214 in patients with Parkinson’s disease to evaluate safety and tolerability in this patient population, as well as motor and
non-motor
exploratory endpoints. In the fourth quarter of 2018, we announced that the Phase 1/2 clinical trial of
ITI-214
has been completed and topline results demonstrated
ITI-214
was generally well-tolerated with a favorable safety profile and clinical signs consistent with improvements in motor symptoms and dyskinesias. In addition, in the first quarter of 2018, the investigational new drug application, or IND, went into effect for
ITI-214
for the treatment of heart failure. The first clinical study in this program, is a randomized, double-blind, placebo-controlled Phase 1/2 study of escalating single doses of
ITI-214
to evaluate safety and hemodynamic effects in patients with systolic heart failure and we anticipate reporting topline results from this study in the first half of 2020.
Our pipeline also includes preclinical programs that are focused on advancing drugs for the treatment of schizophrenia, Parkinson’s disease, AD and other neuropsychiatric and neurodegenerative disorders. We are also investigating the development of treatments for disease modification of neurodegenerative disorders and
non-CNS
diseases, including our
ITI-333
development program.
ITI-333
is designed as a potential treatment for substance use disorders, pain and psychiatric comorbidities including depression and anxiety. There is a pressing need to develop new drugs to treat opioid addiction and safe, effective,
non-addictive
treatments to manage pain. Preclinical safety studies with
ITI-333
are currently ongoing and we expect to initiate a clinical program in 2020.
We have assembled a management team with significant industry experience to lead the discovery, development and commercialization of our product candidates. We complement our management team with a group of scientific and clinical advisors that includes recognized experts in the fields of schizophrenia and other CNS disorders.
The following discussion summarizes the key factors our management believes are necessary for an understanding of our financial statements.
Net revenues from product sales consist of sales of CAPLYTA, which was approved by the FDA on December 2019. We initiated the commercial launch of CAPLYTA in late March 2020 and generated approximately $882,500 in net revenue from product sales in the quarter ended March 31, 2020. In addition, we had approximately $201,000 of grant revenues for the three months ended March 31, 2020 compared to no grant revenue for the three months ended March 31, 2019. We have received and may continue to receive grants from U.S. government agencies and foundations.
We do not expect any revenues that we may generate in the next several years to be significant enough to fund our operations.
The process of researching, developing and commercializing drugs for human use is lengthy, unpredictable and subject to many risks. We are unable with certainty to estimate either the costs or the timelines in which those costs will be incurred. The costs associated with the commercialization of CAPLYTA will be substantial and will be incurred prior to our generating sufficient revenue to offset these costs. Costs for the clinical development of lumateperone for the treatment of bipolar depression consumes and, together with our anticipated clinical development programs for depressive disorders and
ITI-214,
will continue to consume a large portion of our current, as well as projected, resources. We intend to pursue other disease indications that lumateperone may address, but there are significant costs associated with pursuing FDA approval for those indications, which would include the cost of additional clinical trials.
Our
ITI-002
program has a compound,
ITI-214,
in Phase 1/2 development. We intend to pursue the development of our PDE program, including
ITI-214
for the treatment of several CNS and
non-CNS
conditions, including cardiovascular disease. We have initiated our development program for
ITI-214
for Parkinson’s disease. In addition, in the first quarter of 2018, the IND went into effect for
ITI-214
for the treatment of heart failure and our clinical development program for this indication is ongoing. Our other projects are still in the preclinical stages, and will require extensive funding not only to complete preclinical testing, but to commence and complete clinical trials. Expenditures that we incur on these projects will be subject to availability of funding in addition to the funding required for the advancement of lumateperone. Any failure or delay in the advancement of lumateperone could require us to
re-allocate
resources from our other projects to the advancement of lumateperone, which could have a material adverse impact on the advancement of these other projects and on our results of operations. Our operating expenses are comprised of (i) costs of product sales; (ii) research and development expenses; (iii) general and administrative and (iv) selling expenses.
