operating lease asset of $16.5 million and a corresponding lease liability of $13.5 million in the third quarter of 2020.
The Company is required to maintain a letter of credit associated with its leases at the Premises. The balances of the Company's certificate of deposit associated with the letter of credit for its leases at the Premises of $1.1 million as of September 30, 2020 and December 31, 2019 were classified as long-term investment—restricted in the consolidated balance sheets. The Company expects to increase the letter of credit and associated certificate of deposit by $0.9 million for the Additional Space in the fourth quarter of 2020.
In August 2020, the Company amended and restated its real estate leases primarily for office and laboratory space in Lawrence, Kansas (the 2020 Lawrence Lease Agreements). The initial term of the 2020 Lawrence Lease Agreements will expire on December 31, 2030 unless terminated earlier in accordance with the terms of the lease and the Company is entitled to two five-year options to extend the leases. The 2020 Lawrence Lease Agreements modified a previously existing operating lease which
17

Table of Contents
Deciphera Pharmaceuticals, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)

resulted in an additional operating lease asset of $1.4 million and a corresponding lease liability of $1.4 million during the third quarter of 2020. Additionally, as a result of the 2020 Lawrence Lease Agreements, some previously existing operating leases will terminate as of December 31, 2020. The Company expects that additional new operating leases associated with the 2020 Lawrence Lease Agreements will commence in 2021 under ASC 842.
The Company's leases contain options to extend the lease terms; however, these extensions were not included in the operating lease assets and lease liabilities recorded on the consolidated balance sheets as they were not reasonably certain of being exercised.
During the three and nine months ended September 30, 2020 and 2019, the Company was subject to certain lease agreements to accommodate short-term or temporary needs. The expenses related to the Company's short-term or temporary lease agreements are included in short-term lease costs for the three and nine months ended September 30, 2020 and 2019, as applicable.
The Company's leases require the Company to pay for its share of certain operating expenses, taxes, and other expenses based on actual costs incurred and therefore, as the amounts are variable in nature, are expensed in the period incurred and included in variable lease costs for the three and nine months ended September 30, 2020 and 2019. Payment escalations specified in the leases are recognized on a straight-line basis over the lease terms.
All of the Company's leases qualify as operating leases. The following table summarizes the presentation of the Company's operating leases in the consolidated balance sheet:
(in thousands)As of September 30, 2020As of December 31, 2019
Operating lease assets$37,171 $21,158 
Current operating lease liabilities$2,010 $1,747 
Operating lease liabilities, net of current portion29,394 15,904 
Total operating lease liabilities$31,404 $17,651 
The components of lease expense were as follows:
Three Months Ended September 30,Nine Months Ended September 30,
(in thousands)2020201920202019
Operating lease cost$1,321 $104 $2,843 $462 
Short-term lease cost18 82 336 270 
Variable lease cost144 128 343 337 
Total lease expense$1,483 $314 $3,522 $1,069 
Future annual minimum lease payments under operating leases were as follows:
(in thousands)As of September 30, 2020
Remainder of 2020 (three months)$622 
20214,143 
20224,225 
20234,308 
20244,390 
20254,472 
Thereafter18,519 
Total future minimum lease payments40,679 
Less: imputed interest(9,275)
Total operating lease liabilities$31,404 
18

Table of Contents
Deciphera Pharmaceuticals, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)

The weighted-average remaining lease term and weighted-average discount rate of the Company's operating leases are as follows:
As of September 30, 2020As of December 31, 2019
Weighted-average remaining lease term in years
9.219.63
Weighted-average discount rate
5.60 %5.36 %
Supplemental disclosure of cash flow information related to the Company's operating leases included in cash flows used in operating activities in the consolidated statement of cash flows is as follows:
Three Months Ended September 30,Nine Months Ended September 30,
(in thousands)2020201920202019
Cash paid for amounts included in the measurement of operating lease liabilities
$618 $104 $2,024 $424 
Operating lease liabilities arising from obtaining operating lease assets
$14,883 $142 $14,883 $142 

5. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
(in thousands)As of September 30, 2020As of December 31, 2019
External research and development expenses$31,354 $20,462 
Payroll and related expenses13,450 12,902 
Professional fees2,514 3,810 
Revenue-related reserves1,260  
Other363 1,542 
Total accrued expenses and other current liabilities$48,941 $38,716 

6. Stock-Based Awards
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). The Company also has outstanding stock options under its 2015 Equity Incentive Plan but is no longer granting awards under this plan. As of September 30, 2020, 1,748,489 shares of common stock were available for issuance under the 2017 Plan. As of September 30, 2020, 1,409,433 shares of common stock were available for issuance to participating employees under the ESPP. The purchase price of common stock under the Company's 2017 ESPP, is equal to 85% of the lesser of (i) the fair market value per share of the common stock on the first business day of an offering period and (ii) the fair market value per share of the common stock on the purchase date. The fair value of the discounted purchases made under the Company's 2017 ESPP is calculated using the Black-Scholes valuation model. The fair value of the look-back provision plus the 15% discount is recognized as stock-based compensation expense in the consolidated statements of operations and comprehensive loss over the 6-month purchase period. Employees began participating in the ESPP program during the second quarter of 2020.
Stock-based compensation expense was classified in the consolidated statements of operations and comprehensive loss as follows:
Three Months Ended September 30,Nine Months Ended September 30,
(in thousands)2020201920202019
Research and development expenses$4,518 $1,992 $13,082 $5,474 
Selling, general, and administrative expenses5,310 2,737 14,349 9,591 
Total stock-based compensation$9,828 $4,729 $27,431 $15,065 
19

Table of Contents
Deciphera Pharmaceuticals, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)

As of September 30, 2020, total unrecognized compensation cost related to the unvested share-based awards was $92.6 million, which is expected to be recognized over a weighted average of 2.7 years.
During the nine months ended September 30, 2019, the Company recorded $2.4 million of stock-based compensation expense related to the modification of stock options pursuant to the transition agreement with its former President and Chief Executive Officer. These expenses were classified as selling, general, and administrative expenses within the consolidated statements of operations and comprehensive loss.
During the three and nine months ended September 30, 2020, the Company recorded $0.4 million and $1.7 million, respectively, of stock-based compensation expense related to vesting events associated with performance-based restricted stock units that became probable and were achieved during the second quarter of 2020. These expenses were classified as research and development expenses within the consolidated statements of operations and comprehensive loss.
7. Commitments and Contingencies
KBA Grants
Prior to 2014, the Company received funding from two research and development grants from the Kansas Bioscience Authority (KBA), totaling $2.0 million and no further amounts will be received under these grants. Pursuant to Kansas law, the Company may be required to repay some or all of the financial assistance received from the KBA, subject to the discretion of the KBA, if the Company relocates the operations in which the KBA invested outside of the State of Kansas, if the Company initiates procedures to dissolve and wind up or cease operations within ten years after receiving such financial assistance or upon certain significant changes to ownership of the Company. The Company will only account for the repayment of the grants if it becomes probable that the Company will be required to repay any funds previously received.
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 September 30, 2020, the Company's contractual commitments for such obligations were $7.9 million, which are primarily 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 September 30, 2020 or December 31, 2019.
20

