UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2021

OR

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

FOR THE TRANSITION PERIOD FROM                      TO

Commission File Number 001-38792

Alector, Inc.

(Exact name of Registrant as specified in its Charter)

Delaware	82-2933343
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
131 Oyster Point Blvd, Suite 600 South San Francisco, California	94080
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: 415-231-5660

Not applicable

(Former name, former address, and former fiscal year, if changed since last report)

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

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock	ALEC	The Nasdaq Stock Market LLC (The Nasdaq Global Select Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

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

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

As of April 30, 2021, the registrant had 79,767,212 shares of common stock, $0.0001 par value per share, outstanding.

Alector, Inc.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations and Comprehensive Loss	2
	Condensed Consolidated Statements of Stockholders’ Equity	3
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	19
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	20
Item 1A.	Risk Factors	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66
Item 6.	Exhibits	67
	Signatures	68

i

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical facts contained in this report, including statements regarding our future results of operations and financial position, business strategy, product candidates, planned preclinical studies and clinical trials, results of clinical trials, research and development costs, regulatory approvals, timing and likelihood of success, as well as plans and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties, and other important factors that are in some cases beyond our control and may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “would,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this report include, but are not limited to, statements about:

• our plans relating to the development and manufacturing of our product candidates and research programs;

• the ability of our clinical trials to demonstrate safety and efficacy of our product candidates, and other positive results;

• the timing and focus of our future clinical trials, and the reporting of data from those trials;

• the impact of the coronavirus (COVID-19) pandemic on our business;

• our plans relating to commercializing our product candidates, if approved, including the geographic areas of focus and sales strategy;

• the expected potential benefits of strategic collaborations with third parties and our ability to attract collaborators with development, regulatory and commercialization expertise;

• our estimates of the number of patients in the United States who suffer from the diseases we are targeting and the number of patients that will enroll in our clinical trials;

• the size of the market opportunity for our product candidates in each of the diseases we are targeting;

• our ability to expand our product candidates into additional indications and patient populations;

• the success of competing therapies that are or may become available;

• the beneficial characteristics, safety, efficacy, and therapeutic effects of our product candidates;

• the timing or likelihood of regulatory filings and approvals, including our expectation to seek special designations, such as orphan drug designation, for our product candidates for various diseases;

• our ability to obtain and maintain regulatory approval of our product candidates;

• our plans relating to the further development and manufacturing of our product candidates, including additional indications that we may pursue;

• existing regulations and regulatory developments in the United States and other jurisdictions;

• our continued reliance on third parties to conduct additional clinical trials of our product candidates, and for the manufacture of our product candidates for preclinical studies and clinical trials;

• our plans and ability to obtain or protect intellectual property rights, including extensions of existing patent terms where available;

• the need to hire additional personnel and our ability to attract and retain such personnel;

• the accuracy of our estimates regarding expenses, future revenue, capital requirements, and needs for additional financing;

• our financial performance; and

• the sufficiency of our existing cash and cash equivalents to fund our future operating expenses and capital expenditure requirements.

ii

We have based these forward-looking statements largely on our current expectations and projections about our business, the industry in which we operate and financial trends that we believe may affect our business, financial condition, results of operations, and prospects, and these forward-looking statements are not guarantees of future performance or development. These forward-looking statements speak only as of the date of this report and are subject to a number of risks, uncertainties, and assumptions described in the section titled “Risk Factors” and elsewhere in this report. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein until after we distribute this Quarterly Report on Form 10-Q, whether as a result of any new information, future events, or otherwise.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and you are cautioned not to unduly rely upon these statements.

Investors and others should note that we may announce material business and financial information to our investors using our investor relations website (https://investors.alector.com), Securities and Exchange Commission (SEC) filings, webcasts, press releases, and conference calls. We use these mediums, including our website, to communicate with our stockholders and public about our company, our products, and other issues. It is possible that the information that we make available may be deemed to be material information. We therefore encourage investors and others interested in our company to review the information that we make available on our website.

