arvn-10q_20200331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 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: 001-38672

 

ARVINAS, INC.

(Exact name of registrant as specified in its Charter)

 

 

Delaware

47-2566120

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

 

5 Science Park

395 Winchester Ave.

New Haven, Connecticut

06511

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (203) 535-1456

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common stock, par value $0.001 per share

 

ARVN

 

The Nasdaq Stock Market LLC

 

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 filer

 

  

Accelerated filer

 

Non-accelerated filer

 

☐  

  

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES      NO  

 

As of April 24, 2020, the registrant had 39,149,567 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 

 

 


Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

2

Item 1.

Financial Statements (Unaudited)

2

 

Condensed Consolidated Balance Sheets

2

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

3

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity

4

 

Condensed Consolidated Statements of Cash Flows

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23

Item 4.

Controls and Procedures

23

PART II.

OTHER INFORMATION

25

Item 1.

Legal Proceedings

25

Item 1A.

Risk Factors

25

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

64

Item 6.

Exhibits

65

Signatures

66

 

 

 

i


FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “predict,” “project,” “target,” “potential,” “goals,” “will,” “would,” “could,” “should,” “continue” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

The forward-looking statements in this Quarterly Report on Form 10-Q include, among other things, statements about:

 

the timing and conduct of our clinical trial programs of ARV-110 and ARV-471, including statements regarding the conduct of our ongoing Phase 1/2 clinical trials of ARV-110 and ARV-471 and the period during which the results of the clinical trials will become available;

 

the timing of, and our ability to obtain, marketing approval of ARV-110 and ARV-471, and the ability of ARV-110 and ARV-471 and our other product candidates to meet existing or future regulatory standards;

 

our plans to pursue research and development of other product candidates;

 

the potential advantages of our platform technology and our product candidates;

 

the extent to which our scientific approach and platform technology may potentially address a broad range of diseases;

 

the potential benefits of our arrangements with Yale University and Professor Crews;

 

the potential receipt of revenue from future sales of our product candidates;

 

the rate and degree of market acceptance and clinical utility of our product candidates;

 

our estimates regarding the potential market opportunity for our product candidates;

 

our sales, marketing and distribution capabilities and strategy;

 

our ability to establish and maintain arrangements for manufacture of our product candidates;

 

the potential achievement of milestones and receipt of payments under our collaborations;

 

our ability to enter into additional collaborations with third parties;

 

our intellectual property position;

 

our estimates regarding expenses, future revenues, capital requirements and needs for additional financing;

 

the impact of government laws and regulations; and

 

our competitive position.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements except as required by applicable law.

In this Quarterly Report on Form 10-Q, unless otherwise stated or the context otherwise requires, references to the “Company,” “Arvinas,” “we,” “us,” and “our,” except where the context requires otherwise, refer to Arvinas, Inc. and its consolidated subsidiaries, or any one or more of them as the context may require, and “our board of directors” refers to the board of directors of Arvinas, Inc.

 

 

ii


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Arvinas, INC. and Subsidiaries

Condensed Consolidated Balance Sheets (unaudited)

 

 

 

March 31,

2020

 

 

December 31,

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

36,106,323

 

 

$

9,211,057

 

Marketable securities

 

 

226,728,165

 

 

 

271,661,456

 

Other receivables

 

 

3,878,438

 

 

 

6,280,828

 

Prepaid expenses and other current assets

 

 

3,482,238

 

 

 

3,727,294

 

Total current assets

 

 

270,195,164

 

 

 

290,880,635

 

Property, equipment and leasehold improvements, net

 

 

9,575,768

 

 

 

8,455,411

 

Operating lease right of use assets

 

 

2,650,090

 

 

 

2,278,623

 

Other assets

 

 

28,777

 

 

 

26,757

 

Total assets

 

$

282,449,799

 

 

$

301,641,426

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,020,794

 

 

$

4,556,827

 

Accrued expenses

 

 

6,783,724

 

 

 

7,602,904

 

Deferred revenue

 

 

22,464,819

 

 

 

19,979,525

 

Current portion of operating lease liability

 

 

899,653

 

 

 

673,896

 

Total current liabilities

 

 

33,168,990

 

 

 

32,813,152

 

Deferred revenue

 

 

33,730,795

 

 

 

38,427,882

 

Long term debt

 

 

2,000,000

 

 

 

2,000,000

 

Operating lease liability

 

 

1,842,901

 

 

 

1,714,111

 

Total liabilities

 

 

70,742,686

 

 

 

74,955,145

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 38,672,433 and 38,461,353 shares

   issued and outstanding as of March 31, 2020 and December 31, 2019,

   respectively

 

 

38,672

 

 

 

38,461

 

Accumulated deficit

 

 

(394,296,017

)

 

 

(372,556,846

)

Additional paid-in capital

 

 

606,567,072

 

 

 

599,097,090

 

Accumulated other comprehensive income (loss)

 

 

(602,614

)

 

 

107,576

 

Total stockholders’ equity

 

 

211,707,113

 

 

 

226,686,281

 

Total liabilities and stockholders’ equity

 

$

282,449,799

 

 

$

301,641,426

 

 

See accompanying notes

2


Arvinas, INC. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited)

 

Condensed Consolidated Statements of Operations

 

For the Three Months

Ended March 31,

 

 

 

2020

 

 

2019

 

Revenue

 

$

6,239,628

 

 

$

4,016,489

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

21,726,686

 

 

 

14,190,359

 

General and administrative

 

 

7,925,005

 

 

 

5,640,629

 

Total operating expenses

 

 

29,651,691

 

 

 

19,830,988

 

Income (loss) from operations

 

 

(23,412,063

)

 

 

(15,814,499

)

Other income (expenses)

 

 

 

 

 

 

 

 

Other income, net

 

 

390,009

 

 

 

243,122

 

Interest income

 

 

1,299,133

 

 

 

1,190,523

 

Interest expense

 

 

(16,250

)

 

 

(23,638

)

Total other income

 

 

1,672,892

 

 

 

1,410,007

 

Net loss

 

 

(21,739,171

)

 

 

(14,404,492

)

Net loss per common share, basic and diluted

 

$

(0.56

)

 

$

(0.46

)

Weighted average common shares outstanding, basic

   and diluted

 

 

38,548,483

 

 

 

31,325,516

 

 

Condensed Consolidated Statements of Comprehensive Loss

 

For the Three Months

Ended March 31,

 

 

 

2020

 

 

2019

 

Net loss

 

$

(21,739,171

)

 

$

(14,404,492

)

Other comprehensive gain (loss):

 

 

 

 

 

 

 

 

Unrealized gain (loss) on available-for-sale securities

 

 

(710,190

)

 

 

297,754

 

Comprehensive loss

 

$

(22,449,361

)

 

$

(14,106,738

)

 

See accompanying notes

 

 

3


Arvinas, INC. and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

Total

 

 

 

Common

 

 

Accumulated

 

 

Paid-in

 

 

Comprehensive

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Deficit

 

 

Capital

 

 

Income (Loss)

 

 

Equity

 

Balance at December 31, 2018

 

 

31,235,458

 

 

$

31,236

 

 

$

(302,264,619

)

 

$

439,118,089

 

 

$

(217,723

)

 

$

136,666,983

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

5,177,448

 

 

 

 

 

 

5,177,448

 

Net loss

 

 

 

 

 

 

 

 

(14,404,492

)

 

 

 

 

 

 

 

 

(14,404,492

)

Restricted stock vesting

 

 

133,406

 

 

 

133

 

 

 

 

 

 

(133

)

 

 

 

 

 

 

Unrealized gain on available-for

   -sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

297,754

 

 

 

297,754

 