Costs of product sales are comprised of:
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Direct costs of formulating, manufacturing and packaging drug product |
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Overhead costs consisting of labor, customs, stock based compensation, shipping, outside inventory management and other miscellaneous operating costs; and |
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• |
Royalty payments on product sales. |
Research and development costs are comprised of:
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internal recurring costs, such as costs relating to labor and fringe benefits, materials, supplies, facilities and maintenance; and |
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• |
fees paid to external parties who provide us with contract services, such as pre-clinical testing, manufacturing and related testing, clinical trial activities and license milestone payments. |
General and administrative expenses are incurred in three major categories:
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salaries and related benefit costs; |
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patent, legal, and professional costs; and |
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• |
office and facilities overhead. |
Selling expenses are incurred in three major categories:
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salaries and related benefit costs of a dedicated sales force; |
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sales operation costs; and |
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marketing and promotion expenses. |
Product sold through March 31, 2020 generally consisted of drug product that was previously charged to research and development expense prior to FDA approval of CAPLYTA. Because the Company previously expensed drug product the cost of drug product sold is lower than it would have been and has a positive impact on our cost of product sales and related product gross margins for the three months ended March 31, 2020. The Company’s reported cost of product sales as a percentage of product sales, net was 7.9% or approximately $69,000 for the three months ended March 31, 2020. Had direct and overhead costs not been previously recognized into research and development expense, the percentage would have been 14.7% or approximately $130,000.
We will continue to have these favorable results until our sales of CAPLYTA include drug product that is manufactured after the FDA approval. We are currently unable to estimate how long it will be until we begin selling product manufactured post FDA approval.
We expect that research and development expenses will increase moderately as we proceed with our Phase 3 clinical trials of lumateperone for the treatment of bipolar depression and depressive disorders, other clinical trials, increased manufacturing of drug product for clinical trials and
pre-clinical
development activities. We also expect that our general and administrative costs will increase from prior periods primarily due to costs associated with building infrastructure to support the anticipated commercial sales of CAPLYTA, which will include hiring additional personnel and the cost of additional facility space. On September 28, 2018, we signed a lease with a related party to acquire 15,534 square feet of additional office space in our current headquarters facility. We granted options to purchase 1,833,102 shares of our common stock in 2019 and have granted options to purchase an additional 696,161 shares of our common stock in the first quarter of 2020. We also granted time based restricted stock units, or RSUs, for 950,449 of our common stock in 2019 and time based RSUs for 972,746 shares of our common stock in the first quarter of 2020. We will recognize expense associated with these RSUs and options over three years in both research and development expenses and general and administrative expenses. In the first quarter of 2017, we also granted performance based RSUs, which vest based on the achievement of certain milestones that include (i) the submission of an NDA with the FDA for lumateperone for the treatment of schizophrenia, (ii) the approval of the NDA by the FDA, or the Milestone RSUs, and (iii) the achievement of certain comparative shareholder returns against our peers, or the TSR RSUs. The Milestone RSUs were valued at the closing price on March 8, 2017. The RSUs related to the NDA submission were amortized through December 31, 2018 based on the probable vesting date. The NDA submission milestone was achieved in the third quarter of 2018. The Milestone RSUs related to the NDA submission vested on December 31, 2018. The NDA approval milestone was achieved in the fourth quarter of 2019. The Milestone RSUs related to the NDA approval vested on December 31, 2019. The TSR RSUs were valued using the Monte Carlo simulation method and were amortized over the life of the RSU’s which vested on January 24, 2020. In the first quarter of 2020, we also granted performance based RSUs, which vest based on the achievement of certain milestones that include (i) the approval of a planned NDA by the FDA, or the 2020 Milestone RSUs, and (ii) the achievement of certain comparative shareholder returns against our peers, or the 2020 TSR RSUs. The 2020 Milestone RSUs were valued at the closing price on February 18, 2020. The 2020 TSR RSUs were valued using the Monte Carlo simulation method. We expect to continue to grant stock options and other stock-based awards in the future, which with our growing employee base will increase our stock-based compensation expense in future periods.
The following table sets forth our revenues, operating expenses, interest income and income tax expense for the three-month periods ended March 31, 2020 and 2019 (in thousands):
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For the Three Months Ended March 31, |
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General and administrative |
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) |
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) |
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$ |
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Comparison of Three-Month Periods Ended March 31, 2020 and March 31, 2019
Revenues for the three months ended March 31, 2020 and 2019 were $1,083,479 and zero, respectively. Net product sales were approximately $882,500 for the three months ended March 31, 2020 and were comprised of sales of CAPYLTA, which was approved by the FDA on December 20, 2019 and became available to wholesalers in March 2020. No similar net product sales were recognized during the three months ended March 31, 2019. In addition, revenue from a government grant was approximately $201,000 for the three months ended March 31, 2020.