Table of Contents
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, 2019 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. We are leveraging our proprietary switch-control kinase inhibitor platform and deep expertise in kinase biology to develop a broad portfolio of innovative medicines. On May 15, 2020, QINLOCK was approved 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. QINLOCK is currently being investigated in a Phase 3 study for the treatment of patients with second-line GIST. In addition to QINLOCK, we are advancing multiple drug candidates from our platform in various stages of clinical development. We have used our platform to develop a diverse pipeline of tumor-targeted and immuno-targeted drug candidates designed to improve outcomes for patients with cancer by improving the quality, rate, and/or durability of their responses to treatment that includes our approved drug, QINLOCK, and two clinical-stage, one preclinical-stage, and ongoing research-stage programs. We wholly own QINLOCK and our drug candidates with the exception of a development and commercialization out-license agreement for QINLOCK in Greater China. We are preparing for a potential launch of QINLOCK in Europe and we have, and intend in the future to, enter into select distributor arrangements to offer QINLOCK to geographies where we do not intend to build a local presence, such as Australia and Canada.
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, and building a commercial and marketing organization. Our only product approved for sale is QINLOCK, which only recently received approval, and we have not generated substantial revenue from product sales.
On October 2, 2017, we completed an initial public offering (IPO), of our common stock, pursuant to which we issued and sold 7,500,000 shares of common stock at a public offering price of $17.00 per share, resulting in net proceeds of $114.1 million after deducting underwriting discounts and commissions and other offering expenses. On October 4, 2017, we issued and sold an additional 666,496 shares of our common stock at the IPO price of $17.00 per share, pursuant to the underwriters' partial exercise of their option to purchase additional shares of common stock, resulting in additional net proceeds of $10.5 million after deducting discounts and commissions.
On June 11, 2018, we issued and sold 4,300,000 shares of our common stock in a follow-on public offering at a public offering price of $40.00 per share, resulting in net proceeds of $161.0 million after deducting underwriting discounts and commissions and other offering expenses. On June 20, 2018, we issued and sold an additional 645,000 shares of our common stock at the public offering price of $40.00 per share, pursuant to the underwriters' full exercise of their option to purchase additional shares of common stock, resulting in additional net proceeds of $24.3 million after deducting underwriting discounts and commissions.
On August 19, 2019, we issued and sold 10,810,810 shares of our common stock in a follow-on public offering at a public offering price of $37.00 per share, resulting in net proceeds of $375.4 million after deducting underwriting discounts and commissions and other offering expenses. On September 3, 2019, we issued and sold an additional 1,621,621 shares of our common stock at the public offering price of $37.00 per share, pursuant to the underwriters' full exercise of their option to purchase additional shares of common stock, resulting in additional net proceeds of $56.4 million after deducting underwriting discounts and commissions.
On February 19, 2020, we issued and sold 3,181,818 shares of our common stock in a follow-on public offering at a public offering price of $55.00 per share, resulting in net proceeds of $163.7 million after deducting underwriting discounts and commissions and other offering expenses. On February 25, 2020, we issued and sold an additional 477,272 shares of our common stock at the public offering price of $55.00 per share, pursuant to the underwriters' full exercise of their option to purchase additional shares of common stock, resulting in additional net proceeds of $24.7 million after deducting underwriting discounts and commissions.
21

Table of Contents
In August 2020, we entered into an Open Market Sale Agreement℠ (the Sales Agreement) with Jefferies LLC (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 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 Sales Agreement, but we have no obligation to sell any Shares under the Sales Agreement. We or Jefferies may suspend or terminate the offering of Shares upon notice to the other party and subject to other conditions. As of September 30, 2020, we had not made any sales of Shares pursuant to the Sales Agreement.
Prior to our IPO, we had funded our operations primarily with proceeds from the sales of preferred shares, proceeds from the issuance of convertible notes, payments received under a concluded collaboration agreement, borrowings under a repaid construction loan, and research and development grants from the Kansas Bioscience Authority (KBA).
Since our inception, we have incurred significant operating losses. Our ability to generate product revenues sufficient to achieve profitability will depend heavily on the successful commercialization of QINLOCK and the development and eventual commercialization of one or more of our drug candidates. Our net loss was $203.7 million for the nine months ended September 30, 2020 and $192.3 million for the year ended December 31, 2019. As of September 30, 2020 we had an accumulated deficit of $691.7 million. We expect to continue to incur significant expenses and operating losses for the foreseeable future. We expect that our expenses and capital requirements will increase in connection with our ongoing activities, particularly as we:
continue our commercial activities in support of the launch of 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.;
continue our Phase 1 clinical trial for QINLOCK;
continue with our ongoing pivotal Phase 3 clinical trial of QINLOCK in second-line GIST;
continue with our ongoing and planned clinical programs for DCC-3014 and rebastinib;
prepare to file an IND and conduct potential development of DCC-3116;
develop any other future drug candidates we may choose to pursue;
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, including without limitation, our efforts to scale up drug substance and drug product manufacturing capabilities for commercial-grade product;
maintain, expand, protect, and enforce our intellectual property portfolio;
develop and expand our sales, marketing, and distribution capabilities for QINLOCK and any current or future drug candidates for which we obtain marketing approval, if any, including in Europe and other potential international capabilities; and
expand our operational, financial, and management systems and increase personnel, including to support our clinical development and commercialization efforts and our operations as a public company, including international operations in Europe and other potential geographies.
As we continue to seek regulatory approval for our drug and drug candidates, including QINLOCK for the treatment of second-line GIST patients, 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 incur additional costs associated with continuing to operate as a public company.
As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. We may not be successful in our commercialization of QINLOCK. Until at least such time as we can generate substantial revenue from product sales, if ever, we expect to finance our operations primarily through a combination of equity offerings, debt financings, 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,
22