Balance at March 31, 2019

 

 

31,368,864

 

 

$

31,369

 

 

$

(316,669,111

)

 

$

444,295,404

 

 

$

80,031

 

 

$

127,737,693

 

Balance at December 31, 2019

 

 

38,461,353

 

 

$

38,461

 

 

$

(372,556,846

)

 

$

599,097,090

 

 

$

107,576

 

 

$

226,686,281

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

6,119,711

 

 

 

 

 

 

6,119,711

 

Net loss

 

 

 

 

 

 

 

 

(21,739,171

)

 

 

 

 

 

 

 

 

(21,739,171

)

Restricted stock vesting

 

 

128,732

 

 

 

129

 

 

 

 

 

 

(129

)

 

 

 

 

 

 

Proceeds from exercise of stock

   options

 

 

82,348

 

 

 

82

 

 

 

 

 

 

1,350,400

 

 

 

 

 

 

1,350,482

 

Unrealized loss on available-for

   -sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(710,190

)

 

 

(710,190

)

Balance at March 31, 2020

 

 

38,672,433

 

 

$

38,672

 

 

$

(394,296,017

)

 

$

606,567,072

 

 

$

(602,614

)

 

$

211,707,113

 

 

See accompanying notes

4


 

Arvinas, INC. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(21,739,171

)

 

$

(14,404,492

)

Adjustments to reconcile net loss to net cash

   used in operating activities:

 

 

 

 

 

 

 

 

Amortization of debt discount

 

 

 

 

 

4,491

 

Depreciation and amortization

 

 

617,469

 

 

 

246,159

 

Net accretion of bond discounts/premiums

 

 

366,132

 

 

 

5,383

 

Amortization of right to use assets

 

 

169,904

 

 

 

180,398

 

Stock-based compensation

 

 

6,119,711

 

 

 

5,177,448

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Account receivable

 

 

 

 

 

2,775,831

 

Other receivables

 

 

2,402,390

 

 

 

(213,548

)

Prepaid expenses and other current assets

 

 

243,036

 

 

 

363,434

 

Accounts payable

 

 

(1,911,635

)

 

 

(1,704,241

)

Accrued expenses

 

 

(819,180

)

 

 

(1,053,720

)

Deferred revenue

 

 

(2,211,793

)

 

 

(4,016,489

)

Operating lease liabilities

 

 

(186,824

)

 

 

(93,023

)

Net cash used in operating activities

 

 

(16,949,961

)

 

 

(12,732,369

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of marketable securities

 

 

(8,605,116

)

 

 

(3,261,254

)

Maturities of marketable securities

 

 

52,462,085

 

 

 

42,016,000

 

Purchase of property, equipment and leasehold

   improvements

 

 

(1,362,224

)

 

 

(380,644

)

Net cash provided by investing activities

 

 

42,494,745

 

 

 

38,374,102

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayments of long-term debt

 

 

 

 

 

(45,542

)

Proceeds from exercise of stock options

 

 

1,350,482

 

 

 

 

Net cash provided by (used in) financing activities

 

 

1,350,482

 

 

 

(45,542

)

Net increase in cash and cash equivalents

 

 

26,895,266

 

 

 

25,596,191

 

Cash and cash equivalents, beginning of the period

 

 

9,211,057

 

 

 

3,190,056

 

Cash and cash equivalents, end of the period

 

$

36,106,323

 

 

$

28,786,247

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Purchases of property, equipment and leasehold improvements

   unpaid at period end

 

$

375,602

 

 

$

509,966

 

Cash paid for interest

 

$

16,250

 

 

$

24,563

 

 

See accompanying notes

5


 

Arvinas, INC. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

1. Nature of Business

Arvinas, Inc. and subsidiaries (the Company) is a clinical-stage biopharmaceutical company dedicated to improving the lives of patients suffering from debilitating and life-threatening diseases through the discovery, development and commercialization of therapies that degrade disease-causing proteins. The Company expects to incur additional operating losses and negative operating cash flows for the foreseeable future.

A novel strain of coronavirus (COVID-19) was first identified in December 2019, and subsequently declared a global pandemic by the World Health Organization on March 11, 2020. As a result of the outbreak, many companies have experienced disruptions in their operations and in markets served.  The Company has instated some and may take additional temporary precautionary measures intended to help ensure the well-being of its employees and minimize business disruption. The Company considered the impact of COVID-19 on the assumptions and estimates used and determined that there were no material adverse impacts on the Company’s results of operations and financial position at March 31, 2020. The full extent of the future impacts of COVID-19 on the Company’s operations is uncertain. A prolonged outbreak could have a material adverse impact on financial results and business operations of the Company, including the timing and ability of Company to complete certain clinical trials and other efforts required to advance the development of its targets.

2. Summary of Significant Accounting Policies

Unaudited Interim Financial Statements

The accompanying condensed consolidated financial statements are unaudited and have been prepared by the Company in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission. The year-end condensed consolidated balance sheet data was derived from the Company’s audited financial statements but does not include all disclosures required by U.S. GAAP. These condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the years ended December 31, 2019 and 2018 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission on March 16, 2020 (the Annual Report). The condensed consolidated financial statements, in the opinion of management, reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position and results of operations.

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses, which provides a model for recognizing credit losses on financial instruments based on an estimate of current expected losses, requiring immediate recognition of credit losses expected over the life of a financial instrument. The Company adopted ASU 2016-13 in the first quarter of 2020. The adoption of the standard was immaterial to the accompanying condensed consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases. ASU 2016-02 requires lessees to present right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. The guidance is effective for years beginning after December 15, 2018 and is to be applied using a modified retrospective approach applied at the beginning of the earliest comparative period in the financial statements or in the year of adoption with a cumulative effect to the opening balance of retained earnings. The Company adopted the new guidance as of January 1, 2019 using the modified retrospective adoption method in which it did not restate prior periods. The Company elected the practical expedient to include both lease and non-lease components as a single component and account for it as a lease. In adopting the standard, the Company also elected to utilize several other practical expedients, including not reassessing contracts for classification as a lease, not having to reassess the lease classification of existing leases, and not reassessing the initial direct costs of existing leases. The adoption of this standard resulted in the recognition of right-of-use assets and related lease liabilities of approximately $2.4 million related to its operating lease commitments on the Condensed Consolidated Balance Sheet as of January 1, 2019.

In June 2018, the FASB issued ASU No. 2018-07, Improvements in Nonemployee Share-Based Payment Accounting. ASU 2018-07 aligns the accounting for share-based payment awards to nonemployees with the accounting for share-based awards to employees. ASU 2018-07 is effective for interim and annual reporting periods beginning after

6


 

December 15, 2018 and early adoption is permitted. The Company adopted ASU 2018-07 in the first quarter of 2019. The adoption of the standard was immaterial to the accompanying condensed consolidated financial statements.

During the three months ended March 31, 2020, there were no changes to the Company’s significant accounting policies as described in Note 2 to the financial statements included in the Company’s condensed consolidated financial statements as of December 31, 2019 and 2018 and for the years then ended included in the Annual Report.

3. Research Collaboration and License Agreements

 

In June 2019, the Company and Bayer AG entered into a Collaboration and License Agreement (Bayer Collaboration Agreement) setting forth the Company’s collaboration with Bayer AG to identify or optimize proteolysis targeting chimeras, or PROTAC® targeted protein degraders, that mediate for degradation of target proteins (Targets), using the Company’s proprietary platform technology, which Targets will be selected by Bayer AG, subject to certain exclusions and limitations.  The Bayer Collaboration Agreement became effective in July 2019. Under the terms of the Bayer Collaboration Agreement, the Company received an upfront non-refundable payment of $17.5 million in exchange for the use of the Company’s technology license and a $1.5 million payment to fund research activities. Bayer is committed to fund an additional $10.5 million through 2022, of which $3.0 million was received in the three months ended March 31, 2020. These payments are being recognized over the total estimated period of performance. The Company is also eligible to receive up to $197.5 million in development milestone payments and up to $490.0 million in sales-based milestone payments for all designated Targets. In addition, the Company is eligible to receive, on net sales of PROTAC targeted protein degrader-related products, mid-single digit to low-double digit tiered royalties, which may be subject to reductions.