Cost of product sales was approximately $69,000 for the three months ended March 31, 2020. Cost of product sales consisted primarily of product royalty fees, overhead and minimal direct costs. Product sold during the three months ended March 31, 2020 generally consisted of drug product that was previously charged to research and development expense prior to FDA approval of CAPLYTA. This minimal cost drug product had a positive impact on our cost of product sales and related product gross margins for the three months ended March 31, 2020. We will continue to have a lower cost of product sales that excludes the cost of the drug product that was incurred prior to FDA approval until our sales of CAPLYTA include drug product that is manufactured after the FDA approval. We expect that this will be the case for the near-term and as a result, our cost of product sales will be less than we anticipate it will be in future periods. No similar cost of product sales was recognized during the three months ended March 31, 2019.
Research and Development Expenses
The following tables set forth our research and development expenses for the three-month periods ended March 31, 2020 and 2019 (in thousands):
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Three Months Ended March 31, |
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Total research and development expenses |
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$ |
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Three Months Ended March 31, |
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Other projects and overhead |
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Total research and development expenses |
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Research and development expenses decreased to $16.0 million for the three month period ended March 31, 2020 as compared to $25.0 million for the three month period ended March 31, 2019, representing a decrease of approximately 36%. This decrease is due primarily to a decrease of approximately $4.6 million of costs associated with lumateperone clinical costs, a decrease of approximately $3.2 million in manufacturing expense, a decrease of $2.8 million of costs associated with lumateperone
non-clinical
costs, a decrease of approximately $0.1 million for stock compensation expense, all of which are partially offset by an increase of approximately $1.7 million of non
lumateperone
related projects.
As development of lumateperone progresses, we anticipate costs for lumateperone to increase due primarily to ongoing and planned clinical trials relating to our lumateperone programs in the next several years as we conduct Phase 3 and other clinical trials. We are also required to complete
non-clinical
testing to obtain FDA approval and manufacture material needed for clinical trial use, which includes
non-clinical
testing of the drug product and the creation of an inventory of drug product in anticipation of possible FDA approval. We received FDA approval on December 20, 2019 for lumateperone as a treatment for schizophrenia.
We currently have several projects, in addition to lumateperone, that are in the research and development stages, including in the areas of cognitive dysfunction and the treatment of neurodegenerative diseases, including AD, among others. We have used internal resources and incurred expenses not only in relation to the development of lumateperone, but also in connection with these additional projects as well, including our PDE program. We have not, however, reported these costs on a
project-by-project
basis, as these costs are broadly spread among these projects. The external costs for these projects have been modest and are reflected in the amounts discussed in this section “—Research and Development Expenses.”
The research and development process necessary to develop a pharmaceutical product for commercialization is subject to extensive regulation by numerous governmental authorities in the United States and other countries. This process typically takes years to complete and requires the expenditure of substantial resources. The steps required before a drug may be marketed in the United States generally include the following:
|
• |
completion of extensive pre-clinical laboratory tests, animal studies, and formulation studies in accordance with the FDA’s Good Laboratory Practice, or GLP, regulations; |
|
• |
submission to the FDA of an Investigational New Drug application, or IND, for human clinical testing, which must become effective before human clinical trials may begin; |
|
• |
performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug for each proposed indication; |
|
• |
submission to the FDA of a New Drug Application, or NDA, after completion of all clinical trials; |
|
• |
satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities at which the active pharmaceutical ingredient, or API, and finished drug product are produced and tested to assess compliance with current Good Manufacturing Practices, or cGMPs; |
|
• |
satisfactory completion of FDA inspections of clinical trial sites to assure that data supporting the safety and effectiveness of product candidates has been generated in compliance with Good Clinical Practices; and |
|
• |
FDA review and approval of the NDA prior to any commercial marketing or sale of the drug in the United States. |
The successful development of our product candidates and the approval process requires substantial time, effort and financial resources, and is uncertain and subject to a number of risks. We cannot be certain that any of our product candidates will prove to be safe and effective, will meet all of the applicable regulatory requirements needed to receive and maintain marketing approval, or will
Selling, General and Administrative Expenses
Selling, general and administrative costs for the three-month period ended March 31, 2020 were $34.1 million as compared to $11.7 million in the three-month period ended March 31, 2019 which represents an increase of 191%. Below is a breakout of these expenses into selling and general administrative costs for the periods.
