UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2022

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 No. 001-37852

PROTAGONIST THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

Delaware	98-0505495
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
7707 Gateway Boulevard, Suite 140 Newark, California	94560-1160
(Address of registrant’s principal executive offices)	(Zip code)
(510) 474-0170 (Registrant’s telephone number, including area code

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.00001	PTGX	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	☐
		Smaller reporting company	☐
Non-accelerated filer	☐	Emerging growth company	☐

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

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

As of October 31, 2022, there were 49,198,411 shares of the registrant’s Common Stock, par value $0.00001 per share, outstanding.

PROTAGONIST THERAPEUTICS, INC.

FORM 10-Q

TABLE OF CONTENTS

I
		Page
PART I	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Comprehensive Loss	3
	Condensed Consolidated Statements of Stockholders’ Equity	4
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	38
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	65
Item 3.	Defaults Upon Senior Securities	65
Item 4.	Mine Safety Disclosure	65
Item 5.	Other Information	65
Item 6.	Exhibits	65
	SIGNATURES	67

PART I. – FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

PROTAGONIST THERAPEUTICS, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share data)

	September 30,		December 31,
	2022		2021
Assets
Current assets:
Cash and cash equivalents	$	152,816	$	123,665
Marketable securities		114,621		203,235
Receivable from collaboration partner and contract asset - related party		125		1,566
Research and development tax incentive receivable		—		2,792
Prepaid expenses and other current assets		9,055		9,478
Total current assets		276,617		340,736
Property and equipment, net		1,783		1,798
Restricted cash - noncurrent		225		225
Operating lease right-of-use asset		3,549		4,936
Total assets	$	282,174	$	347,695
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	4,715	$	1,600
Payable to collaboration partner - related party		32		899
Accrued expenses and other payables		29,574		37,716
Deferred revenue - related party		—		1,601
Operating lease liability - current		2,433		2,200
Total current liabilities		36,754		44,016
Operating lease liability - noncurrent		1,804		3,658
Total liabilities		38,558		47,674
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.00001 par value, 10,000,000 shares authorized; no shares issued and outstanding		—		—
Common stock, $0.00001 par value, 90,000,000 shares authorized; 49,198,411 and 47,838,330 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively		—		—
Additional paid-in capital		746,657		709,682
Accumulated other comprehensive loss		(480)		(299)
Accumulated deficit		(502,561)		(409,362)
Total stockholders’ equity		243,616		300,021
Total liabilities and stockholders’ equity	$	282,174	$	347,695

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

1

PROTAGONIST THERAPEUTICS, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share data)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
License and collaboration revenue - related party	$	—	$	10,286	$	26,581	$	18,740
Operating expenses:
Research and development		25,402		36,956		96,331		87,633
General and administrative		6,901		7,256		25,107		19,936
Total operating expenses		32,303		44,212		121,438		107,569
Loss from operations		(32,303)		(33,926)		(94,857)		(88,829)
Interest income		1,157		122		1,809		321
Other expense, net		(86)		—		(151)		(136)
Net loss	$	(31,232)	$	(33,804)	$	(93,199)	$	(88,644)
Net loss per share, basic and diluted	$	(0.64)	$	(0.70)	$	(1.90)	$	(1.94)
Weighted-average shares used to compute net loss per share, basic and diluted		49,107,639		47,987,184		48,971,329		45,705,782

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2

PROTAGONIST THERAPEUTICS, INC.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(In thousands)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Net loss	$	(31,232)	$	(33,804)	$	(93,199)	$	(88,644)
Other comprehensive loss:
Loss on translation of foreign operations		(79)		(140)		(193)		(207)
Unrealized gain (loss) on marketable securities		319		(5)		12		(25)
Comprehensive loss	$	(30,992)	$	(33,949)	$	(93,380)	$	(88,876)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3

PROTAGONIST THERAPEUTICS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(In thousands, except share data)