 

The Company determined that the Bayer Collaboration Agreement and a Stock Purchase Agreement entered into with Bayer AG at the same time should be evaluated as a combined contract in accordance with ASC 606, Revenue from Contracts with Customers, given that the agreements were entered into at the same time and have the same commercial objective to provide funding to further the Company’s research utilizing its proprietary technology. The Company identified the elements under the agreements as license and research revenue and the issuance of the common stock. The Company determined the fair value of the shares sold under the Stock Purchase Agreement to be $2.9 million less than the contractual purchase price stipulated in the agreement. In accordance with the applicable accounting guidance in ASC 815-40, Contracts in Entity’s Own Equity, the Company determined that the sale of stock should be recorded at fair value. Therefore, the Company allocated the additional $2.9 million of consideration received under the Stock Purchase Agreement to the Bayer Collaboration Agreement given that the two contracts were determined to be combined contracts. This amount has, therefore, been added to the total transaction price and was included in initial contract liabilities balances.

In December 2017, the Company entered into a Research Collaboration and License Agreement with Pfizer, Inc. (Pfizer) (the Pfizer Collaboration Agreement). Under the terms of the Pfizer Collaboration Agreement, the Company received an upfront non-refundable payment and certain additional payments totaling $28.0 million in 2018 in exchange for use of the Company’s technology license and to fund Pfizer-related research as defined within the agreement. These payments are being recognized as revenue over the total estimated period of performance. The Company is also eligible to receive up to an additional $37.5 million in non-refundable option payments if Pfizer exercises its options for all targets under the agreement. Pfizer exercised an option for $2.5 million in December 2018 and the amount was included in accounts receivable at December 31, 2018. The option will be recognized as revenue over the estimated period of performance. The Company is also entitled to receive up to $225 million in development milestone payments and up to $550 million in sales-based milestone payments for all designated targets under the Pfizer Collaboration Agreement, as well as tiered royalties based on sales. Pfizer paid the Company $1.2 million in December 2019 and $1.0 million in March 2020 relating to adding additional targets into the collaboration. These payments are being recognized over the estimated period of performance.

In September 2015, the Company entered into an Option and License Agreement with Genentech, Inc. and F. Hoffman-La Roche Ltd. (together, Genentech) (the Genentech Agreement). During 2015, the Company received an upfront non-refundable payment of $11.0 million in exchange for use of the Company’s technology license and to fund Genentech-related research as defined within the Genentech Agreement. In November 2017, the Company entered into an Amended and Restated Option, License, and Collaboration Agreement with Genentech, Inc. and F. Hoffman-La Roche Ltd. (the Genentech Modification), amending the Genentech Agreement. Under the Genentech Modification, the Company received additional upfront non-refundable payments of $34.5 million to fund Genentech-related research and Genentech has the right to designate up to ten targets. The Company is eligible to receive up to $27.5 million in additional expansion target payments if Genentech exercises its options on all remaining targets. Upfront non-refundable payments are

7


 

recognized as revenue over the total estimated period of performance. The Company is eligible to receive up to $44.0 million per target in development milestone payments, $52.5 million in regulatory milestone payments and $60.0 million in commercial milestones based on sales as well as tiered royalties based on sales.

Information about contract liabilities, which are recorded as deferred revenue on the condensed consolidated balance sheets, is as follows:

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Contract liabilities

 

$

56,195,615

 

 

$

58,407,408

 

Revenues recognized in the period from

 

 

 

 

 

 

 

 

Amounts included in deferred revenue in previous periods

 

$

5,182,381

 

 

$

14,335,188

 

 

Changes in deferred revenue from December 31, 2019 to March 31, 2020 were due to additions to deferred revenue of $4.0 million related to the Bayer Collaboration Agreement and Pfizer Collaboration Agreement and $6.2 million of revenue recognized on the research collaboration and license agreements.

The aggregate amount of the transaction price allocated to performance obligations that are unsatisfied as of March 31, 2020 was $56.2 million, which is expected to be recognized as revenue for the years ending December 31 are (in millions):

 

Remainder of 2020

 

$

17.2

 

2021

 

 

20.2

 

2022

 

 

14.0

 

2023

 

 

4.8

 

 

 

$

56.2

 

 

4. Fair Value Measurements

ASC Topic 820, Fair Value Measurements and Disclosures, requires disclosure of the fair value of financial instruments held by the Company. ASC 825, Financial Instruments, defines fair value and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The Company’s principal financial instruments are comprised of cash, marketable securities, accounts receivable, accounts payable, accrued liabilities and long-term debt. The carrying value of all financial instruments approximates fair value. The three levels of valuation hierarchy are defined as follows:

Level 1—Inputs are based upon observable or quoted prices for identical instruments traded in active markets.

Level 2—Inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s Level 2 investments consist primarily of corporate notes and bonds and U.S. government and agency securities.

Level 3—Inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.

The Company’s marketable securities consist of corporate bonds which are adjusted to fair value at each balance sheet date, based on quoted prices, which are considered Level 2 inputs.

8


 

The following is a summary of the Company’s available-for-sale securities as of March 31, 2020 and December 31, 2019:

 

March 31, 2020

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

Description

 

Effective

Maturity

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair Value

 

Corporate bonds

 

2020-2021

 

$

139,683,150

 

 

$

83,222

 

 

$

(389,777

)

 

$

139,376,595

 

Corporate bonds

 

2021

 

 

87,647,629

 

 

 

76,525

 

 

 

(372,584

)

 

 

87,351,570

 

 

 

 

 

$

227,330,779

 

 

$

159,747

 

 

$

(762,361

)

 

$

226,728,165

 

 

December 31, 2019

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

Description

 

Effective

Maturity

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair Value

 

Corporate bonds

 

2020

 

$

145,359,876

 

 

$

49,722

 

 

$

 

 

$

145,409,598

 

Corporate bonds

 

2021

 

 

126,194,004

 

 

 

57,854

 

 

 

 

 

 

126,251,858

 

 

 

 

 

$

271,553,880

 

 

$

107,576

 

 

$

 

 

$

271,661,456

 

 

The following tables summarize the fair values and levels within the fair value hierarchy in which the fair value measurements fall for assets and liabilities measured on a recurring basis:

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Description

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

 

 

$

226,728,165

 

 

$

 

 

$

226,728,165

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Description

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

 

 

$

271,661,456

 

 

$

 

 

$

271,661,456

 

 

5. Property, Equipment and Leasehold Improvements

Property, equipment and leasehold improvements consist of the following at:

 

 

 

March 31,

2020

 

 

December 31,

2019

 

Laboratory equipment

 

$

8,840,539

 

 

$

8,045,179

 

Office equipment

 

 

915,129

 

 

 

865,888

 

Leasehold improvements

 

 

3,695,443

 

 

 

2,809,205

 

    Total

 

 

13,451,111

 

 

 

11,720,272

 

Less: accumulated depreciation and amortization

 

 

(3,875,343

)

 

 

(3,264,861

)

Property, equipment and leasehold improvements, net

 

$

9,575,768

 

 

$

8,455,411

 

 

Depreciation and amortization expense totaled $617,469 and $246,159 for the three months ended March 31, 2020 and 2019, respectively.