iii

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

ALECTOR, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

	March 31,			December 31,
	2021			2020
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	110,703		$	49,969
Marketable securities		252,041			363,339
Prepaid expenses and other current assets		11,993			8,203
Total current assets		374,737			421,511
Property and equipment, net		29,469			30,181
Operating lease right-of-use assets		32,094			32,470
Restricted cash		1,472			1,472
Other assets		2,592			2,617
Total assets	$	440,364		$	488,251
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	5,310		$	3,004
Accrued clinical supply costs		9,384			11,148
Accrued liabilities		18,970			22,538
Deferred revenue, current portion		22,700			23,886
Operating lease liabilities, current portion		7,698			7,512
Total current liabilities		64,062			68,088
Deferred revenue, long-term portion		105,493			108,417
Operating lease liabilities, long-term portion		42,822			43,744
Other long-term liabilities		158			472
Total liabilities		212,535			220,721
Stockholders' equity:
Common stock, $0.0001 par value; 200,000,000 shares authorized; 79,731,647 and    79,316,261 shares issued and outstanding as of March 31, 2021 and December 31, 2020		8			8
Additional paid-in capital		689,630			676,956
Accumulated other comprehensive income		410			614
Accumulated deficit		(462,219	)		(410,048	)
Total stockholders' equity		227,829			267,530
Total liabilities and stockholders’ equity	$	440,364		$	488,251

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

1

ALECTOR, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(In thousands, except share and per share data)

	Three Months Ended March 31,
	2021			2020
Collaboration revenue	$	4,110		$	7,171
Operating expenses:
Research and development		45,733			34,605
General and administrative		11,012			14,644
Total operating expenses		56,745			49,249
Loss from operations		(52,635	)		(42,078	)
Other income, net		464			2,059
Net loss		(52,171	)		(40,019	)
Unrealized gain (loss) on marketable securities		(204	)		2,640
Comprehensive loss	$	(52,375	)	$	(37,379	)
Net loss per share, basic and diluted	$	(0.66	)	$	(0.53	)
Shares used in computing net loss per share, basic and diluted		79,386,836			74,820,950

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

2

ALECTOR, INC.

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(In thousands, except share data)

	Common Stock				Additional Paid-In Capital		Accumulated Other Comprehensive Income			Accumulated Deficit			Total Stockholders’ Equity
	Shares		Amount
Balance — December 31, 2020		79,316,261	$	8	$	676,956	$	614		$	(410,048	)	$	267,530
Exercise of stock options		415,386		—		3,874		—			—			3,874
Stock-based compensation		—		—		8,800		—			—			8,800
Unrealized loss on marketable securities		—		—		—		(204	)		—			(204	)
Net loss		—		—		—		—			(52,171	)		(52,171	)
Balance — March 31, 2021		79,731,647		8		689,630		410			(462,219	)		227,829

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

3

ALECTOR, INC.

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(In thousands, except share data)

	Common Stock				Additional Paid-In Capital		Accumulated Other Comprehensive Income		Accumulated Deficit			Total Stockholders’ Equity
	Shares		Amount
Balance — December 31, 2019		69,052,873	$	7	$	414,414	$	142	$	(219,820	)	$	194,743
Issuance of common stock upon    follow-on public offering, net of    issuance costs of $1,148		9,602,500		1		224,510		—		—			224,511
Exercise of stock options		361,096		—		3,217		—		—			3,217
Stock-based compensation		—		—		6,642		—		—			6,642
Unrealized gain on marketable securities		—		—		—		2,640		—			2,640
Net loss		—		—		—		—		(40,019	)		(40,019	)
Balance — March 31, 2020		79,016,469		8		648,783		2,782		(259,839	)		391,734

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

4

ALECTOR, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	Three Months Ended March 31,
	2021			2020
Cash flows from operating activities:
Net loss	$	(52,171	)	$	(40,019	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,541			1,446
Stock-based compensation		8,800			6,642
Amortization of premiums and accretion of discounts on marketable securities		594			(240	)
Amortization of right-of-use assets		461			297
Loss from disposal of property and equipment, net		—			9
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		(3,790	)		(3,305	)
Other assets		25			(284	)
Accounts payable		2,592			3,135
Accrued liabilities and accrued clinical supply costs		(5,500	)		7,805
Deferred revenue		(4,110	)		(7,171	)
Lease liabilities		(821	)		(628	)
Other long-term liabilities		(314	)		—
Net cash used in operating activities		(52,693	)		(32,313	)
Cash flows from investing activities:
Purchase of property and equipment		(947	)		(3,566	)
Purchase of marketable securities		—			(202,906	)
Maturities of marketable securities		110,500			81,600
Net cash provided by (used in) investing activities		109,553			(124,872	)
Cash flows from financing activities:
Proceeds from issuance of common stock upon follow-on public offering, net of    issuance costs		—			225,244
Proceeds from the exercise of options to purchase common stock		3,874			3,217
Net cash provided by financing activities		3,874			228,461
Net increase in cash, cash equivalents, and restricted cash		60,734			71,276
Cash, cash equivalents, and restricted cash at beginning of period		51,441			91,113
Cash, cash equivalents, and restricted cash at end of period	$	112,175		$	162,389
Non-cash investing and financing activities:
Property and equipment purchases included in accounts payable and accrued liabilities	$	628		$	178
Deferred offering costs in accounts payable and accrued liabilities	$	—		$	641