						Accumulated
				Additional		Other				Total
	Common			Paid-In		Comprehensive		Accumulated		Stockholders'
	Stock			Capital		(Loss) Gain		Deficit		Equity
Three months ended September 30, 2022	Shares	Amount
Balance at June 30, 2022	48,683,931	$	—	$	740,027	$	(720)	$	(471,329)	$	267,978
Issuance of common stock under equity incentive and employee stock purchase plans	114,483		—		680		—		—		680
Issuance of common stock upon exercise of Exchange Warrants	399,997		—		—		—		—		—
Stock-based compensation expense	—		—		5,950		—		—		5,950
Other comprehensive gain	—		—		—		240		—		240
Net loss	—		—		—		—		(31,232)		(31,232)
Balance at September 30, 2022	49,198,411	$	—	$	746,657	$	(480)	$	(502,561)	$	243,616

						Accumulated
				Additional		Other				Total
	Common			Paid-In		Comprehensive		Accumulated		Stockholders'
	Stock			Capital		(Loss) Gain		Deficit		Equity
Three months ended September 30, 2021	Shares	Amount
Balance at June 30, 2021	47,525,560	$	—	$	696,157	$	(59)	$	(338,651)	$	357,447
Issuance of common stock pursuant to public offering, net of issuance costs	—		—		6		—		—		6
Issuance of common stock under equity incentive and employee stock purchase plans	146,094		—		1,381		—		—		1,381
Stock-based compensation expense	—		—		4,775		—		—		4,775
Other comprehensive loss	—		—		—		(145)		—		(145)
Net loss	—		—		—		—		(33,804)		(33,804)
Balance at September 30, 2021	47,671,654	$	—	$	702,319	$	(204)	$	(372,455)	$	329,660

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

PROTAGONIST THERAPEUTICS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(In thousands, except share data)

						Accumulated
				Additional		Other				Total
	Common			Paid-In		Comprehensive		Accumulated		Stockholders'
	Stock			Capital		(Loss) Gain		Deficit		Equity
Nine months ended September 30, 2022	Shares	Amount
Balance at December 31, 2021	47,838,330	$	—	$	709,682	$	(299)	$	(409,362)	$	300,021
Issuance of common stock pursuant to at-the-market offering, net of issuance costs	422,367		—		14,553		—		—		14,553
Issuance of common stock under equity incentive and employee stock purchase plans	545,443		—		3,895		—		—		3,895
Issuance of common stock upon exercise of Exchange Warrants	399,997		—		—		—		—		—
Shares withheld for net settlement of tax withholding upon vesting of restricted stock units	(7,726)		—		(188)		—		—		(188)
Stock-based compensation expense	—		—		18,690		—		—		18,690
Issuance costs related to prior period common stock offering	—		—		25		—		—		25
Other comprehensive loss	—		—		—		(181)		—		(181)
Net loss	—		—		—		—		(93,199)		(93,199)
Balance at September 30, 2022	49,198,411	$	—	$	746,657	$	(480)	$	(502,561)	$	243,616

						Accumulated
				Additional		Other				Total
	Common			Paid-In		Comprehensive		Accumulated		Stockholders'
	Stock			Capital		(Loss) Gain		Deficit		Equity
Nine months ended September 30, 2021	Shares	Amount
Balance at December 31, 2020	43,745,465	$	—	$	563,389	$	28	$	(283,811)	$	279,606
Issuance of common stock pursuant to public offering, net of issuance costs	3,503,311		—		123,804		—		—		123,804
Issuance of common stock under equity incentive and employee stock purchase plans	429,938		—		3,944		—		—		3,944
Shares withheld for net settlement of tax withholding upon vesting of restricted stock units	(7,060)		—		(189)		—		—		(189)
Stock-based compensation expense	—		—		11,371		—		—		11,371
Other comprehensive loss	—		—		—		(232)		—		(232)
Net loss	—		—		—		—		(88,644)		(88,644)
Balance at September 30, 2021	47,671,654	$	—	$	702,319	$	(204)	$	(372,455)	$	329,660