 

6. Right to Use Assets and Liabilities

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (ROU) assets and operating lease liabilities in the condensed consolidated balance sheets.

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate ranges from 5.1-6.6%. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Some of the Company’s leases include options to extend or terminate the lease. The Company includes these options in the

9


 

recognition of the Company’s ROU assets and lease liabilities when it is reasonably certain that the Company will exercise the option.

The Company has operating leases for its corporate office and certain equipment, which expire no later than December 31, 2022. The leases have a weighted average remaining term of 2.7 years. Maturities of lease liabilities for the years ending December 31 are:

 

Remainder of 2020

 

$

739,049

 

2021

 

 

1,115,850

 

2022

 

 

1,099,232

 

Total lease payments

 

 

2,954,131

 

Less: imputed interest

 

 

(211,577

)

Total

 

$

2,742,554

 

 

The operating lease cost for the three months ended March 31, 2020 and 2019 was $207,107 and $211,509, respectively. The operating cash flows used for the operating leases for the three months ended March 31, 2020 and 2019 were $186,824 and $93,023, respectively. The amortization of the ROU assets for the three months ended March 31, 2020 and 2019 was $169,904 and $180,398, respectively.

7. Accrued Expenses

Accrued expenses consisted of the following at:

 

 

 

March 31,

2020

 

 

December 31,

2019

 

Employee expenses

 

$

1,973,511

 

 

$

5,810,723

 

Research and development expenses

 

 

3,907,224

 

 

 

1,186,935

 

Professional fees and other

 

 

902,989

 

 

 

605,246

 

 

 

$

6,783,724

 

 

$

7,602,904

 

 

8. Long-Term Debt

In August 2013, the Company entered into a Loan Agreement (Loan) and a Stock Subscription Warrant, with Connecticut Innovations, Incorporated (CII). Under the Loan, the Company could draw up to $750,000 for the purpose of purchasing laboratory equipment, information technology equipment and leasehold improvements. Leasehold improvements were limited to $100,000. Interest on the Loan was compounded on a monthly basis at a rate of 7.50% per annum and was required to be paid on a monthly basis beginning on the date of the first draw of funds for 10 months, then with principal payments beginning on June 1, 2015 and payable monthly until the maturity date of July 31, 2019. The Company had the ability to prepay the amount due at any time prior to the maturity date without premium or penalty. The Loan was secured by substantially all of the Company’s assets. The Company paid the loan in full in July 2019. Interest expense recorded related to the amortization of the debt discount in the three months ended March 31, 2019 was $3,090.

 

In connection with an Assistance Agreement with the State of Connecticut (Assistance Agreement) entered into in 2014, under which all the borrowings by the Company were forgiven in accordance with the Assistance Agreement, the Company is required to be located in the State of Connecticut through January 2024, with a default penalty of repayment of the full original funding amount of $2.5 million plus liquidated damages of 7.5%.

In June 2018, the Company entered into an Assistance Agreement with the State of Connecticut (2018 Assistance Agreement) to provide funding for the expansion and renovation of laboratory and office space (Project). Under the terms of the 2018 Assistance Agreement, the Company could borrow from the State of Connecticut a maximum of $2.0 million, provided that the funding does not exceed more than 50% of the total Project costs. In September 2018, the Company borrowed $2.0 million under the 2018 Assistance Agreement, bearing interest at 3.25% per annum and interest payments will be required for the first 60 months from the funding date. Thereafter, the loan begins to fully amortize through month 120, maturing in September 2028. According to the terms of the 2018 Assistance Agreement, up to $1.0 million of the funding thereunder can be forgiven if the Company meets certain employment conditions, as defined therein. The Company may also be required to prepay a portion of the loan if the employment conditions are not met. The 2018 Assistance Agreement requires that the Company be located in the State of Connecticut through September 2028 with a

10


 

default penalty of repayment of the full original funding amount of $2.0 million plus liquidated damages of 7.5% of the total amount of funding received.

Anticipated future minimum payments on long-term debt for the years ending December 31 are:

 

2023

 

$

92,480

 

2024

 

 

377,516

 

Beyond

 

 

1,530,004

 

Total

 

$

2,000,000

 

 

 

During the three months ended March 31, 2020 and 2019, interest expense was $16,250 and $23,638, respectively.

 

9. Equity

In September 2018, the Company adopted the 2018 Employee Stock Purchase Plan (the 2018 ESPP) initially providing participating employees with the opportunity to purchase an aggregate of 311,850 shares of our common stock. The number of shares of our common stock reserved for issuance under the 2018 ESPP increased, pursuant to the terms of the 2018 ESPP, by an additional 323,377 shares, equal to 1% of our then-outstanding common stock, effective as of January 1, 2019, and by an additional 390,371 shares, equal to 1% of our then-outstanding common stock, effective as of January 1, 2020. The first offering period under our 2018 ESPP commenced on January 1, 2020.

All of our employees are eligible to participate in the 2018 ESPP, provided they meet certain employment requirements. On each offering commencement date, each participant will be granted the right to purchase, on the last business day of the offering period, a number of shares of our common stock determined by multiplying $2,083 by the number of full months in the offering period and dividing that product by the closing price of our common stock on the first day of the offering period. On the commencement date of each offering period, each eligible employee may authorize up to a maximum of 15% of the compensation he or she receives during the offering period to be deducted by us during the offering period. Under the terms of the 2018 ESPP, the purchase price shall be determined by our board of directors for each offering period and will be at least 85% of the applicable closing price of our common stock. If our board of directors does not make a determination of the purchase price, the purchase price will be 85% of the lesser of the closing price of our common stock on the first business day of the offering period or the last business day of the offering period.

In the Fourth Amendment to the Company’s Incentive Share Plan (the Incentive Plan) adopted in March 2018, the Company was authorized to issue up to an aggregate of 6,199,477 incentive units pursuant to the Incentive Plan. Generally, incentive units were granted at no less than fair value as determined by the board of managers and had vesting periods ranging from one to four years. The Incentive Plan was terminated in September 2018. In September 2018, the Company’s board of directors adopted and the Company’s stockholders approved the 2018 Stock Incentive Plan (the 2018 Plan), which became effective upon the effectiveness of the registration statement on Form S-1 for the Company’s initial public offering. The number of common shares initially available for issuance under the 2018 Plan is the sum of (1) 4,067,007 shares of common stock; plus (2) the number of shares of common stock (up to 1,277,181) issued in respect of incentive units granted under the Incentive Plan that are subject to vesting immediately prior to the effectiveness of the registration statement that expire, terminate or are otherwise surrendered, cancelled, forfeited or repurchased by the Company at their original issuance price pursuant to a contractual repurchase right; plus (3) an annual increase on the first day of each fiscal year beginning with the fiscal year ending December 31, 2019 and continuing to, and including, the fiscal year ending December 31, 2028, equal to the lowest of 4,989,593 shares of the Company’s common stock, 4% of the number of shares of the Company’s common stock outstanding on the first day of the fiscal year and an amount determined by the Company’s board of directors. The increase in the number of authorized shares for the fiscal years ending December 31, 2020 and 2019 was 1,561,485 and 1,293,510, respectively. Common shares subject to outstanding equity awards that expire or are terminated, surrendered, or canceled without having been fully exercised or are forfeited in whole or in part shall be available for future grants of awards.

 

During the three months ended March 31, 2020, the Company recognized compensation expense of $6,119,711 relating to the issuance of incentive awards, and at March 31, 2020, there was $38,479,111 of compensation expense that is expected to be amortized over a weighted average period of approximately two years.