General and administrative expenses were $13.3 million in 2020 as compared to $6.5 million for the same period in 2019, an increase of 103%. This increase is due to increased professional fees of $2.1 million, labor and bonus expense of $1.5 million, information technology services of $1.5 million, stock compensation expense of approximately $0.6 million, and the remainder on insurance, lease expense, and other administrative expenses. Salaries, bonuses and related benefit costs for our general and administrative functions for the three months ended March 31, 2020 and 2019 constituted approximately 47% and 64%, respectively, of our general and administrative costs.
Selling costs were $20.8 million for the three-month period ended March 31, 2020 as compared to
pre-commercialization
costs of $5.2 million in the same period in 2019, or an increase of 304%. This increase is primarily due to an increase in sales related labor costs of $9.9 million and commercialization costs of $5.8 million. Salaries, bonuses and related benefit costs for our sales and marketing functions for the three months ended March 31, 2020 and 2019 constituted approximately 53% and 23%, respectively, of our selling costs.
We expect selling, general and administrative costs to increase significantly from the first quarter 2020 as the onboarding of our sales force was completed during the three months ended March 31, 2020 and we are expanding post approval marketing and market access efforts as well as our administrative infrastructure.
Liquidity and Capital Resources
Through March 31, 2020, we provided funds for our operations by obtaining a total of approximately $1.2 billion of cash primarily through public and private offerings of our common stock and other securities, grants from government agencies and foundations and payments received under a terminated license and collaboration agreement. We do not believe that grant revenue will be a significant source of funding in the near future.
On January 10, 2020, we completed a public offering of 10,000,000 shares of our common stock. All of the shares in the offering were sold by the Company, with gross proceeds to the Company of $295.0 million and net proceeds of approximately $277.0 million, after deducting underwriting discounts, commissions and offering expenses.
As of March 31, 2020, we had a total of approximately $450.4 million in cash and cash equivalents,
available-for-sale
investment securities, restricted cash and approximately $31.1 million of short-term liabilities consisting entirely of liabilities from operations, including approximately $3.2 million of short-term lease obligations. In the three months ended March 31, 2020, we spent approximately $52.9 million in cash for operations and equipment, not including an offset of $1.7 million of interest income. We reduced working capital by approximately $41.2 million for the three months ended March 31, 2020. The use of cash was primarily for selling and marketing costs in connection with our commercial launch of CAPLYTA, conducting clinical trials and
non-clinical
testing, product manufacturing, and funding recurring operating expenses.
Based on our current operating plans, we expect that our existing cash, cash equivalents and marketable securities will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months from the filing date of this quarterly report. During that time, we expect that our expenses will increase substantially due primarily to our commercialization activities and related infrastructure expansion in connection with the commercialization of CAPLYTA for the treatment of schizophrenia; the development of lumateperone in our late stage clinical programs; the development of our other product candidates, including
ITI-214;
the continuation of manufacturing activities for anticipated future sales of product and in connection with the development of lumateperone; and general operations.
For the remainder of the year 2020, we expect to spend up to $230 million primarily related to the marketing and commercialization of CAPLYTA, lumateperone clinical development including clinical trial conduct, regulatory activities, manufacturing, expansion of our administrative infrastructure and other development activities. Our other development activities will include efforts related to the
ITI-214
and
ITI-333
programs, among others. However, the
COVID-19
pandemic may negatively impact our commercialization of CAPLYTA, our ability to complete our ongoing or planned preclinical and clinical trials, our ability to obtain approval of any product candidates from the FDA or other regulatory authorities, and our workforce and therefore our research, development and commercialization activities. This may ultimately have a material adverse effect on our liquidity, although we are unable to make any prediction with certainty given the rapidly changing nature of the pandemic and governmental and other responses to it.