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5

PROTAGONIST THERAPEUTICS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	Nine Months Ended
	September 30,
	2022		2021
Cash Flows from Operating Activities
Net loss	$	(93,199)	$	(88,644)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation		18,690		11,371
Operating lease right-of-use asset amortization		1,751		1,378
Net amortization of premium on marketable securities		365		1,321
Depreciation		778		578
Changes in operating assets and liabilities:
Research and development tax incentive receivable		2,719		(854)
Receivable from collaboration partner - related party		1,441		(212)
Prepaid expenses and other assets		413		(2,632)
Accounts payable		3,121		(2,285)
Payable to collaboration partner - related party		(867)		(1,611)
Accrued expenses and other payables		(8,127)		14,393
Deferred revenue - related party		(1,601)		(12,236)
Operating lease liability		(1,986)		(1,493)
Net cash used in operating activities		(76,502)		(80,926)
Cash Flows from Investing Activities
Purchase of marketable securities		(134,279)		(255,902)
Proceeds from maturities of marketable securities		222,537		213,080
Purchases of property and equipment		(725)		(905)
Net cash provided by (used in) investing activities		87,533		(43,727)
Cash Flows from Financing Activities
Proceeds from at-the-market offering, net of issuance costs		14,553		123,995
Proceeds from issuance of common stock upon exercise of stock options and purchases under employee stock purchase plan		3,895		3,944
Tax withholding payments related to net settlement of restricted stock units		(188)		(189)
Issuance costs related to prior period common stock offering		25		—
Net cash provided by financing activities		18,285		127,750
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(165)		(148)
Net increase in cash, cash equivalents and restricted cash		29,151		2,949
Cash, cash equivalents and restricted cash, beginning of period		123,890		117,818
Cash, cash equivalents and restricted cash, end of period	$	153,041	$	120,767
Supplemental Disclosure of Non-Cash Financing and Investing Information:
Purchases of property and equipment in accounts payable and accrued liabilities	$	61	$	24
Issuance costs related to common stock offering included in accrued liabilities and other payables	$	—	$	191

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6

PROTAGONIST THERAPEUTICS, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1.Organization and Description of Business

Protagonist Therapeutics, Inc. (the “Company”) is headquartered in Newark, California. The Company is a biopharmaceutical company with peptide-based new chemical entities rusfertide and PN-235 in different stages of clinical development, all derived from the Company’s proprietary technology platform. The Company’s clinical programs fall into two broad categories of diseases; (i) hematology and blood disorders, and (ii) inflammatory and immunomodulatory diseases. Protagonist Pty Limited (“Protagonist Australia”) is a wholly-owned subsidiary of the Company and is located in Brisbane, Queensland, Australia.

Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and assessing performance. The Company operates and manages its business as one operating segment. The Company’s Chief Executive Officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for allocating and evaluating financial performance.

Liquidity

As of September 30, 2022, the Company had cash, cash equivalents and marketable securities of $267.4 million. The Company has incurred net losses from operations since inception and had an accumulated deficit of $502.6 million as of September 30, 2022. The Company’s ultimate success depends upon the outcome of its research and development and collaboration activities. The Company expects to incur additional losses in the future and anticipates the need to raise additional capital to continue to execute its long-range business plan. Since the Company’s initial public offering in August 2016, it has financed its operations primarily through proceeds from offerings of common stock and payments received under license and collaboration agreements.

Risks and Uncertainties

The Company is subject to risks and uncertainties as a result of the ongoing COVID-19 pandemic. The impact of the COVID-19 pandemic on the Company’s activities depends on a number of factors, including, but not limited to, the duration and severity of the pandemic; the development and spread of COVID-19 variants, the timing, extent, effectiveness and durability of COVID-19 vaccine programs or other treatments; and new or continuing travel and other restrictions and public health measures. The Company has experienced delays in its existing and planned clinical trials due to the worldwide impacts of the pandemic. The Company’s future results of operations and liquidity could be adversely impacted by further delays in existing and planned clinical trials, continued difficulty in recruiting patients for these clinical trials, delays in manufacturing and collaboration activities, supply chain disruptions, and the ongoing impact on its operating activities and employees. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business. The extent of the impact of the COVID-19 pandemic remains difficult to predict as this event is ongoing and information continues to evolve. As of the date of issuance of these condensed consolidated financial statements, the extent to which the COVID-19 pandemic may materially impact the Company’s future financial condition, liquidity or results of operations remains uncertain.