11


 

The fair value of the stock options granted during the three months ended March 31, 2020 was determined using the Black-Scholes option pricing model with the following assumptions:

 

 

 

March 31,

2020

 

Expected volatility

 

70.3-71.4%

 

Expected term (years)

 

5.6-7.0

 

Risk free interest rate

 

0.8-1.6%

 

Expected dividend yield

 

 

0

%

Exercise price

 

$41.62-49.97

 

 

Given the Company’s common stock has not been trading for a sufficient period of time, the Company utilizes a collection of volatilities of peer companies to estimate the expected volatility of its common stock. The expected term is calculated utilizing the simplified method.

The following table provides a summary of the restricted stock grant activity under the Incentive Plan during the three months ended March 31, 2020. These amounts include restricted stock granted to employees, directors and consultants.

 

 

 

Shares

 

 

Weighted Average

Grant Date

Fair Value Per

Share

 

Unvested restricted stock at December 31, 2019

 

 

576,074

 

 

$

16.00

 

Vested

 

 

(87,336

)

 

$

16.00

 

Forfeited

 

 

(4,114

)

 

$

16.00

 

Unvested restricted stock at March 31, 2020

 

 

484,624

 

 

$

16.00

 

 

The following table provides a summary of the stock option activity under the 2018 Plan during the three months ended March 31, 2020. These amounts include stock options granted to employees, directors and consultants.

 

 

 

Options

 

 

Weighted Average

Fair Value

 

Outstanding at December 31, 2019

 

 

3,432,198

 

 

$

11.32

 

Granted

 

 

1,093,642

 

 

$

29.77

 

Exercised

 

 

(82,348

)

 

$

10.00

 

Forfeited

 

 

(10,648

)

 

$

10.56

 

Outstanding at March 31, 2020

 

 

4,432,844

 

 

$

15.90

 

Exercisable at March 31, 2020

 

 

1,295,014

 

 

$

10.45

 

 

The following table provides a summary of the restricted stock unit activity under the 2018 Plan during the three months ended March 31, 2020. These amounts include restricted stock units granted to employees.

 

 

 

Shares

 

 

Weighted Average

Grant Date

Fair Value Per

Share

 

Unvested restricted stock units at December 31, 2019

 

 

181,372

 

 

$

20.00

 

Vested

 

 

(41,336

)

 

$

19.36

 

Unvested restricted stock units at March 31, 2020

 

 

140,036

 

 

$

20.19

 

 

At March 31, 2020, there were 418,697 restricted shares under the Incentive Plan, 4,020,181 stock options under the 2018 Plan, and 109,434 restricted stock units under the 2018 Plan that vested and are expected to vest.

10. Income Taxes

The Company’s effective tax rate was 0.0% for the three months ended March 31, 2020 and 2019. The primary reconciling items between the federal statutory rate of 21.0% for the three months ended March 31, 2020 and 2019 and

12


 

the Company’s overall effective tax rate of 0.0% was the effect of equity compensation and the valuation allowance recorded against the full amount of its net deferred tax assets.

Valuation allowance is established when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The realization of deferred tax assets depends on the generation of future taxable income during the period in which related temporary differences become deductible.

The Company is subject to tax in the U.S. Federal jurisdiction and the states of Connecticut and Massachusetts. The Company pays franchise tax in the states mentioned above due to its loss position. As a result, there is no state income tax provision recorded for the three months ended March 31, 2020 and 2019.

 

11. Net Loss Per Common Share

Basic and diluted loss per common share were calculated as follows:

 

 

 

For the Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Net loss

 

$

(21,739,171

)

 

$

(14,404,492

)

Weighted average number of common shares

   outstanding, basic and diluted

 

 

38,548,483

 

 

 

31,325,516

 

Net loss per common share

 

$

(0.56

)

 

$

(0.46

)

 

The Company’s potential dilutive securities have been excluded from the computation of diluted net loss per common share as the effect would be to reduce the net loss per common share. The following common share equivalents have been excluded from the calculations of diluted loss per common share because their inclusion would have been antidilutive for the three months ended March 31:

 

 

 

2020

 

 

2019

 

Stock options

 

 

4,432,844

 

 

 

3,300,578

 

Restricted stock

 

 

484,624

 

 

 

957,385

 

Restricted stock units

 

 

140,036

 

 

 

176,841

 

 

 

 

5,057,504

 

 

 

4,434,804

 

 

12. Investment in Equity Method Investee

In June 2019, the Company entered into an agreement to establish a joint venture (Commitment Agreement) with Bayer CropScience LP (Bayer LP) to research, develop and commercialize PROTAC targeted protein degraders for applications in the field of agriculture. In July 2019, the Company and Bayer LP completed the formation of the joint venture entity, Oerth Bio LLC (Oerth), a limited liability corporation. Pursuant to the terms of the Commitment Agreement, the Company made an in-kind intellectual property contribution to Oerth in the form of a license to certain of the Company’s proprietary technology. Bayer LP has made a $56.0 million total cash commitment to Oerth and an in-kind intellectual property contribution. The Company and Bayer LP each hold an ownership interest in Oerth initially representing 50% of the ownership interests. A 15% ownership interest of Oerth is reserved for the future grant of incentive units to employees and service providers of Oerth.

Under the Commitment Agreement, the Company has no obligation to provide any additional funding and the Company’s ownership interest will not be diluted from future contributions from Bayer LP. The Company has no exposure to future losses of Oerth. The activities of Oerth are controlled by a management board under the joint control of the Company and Bayer LP. As Oerth is jointly controlled by the Company and Bayer LP, the Company accounts for its 50% interest using the equity method of accounting. The Company determined that Oerth is a variable interest entity and, accordingly, the Company has evaluated the significant activities of Oerth under the variable interest entity model and concluded that the significant activities consist primarily of research and development activities and, as the Company does not have the sole power to direct such activities, the Company is not the primary beneficiary.

The Company will also provide to Oerth compensated research and development services and administrative services through a separate agreement. The services rendered by the Company during the three months ended March 31, 2020 were insignificant.

13


 

Total operating expenses and net loss of Oerth for the three months ended March 31, 2020 was $1.2 million and $1.1 million, respectively.

The Company’s initial investment in Oerth was $49.4 million which represented the fair value of shares received in exchange for the contribution of the license. The elimination of the intra-entity profit component of the revenue resulted in a reduction in the balance of the investment in Oerth, bringing its initial carrying value of the investment to $24.7 million. After recognition of its proportionate share of Oerth’s losses for the period the carrying value of the investment is now $0.

 

14


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of financial condition and operating results together with our condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2019 filed on March 16, 2020. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in or implied by these forward-looking statements. For convenience of presentation some of the numbers have been rounded in the text below.

Overview

We are a clinical-stage biopharmaceutical company dedicated to improving the lives of patients suffering from debilitating and life-threatening diseases through the discovery, development and commercialization of therapies to degrade disease-causing proteins. We use our proprietary technology platform to engineer proteolysis targeting chimeras, or PROTAC targeted protein degraders, that are designed to harness the body’s own natural protein disposal system to selectively remove disease-causing proteins. We believe that our targeted protein degradation approach is a therapeutic modality that may provide distinct advantages over existing modalities, including traditional small molecule therapies and gene-based medicines. Our small molecule PROTAC technology has the potential to address a broad range of intracellular disease targets, including those representing the up to 80% of proteins that cannot be addressed by existing small molecule therapies, commonly referred to as “undruggable” targets. We are using our PROTAC platform to build an extensive pipeline of protein degradation product candidates to target diseases in oncology, neuroscience, and other therapeutic areas.