We will require significant additional financing in the future to continue to fund our operations. We believe that we have the funding in place to commercialize CAPLYTA in patients with schizophrenia. With our existing cash, cash equivalents and
available-for-sale
investment securities, we believe that we have the funds to complete our ongoing clinical trials of lumateperone in bipolar disorder as a monotherapy and as an adjunctive therapy with lithium or valproate. We also plan to fund additional clinical trials of lumateperone for the treatment of behavioral disturbances in dementia and depressive disorders; preclinical and clinical development of our
ITI-007
long acting injectable development program; additional clinical trials of lumateperone; continued clinical development of our PDE program, including
ITI-214;
research and preclinical development of our other product candidates; and the continuation of manufacturing activities in connection with the development of lumateperone. We anticipate requiring additional funds for further development of lumateperone in patients with bipolar disorder, depressive disorders and other indications, and for development of our other product candidates. We have incurred losses in every year since inception with the exception of 2011, when we received an
up-front
fee and a milestone payment related to a license agreement that has been terminated. These losses have resulted in significant cash used in operations. For the three months ended March 31, 2020, we used net cash in operating activities and purchases of equipment of approximately $52.9 million. This total does not include an offset for $1.7 million of interest income received. While we have several research and development programs underway, the lumateperone program has advanced the furthest and will continue to consume increasing amounts of cash for conducting clinical trials and the testing and manufacturing of product material. As we continue to conduct the activities necessary to pursue FDA approval of lumateperone beyond schizophrenia and our other product candidates, as well as commercialization efforts, we expect the amount of cash to be used to fund operations to increase over the next several years.
We intend to pursue the development of our PDE1 program, including
ITI-214
for the treatment of several CNS and
non-CNS
conditions. We anticipate a moderate increase in our operating expenses related to our PDE development programs. Following the positive safety and tolerability results in our Phase 1 program, we initiated our development program for
ITI-214
for Parkinson’s disease and commenced patient enrollment in the third quarter of 2017 in a Phase 1/2 clinical trial of
ITI-214
in patients with Parkinson’s disease to evaluate safety and tolerability in this patient population, as well as motor and
non-motor
exploratory endpoints. In addition, in the first quarter of 2018, the IND went into effect for
ITI-214
for the treatment of heart failure. Clinical conduct of the first clinical study in this program, a randomized, double-blind, placebo-controlled study of escalating single doses of
ITI-214
to evaluate safety and hemodynamic effects in patients with systolic heart failure, is ongoing. We expect these expenses to increase in the next several years.
We seek to balance the level of cash, cash equivalents and investments on hand with our projected needs and to allow us to withstand periods of uncertainty relative to the availability of funding on favorable terms. Until we can generate significant revenues from operations, we will need to satisfy our future cash needs through public or private sales of our equity securities, sales of debt securities, incurrence of debt from commercial lenders, strategic collaborations, licensing a portion or all of our product candidates and technology and, to a lesser extent, grant funding. On August 30, 2019, we filed a universal shelf registration statement on Form
S-3,
which was declared effective by the SEC on September 12, 2019, on which we registered for sale up to $350 million of any combination of our common stock, preferred stock, debt securities, warrants, rights and/or units from time to time and at prices and on terms that we may determine, which includes up to $75 million of common stock that we may issue and sell from time to time, through SVB Leerink LLC acting as our sales agent, pursuant to the sale agreement that we entered into with SVB Leerink on August 29, 2019 for our
“at-the-market”
equity program. In addition, on January 6, 2020, we filed an automatic shelf registration statement on Form
S-3
with the SEC, which became effective upon filing, on which we registered for sale an unlimited amount of any combination of its common stock, preferred stock, debt securities, warrants, rights, and/or units from time to time and at prices and on terms that we may determine, so long as we continue to satisfy the requirements of a “well-known seasoned issuer” under SEC rules. These registration statements will remain in effect for up to three years from the respective dates they became effective.
We cannot be sure that future funding will be available to us when we need it on terms that are acceptable to us, or at all. We sell securities and incur debt when the terms of such transactions are deemed favorable to us and as necessary to fund our current and projected cash needs. The amount of funding we raise through sales of our common stock or other securities depends on many factors,
including, but not limited to, the magnitude of sales of CAPLYTA, the status and progress of our product development programs, projected cash needs, availability of funding from other sources, our stock price and the status of the capital markets. Due to the volatile nature of the financial markets, equity and debt financing may be difficult to obtain. Additionally, the continued spread of
COVID-19
and uncertain market conditions may limit our ability to access any financing. In addition, any unfavorable results in the commercialization of CAPLYTA and unfavorable development or delay in the progress of our lumateperone program could have a material adverse impact on our ability to raise additional capital.