The Company is currently operating in a period of economic uncertainty and capital markets disruption, which has been significantly impacted by domestic and global monetary and fiscal policy, geopolitical instability, an ongoing military conflict between Russia and Ukraine, and historically high domestic and global inflation. In particular, the conflict in Ukraine has exacerbated market disruptions, including significant volatility in commodity prices, as well as supply chain interruptions, and has contributed to record inflation globally. The U.S. Federal Reserve and other central banks may be unable to contain inflation through more restrictive monetary policy and inflation may increase or continue for a prolonged period of time. Inflationary factors, such as increases in the cost of clinical supplies, interest rates, overhead costs and transportation costs may adversely affect the Company’s operating results. The Company continues to monitor these events and the potential impact on its business. Although the Company does not believe that inflation has had a material impact on its financial position or results of operations to date, it may be adversely affected

7

in the future due to domestic and global monetary and fiscal policy, supply chain constraints, consequences associated with COVID-19 and the ongoing conflict between Russia and Ukraine, and such factors may lead to increases in the cost of manufacturing for and initiation of studies in the Company’s product candidates.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the SEC regarding interim financial reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP have been condensed or omitted, and accordingly the condensed consolidated balance sheet as of September 30, 2022 has been derived from the Company’s unaudited consolidated financial statements at that date but does not include all of the information required by GAAP for complete consolidated financial statements. These unaudited interim condensed consolidated financial statements have been prepared on the same basis as the Company’s annual consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) that are necessary for a fair presentation of the Company’s condensed consolidated financial statements. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022 or for any future period.

The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K, filed with the SEC on February 28, 2022.

Principles of Consolidation

The accompanying unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany transactions and balances have been eliminated upon consolidation.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, accruals for research and development activities, stock-based compensation, income taxes, marketable securities and leases. Estimates related to revenue recognition include actual costs incurred versus total estimated costs of the Company’s deliverables to determine percentage of completion in addition to the application and estimates of potential revenue constraints in the determination of the transaction price under its license and collaboration agreements. Management bases these estimates on historical and anticipated results, trends, and various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to forecasted amounts and future events. Actual results could differ materially from these estimates.

Due to the ongoing COVID-19 pandemic, military conflict between Ukraine and Russia and inflationary pressures, there has been uncertainty and disruption in the global economy and financial markets. The Company has taken into consideration any known impacts in its accounting estimates to date and is not aware of any additional specific events or circumstances that would require any additional updates to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of the date of issuance of this report. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.

8

Cash as Reported in Condensed Consolidated Statements of Cash Flows

Cash as reported in the condensed consolidated statements of cash flows includes the aggregate amounts of cash and cash equivalents and the restricted cash as presented on the condensed consolidated balance sheets.

Cash as reported in the condensed consolidated statements of cash flows consists of (in thousands):

	September 30,
	2022		2021
Cash and cash equivalents	$	152,816	$	120,542
Restricted cash - noncurrent		225		225
Total cash reported on condensed consolidated statements of cash flows	$	153,041	$	120,767

Significant Accounting Policies

There have been no material changes to the Company’s significant accounting policies during the three and nine months ended September 30, 2022 as compared to those disclosed in Note 2. Significant Accounting Policies included in our Annual Report on Form 10-K for the year ended December 31, 2021.

Recently Issued Accounting Pronouncements Not Yet Adopted as of September 30, 2022

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which is intended to provide financial statement users with more useful information about expected credit losses on financial assets held by a reporting entity at each reporting date. The new standard replaces the existing incurred loss impairment methodology with a methodology that requires consideration of a broader range of reasonable and supportable forward-looking information to estimate all expected credit losses. This guidance was originally effective for fiscal years and interim periods within those years beginning after December 15, 2019, with early adoption permitted for fiscal years and interim periods within those years beginning after December 15, 2018. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which amended the mandatory effective date of ASU No. 2016-13 for smaller reporting companies. Based on the Company’s status as a smaller reporting company as of November 15, 2019, ASU 2016-13 is effective for the Company for fiscal years and interim periods beginning after December 15, 2022. The Company does not expect the adoption of this new guidance to have a material impact on its condensed consolidated financial statements and disclosures.