Our two lead product candidates are ARV-110 and ARV-471. We are developing ARV-110, a PROTAC protein degrader targeting the androgen receptor protein, or AR, for the treatment of men with metastatic castration-resistant prostate cancer, or mCRPC. We initiated a Phase 1 clinical trial of ARV-110 in March 2019. We are also developing ARV-471, a PROTAC protein degrader targeting the estrogen receptor protein, or ER, for the treatment of patients with locally advanced or metastatic ER positive / HER2 negative breast cancer. We initiated a Phase 1 clinical trial for ARV-471 in August 2019. In the fourth quarter of 2019 and the first quarter of 2020, we amended the protocols for each of our Phase 1 clinical trials for ARV-110 and ARV-471, respectively, to include the Phase 2 expansion cohorts that would initiate once recommended doses and schedules have been determined.

In October 2019, we announced initial safety, tolerability and pharmacokinetic data from the ongoing Phase 1/2 clinical trial for each of ARV-110 and ARV-471. The initial data from these Phase 1/2 clinical trials showed dose proportionality for ARV-110 and that exposures of both ARV-110 and ARV-471 have reached levels associated with tumor growth inhibition in preclinical studies. In addition, the data disclosed in October 2019 for both ARV-110 and ARV-471 showed that each dose tested had been well tolerated and that no dose-limiting toxicities and no grade 2, 3, or 4 related adverse events had been observed. Since October 2019, dose escalation for each of the Phase 1/2 clinical trials has continued and both trials are currently ongoing. We expect to share additional clinical data from the dose escalation of the Phase 1/2 trial of ARV-110 at the American Society of Clinical Oncology (ASCO) annual meeting in the second quarter of 2020 and from the dose escalation portion of the Phase 1/2 trial of ARV-471 in the second half of 2020.

A novel strain of coronavirus (COVID-19) was first identified in December 2019, and subsequently declared a global pandemic by the World Health Organization on March 11, 2020. As a result of the outbreak, many companies have experienced disruptions in their operations and in markets served.  We have instated some and may take additional temporary precautionary measures intended to help ensure our employees well-being and minimize business disruption. We considered the impact of COVID-19 on the assumptions and estimates used and determined that there were no material adverse impacts on our results of operations and financial position at March 31, 2020. The full extent of the future impacts of COVID-19 on our operations is uncertain. A prolonged outbreak could have a material adverse impact on our financial results and business operations, including the timing and our ability to complete certain clinical trials and other efforts required to advance the development of our targets.

We commenced operations in 2013, and our operations to date have been limited to organizing and staffing our company, business planning, raising capital, conducting discovery and research activities, filing patent applications, identifying potential product candidates, undertaking preclinical studies, establishing arrangements with third parties for the manufacture of initial quantities of our product candidates and conducting early-stage clinical trials. To date, we have not generated any revenue from product sales and have financed our operations primarily through sales of our equity interests, proceeds from our collaborations, grant funding and debt financing. Through March 31, 2020, we raised approximately $386.8 million in gross proceeds from the sale of common stock, the exercise of stock options, and the sale

15


 

of Series A, Series B and Series C convertible preferred units, and had received an aggregate of $116.4 million in payments from collaboration partners, grant funding and partially forgivable loans from the State of Connecticut.

We are a clinical-stage company. ARV-110 and ARV-471 are each in a Phase 1/2 clinical trial and our other drug discovery activities are at the research and preclinical development stages. Our ability to generate revenue from product sales sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our product candidates. Since inception, we have incurred significant operating losses. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. Our net loss was $21.7 million for the three months ended March 31, 2020, $70.3 million for the year ended December 31, 2019 and $41.5 million for the year ended December 31, 2018. As of March 31, 2020, we had an accumulated deficit of $394.3 million.

Our total operating expenses were $29.7 million for the three months ended March 31, 2020, $94.5 million for the year ended December 31, 2019 and $58.1 million for the year ended December 31, 2018. We anticipate that our expenses will increase substantially due to costs associated with our anticipated clinical activities for ARV-110 and ARV-471, development activities associated with our other product candidates, research activities in oncology, neurological and other disease areas to expand our pipeline, hiring additional personnel in research, clinical trials, quality and other functional areas, increased expenses incurred with contract manufacturing organizations, or CMOs, to supply us with product for our preclinical studies and clinical trials, as well as other associated costs including the management of our intellectual property portfolio.

We do not expect to generate revenue from sales of any product for many years, if ever. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research or product development programs or any future commercialization efforts, or to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us.

Financial Operations Overview

Revenue

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the foreseeable future. Our revenues to date have been generated through research collaboration and license agreements. Revenue is recognized ratably over our expected performance period under each agreement. We expect that any revenue for the next several years will be derived primarily from our current collaboration agreements and any additional collaborations that we may enter into in the future. To date, we have not received any royalties under any of the collaboration agreements.

Genentech License Agreement

In September 2015, we entered into an Option and License Agreement with Genentech, Inc. and F. Hoffmann-La Roche Ltd, collectively referred to as Genentech, focused on PROTAC targeted protein degrader discovery and research for target proteins, or Targets, based on our proprietary platform technology, other than excluded Targets as described below. This collaboration was expanded in November 2017 through an Amended and Restated Option, License and Collaboration Agreement, which we refer to as the Restated Genentech Agreement.

Under the Restated Genentech Agreement, Genentech has the right to designate up to ten Targets for further discovery and research utilizing our PROTAC platform technology. Genentech may designate as a Target any protein to which a PROTAC targeted protein degrader, by design, binds to achieve its mechanism of action, subject to certain exclusions. Genentech also has the right to remove a Target from the collaboration and substitute a different Target that is not an excluded Target at any time prior to our commencing research on such Target or in certain circumstances following commencement of research by us.

At the time we entered into the original agreement with Genentech we received an upfront payment of $11.0 million, and at the time we entered into the Restated Genentech Agreement, we received an additional $34.5 million in upfront payments and expansion target payments. We are eligible to receive up to an aggregate of $27.5 million in additional expansion target payments if Genentech exercises its options for all remaining Targets. We are also eligible to receive payments aggregating up to $44.0 million per Target upon the achievement of specified development milestones; payments aggregating up to $52.5 million per Target (assuming approval of two indications) subject to the achievement of specified regulatory milestones; and payments aggregating up to $60.0 million per PROTAC targeted protein degrader

16


 

directed against the applicable Target, subject to the achievement of specified sales milestones. These milestone payments are subject to reduction if we do not have a valid patent claim covering the licensed PROTAC targeted protein degrader at the time the milestone is achieved. We are also eligible to receive, on net sales of licensed PROTAC targeted protein degraders, mid-single digit royalties, which may be subject to reductions.

Pfizer Collaboration Agreement

In December 2017, we entered into a Research Collaboration and License Agreement with Pfizer, Inc., or Pfizer, setting forth our collaboration to identify or optimize PROTAC targeted protein degraders that mediate for degradation of Targets, using our proprietary platform technology that are identified in the agreement or subsequently selected by Pfizer, subject to certain exclusions. We refer to this agreement as the Pfizer Collaboration Agreement.

Under the Pfizer Collaboration Agreement, Pfizer has designated a number of initial Targets. For each identified Target, we and Pfizer will conduct a separate research program pursuant to a research plan. Pfizer may make substitutions for any of the initial Target candidates, subject to the stage of research for such Target.

In the year ended December 31, 2018, we received an aggregate of $28.0 million in upfront payments and certain additional payments under the terms of the Pfizer Collaboration Agreement. We are also eligible to receive up to an additional $37.5 million in non-refundable option payments if Pfizer exercises its options for all Targets under the agreement. In the three months ended March 31, 2020 and the year ended December 31, 2019, we received an aggregate of $1.0 million and $4.0 million, respectively, for option and substitution target payments under the agreement. We are also entitled to receive up to $225.0 million in development milestone payments and up to $550.0 million in sales-based milestone payments for all designated Targets under the agreement, as well as mid- to high-single digit tiered royalties based on sales of PROTAC targeted protein degrader-related products, which may be subject to reductions.