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

5

ALECTOR, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. The Company and Liquidity

Alector, Inc. (Alector or the Company) is a Delaware corporation headquartered in South San Francisco, California. Alector is a clinical stage biopharmaceutical company pioneering immuno-neurology, a novel therapeutic approach for the treatment of neurodegeneration.

Follow-on Offering

On January 30, 2020, the Company completed a follow-on offering through issuing and selling 9,602,500 shares of common stock at a public offering price of $25.00 per share, including 1,252,500 shares sold pursuant to the underwriters’ full exercise of their option to purchase additional shares, resulting in aggregate net proceeds of $224.5 million, after deducting underwriting discounts and commissions and offering costs.

2.

Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (GAAP) as defined by the Financial Accounting Standards Board (FASB). In the opinion of management, these unaudited condensed consolidated financial statements include all normal, recurring adjustments that are necessary to present fairly the results of the interim periods presented. The condensed consolidated financial statements include the accounts of Alector, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These interim financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2020, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 25, 2021.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expense during the reporting period. The Company evaluates its estimates, including those related to revenue recognition, manufacturing accruals, clinical accruals, fair value of assets and liabilities, income taxes uncertainties, stock-based compensation, and related assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could materially differ from those estimates.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, and short-term marketable securities. Cash and cash equivalents are deposited in checking and sweep accounts at a financial institution. Such deposits may, at times, exceed federally insured limits.

Cash, Cash Equivalents, and Restricted Cash

6

The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash and cash equivalents. Cash equivalents, which consist of amounts invested in money market funds, are stated at fair value. There are no significant unrealized gains or losses on the money market funds for the periods presented.

Restricted cash as of March 31, 2021 relates to a letter of credit established for a lease entered into in June 2018.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same amounts shown in the condensed consolidated statements of cash flows:

	Three Months Ended March 31,
	2021		2020
	(In thousands)
Cash and cash equivalents	$	110,703	$	160,917
Restricted cash		1,472		1,472
Total cash, cash equivalents, and restricted cash	$	112,175	$	162,389

Fair Value of Financial Instruments

The Company’s financial instruments include cash and cash equivalents, marketable securities, accounts payable, and accrued liabilities. The Company’s financial instruments approximate fair value due to their relatively short maturities.

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines the fair value of its financial instruments based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2 – Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level 3 – Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

Revenue Recognition

The Company entered into an agreement in October 2017 with AbbVie Biotechnology, Ltd. (AbbVie) to co-develop antibodies to two program targets in preclinical development (AbbVie Agreement). Under the terms of the AbbVie Agreement, AbbVie made $205.0 million in upfront payments, of which $5.0 million and $200.0 million was received by the Company in October 2017 and January 2018, respectively. The Company will perform research and development services for the antibodies to the two programs through the end of Phase 2 clinical trials which the Company expects to conduct through 2023. AbbVie will then have the exclusive right to exercise an option to enter into a license and collaboration agreement with the Company for one or both of the programs for $250.0 million each. If AbbVie exercises its option for the programs, AbbVie will take over the development of the product candidates for such program and costs will be split between the parties. The Company will also share in profits and losses upon commercialization of any products from such program. However, following AbbVie’s exercise of its option for a program, the Company may opt out of sharing in development costs and profits or losses for that program and instead receive tiered royalties. Additionally, under the terms of the AbbVie Agreement, the Company will be eligible to earn up to an additional $242.8 million in milestone payments per program related to the initiation of certain clinical studies and regulatory approval for up to three indications per program. The Company assessed its collaboration agreement with AbbVie in the context of the delivery of the research and development services.