Note 3. License and Collaboration Agreement

Agreement Terms

On July 27, 2021, the Company entered into an amended and restated License and Collaboration Agreement (“Restated Agreement”) with Janssen Biotech, Inc., a Pennsylvania corporation (“Janssen”). The Restated Agreement amends and restates the License and Collaboration Agreement, dated May 26, 2017, by and between the Company and Janssen (as amended by the First Amendment thereto, effective May 7, 2019, the “Original Agreement”). Janssen is a related party to the Company as Johnson & Johnson Innovation - JJDC, Inc., a significant stockholder of the Company, and Janssen are both subsidiaries of Johnson & Johnson. The Original Agreement became effective on July 13, 2017. Upon the effectiveness of the Original Agreement, the Company received a non-refundable, upfront cash payment of $50.0 million from Janssen. Upon the effectiveness of the First Amendment, the Company received a $25.0 million payment from Janssen in 2019. The Company also received a $5.0 million payment triggered by the successful nomination of a second-generation oral Interleukin (“IL”)-23 receptor antagonist development compound (“second-generation compound”) during the first quarter of 2020 and a $7.5 million payment triggered by the completion of data collection activities for the first Phase 1 clinical trial of a second-generation compound during the fourth quarter of 2021. In April 2022, the Company received a $25.0 million milestone payment in connection with the dosing of the third patient in the first Phase 2 clinical trial for a second-generation compound during the first quarter of 2022.

9

The Restated Agreement relates to the development, manufacture and commercialization of oral IL-23 receptor antagonist drug candidates. The candidates nominated for initial development pursuant to the Restated Agreement include PTG-200 (JN-67864238), PN-232 (JNJ-75105186) and PN-235 (JNJ-77242113). PTG-200 is an oral IL-23 receptor antagonist that was in Phase 2a development for the treatment of Crohn’s disease (“CD”). During the fourth quarter of 2021, following a pre-specified interim analysis criteria, a portfolio decision was made by Janssen to stop further development of both PTG-200 and PN-232 in favor of advancing PN-235, based on its superior potency and overall pharmacokinetic and pharmacodynamic profile. Janssen is primarily responsible for the conduct of all future trials, including these anticipated Phase 2 trials, and the Company is primarily responsible for the conduct of the second-generation Phase 1 trials.

Pursuant to the Restated Agreement, the parties:

● amended development milestones to reflect Janssen’s expected development of collaboration compounds for multiple indications in the IL-23 pathway;

● limited the Company’s further development and related expense obligations under the Restated Agreement to the PTG-200 Phase 2a trial and the ongoing Phase 1 trials in PN-232 and PN-235; Janssen is responsible for all other future development and related expenses under the Restated Agreement; and

● concluded the parties’ two-year research collaboration, while enabling Janssen to continue conducting additional research through July 2024 on compounds developed pursuant to the Original Agreement.

The Restated Agreement enables Janssen to develop collaboration compounds for multiple indications. Under the Restated Agreement, Janssen is required to use commercially reasonable efforts to develop at least one collaboration compound for at least two indications.

The Company’s development cost obligations in the Original Agreement for the period following the effective date of the Original Agreement were as follows: (a) up to $20.0 million of costs related to up to three Phase 1 trials of second-generation compounds; (b) up to $20.0 million of costs related to Phase 2a and 2b costs for PTG-200 (i.e., 20% of the first $100.0 million in costs); and (c) up to $25.0 million in costs related to up to two Phase 2 trials evaluating second-generation compounds.

The Company’s continuing development expense obligations under the Restated Agreement were as follows: (a) the Company funded 20% of the costs related to the Phase 2a trial evaluating PTG-200 for the treatment of CD (subject to a $20.0 million cap); (b) the Company was responsible for 50% of agreed-upon costs related to the ongoing Phase 1 trial evaluating PN-235 incurred through January 4, 2021; and (c) the Company was responsible for 100% of agreed-upon costs related to the Phase 1 trial evaluating PN-232.

Certain of the Company’s previous development expense obligations under the Original Agreement were limited or eliminated as follows: (a) the Company’s previous $25.0 million obligation for 20% of costs related to Phase 2 trials for second-generation products was eliminated; (b) the Company’s previous $5.0 million obligation for 50% of the costs of a potential third Phase 1 trial evaluating a second-generation compound was eliminated; and (c) the Company had no obligation to fund any portion of any Phase 2b or other trial evaluating PTG-200 beyond the Phase 2a trial in CD.