To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring debt, making capital expenditures or declaring dividends. If we raise additional funds through government or other third-party funding, marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.
If adequate funds are not available to us on a timely basis, we may be required to: (1) delay, limit, reduce or terminate
pre-clinical
studies, clinical trials or other clinical development activities for one or more of our product candidates, including our lead product candidate lumateperone,
ITI-214,
and our other product candidates; (2) delay, limit, reduce or terminate our discovery research or
pre-clinical
development activities; or (3) enter into licenses or other arrangements with third parties on terms that may be unfavorable to us or sell, license or relinquish rights to develop or commercialize our product candidates, technologies or intellectual property at an earlier stage of development and on less favorable terms than we would otherwise agree.
Our cash is maintained in checking accounts, money market accounts, money market mutual funds, U.S. government agency securities, certificates of deposit, commercial paper, corporate notes and corporate bonds at major financial institutions. Due to the current low interest rates available for these instruments, we are earning limited interest income. We do not expect interest income to be a significant source of funding over the next several quarters. Our investment portfolio has not been adversely impacted by the problems in the credit markets that have existed over the last several years, but there can be no assurance that our investment portfolio will not be adversely affected in the future.
In 2014, we entered into a long-term lease with a related party which, as amended, provided for a lease of 16,753 square feet of useable laboratory and office space located at 430 East 29th Street, New York, New York 10016. Concurrent with this lease, we entered into a license agreement to occupy certain vivarium related space in the same facility for the same term, rent and escalation provisions as the lease. This license has the primary characteristics of a lease and is characterized as a lease in accordance with ASU
2016-02
for accounting purposes. In September 2018, we further amended the lease to obtain an additional 15,534 square feet of office space beginning October 1, 2018 and to extend the term of the lease for previously acquired space. The lease, as amended, has a term of 14.3 years ending in May 2029. In February 2019, we entered into a long-term lease for 3,164 square feet of office space in Towson, Maryland beginning March 1, 2019. The lease has a term of 3.2 years ending in April 2022. We anticipate acquiring additional space in 2020 to accommodate our commercial and infrastructure expansion which could result in a moderate increase in facility costs. On May 17, 2019, we entered into a vehicle fleet lease with a company to acquire motor vehicles for certain employees. The vehicle fleet lease provides for individual leases for the vehicles, which at each lease commencement was determined to qualify for operating lease treatment. We began leasing vehicles under the vehicle fleet lease in March 2020.
Off-Balance
Sheet Arrangements
We do not have any
off-balance
sheet arrangements.
Critical Accounting Policies and Estimates
Our critical accounting policies are those policies which require the most significant judgments and estimates in the preparation of our consolidated financial statements. We evaluate our estimates, judgments, and assumptions on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. A summary of our critical accounting policies is presented in Part II, Item 7, of our Annual Report on Form
10-K
for the year ended December 31, 2019 and Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form
10-Q.
There have been no material changes to our critical accounting policies during the three months ended March 31, 2020. With the launch of product sales this quarter, the accounting policy for revenue recognition, which was previously developed, was implemented.
The discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses for the periods presented. Judgments must
also be made about the disclosure of contingent liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management makes estimates and exercises judgment in research and development, including clinical trial accruals. Actual results may differ from those estimates and under different assumptions or conditions.
Recently Issued Accounting Pronouncements
We review new accounting standards to determine the expected financial impact, if any, that the adoption of each such standard will have. For the recently issued accounting standards that we believe may have an impact on our financial statements, see “Recently Issued Accounting Standards” in Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form
10-Q,
and “Recently Issued Accounting Standards” in Note 2 to our audited consolidated financial statements and “Recently Issued Accounting Pronouncements” in our Annual Report on Form
10-K
for the year ended December 31, 2019 filed on March 2, 2020.