Bayer Collaboration Agreement

 

In June 2019, we entered into the Bayer Collaboration Agreement with Bayer, setting forth our collaboration to identify or optimize PROTAC targeted protein degraders that mediate for degradation of Targets, using our proprietary platform technology, that are selected by Bayer, subject to certain exclusions and limitations.  The Bayer Collaboration Agreement became effective in July 2019.

 

Under the Bayer Collaboration Agreement, we and Bayer will conduct a research program pursuant to separate research plans mutually agreed to by us and Bayer and tailored to each Target selected by Bayer. Bayer may make substitutions for any such initial Target candidates, subject to certain conditions and based on the stage of research for such Target. During the term of the Bayer Collaboration Agreement, we are not permitted, either directly or indirectly, to design, identify, discover or develop any small molecule pharmacologically-active agent whose primary mechanism of action is, by design, directed to the inhibition or degradation of any Target selected or reserved by Bayer, or grant any license, covenant not to sue or other right to any third party in the field of human disease under the licensed intellectual property for the conduct of such activities.

 

Under the terms of the Bayer Collaboration Agreement, we received an aggregate upfront non-refundable payment of $17.5 million, plus an additional $1.5 million in research funding payments. Bayer is committed to fund an additional $10.5 million, of which $3.0 million was received in the three months ended March 31, 2020, in research funding payments through 2022, subject to potential increases if our costs for research activities exceed the research funding payments allocated to a Target and certain conditions are met. We are also eligible to receive up to $197.5 million in development milestone payments and up to $490.0 million in sales-based milestone payments for all designated Targets. In addition, we are eligible to receive, on net sales of PROTAC targeted protein degrader-related products, mid-single digit to low-double digit tiered royalties, which may be subject to reductions.

Operating Expenses

Our operating expenses since inception have consisted solely of research and development costs and general and administrative costs.

17


 

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our research activities, including our discovery efforts, and the development of our product candidates, and include:

 

salaries, benefits and other related costs, including stock-based compensation expense, for personnel engaged in research and development functions;

 

expenses incurred under agreements with third parties, including contract research organizations and other third parties that conduct research and preclinical activities on our behalf as well as third parties that manufacture our product candidates for use in our preclinical studies and clinical trials;

 

costs of outside consultants, including their fees, stock-based compensation and related travel expenses;

 

the costs of laboratory supplies and developing preclinical study and clinical trial materials;

 

facility-related expenses, which include direct depreciation costs of equipment and allocated expenses for rent and maintenance of facilities and other operating costs; and

 

third-party licensing fees.

We expense research and development costs as incurred.

We typically use our employee and infrastructure resources across our development programs, and as such, do not track all our internal research and development expenses on a program-by-program basis. The following table summarizes our research and development expenses for our AR program, ER program and all other platform and exploratory research and development costs:

 

 

 

For the Three Months

Ended March 31,

 

(in thousands)

 

2020

 

 

2019

 

AR program costs

 

$

3,848

 

 

$

2,856

 

ER program costs

 

 

4,122

 

 

 

1,794

 

Other research and development costs

 

 

13,757

 

 

 

9,540

 

Total research and development costs

 

$

21,727

 

 

$

14,190

 

 

Research and development activities are central to our business model. We expect that our research and development expenses will continue to increase substantially for the foreseeable future as we conduct clinical trials for ARV-110 and ARV-471 and continue to discover and develop additional product candidates.

We cannot reasonably estimate or determine with certainty the duration and costs of future clinical trials of ARV-110 and ARV-471 or any other product candidate we may develop or if, when, or to what extent we will generate revenue from the commercialization and sale of any product candidate for which we obtain marketing approval. We may never succeed in obtaining marketing approval for any product candidate. The successful development and commercialization of our product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

 

successful completion of preclinical studies;

 

successful initiation of clinical trials;

 

successful patient enrollment in and completion of clinical trials;

 

receipt and related terms of marketing approvals from applicable regulatory authorities;

 

obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates;

 

making arrangements with third-party manufacturers, or establishing manufacturing capabilities, for both clinical and commercial supplies of our product candidates;

 

establishing sales, marketing and distribution capabilities and launching commercial sales of our products, if and when approved, whether alone or in collaboration with others;

 

acceptance of our products, if and when approved, by patients, the medical community and third-party payors;

18


 

 

obtaining and maintaining third-party coverage and adequate reimbursement;

 

maintaining a continued acceptable safety profile of the products following approval; and

 

effectively competing with other therapies.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the U.S. Food and Drug Administration, or FDA, or another regulatory authority were to require us to conduct clinical trials beyond those that we anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in our clinical trials due to patient enrollment or other reasons, we would be required to expend significant additional financial resources and time on the completion of clinical development.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive, finance, business development and administrative functions. General and administrative expenses also include legal fees relating to intellectual property and corporate matters; professional fees for accounting, auditing, tax and consulting services; insurance costs; travel expenses; and facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.

We expect that our general and administrative expenses will increase in the future as we increase our personnel headcount to support increased research and development activities relating to our product candidates. We also expect to incur increased expenses associated with being a public company, including costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with Nasdaq and Securities and Exchange Commission requirements; director and officer insurance costs; and investor and public relations costs.

Interest Income (Expense)

Interest income consists of interest earned on our cash, cash equivalents and short-term investments. Interest income has increased in 2020 as we invest our excess cash from the proceeds of our public offerings. Interest expense consists of interest paid or accrued on our outstanding debt. Interest expense was approximately $16,000 and $24,000 for the three months ended March 31, 2020 and 2019, respectively. Interest expense has decreased in 2020 due to one loan being fully paid off in July 2019.

Income Taxes

Since our inception in 2013, we have not recorded any U.S. federal or state income tax benefits for the net losses we have incurred in any year or for our federal earned research and development tax credits, due to our uncertainty of realizing a benefit from those items. As of December 31, 2019, we had federal net operating loss carryforwards of $103.5 million, which begin to expire in 2033. As of December 31, 2019, we also had federal and state research and development tax credit carryforwards of $5.1 million and $2.6 million, respectively, which begin to expire in 2033 and 2028, respectively.

As of March 31, 2020, Arvinas, Inc. had four wholly owned subsidiaries organized as C-corporations: Arvinas Operations, Inc., Arvinas Androgen Receptor, Inc., Arvinas Estrogen Receptor, Inc., and Arvinas Winchester, Inc. Prior to December 31, 2018, these subsidiaries were separate filers for federal tax purposes. Net operating loss carryforwards are generated from the C-corporation subsidiaries’ filings. We have provided a valuation allowance against the full amount of the deferred tax assets since, in the opinion of management, based upon our earnings history, it is more likely than not that the benefits will not be realized.

Critical Accounting Policies and Use of Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of our condensed consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, costs and expenses and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about

19


 

the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

For a discussion of our significant accounting policies and recent accounting pronouncements, see Note 2 to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and Note 2 to the financial statements included in our consolidated financial statements as of December 31, 2019 and 2018 and for the years then ended included in our Annual Report on Form 10-K for the year ended December 31, 2019 filed on March 16, 2020.  

Results of Operations

Comparison of Three Months ended March 31, 2020 and 2019

Revenues

Revenues for the three months ended March 31, 2020 were $6.2 million, as compared to $4.0 million for the three months ended March 31, 2019. The increase in revenues of $2.2 million over the prior year is primarily due to the revenues related to the Bayer Collaboration Agreement, which was initiated in the third quarter of 2019, and an increase in license and rights to technology fees and research and development activities related to the Pfizer Collaboration Agreement.