One milestone for second-generation Phase 2 development was reduced from $50.0 million to $25.0 million in the Restated Agreement; otherwise, the various milestone payment amounts in the Restated Agreement remain substantially the same as in the Original Agreement. To reflect parallel development of multiple indications in the IL-23 pathway, milestone payments under the Restated Agreement generally now correspond to the achievement of specified milestones in: (a) any initial indication (rather than CD, as in the Original Agreement); (b) any second indication (rather than ulcerative colitis (“UC”), as in the Original Agreement); and (c) any third indication. With respect to second-generation compounds, milestone payments for second and third indications may be triggered by any second-generation

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compound (i.e., not necessarily the second-generation compound that triggered the initial payment for any indication, or the payment for a second indication). In addition, the opt-in payments contemplated by the Original Agreement related to the scope of Janssen’s license rights have been converted into development milestones in the Restated Agreement.

Upcoming potential development milestones for second-generation compounds include:

● $10.0 million for dosing of the third patient in the first Phase 2 clinical trial for any second-generation compound for a second indication (i.e., an indication different than the indication which triggered the $25.0 million milestone described above);

● $50.0 million for dosing of the third patient in a Phase 3 clinical trial for a second-generation compound for any indication;

● $15.0 million for dosing of the third patient in a Phase 3 clinical trial for a second-generation compound for a second indication; and

● $115.0 million for a Phase 3 clinical trial for a second-generation compound for any indication meeting its primary clinical endpoint.

Development milestones for PTG-200 were unchanged under the Restated Amendment, except that milestone achievement is generally no longer indication-specific.

Pursuant to the Restated Agreement, the Company remains eligible to receive tiered royalties on net product sales at percentages ranging from mid-single digits to ten percent. The sales milestone payments in the Original Agreement also remain the same in the Restated Agreement.

Pursuant to both the Original and Restated Agreements, payments to the Company for research and development services are generally billed and collected as services are performed or assets are delivered, including research activities and Phase 1 and Phase 2 development activities. Janssen bills the Company for its share of the PTG-200 Phase 2a development costs as expenses are incurred by Janssen. Milestone payments are received after the related milestones are achieved.

Janssen retains exclusive, worldwide rights to develop and commercialize IL-23 receptor antagonist compounds derived from the research collaboration conducted under the Original Agreement, or Janssen’s further research under the Restated Agreement. Any further research and development will be conducted by Janssen. The Company will have the right to co-detail (for CD and UC indications) up to two of the IL-23 receptor antagonist compounds under the collaboration in the U.S. market.

The Restated Agreement remains in effect until the royalty obligations cease following patent and regulatory expiry, unless terminated earlier. Upon a termination of the Restated Agreement, all rights revert back to the Company, and in certain circumstances, if such termination occurs during ongoing clinical trials, Janssen would, if requested, provide certain financial and operational support to the Company for the completion of such trials.

Revenue Recognition

The Restated Agreement contains a single performance obligation for the development license; Phase 1 development services for PTG-200, PN-232 and PN-235; the Company’s services associated with Phase 2a development for PTG-200 in CD; the initial year of second-generation compound research services; and all other such services that the Company may perform at the request of Janssen to support the development of PTG-200 through Phase 2a and PN-232 and PN-235 through Phase 1. Under the Restated Agreement, development services performed by the Company for PTG-200 beyond Phase 2a and PN-232 and PN-235 beyond Phase 1 are no longer required.

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The Company determined that the license was not distinct from the revised development services within the context of the agreement because the revised development services did not change the utility of the intellectual property. The Company also concluded that the remaining development services are not distinct from the partially delivered combined promise comprised under the agreement prior to the Restated Agreement of the development license and PTG-200, PN-232 and PN-235 services, including compound supply and other services. Therefore, the Restated Agreement is treated as if it were part of the Original Agreement. The Restated Agreement was accounted for as if it were a modification of services under the Original Agreement by applying a cumulative catch-up adjustment to revenue. As of the effective date of the Restated Agreement, the Company calculated the adjusted cumulative revenue under the Restated Agreement with primary updates to the transaction price, including the release of and update of prior constraints and fewer remaining services to be provided, resulting in a cumulative adjustment that increased revenue by $8.0 million for the year ended December 31, 2021.