Table of Contents
or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back, or discontinue the development and commercialization of one or more of our drug candidates.
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 or when or if we will be able to achieve or maintain profitability. Even if we are able to generate substantial product sales of QINLOCK, we may not become profitable. 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 reduce or terminate our operations.
As of September 30, 2020, we had cash, cash equivalents, and marketable securities of $584.3 million. We believe that our cash, cash equivalents, and marketable securities as of September 30, 2020, together with anticipated product revenues, but excluding any potential future milestone payments or other payments under our collaboration or license agreements, if any, will enable us to fund our operating expenses and capital expenditure requirements into the second half of 2022. For additional information, please read the "Liquidity and Capital Resources" section included below.
Recent Developments
QINLOCK
On May 15, 2020, QINLOCK was approved 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. Following the FDA approval of QINLOCK, in May 2020, we commenced commercial sales of QINLOCK in the U.S. and began generating product revenue. In June 2020, QINLOCK was authorized for sale in Canada by Health Canada for the treatment of adult patients with advanced GIST who have received prior treatment with imatinib, sunitinib, and regorafenib. In July 2020, the Australian Therapeutic Goods Administration (TGA) approved QINLOCK for the treatment of adult patients with advanced GIST who have received prior treatment with three or more kinase inhibitors, including imatinib. Additionally, in July 2020, our licensee, Zai, announced that the China National Medical Products Administration (NMPA) accepted the NDA submission for QINLOCK for the treatment of adult patients with advanced GIST who have received prior treatment with three or more kinase inhibitors, including imatinib.
In November 2020, we announced that we submitted and received validation of a marketing authorisation application (EU MAA) by the European Medicines Agency (EMA) for QINLOCK in fourth-line GIST in the European Union (EU). Validation of the EU MAA by the EMA confirms that the application is sufficiently complete for the EMA to begin its formal review process. In preparation for a potential European approval, we intend to establish a direct commercial presence in key European markets and build a targeted infrastructure to commercialize QINLOCK, if approved.
We currently expect to achieve our previously stated QINLOCK clinical milestone of full target enrollment in INTRIGUE, our ongoing Phase 3 study to evaluate QINLOCK compared to sunitinib in 426 patients in second-line GIST, in the fourth quarter of 2020.
At the Market Offering Program
In August 2020, we entered into the Sales Agreement with Jefferies, pursuant to which we may issue and sell shares of our common stock in "at-the-market" offerings having aggregate proceeds of up to $200.0 million from time to time through Jefferies as our sales agent. As of September 30, 2020, we had not made any sales pursuant to the Sales Agreement.
Coronavirus (COVID-19)
The full extent to which the COVID-19 pandemic, or the future outbreak of any other highly infectious or contagious diseases, may impact our business, including our preclinical studies, clinical trial operations, or commercialization efforts will depend on continuously changing circumstances, which are highly uncertain and cannot be predicted at this time, such as the duration of such pandemic including future waves of infection, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. The ongoing fluidity of this situation precludes any prediction as to the full impact of the COVID-19 pandemic but it could have a material adverse effect on our business, financial condition, and results of operations. The COVID-19 pandemic may also have the effect of heightening the risks to which we are subject, including various aspects of our preclinical studies and ongoing clinical trials, the reliance on third parties in our supply chain for materials and manufacturing of our drug and drug candidates, disruptions in health regulatory agencies' operations globally, the volatility of our common stock, our ability to access capital markets, and our ability to successfully launch, commercialize, and generate revenue from QINLOCK.
23