7

The Company recognizes collaboration revenue by measuring the progress toward complete satisfaction of the performance obligation using an input measure. In order to recognize revenue over the research and development period, the Company measures actual costs incurred to date compared to the overall total expected costs to satisfy the performance obligation. Revenues are recognized as the program costs are incurred. The Company re-evaluates the estimate of expected costs to satisfy the performance obligation each reporting period and make adjustments for any significant changes. Clinical trials are expensive and can take many years to complete, and the outcome is inherently uncertain. Changes in the Company’s forecasted costs are likely to occur over time based upon changes in clinical trial procedures set forth in protocols, changes in estimates of manufacturing costs, or feedback from regulators on the design or operation of clinical trials. The Company has had changes to the overall expected costs to satisfy the performance obligations from period to period. For the three months ended March 31, 2021, the Company had a 4% increase in the forecast of the total expected costs. For the three months ended March 31, 2021, the increase in the overall expected costs to satisfy the performance obligation resulted in an approximately $4.6 million reduction in revenue compared to if the expected costs had remained the same, as a result of the cumulative catch up for the change in estimate. Collaboration revenue under the Company’s collaboration agreement with AbbVie during the three months ended March 31, 2021 was $4.1 million, the entire amount of which was included in deferred revenue at the beginning of the period. The deferred revenue was $128.2 million as of March 31, 2021. The deferred revenue is expected to be recognized over the research and development period of the programs through the completion of Phase 2 clinical trials.

The Company entered into an agreement in March 2020 with Innovent Biologics (Innovent) to license, develop, and commercialize AL008 in China (Innovent Agreement). AL008 is the Company’s novel antibody targeting the CD47-SIRP-alpha pathway, a potent survival pathway co-opted by tumors to evade the innate immune system. Under the terms of the Innovent Agreement, Innovent may pay the Company up to $11.5 million in development milestones, $112.5 million in sales milestones, and future royalties for any sales. The Company retains the rights to develop and commercialize AL008 outside of China. The Company has determined there is one performance obligation for the delivery of the license and will recognize revenue when it is probable that there will not be significant reversal of cumulative revenue. Development and sales milestones under the Innovent Agreement have not been included in the transaction price, as all these amounts were fully constrained as of March 31, 2021. As of March 31, 2021, no revenue has been recognized or payments received under the Innovent Agreement.

Comprehensive Loss

Comprehensive loss includes net loss and certain changes in stockholders’ equity that are the result of transactions and economic events other than those with stockholders. The Company’s only element of other comprehensive loss was net unrealized gain (loss) on marketable securities.

3. Fair Value Measurements

The following tables summarize the Company’s financial assets measured at fair value on a recurring basis by level within the fair value hierarchy:

	March 31, 2021
	Fair Value Hierarchy	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Market Value
	(In thousands)
Money market funds	Level 1	$	80,312	$	—	$	—		$	80,312
U.S. government treasury securities	Level 1		251,632		409		—			252,041
Total cash equivalents and marketable    securities		$	331,944	$	409	$	—		$	332,353
	December 31, 2020
	Fair Value Hierarchy	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Market Value
	(In thousands)
Money market funds	Level 1	$	37,951	$	—	$	—		$	37,951
U.S. government treasury securities	Level 1		357,725		620		(6	)		358,339
Corporate bonds	Level 2		5,000	$	—	$	—			5,000
Total cash equivalents and marketable    securities		$	400,676	$	620	$	(6	)	$	401,290

8

The Company’s Level 2 securities are valued using third-party pricing sources. The pricing services utilize industry standard valuation models for which all significant inputs are observable. The Company classifies marketable securities available to fund current operations as current assets. As of March 31, 2021, the remaining contractual maturities of $286.9 million of investments were less than one year and $45.4 million of investments were after one year through two years. The Company does not intend to sell the investments that are currently in an unrealized loss position, and it is highly unlikely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity. As of March 31, 2021, the Company considered any unrealized losses on our marketable securities to be driven by factors other than credit risk.

4. Commitments and Contingencies

On June 18, 2019, the Company initiated a confidential arbitration proceeding against Dr. Asa Abeliovich, the Company’s former consulting co-founder, related to alleged breaches of his consulting agreement and the improper use of Alector’s confidential information that he learned during the course of rendering services to the Company as consulting Chief Scientific Officer/Chief Innovation Officer. An independent arbitrator issued a confidential decision in favor of Alector, finding Dr. Abeliovich liable for breach of his confidentiality agreement and for spoliation based on his destruction of documents relevant to the proceeding. In March 2021, the arbitrator awarded damages of $1.3 million. As the damages were reimbursement of specific legal expenses during the arbitration proceeding, we recorded the amount as an offset to general and administrative expenses.