The contract duration is defined as the period in which parties to the contract have present enforceable rights and obligations. For revenue recognition purposes, the duration of the Restated Agreement for the identified single initial performance obligations began on the Original Agreement effective date of July 13, 2017 and ended upon the completion of Phase 1 clinical trials for PN-232 and PN-235. Final activities related to these trials were completed as of June 30, 2022.

The Company uses the most likely amount method to estimate variable consideration included in the transaction price. Variable consideration after the effective date of the Restated Agreement consists of future milestone payments and cost sharing payments for agreed upon services offset by development costs reimbursable to Janssen. Cost sharing payments from Janssen relate to the agreed upon services for development activities that the Company performs within the duration of the contract are included in the transaction price at the Company’s share of the estimated budgeted costs for these activities, including primarily internal full-time equivalent effort and third-party contract costs. Cost sharing payments to Janssen related to agreed-upon services for activities that Janssen performs within the duration of the contract are not a distinct service that Janssen transfers to the Company. Therefore, the consideration payable to Janssen is accounted for as a reduction in the transaction price.

The final transaction price of the initial performance obligation under the Restated Agreement was $131.7 million as of June 30, 2022. In order to determine the transaction price, the Company evaluated all payments to be received during the duration of the contract, net of development costs reimbursement expected to be payable to Janssen. The transaction price as of June 30, 2022 included $112.5 million of nonrefundable payments received to date, $17.9 million of reimbursement from Janssen for services performed for IL-23 receptor antagonist compound research costs and other services, and variable consideration consisting of $8.2 million of development cost reimbursement from Janssen, partially offset by $6.9 million of net cost reimbursement due to Janssen for services performed. The Company concluded that the variable consideration constraint was appropriately reflected in the estimated transaction price as of June 30, 2022, and that the achievement of future milestones was subject to additional development and/or regulatory uncertainty and therefore it was not probable at June 30, 2022 that a material reversal of such revenues would not occur. Janssen also opted in for certain additional services to be performed by the Company that were outside the initial performance obligation. Revenue for these additional services was recognized as these services were performed.

The Company utilizes a cost-based input method to measure proportional performance and to calculate the corresponding amount of revenue to recognize. In applying the cost-based input methods of revenue recognition, the Company uses actual costs incurred relative to expected costs to fulfill the combined performance obligation. These costs consist primarily of internal full-time equivalent effort and third-party contract costs. Revenue is recognized based on actual costs incurred as a percentage of total estimated costs as the Company completes its performance obligations. A cost-based input method of revenue recognition requires management to make estimates of costs to complete the Company’s performance obligations. The Company believes this is the best measure of progress because other measures do not reflect how the Company transfers its performance obligation to Janssen. In making such estimates, significant judgment is required to evaluate assumptions related to cost estimates. The cumulative effect of revisions to estimated costs to complete the Company’s performance obligations will be recorded in the period in which changes are identified and amounts can be reasonably estimated. A significant change in these assumptions and estimates could have a material impact on the timing and amount of revenue recognized in future periods.

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For the nine months ended September 30, 2022, the Company recognized license and collaboration revenue of $26.6 million. No license and collaboration revenue was recognized for the three months ended September 30, 2022 because the Company completed its performance obligation under the collaboration as of June 30, 2022. License and collaboration revenue for the nine months ended September 30, 2022 was primarily related to the transaction price under the Restated Agreement recognized based on proportional performance.

For the three and nine months ended September 30, 2021, the Company recorded a cumulative catch-up adjustment increasing license and collaboration revenue by $8.0 million, and also recognized license and collaboration revenue of $2.3 million and $9.9 million, respectively, related to the contract modification under the Restated Agreement entered in July 2021. In addition, the Company recognized $0.8 million in revenue for the nine months ended September 30, 2021 related to additional services provided by the Company under the agreement. No revenue related to additional services provided by the Company under the Restated Agreement was recognized for the three months ended September 30, 2021.