Table of Contents
We are continuing to assess the long-term impact of COVID-19 on our business operations in an effort to mitigate interruption to our clinical programs, research efforts, commercial launch of QINLOCK, and other business activities and to ensure the safety and well-being of our employees, as well as the physicians and patients participating in our clinical studies. Because COVID-19 infections have been reported throughout the U.S. and worldwide, certain national, state, and local governmental authorities have issued orders, proclamations, and/or directives aimed at minimizing the spread of COVID-19. Although some of these restrictions were eased or lifted, in response to local surges and new waves of infection, some countries, states, and local governments have reinstituted these restrictions, and additional, more restrictive orders, proclamations, and/or directives may be issued in the future. In response to the COVID-19 pandemic, we have implemented precautionary measures to protect the health and safety of our employees, partners, and patients, including encouraging all employees, other than those engaged in laboratory research activities, to work-from-home, and requiring adherence to onsite occupancy limits and appropriate safety measures designed to comply with federal, state, and local guidelines.
Our ability to successfully launch, commercialize, and generate revenue from QINLOCK may be adversely affected by the impact of the COVID-19 pandemic. For example, limited hospital access for non-patients, social distancing requirements, and precautionary measures due to COVID-19 have impacted the ability of our sales personnel to interact in-person with customers. In response, we have implemented a virtual launch model, which may adversely affect the ability of our sales professionals to effectively market QINLOCK to physicians, which may have a negative impact on our sales and our market penetration. In addition, in the U.S. we are utilizing various programs to help patients afford our products, including patient assistance programs for eligible patients. Market disruption and rising unemployment caused by the COVID-19 pandemic may lead to increased utilization of our patient assistance programs, which could reduce revenues.
In addition, we continue to actively monitor risks associated with potential interruptions to our clinical studies due to the impact of COVID-19 and are in frequent communication with clinical study sites and contract research organizations (CROs). Some clinical trial sites have maintained or reinstituted restrictions on site visits by sponsors and CROs, initiation of new trials, patient visits, and new patient enrollment as a result of COVID-19. While all of our studies remain open for enrollment, we have provided guidance to our clinical trial sites that new patient enrollment may occur at sites where resources allow these patients to be safely enrolled and closely monitored and enrollment has slowed at, or has been or may in the future be temporarily paused for new patients in some sites. In addition, we continue to work closely with our study sites and CROs to allow for utilization of remote and local assessments, such as televisits, in accordance with FDA guidance, as well as to ensure availability of study drug for patients. While study activities are continuing in the clinical trials we have underway in sites across the globe, and although some of these restrictions have been eased or lifted, we cannot guarantee that COVID-19 precautions, either now or in the future, or the impact of the pandemic, will not directly or indirectly affect the expected timelines for some of our clinical trials.
In light of the changing circumstances surrounding the COVID-19 pandemic, the operating environment remains fluid and uncertain, and the full significance of the impact of the COVID-19 outbreak on our business and the duration for which it may have an impact cannot be determined at this time.
Rebastinib Development Update
Rebastinib is an investigational, orally administered, potent, and selective inhibitor of TIE2 kinase, which plays an important role in regulating tumor angiogenesis, invasiveness, metastasis, and immunotolerance. We are currently studying rebastinib in two Phase 1b/2 studies in combination with chemotherapy, one with paclitaxel and one with carboplatin. Both studies are divided into two parts. Part 1 of each study was designed to select a combination dose of rebastinib with each chemotherapy agent. Part 2 of each study is designed as a Simon 2-stage design; in the first stage, the combinations are being evaluated in multiple solid tumor cohorts in up to 18 patients each. If there are more than four responses in a given cohort, that cohort is expanded to up to a total of 33 patients.
In May 2020, we announced that we have observed in the paclitaxel combination study the required number of responses in the first stage in both the endometrial and ovarian cancer cohorts, two of the cohorts in Part 2 of this study, triggering the expansion of enrollment in these cohorts. In addition, based on the clinical activity observed in Part 1, we have added a cohort for patients with carcinosarcoma in Part 2 of the study.
Components of Our Results of Operations
Revenues
On May 15, 2020, QINLOCK was approved 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. Following the FDA approval of QINLOCK, in May 2020, we commenced commercial sales of QINLOCK in the U.S. and began generating product revenue. We may generate
24