5. Stock-based Compensation

The Company recognized stock-based compensation as follows:

	Three Months Ended March 31,
	2021		2020
	(In thousands)
Research and development	$	4,363	$	3,111
General and administrative		4,437		3,531
Total stock-based compensation	$	8,800	$	6,642

Restricted Common Stock

Activity for the restricted common stock is shown below:

	Number of Shares			Weighted Average Grant Date Fair Value per Share
Unvested restricted common stock as of    December 31, 2020		186,425		$	6.95
Vested		(85,544	)		6.95
Unvested restricted common stock as of March 31, 2021		100,881		$	6.95

As of March 31, 2021, total unrecognized stock-based compensation related to unvested restricted common stock was $0.5 million, which the Company expects to recognize over a remaining weighted-average period of 0.6 years.

2019 Equity Incentive Plan

On January 1, 2021, the Company added 3,965,813 shares to the shares reserved for issuance under the 2019 Equity Incentive Plan (2019 Plan). As of March 31, 2021, the Company had reserved 19,178,644 shares of common stock for issuance under the 2019 Plan, of which 6,544,211 shares were available for issuance.

9

Activity for the options to purchase common stock shown below (in thousands, except share and per share amounts):

	Number of Options			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term (In years)		Aggregate Intrinsic Value
Outstanding as of December 31, 2020		12,654,998		$	13.96
Granted		521,748			16.02
Exercised		(415,386	)		9.33
Forfeited		(126,927	)		16.03
Outstanding as of March 31, 2021		12,634,433		$	14.18		8.6	$	84,326
Exercisable as of March 31, 2021		3,893,199		$	13.27		8.0	$	28,021
Vested and expected to vest as of March 31, 2021		12,634,433		$	14.18		8.6	$	84,326

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock options and the fair value of the Company’s common stock for stock options that were in-the-money. As of March 31, 2021, total unrecognized stock-based compensation related to unvested stock options was $79.4 million, which the Company expects to recognize over a remaining weighted-average period of 2.3 years.

2019 Employee Stock Purchase Plan

The 2019 Employee Stock Purchase Plan (2019 ESPP) enables eligible employees of the Company to purchase shares of common stock at a discount. As of March 31, 2021, the Company has reserved for issuance 2,524,063 shares of common stock pursuant to the 2019 ESPP. Each offering period is approximately six months long. 2019 ESPP participants will purchase shares of common stock at a price per share equal to 85% of the lesser of (1) the fair market value per share of the common stock on the first trading day of the offering period or (2) the fair market value of the common stock on the purchase date.

6. Related Party Transactions

The Company has a collaboration agreement with Adimab, LLC (Adimab) under which the Company is developing antibodies discovered by Adimab in its AL001 and AL101 product candidates, and the Company is developing antibodies optimized by Adimab in its AL002 and AL003 product candidates (2014 Adimab Agreement). In August 2019, the Company signed a new collaboration agreement with Adimab for research and development of additional antibodies (2019 Adimab Agreement). The Chief Executive Officer of Adimab is a Co-founder and Chairperson of the board of directors of Alector. For the three months ended March 31, 2021, the Company incurred $1.0 million of expenses for a milestone payment for first patient dosed in the AL002 Phase 2 trial. For the three months ended March 31, 2020, the Company incurred no expenses. The Company had no accrued liabilities due to Adimab as of March 31, 2021 and December 31, 2020. Under the 2014 Adimab Agreement, the Company will owe up to $3.5 million in milestone payments per program to Adimab for its product candidates. The Company will also owe low- to mid- single-digit royalty payments for commercial sales of such product candidates. Under the 2019 Adimab Agreement, the Company will owe certain milestone payments per program for its product candidates and low single-digit royalty payments for commercial sales of such product candidates.

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7. Net Loss Per Share

The following outstanding potentially dilutive shares have been excluded from the calculation of diluted net loss per share for the periods presented due to their anti-dilutive effect:

	Three Months Ended March 31,
	2021		2020
Restricted stock subject to future vesting		100,881		800,306
Options to purchase common stock		12,634,433		9,053,601
Shares committed under 2019 ESPP		86,677		44,464
Total		12,821,991		9,898,371

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

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties, including those described in the section titled “Special Note Regarding Forward Looking Statements.” Our actual results and the timing of selected events could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those set forth under the section titled “Risk Factors” included elsewhere in this report.