Research and Development Expenses

Research and development expenses for the three months ended March 31, 2020 were $21.7 million, compared with $14.2 million for the three months ended March 31, 2019. The increase of $7.5 million was primarily due to an increase in our continued investment in our platform and exploratory programs of $4.2 million, expenses related to our ER program of $2.3 million and AR program of $0.9 million. The increase in spending over all of our programs was primarily due to increased personnel and personnel costs utilized across all of our programs of $2.6 million. Direct expenses related to our platform and exploratory targets increased by $1.7 million as we expanded the number of protein targets in the exploratory phase. Clinical trial and related drug manufacturing costs for our AR and ER programs increased by $4.2 million with the two clinical trials in progress in 2020, partially offset by a decrease in lead optimization and IND-enabling costs for these programs of $1.0 million.

General and Administrative Expenses

General and administrative expenses were $7.9 million for the three months ended March 31, 2020, compared with $5.6 million for the three months ended March 31, 2019. The increase of $2.3 million was primarily due to an increase of personnel and facility related costs of $2.1 million, including $0.5 million related to stock compensation expense.

Other Income (Expenses)

Other income was $1.7 million for the three months ended March 31, 2020, compared with $1.4 million for the three months ended March 31, 2019. The increase of $0.3 million was primarily related to an increase in interest income and refundable research and development credits from the State of Connecticut.

Liquidity and Capital Resources

Sources of Liquidity

We do not currently have any approved products and have never generated any revenue from product sales. To date, we have financed our operations primarily through the sale of equity interests and through payments from collaboration partners, grant funding and loans from the State of Connecticut. Through March 31, 2020, we raised approximately $386.8 million in gross proceeds from the sale of common stock, and Series A, Series B and Series C convertible preferred units, and had received an aggregate of $116.4 million in payments from collaboration partners, grant funding and forgivable and partially forgivable loans from the State of Connecticut. In October 2018, we completed our initial public offering in which we issued and sold an aggregate of 7,700,482 shares of common stock, including 200,482 additional shares of common stock upon the exercise in part by the underwriters of their option to purchase additional shares at a public offering price of $16.00 per share, for aggregate gross proceeds of $123.2 million before underwriting discounts and commissions and expenses. In July 2019, we sold 1,346,313 shares of common stock to Bayer AG for aggregate gross proceeds of $32.5 million. In November 2019, we completed a follow-on offering in which we issued 5,227,273 shares of common stock at a public offering price of $22.00 per share, for aggregate gross proceeds of $115.0 million before fees and expenses.

20


 

Cash Flows

Our cash, cash equivalents and marketable securities totaled $262.8 million as of March 31, 2020 and $280.9 million as of December 31, 2019. We had outstanding loan balances of $2.0 million as of March 31, 2020 and December 31, 2019.

The following table summarizes our sources and uses of cash for the period presented:

 

 

 

For the Three Months

Ended March 31,

 

(in thousands)

 

2020

 

 

2019

 

Net cash used in operating activities

 

$

(16,950

)

 

$

(12,732

)

Net cash provided by investing activities

 

 

42,495

 

 

 

38,374

 

Net cash provided by (used in) financing activities

 

 

1,350

 

 

 

(46

)

Increase in cash and cash equivalents

 

$

26,895

 

 

$

25,596

 

 

Operating Activities

Net cash used in operating activities for the three months ended March 31, 2020 was $16.9 million, primarily due to our net loss of $21.7 million, a reduction in accounts payable and accrued expenses of $2.7 million, and a reduction in deferred revenue of $2.2 million, partially offset by non-cash charges of $7.2 million and a decrease in other receivables and prepaid expenses of $2.6 million. Non-cash charges were primarily stock compensation expense of $6.1 million and depreciation and amortization of $0.6 million.

Net cash used in operating activities for the three months ended March 31, 2019 was $12.7 million, primarily due to our net loss of $14.4 million, a reduction in deferred revenue of $4.0 million, and a decrease in accounts payable and accrued expenses of $2.8 million, partially offset by non-cash charges of $5.6 million and the receipt of $2.8 million in collaboration partner payments. The reduction in deferred revenue was due to revenue recognized in the period. Non-cash charges were primarily stock compensation expense of $5.2 million and depreciation and amortization of $0.2 million.

Investing Activities

Net cash provided by investing activities for the three months ended March 31, 2020 was $42.5 million, attributable to the maturities of marketable securities in excess of new purchases of marketable securities of $43.9 million, partially offset by purchases of property and equipment of $1.4 million.

Net cash provided by investing activities for the three months ended March 31, 2019 was $38.4 million, attributable to the maturities of marketable securities in excess of new purchases of marketable securities of $38.8 million, partially offset by purchases of property and equipment of $0.4 million.

Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2020 of $1.3 million was attributable to the proceeds from the exercise of stock options.

Net cash used in financing activities for the three months ended March 31, 2019 of $0.1 million was attributable to payments on our long-term debt.

Funding Requirements

Since our inception, we have incurred significant operating losses. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future as we advance the preclinical and clinical development of our product candidates. In addition, we expect to continue to incur additional costs associated with operating as a public company.

Specifically, we anticipate that our expenses will increase substantially if and as we:

 

continue a Phase 1/2 clinical trial of our product candidate, ARV-110, in men with mCRPC;

 

continue a Phase 1/2 clinical trial of our product candidate, ARV-471, in patients with locally advanced or metastatic ER positive / HER2 negative breast cancer;

 

apply our PROTAC platform to advance additional product candidates into preclinical and clinical development;

21


 

 

expand the capabilities of our PROTAC platform;

 

seek marketing approvals for any product candidates that successfully complete clinical trials;

 

ultimately establish a sales, marketing and distribution infrastructure and scale up external manufacturing capabilities to commercialize any products for which we may obtain marketing approval;

 

expand, maintain and protect our intellectual property portfolio;

 

hire additional development, including clinical and regulatory, and scientific personnel; and

 

add operational, financial and management information systems and personnel to support our research, product development and future commercialization efforts and support our operations as a public company.

As of March 31, 2020, we had $262.8 million in cash, cash equivalents and marketable securities. We believe that our cash, cash equivalents and marketable securities as of March 31, 2020 will enable us to fund our planned operating expenses and capital expenditure requirements into 2022. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. Our future capital requirements will depend on many factors, including:

 

the progress, costs and results of our Phase 1/2 clinical trial for ARV-110 and our Phase 1/2 clinical trial for ARV-471 and any future clinical development of ARV-110 and ARV-471;

 

the scope, progress, costs and results of preclinical and clinical development for our other product candidates and development programs;

 

the number of, and development requirements for, other product candidates that we pursue, including our other oncology and neurodegenerative research programs;

 

the success of our collaborations with Pfizer, Genentech and Bayer;

 

the costs, timing and outcome of regulatory review of our product candidates;

 

the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any of our product candidates for which we receive marketing approval;

 

the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;

 

the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims; and

 

our ability to establish collaboration arrangements with other biotechnology or pharmaceutical companies on favorable terms, if at all, for the development or commercialization of our product candidates.

As a result of these anticipated expenditures, we will need to obtain substantial additional financing in connection with our continuing operations. Until such time, if ever, as we can generate substantial revenue from product sales, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. Although we may receive potential future payments under our collaborations with Pfizer, Genentech and Bayer, we do not currently have any committed external source of funds. Adequate additional funds may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on attractive terms, we may be required to delay, limit, reduce or terminate our research, product development programs or any future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

To the extent that we raise additional capital through the sale of equity or convertible debt securities, our stockholders’ ownership interests will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights as common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures or declaring dividends.