Table of Contents
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 near future will be derived primarily from sales of QINLOCK in the U.S. and, payments, if any, made under the license (the Zai License Agreement) and supply (the Zai Supply Agreement) agreements we entered into with Zai in June 2019 and February 2020, respectively, as well as any collaborations, distributor arrangements, or additional license agreements that we may enter into in the future. We cannot provide assurance as to the timing of future milestone or royalty payments or that we will receive any of these payments at all. We cannot provide assurance as to when or 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 receive marketing approval, if any. We may never succeed in obtaining regulatory approval for any of our drug candidates other than QINLOCK.
Net Product Revenues
Following the FDA approval of QINLOCK in May 2020, we commenced commercial sales of QINLOCK in the U.S. and began generating product revenue. As of September 30, 2020, the Company's only source of product revenues were from the sales of QINLOCK. Product revenues are recorded net of estimates of variable consideration. Please read Note 1, Nature of the Business and Summary of Significant Accounting Policies, of these consolidated financial statements for further details of the reserves recorded for variable considerations.
Zai License Agreement
Pursuant to the terms of the Zai License Agreement, we received an upfront cash payment of $20.0 million and became eligible to receive up to $185.0 million in potential development and commercial milestone payments, consisting of up to $50.0 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 potential annual net sales of QINLOCK, including certain follow-on compounds (the Licensed Products), if approved, in the Greater China region (the Territory), subject to adjustments in specified circumstances.
As of September 30, 2020, QINLOCK had not received regulatory approval in the Territory, and it is not possible to estimate when, or if, we may receive royalty payments or commercial milestones under the Zai License Agreement.
Zai Supply Agreement
Pursuant to the terms of the Zai Supply Agreement, costs incurred by the Company for external manufacturing services are reimbursed by Zai.
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.
Cost of sales for newly launched products, such as QINLOCK, will not be significant until the initial pre-launch inventory is depleted, and additional inventory is manufactured and sold. As a result, the gross margin on sales of QINLOCK for the three and nine months ended September 30, 2020 was enhanced by the use of active pharmaceutical ingredients and components that were previously expensed as research and development expenses prior to the launch of QINLOCK.
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:
successful completion of preclinical studies and clinical trials;
receipt and related terms of marketing approvals from applicable regulatory authorities;
raising additional funds necessary to complete clinical development of and commercialize QINLOCK and any current or future drug candidates for which we receive approval;
25

Table of Contents
obtaining and maintaining patent, trade secret and other intellectual property protection, and regulatory exclusivity for our drug and drug candidates;
making arrangements with third-party manufacturers, or establishing manufacturing capabilities, for both clinical and commercial supplies of our drug and drug candidates;
developing and implementing marketing and reimbursement strategies;
continuing to establish sales, marketing, and distribution capabilities to support the commercial launch of QINLOCK or our drug candidates, if and when approved, whether alone or in collaboration with others such as Zai, our licensee for QINLOCK in the Greater China region;
acceptance of QINLOCK or our drug candidates, if and when approved, by patients, the medical community, and third-party payors;
effectively competing with other therapies;
the ability to obtain clearance or approval of companion diagnostic tests, if required, on a timely basis, or at all;
obtaining and maintaining third-party coverage and adequate reimbursement;
protecting and enforcing our rights in our intellectual property portfolio; and
maintaining a continued acceptable safety profile of our products following approval.
A change in the outcome of any of these variables with respect to the commercialization of QINLOCK or the development of any of our drug candidates would significantly change the costs and timing associated with the commercialization of QINLOCK or development of 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 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 for 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 kinase switch control inhibitor platform technology, or facility expenses, including depreciation or other indirect costs, to specific product dev