Overview

We are a clinical stage biopharmaceutical company pioneering immuno-neurology, a novel therapeutic approach for the treatment of neurodegeneration. Immuno-neurology targets immune dysfunction as a root cause of multiple pathologies that are drivers of degenerative brain disorders. We are developing therapies designed to simultaneously counteract these pathologies by restoring healthy immune function to the brain. Supporting our scientific approach, our Discovery Platform enables us to advance a broad portfolio of product candidates, validated by human genetics, which we believe will improve the probability of technical success over shorter development timelines. As a result, we have identified over 100 system targets, have advanced four product candidates, AL001, AL002, AL003, and AL101, into clinical development, and continue to develop our research pipeline.

At Alector we are committed to developing transformative treatments for neurodegeneration. We believe that our mission could potentially benefit millions of patients and families affected by neurodegenerative diseases worldwide, and even with the current global COVID-19 pandemic, we remain focused on advancing our portfolio of immuno-neurology programs. Our primary responsibility is ensuring the health and safety of our employees, participants in our clinical trials, and our clinical trial site teams, and we are continuing to monitor and comply with current regulatory, institutional, and government guidance for conduct of our business. We are closely monitoring the evolving impact of COVID-19 on our operations and we continue to be committed to our discovery, research, and clinical development plans and timelines.

We are aware that the COVID-19 pandemic has impacted the ability of certain clinical sites to maintain scheduled events for clinical study participants due in part to the site’s temporary suspension of activities or regional shelter-in-place directives. We intend to continue to collect data from all existing clinical trial participants and to make progress in completing the enrollment across these on-going clinical trials taking into account applicable regulatory, institutional, and government guidance compliance regimes. Any unscheduled changes in study conduct due to COVID-19-related events could negatively impact the integrity, reliability, or robustness of the data from our clinical trials.

AL001, our first product candidate, modulates progranulin (PGRN), a key regulator of immune activity in the brain with genetic links to multiple neurodegenerative disorders, including frontotemporal dementia (FTD), Alzheimer’s disease, Parkinson’s disease, and amyotrophic lateral sclerosis (ALS). AL001 is initially designed to treat FTD, a severe, rapidly progressing neurodegenerative disorder that affects 50,000 to 60,000 people in the United States and roughly 110,000 people in the European Union, with potentially higher prevalence in Asia and Latin America.

AL001 is initially aimed at treating people with FTD who have a known genetic mutation that causes a deficiency in PGRN, which is called FTD-GRN. Our AL001 program has successfully demonstrated safety, target engagement, and proof-of-mechanism with a well-tolerated safety profile in the central nervous systems of healthy volunteers and FTD patients in our Phase 1a, Phase 1b, and Phase 2 clinical trials. In July 2020, we advanced AL001 into a global pivotal Phase 3 trial, named INFRONT-3, in both pre-symptomatic and symptomatic participants with FTD-GRN. We own worldwide rights to AL001.

AL101, our second product candidate in our PGRN portfolio, is designed to treat people suffering from more prevalent neurodegenerative diseases including Alzheimer’s disease and Parkinson’s disease, in addition to FTD. In line with our therapeutic hypothesis for FTD, mutations that moderately reduce the expression levels of PGRN have been shown to increase the risk of developing Alzheimer’s disease and Parkinson’s disease, and increased PGRN levels have been demonstrated to be protective for these diseases in animal models. We initiated our AL101 clinical study in January 2020, and we expect to start receiving Phase 1a data in 2021. We also own worldwide rights for AL101.

Our AL002 product candidate is aimed at treating patients with Alzheimer’s disease and is being developed in collaboration with AbbVie. Alzheimer’s disease is a chronic neurodegenerative disease that is the most common cause of dementia, affecting nearly six million Americans in 2020 and that number is projected to rise to nearly 14 million by 2050.

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Alzheimer’s disease is the sixth leading cause of death in the United States. AL002 is focused on modulating check-point receptors on the brain’s immune cells, targeting Triggering Receptor Expressed on Myeloid cells 2 (TREM2). AL002 has demonstrated a safety and tolerability profile that supports further development, target engagement, and proof-of-mechanism in the central nervous systems of healthy volunteers in a Phase 1 trial. We initiated a Phase 2 trial evaluating AL002 in patients with early Alzheimer’s disease in January 2021.

AL003 is another product candidate designed to treat patients with Alzheimer’s disease and is also being developed in collaboration with AbbVie. AL003 focuses on modulating check-point receptors on the brain’s immune cells, targeting sialic acid binding Ig-like lectin 3 (SIGLEC 3). AL003 has demonstrated a safety and tolerability profile that supports further development and peripheral target engagement in healthy volunteers in a Phase 1a study. AL003 has also completed enrollment of Alzheimer’s disease patients in a Phase1b study that continues to progress.