Certain Factors That May Affect Future Results of Operations
The SEC encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Quarterly Report on Form
10-Q
contains such “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other important factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about: the accuracy of our estimates regarding expenses, future revenues, uses of cash, cash equivalents and investment securities, capital requirements and the need for additional financing; our expectations regarding our commercialization of CAPLYTA, including the impact of
COVID-19
on the commercialization of CAPLYTA and our ability to adapt our approach as appropriate; the supply and availability of and demand for our product, the initiation, cost, timing, progress and results of our development activities,
non-clinical
studies and clinical trials; the timing of and our ability to obtain and maintain regulatory approval, or submit an application for regulatory approval, of lumateperone and our other existing product candidates, any product candidates that we may develop, and any related restrictions, limitations, and/or warnings in the label of any approved product candidates; our plans to research, develop and commercialize lumateperone and our other current and future product candidates; the election by any collaborator to pursue research, development and commercialization activities; our ability to obtain future reimbursement and/or milestone payments from our collaborators; our ability to attract collaborators with development, regulatory and commercialization expertise; our ability to obtain and maintain intellectual property protection for our product candidates; our ability to successfully commercialize lumateperone and our other product candidates; the performance of our third-party suppliers and manufacturers and our ability to obtain alternative sources of raw materials; our ability to obtain additional financing; our use of the proceeds from our securities offerings; our exposure to investment risk, interest rate risk and capital market risk; and our ability to attract and retain key scientific or management personnel.
Words such as “may,” “anticipate,” “estimate,” “expect,” “may,” “project,” “intend,” “plan,” “believe,” “potential,” “predict,” “project,” “likely,” “will,” “would,” “could,” “should,” “continue” and words and terms of similar substance used in connection with any discussion of future operating or financial performance, identify forward-looking statements. All forward-looking statements are management’s present expectations of future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially and adversely from those described in the forward-looking statements. These risks include, but are not limited to, the following: there are no guarantees that CAPLYTA will be commercially successful; we may encounter issues, delays or other challenges in launching or commercializing CAPLYTA; the
COVID-19
pandemic may negatively impact our commercial plans and sales for CAPLYTA; the
COVID-19
pandemic may negatively impact the conduct of, and the timing of enrollment, completion and reporting with respect to, our clinical trials, whether CAPLYTA receives adequate reimbursement from third-party payers; the degree to which CAPLYTA receives acceptance from patients and physicians for its approved indication; challenges associated with execution of our sales activities, which in each case could limit the potential of our product; results achieved in CAPLYTA in the treatment of schizophrenia following commercialization may be different than observed in clinical trials, and may vary among patients; any other impacts on our business as a result of or related to the
COVID-19
pandemic; risks associated with our current and planned clinical trials; we may encounter unexpected safety or tolerability issues with CAPLYTA for the treatment of schizophrenia or in ongoing or future trials and other development activities; our other product candidates may not be successful or may take longer and be more costly than anticipated; product candidates that appeared promising in earlier research and clinical trials may not demonstrate safety and/or efficacy in larger-scale or later clinical trials; our proposals with respect to the regulatory path for our product candidates may not be acceptable to the FDA; our reliance on collaborative partners and other third parties for development of our product candidates; and the other risk factors detailed under the heading “Risk Factors” in our most recent Annual Report on Form
10-K,
as updated under the heading “Risk Factors” from time to time in our subsequent periodic and current reports filed with the SEC.
Item 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Interest Rate Sensitivity.
As of March 31, 2020, we had cash, cash equivalents, marketable securities and restricted cash of approximately $450.4 million consisting of cash deposited in a highly rated financial institution in the United States, in a short-term U.S. Treasury money market fund, and in high-grade corporate bonds and commercial paper. The primary objective of our investment activities is to preserve our capital for the purpose of funding operations. We do not enter into investments for trading or speculative purposes. We believe that we do not have material exposure to high-risk investments such as mortgage-backed securities, auction rate securities or other special investment vehicles within our money-market fund investments. We believe that we do not have any material exposure to changes in fair value as a result of the recent changes in interest rates or through potential changes in the credit worthiness of the issuers of our
available-for-sale
securities. The recent changes the market place resulted in an unrealized loss of approximately $145,000 for the three months ended March 31, 2020, compared to an unrealized gain of approximately $128,000 for the year
ended of December 31, 2019. We have the ability and plan to hold these investments to maturity. Declines in interest rates, however, would reduce future investment income.
We currently have limited product revenues and depend on funds raised through other sources. One possible source of funding is through further equity offerings. Our ability to raise funds in this manner depends upon capital market forces affecting our stock price.