The following tables present changes in the Company’s contract assets and liabilities during the periods presented (in thousands):

	Balance at						Balance at
	Beginning of						End of
Nine Months Ended September 30, 2022	Period		Additions		Deductions		Period
Contract assets:
Receivable from collaboration partner - related party	$	1,566	$	25,165	$	(26,606)	$	125
Contract liabilities:
Deferred revenue - related party	$	1,601	$	25,757	$	(27,358)	$	—
Payable to collaboration partner - related party	$	899	$	52	$	(919)	$	32
	Balance at						Balance at
	Beginning of						End of
Nine Months Ended September 30, 2021	Period		Additions		Deductions		Period
Contract assets:
Receivable from collaboration partner - related party	$	2,426	$	5,732	$	(5,520)	$	2,638
Contract liabilities:
Deferred revenue - related party	$	14,477	$	16,715	$	(28,951)	$	2,241
Payable to collaboration partner - related party	$	2,732	$	9,785	$	(11,396)	$	1,121

During the three and nine months ended September 30, 2022, the Company recognized revenue of zero and $0.9 million, respectively, from amounts included in the deferred revenue contract liability balance at the beginning of each period. During the three and nine months ended September 30, 2021, the Company recognized revenue of $0.2 million and $1.7 million, respectively, from amounts included in the deferred revenue contract liability balance at the beginning of each period. None of the costs to obtain or fulfill the contract were capitalized.

Note 4. Fair Value Measurements

Financial assets and liabilities are recorded at fair value. The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.

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Level 2—Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

In determining fair value, the Company utilizes quoted market prices, broker or dealer quotations, or valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and considers counterparty credit risk in its assessment of fair value.

The following table presents the fair value of the Company’s financial assets determined using the inputs defined above (in thousands).

	September 30, 2022
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	39,234	$	—	$	—	$	39,234
Commercial paper		—		98,226		—		98,226
Corporate debt securities		—		6,320		—		6,320
U.S. Treasury and agency securities		—		118,254		—		118,254
Total financial assets	$	39,234	$	222,800	$	—	$	262,034

	December 31, 2021
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	39,854	$	—	$	—	$	39,854
Commercial paper		—		157,141		—		157,141
Corporate debt securities		—		75,548		—		75,548
U.S. Treasury and agency securities				40,017		—		40,017
Supranational and sovereign government securities		—		6,010		—		6,010
Total financial assets carried at fair value	$	39,854	$	278,716	$	—	$	318,570

The Company’s commercial paper, corporate debt securities, U.S. Treasury and agency securities, including U.S. Treasury bills, and supranational and sovereign government securities are classified as Level 2 as they were valued based upon quoted market 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 inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets.

The carrying amount of our remaining financial assets and liabilities, including cash, receivables and payables, approximates their fair value due to their short-term nature.

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Note 5. Cash Equivalents and Marketable Securities

Cash equivalents and marketable securities consisted of the following (in thousands):

	September 30, 2022
	Amortized		Gross Unrealized
	Cost		Gains		Losses		Fair Value
Money market funds	$	39,234	$	—	$	—	$	39,234
Commercial paper		98,238		—		(12)		98,226
Corporate debt securities		6,328		—		(8)		6,320
U.S. Treasury and agency securities		118,365		15		(126)		118,254
Total cash equivalents and marketable securities	$	262,165	$	15	$	(146)	$	262,034
Classified as:
Cash equivalents							$	147,413
Marketable securities - current								114,621
Total cash equivalents and marketable securities							$	262,034

	December 31, 2021
	Amortized		Gross Unrealized
	Cost		Gains		Losses		Fair Value
Money market funds	$	39,854	$	—	$	—	$	39,854
Commercial paper		157,157		—		(16)		157,141
Corporate debt securities		75,598		—		(50)		75,548
U.S. Treasury and agency securities		40,093		—		(76)		40,017
Supranational and sovereign government securities		6,011		—		(1)		6,010
Total cash equivalents and marketable securities	$	318,713	$	—	$	(143)	$	318,570
Classified as:
Cash equivalents