AL044 is our latest prioritized product candidate that targets MS4A4A, a major risk gene for Alzheimer’s disease that encodes a transmembrane receptor protein that is expressed selectively in microglia in the brain and is associated with control of microglia functionality and potential viability. We own worldwide rights to AL044.

We are also expanding our discovery platform to other indications, such as the field of immuno-oncology. We believe that products focused on innate immune biology will complement and expand the efficacy of current immuno-oncology drugs that target the adaptive immune system. For example, we have entered into a licensing agreement with Innovent to develop and commercialize AL008, our novel antibody that combines inhibition of the CD47-SIRP-alpha (SIRPα) pathway, a potent immune checkpoint pathway co-opted by tumors to evade the immune system. AL008 is a potential best-in-class SIRP-alpha inhibitor with a unique dual mechanism of action that non-competitively antagonizes the CD47-SIRP-alpha pathway by inducing the internalization and degradation of the inhibitory receptor on macrophages to relieve immune suppression (a "don't eat me signal") while also engaging Fc gamma receptors to promote immuno-stimulatory pathways that drive anti-tumor immunity. Our AL009 product candidate is a first-in-class multi Siglec inhibitor that works to enhance both the innate and adaptive immune system response to tumors by blocking a critical glycan checkpoint pathway that drives immune inhibition. This product candidate is being developed in oncology and we believe it could also have potential therapeutic application to neurodegenerative disorders.

Our operations have been financed primarily through the issuance and sale of convertible preferred stock, our collaboration with AbbVie, and issuance of common stock upon the completion of our IPO. We completed our IPO in February 2019, and received $168.2 million net proceeds, after deducting underwriting discounts and commissions and offering expenses. We completed a follow-on offering in January 2020 and received $224.5 million net proceeds, after deducting underwriting discounts and commissions and offering expenses.

To date, we have not had any products approved for sale and have not generated any revenue from product sales nor been profitable. Further, we do not expect to generate revenue from product sales until such time, if ever, that we are able to successfully complete the development and obtain marketing approval for one of our product candidates. We will continue to require additional capital to develop our product candidates and fund operations for the foreseeable future. We have incurred net losses in each year since inception and expect to continue to incur net losses for the foreseeable future. Our ability to generate product revenue will depend on the successful development and eventual commercialization of one or more of our product candidates. Our net losses were $52.2 million and $40.0 million for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, we had an accumulated deficit of $462.2 million. Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We expect our expenses will increase substantially in connection with our ongoing activities, as we:

• advance product candidates through preclinical studies and clinical trials;

• pursue regulatory approval of product candidates;

• hire additional personnel;

• continue to operate as a public company;

• acquire, discover, validate, and develop additional product candidates;

• require the manufacture of supplies for our preclinical studies and clinical trials; and

• obtain, maintain, expand, and protect our intellectual property portfolio.

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Components of Results of Operations

Revenue

We have not generated any revenue from product sales and do not expect to do so in the near future. Our revenue to date has been primarily related to the AbbVie Agreement to co-develop product candidates in two programs in clinical development with AbbVie. We recognize revenue related to our research and development grant as the related research services are performed. We recognize revenue from the upfront payments under the AbbVie Agreement over time as the services are provided. Revenues are recognized as the program costs are incurred by measuring actual costs incurred to date compared to the overall total expected costs to satisfy the performance obligation. In addition to receiving the upfront payments, we may also be entitled to development and regulatory milestone payments, opt-in payments for continued development after proof-of-concept for AL002 and AL003, and other future payments from profit sharing or royalties after commercialization of product candidates from such programs.

We expect that our revenue for the next several years will be derived primarily from the AbbVie Agreement. The balance of deferred revenue was $128.2 million as of March 31, 2021. The deferred revenue is expected to be recognized over the research and development period of the programs through the completion of Phase 2 clinical trials for AL002 and AL003.

Research and Development Expenses

Research and development expenses account for a significant portion of our operating expenses. We record research and development expenses as incurred. Research and development expenses consist primarily of costs incurred for the discovery and development of our product candidates, which include:

• expenses incurred under agreements with third-party contract organizations, preclinical testing organizations, and consultants;

• costs related to production of clinical materials, including fees paid to contract manufacturers;

• laboratory and vendor expenses related to the execution of preclinical studies and clinical trials;

• personnel-related expenses, including salaries, benefits, and stock-based compensation for personnel engaged in research and development functions;

• costs related to the preparation of regulatory submissions;

• third-party license fees; and

• facilities and other expenses, which include expenses for rent and maintenance of facilities, depreciation and amortization expense, and other supplies.