Item 4. |
CONTROLS AND PROCEDURES |
(a)
Evaluation of Disclosure Controls and Procedures
. Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e)
and
15d-15(e))
as of the end of the period covered by this Form
10-Q,
have concluded that, based on such evaluation, our disclosure controls and procedures were effective at a reasonable assurance level to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
(b)
Changes in Internal Controls
. Beginning January 1, 2020, we implemented ASU No.
2016-13,
“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU
2016-13”).
Although the adoption of the new accounting standard did not materially impact our condensed consolidated balance sheet, statements of operations and cash flows as of and for the three months ended March 31, 2020, we did implement new internal control procedures to support the new accounting and reporting processes associated with adopting the guidance. Prior to the launch of product sales this quarter, we implemented internal controls and business processes around revenue recognition and inventory. There were no other changes in our internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during the three months ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1. |
LEGAL PROCEEDINGS |
We are not currently a party to any material legal proceedings.
Except as set forth below, there have been no material changes to the risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form
10-K
for the year ended December 31, 2019, filed with the Securities and Exchange Commission on March 2, 2020.
The outbreak of the novel strain of coronavirus,
SARS-CoV-2,
or similar public health crises, could have a material adverse impact on our business, financial condition and results of operations, including our commercial operations and sales, clinical trials and preclinical studies.
Public health crises, such as pandemics or similar outbreaks, could adversely impact our business. In December 2019, a novel strain of coronavirus,
SARS-CoV-2,
which causes coronavirus disease 2019
(COVID-19),
surfaced in Wuhan, China. Since then,
SARS-CoV-2
and
COVID-19
have spread to multiple countries, including the United States. The
COVID-19
pandemic is evolving, and to date has led to the implementation of various responses, including government-imposed quarantines, travel restrictions and other public health safety measures. In response to the spread of
SARS-CoV-2
and
COVID-19,
we have instructed the majority of our office-based employees to work from home. Our increased reliance on personnel working from home may negatively impact productivity, or disrupt, delay, or otherwise adversely impact our business. In addition, this could increase our cyber security risk, create data accessibility concerns, and make us more susceptible to communication disruptions, any of which could adversely impact our business operations or delay necessary interactions with local and federal regulators, ethics committees, manufacturing sites, research or clinical trial sites and other important agencies and contractors. In connection with our commercial launch of CAPLYTA, which is approved by U.S. Food and Drug Administration for the treatment of schizophrenia in adults, our commercial organization and sales force and medical organization are having significantly reduced personal interactions with physicians and customers and increasingly conduct promotional activities virtually, and we have elected to cease
in-person
interactions with physicians and customers entirely for some period of time in the interest of employee and community safety. As a result of the
COVID-19
outbreak, or similar pandemics, we may experience disruptions that could severely impact our business, including our ability to successfully commercialize our only commercial product, CAPLYTA, in the U.S., and these disruptions could negatively impact our sales of CAPLYTA. Business interruptions from the current or future pandemics may also adversely impact the third parties we rely on to sufficiently manufacture CAPYLTA and to produce our product candidates in quantities we require, which may impair the commercialization and our research and development activities.
We are currently conducting clinical trials for our product candidates in many countries, including the United States, Europe and Russia and may expand to other geographies. Timely enrollment of, completion of and reporting on our clinical trials is dependent upon these global clinical trial sites which are, or in the future may be, adversely affected by the
COVID-19
outbreak or other pandemics. Some factors from the
COVID-19
outbreak that may adversely affect the timing and conduct of our clinical trials and adversely impact our business generally, include but are not limited to delays or difficulties in clinical site initiation, diversion of healthcare resources away from clinical trials to pandemic concerns, limitations on travel, regulatory delays and supply chain disruptions.
The
COVID-19
outbreak continues to rapidly evolve, and the extent to which the outbreak impacts our business, including our commercial results, clinical trials, and preclinical studies will depend on future developments, which are highly uncertain.
Item 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Unregistered Sales of Equity Securities
Issuer Purchases of Equity Securities
We did not repurchase any of our equity securities during the quarter ended March 31, 2020.
Item 3. |
DEFAULTS UPON SENIOR SECURITIES |
Item 4. |
MINE SAFETY DISCLOSURES |
Item 5. |
OTHER INFORMATION |