We expense all research and development costs in the periods in which they are incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors, collaborators, and third-party service providers. Nonrefundable advance payments for goods or services to be received in future periods for use in research and development activities are deferred and capitalized. The capitalized amounts are then expensed as the related goods are delivered and as services are performed.

Specific program expenses include expenses associated with the development of our most advanced product candidates, AL001 which commenced dosing of the first patient in a pivotal Phase 3 clinical trial, INFRONT-3, and remains in an ongoing Phase 2 clinical trial, AL002, which commenced dosing of the first patient in a Phase 2 clinical trial, and AL003 and AL101, which are in Phase 1 clinical trials. We also have expenses related to the discovery and development of future product candidates and separately tracked expenses related to programs that we expect to move out of preclinical studies and into Phase 1 clinical trials. We do not track personnel or other operating expenses incurred for our research and development programs on a program-specific basis. These expenses primarily relate to salaries and benefits, stock-based compensation, facility expenses, including depreciation, and lab consumables.

At this time, we cannot reasonably estimate or know the nature, timing, and estimated costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates. We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates, as our product candidates advance into later stages of development, as we begin to conduct larger clinical trials, as we seek regulatory approvals for any product candidates that

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successfully complete clinical trials, and incur expenses associated with hiring additional personnel to support our research and development efforts. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel-related costs, including stock-based compensation, for our personnel in executive, legal, finance and accounting, information technology, human resources, and other administrative functions. General and administrative expenses also include legal fees relating to intellectual property and corporate matters, professional fees paid for accounting, auditing, consulting, and tax services, insurance costs, and facility costs not otherwise included in research and development expenses.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research activities and development of our programs. We also anticipate that we will continue to incur expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and those of the NASDAQ Stock Market on which our securities are traded, legal, auditing, additional insurance expenses, investor relations activities, and other administrative and professional services.

Other Income, Net

Other income, net consists of interest earned on our cash equivalents and marketable securities and foreign currency transaction gains and losses incurred during the period.

Results of Operations

Comparison of the Three Months Ended March 31, 2021 and 2020

	Three Months Ended March 31,						Dollar
	2021			2020			Change
	(In thousands)
Collaboration revenue	$	4,110		$	7,171		$	(3,061	)
Operating expenses:
Research and development		45,733			34,605			11,128
General and administrative		11,012			14,644			(3,632	)
Total operating expenses		56,745			49,249			7,496
Loss from operations		(52,635	)		(42,078	)		(10,557	)
Other income, net		464			2,059			(1,595	)
Net loss	$	(52,171	)	$	(40,019	)	$	(12,152	)

Revenue

Collaboration revenue was $4.1 million for the three months ended March 31, 2021, compared to $7.2 million for the three months ended March 31, 2020. We recognize revenue from the upfront payments under the AbbVie Agreement over time as the services are provided. Revenues are recognized as the program costs are incurred by measuring actual costs incurred to date compared to the overall total expected costs to satisfy the performance obligation. Changes in estimates for revenue recognized over time are recognized on a cumulative basis. Revenue decreased by $3.1 million, reflecting the level of our cumulative research activities on the AL002 and AL003 programs under the AbbVie Agreement, including an increase to the overall budget.

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Research and Development Expenses

Research and development expenses were $45.7 million for the three months ended March 31, 2021, compared to $34.6 million for the three months ended March 31, 2020. The increase of $11.1 million was driven by a $4.7 million increase in personnel-related expenses, including stock-based compensation, due to an increase in headcount and issuance of option grants to employees. We had a $2.6 million increase in AL001 related to continued progression through clinical trials. In addition, expenses increased by $1.9 million for other early stage programs as we continue to invest in developing our pipeline. We also had a $1.4 million increase in facilities and other unallocated research and development expenses related to purchase of new lab equipment, a new lease, and overall growth.

	Three Months Ended March 31,				Dollar
	2021		2020		Change
	(In thousands)
Direct research and development expenses
AL001	$	10,567	$	7,997	$	2,570
AL101		1,032		1,147		(115	)
AL002		6,846		5,636		1,210
AL003